Attached files
file | filename |
---|---|
EX-10.20 - WUHAN GENERAL GROUP (CHINA), INC | v178641_ex10-20.htm |
EX-21.1 - WUHAN GENERAL GROUP (CHINA), INC | v178641_ex21-1.htm |
EX-31.2 - WUHAN GENERAL GROUP (CHINA), INC | v178641_ex31-2.htm |
EX-31.1 - WUHAN GENERAL GROUP (CHINA), INC | v178641_ex31-1.htm |
EX-32.1 - WUHAN GENERAL GROUP (CHINA), INC | v178641_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
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
o
|
Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
transition period from ________ to ________
Commission
file number 001-34125
WUHAN
GENERAL GROUP (CHINA), INC.
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
84-1092589
(I.R.S.
Employer Identification No.)
|
Canglongdao Science
Park of Wuhan East Lake Hi-Tech Development Zone
Wuhan, Hubei, People’s
Republic of China
(Address
of Principal Executive Offices)
|
430200
(Zip
Code)
|
86-27-5970-0069
(Registrant’s
Telephone Number, including area code)
Securities
registered under Section 12(b) of the Exchange Act:
Title of Each
Class
|
Name of Each Exchange
on Which Registered
|
|
Common
Stock, par value $0.0001 per share
|
The
NASDAQ Stock Market LLC
|
Securities
registered under Section 12(g) of the Exchange Act: None.
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes ¨ No ý
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
Yes ¨ No ý
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for past 90 days. Yes ý No ¨
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 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨No ¨
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. ý
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated
filer ¨
Non-accelerated filer ¨ Smaller
reporting company ý
(Do not check if a smaller reporting
company)
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes ¨ No ý
As of June 30, 2009, the aggregate
market value of the registrant’s common stock held by non-affiliates was
approximately $46,551,455 based on the closing sale price as quoted on the
NASDAQ Capital Market.
As of March 30, 2010, the registrant
had a total of 25,351,950 shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the company’s Proxy Statement for its 2010 Annual Meeting of Stockholders are
incorporated by reference into Part III.
TABLE
OF CONTENTS
Page
|
|
PART
I
|
1
|
Item
1. Business.
|
1
|
Item
1A. Risk Factors.
|
12
|
Item
1B. Unresolved Staff Comments.
|
26
|
Item
2. Properties.
|
26
|
|
|
Item
3. Legal Proceedings.
|
27
|
Item
4. Reserved.
|
27
|
PART
II
|
27
|
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
|
27
|
Item
6. Selected Financial Data.
|
28
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
|
29
|
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
|
46
|
Item
8. Financial Statements and Supplementary Data.
|
46
|
Item
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
46
|
Item
9A. Controls and Procedures.
|
46
|
Item
9B. Other Information.
|
49
|
PART
III
|
50
|
Item
10. Directors, Executive Officers and Corporate
Governance.
|
50
|
Item
11. Executive Compensation.
|
50
|
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
50
|
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
|
50
|
Item
14. Principal Accountant Fees and Services.
|
50
|
PART
IV
|
51
|
Item
15. Exhibits and Financial Statement Schedules.
|
51
|
i
Cautionary
Statement Regarding Forward-Looking Statements
The
information contained in this report includes some statements that are not
purely historical fact and that are “forward-looking statements” as defined by
the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include, but are not limited to, statements regarding
our management’s expectations, hopes, beliefs, intentions or strategies
regarding the future, including our financial condition, results of operations,
available liquidity, ability to refinance outstanding debt, ability to collect
on our accounts receivable, completion of our turbine manufacturing facility on
our main Wuhan campus and workshop and related facilities of Wuhan Sungreen
Environment Protection Equipment Co., Ltd., the development of our industrial
parts and machinery equipment business and growth of our
businesses. The words “anticipates,” “believes,” “could,”
“estimates,” “expects,” “intends,” “may,” “projects,” “should,” and similar
expressions, or the negatives of such terms, identify forward-looking
statements.
The
forward-looking statements contained in this report are based on our current
expectations and beliefs concerning future developments. There can be
no assurance that future developments actually affecting us will be those
anticipated. These forward-looking statements involve a number of risks,
uncertainties (some of which are beyond our control) or other assumptions that
may cause actual results to be materially different from those expressed or
implied by these forward-looking statements, including the
following:
|
·
|
vulnerability
of our business to general economic
downturn;
|
|
·
|
our
ability to obtain financing on favorable terms;
|
|
·
|
our
ability to comply with the covenants and other terms of our loan
agreements with Standard Chartered Bank (China) Limited, Guangzhou
Branch;
|
|
·
|
establishing
our business segment relating to industrial parts and machinery
equipment;
|
|
·
|
operating
in the PRC generally and the potential for changes in the laws of the PRC
that affect our operations including tax
law;
|
|
·
|
remediating
material weaknesses in our internal control over financial
reporting;
|
|
·
|
our
failure to meet or timely meet contractual performance standards and
schedules;
|
|
·
|
our
dependence on the steel and iron markets;
|
|
·
|
exposure
to product liability and defect
claims;
|
|
·
|
our
ability to obtain all necessary government certifications and/or licenses
to conduct our business;
|
|
·
|
the
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on our operations;
and
|
|
·
|
the
other factors referenced in this
report.
|
These
risks and uncertainties, along with others, are also described in the Risk
Factors section in Part I, Item 1A of this Form 10-K. We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as may be required
under applicable securities laws.
ii
PART
I
Item
1. Business.
We
obtained statistical data, market data and other industry data and forecasts
used throughout, or incorporated by reference in, this report from market
research, publicly available information and industry publications. Industry
publications generally state that they obtain their information from sources
that they believe to be reliable, but they do not guarantee the accuracy and
completeness of the information. Similarly, while we believe that the
statistical data, industry data and forecasts and market research are reliable,
we have not independently verified the data, and we do not make any
representation as to the accuracy of the information. We have not sought the
consent of the sources to refer to their reports appearing or incorporated by
reference in this report.
Overview
Wuhan
General Group (China), Inc. (the “Company”) is a holding company whose primary
business operations are conducted through our wholly owned subsidiary, Universe
Faith Group, Ltd. (“UFG”), which has no operations of its own and only serves to
hold our Chinese operating subsidiaries, Wuhan Blower Co., Ltd. (“Wuhan
Blower”), Wuhan Generating Equipment Co., Ltd. (“Wuhan Generating”) and Wuhan
Sungreen Environment Protection Equipment Co., Ltd. (“Wuhan Sungreen”), which we
formerly referred to as Wuhan Xingelin Machinery Equipment Manufacturing
Co., Ltd., or Wuhan Xingelin. Wuhan Blower is a manufacturer of
industrial blowers that are principally components of steam-driven electrical
power generation plants. Wuhan Generating manufactures industrial steam and
water turbines, which also are principally used in electrical power generation
plants. Wuhan Sungreen manufactures silencers, connectors and other general
parts for industrial blowers and electrical equipment, and it produces general
machinery equipment. Wuhan Blower, Wuhan Generating and Wuhan Sungreen conduct
all of their operations in the People’s Republic of China, which we refer to in
this report as PRC or China. Prior to our acquisition of UFG in February 2007,
we were a publicly held shell company with no operations other than efforts to
identify suitable parties for a merger transaction.
Our
Corporate History
The
Company was incorporated on July 19, 1988 under the laws of the State of
Colorado as Riverside Capital, Inc. On February 28, 1989, Riverside Capital
completed a public offering of 20,500,000 units (consisting of common stock and
warrants) at an offering price of $0.01 per unit. Riverside Capital engaged in
various business endeavors, and on March 18, 1992, acquired 100% of the
outstanding shares of United National Film Corporation. At that time, we changed
our name to United National Film Corporation. We were not successful in the film
business, and in June 2001, we suspended all business activities and became a
“reporting shell corporation.” As such, we had no operations other than
maintaining our public company status and searching for a suitable party with
which to execute a reverse merger transaction, in which a previously private
company takes on our public company status. In October 2006, we changed our
state of incorporation from Colorado to Nevada.
On
February 7, 2007, we completed a share exchange transaction, in which we issued
to Fame Good International Limited (“Fame”), as the sole stockholder of UFG,
17,912,446 newly issued shares of our common stock in exchange for all of the
issued and outstanding capital stock of UFG held by Fame. As a result, UFG
became our wholly owned subsidiary, Fame became our controlling stockholder and
the management team of Wuhan Blower replaced our prior management. Prior to the
share exchange transaction, we had no relationship with Fame, UFG and its
subsidiaries. On March 13, 2007, the Company changed its name from “United
National Film Corporation” to “Wuhan General Group (China), Inc.”
1
Prior to
the share exchange transaction, we had 1,800,000 shares of common stock
outstanding. Following the closing of the share exchange transaction, we had
19,712,446 shares of common stock outstanding. As of March 30, 2010,
we had 25,351,950 shares of common stock outstanding.
Background
and History of UFG and Wuhan Blower
UFG was
incorporated in the British Virgin Islands in August 2006. Until the share
exchange transaction in February 2007, UFG was a wholly owned subsidiary of
Fame, also a BVI company and now our controlling stockholder. Our President and
Chief Executive Officer, Mr. Xu Jie, acquired control of Fame, and Fame acquired
control of UFG, in late August 2006. Neither Fame nor UFG had any active
business operations until UFG acquired Wuhan Blower in September
2006.
Wuhan
Blower was founded in 1958 as the Wuhan Blower Company, a State-Owned Enterprise
(“SOE”) and became one of the largest manufacturers of industrial blowers in
central and southwest China. In 2004, Mr. Xu purchased the company with the
intention of making changes to its management structure, employee utilization,
plant location and general operations which would transform it from a
traditional Chinese SOE into a modern, efficient operating company. Mr. Xu
relocated the company to the East Lake Hi-Tech Development Zone in Wuhan, with
much improved access to railroads, waterways and roads necessary for the
transportation of its products, and constructed a new headquarters, research and
development, and manufacturing facilities at this location.
On
January 9, 2007, Wuhan Blower completed its acquisition of Wuhan Generating, a
manufacturer of water and steam turbines, which is a complementary business to
that of Wuhan Blower. We completed the construction of a new turbine
manufacturing facility in 2009 for Wuhan Generating. We have installed a portion
of the customized equipment in this facility and have begun producing steam
turbines from this facility. We have purchased additional customized equipment
for this facility and will install this equipment in order to increase our
production capacity.
On
December 25, 2008, we acquired certain assets to establish our newest
subsidiary, Wuhan Sungreen. This is described in more detail below in
“Overview – Establishment of Wuhan Sungreen.”
We are
located in Wuhan, the capital of China’s Hubei Province and one of the ten
largest cities in China. Hubei is centrally located and is a key player in
the Chinese automotive, metallurgy, machinery, power generation, textiles and
high-tech industries. Wuhan is one of the major university cities in the PRC,
providing a highly educated workforce for the area’s industries.
Acquisition
of UFG
On
February 7, 2007, we completed the share exchange transaction, also known as a
“reverse acquisition” transaction, whereby UFG became our wholly owned
subsidiary and Fame became our controlling stockholder.
2
Upon the
closing of the share exchange transaction, Glenn A. Little, then our sole
director and officer, submitted his resignation from all offices that he held
effective immediately. Xu Jie, the President and Chief Executive Officer of
Wuhan Blower, was appointed our President, Chief Executive Officer and Chairman
of the Board. In addition, the Wuhan Blower executive officers became our
executive officers.
February
2007 Private Placement
Also on
February 7, 2007, we completed a private placement transaction in which we
issued to nine institutional investors an aggregate of 10,287,554 shares of our
newly created Series A Convertible Preferred Stock (“Series A Preferred Stock”)
at a price of $2.33 per share for gross proceeds of $23,970,000. The Series A
Preferred Stock is convertible into shares of our common stock on a 1-for-1
basis. The holders of our Series A Preferred Stock are not required to pay a
conversion price or any other consideration in order to convert Series
A Preferred Stock into common stock. The Series A Preferred Stock is
entitled to a dividend equal to 5% per annum, which accrue quarterly. We must
pay any unpaid dividends on our Series A Preferred Stock before paying dividends
on our common stock.
Except
with respect to specified transactions that may affect the Series A Preferred
Stock and except as otherwise required by Nevada law, the Series A Preferred
Stock has no voting rights. Of our outstanding shares of Series A Preferred
Stock, 32.5% was converted into 3,343,560 shares of common stock in 2008 and
none were converted in 2009. The remaining shares of our Series A Preferred
Stock will convert automatically into our common stock if the trading price and
volume of our common stock reach certain levels. In the event of our
liquidation, the holders of Series A Preferred Stock shall be entitled to
receive, out of our assets available for distribution to stockholders, an amount
equal to $2.33 per share plus any accrued and unpaid dividends before any
payment can be made to the holders of our common stock.
In the
private placement, we also issued three series of common stock purchase warrants
to the nine institutional investors - Series A, J and B.
The
investors in the February 2007 private placement received “60% warrant coverage”
on their investment. As a result, we issued to the investors, on a pro rata
basis, Series A Warrants to purchase an aggregate of 6,172,531 shares of common
stock. The Series A Warrants have an exercise price of $2.57 per share and
expire on February 7, 2012.
In
addition, each of the private placement investors who invested at least
$2,000,000 also were entitled to purchase shares of our common stock on the same
terms as such investor’s initial purchase. To represent this right, we issued
Series J Warrants to these investors to purchase an aggregate of 9,358,370
shares of common stock. The Series J Warrants had an exercise price of $2.33 per
share and expired on November 7, 2008. As described in more
detail below in “Overview – Creation of Series B Preferred Stock” in this Part
I, Item 1, we amended the terms of the Series J Warrants in September 2008 so
that the warrants became exercisable for Series B Convertible Preferred Stock
(“Series B Preferred Stock”) rather than common stock. Prior to the
expiration date, a portion of the Series J Warrants was exercised for a total of
6,369,078 shares of Series B Preferred Stock.
3
Investors
receiving Series J Warrants also received “60% warrant coverage” on this
additional investment, if made. The Series B Warrants can only be exercised upon
and to the extent that the Series J Warrants were exercised. The Series B
Warrants have an exercise price of $2.57 and expire on February 7,
2012. Based on the amount of Series J Warrants exercised prior to
expiration, the Series B Warrants are exercisable for 3,821,446 shares of common
stock.
As
partial consideration for services rendered by 1st
BridgeHouse Securities, LLC (“1st
BridgeHouse”), the placement agent for the February 2007 private placement, we
agreed to issue warrants to purchase common stock to 1st
BridgeHouse in an amount equal to 10% of all shares of Series A Preferred Stock
sold in the private placement, plus 10% of any shares of common stock issued
pursuant to the Series A, B and J Warrants issued in the private placement. This
right is represented by Series C, AA, BB and JJ warrants originally issued to
1st
BridgeHouse. The Series C, AA, BB and JJ Warrants relate to the Series A
Preferred Stock, Series A Warrants, Series B Warrants and Series J Warrants,
respectively. The exercise prices of the Series C, AA, BB and JJ Warrants are
$2.57, $2.83, $2.83 and $2.57, respectively. These exercise prices are 110% of
the purchase price for the related security. As of December 31, 2009, there were
635,710, up to 617,253, up to 382,145 and 636,908 shares of common stock
issuable under the Series C, AA, BB and JJ Warrants, respectively. The Series C,
AA, BB and JJ Warrants expire on February 7, 2017.
Creation of Series B Preferred
Stock
On
September 5, 2008, the Company entered into an Agreement to Amend Series J
Warrants of the Company with holders of warrants exercisable for a majority of
the shares of warrant stock issuable under the Company’s Series A, B and J
Warrants. This agreement amended the Series J Warrants so that such warrants
would be exercisable for shares of the Company’s Series B Preferred Stock. Prior
to this agreement, the Series J Warrants were exercisable for shares of the
Company’s common stock.
In
connection with this agreement, the Company designated 9,358,370 shares of
preferred stock as Series B Preferred Stock with those rights and preferences as
set forth in the Certificate of Designation of the Relative Rights and
Preferences of the Series B Convertible Preferred Stock of the Company (the
“Certificate of Designation”). The Series B Preferred Stock ranks senior to the
Company’s common stock and junior to the Company’s Series A Preferred Stock. The
shares of Series B Preferred Stock are convertible on a one-for-one basis into
shares of the Company’s common stock. The foregoing is only a summary of the
Series B Preferred Stock and is qualified by the exact terms of the Certificate
of Designation, which was Exhibit 4.1 to our Form 8-K filed on September 11,
2008.
Certain
investors exercised their amended Series J Warrants for an aggregate of
6,369,078 shares of Series B Preferred Stock. The Company received gross
proceeds of $14,839,952 for the issuance of those shares in connection with the
exercise of the Series J Warrants. The total amount of commission paid to the
placement agent, 1st
BridgeHouse, was 10% of the gross proceeds, or $1,483,995. The
Company also paid a total of $274,480 for other financing related expenses. The
net proceeds from the transactions, after accounting for placement agent
commissions and other related financing expenses, was $13,081,477.
4
Lock-Up
Agreement in connection with February 2007 Private Placement
In
connection with the February 2007 private placement, we entered into a lock-up
agreement with Fame. Under the terms of the lock-up agreement, Fame agreed not
to sell any shares of our common stock until February 5, 2011, unless permitted
by the holders of at least 75% of the outstanding Series A Preferred Stock. The
lock-up agreement contains a limited exception for bona fide gifts.
Establishment of Wuhan
Sungreen
On December 25, 2008, Wuhan Blower
entered into an Asset Purchase Agreement with Wuhan Gongchuang Real Estate Co.,
Ltd., pursuant to which Wuhan Blower acquired certain assets including certain
buildings, equipment and land use rights (the “Sukong Assets”). In connection
with this acquisition, we created Wuhan Sungreen to hold the Sukong Assets and
develop these assets into a new business that produces and supplies blower parts
and machinery equipment to Wuhan Blower, Wuhan Generating and third party
customers.
Our
Products
We engage
primarily in the design, development, manufacture and sale of industrial blowers
in China. Our industrial blowers are used primarily in steam-driven electrical
power generation plants. In addition, we produce steam and water turbines in our
blower facilities, our turbine manufacturing facility and in shared facilities.
Steam and water turbines are manufactured principally for use in electrical and
hydropower plants. Finally, we recently began producing blower parts and
machinery equipment. This business supplies Wuhan Blower and Wuhan Generating
with these parts and equipment and also sells them to third
parties.
Industrial
Blowers
Industrial Blowers
Generally
Industrial
blowers are used to move very large volumes of air through industrial processes.
When used in conjunction with an industrial furnace in steam-driven electrical
power generation plants, they:
|
·
|
blow
air into furnaces in order to increase oxygen and improve
combustion;
|
|
·
|
blow
fuel (primarily coal dust) into furnaces; and
|
|
·
|
remove
furnace exhaust.
|
If
pollution control is required for the waste gases, then:
|
·
|
a
blower will propel the exhaust gases through a pollution reduction unit
(such as a de-sulphurization unit);
and
|
|
·
|
a
final blower will push the “cleaned” gases to and through the
smokestack.
|
Industrial
blowers are custom-made for the specific installation in which they will be
used. The blower can be driven by an industrial scale electric motor, a diesel
engine or a steam turbine. In addition to their use in power generation plants,
industrial blowers are also used in the metallurgy and petrochemicals
industries, as well as for ventilation in mines, mass transit (subways, tunnels,
stations) and sewage treatment (for aeration).
5
Our Industrial Blower
Products
Our
primary blower products are:
|
·
|
Axial fans. These
consist of a bladed impeller (fan) in an elongated cylindrical casing and
are primarily used to provide high-volume, low-pressure air for larger
power stations of 200 to 1,000
megawatts.
|
|
·
|
Centrifugal Blowers.
These consist of a “squirrel cage” type impeller (or rotor) in a scroll-
or spiral-shaped casing. Air is drawn into the center of the squirrel cage
through a hole in the side of the casing and is thrown out at a right
angle by the rotational force. These blowers provide lower volumes of air,
but at higher pressures, and are used in medium-sized power stations of
100 to 300 megawatts for blowing coal dust into furnaces. They are also
used for aeration in sewage treatment
plants.
|
When
required for noise abatement purposes, we also manufacture silencers or
“mufflers” fitted to the exhaust side of our centrifugal blowers. These
silencers are very similar in form and function to the muffler on an automobile:
the silencer interior is fitted with perforated metal trays stuffed with a sound
absorbing material such as fiberglass.
We are
one of the largest suppliers of industrial blowers in our market to the Chinese
electrical power generation industry, which is growing rapidly. All of our
products are custom-built for specific purchasers. The majority of our product
revenue comes from competitive bidding.
A typical
blower costs approximately $85,000 and takes 45 to 90 days to build, from design
to finish. We are currently producing approximately 800 blower/fan units per
year.
The
manufacture of these products combines both low-tech and high-tech processes.
The low-tech process consists of the cutting and welding of the steel for both
the rotors and the casings. The high-tech process consists of the product
design, the “finish” manufacturing of the rotor shafts, and the balancing of the
rotor assemblies.
We make
extensive use of computer aided design (CAD) and computer aided engineering
(CAE) in the design phase of our manufacturing process. In particular, CAE
provides us with the ability to do finite element analysis of our rotor designs,
while CAD allows us to do three dimensional modeling (to include molding
coordinates for the fan/blower blades) and design of the inlet and outlet
parameters. Our relationships with the Science and Technology University of
Central China, Jiaotong University and the Acoustic Institute of the China
Science Academy allow us to stay abreast of the latest developments in the
fields of fluid dynamics, material sciences and acoustics.
We have a
sophisticated acoustics lab in our facility. We share this acoustics lab with
our university partners, and the China Fan Performance Test Center uses it for
some of its work.
Through
the use of the above technologies, we are able to design fans/blowers of the
highest efficiency providing precisely the volumes and pressures
required.
6
Parts
purchased from third parties consist mainly of the electric motor specified by
the client (normally equal to about 20% of the build cost of the assembly) and
bearing castings. Following the establishment of our new blower parts
manufacturing business, which will be conducted by our Wuhan Sungreen, we expect
to purchase fewer blower parts from unrelated third parties.
Turbines
Steam Turbines
Generally
In a
steam-driven electrical or thermal power generation plant, blowers like those we
manufacture feed fuel and air into a large furnace. The primary purpose of the
furnace is to produce steam for the powering of steam-driven turbines. A stream
turbine takes the force of the steam and converts it into rotary motion, which
is then used to drive machinery.
Steam
turbines are normally categorized by their output in watts – kilowatts through
megawatts. A small steam turbine of 750 kilowatts is capable of lighting 7,500
100-watt light bulbs. A large 500 megawatt turbine can light 5 million 100-watt
light bulbs or supply the power for a medium-sized city.
Steam
turbines are high-precision, high-tolerance pieces of machinery and in many
respects are similar to a jet engine. Each is built-to-order according to the
design specifications of the customer. In general, they are very large pieces of
machinery with extremely heavy castings. The manufacture of steam turbines, like
blowers, requires both low-tech and high-tech processes.
Water Turbines
Generally
For those
applications such as a hydropower plant where the customer is close to a source
of water power and does not need steam for other applications in its plant, a
water turbine may be more economical than a steam turbine. In this case, the
cost of building a source of water pressure (typically a dam) and the viaduct to
the water turbine must be weighed against the cost of building a steam plant. In
general, water turbines have lower tolerances and are considered lower
technology than steam turbines.
A water
turbine operates very much like an enclosed water wheel- high velocity incoming
water pushes against the turbine blades, forcing the turbine to rotate and
provide power to the attached generator set.
As with a
steam turbine, each is built-to-order according to the design specifications of
the customer. The most important consideration in the design is the height of
the water column above the turbine, which will determine how large the turbine
must be and how fast it must turn to achieve the desired power
output.
Our Turbine
Products
We have
been producing water turbines from our blower manufacturing facilities since
2007. We completed the construction of a new turbine manufacturing facility in
2009 for Wuhan Generating. We currently produce steam turbines at our new
turbine manufacturing facility and we also produce steam turbines at our blower
manufacturing facility and at a shared facility. As we receive additional
turbine orders, we will purchase and install additional customized equipment in
this new facility to increase our production capacity.
7
We
currently manufacture the following types of steam turbines:
|
·
|
Regular
steam turbines - these turbines are designed to make maximum use of the
steam, with any waste steam vented into the atmosphere through cooling
towers.
|
|
·
|
Co-generation
steam turbines - these turbines are designed to provide for the use of
“waste steam” by a nearby industrial plant (such as a paper or chemical
plant).
|
Steam
turbine production is characterized by low unit volume with high unit revenue
and margins. While it is difficult to generalize, a 100 megawatt steam turbine
costs approximately $6 million and takes three to six months to
build.
Water
turbines, on the other hand, bear a stronger resemblance (in manufacture) to our
traditional industrial blowers. A water turbine resembles a blower operating in
reverse, powered by water rather than air. Given this similarity, we began
production of water turbines in our existing facilities and in shared facilities
before our new turbine manufacturing facility was completed.
A typical
ten megawatt water turbine costs approximately $450,000 and takes three to four
months to construct.
The
design and manufacturing of steam and water turbines require a high degree of
engineering skill. We have a close relationship with Beijing 3-D, a high tech
enterprise co-sponsored by the Chinese Academy of Sciences, for the purpose of
developing new designs and manufacturing technology for the power generation
equipment manufacturing industry in China. Beijing 3-D has developed world-class
3-dimensional CAD tools for use in the design of steam and water turbines. We
anticipate obtaining rights to this technology in exchange for payment of a
sales royalty on turbines utilizing the technology, although no formal agreement
is currently in place. We believe this
technology gives us significant advantages in providing our customers with the
highest quality turbines, tailored precisely to their needs. Through its use, we
believe we are able to:
|
·
|
increase
steam generator thermal efficiency by approximately 5% to
7%;
|
|
·
|
reduce
coal consumption by approximately 15 to 21g per KWH;
and
|
|
·
|
increase
megawatt output by approximately 10% per
unit.
|
As a
result, we believe that we compete effectively in the turbine market. We also
help provide for China’s need for cleaner and more efficient electric power
production.
Development of Our Steam and
Water Turbine Business
On
January 9, 2007, Wuhan Blower completed the formation of Wuhan Generating. To
develop the Company’s turbine business, Wuhan Blower reached an understanding
with China Chang Jiang Energy Corporation (“China Chang Jiang”), which owns
Wuhan Turbine Works, a manufacturer of energy turbines for power plants. China
Chang Jiang has agreed to allow us to assume the operations of Wuhan Turbine
Works related to the manufacture of steam turbines up to 300 megawatts and water
turbines up to 200 megawatts. To this end, Wuhan Generating hired a number of
the management team members from Wuhan Turbine Works. These former Wuhan Turbine
Works management team members and a limited number of Wuhan Turbine Works
skilled laborers helped Wuhan Generating launch its turbine operations in 2007.
Wuhan Generating recruited 150 employees in 2009, and upon the installation of
all the customized equipment in our turbine manufacturing facility, Wuhan
Generating expects to hire approximately 100 additional employees to assist with
turbine manufacturing.
8
We are
utilizing a management strategy for Wuhan Generating that is similar to the one
we used for Wuhan Blower during its first two years: management and employee
restructuring, movement to a new facility (on our existing premises) and an
intense focus on research and development.
We have
constructed a turbine manufacturing facility adjacent to our blower
manufacturing facilities. We manufacture turbines at our new facility, at our
blower manufacturing facility and at shared facilities. We have purchased
additional customized equipment for our turbine manufacturing facility and will
install this equipment in order to increase our production capacity as we
receive additional turbine orders from our customers. We have spent
approximately $22.5 million on the turbine plant and related equipment; a
portion of the funding for this project was derived from the net proceeds of
our February 2007 private placement and the fall 2008 Series J Warrant
exercises.
In
addition, we have constructed an administrative building for the turbine
manufacturing facility, which is located adjacent to the turbine manufacturing
facility. The administrative building will be used by personnel in
turbine supplies and sales and for other administrative tasks. Construction on
the administrative building began in June 2006 and was completed in
December 2007. We are currently conducting turbine sales from our blower
administrative building. As our turbine sales grow and provide us with
additional working capital, we will complete the interior of our turbine
administrative building and transfer our current and future turbine
administrative staff to this new building.
The
development of the turbine business puts us on a high-margin per unit business
path, offering us exceptional growth opportunities by participating in China’s
dynamic growth in electrical generating capacity requirements.
In
starting our turbine enterprise, we have a seasoned, tested management team, the
availability of cutting-edge design and manufacturing technology and a new
fabrication facility. With these assets, we believe we have assembled the pieces
to create the predominant steam and water turbine manufacturer in
China.
In July 2007, we entered into a
contract for approximately $26.37 million with Jiangsu Huangli Paper Industry
Co., Ltd. (“Jiangsu Huangli”) to build a thermal electric power plant with four
boiler furnaces and two turbine generator groups in Jiangyin, Jiangsu. The
construction of the power plant was temporarily suspended in 2009 due to the
lack of funding by Jiangsu Huangli. We expect the power plant to be completed
around June 2010.
Our
Market
The
market for blowers, steam turbines and water turbines in China is directly
driven by the growth in the country’s overall demand for electricity and the now
mandated requirement for electrical generating equipment that is both more fuel
efficient and less polluting. According to the Energy Information
Administration, China currently has the second greatest amount of installed
electrical capacity of any nation, trailing only the United States. China’s total installed
electricity generating capacity in 2009 was approximately 874 gigawatts
according to the
China Bureau of Statistics. According to the People’s Daily
Online, the Chinese government made the increase in installed capacity a major
part of the 10th (2005)
and 11th (2010)
Five Year Plans. According to RNCOS, an industry research firm, China will
consume around 16% of the world’s energy by 2020.
9
China’s
electrical capacity is installed not only in centralized major power production
plants, but also often on the premises of major industrial facilities. The
on-site production of power allows a company to avoid brownouts or complete loss
of service. In this manner, many companies have insulated themselves from the
short-fall in overall capacity.
Distribution
Methods
In our
industrial blower and turbine businesses, we receive proposals and contracts
mostly through referrals and competitive bidding. We have a marketing
and sales team that provides support and consultation to our
customers. We mainly market our products to steel companies, power
plants, chemical companies, paper mills and hydroelectric power
plants. We also collaborate with major system integrators to jointly
develop and market new products. We have a well established sales
team and a close involvement with major research institutes and design firms
across China. We work jointly with these institutions to develop and
customize products for the specific needs of our customers. We
believe this interactive working relationship with customers has allowed us to
win repeat business, increase visibility and enhance our growth.
We are still developing our relatively
new blower and turbine parts and machinery equipment
business. Currently, this business is primarily manufacturing
products for use by our industrial blower and turbine
businesses. Thus far, this business has utilized referrals and
competitive bidding to secure orders from third parties. This
business also has been working with our blower and turbine sales staff to market
its products.
Our
Customers
In our
blower manufacturing business, we currently have a base of over 420
customers. Our turbine manufacturing business has approximately 62
customers. Our industrial parts and
machinery equipment business has approximately 40 customers, not including Wuhan
Blower and Wuhan Generating.
Raw
Materials and Supplies
The
principal raw materials used in the manufacture of our products are rolled steel
and iron. We believe these materials are widely available from multiple sources,
though we primarily obtain them from three suppliers: Wuhan Iron and Steel
Group, Baoshan Iron & Steel Co. and Jinan Iron & Steel Co.
Research
and Development
We
believe that our research and development (“R&D”) facilities are among the
most advanced in the industry. Our R&D department operates out of a facility
at our Wuhan campus. Our relationships with the Science and Technology
University of Central China, Jiaotong University and the Acoustic Institute of
China Science Academy allow us to stay abreast of the latest developments in the
fields of fluid dynamics, material sciences and acoustics. We have a
sophisticated acoustics lab in our facility, which we share with our university
partners and which the China Fan Performance Test Center uses for some of its
work. During 2009, R&D expense was approximately 1% of sales and we expect
R&D expense to be approximately 1.5% of 2010 sales. Generally, we are able
to offset these costs through increases in the sales price of our
products.
10
Our
Competition
We
believe that there are currently approximately 2,000 blower and fan manufactures
in China, but that most of these are small and do not have the R&D and
manufacturing resources that we do. We compete mainly with six large scale
manufacturers. We believe that there are currently approximately 240
turbine manufactures in China, but that most of these are small and do not have
the R&D and manufacturing resources that we do. We believe there
are approximately five significant manufacturers of steam and water turbines
with whom we compete. In both our blower and turbine businesses, we compete
primarily on the basis of reputation, price, quality, engineering, timeliness
and post-purchase services.
Regulation
We do not
face any significant government regulation of our businesses or in connection
with the production of our products. We do not require any special government
permits to produce our products other than those permits that are required of
all corporations in China.
Our
Employees
As
of March 30, 2010, we employed approximately 810 full-time
employees.
Each of
Wuhan Blower, Wuhan Generating and Wuhan Sungreen has a trade union that
protects employees’ rights, aims to assist in the fulfillment of our economic
objectives, encourages employee participation in management decisions and
assists in mediating disputes between us and union members. This type of union
is typical in the PRC and is not similar to American or European labor
unions. We believe that we maintain a satisfactory working
relationship with our employees and we have not experienced any significant
labor disputes or any difficulty in recruiting employees for our
operations.
As
required by applicable Chinese law, we have entered into employment contracts
with all of our officers, managers and employees.
Our
employees in the PRC participate in a state pension scheme organized by Chinese
municipal and provincial governments. In addition, as required by PRC law, we
provide employees in the PRC with various types of social insurance, including
medical insurance, unemployment insurance and occupational injury
insurance.
11
Item
1A. Risk Factors.
An
investment in our common stock or other securities involves a number of
risks. You should carefully consider each of the risks described
below before deciding to invest in our common stock or other
securities. If any of the following risks develops into actual
events, our business, financial condition or results of operations could be
negatively affected, the market price of our common stock or other securities
could decline and you may lose all or part of your investment.
The
risk factors presented below are all of the ones that we currently consider
material. However, they are not the only ones facing our
Company. Additional risks not presently known to us, or which we
currently consider immaterial, may also adversely affect us. There
may be risks that a particular investor views differently from us, and our
analysis might be wrong. If any of the risks that we face actually
occur, our business, financial condition and operating results could be
materially adversely affected and could differ materially from any possible
results suggested by any forward-looking statements that we have made or might
make. In such case, the trading price of our common stock or the
value of our other securities could decline, and you could lose part or all of
your investment.
Risk
Factors Related to Our Business
Our
steam and water turbine business is a critical component of our growth and
overall business strategy, yet our turbine facility is not fully operational and
we have limited experience manufacturing turbines.
In late
2005, Wuhan Blower reached an understanding with many of the former management
members of Wuhan Turbine Works, a business owned by China Chang Jiang Energy
Corporation, whereby it would establish a new business utilizing their
management and technology to manufacture small to mid-size steam and water
turbines. At that time, we began producing turbines in our existing
manufacturing facilities and in shared facilities. In March 2006, we
broke ground on a new turbine manufacturing facility. The construction of the
turbine manufacturing facility was completed in 2009 and approximately 90% of
the equipment has been installed. As we receive additional turbine orders, we
will install additional customized equipment in this facility in order to
increase our production capacity. We have begun production of turbines from this
facility and will expand production once the installation is complete. The
manufacture of turbines has become a critical component of our business.
However, we have only four years experience manufacturing turbines.
Because
we have had a limited operating history in the turbine manufacturing business,
it is difficult to forecast accurately our future revenues and expenses related
to this business. Additionally, our turbine operations will continue to be
subject to risks inherent in the establishment of a new business, including,
among other things, efficiently deploying our capital, developing our product
and service offerings, developing and implementing our marketing campaigns and
strategies and developing awareness and acceptance of our products. Our ability
to generate future revenues from these operations will be dependent on a number
of factors, many of which are beyond our control. To be successful, we must,
among other things, complete the installation of the customized equipment and
establish market recognition in this business. This will require us to expend
significant resources, including capital and management time.
12
Wuhan
Sungreen is not fully operational and we have little experience manufacturing
and marketing parts for blowers and other industrial equipment.
Wuhan
Sungreen currently produces industrial parts mainly for Wuhan Blower and Wuhan
Generating. Because we have no experience in the parts and machinery equipment
manufacturing business, we may not be successful in selling these products to
third parties. In addition, it is difficult to forecast accurately our future
revenues and expenses related to this business. We also have not completed
construction of a workshop and other buildings to be used by Wuhan
Sungreen. We expect this construction to be completed by the end of
2010.
Our
operations will continue to be subject to risks inherent in the establishment of
a new business, including, among other things, efficiently deploying our
capital, developing our product and service offerings, developing and
implementing our marketing campaigns and strategies and developing awareness and
acceptance of our products. Our ability to generate future revenues from these
operations will be dependent on a number of factors, many of which are beyond
our control. To be successful, we must, among other things, complete our
remaining workshop, integrate our existing management and establish market
recognition in this business. This will require us to expend significant
resources, including capital and management time.
We
have not paid the remaining balance in connection with the Sukong Assets and we
may require additional financing to meet this obligation and to complete
construction of various buildings for Wuhan Sungreen.
We owe a balance of approximately $1.25
million in connection with the Sukong Assets. In addition, we must pay an
additional $5.13 million to complete construction on the acquired facilities. We
may require financing to meet these obligations. There is no guarantee that we
will obtain such financing, and, if we are not able to meet our financial
commitment in a timely manner, we may not be able to continue Wuhan Sungreen’s
operations.
Our
management has identified material weaknesses in our internal control over
financial reporting and disclosure controls and procedures that, if not properly
remediated, could result in material misstatements in our financial statements
in future periods.
In
conjunction with the preparation of this Form 10-K, our management carried out
an evaluation of the effectiveness of the design and operation of our internal
control over financial reporting and disclosure controls and procedures as of
December 31, 2009. Based upon this evaluation, our CEO and CFO concluded that
our internal control over financial reporting and disclosure controls and
procedures contained significant deficiencies and material weaknesses and
therefore were not effective. For more detailed information regarding
our internal control over financial reporting and our disclosure controls and
procedures, see Part II, Item 9A Controls and Procedures.
If the
remedial policies and procedures we implement are insufficient to address the
identified material weaknesses, or if additional significant deficiencies or
material weaknesses in our internal controls are discovered in the future, we
may fail to meet our future reporting obligations, our financial statements may
contain material misstatements and our operating results may be adversely
affected. Any such failure also could adversely affect the results of the
periodic management evaluations regarding the effectiveness of our internal
control over financial reporting.
13
We must implement additional and
expensive procedures and controls in order to grow our business and organization
and to satisfy reporting requirements, which will increase our costs and require
additional management resources.
As a U.S.
public reporting company, we are required to comply with the Sarbanes-Oxley Act
and the related rules and regulations of the SEC, including the requirements
that we maintain disclosure controls and procedures and adequate internal
control over financial reporting. We also are required to comply with
marketplace rules to maintain our NASDAQ listing. Compliance with the
Sarbanes-Oxley Act and other SEC and NASDAQ requirements will increase our costs
and require additional management resources. We have begun upgrading our
procedures and controls and will need to continue to implement additional
procedures and controls as we grow our business and organization and to satisfy
new reporting requirements. If we are unable to complete the required assessment
as to the adequacy of our internal control over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act, or if we fail to maintain internal
control over financial reporting, our ability to produce timely, accurate and
reliable periodic financial statements could be impaired.
Our
substantial indebtedness could adversely affect our results of operations and
financial condition and prevent us from fulfilling our financial
obligations.
|
·
|
limiting
our ability to obtain additional financing to fund growth, working
capital, capital expenditures, debt service requirements or other cash
requirements;
|
|
·
|
limiting
our operational flexibility due to the covenants contained in our debt
agreements;
|
|
·
|
limiting
our ability to invest operating cash flow in our business due to debt
service requirements;
|
|
·
|
limiting
our ability to compete with companies that are not as highly leveraged and
that may be better positioned to withstand economic downturns;
and
|
|
·
|
increasing
our vulnerability to fluctuations in market interest
rates.
|
Our
ability to meet our expenses and debt service obligations will depend on our
future performance, which will be affected by financial, business, economic and
other factors, including potential changes in customer preferences, the success
of product and marketing innovation and pressure from competitors. If we do not
have enough money to pay our debt service obligations, we may be required to
raise additional equity capital, sell assets or borrow more money. We may
not be able, at any given time, to raise additional equity
capital, sell assets or borrow more money on terms acceptable to us or at
all. In the past, we have refinanced our debt prior
to maturity. However, there can be no assurance that we will be able to
refinance our debt on favorable terms, if at all, in the
future.
14
Restrictions in our loan agreement
with Standard Chartered Bank limit our operating and strategic
flexibility.
Our
current loan agreement with Standard Chartered Bank (China) Limited, Guangzhou
Branch contains covenants and events of default that, among other things,
require us to satisfy financial tests and maintain financial ratios. Among other
things, these covenants and events of default limit our ability to:
|
·
|
incur
additional debt;
|
|
·
|
create
or permit to exist certain liens;
|
|
·
|
pay
dividends on capital stock;
|
|
·
|
engage
in specified asset sales;
|
|
·
|
enter
into transactions with affiliates;
|
|
·
|
engage
in mergers and acquisitions; and
|
|
·
|
make
capital expenditures.
|
Events
beyond our control could affect our ability to comply with these covenants,
including the required financial ratios. Failure to comply with any of these
debt covenants would result in a default under this loan agreement. A default
would permit the lender to accelerate the maturity of the debt under this
agreement, foreclose upon our assets securing the debt and terminate any
commitments to lend. Under these circumstances, we may not have sufficient funds
or other resources to satisfy our debt and other obligations. In addition, the
limitations imposed by the loan agreement on our ability to incur additional
debt and to take other actions may significantly impair our ability to obtain
other financing and may prevent us from taking advantage of attractive business
opportunities.
We
are subject to certain financial loan covenants under our loan agreement with
Standard Chartered Bank. If we are unable to satisfy these covenants
or obtain a waiver, the lender could demand immediate repayment of this
loan.
We are
required to comply with certain financial covenants under the loan agreement
with Standard Chartered Bank, including the requirement to maintain certain
leverage ratios among other things. If we are not able to comply with
such covenants, the Company’s outstanding loan balance could become due and
payable immediately and our existing credit facilities with Standard Chartered
Bank could be cancelled. Unless we are able to obtain a waiver from
Standard Chartered Bank for any covenant violations, our business, financial
condition and results of operations would be significantly harmed.
The Company was in compliance with all loan covenants as of December
31, 2009, except that the Company did not comply with the days accounts
receivable ratio covenant in its loan agreement with Standard Chartered.
This ratio is calculated by dividing the Company’s 2009 revenue by 360 and then
dividing that number into accounts receivable. At December 31, 2009, the
Company’s days account receivable ratio was 209, which was above the maximum of
180 provided in the Standard Chartered loan agreement. The Company has
requested a waiver from Standard Chartered for this
noncompliance. Based on the Company’s conversations with Standard
Chartered, the Company does not believe that Standard Chartered will take any
adverse action against the Company for noncompliance with this financial
covenant. However,
Standard
Chartered Bank may not provide a waiver
on acceptable terms.
Our
President and Chief Executive Officer personally guarantees certain of our
financing, the loss of which would adversely affect our business prospects,
results of operations and financial condition.
Our
President and Chief Executive Officer, Mr. Xu Jie, personally guarantees certain
loan facilities that have become an important financing source to our businesses
due to recent cash constraints, which we expect to continue in the near term. We
have no agreement with Mr. Xu regarding his providing such personal
guarantees. Therefore, Mr. Xu could discontinue his guarantee of our
financing at any time. Furthermore, if Mr. Xu ceases to serve as our
President and Chief Executive Officer, or in some similar capacity, by reason of
his death, resignation, termination or for any other reason, we would likely
immediately lose our access to this financing. If this financing were not
available to us and we were unable to replace it with another source of
financing or cash on hand, in the near term we would have to significantly
reduce our spending, which would have a material adverse effect on our business
prospects, financial condition and results of operations.
15
Default
in payment by one or more customers that have large account receivable balances
could adversely impact our results of operations and financial
condition.
A
significant portion of our working capital consists of accounts receivable from
customers. As of December 31, 2009, we had an aggregate amount of $53.96 million
in accounts receivables. If customers responsible for a significant amount of
accounts receivable were to become insolvent or otherwise unable or unwilling to
make timely payments, our business, results of operation, financial condition or
liquidity could be adversely affected. The recent economic downturn
has resulted in longer payment cycles and increased collection costs in excess
of management’s expectations. The economic downturn also may result
in higher defaults than we anticipate.
We
rely on third-party relationships to augment our research and development
capabilities. If we fail to establish new, or maintain existing, collaborative
arrangements, or if our partners do not perform, we may be unable to research
and develop new products and make technological advancements.
Although
we maintain our own research and development facilities, we also rely on
collaborative arrangements with third-parties to research and develop new
products and make technological advancements. For example, we have relationships
with the Science and Technology University of Central China, Jiaotong University
and the Acoustic Institute of the China Science Academy that allow us to stay
abreast of the latest developments in the fields of fluid dynamics, material
sciences and acoustics. We would be harmed by the loss of such
relationships. In addition, we license technological information, and
receive related technical assistance, from Mitsubishi Heavy Industries, Ltd. in
connection with the majority of axial flow fans that we produce. If we fail to
retain our rights under the license agreement, we would not be able to produce
axial flow fans using the technical information provided by Mitsubishi.
Additional collaborations may be necessary in the future. If we fail to enter
into additional collaborative arrangements or fail to maintain our existing
collaborative arrangements, we may not be able to compete successfully with
other companies that achieve technological advancements.
Our
dependence on collaborative arrangements with third-parties subjects us to a
number of risks, including, among others:
|
·
|
collaborative
arrangements may not be on terms favorable to
us;
|
|
·
|
disagreements
with partners may result in delays in research and development,
termination of our collaboration agreements or time consuming and
expensive legal action;
|
|
·
|
we
cannot control the amount and timing of resources that our partners devote
to our research and development and our partners may not allocate
sufficient funds or resources to our projects, or may not perform their
obligations as expected;
|
16
|
·
|
partners
may choose to research and develop, independently or with other companies,
alternative products or technological advancements, including products or
advancements that would compete with
ours;
|
|
·
|
agreements
with partners may expire or be terminated without renewal, or partners may
breach collaboration agreements with us;
|
|
·
|
business
combinations or significant changes in a partner’s business strategy might
adversely affect that partner’s willingness or ability to complete its
obligations to us; and
|
|
·
|
the
terms and conditions of the relevant agreements may no longer be
suitable.
|
The
occurrence of any of these or similar events could adversely affect our research
and development capabilities.
We
have limited business insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. As a result, we do
not have any business liability insurance coverage for our operations. If we
incur any losses, we will have to bear those losses without any assistance. As a
result, we may not have sufficient capital to cover material damage to, or the
loss of, our manufacturing facilities due to fire, severe weather, flood or
other causes, and such damage or loss would have a material adverse effect on
our financial condition, business and prospects.
Our
results could be adversely impacted by product quality and
performance.
We
manufacture and install products based on specific requirements of each of our
customers. We believe that future orders of our products or services will depend
on our ability to maintain the performance, reliability and quality standards
required by our customers. If our products or services have performance,
reliability or quality problems, we may experience delays in the collection of
accounts receivables, higher manufacturing or installation costs, additional
warranty and service expense, and reduced, cancelled or discontinued orders.
Additionally, performance, reliability or quality claims from our customers,
with or without merit, could result in costly and time-consuming litigation that
could require significant time and attention of management and involve
significant monetary damages.
Price
fluctuations and supply constraints in the steel and iron markets could reduce
our profit margins or prevent us from meeting delivery schedules to our
customers.
Our
business is dependent on the prices and supply of steel and iron, which are the
principal raw materials used in our products. The steel and iron industries are
highly cyclical in nature, and steel and iron prices have been volatile in
recent years and may remain volatile in the future. Steel and iron prices are
influenced by numerous factors beyond our control, including general economic
conditions, competition, labor costs, production costs, import duties and other
trade restrictions. In 2007 and early 2008, there were unusually rapid and
significant increases in steel and iron prices and severe shortages in the steel
and iron industries due in part to increased demand from China’s expanding
economy and high energy prices. These increases were followed in the second half
of 2008 by significant decreases. We do not have any long-term contracts for the
purchase of steel and iron and normally do not maintain inventories of steel and
iron in excess of our current production requirements. We can give you no
assurance that steel and iron will remain available to us at competitive prices
or that prices will not continue to be volatile. If the available supply of
steel and iron declines, we could experience price increases that we are not
able to pass on to our customers, a deterioration of service from our suppliers
or interruptions or delays that may cause us not to meet delivery schedules to
our customers. Any of these problems could adversely affect our results of
operations and financial condition.
17
Expansion
of our business may strain our management and operational infrastructure and
impede our ability to meet any increased demand for our products. In addition,
we may need additional funding to support our growth, and this funding may not
be available to us.
Our
business plan is to grow significantly our operations by meeting the anticipated
growth in demand for existing products, and by introducing new products. Our
planned growth includes the continued development of our turbine manufacturing
business and the development of our industrial parts and machinery equipment
business. Growth in our businesses may place a significant strain on our
personnel, management, financial systems and other resources. Our business
growth also presents numerous risks and challenges, including:
|
·
|
our
ability successfully and rapidly to expand sales to potential customers in
response to potentially increasing
demand;
|
|
·
|
the
costs associated with such growth, which are difficult to quantify, but
could be significant; and
|
|
·
|
rapid
technological change.
|
To
accommodate this growth and compete effectively, we may need to obtain
additional funding to improve and expand our manufacturing facilities,
information systems, procedures and controls and to expand, train, motivate and
manage existing and additional employees. Funding may not be available in a
sufficient amount or on favorable terms, if at all. If we are not able to manage
these activities and implement these strategies successfully to expand to meet
any increased demand, our operating results could suffer.
We
depend heavily on key personnel, and turnover of key employees and senior
management could harm our business.
Our
future business and results of operations depend in significant part upon the
continued contributions of our key technical and senior management personnel,
including in particular Xu Jie, our President, Chief Executive Officer and
Chairman of the Board. They also depend in significant part upon our ability to
attract and retain additional qualified management, technical, marketing and
sales and support personnel for our operations. If we lose a key employee, if a
key employee fails to perform in his or her current position, or if we are not
able to attract and retain skilled employees as needed, our business could
suffer. Significant turnover in our senior management could significantly
deplete institutional knowledge held by our existing senior management team. We
depend on the skills and abilities of these key employees in managing the
manufacturing, technical, marketing and sales aspects of our business, any part
of which could be harmed by turnover in the future.
18
We
are a holding company and rely on the receipt of dividends from our operating
subsidiaries. We may encounter limitations on the ability of our subsidiaries to
pay dividends to us.
As a
holding company, we have no direct business operations other than the ownership
of our operating subsidiaries. Our ability to pay dividends and meet other
obligations depends upon the receipt of dividends or other payments from our
operating subsidiaries. In addition, our operating subsidiaries, from time to
time, may be subject to restrictions on their ability to make distributions to
us, including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions relating to doing business in China
as discussed below. If future dividends are paid in Renminbi, fluctuations in
the exchange rate for the conversion of Renminbi into U.S. dollars may reduce
the amount received by U.S. stockholders upon conversion of the dividend payment
into U.S. dollars.
The
ability of our Chinese operating subsidiaries to pay dividends may be restricted
due to their corporate structure.
All of
our operations are conducted in China and substantially all of our revenues are
generated in China. Chinese regulations currently permit the payment
of dividends only out of accumulated profits as determined in accordance with
Chinese accounting standards and regulations. This calculation may differ from
the one performed under generally accepted accounting principles in the United
States, or U.S. GAAP. As a result, we may not receive sufficient distributions
from our Chinese subsidiaries to enable us to make dividend distributions to our
stockholders in the future. The limitations on distributions of the profits of
our Chinese operating subsidiaries could negatively affect our financial
condition and assets, even if our U.S. GAAP financial statements indicate that
our operations have been profitable.
Currently,
our subsidiaries in China are the only significant sources of revenues or
investment holdings for the payment of dividends. If they do not accumulate
sufficient profits under Chinese accounting standards and regulations, we will
be unable to pay any dividends.
We
enjoy certain preferential tax concessions, and the loss of these preferential
tax concessions would cause our tax liabilities to increase and our
profitability to decline.
On
January 1, 2008, the Law of the People’s Republic of China on Enterprise Income
Tax, or the EIT Law, became effective. In accordance with the EIT
Law, the corporate income tax rate was set at 25% for all
enterprises. However, certain industries and projects, such as
enterprises with foreign investors, may enjoy favorable tax treatment pursuant
to the EIT Law and its implementing rules. For 2009, Wuhan Blower and
Wuhan Generating were subject to a 12.5% income tax rate and Wuhan Sungreen was
subject to a 25% income tax rate. We expect that our operating
subsidiaries will be subject to the same rates in 2010.
There can
be no assurance that we will continue to qualify for this preferential tax
treatment or that Chinese tax regulations will remain the same. If we
do not continue to receive our reduced income tax rate, our tax liabilities will
increase and our net income will decrease accordingly.
Under
the EIT Law, we may be classified as a “resident enterprise” for PRC tax
purposes, which may subject us to PRC enterprise income tax for any dividends we
receive from our Chinese subsidiaries and to PRC income tax withholding for any
dividends we pay to our non-PRC stockholders.
Under the
EIT Law, an enterprise established outside of China whose “de facto management
bodies” are located in China is considered a “resident enterprise” and is
subject to the 25% enterprise income tax rate on its worldwide
income. The EIT Law and its implementing rules are relatively new and
it is unclear how tax authorities will determine the tax residency of
enterprises established outside of China.
19
Based on
a recent Notice issued by the State Administration of Taxation, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a resident enterprise if (i) its senior
management in charge of daily operations reside or perform their duties mainly
in China; (ii) its financial or personnel decisions are made or approved by
bodies or persons in China; (iii) substantial assets and properties, accounting
books, corporate chops, board and shareholder minutes are kept in China; and
(iv) at least half of its directors or senior management resides in
China.
All of
our management is currently based in China. If the PRC tax
authorities determine that our U.S. holding company is a “resident enterprise”
for PRC enterprise income tax purposes, we may be subject to an enterprise
income tax rate of 25% on our worldwide taxable income. The “resident
enterprise” classification also could subject us to a 10% withholding tax on any
dividends we pay to our non-PRC stockholders if the relevant PRC authorities
determine that such income is PRC-sourced income. In addition to the
uncertainties regarding the interpretation and application of the new “resident
enterprise” classification, the EIT Law may change in the future, possibly with
retroactive effect. If we are classified as a “resident enterprise”
and we incur these tax liabilities, our net income will decrease
accordingly.
Risks
Related to the Market for Our Stock and Our Capital Structure
The
issuance of shares of common stock upon the exercise or conversion of
outstanding securities may cause significant dilution to our
stockholders and may have an adverse impact on the market price of
our common stock.
As of December 31, 2009, there were
24,941,524 shares of our common stock issuable upon conversion of outstanding
Series A Preferred Stock and Series B Preferred Stock and exercise of
outstanding warrants and options. The issuance of our shares upon the exercise
or conversion of these securities will increase the number of shares of our
common stock outstanding, which could depress
the market price of our common stock.
The perceived risk of dilution may cause our
stockholders to sell their shares, which would contribute to a downward movement
in the price of our common stock. Moreover,
the perceived risk of dilution and the resulting downward pressure on our stock
price could encourage investors to engage in short sales of our common stock. By increasing the number of
shares offered for sale, material amounts of short selling could further
contribute to progressive price declines in our common stock.
We
are prohibited from declaring dividends on our common stock or acquiring any of
our equity securities so long as our Series A Preferred Stock remains
outstanding.
Pursuant to the terms of the Series A
Convertible Preferred Stock Purchase Agreement, which was entered into in
connection with the February 2007 private placement, we cannot declare or pay
any dividends or make any other distributions to any holders of common stock or
acquire any of our equity securities so long as any of the Series A Preferred
Stock is outstanding. While our Series A Preferred Stock remains
outstanding, our holders of common stock will have to rely solely on stock price
appreciation for any return on their investment.
20
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses and pose challenges for our management
team.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act and SEC regulations, have
created uncertainty for public companies and significantly increased the costs
and risks associated with accessing the public markets and public reporting. Our
management team, which has limited experience operating a U.S. public company,
will need to devote significant time and financial resources to comply with both
existing and evolving standards for public companies, which will lead to
increased general and administrative expenses and a diversion of management
time and attention from revenue generating activities to compliance
activities.
Climate change and related regulatory
responses may impact our business.
Climate
change as a result of emissions of greenhouse gases is a significant topic of
discussion and may generate U.S. federal and other regulatory responses in the
near future, including the imposition of a so-called “cap and trade”
system. It is impracticable to predict with any certainty the impact
of climate change on our business or the regulatory responses to it, although we
recognize that they could be significant. The most direct impact is
likely to be an increase in energy costs, which would increase slightly our
operating costs, primarily through increased utility and transportations
costs. In addition, many of our consumers operate power plants and
any restrictions or penalties on their operations could adversely affect their
demand for our products. However, it is too soon for us to predict
with any certainty the ultimate impact, either directionally or quantitatively,
of climate change and related regulatory responses.
Standards
for compliance with Section 404 of the Sarbanes-Oxley Act are relatively new for
our Company, and if we fail to comply in a timely manner, investor confidence
could be harmed and our stock price could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act require an
annual assessment of a public company’s internal control over financial
reporting by management and an audit of the public company’s internal control
over financial reporting by such company’s independent registered public
accountants. We completed annual assessments of our internal controls
in connection with the preparation of our Form 10-KSB for the fiscal year ended
December 31, 2007 and our Form 10-K for the fiscal years ended December 31, 2008
and 2009. These assessments identified material weaknesses in our internal
control over financial reporting. The audit requirement will first apply to our
Form 10-K for the fiscal year ended December 31, 2010. Since this audit process
will be new for our company, we may encounter problems or delays in completing
the implementation of any requested improvements and receiving the audit report
from our independent registered public accountants. Since we previously have not
been able to assess our internal control over financial reporting as effective,
our independent registered public accountants may not be able to provide an
unqualified report for the fiscal year ended December 31, 2010. This may
negatively impact investor confidence and our share price.
21
Our
principal stockholder has the ability to control our operations, including the
election of our directors.
Fame Good
International Limited, a holding company controlled by our President and Chief
Executive Officer, Xu Jie, is the owner of approximately 70.6% of our
outstanding voting securities (excluding shares of our Series A and Series B
Preferred Stock which, until converted into common stock, only vote as a class
on certain matters affecting such preferred stock). As a result, Mr. Xu
possesses significant influence, giving him the ability, among other things, to
elect each member of our Board of Directors and to authorize or prevent proposed
significant corporate transactions. His ownership and control also may have the
effect of delaying or preventing a future change in control, impeding a merger,
consolidation, takeover or other business combination or discouraging a
potential acquirer from making a tender offer. Additionally, Mr. Xu’s interests
may differ from the interests of our other stockholders.
Certain
provisions of our Articles of Incorporation may make it more difficult for a
third party to effect a change in control.
Our
Articles of Incorporation authorize the Board of Directors to issue up to
50,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the Board of Directors without further action by the stockholders. These terms
may include voting rights including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of any preferred
stock could diminish the rights of holders of our common stock, and therefore
could reduce the value of such common stock. In addition, specific rights
granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell assets to, a third party. The ability of the
Board of Directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a change in
control, which in turn could prevent the stockholders from recognizing a gain in
the event that a favorable offer is extended and could materially and negatively
affect the market price of our common stock.
Risks
Related to Doing Business in China
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
In the
last 30 years, despite a process of devolution of regulatory control to
provincial and local levels and resulting economic autonomy and private economic
activities, the Chinese central government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be
harmed by changes in its laws and regulations, including those relating to
taxation, import and export tariffs, environmental regulations, land use rights,
property and other matters. We believe that our operations in China are in
material compliance with all applicable legal and regulatory requirements.
However, the central or local governments of the jurisdictions in which we
operate may impose new, stricter regulations or interpretations of existing
regulations that would require additional expenditures and efforts on our part
to ensure our compliance with such regulations or interpretations.
22
Accordingly,
government actions in the future, including any decision to adjust
economic policies or even to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Any
recurrence of severe acute respiratory syndrome, or SARS, the H1N1 virus (swine
flu) or another widespread public health problem, could harm our
operations.
A renewed
outbreak of SARS or another widespread public health problem such as new
strains of avian influenza or the H1N1 virus (swine flu) in China could
have a negative effect on our operations.
Our
operations may be impacted by a number of health-related factors, including the
following:
|
·
|
quarantines
or closures of some of our manufacturing facilities or offices which would
severely disrupt our operations,
|
|
·
|
the
sickness or death of our key officers and employees,
and
|
|
·
|
a
general slowdown in the Chinese
economy.
|
Any of
the foregoing events or other unforeseen consequences of public health problems
could damage our operations.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues are settled in Renminbi, and any future restrictions on
currency exchanges may limit our ability to use revenue generated in Renminbi to
fund any future business activities outside China or to make dividend or other
payments in U.S. dollars. Although the Chinese government introduced regulations
in 1996 to allow greater convertibility of the Renminbi for current account
transactions, significant restrictions still remain, including primarily the
restriction that foreign investment enterprises may only buy, sell or remit
foreign currencies after providing valid commercial documents at those banks in
China authorized to conduct foreign exchange business. In addition, conversion
of Renminbi for capital account items, including direct investment and loans, is
subject to governmental approval in China, and companies are required to open
and maintain separate foreign exchange accounts for capital account items. We
cannot be certain that the Chinese regulatory authorities will not impose more
stringent restrictions on the convertibility of the Renminbi.
The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition and the value of our common stock.
The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and Renminbi, and between those currencies and other currencies in which
our sales may be denominated. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operational needs and should the Renminbi
appreciate against the U.S. dollar at that time, our financial position, the
business of the Company and the price of our common stock may be harmed.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of declaring dividends on our capital stock or for other business
purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar
equivalent of our earnings from our subsidiaries in China would be
reduced.
23
Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including the U.S. dollar, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative to
the U.S. dollar has remained stable and has appreciated against the U.S. dollar.
Countries, including the United States, have argued that the Renminbi is
artificially undervalued due to China’s current monetary policies and have
pressured China to allow the Renminbi to float freely in world markets. In July
2005, the PRC government changed its policy of pegging the value of the Renminbi
to the U.S. dollar. Under the new policy the Renminbi is permitted to fluctuate
within a narrow and managed band against a basket of designated foreign
currencies. Since then, the Renminbi has appreciated by more than 20% against
the U.S. dollar. While the international reaction to the Renminbi revaluation
has generally been positive, there remains significant international pressure on
the PRC government to adopt an even more flexible currency policy, which could
result in further and more significant appreciation of the Renminbi against the
U.S. dollar.
Inflation
in the PRC could negatively affect our profitability and growth.
While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. During the past 15 years, the rate of inflation in China has been as
high as approximately 20% and China has experienced deflation as low as
approximately minus 2%. If prices for our products and services rise at a rate
that is insufficient to compensate for the rise in the costs of supplies such as
raw materials, it may have an adverse effect on our profitability.
PRC
regulations relating to acquisitions of PRC companies by foreign entities may
create regulatory uncertainties that could restrict or limit our ability to
operate.
In
October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued
a Notice on Relevant Issues concerning Foreign Exchange Administration for
Domestic Residents to Engage in Financing and in Return Investment via Overseas
Special Purpose Companies.
In
accordance with the notice, if an acquisition of a PRC company by an offshore
company controlled by PRC residents has been confirmed by a Foreign Investment
Enterprise Certificate prior to the promulgation of the notice, the PRC
residents must each submit a registration form to the local provincial SAFE
branch with respect to their establishment of an offshore company and also must
file an amendment to such registration if the offshore company experiences
material events, such as changes in the share capital, share transfer, mergers
and acquisitions, spin-off transaction or use of assets in China to guarantee
offshore obligations. The notice also provides that failure to comply with the
registration procedures set forth therein may result in restrictions on our PRC
resident stockholders and subsidiaries. Pending the promulgation of detailed
implementation rules, the relevant government authorities are reluctant to
commence processing any registration or application for approval required under
the SAFE notices.
24
In
addition, on August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the
State-Owned Assets Supervision and Administration Commission of the State
Council, State Administration of Taxation, State Administration for Industry and
Commerce, China Securities Regulatory Commission and SAFE, amended and released
the Provisions for Foreign Investors to Merge and Acquire Domestic Enterprises,
new foreign-investment rules which took effect September 8, 2006, superseding
much, but not all, of the guidance in the prior SAFE circulars. These rules
significantly revised China’s regulatory framework governing onshore-offshore
restructurings and how foreign investors can acquire domestic enterprises. These
rules signify greater PRC government attention to cross-border merger,
acquisition and other investment activities, by confirming MOFCOM as a key
regulator for issues related to mergers and acquisitions in China and requiring
MOFCOM approval of a broad range of merger, acquisition and investment
transactions. Further, the rules establish reporting requirements for
acquisition of control by foreigners of companies in key industries, and
reinforce the ability of the Chinese government to monitor and prohibit foreign
control transactions in key industries.
These
rules may significantly affect the means by which onshore-offshore
restructurings are undertaken in China in connection with offshore private
equity and venture capital financings, mergers and acquisitions. It is expected
that such transactional activity in China in the near future will require
significant case-by-case guidance from MOFCOM and other government authorities
as appropriate. It is anticipated that application of the rules will be subject
to significant administrative interpretation, and we will need to closely
monitor how MOFCOM and other ministries apply the rules to ensure that our PRC
and offshore activities continue to comply with PRC law. Given the uncertainties
regarding interpretation and application of the rules, we may need to expend
significant time and resources to maintain compliance.
It is
uncertain how our business operations or future strategy will be affected by the
interpretations and implementation of the SAFE notices and rules.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. In addition, we are required to maintain records that accurately and
fairly represent our transactions and have an adequate system of internal
accounting controls. Chinese companies and some other foreign companies,
including some that may compete with us, are not subject to these prohibitions,
and therefore may have a competitive advantage over us. Corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices occur from time to time
in the PRC, and our executive officers and employees have not been subject to
the United States Foreign Corrupt Practices Act prior to the completion of the
share exchange in February 2007. If our employees or other agents are found to
have engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial
condition and results of operations.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
PRC
companies historically have not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and computer, financial and other control systems.
As a result, 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 standards required of U.S. public companies. Therefore, we
may, in turn, experience difficulties in implementing and maintaining adequate
internal controls as required under Section 404 of the Sarbanes-Oxley Act. This
may result in significant deficiencies or material weaknesses in our internal
controls which could impact the reliability of our financial statements and
prevent us from complying with SEC rules and regulations and the requirements of
the Sarbanes-Oxley Act. Any such deficiencies, weaknesses or lack of compliance
could have a material adverse effect on our business.
25
Our
business may be adversely affected as a result of China’s entry into the World
Trade Organization (“WTO”) because the preferential tax treatments available to
us may be discontinued and foreign manufacturers may compete with us in the
PRC.
The PRC
became a member of the WTO on December 11, 2001. The current tax benefits that
we enjoy may be discontinued as a result of the PRC’s membership in the WTO. If
this happened, our profitability would be adversely affected. In addition, we
may face additional competition from foreign manufacturers if they set up their
production facilities in the PRC or form Sino-foreign joint ventures with our
competitors in the PRC. In the event that we fail to maintain our
competitiveness against these competitors, our profitability may be adversely
affected.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original legal actions in China based upon U.S.
laws, including the federal securities laws or other foreign laws, against us or
our management.
All of
our current operations are conducted in China. Moreover, the majority of our
officers and directors are currently nationals and residents of China. All or
substantially all of the assets of these persons are located outside the United
States and in the PRC. As a result, it may not be possible to effect service of
process upon these persons within the United States or elsewhere outside China.
In addition, uncertainty exists as to whether the courts of China would
recognize or enforce judgments of U.S. courts obtained against us or our
officers and/or directors predicated upon the civil liability provisions of the
securities laws of the United States or any state thereof, or be competent to
hear original legal actions brought in China against us or such persons
predicated upon the securities laws of the United States or any state
thereof.
Item
1B. Unresolved Staff Comments.
As a
“smaller reporting company,” as defined by Item 10 of Regulation S-K, the
Company is not required to provide this information.
Item
2. Properties.
Wuhan
Blower and Wuhan Generating are located on a shared campus in the Canglongdao
Science Park of Wuhan East Lake Hi-Tech Development Zone in the southernmost
part of Wuhan, Hubei Province, People’s Republic of China, where we have easy
access to the railroads, waterways and roads necessary for the transportation of
our products and where we operate in a new facility in a campus-like setting. We
hold a long term lease on a property with a land area of approximately 1,400,000
square feet with approximately 440,000 square feet of administration and factory
space, which is used to produce blowers and turbines. We finished constructing a
new turbine manufacturing facility in 2009, which occupies an additional 215,482 square
feet, and the exterior of an administrative
building that will facilitate the orders and sales of turbines.
The new administrative building will house the business
operations of Wuhan Generating and will provide an additional 134,656 square
feet. We also hold a long term lease on a property with a land area of
approximately 792,547 square feet used by Wuhan Sungreen to produce industrial
parts and machinery equipment. Wuhan Sungreen has constructed two of its
workshops, and once it completes its third workshop and an administrative
building which the Company expects contruction on both to be completed by the
end of 2010, Wuhan Sungreen will have approximately 650,367 square feet of
workshops, warehouse, retail, office and dormitory buildings.
26
We have
sales offices in the following cities:
|
·
|
Xi’an;
|
|
·
|
Guangzhou;
|
|
·
|
Shanghai;
|
|
·
|
Beijing;
|
|
·
|
Chongqing;
and
|
|
·
|
Nanjing.
|
Item
3. Legal Proceedings.
From time
to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business.
Item
4. Reserved.
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
On July
18, 2008, our common stock commenced trading on the NASDAQ Capital Market under
the symbol “WUHN.” Prior to that time, our common stock was quoted on
the OTC Bulletin Board. The following table sets forth the high and low sale
prices for our common stock for each full quarterly period for the last two
completed fiscal years.
Low
|
High
|
|||||||
First
Quarter 2008
|
$ | 7.01 | $ | 17.50 | ||||
Second
Quarter 2008
|
$ | 4.00 | $ | 10.90 | ||||
Third
Quarter 2008
|
$ | 3.00 | $ | 8.00 | ||||
Fourth
Quarter 2008
|
$ | 2.32 | $ | 6.38 | ||||
First
Quarter 2009
|
$ | 2.41 | $ | 4.77 | ||||
Second
Quarter 2009
|
$ | 1.57 | $ | 2.74 | ||||
Third
Quarter 2009
|
$ | 1.59 | $ | 4.00 | ||||
Fourth
Quarter 2009
|
$ | 1.87 | $ | 2.64 |
Holders
As of
March 30, 2010, there were approximately 147 holders of record of our common
stock.
27
Dividends
We have
not declared or paid any cash dividends on our common stock during the last
three fiscal years. For the foreseeable future, we intend to retain any earnings
to finance the development and expansion of our business, and do not anticipate
paying any cash dividends on our common stock. Any future determination to pay
dividends will be at the discretion of our Board of Directors and will be
dependent upon then existing conditions, including our financial condition and
results of operations, capital requirements, contractual restrictions, business
prospects, and other factors that the Board of Directors considers
relevant.
The
holders of our Series A Preferred Stock are entitled to receive, out of legally
available assets, dividends at the rate of 5% per annum, which accrue quarterly.
Dividends on the Series A Preferred Stock, which are payable in cash or
registered shares of common stock, are cumulative and are prior and in
preference to payment of any dividend or distribution on any junior stock,
including our Series B Preferred Stock and common stock. So long as any shares
of our Series A Preferred Stock are outstanding, we cannot pay any dividend or
make any distribution on any junior stock.
Equity
Compensation Plan Information
We
maintain the 2007 Stock Option Plan (the “Plan”) pursuant to which we may grant
options to purchase shares of common stock to eligible persons. The
following table sets forth summary information regarding options granted and
outstanding under equity compensation plans approved and not approved by the
Company’s stockholders. The following table provides information about option
awards under the Plan as of December 31, 2009.
Number
of
securities to be
issued
upon exercise of
outstanding
options,
warrants
and
rights
|
Weighted-
average exercise
price
of
outstanding
options,
warrants
and
rights
|
Number of securities
remaining available for
future
issuance under
the
Plan (excluding
securities
reflected in
first
column)
|
||||||||||
Equity
compensation plans previously approved by security holders
|
80,000 | $ | 7.08 | 2,920,000 | ||||||||
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
Total
|
80,000 | $ | 7.08 | 2,920,000 |
Item
6. Selected Financial Data.
As a
“smaller reporting company,” as defined by Item 10 of Regulation S-K, the
Company is not required to provide this information.
28
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The
Company is a holding company that conducts its operations through three indirect
operating subsidiaries: Wuhan Blower, Wuhan Generating and Wuhan Sungreen, each
a company operating in China. UFG, a wholly owned subsidiary of the
Company, owns 100% of the capital stock of Wuhan Blower, which in turn owns 100%
of the capital stock of Wuhan Generating and Wuhan Sungreen.
The
information and data contained in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations reflect the operating results and
financial condition for the years ended December 31, 2009 and 2008.
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Sales. Sales decreased $25.55
million, or 21.54%, to $93.08 million in 2009 from $118.63 million in
2008. The decrease in sales was primarily due to a delay in the
equipment replacement cycle within China’s steel manufacturing companies which
resulted in fewer sales in 2009 and capital expenditure restrictions on our
power plant customers due to the global economic crisis.
Cost of Sales. Our cost of
sales decreased $14.72 million, or 17.43%, to $69.72 million in 2009 from $84.44
million in 2008. This decrease was due to the significant decrease in sales of
$10.66 million due to lower demand from steel companies for our blower products
and a decrease in sales of $15.64 million in our turbine business.
Gross Profit. Our gross
profit decreased $10.83 million, or 31.68%, to $23.36 million in 2009 from
$34.19 million in 2008. Gross profit as a percentage of sales was
25.10% in 2009 compared to 28.82% in 2008. The decline in gross
profit is primarily driven by the decrease in sale price of our turbine
products, which decreased about 12.04% due to increased competition and from the
lower economies of scale due to our decrease in sales.
Selling Expenses. Our selling
expenses in 2009 decreased approximately $1.74 million, or 51.99%, to
approximately $1.61 million from approximately $3.35 million in
2008. As a percentage of sales, selling expenses were 1.73% in 2009
compared to 2.82% in 2008. This decrease as a percentage of sales was
primarily attributable to lower incentive expenses as a result of the
significant decrease in sales.
General and Administrative
Expenses. Our general and administrative expenses decreased
approximately $157,408, or 2.03%, to $7.60 million in 2009 from approximately
$7.75 million in 2008. This decrease was primarily due to
management’s effective control of expenses, offset by a consultancy fee of
approximately $187,624 relating to a bridge loan in 2009. As a
percentage of sales, general and administrative expenses were 8.16% in 2009
compared to 6.54% in 2008. This increase as a percentage of sales was
primarily attributable to the lower economies of scale as a result of the
significant decrease in sales and the reasons mentioned above.
Warranty
Expense. Our warranty expense decreased to approximately
$371,764 in 2009 from approximately $469,586 in 2008. This decrease
was primarily due to our decrease in sales. As a percentage of sales,
warranty expense was 0.40% in 2009, which is consistent with that in
2008.
Operating Income. Our
operating income decreased $8.84 million, or 39.06%, to $13.78 million in 2009
from $22.62 million in 2008. As a percentage of sales, operating
income was 14.81% in 2009 compared to 19.07% in 2008. This decrease
as a percentage of sales was primarily attributable to the lower economies of
scale as a result of the significant decrease in sales and the reasons mentioned
above.
29
Interest
Income. Our interest income increased to approximately
$341,071 in 2009 from approximately $84,525 in 2008. This income was
primarily due to the interest on the restricted cash deposit.
Other Income (Expenses). Our
other income decreased to approximately $226,798 in 2009 from approximately
$986,678 in 2008. As a percentage of sales, other income was 0.24% in
2009 compared to 0.83% in 2008. Our other expenses decreased to
approximately $92,132 in 2009 from approximately $199,621 in 2008. As
a percentage of sales, other expenses was 0.10% in 2009 compared to 0.17% in
2008.
Interest Expense. Our
interest expense increased to approximately $3.20 million in 2009 from
approximately $1.99 million in 2008. This increase was
primarily due to an increase in bank borrowings to approximately $46.76
million at December 31, 2009 from approximately $36.63 million at
December 31, 2008. Moreover, additional interest of
approximately $555,484 relating to bridge loan and a fee of approximately
$58,572 relating to a loan arrangement was incurred in 2009. As a
percentage of sales, interest expense was 3.44% in 2009 and 1.68% in
2008.
Income Taxes. The Company’s
income tax liability was approximately $1.45 million in 2009 compared to $0 in
2008. This increase resulted from the expiration of a tax holiday
enjoyed by the Company in 2008. For the year ended December 31, 2009,
Wuhan Blower and Wuhan Generating were subject to a 12.5% tax rate and Wuhan
Sungreen was subject to a 25% tax rate.
Net Income. Our net income
decreased $7.69 million, or 47.60%, to $8.46 million in 2009 from $16.15 million
in 2008, as a result of the factors described above, offset by a non-cash
charge of $1.15 million in 2009 compared to $5.36 million in 2008.
Liquidity
and Capital Resources
Our
primary capital needs have been to fund the working capital requirements
necessitated by the expansion of our manufacturing facilities and the
development of our new industrial parts and machinery equipment
business. We finance our business operations primarily through cash
generated by our operations, bank loans and various financing
transactions. As of December 31, 2009, we had cash and cash
equivalents of $8.17 million, including restricted cash of $7.76
million.
As
discussed above, in 2009, our sales decreased 21.54% compared to
2008. This decrease in sales was primarily due to a delay in the
equipment replacement cycle within China’s steel manufacturing companies which
resulted in fewer sales and capital expenditure restrictions on our power plant
customers due to the global economic crisis. For many of the same
reasons, we also have experienced significant delays in receiving payments from
our customers. As discussed in more detail below, the number of days
sales were outstanding increased 93 days at December 31, 2009, compared to
December 31, 2008. The combination of these factors resulted in our
income from operations being insufficient to meet our working capital
needs. At the same time, banks tightened their lending policies as a
result of the turmoil in the credit markets. This required us to use
bridge loans to finance our working capital needs during this
period.
30
On
November 11, 2009, we closed a new loan facility with Standard Chartered Bank
(China) Limited, Guangzhou Branch; this loan facility provides up to RMB
303,100,000 (approximately $44.4 million) in senior secured debt
financing. As described in more detail below, the proceeds received
to date have been used to repay our existing bank loans and notes and fund our
ongoing construction projects. In addition, the loan proceeds should
allow us to use our operating income to fund our working capital
needs.
The
majority of our customers pay us in installments at various stages of project
completion. The percentage of the purchase price due at the various stages
varies somewhat between contracts. In our standard sales contract, we receive
60% of the purchase price of a piece of equipment at the time of delivery.
Alternatively, some sales contracts provide for 15% due upon signing and 45% due
upon delivery. We generally receive an additional 30% of the purchase price when
the equipment is installed and runs without problem for 72 hours. However, since
our equipment is generally a component of a larger project, there are times that
customers do not allow us to install the equipment immediately upon delivery. We
generally require the final 10% no less than 18 months following the
installation. Moreover, for our customers with restricted capital expenditures,
the payment due upon delivery and after installation is occasionally delayed.
Due to the global economic crisis, some customers did not strictly adhere to the
contractual payment terms. This increased our accounts receivable, which
is discussed in detail below. Although the payment terms in our standard
sales contract result in a long payment cycle, we believe our payment terms are
typical in our industry in China and the allowance of bad debts according to our
accounting policy is effective and sufficient.
Accounts
receivable are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. Pursuant to the Company’s
accounting policies, the allowance for doubtful accounts is determined by
applying a rate of five percent on outstanding accounts
receivable. In addition, the Company uses a specific review process
to determine if any additional allowances for doubtful accounts are
required. Bad debts are charged against the allowance when
outstanding accounts receivable have been determined to be
uncollectible. We provide for bad debts principally based upon the
aging of accounts receivable, in addition to collectability of specific customer
accounts, our history of bad debts and the general condition of the
industry. Due to the difficulty in assessing future trends and the
global economic downturn, we could be required to increase our provisions for
doubtful accounts. As our accounts receivable age and become
uncollectible, our cash flow and results of operations are negatively
impacted.
Accounts receivable increased from
$41.5 million to $54.0 million from December 31, 2008 to December 31,
2009. The allowance for bad debt provided in accordance with the
Company’s accounting policy was $2.8 million at December 31,
2009. The Company applied a rate of 5% on outstanding accounts
receivable, which resulted in an allowance of $1.6 million. The
number of days that sales were outstanding increased in 2009 when compared to
2008; so, the Company made an assessment of its outstanding receivables and
provided a specific write off during the year in the amount of $1.9 million to
reflect actual unrecoverable amounts. Although the Company’s results
of operations were adversely impacted by the global economic slowdown in 2008
and in the first half of 2009, the Company is experiencing a recovery and it
believes that its customers will make payments on their outstanding
balances.
In order
to manage this increase in accounts receivable, we have employed additional
resources in collecting on outstanding accounts receivable and have aligned more
closely sales commissions with the collection on sales. The accounts receivable
balance increased by $12.48 million, with a corresponding increase in days sales
outstanding of 93 days, at December 31, 2009 compared to December 31,
2008. This increase resulted primarily from delayed payments from our
major customers. Our major customers, particularly state-owned steel
companies and power generating companies, delayed their payments to the Company
due to the economic slow down and the resulting restrictions on their
cash. This resulted in a significant increase in days sales
outstanding for our accounts receivable. In addition, most of our
major customers demanded lower prepayments and progress billings and longer
payment terms. All of these fadctors negatively affected the
Company’s operating cash flow.
At
December 31, 2009, we had $4.68 million in other receivables, which is an
increase of approximately $2.97 million compared to the balance at December 31,
2008.
We also
had advances to suppliers of $24.62 million at December 31, 2009, which
increased by $4.34 million compared to the balance at December 31,
2008. The increase was mainly due to significant payments made during
the year 2009 to suppliers for electrical power generators and raw
materials. We typically need to place a deposit in advance with our
suppliers on a portion of the purchase price, and for some suppliers, we must
maintain a deposit for future orders.
We had
inventory turnover of 7.10 times and 12.84 times for the year ended December 31,
2009 and December 31, 2008, respectively. We calculate inventory
turnover as sales divided by average inventory. Inventory increased
$987,021 in raw materials, $4.25 million in work in progress and decreased
$194,561 in finished goods for the year ended December 31, 2009. The
raw materials increase resulted from the Company’s effort to increase desired
stock levels to take advantage of decreased steel prices during 2009 and to
increase production level.
31
Net cash
used in operating activities for 2009 was approximately $15.42 million, as
compared to approximately $5.48 million used in 2008. This change was
primarily due to a decrease in net operating income coupled with an increase in
receivables with a relatively long collection period and increased advances to
suppliers, but partially offset by an increase in customer
deposits.
Net
cash provided in investing activities in 2009 was approximately $2.92
million, as compared to approximately $16.83 million used in
2008. This change was mainly a result of a decrease in restricted
cash.
Net cash
provided by financing activities in 2009 was approximately $9.93 million, as
compared to approximately $19.95 million provided in 2008. This
change was primarily due to the proceeds raised from the exercise of warrants by
investors in 2008.
We intend
to expend a significant amount of capital to complete our facilities and the
installation of equipment and to make deposits for performance bonds for new
projects that we have obtained. In light of the Company’s new credit
facility with Standard Chartered Bank, which is discussed below, the Company
believes that its currently available working capital, combined with cash from
operations and bank financing, should be adequate to sustain operations at
current levels through at least the next 12 months. 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
reducing interest expense.
Bank Loans
Generally
As of
December 31, 2009, we had banking facilities in the form of bank loans and loan
facilities from other non-bank entities totaling approximately $46.76 million
(based on an exchange rate of 6.83720 RMB per 1 U.S. dollar). The
Company had no availability under its bank facilities and loan facilities as of
December 31, 2009. Information regarding these loans is set forth below in
US $.
32
Interest
|
At
|
At
|
|||||||||||||
Rate
Per
|
December
31,
|
December
31,
|
|||||||||||||
Subsidiary
|
Type
|
Name
of Creditor
|
Due
Date
|
Annum
|
2009
|
2008
|
|||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
5/20/2009
|
8.96 | % | $ | - | $ | 729,479 | ||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
5/22/2009
|
8.96 | % | - | 729,479 | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
5/25/2009
|
8.96 | % | - | 729,480 | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
5/27/2009
|
8.96 | % | - | 729,480 | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
5/29/2009
|
8.96 | % | - | 729,480 | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
6/4/2009
|
8.96 | % | - | 729,480 | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
6/23/2009
|
8.96 | % | - | 583,584 | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
8/26/2009
|
8.96 | % | - | 1,167,168 | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
8/24/2009
|
8.96 | % | - | 1,167,168 | ||||||||
Wuhan
Blower
|
Bank
Loans
|
China
Citic Bank
|
4/19/2010
|
5.31 | % | 3,656,467 | - | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Bank
of China Ltd.
|
3/2/2010
|
5.40 | % | 804,423 | - | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Guangdong
Development Bank
|
6/15/2010
|
6.37 | % | 1,608,846 | - | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Agricultural
Bank of China
|
8/6/2010
|
5.84 | % | 7,312,935 | - | ||||||||
Wuhan
Blower
|
Bank
Loans
|
Hankou
Bank
|
7/5/2010
|
4.425 | % | 833,675 | - | ||||||||
subtotal
|
14,216,346 | 7,294,798 | |||||||||||||
Wuhan
Blower
|
Notes
Payable
|
China
Minsheng Banking Corp., Ltd.
|
1/22/2009
|
- | 1,458,959 | ||||||||||
Wuhan
Blower
|
Notes
Payable
|
Citic
Industrial Bank
|
3/27/2009
|
- | 3,647,399 | ||||||||||
Wuhan
Blower
|
Notes
Payable
|
Industrial
Bank Co., Ltd.
|
2/28/2009
|
- | 1,313,064 | ||||||||||
Wuhan
Blower
|
Notes
Payable
|
Industrial
Bank Co., Ltd.
|
3/2/2009
|
- | 1,750,751 | ||||||||||
Wuhan
Blower
|
Notes
Payable
|
Industrial
Bank Co., Ltd.
|
2/28/2009
|
- | 1,313,064 | ||||||||||
Wuhan
Blower
|
Notes
Payable
|
Shanghai
Pudong Development Bank
|
2/10/2009
|
- | 579,760 | ||||||||||
Wuhan
Blower
|
Notes
Payable
|
Shanghai
Pudong Development Bank
|
2/18/2009
|
- | 744,069 | ||||||||||
Wuhan
Blower
|
Notes
Payable
|
Standard
Chartered Bank
|
4/21/2010
|
1,828,234 | - | ||||||||||
Wuhan
Blower
|
Notes
Payable
|
Standard
Chartered Bank
|
3/3/2010
|
417,047 | |||||||||||
Wuhan
Blower
|
Notes
Payable
|
Standard
Chartered Bank
|
3/18/2010
|
1,462,587 | |||||||||||
Wuhan
Blower
|
Notes
Payable
|
Standard
Chartered Bank
|
2/11/2010
|
731,294 | |||||||||||
Wuhan
Blower
|
Notes
Payable
|
Bank
of Communications
|
1/24/2010
|
892,178 | - | ||||||||||
subtotal
|
5,331,340 | 10,807,067 |
33
Wuhan
Generating
|
Bank
Loans
|
Citic
Industrial Bank
|
3/2/2009
|
8.22 | % | - | 2,917,919 | ||||||||
Wuhan
Generating
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
1/7/2009
|
7.47 | % | - | 1,458,959 | ||||||||
Wuhan
Generating
|
Bank
Loans
|
Hankou
Bank
|
10/13/2010
|
5.31 | % | 1,462,587 | - | ||||||||
Wuhan
Generating
|
Bank
Loans
|
Bank
of Communications
|
12/23/2010
|
5.67 | % | 1,462,587 | - | ||||||||
Wuhan
Generating
|
Bank
Loans
|
Bank
of Communications **
|
12/23/2010
|
5.67 | % | 1,462,587 | 1,458,959 | ||||||||
subtotal
|
4,387,761 | 5,835,837 | |||||||||||||
Wuhan
Generating
|
Long
Term Loan
|
Standard
Chartered Bank
|
12/17/2012
|
9.40 | % | 2,925,714 | - | ||||||||
Wuhan
Blower
|
Long
Term Loan
|
Standard
Chartered Bank
|
12/16/2013
|
9.40 | % | 7,094,145 | - | ||||||||
Wuhan
Sungreen
|
Notes
Payable
|
Various
vendors and individuals
|
On
Demand
|
13,066 | - | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
6/26/2009
|
- | 2,480,231 | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/15/2009
|
- | 1,458,958 | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/16/2009
|
- | 4,376,878 | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
6/24/2009
|
- | 4,376,878 | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/6/2010
|
1,462,587 | - | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/12/2010
|
1,462,587 | - | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/17/2010
|
1,462,587 | - | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/22/2010
|
1,462,587 | - | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Hankou
Bank
|
4/13/2010
|
1,462,587 | - | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Hankou
Bank
|
4/21/2010
|
530,188 | - | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Hankou
Bank
|
4/26/2010
|
917,773 | - | ||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
4/8/2010
|
3,948,985 | - | ||||||||||
subtotal
|
12,789,881 | 12,692,947 | |||||||||||||
total
|
$ | 46,758,253 | $ | 36,630,649 |
**
|
In
2008, loan was classified as long-term
loan
|
34
We plan
to either repay this debt as it matures or refinance this debt with other
debt. Our subsidiary, Wuhan Blower, recently financed up to RMB
303,100,000 (approximately $44.4 million) in the form of a bank loan that was
used to repay our current bank debt, purchase equipment for Wuhan Generating and
complete the capital expenditure investments of Wuhan Sungreen. Since
these proceeds are available to Wuhan Generating to complete its construction
projects, the Company can use the funds generated from operations for working
capital.
On
November 11, 2009, Wuhan Blower, Wuhan Generating and Wuhan Sungreen
(collectively, the “Borrowers”) entered into a Loan Agreement with Standard
Chartered Bank (China) Limited, Guangzhou Branch (the “Standard
Chartered”). The Loan Agreement provides for a loan facility totaling
RMB 303,100,000 (approximately $44.4 million) in senior secured debt financing
consisting of a term loan facility for up to RMB 211,600,000 (approximately
$31.0 million) (the “Tranche A Loan”) and a term loan facility for up to RMB
91,500,000 (approximately $13.4 million) (the “Tranche B Loan,” together with
the Tranche A Loan, the “Loans”). The Tranche A Loan was used
primarily to repay the existing bank debts of Wuhan Blower and Wuhan Generating
and to purchase equipment for Wuhan Generating. The Tranche B Loan
will be used primarily to facilitate the capital expenditure investments of
Wuhan Sungreen.
As of
December 31, 2009, the Company had used approximately $10.02 million under the
Tranche A Loan and approximately $4.44 million under a bridge loan with Standard
Chartered. As of December 31, 2009, the Company had under the Tranche
A Loan and Tranche B Loan unused amounts of approximately $20.93 million and
$13.38 million, respectively. The Company also had approximately
$1.41 million unused under the bridge loan with Standard
Chartered. These unused amounts are not available to the Company
until the Company meets certain conditions. As of January 29, 2010,
the Company received an additional amount of approximately $13.03 million under
the Tranche A Loan.
The obligations under the Loan Agreement are
guaranteed by the Company, Universe Faith Group Limited and Mr. Xu Jie
personally. Each of the guarantors also is a party to the Loan
Agreement.
35
Both the
Tranche A Loan and the Tranche B Loan will mature on the third anniversary of
the date of the first drawdown under the Tranche A Loan, subject to an extension
of one year and a half at Standard Chartered’s sole
discretion. Commencing fifteen months after the first drawdown under
the Tranche A Loan, the Borrowers will be required to pay eight successive
quarterly installments on the Tranche A Loan. With respect to the
Tranche B Loan, the Borrowers will be required to make eight installment
payments commencing fifteen months after the first drawdown under the Tranche A
Loan.
The
Tranche A Loan bears interest at a fixed rate of 9.40%. The interest
rate of the Tranche B Loan will be either a fixed rate or floating rate plus
margin, to be determined at the time of the first drawdown. The
Borrowers also must pay to Standard Chartered, who also serves as the facility
agent, an annual commitment fee of 3%, which is to be paid monthly while the
Loans are available.
Subject
to certain conditions, the Borrowers may voluntarily prepay the Loans with a
prepayment fee. The Borrowers are subject to a mandatory prepayment
of the Loans if the Borrowers obtain any new debt financing, dispose of certain
assets, distribute dividends or change control, among other
circumstances.
The Loan
Agreement contains covenants, which include, among others: limitation on the
incurrence of additional indebtedness; limitation on guarantees, liens,
investments, sale of assets, mergers, change of control and capital
expenditures; and maintenance of specified financial ratios. So long
as any amount is outstanding under the Loans, (1) the Borrowers must maintain a
Loan to Value Ratio of 75% through June 2010 and 65% thereafter and (2) Wuhan
Blower must maintain (i) a ratio of total debt to EBITDA of less than certain
amounts that range from 3.0 to 3.5 during 2009 and 2010 and 2.5 in 2011 and (ii)
total revenues must exceed certain amounts that range between RMB 600,000,000
(approximately $87.9 million) to RMB 750,000,000 (approximately $109.9 million)
from 2009 through 2011. The
Company was in compliance with all loan covenants as of December 31, 2009,
except that the Company did not comply with the days accounts receivable ratio
covenant in its loan agreement with Standard Chartered. This ratio is
calculated by dividing the Company’s 2009 revenue by 360 and then dividing that
number into accounts receivable. At December 31, 2009, the Company’s
days account receivable ratio was 209, which was above the maximum of 180
provided in the Standard Chartered loan agreement. The Company has
requested a waiver from Standard Chartered for this
noncompliance. Based on the Company's conversations with Standard
Chartered, the Company does not believe that Standard Chartered will take any
adverse action against the Company for noncompliance with this financial
covenant.
The
Tranche B Loan is subject to additional conditions, including the completion of
syndication of at least RMB 80,000,000 (approximately $11.7 million) under the
Tranche A Loan and the Borrowers maintaining a ratio of total debt to
consolidated EBITDA of less than 2.9 and total annual revenues of at least RMB
600,000,000 (approximately $87.9 million).
As a
condition to the Loans, the Borrowers granted to Standard Chartered a security
interest in substantially all of their assets, including, among other things,
mortgages over land use rights and ownership of buildings, factories and
equipment, pledge of shares, existing and future account receivables that exceed
certain amounts and registered trademarks. In addition, each of the
Borrowers agreed to provide financial and other information within certain time
frames, including audited financial statements within 90 calendar days after the
end of each fiscal year and unaudited financial statements within 15 calendar
days after the end of each fiscal quarter. Each of the Borrowers and
guarantors also agreed, among other things, that there will be no material
changes in the senior officers or board of directors without the prior written
consent of Standard Chartered, and all related party transactions will be at
arm’s-length.
The
failure to satisfy the covenants under the Loan Agreement or the occurrence of
other specified events that constitute an event of default could result in the
acceleration of the repayment obligations of the Borrowers. The
events of default include, among others: the failure to make payments under the
Loan Agreement; insolvency or bankruptcy proceedings involving any of the
Borrowers; cross defaults to other indebtedness by the Borrowers; material
litigation or a change in control of the Borrowers; and subject to certain
limitations, the failure to perform or observe covenants or other obligations
under the Loan Agreement or related documents by the Borrowers or
guarantors.
36
The
Borrowers are subject to a penalty interest rate of 1% on all amounts due and
unpaid if the Borrowers fail to pay any sum payable when due. In
addition, the Borrowers are subject to a penalty interest rate of the People’s
Bank of China rate, plus a mark up of 50% to 100%, on all amounts used for
purposes that do not comply with the stated purposes under the Loan
Agreement.
The Loan Agreement is governed by the
laws of the PRC. All financial covenants under the Loan Agreement are
based on generally accepted accounting principles in the PRC. All
amounts in the Loan Agreement are denominated in RMB, which is the currency used
in the PRC. The dollar translations used in this summary of the Loan
Agreement are based on the exchange rate of RMB 6.83 for each 1.00 U.S. Dollar,
on November 12, 2009.
In
connection with the Loan Agreement, the Borrowers entered into an agreement with
Standard Chartered Corporate Advisory Co. (Beijing), Ltd. (the “Advisor”) for
certain advisory and management services. Under this agreement, the
Borrowers agreed to pay to the Advisor a management fee of 1% of the net gross
revenues of the Borrowers in connection with the Tranche B Loan. This
management fee remains valid and payable until one year after the maturity date
of the Loans. In addition, the Borrowers have agreed to pay to the
Advisor an advisory fee of 8% of the Loans. This description of the
agreement is qualified in its entirety by reference to the Consulting Service
Agreement, which is being filed as Exhibit 10.20 to this Annual Report on Form
10-K.
The
foregoing summary of the Loan Agreement is qualified in its entirety by
reference to the Loan Agreement, which is filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the SEC on November 16,
2009.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
Method
of Accounting
The
Company maintains its general ledger and journals with the accrual method of
accounting for financial reporting purposes. The financial statements
and notes are representations of management. Accounting policies
adopted by the Company conform to generally accepted accounting principles in
the United States of America and have been consistently applied in the
presentation of financial statements, which are compiled on the accrual basis of
accounting.
37
The
Company modified the presentation of the statement of cash flows for the year
ended December 31, 2008. The change is related to the purchase of the
Sukong Assets. The purchase was previously presented as an all cash
transaction. The restated presentation shows that a significant
portion of the total purchase price was a non-cash transaction where the Company
transferred certain advances to suppliers and receivables without recourse
valued at $20,064,965 to the seller in exchange for the Sukong
Assets. The
Company also reclassified inventory related to the Huangli Project which was a
correction of a classification error. The amount of $2,188,439 was
previously classified in the construction-in-progress at December 31,
2008. The Company has moved the amount to the inventory account, and
it has been subcategorized as raw materials. The reclassification
caused a decrease in construction in progress and a corresponding increase in
the inventory accounts. The related total of current assets increased
while the total of non-current assets decreased. Total assets
remained unchanged. Net cash sourced from operations was previously
$16,776,026. The restated presentation shows net cash used in
operations is $5,477,378. The net cash used in investing activities
was previously $39,087,376. The restated presentation shows cash used
in investing activities as $16,833,972. The Company’s earnings for the year
ended December 31, 2008 were unaffected by the change in
presentation caused by the non-cash investing activity related to the
Sukong Assets and the reclassification of inventory related to the Huangli
Project. In accordance with SFAS 154 Accounting Changes and Error
Corrections, the revision is accounted for as a correction of error by the
Company. The Company did not make any adjustment to its general
ledger accounts. The restatement was limited to the presentation of
the statement of cash flows.
Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries, UFG, Wuhan Blower, Wuhan Generating and Wuhan
Sungreen. Inter-company transactions, such as sales, cost of sales,
due to/due from balances, investment in subsidiaries, and subsidiaries’
capitalization have been eliminated.
Economic
and Political Risks
The
Company’s operations are conducted in the People’s Republic of China (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 economy.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting years. These estimates and assumptions include, but are not
limited to, the valuation of accounts receivable and inventories, deferred
income taxes, warranty liability and the estimation of useful lives of property,
plant and equipment. Actual results could differ from these
estimates.
Cash
and Cash Equivalents
The
Company considers all cash and other highly liquid investments with initial
maturities of three months or less to be cash equivalents. The
Company maintains bank accounts in the PRC.
Accounts
Receivable-Trade
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An allowance for doubtful
accounts is made when collection of the full amount is no longer probable.
Pursuant to the Company’s accounting policies, the allowance for doubtful
accounts is determined by applying a rate of five percent on outstanding trade
receivables. In addition, the Company uses a specific review process to
determine if any additional allowances for doubtful accounts are
required. Bad debts are charged against the allowance when
outstanding trade receivables have been determined to be
uncollectible.
38
Inventory
Inventory,
consisting of raw materials, work in progress, and finished products, is stated
at the lower of cost or market value. Finished products are comprised
of direct materials, direct labor and an appropriate proportion of
overhead.
Property,
Plant, and Equipment
Property,
plant, and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over their estimated useful
lives, using the straight-line method with 5% salvage value. Estimated useful
lives of the property, plant and equipment are as follows:
Buildings
|
30
years
|
|
Machinery
and Equipment
|
10
years
|
|
Furniture
and Fixtures
|
5
years
|
|
Motor
Vehicles
|
5
years
|
Intangible
Assets
Intangible
assets are stated at cost less accumulated amortization. Amortization
is provided over the respective useful lives, using the straight-line
method. Estimated useful lives of intangibles are as
follows:
Technical
Licenses
|
10
years
|
|
Trademark
|
20
years
|
Annually,
the Company reviews the intangible assets for impairment, in accordance with ASU
350 Impairment of Long-Lived Assets. The Company considers whether
the estimated future benefits of the technical licenses and trademarks will be
fully realized over the course of their estimated useful lives. If
the technical licenses become obsolete, or trademarks are unsuccessfully
defended against infringement by third-parties, the Company will consider future
cash flows and relevant factors to quantify the level of impairment and record
impairment adjustments accordingly. The Company has not yet
recognized any impairment upon the intangible assets.
Land
Use Rights
The
Company carries land use rights at cost less accumulated
amortization. Land use rights are amortized straight-line over the
useful life of 50 years for the Wuhan Blower and Wuhan Generating campus, and of
30 years for the Wuhan Sungreen campus.
Accounting
for Impairment of Long-Lived Assets
The
Company adopted Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The Company periodically evaluates the carrying
value of long-lived assets to be held and used in accordance with SFAS
144. SFAS 144 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets’ carrying amounts. In that event, a loss is recognized
based on the amount by which the carrying amount exceeds the fair market value
of the long-lived assets. Loss on long-lived assets to be disposed of
is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. The
Company’s long-lived assets are grouped by their presentation on the financial
statements according to the balance sheet and further segregated by their
operating and asset type. Long-lived assets subject to impairment
include buildings, equipment, vehicles, trademarks, software licenses, land use
rights and real property available for sale. The Company considers
annually whether these assets are impaired. The Company makes its
determinations based on various factors that impact those assets. For
example, the Company considers real property impaired if property prices
decrease drastically and it is unlikely that the prices will recover within the
foreseeable future. Although property values in the PRC have
experienced a decline during the last year, prices are increasing again.
Therefore, the Company believes its real property has at least retained the
value of its original cost to the Company. Equipment used for
production, which undergo regular maintenance, is assessed
annually. The Company has maintained a profitable business amidst the
economic downturn and equipment has continued to be used for production,
indicating that such equipment still retains its value to the
Company. Based on its review, the Company believes that, as of
December 31, 2009 and December 31, 2008, there were no significant impairments
of its long-lived assets.
The
Company believes that cash flows generated by its ongoing business, which
incorporates significant use of the long-lived assets of the Company, provide
sufficient profit so that it is unnecessary to record any impairment
charges. The Company believes that current annual provision of
depreciation and amortization provides sufficient expense related to the use of
the long-lived assets carried on the Company’s books.
39
Revenue
Recognition
Revenue
from the sale of blower products, generating equipment and other general
equipment is recognized at the time of the transfer of risks and rewards of
ownership, which generally occurs when the goods are delivered to customers
and the title passes. The Company believes that the installation is
not essential to the functionality of the equipment. This is because
the equipment is tested at the Company’s facilities before it is shipped and
consequently, the equipment is completed and functional at the point that it is
delivered to the customer. Additionally, since the Company’s products
generally are a smaller component of a large project, after delivery, the
Company has no control over how the customer will use the delivered products and
sometimes other companies are used to install the equipment purchased from
us. Finally, our customers do not have a contractual right to return
products to the Company, and we historically have experienced virtually no
returns.
Revenue
from product sales is recognized when the goods are delivered and title has
passed. Product sales revenue represents the invoiced value of goods, net of the
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 percent 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 the finished
product.
Revenue
from “Turn-Key” construction projects is recognized using the
percentage-of-completion method of accounting and therefore takes into account
the costs, estimated earnings and revenue to date on contracts not yet
completed. Revenue recognized is that percentage of the total contract price
that cost expended to date bears to anticipated final total cost, based on
current estimates of costs to complete. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs, and depreciation
costs. Selling, general, and administrative costs are charged to expense as
incurred. At the time a loss on a contract becomes known, the entire amount of
the estimated ultimate loss is recognized in the consolidated financial
statements. Claims for additional contract costs are recognized upon a signed
change order from the customer or until pricing is agreed upon by the
customer. The Company has not filed any claims against its customers
for loss or delays caused by the customers.
Revenue
from the rendering of maintenance services is recognized when such services are
provided.
Provision
is made for foreseeable losses as soon as they are anticipated by
management.
Cost
of Sales
The
Company’s cost of sales is comprised of raw materials, factory worker salaries
and related benefits, machinery supplies, maintenance supplies, depreciation,
utilities, inbound freight, purchasing and receiving costs, inspection and
warehousing costs.
40
Selling
Expenses
Selling
expenses are comprised of outbound freight, client entertainment, commissions,
depreciation and travel and lodging expenses.
General
& Administrative Expenses
General
and administrative expenses include outside consulting services, research &
development, executive compensation, quality control, and general overhead such
as the finance department, administrative staff, and depreciation and
amortization expense.
Research
and Development
The
Company expenses all research and development costs as incurred.
Shipping
and Handling
Shipping
and handling costs represent costs associated with shipping products to
customers and handling finished goods. Shipping and handling costs billed to
customers are recognized as revenue and shipping and handling costs incurred by
the Company are included in cost of sales.
Foreign
Currency Translation
The
Company maintains its financial statements in the functional currency, which is
the Renminbi (RMB). Monetary assets and liabilities denominated in
currencies other than the functional currency are translated into the functional
currency at rates of exchange prevailing at the balance sheet
dates. Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchange
rates prevailing at the dates of the transaction. Exchange gains or
losses arising from foreign currency transactions are included in the
determination of net income for the respective periods.
For
financial reporting purposes, the financial statements of the Company, which are
prepared using the functional currency, have been translated into United States
dollars. Assets and liabilities are translated at the exchange rates
at the balance sheet dates and revenue and expenses are translated at the
average exchange rates and stockholders’ equity is translated at historical
exchange rates. Translation adjustments are not included in
determining net income but are included in foreign exchange adjustment to other
comprehensive income, a component of stockholders’ equity.
Exchange
Rates
|
December
31, 2009
|
December
31, 2008
|
||||||
Year-end
RMB: US$ exchange rate
|
6.83720 | 6.85420 | ||||||
Average
12 month RMB: US$ exchange rate
|
6.84088 | 6.96225 |
RMB is
not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
41
Income
Taxes
The
Company uses the accrual method of accounting to determine income taxes for the
year. The Company has implemented Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities computed
according to the United States and People’s Republic of China (PRC) tax laws are
provided for the tax effects of transactions reported in the financial
statements and consists of taxes currently due plus deferred taxes related
primarily to differences between the basis of fixed assets and intangible assets
for financial and tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will be
either taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes also are recognized for operating losses that are
available to offset future income taxes. A valuation allowance is created to
evaluate deferred tax assets if it is more likely than not that these items will
either expire before the Company is able to realize that tax benefit, or that
future realization is uncertain.
Effective
January 1, 2009, PRC government implemented a new 25% tax rate across the board
for all enterprises regardless of whether domestic or foreign enterprise without
any tax holiday which is defined as “two-year exemption followed by three-year
half exemption” hitherto enjoyed by tax payers. As a result of the new tax law
of a standard 25% tax rate, tax holidays terminated as of December 31, 2008.
However, PRC government has established a set of transition rules to allow
enterprises that had already started tax holidays before January 1, 2009, to
continue enjoying the tax holidays until being fully utilized. For the year
ended December 31, 2009, Wuhan Blower and Wuhan Generating were subject to a
12.5% tax rate and Wuhan Sungreen was subject to a 25% tax rate.
The
Company is subject to United States Tax according to Internal Revenue Code
Sections 951 and 957. Corporate income tax is imposed on progressive rates in
the range of:
Taxable
Income
|
||||||||||||||
Rate
|
Over
|
But Not Over
|
Of Amount Over
|
|||||||||||
15 | % | 0 | 50,000 | 0 | ||||||||||
25 | % | 50,000 | 75,000 | 50,000 | ||||||||||
34 | % | 75,000 | 100,000 | 75,000 | ||||||||||
39 | % | 100,000 | 335,000 | 100,000 | ||||||||||
34 | % | 335,000 | 10,000,000 | 335,000 | ||||||||||
35 | % | 10,000,000 | 15,000,000 | 10,000,000 | ||||||||||
38 | % | 15,000,000 | 18,333,333 | 15,000,000 | ||||||||||
35 | % | 18,333,333 | - | - |
Statutory
Reserve
In
accordance with PRC laws, statutory reserve refers to the appropriation from net
income, to the account “statutory reserve” to be used for future company
development, recovery of losses, and increase of capital, as approved, to expand
production or operations. PRC laws prescribe that an enterprise
operating at a profit, must appropriate, on an annual basis, an amount equal to
10% of its profit. Such an appropriation is necessary until the
reserve reaches a maximum that is equal to 50% of the enterprise’s PRC
registered capital. The Company cannot pay dividends out of statutory
reserves or paid in capital registered in PRC.
42
Other
Comprehensive Income
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements. The Company’s current component of other
comprehensive income is the foreign currency translation
adjustment.
Warranty Policy
The
estimation of warranty obligations is determined in the same period that revenue
from the sale of the related products is recognized. The warranty obligation is
based on historical experience and reflects management’s best estimate of
expected costs at the time products are sold. Warranty accruals are adjusted for
known or anticipated warranty claims as new information becomes available.
Future events and circumstances could materially change the estimates and
require adjustments to the warranty obligation. New product launches require a
greater use of judgment in developing estimates until historical experience
becomes available.
Earnings
Per Share
Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period. Diluted
earnings per share is computed on the basis of the weighted average number of
shares of common stock plus the effect of dilutive potential common shares
outstanding during the period using the treasury stock method for warrants and
the as-if method for convertible securities. Dilutive potential
common shares include outstanding warrants, and convertible preferred
stock.
Financial
Instruments
The
Company’s financial instruments are cash and cash equivalents, accounts
receivable, other receivable, advances to suppliers, advances to employees, bank
loans and notes, accounts payable, other payable, dividend payable, accrued
liabilities, and long-term liabilities. The recorded values of cash and cash
equivalents, accounts receivable, other receivable, advances to suppliers,
advances to employees, bank loans and notes, accounts payable, other payable,
dividend payable and accrued liabilities approximate their fair values based on
their short-term nature. The recorded values of long-term liabilities
approximate their fair values, as interest approximates market
rates.
Retirement
Plan
The
employees of the Company participate in the defined contribution retirement
plans managed by the local government authorities whereby the Company is
required to contribute to the schemes at fixed rates of the employees’ salary.
The Company’s contributions to this plan are charged to profit or loss when
incurred. The Company has no obligations for the payment of retirement and other
post-retirement benefits of staff other than the contributions described
above.
43
Recent Accounting
Pronouncements:
In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS
165”). SFAS 165 establishes general standards of accounting for and disclosing
of events that occur after the balance sheet date but before the financial
statements are issued or are available to be issued. SFAS 165 does not
significantly change the types of subsequent events that an entity reports, but
it requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. SFAS 165 is effective for interim
or annual reporting requirements ending after June 15, 2009. The adoption of
this standard did not have a material impact on our financial position, results
of operations or cash flows of the Company.
In June
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-01, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162 (“ASU 2009-01”). ASU 2009-01
established the Accounting Standards Codification (the “Codification”) as the
source of authoritative GAAP recognized by the FASB to be applied to
nongovernmental entities. The Codification supersedes all prior non-SEC
accounting and reporting standards.
Following ASU 2009-01, the FASB will not issue new accounting standards in the
form of FASB
Statements, FASB Staff Positions, or Emerging Issues Task Force abstracts. ASU
2009-01 also modifies the existing
hierarchy of GAAP to include only two levels — authoritative and
non-authoritative. ASU 2009-01 is
effective for financial statements issued for interim and annual periods ending
after September
15, 2009, and early adoption was not permitted. The adoption of this standard
did not have an impact on the financial
position, results of operations or cash flows of the Company.
In August
2009, the FASB issued ASU 2009-05, Fair Value Measurements and
Disclosures (Topic 820) - Measuring Liabilities at Fair Value (“ASU
2009-05”). ASU 2009-05 addresses concerns in situations
where there may be a lack of observable market information to measure the fair
value of a
liability, and provides clarification in circumstances where a quoted market
price in an active market for an identical liability
is not available. In these cases, reporting entities should measure fair value
using a valuation
technique that uses the quoted price of the identical liability when that
liability is traded as an asset, quoted prices for
similar liabilities, or another valuation technique, such as an income or market
approach. ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the
transfer of the liability. ASU 2009-05 is effective for the first reporting
period subsequent to August 2009 and the adoption of
this update is not expected to have a material impact on the financial position,
results of operations, or cash flows of the
Company.
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140 (“SFAS 166”).
SFAS 166 amends the application and disclosure requirements of SFAS
No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities —
a Replacement of FASB Statement 125 (“SFAS 140”), removes the
concept of a
“qualifying special purpose entity” from SFAS 140 and removes the exception from
applying FASB Interpretation (“FIN”)
No. 46(R), Consolidation of
Variable Interest Entities — an Interpretation of ARB No. 51 (“FIN
46(R)”) to qualifying special purpose entities. SFAS 166 is effective for the
first annual reporting period that
begins after November 15, 2009, and early adoption is not permitted. The
adoption of this
standard is not anticipated to have a material impact on the financial position,
results of operations or cash flows of the
Company.
44
In
October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605) —
Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging
Issues Task Force (“ASU 2009-13”). ASU 2009-13
addresses the accounting for multiple-deliverable arrangements where products
or services are
accounted for separately rather than as a combined unit, and addresses how to
separate 71 deliverables and how to
measure and allocate arrangement consideration to one or more units of
accounting. Existing GAAP requires
an entity to use vendor-specific objective evidence (“VSOE”) or third-party
evidence of a
selling price to separate deliverables in a multiple-deliverable selling
arrangement. As a result of ASU 2009-13,
multiple-deliverable arrangements will be separated in more circumstances than
under current guidance. ASU 2009-13
establishes a selling price hierarchy for determining the selling price of a
deliverable. The
selling price will be based on VSOE if it is available, on third-party evidence
if VSOE is not available, or on an estimated selling
price if neither VSOE nor third-party evidence is available. ASU 2009-13
also requires that
an entity determine its best estimate of selling price in a manner that is
consistent with that used to determine the
selling price of the deliverable on a stand-alone basis, and increases the
disclosure requirements related to
an entity’s multiple-deliverable revenue arrangements. ASU 2009-13 must be prospectively applied
to all revenue arrangements entered into or materially modified in fiscal
years beginning on
or after June 15, 2010, and early adoption is permitted. Entities may elect, but
are not required, to adopt the amendments
retrospectively for all periods presented. The Company expects to adopt the
provisions of ASU 2009-13 on January 1,
2011 and does not believe that the adoption of this standard will have a
material impact on
the financial position, results of operations, or cash flows of the
Company.
In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) —
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. ASU 2009-17 replaces the
quantitative-based risk 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. ASU 2009-17 also
requires additional disclosures about a reporting entity’s involvement in
variable interest entities. The provisions of ASU
2009-17 are to be applied beginning in the first fiscal period beginning
after November 15,
2009. The Company adopted ASU 2009-17 on January 1, 2010 and does not anticipate
that the adoption of this standard will
have a material effect on the financial position, results of operations, or cash
flows of the Company.
In
January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) —
Accounting and Reporting for Decreases in Ownership of a Subsidiary — A Scope
Clarification. ASU 2010-02 clarifies that
the scope of previous guidance in the accounting and disclosure requirements
related to decreases in ownership
of a subsidiary apply to (i) a subsidiary or a group of assets that is a
business or nonprofit entity; (ii)
a subsidiary that is a business or nonprofit entity that is transferred to an
equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a
noncontrolling interest in an entity. ASU 2010-02 also expands the disclosure
requirements about
deconsolidation of a subsidiary or derecognition of a group of assets to include
(i) the valuation techniques used to
measure the fair value of any retained investment; (ii) the nature of any
continuing involvement with the
subsidiary or entity acquiring a group of assets; and (iii) whether the
transaction that resulted in the
deconsolidation or derecognition was with a related party or whether the former
subsidiary or entity acquiring the
assets will become a related party after the transaction. The provisions of ASU
2010-02 will be
effective for the first reporting period beginning after December 13, 2009. The
Company adopted the provisions of ASU
2010-02 on January 1, 2010 and does not anticipate that the adoption of this
standard will have a material impact on the financial position, results of
operations, or cash flows of the Company.
45
In
January 2010 the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820) —Improving Disclosures About Fair Value Measurements.
ASU 2010-06 clarifies the requirements for
certain disclosures around fair value measurements and also requires registrants
to provide certain
additional disclosures about those measurements. The new disclosure requirements
include (i) the
significant amounts of transfers into and out of Level 1 and Level 2 fair value
measurements during the period, along with the
reason for those transfers, and (ii) separate presentation of information
about purchases,
sales, issuances and settlements of fair value measurements with significant
unobservable inputs. ASU 2010-06 is
effective for interim and annual reporting periods beginning after December 15,
2009. The Company adopted the provisions
of ASU 2010-06 on January 1, 2010 and does not anticipate that the adoption of
this standard will
have a material impact on the financial position, results of operations, or cash
flows of the Company.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
As a
“smaller reporting company,” as defined by Item 10 of Regulation S-K, the
Company is not required to provide this information.
Item
8. Financial Statements and Supplementary Data.
The
financial statements required by Item 8 are included on pages F-1 to F-36
immediately following the signature page. As a “smaller reporting
company,” as defined by Item 10 of Regulation S-K, the Company is not required
to provide supplementary financial data.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item
9A. Controls and Procedures.
Disclosure
Controls and Procedures
As
required by Rule 15d-15 under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), our management has carried out an evaluation, with the
participation and under the supervision of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31,
2009. Disclosure controls and procedures refer to controls and other
procedures designed to ensure that information required to be disclosed in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating and
implementing possible controls and procedures. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected.
46
Based
upon, and as of the date of this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
contained significant deficiencies and material weaknesses. Therefore, our
management concluded that our disclosure controls and procedures were not
effective. We believe that the deficiencies and weaknesses in our
disclosure controls and procedures result from weaknesses in our internal
control over financial reporting, which is described below.
Internal
Control over Financial Reporting
Management is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company. The Company’s internal control over financial
reporting is 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. The Company’s internal control over financial reporting
includes those policies and procedures that:
|
(i)
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
(ii)
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles (“U.S. GAAP”), and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company;
and
|
|
(iii)
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting cannot
provide absolute assurance of preventing and detecting misstatements on a timely
basis. Internal control over financial reporting is a process that
involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures.
Management
of the Company, including the Company’s Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2009. In
making this evaluation, management used the criteria set forth in the Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Based on this evaluation, we
concluded that we had material weaknesses in our internal control over financial
reporting as of December 31, 2009. The following is a description of
each deficiency or weakness with respect to our internal control over financial
reporting identified in connection with the management evaluation and the
remediation initiatives that we have implemented or intend to implement in the
near future.
47
|
1)
|
The
Company does not have a comprehensive framework for risk evaluation and
assessment at the subsidiary level. The Company also has not
established a separate risk assessment department to assess the
Company’s internal and external risks from a global
perspective.
|
Remediation Initiative
|
We
plan to establish risk assessment and evaluation policies and procedures
at the subsidiary level to promote a more comprehensive framework for
evaluating risks within the Company. In addition, we plan to
establish a separate risk management department, which will enhance the
function of our newly created internal audit department by providing
regular analysis on risk assessment and implementing any necessary
remedies. The risk management department will report directly
to management.
|
|
2)
|
The
current accounting staff lacks sufficient depth, skill and experience with
U.S. GAAP reporting. Further, the Company must establish an
internal audit department that reports to the Audit
Committee.
|
Remediation Initiative
|
We
are seeking additional accountants experienced in several key areas of
accounting, including persons with experience in U.S. GAAP and SEC
financial reporting requirements. We are providing regular
training to our accounting staff regarding U.S. GAAP reconciliation and
disclosures in financial reports. We also are in the process of
establishing an internal audit department for the
Company.
|
|
3)
|
The
Company lacks a formal information technology department to manage the
Company’s information technology operations and risk assessment
framework.
|
Remediation Initiative
We plan
to establish a formal information technology department with clearly defined
functions.
|
4)
|
The
Company does not systematically maintain records of its new and existing
customers. This prevents the Company from properly managing its
client relations.
|
Remediation
Initiative
We
plan to create a comprehensive customer evaluation form and will
enforce documentation retention procedures to ensure proper customer
information is maintained and updated in a secured
database. The evaluation form will allow the Company to collect
information on its customers, including information on the customer’s
business background and credit
worthiness.
|
|
5)
|
The
Company does not keep invoices or other records for its
customers. This prevents the Company from effectively managing
its customer accounts.
|
48
Remediation Initiative
|
We
plan to create an account statement, which we will send to
our customers to confirm orders. We will keep a copy of
these statements for our records.
|
|
6)
|
The
Company does not regularly evaluate the collectability of its outstanding
accounts receivable and other receivables. This may result in
an inaccurate estimation of the Company’s total
receivables.
|
Remediation Initiative
|
We
plan to evaluate and analyze all of our material outstanding accounts
receivable and other receivables on a regular
basis.
|
Because
material weaknesses exist, management concluded that the Company’s internal
control over financial reporting as of December 31, 2009 was not
effective.
This Annual Report on Form 10-K does
not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management’s report in this Annual
Report on Form 10-K.
Changes
in Internal Control over Financial Reporting
Other
than the remediation measures described above, during the year ended December
31, 2009, there was no change in our internal control over financial reporting
that has materially affected, or that is reasonably likely to materially affect,
our internal control over financial reporting.
Item
9B. Other Information.
None.
49
PART III
Item
10. Directors,
Executive Officers and Corporate Governance.
The information required by this Item
will be set forth in our Proxy Statement for the 2010 Annual Meeting
of Stockholders in the sections entitled “Election of Directors,” “Executive
Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and
“Corporate Governance” and is incorporated by reference.
Item
11. Executive Compensation.
The
information required by this Item will be set forth in our Proxy Statement for
the 2010
Annual Meeting of Stockholders in the section entitled “Executive and
Director Compensation” and is incorporated by reference.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The
information required by this Item will be set forth in our Proxy Statement for
the 2010
Annual Meeting of Stockholders in the section entitled “Security
Ownership of Certain Beneficial Owners and Management” and is incorporated by
reference.
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
The information required by this Item
will be set forth in our Proxy Statement for the 2010 Annual Meeting of
Stockholders in the sections entitled “Related Party Transactions” and
“Corporate Governance” and is incorporated by reference.
Item
14. Principal Accountant Fees and Services.
The information required by this Item
will be set forth in our Proxy Statement for the 2010 Annual Meeting of Stockholders in the
section entitled “Auditor Fees” and is incorporated by reference.
50
Part
IV
Item
15. Exhibits and Financial Statement Schedules.
The following documents are filed as
part of this report:
1. Financial Statements
INDEX TO
FINANCIAL STATEMENTS
Report
of Registered Independent Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets
|
F-2
|
|
Consolidated
Statements of Income
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-6
|
|
Consolidated
Statements of Cash Flows
|
F-8
|
|
Notes
to the Financial Statements
|
F-10
|
2. Financial Statement
Schedules
None.
51
3. Exhibits
Exhibit
No.
|
Description
|
|
2.1
|
Share
Exchange Agreement, dated February 7, 2007, among the Company, Universe
Faith Group Limited and Fame Good International Limited (incorporated
herein by reference to Exhibit 2.1 to our Form 8-K filed on February 13,
2007)
|
|
2.2
|
Asset
Purchase Agreement, dated December 25, 2008 (incorporated herein by
reference to Exhibit 2.1 to our Form 8-K filed on February 5,
2009)
|
|
3.1
|
Articles
of Incorporation (incorporated herein by reference to Exhibit 3i.1 to our
Form 8-K filed on November 1, 2006)
|
|
3.2
|
Amendment
to Articles of Incorporation (incorporated herein by reference to Exhibit
3.1 to our Form 8-K filed on March 9, 2007)
|
|
3.3
|
Amendment
to Articles of Incorporation (incorporated herein by reference to Exhibit
3.1 to our Form 8-K filed on September 11, 2008)
|
|
3.4
|
Amended
and Restated Bylaws (as amended through March 8, 2007) (incorporated
herein by reference to Exhibit 3.2 to our Form 8-K filed on March 9,
2007)
|
|
4.1
|
Certificate
of Designation of the Relative Rights and Preferences of the Series A
Convertible Preferred Stock of the Company, dated February 7, 2007,
including the Certificate of Correction filed on February 12, 2007
(incorporated herein by reference to Exhibit 4.1 to our Form 8-K filed on
February 13, 2007)
|
|
4.2
|
Certificate
of Designation of the Relative Rights and Preferences of the Series B
Convertible Preferred Stock of the Company, dated September 4, 2008
(incorporated herein by reference to Exhibit 4.1 to our Form 8-K filed on
September 11, 2008)
|
|
4.3
|
Form
of Series A Warrant (incorporated herein by reference to Exhibit 4.2 to
our Form 8-K filed on February 13, 2007)
|
|
4.4
|
Form
of Series B Warrant (incorporated herein by reference to Exhibit 4.3 to
our Form 8-K filed on February 13, 2007)
|
|
4.5
|
Series
C Warrant, dated February 7, 2007, between the Company and 1st
BridgeHouse Securities, LLC (incorporated herein by reference to Exhibit
4.5 to our Form 8-K filed on February 13, 2007)
|
|
4.6
|
Series
AA Warrant, dated February 7, 2007, between the Company and 1st
BridgeHouse Securities, LLC (incorporated herein by reference to Exhibit
4.6 to our Form 8-K filed on February 13, 2007)
|
|
4.7
|
Series
BB Warrant, dated February 7, 2007, between the Company and 1st
BridgeHouse Securities, LLC (incorporated herein by reference to Exhibit
4.7 to our Form 8-K filed on February 13, 2007)
|
|
4.8
|
Series
JJ Warrant, dated February 7, 2007, between the Company and 1st
BridgeHouse Securities, LLC (incorporated herein by reference to Exhibit
4.8 to our Form 8-K filed on February 13, 2007)
|
|
10.1
|
Series
A Convertible Preferred Stock Purchase Agreement, dated February 7, 2007,
among the Company and the purchasers listed on Exhibit A thereto
(incorporated herein by reference to Exhibit 10.1 to our Form 8-K filed on
February 13, 2007)
|
|
10.2
|
First
Amendment to Series A Convertible Preferred Stock Purchase Agreement,
dated May 19, 2008 (incorporated herein by reference to Exhibit 10.1 to
our Form 8-K filed on June 4, 2008)
|
52
10.3
|
Securities
Escrow Agreement dated February 7, 2007 among the Company, Vision
Opportunity Master Fund, Ltd., Fame Good International Limited and Kramer
Levin Naftalis & Frankel LLP (incorporated herein by reference to
Exhibit 10.4 to our Form 8-K filed on February 13,
2007)
|
|
10.4
|
Lock-Up
Agreement dated February 7, 2007 between the Company and Fame Good
International Limited (incorporated herein by reference to Exhibit 10.6 to
our Form 8-K filed on February 13, 2007)
|
|
10.5
|
License
and Technical Assistance Agreement, dated July 5, 2005, between Wuhan
Blower Co., Ltd. and Mitsubishi Heavy Industries, Ltd. (incorporated
herein by reference to Exhibit 10.7 to our Form 8-K filed on February 13,
2007)
|
|
10.6
|
Technology
Development Agreement, dated August 1, 2006, between Wuhan Blower Co.,
Ltd. and Huazhong University of Science and Technology (incorporated
herein by reference to Exhibit 10.20 to our Form 8-K filed on February 13,
2007)
|
|
10.7†
|
Employment
Agreement, dated October 8, 2006, between Wuhan Blower Co., Ltd. and Jin
Qihai (incorporated herein by reference to Exhibit 10.21 to our Form 8-K
filed on February 13, 2007)
|
|
10.8†
|
Employment
Agreement, dated February 15, 2006, between Wuhan Blower Co., Ltd. and Ge
Zengke (incorporated herein by reference to Exhibit 10.23 to our Form 8-K
filed on February 13, 2007)
|
|
10.9†
|
Employment
Agreement between the Company and Philip Lo (incorporated herein by
reference to Exhibit 10.1 to our Form 8-K filed on March 16,
2010)
|
|
10.10
|
Construction
Agreement, dated March 28, 2006, between Hubei Gongchuang Real Estate Co.,
Ltd. and Hubei Huadu Construction Co., Ltd. (incorporated herein by
reference to Exhibit 10.19 to our Form 8-K filed on February 13,
2007)
|
|
10.11
|
Construction
Contract (Turbine Manufacturing Facilities) between Wuhan Generating
Equipment Co., Ltd. and Hubei Gongchuang Real Estate Co., Ltd.
(incorporated herein by reference to Exhibit 10.1 to our Form 10-QSB filed
on November 14, 2007)
|
|
10.12
|
Supplementary
Agreement to Construction Contract (Turbine Manufacturing Facilities),
dated March 21, 2007, between Wuhan Blower Co., Ltd. and Hubei Gongchuang
Real Estate Co., Ltd. (incorporated herein by reference to Exhibit 10.2 to
our Form 10-QSB filed on November 14, 2007)
|
|
10.13
|
Construction
Contract (Administrative Building for Turbine Facilities), dated March 26,
2007, between Wuhan Generating Equipment Co., Ltd. and Hubei Gongchuang
Real Estate Co., Ltd. (incorporated herein by reference to Exhibit 10.3 to
our Form 10-QSB filed on November 14, 2007)
|
|
10.14
|
Construction
Contract for Thermal Electric Plant, dated July 8, 2007, between Wuhan
Generating Equipment Co., Ltd. and Jiangsu Huangli Paper Industry Co.,
Ltd. (incorporated herein by reference to Exhibit 10.4 to our Form 10-QSB
filed on November 14, 2007)
|
|
10.15†
|
Wuhan
General Group (China), Inc. 2007 Stock Option Plan (incorporated herein by
reference to Exhibit 10.1 to our Form 8-K filed on December 6,
2007)
|
53
10.16†
|
Form
of Option Award Agreement for Directors (incorporated herein by reference
to Exhibit 10.2 to our Form 8-K filed on December 6,
2007)
|
|
10.17†
|
Form
of Option Award Agreement for Employees (incorporated herein by reference
to Exhibit 10.3 to our Form 8-K filed on December 6,
2007)
|
|
10.18†
|
Wuhan
General Group (China), Inc. Outside Director Compensation Package
(incorporated herein by reference to Exhibit 10.4 to our Form 8-K filed on
December 6, 2007)
|
|
10.19
|
Loan
Agreement, dated November 11, 2009, by and among Wuhan Blower Co., Ltd.,
Wuhan Generating Equipment Co., Ltd. and Wuhan Sungreen Machinery
Equipment Manufacturing Co., Ltd. as borrowers, Standard Chartered Bank
(China) Limited, Guangzhou Branch as lender, facility agent and security
agent, and Wuhan General Group (China), Inc., Universe Faith Group Limited
and Mr. Xu Jie as guarantors (translation) (incorporated herein by
reference to Exhibit 10.1 to our Form 8-K filed on November 17,
2009)
|
|
10.20*
|
Consulting
Service Agreement, dated November 11, 2009, by and among Wuhan Blower Co.,
Ltd. and Standard Chartered
Corporate Advisory Co. (Beijing), Ltd. as advisor
(translation)
|
|
14.1
|
Code
of Business Conduct and Ethics (incorporated herein by reference to
Exhibit 14 to our Form 8-K filed on March 14, 2008)
|
|
21.1*
|
Subsidiaries
of the Registrant
|
|
31.1*
|
Certification
of Principal Executive Officer Pursuant to Rule
13a-14(a)
|
|
31.2*
|
Certification
of Principal Financial Officer Pursuant to Rule
13a-14(a)
|
|
32.1*
|
Certifications
Pursuant to 18 U.S.C. Section 1350
|
*
|
Filed
herewith.
|
†
|
Management
contract, compensatory plan or
arrangement.
|
54
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
WUHAN
GENERAL GROUP (CHINA), INC.
|
|||
Date: March
31, 2010
|
By:
|
/s/ Xu Jie | |
Name:
Xu Jie
|
|||
Title:
President and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the date indicated.
Signatures
|
Title
|
Date
|
||
/s/
Xu Jie
|
President,
Chief Executive
|
March
31, 2010
|
||
Xu
Jie
|
Officer
and Director (principal executive officer)
|
|||
/s/
Philip Lo
|
Chief
Financial Officer
|
March
31, 2010
|
||
Philip
Lo
|
(principal
financial and accounting officer)
|
|||
/s/
Ge Zengke
|
Director
|
March
31, 2010
|
||
Ge
Zengke
|
||||
/s/
Huang Zhaoqi
|
Director
|
March
31, 2010
|
||
Huang
Zhaoqi
|
||||
/s/
David K. Karnes
|
Director
|
March
31, 2010
|
||
David
K. Karnes
|
||||
/s/
Brian Lin
|
Director
|
March
31, 2010
|
||
Brian
Lin
|
||||
/s/
Shi Yu
|
Director
|
March
31, 2010
|
||
Shi
Yu
|
||||
/s/
Zheng Qingsong
|
Director
|
March
31, 2010
|
||
Zheng Qingsong |
55
Wuhan
General Group (China), Inc.
Audited
Financial Statements
December
31, 2009 and 2008
(Stated
in US Dollars)
Wuhan
General Group (China), Inc.
Contents
|
Pages
|
|
Report
of Registered Independent Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets
|
F-2
|
|
Consolidated
Statements of Income
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-6
|
|
Consolidated
Statements of Cash Flows
|
F-8
|
|
Notes
to the Financial Statements
|
F-10
|
Board of
Directors and Stockholders
Wuhan
General Group (China), Inc.
Report of Registered
Independent Public Accounting Firm
We have
audited the accompanying consolidated balance sheets of Wuhan General Group
(China), Inc. (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Wuhan General Group (China), Inc.
as of December 31, 2009 and 2008, and the results of its operations and its cash
flows for each of the years then ended in conformity with accounting principles
generally accepted in the United States of America.
|
|
/s/
Samuel H. Wong & Co., LLP
|
|
South
San Francisco, California
|
Samuel
H. Wong & Co., LLP
|
||
March
21, 2010
|
Certified
Public Accountants
|
F-1
Wuhan
General Group (China), Inc.
Consolidated
Balance Sheets
At
December 31, 2009 and 2008
(Stated
in US Dollars)
|
At
December 31,
|
At
December 31,
|
||||||||||
Note
|
2009
|
2008
|
||||||||||
ASSETS
|
||||||||||||
Current
Assets
|
||||||||||||
Cash
|
2(e)
|
$ | 407,394 | $ | 2,817,503 | |||||||
Restricted
Cash
|
3
|
7,759,971 | 13,180,640 | |||||||||
Notes
Receivable
|
4
|
28,520 | - | |||||||||
Accounts
Receivable
|
2(f),5
|
53,962,201 | 41,486,856 | |||||||||
Other
Receivable
|
4,684,372 | 1,719,083 | ||||||||||
Inventory
|
2(g),6
|
15,630,470 | 10,583,906 | |||||||||
Advances
to Suppliers
|
24,616,120 | 20,274,473 | ||||||||||
Advances
to Employees
|
7
|
342,829 | 189,516 | |||||||||
Prepaid
Expenses
|
928,629 | 92,279 | ||||||||||
Prepaid
Taxes
|
546,050 | 604,610 | ||||||||||
Deferred
Tax Asset
|
749,031 | - | ||||||||||
Total
Current Assets
|
109,655,587 | 90,948,867 | ||||||||||
Non-Current
Assets
|
||||||||||||
Real
Property Available for Sale
|
1,103,113 | 1,100,376 | ||||||||||
Property,
Plant & Equipment, net
|
2(h),8
|
32,908,334 | 22,274,551 | |||||||||
Land
Use Rights, net
|
2(j),9
|
12,073,139 | 12,297,429 | |||||||||
Construction
in Progress
|
10
|
17,864,257 | 28,087,572 | |||||||||
Intangible
Assets, net
|
2(i),11
|
212,798 | 363,574 | |||||||||
Total
Assets
|
$ | 173,817,228 | $ | 155,072,368 | ||||||||
LIABILITIES
& STOCKHOLDERS' EQUITY
|
||||||||||||
Liabilities
|
||||||||||||
Current Liabilities
|
||||||||||||
Bank
Loans & Notes
|
12
|
35,276,347 | 35,171,690 | |||||||||
Accounts
Payable
|
8,049,057 | 8,420,678 | ||||||||||
Taxes
Payable
|
3,169,948 | 1,109,548 | ||||||||||
Other
Payable
|
13
|
4,228,042 | 7,708,323 | |||||||||
Dividend
Payable
|
727,129 | 193,804 | ||||||||||
Accrued
Liabilities
|
14
|
3,524,388 | 2,805,558 | |||||||||
Customer
Deposits
|
4,696,719 | 4,614,370 | ||||||||||
Total
Current Liabilities
|
59,671,630 | 60,023,971 | ||||||||||
Long
Term Liabilities
|
||||||||||||
Bank
Loans and Notes
|
12
|
11,481,906 | 1,458,959 | |||||||||
Total
Liabilities
|
71,153,536 | 61,482,930 |
See
Accompanying Notes to the Financial Statements and Accountant’s
Report.
F-2
Wuhan
General Group (China), Inc.
Consolidated
Balance Sheets
At
December 31, 2009 and 2008
(Stated
in US Dollars)
|
At
December 31,
|
At
December 31,
|
||||||||||
Stockholders' Equity
|
Note
|
2009
|
2008
|
|||||||||
Preferred
Stock - $0.0001 Par Value 50,000,000 Shares Authorized; 6,241,453 and
6,241,453 Shares of Series A Convertible Preferred Stock Issued &
Outstanding at December 31, 2009 and 2008, respectively
|
15
|
624 | 624 | |||||||||
Additional
Paid in Capital - Preferred Stock
|
8,170,415 | 8,170,415 | ||||||||||
Additional
Paid in Capital - Warrants
|
3,484,011 | 3,687,794 | ||||||||||
Additional
Paid in Capital - Beneficial Conversion Feature
|
6,371,547 | 6,371,546 | ||||||||||
Preferred
Stock - $0.0001 Par Value 50,000,000 Shares Authorized; 6,354,078 and
6,354,078 Shares of Series B Convertible Preferred Stock Issued &
Outstanding at December 31, 2009 and 2008,
respectively
|
15
|
635 | 635 | |||||||||
Additional
Paid in Capital - Preferred Stock
|
12,637,158 | 12,637,158 | ||||||||||
Additional
Paid in Capital - Warrants
|
2,274,181 | 2,274,181 | ||||||||||
Additional
Paid in Capital - Beneficial Conversion Feature
|
4,023,692 | 4,023,692 | ||||||||||
Common
Stock - $0.0001 Par Value 100,000,000 Shares Authorized; 25,351,950
and 24,752,802 Shares Issued & Outstanding at December 31, 2009
and 2008, respectively
|
|
15
|
2,536 | 2,475 | ||||||||
Additional
Paid in Capital
|
29,793,996 | 28,436,835 | ||||||||||
Statutory
Reserve
|
2(t),16
|
4,563,592 | 3,271,511 | |||||||||
Retained
Earnings
|
23,477,239 | 17,034,243 | ||||||||||
Accumulated
Other Comprehensive Income
|
2(u)
|
7,864,065 | 7,678,329 | |||||||||
Total
Stockholders' Equity
|
102,663,692 | 93,589,438 | ||||||||||
|
||||||||||||
Total
Liabilities & Stockholders' Equity
|
$ | 173,817,228 | $ | 155,072,368 |
See
Accompanying Notes to the Financial Statements and Accountant’s
Report
F-3
Wuhan
General Group (China), Inc.
Consolidated
Statements of Income
For
the years ended December 31, 2009 and 2008
(Stated
in US Dollars)
Year
ended December 31,
|
Year
ended December 31,
|
|||||||||||
Note
|
2009
|
2008
|
||||||||||
Sales
|
2(l)
|
$ | 93,079,755 | $ | 118,633,833 | |||||||
Cost
of Sales
|
2(m)
|
69,720,627 | 84,442,278 | |||||||||
Gross
Profit
|
23,359,128 | 34,191,555 | ||||||||||
Operating Expenses
|
||||||||||||
Selling
|
2(n)
|
1,606,712 | 3,346,586 | |||||||||
General
& Administrative
|
2(o)
|
7,595,755 | 7,753,163 | |||||||||
Warranty
|
2(v),14
|
371,764 | 469,586 | |||||||||
Total
Operating Expenses
|
9,574,231 | 11,569,335 | ||||||||||
Operating
Income
|
13,784,897 | 22,622,220 | ||||||||||
Other Income (Expenses)
|
||||||||||||
Other
Income
|
226,798 | 986,678 | ||||||||||
Interest
Income
|
341,071 | 84,525 | ||||||||||
Other
Expenses
|
(92,132 | ) | (199,621 | ) | ||||||||
Interest
Expense
|
(3,197,789 | ) | (1,990,477 | ) | ||||||||
Stock
Penalty for late listing on NASDAQ
|
15
|
(1,153,439 | ) | (5,355,233 | ) | |||||||
Total
Other Income (Loss) & Expenses
|
(3,875,491 | ) | (6,474,128 | ) | ||||||||
Earnings
before Taxes
|
9,909,406 | 16,148,092 | ||||||||||
Income
Taxes
|
2(s), 17
|
1,447,200 | - | |||||||||
Net
Income
|
$ | 8,462,206 | $ | 16,148,092 | ||||||||
Preferred
Dividends Declared
|
727,129 | 927,102 | ||||||||||
Series
A Constructive Preferred Dividend
|
22
|
- | - | |||||||||
Series
B Constructive Preferred Dividend
|
22
|
- | 4,032,656 | |||||||||
Income
Available to Common Stockholders
|
$ | 7,735,076 | $ | 11,188,335 | ||||||||
Earnings
Per Share
|
18
|
|||||||||||
Basic
|
$ | 0.31 | $ | 0.49 | ||||||||
Diluted
|
$ | 0.22 | $ | 0.26 | ||||||||
Weighted
Average Shares Outstanding
|
||||||||||||
Basic
|
25,176,026 | 22,675,532 | ||||||||||
Diluted
|
37,810,439 | 47,085,048 |
See
Accompanying Notes to the Financial Statements and Accountant’s
Report
F-4
Wuhan
General Group (China), Inc.
Consolidated
Statements of Income
For
the years ended December 31, 2009 and 2008
(Stated
in US Dollars)
Year
ended December 31,
|
Year
ended December 31,
|
|||||||
2009
|
2008
|
|||||||
Comprehensive
Income
|
||||||||
Net
Income
|
$ | 8,462,206 | $ | 16,148,092 | ||||
Other
Comprehensive Income
|
||||||||
Foreign
Currency Translation Adjustment
|
185,736 | 4,327,623 | ||||||
Total
Comprehensive Income
|
$ | 8,647,942 | $ | 20,475,715 |
Series
A
|
Series
A
|
Series
|
Beneficial
|
Series
B
|
Series
B
|
Series
|
Beneficial
|
Accum
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible
|
Preferred
|
A,
J, C
|
Conversion
|
Convertible
|
Preferred
|
B,
JJ
|
Conversion
|
Common
|
-ulated
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred
Stock
|
Stock
|
Warrants
|
Feature
|
Preferred
Stock
|
Stock
|
Warrants
|
Feature
|
Stock
|
Other
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares
|
Additional
|
Additional
|
Additional
|
Shares
|
Additional
|
Additional
|
Additional
|
Shares
|
Additional
|
Compren
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Out-
|
Paid
in
|
Paid
in
|
Paid
in
|
Out-
|
Paid
in
|
Paid
in
|
Paid
in
|
Out-
|
Paid
in
|
Statutory
|
Retained
|
-hensive
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
standing
|
Amount
|
Capital
|
Capital
|
Capital
|
-standing
|
Amount
|
Capital
|
Capital
|
Capital
|
-standing
|
Amount
|
Capital
|
Reserve
|
Earnings
|
Income
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance,
January 1, 2008
|
10,287,554 | 1,029 | 13,466,990 | 6,572,334 | 10,501,982 | - | - | - | - | - | 19,712,446 | 1,971 | 12,349,602 | 633,771 | 8,483,648 | 3,350,706 | 55,362,033 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance
of Preferred Stock for Cash
|
(1,860,866 | ) | 6,369,078 | 637 | 12,667,526 | 2,274,181 | 4,032,657 | (4,032,657 | ) | 13,081,477 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion
of Series A Preferred Stock
|
(4,046,101 | ) | (405 | ) | (5,296,575 | ) | (4,130,436 | ) | (15,000 | ) | (2 | ) | (30,368 | ) | (8,963 | ) | 4,061,101 | 406 | 9,466,342 | - | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance
of Common Stock from Exercise of Series C Warrants
|
(150,287 | ) | 115,361 | 12 | 150,275 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock
Option Compensation
|
227,603 | 227,603 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance
of Common Stock for Listing Penalties
|
863,894 | 86 | 5,355,147 | 5,355,233 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cancellation
of Remaining J Warrants
|
(873,387 | ) | 873,387 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net
Income
|
16,148,092 | 16,148,092 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred
Dividends Declared
|
(927,102 | ) | (927,102 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment
of Compensation from Liabilities to Equity
|
14,479 | 14,479 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Appropriations
of Retained Earnings
|
2,637,740 | (2,637,740 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign
Currency Translation Adjustment
|
4,327,623 | 4,327,623 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance,
December 31, 2008
|
6,241,453 | $ | 624 | $ | 8,170,415 | $ | 3,687,794 | $ | 6,371,546 | 6,354,078 | $ | 635 | $ | 12,637,158 | $ | 2,274,181 | $ | 4,023,692 | 24,752,802 | $ | 2,475 | $ | 28,436,835 | $ | 3,271,511 | $ | 17,034,243 | $ | 7,678,329 | $ | 93,589,438 |
See
Accompanying Notes to the Financial Statements and Accountant’s
Report.
F-6
Wuhan
General Group (China), Inc.
Consolidated
Statements of Stockholders’ Equity
For
the years ended December 31, 2009 and 2008 (Stated in US Dollars)
Series
A
|
Series
A
|
Series
|
Beneficial
|
Series
B
|
Series
B
|
Series
|
Beneficial
|
Accum
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible
|
Preferred
|
A,
J, C
|
Conversion
|
Convertible
|
Preferred
|
B,
JJ
|
Conversion
|
Common
|
-ulated
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred
Stock
|
Stock
|
Warrants
|
Feature
|
Preferred
Stock
|
Stock
|
Warrants
|
Feature
|
Stock
|
Other
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares
|
Additional
|
Additional
|
Additional
|
Shares
|
Additional
|
Additional
|
Additional
|
Shares
|
Additional
|
Compren
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Out-
|
Paid
in
|
Paid
in
|
Paid
in
|
Out-
|
Paid
in
|
Paid
in
|
Paid
in
|
Out-
|
Paid
in
|
Statutory
|
Retained
|
-hensive
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
standing
|
Amount
|
Capital
|
Capital
|
Capital
|
-standing
|
Amount
|
Capital
|
Capital
|
Capital
|
-standing
|
Amount
|
Capital
|
Reserve
|
Earnings
|
Income
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance,
January 1, 2009
|
6,241,453 | $ | 624 | $ | 8,170,415 | $ | 3,687,794 | $ | 6,371,547 | 6,354,078 | $ | 635 | $ | 12,637,158 | $ | 2,274,181 | $ | 4,023,692 | 24,752,802 | $ | 2,475 | $ | 28,436,835 | $ | 3,271,511 | $ | 17,034,243 | $ | 7,678,329 | $ | 93,589,438 | |||||||||||||||||||||||||||||||||||||
Penalty
Shares Issued
|
529,787 | 53 | 1,153,386 | 1,153,439 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise
of C Warrants
|
69,361 | 8 | (8 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cancellation
of Remaining J Warrants
|
(203,783 | ) | 203,783 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net
Income
|
8,462,206 | 8,462,206 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred
Dividends Declared
|
(727,129 | ) | (727,129 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Appropriations
of Retained Earnings
|
1,292,081 | (1,292,081 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign
Currency Translation Adjustment
|
185,736 | 185,736 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance,
December 31, 2009
|
6,241,453 | $ | 624 | $ | 8,170,415 | $ | 3,484,011 | $ | 6,371,547 | 6,354,078 | $ | 635 | $ | 12,637,158 | $ | 2,274,181 | $ | 4,023,692 | 25,351,950 | $ | 2,536 | $ | 29,793,996 | $ | 4,563,592 | $ | 23,477,239 | $ | 7,864,065 | $ | 102,663,692 |
See
Accompanying Notes to the Financial Statements and Accountant’s
Report.
F-7
Wuhan
General Group (China), Inc.
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2009 and 2008
(Stated
in US Dollars)
12
months
|
12
months
|
|||||||
ended
|
ended
|
|||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Cash
Flow from Operating Activities
|
||||||||
Cash
Received from Customers
|
$ | 77,692,950 | $ | 110,726,349 | ||||
Cash
Paid to Suppliers & Employees
|
(89,535,620 | ) | (115,284,453 | ) | ||||
Interest
Received
|
341,071 | 84,525 | ||||||
Interest
Paid
|
(3,197,789 | ) | (1,990,477 | ) | ||||
Taxes
Paid
|
(943,923 | ) | - | |||||
Miscellaneous
Receipts
|
226,798 | 986,678 | ||||||
Cash
Sourced/(Used) in Operating Activities
|
(15,416,513 | ) | (5,477,378 | ) | ||||
Cash
Flows from Investing Activities
|
||||||||
Cash
Released/(Invested in) Restricted Time Deposits
|
5,420,669 | (4,071,775 | ) | |||||
Payments
for Purchases and Construction of Plant & Equipment
|
(2,498,470 | ) | (2,155,271 | ) | ||||
Purchases
of Land Use Rights
|
- | (10,606,926 | ) | |||||
Cash
Sourced/(Used) in Investing Activities
|
2,922,199 | (16,833,972 | ) | |||||
Cash
Flows from Financing Activities
|
||||||||
Proceeds
from Issuance of Preferred Stock
|
- | 13,081,477 | ||||||
Proceeds
from Bank Loans and Notes
|
45,299,293 | 13,594,158 | ||||||
(Repayment
of Bank Loans and Notes)
|
(35,171,690 | ) | (5,096,172 | ) | ||||
Dividends
Paid
|
(193,804 | ) | (1,632,173 | ) | ||||
Cash
Sourced/(Used) in Financing Activities
|
9,933,799 | 19,947,290 | ||||||
Net
Increase/(Decrease) in Cash & Cash Equivalents for the
Period
|
(2,560,515 | ) | (2,364,060 | ) | ||||
Effect
of Currency Translation
|
150,406 | 4,188,598 | ||||||
Cash
& Cash Equivalents at Beginning of Period
|
2,817,503 | 992,965 | ||||||
Cash
& Cash Equivalents at End of Period
|
$ | 407,394 | $ | 2,817,503 | ||||
Non-Cash
Investing Activity:
|
||||||||
Purchase
of Sukong Asset through Hubei Gong Chuang Real Estate Co.,
Ltd.
|
- | 20,064,965 | ||||||
Non-Cash
Financing Activity:
|
||||||||
Constructive
Preferred Stock Dividend
|
- | 4,032,656 |
See
Accompanying Notes to the Financial Statements and Accountant’s
Report.
F-8
Wuhan
General Group (China), Inc.
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2009 and 2008
(Stated
in US Dollars)
12
months
|
12
months
|
|||||||
ended
|
ended
|
|||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Net
Income
|
$ | 8,462,206 | $ | 16,148,092 | ||||
Adjustments
to Reconcile Net Income to
|
||||||||
Net
Cash Provided by / <Used in> Operating Activities :
|
||||||||
Non-Cash
Purchase of Sukong Assets
|
(20,064,965 | ) | ||||||
Reclassification
of prior period stock compensation from liability to
equity
|
- | 14,479 | ||||||
Stock
Penalties
|
1,153,439 | 5,355,233 | ||||||
Stock
Compensation
|
- | 227,603 | ||||||
Amortization
|
407,659 | 190,192 | ||||||
Depreciation
|
2,088,002 | 2,157,143 | ||||||
Decrease/(Increase)
in Notes Receivable
|
(28,520 | ) | 1,865,491 | |||||
Decrease/(Increase)
in Accounts Receivable
|
(12,475,345 | ) | (9,611,445 | ) | ||||
Decrease/(Increase)
in Other Receivable
|
(2,965,288 | ) | 258,563 | |||||
Decrease/(Increase)
in Inventory
|
(5,046,563 | ) | (2,687,946 | ) | ||||
Decrease/(Increase)
in Advances to Suppliers
|
(4,341,647 | ) | (7,531,343 | ) | ||||
Decrease/(Increase)
in Advances to Employees
|
(153,313 | ) | (51,096 | ) | ||||
Decrease/(Increase)
in Prepaid Expenses
|
(836,350 | ) | (92,279 | ) | ||||
Decrease/(Increase)
in Prepaid Taxes
|
58,560 | (347,057 | ) | |||||
Decrease/(Increase)
in Deferred Tax Asset
|
(749,031 | ) | - | |||||
Increase/(Decrease)
in Accounts Payable
|
(371,621 | ) | 3,673,380 | |||||
Increase/(Decrease)
in Taxes Payable
|
2,060,400 | 66,165 | ||||||
Increase/(Decrease)
in Other Payable
|
(3,538,783 | ) | 4,570,747 | |||||
Increase/(Decrease)
in Related Party Payable
|
58,503 | - | ||||||
Increase/(Decrease)
in Accrued Liabilities
|
718,830 | 801,759 | ||||||
Increase/(Decrease)
in Customer Deposits
|
82,349 | (420,094 | ) | |||||
Total
of all adjustments
|
(23,878,719 | ) | (21,625,470 | ) | ||||
Net
Cash Provided by Operating Activities
|
$ | (15,416,513 | ) | $ | (5,477,378 | ) |
F-9
Wuhan General Group (China), Inc.
For the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
1. ORGANIZATION
AND PRINCIPAL ACTIVITIES
Wuhan
General Group (China), Inc. (the “Company”) is a holding company whose primary
business operations are conducted through its operating subsidiaries Wuhan
Blower Co., Ltd. (“Wuhan Blower”), Wuhan Generating Equipment Co., Ltd. (“Wuhan
Generating Equipment”), and Wuhan Sungreen Environment Protection Equipment Co.,
Ltd. (“Wuhan Sungreen”), formerly known as Wuhan Xingelin Machinery Equipment
Manufacturing Co., Ltd. Wuhan Blower is a China-based manufacturer of
industrial blowers that principally are components of steam driven electrical
power generation plants. Wuhan Generating Equipment is a China-based
manufacturer of industrial steam and water turbines, also principally for use in
electrical power generation plants. Wuhan Sungreen is a China-based
manufacturer of blower silencers, connectors, and other general spare parts for
blowers and electrical equipment.
The
Company was formed under the laws of the State of Colorado on July 19, 1988 as
Riverside Capital, Inc. On March 18, 1992, the Company changed its
name to United National Film Corporation. In June 2001, the Company
suspended all business activities and became a “shell company.”
In 2006,
the Company effectively dissolved or abandoned all subsidiaries, which may or
may not have been active in periods prior to June 2001. On October
20, 2006, the Company changed its state of incorporation from Colorado to Nevada
by means of a merger with and into a Nevada corporation formed on September 12,
2006 solely for the purpose of effecting the reincorporation.
On
February 7, 2007, the Company entered into a share exchange agreement with Fame
Good International Limited (“Fame”) and Universe Faith Group Limited
(“UFG”). Prior to the share exchange, Fame was the sole stockholder
of UFG, which is the parent company of Wuhan Blower and Wuhan Generating
Equipment. Pursuant to the share exchange, UFG became a wholly owned
subsidiary of the Company and Fame became the Company’s controlling
stockholder. On March 13, 2007, the Company changed its name from
United National Film Corporation to Wuhan General Group (China),
Inc.
The share
exchange transaction has been accounted for as a recapitalization of UFG where
the Company (the legal acquirer) is considered the accounting acquiree and UFG
(the legal acquiree) is considered the accounting acquirer. As a
result of this transaction, the Company is deemed to be a continuation of
the business of UFG.
Accordingly,
the financial data included in the accompanying consolidated financial
statements for all periods prior to February 7, 2007 is that of the accounting
acquirer (UFG). The historical stockholders’ equity of the accounting
acquirer prior to the share exchange has been retroactively restated as if the
share exchange transaction occurred as of the beginning of the first period
presented.
On
December 25, 2008, Wuhan Blower, entered into an Asset Purchase Agreement with
Wuhan Gongchuang Real Estate Co., Ltd. (the “Seller”, also known as “Hubei
Gongchuang Real Estate Co., Ltd”) pursuant to which Wuhan Blower acquired
certain assets owned by Seller, including certain buildings, equipment, land use
rights, and construction in progress. An 8-K filed with the US
Securities and Exchange Commission on February 5, 2009 further details the
transaction. Title of the assets purchased under the above agreement
has been recorded under Wuhan Sungreen. Wuhan Blower currently owns
100% beneficial interest in Wuhan Sungreen. Wuhan Sungreen is
incorporated under the laws of the PRC. The purchased assets have
been accounted for on Wuhan Sungreen’s books as contributed
capital.
The
assets that were purchased from the Seller were re-appraised by an independent
appraisal firm Zhuhai GongPingSiYuan Appraising Co
Ltd (“Zhuhai”). The re-appraisal found that the purchase
price of the assets was not materially unfair. Zhuhai concluded that
when the entire construction of the workshop and buildings is completed, the
purchase price should be considered fair. See also Note 8 – Property,
Plant, and Equipment.
F-10
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a)
|
Method
of Accounting
|
The
Company maintains its general ledger and journals with the accrual method of
accounting for financial reporting purposes. The financial statements
and notes are representations of management. Accounting policies
adopted by the Company conform to generally accepted accounting principles in
the United States of America and have been consistently applied in the
presentation of financial statements, which are compiled on the accrual basis of
accounting.
The
Company modified the presentation of the statement of cash flows for the year
ended December 31, 2008. The change is related to the purchase of
Sukong Assets as detailed in Note 1 - Organization and Principal
Activities. The purchase was previously presented as an all cash
transaction. The restated presentation shows that a significant
portion of the total purchase price was a non-cash transaction where the Company
transferred certain advances to suppliers and receivables without recourse
valued at $20,064,965 to the seller in exchange for the Sukong
Assets. The Company also reclassified inventory related to the
Huangli Project which was a correction of a classification error. The
amount of $2,188,439 was previously classified in the construction-in-progress
at December 31, 2008. The Company has moved the amount to the
inventory account, and it has been subcategorized as raw
materials. The reclassification caused a decrease in construction in
progress and a corresponding increase in the inventory accounts. The
related total of current assets increased while the total of non-current assets
decreased. Total assets remained unchanged. Net cash sourced
from operations was previously $16,776,026. The restated presentation
shows net cash used in operations is $5,477,378. The net cash used in
investing activities was previously $39,087,376. The restated
presentation shows cash used in investing activities as $16,833,972. The
Company’s earnings for the year ended December 31, 2008 was unaffected by the
change in presentation caused by the non-cash investing activity related to the
Sukong Assets and the reclassification of inventory related to the Huangli
project. In accordance with SFAS 154 Accounting Changes and Error
Corrections, the revision is accounted for as a correction of error by the
Company. The Company did not make any adjustment to its general
ledger accounts. The restatement was limited to the presentation of
the statement of cash flows.
(b)
|
Consolidation
|
The
consolidated financial statements include the accounts of the Company and its
subsidiaries, UFG, Wuhan Blower, Wuhan Generating Equipment and Wuhan
Sungreen. Inter-company transactions, such as sales, cost of sales,
due to/due from balances, investment in subsidiaries, and subsidiaries’
capitalization have been eliminated.
(c)
|
Economic
and Political Risks
|
The
Company’s operations are conducted in the People’s Republic of China (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 economy.
(d)
|
Use
of Estimates
|
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting years. These estimates and assumptions include, but are not
limited to, the valuation of accounts receivable and inventories, deferred
income taxes, warranty liability and the estimation of useful lives of property,
plant, and equipment. Actual results could differ from these
estimates.
F-11
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
(e)
|
Cash
and Cash Equivalents
|
The
Company considers all cash and other highly liquid investments with initial
maturities of three months or less to be cash equivalents. The
Company maintains bank accounts in the PRC.
(f)
|
Accounts
Receivable-Trade
|
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An allowance for doubtful
accounts is made when collection of the full amount is no longer probable.
Pursuant to the Company’s accounting policies, the allowance for doubtful
accounts is determined by applying a rate of five percent on outstanding trade
receivables. In addition, the Company uses a specific review process to
determine if any additional allowances for doubtful accounts are
required. Bad debts are charged against the allowance when
outstanding trade receivables have been determined to be uncollectible.
See also Note 5 – Accounts Receivable.
(g)
|
Inventory
|
Inventory,
consisting of raw materials, work in progress, and finished products, is stated
at the lower of cost or market value. Finished products are comprised
of direct materials, direct labor and an appropriate proportion of
overhead.
(h)
|
Property,
Plant, and Equipment
|
Property,
plant, and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over their estimated useful
lives, using the straight-line method with 5% salvage value. Estimated useful
lives of the property, plant and equipment are as follows:
Buildings
|
30
years
|
|
Machinery
and Equipment
|
10
years
|
|
Furniture
and Fixtures
|
5
years
|
|
Motor
Vehicles
|
5
years
|
(i)
|
Intangible
Assets
|
Intangible
assets are stated at cost less accumulated amortization. Amortization
is provided over the respective useful lives, using the straight-line
method. Estimated useful lives of intangibles are as
follows:
Technical
Licenses
|
10
years
|
|
Trademark
|
20
years
|
Annually,
the Company reviews the intangible assets for impairment, in accordance with ASU
350 Impairment of Long-Lived Assets. The company considers whether
the estimated future benefits of the technical licenses and trademarks will be
fully realized over the course of their estimated useful lives. If
the technical licenses become obsolete, or trademarks are unsuccessfully
defended against infringement by third-parties, the Company will consider future
cash flows and relevant factors to quantify the level of impairment and record
impairment adjustments accordingly. The Company has not yet
recognized any impairment upon the intangible assets.
(j)
|
Land
Use Rights
|
The
Company carries land use rights at cost less accumulated
amortization. Land use rights are amortized straight-line over the
useful life of 50 years for the Wuhan Blower and Wuhan Generating campus, and of
30 years for the Wuhan Sungreen campus.
F-12
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
(k)
|
Accounting
for Impairment of Long-Lived Assets
|
The
Company adopted Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The Company periodically evaluates the carrying
value of long-lived assets to be held and used in accordance with SFAS
144. SFAS 144 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets’ carrying amounts. In that event, a loss is recognized
based on the amount by which the carrying amount exceeds the fair market value
of the long-lived assets. Loss on long-lived assets to be disposed of
is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. The Company’s long-lived assets are grouped
by their presentation on the financial statements according to the balance sheet
and further segregated by their operating and asset type. Long-lived
assets subject to impairment include buildings, equipment, vehicles, trademarks,
software licenses, land use rights and real property available for
sale. The Company considers annually whether these assets are
impaired. The Company makes its determinations based on various
factors that impact those assets. For example, the Company considers
real property impaired if property prices decrease drastically and it is
unlikely that the prices will recover within the foreseeable
future. Although property values in the PRC have experienced a
decline during the last year, prices are increasing again. Therefore, the
Company believes its real property has at least retained the value of its
original cost to the Company. Equipment used for production, which
undergo regular maintenance, are assessed annually. The Company has
maintained a profitable business amidst the economic downturn and equipment has
continued to be used for production, indicating that such equipment still
retains its value to the Company. Based on its review, the Company
believes that, as of December 31, 2009 and 2008, there were no significant
impairments of its long-lived assets.
The
Company believes that cash flows generated by its ongoing business, which
incorporates significant use of the long-lived assets of the Company, provide
sufficient profit so that it is unnecessary to record any impairment
charges. The Company believes that current annual provision of
depreciation and amortization provides sufficient expense related to the use of
the long-lived assets carried on the Company’s books.
(l)
|
Revenue
Recognition
|
Revenue
from the sale of blower products, generating equipment and other general
equipment is recognized at the time of the transfer of risks and rewards of
ownership, which generally occurs when the goods are delivered to customers
and the title passes. The Company believes that the installation is
not essential to the functionality of the equipment. This is because
the equipment is tested at the Company’s facilities before it is shipped and
consequently, the equipment is completed and functional at the point that it is
delivered to the customer. Additionally, since the Company’s products
generally are a smaller component of a large project, after delivery, the
Company has no control over how the customer will use the delivered products and
sometimes other companies are used to install the equipment purchased from
us. Finally, our customers do not have a contractual right to return
products to the Company, and we historically have experienced virtually no
returns.
·
|
Revenue
from product sales is recognized when the goods are delivered and title
has passed. Product sales revenue represents the invoiced value of goods,
net of the 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 the finished product.
|
·
|
Revenue
from “Turn-Key” construction projects is recognized using the
percentage-of-completion method of accounting and therefore takes into
account the costs, estimated earnings and revenue to date on contracts not
yet completed. Revenue recognized is that percentage of the total contract
price that cost expended to date bears to anticipated final total cost,
based on current estimates of costs to complete. Contract costs include
all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs,
and depreciation costs. Selling, general, and administrative costs are
charged to expense as incurred. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is recognized in
the consolidated financial statements. Claims for additional contract
costs are recognized upon a signed change order from the customer or in
accordance with paragraphs 62 and 65 of AICPA Statement of Position 81-1,
"Accounting for Performance of Construction - Type and Certain Production
- Type Contracts."
|
F-13
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
·
|
Revenue
from the rendering of maintenance services is recognized when such
services are provided.
|
·
|
Provision
is made for foreseeable losses as soon as they are anticipated by
management.
|
(m)
|
Cost
of Sales
|
The
Company’s cost of sales is comprised of raw materials, factory worker salaries
and related benefits, machinery supplies, maintenance supplies, depreciation,
utilities, inbound freight, purchasing and receiving costs, inspection and
warehousing costs.
(n)
|
Selling
Expenses
|
Selling
expenses are comprised of outbound freight, client entertainment, commissions,
depreciation, and travel and lodging expenses.
(o)
|
General
& Administrative Expenses
|
General
and administrative expenses include outside consulting services, research &
development, executive compensation, quality control, and general overhead such
as the finance department, administrative staff, and depreciation and
amortization expense.
(p)
|
Research
and Development
|
The
Company expenses all research and development costs as incurred.
(q)
|
Shipping
and Handling
|
Shipping
and handling costs represent costs associated with shipping products to
customers and handling finished goods. Shipping and handling costs billed to
customers are recognized as revenue and shipping and handling costs incurred by
the Company are included in cost of sales.
(r)
|
Foreign
Currency Translation
|
The
Company maintains its financial statements in the functional currency, which is
the Renminbi (RMB). Monetary assets and liabilities denominated in
currencies other than the functional currency are translated into the functional
currency at rates of exchange prevailing at the balance sheet
dates. Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchange
rates prevailing at the dates of the transaction. Exchange gains or
losses arising from foreign currency transactions are included in the
determination of net income for the respective periods.
For
financial reporting purposes, the financial statements of the Company, which are
prepared using the functional currency, have been translated into United States
dollars. Assets and liabilities are translated at the exchange rates
at the balance sheet dates and revenue and expenses are translated at the
average exchange rates and stockholders’ equity is translated at historical
exchange rates. Translation adjustments are not included in
determining net income but are included in foreign exchange adjustment to other
comprehensive income, a component of stockholders’ equity.
December
31,
|
December
31,
|
|||||||
Exchange Rates
|
2009
|
2008
|
||||||
Year
end RMB : US$ exchange rate
|
6.83720 | 6.85420 | ||||||
Average
12-month RMB : US$ exchange rate
|
6.84088 | 6.96225 |
F-14
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
RMB is
not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
(s)
|
Income
Taxes
|
The
Company uses the accrual method of accounting to determine income taxes for the
year. The Company has implemented Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities computed
according to the United States and People’s Republic of China (PRC) tax laws are
provided for the tax effects of transactions reported in the financial
statements and consists of taxes currently due plus deferred taxes related
primarily to differences between the basis of fixed assets and intangible assets
for financial and tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will be
either taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes also are recognized for operating losses that are
available to offset future income taxes. A valuation allowance is created to
evaluate deferred tax assets if it is more likely than not that these items will
either expire before the Company is able to realize that tax benefit, or that
future realization is uncertain.
Effective
January 1, 2009, PRC government implemented a new 25% tax rate across the board
for all enterprises regardless of whether domestic or foreign enterprise without
any tax holiday which is defined as "two-year exemption followed by three-year
half exemption" hitherto enjoyed by tax payers. As a result of the new tax law
of a standard 25% tax rate, tax holidays terminated as of December 31, 2008.
However, PRC government has established a set of transition rules to allow
enterprises already started tax holidays before January 1, 2009, to continue
enjoying the tax holidays until being fully utilized. For the year
ended December 31, 2009, Wuhan Blower and Wuhan Generating were subject to a
12.5% tax rate and Wuhan Sungreen was subject to a 25% tax rate.
The
Company is subject to United States Tax according to Internal Revenue Code
Sections 951 and 957. Corporate income tax is imposed on progressive rates in
the range of: -
Taxable
Income
|
||||||||||||||
Rate
|
Over
|
But Not Over
|
Of Amount Over
|
|||||||||||
15 | % | 0 | 50,000 | 0 | ||||||||||
25 | % | 50,000 | 75,000 | 50,000 | ||||||||||
34 | % | 75,000 | 100,000 | 75,000 | ||||||||||
39 | % | 100,000 | 335,000 | 100,000 | ||||||||||
34 | % | 335,000 | 10,000,000 | 335,000 | ||||||||||
35 | % | 10,000,000 | 15,000,000 | 10,000,000 | ||||||||||
38 | % | 15,000,000 | 18,333,333 | 15,000,000 | ||||||||||
35 | % | 18,333,333 | - | - |
(t)
|
Statutory
Reserve
|
In
accordance with PRC laws, statutory reserve refers to the appropriation from net
income, to the account “statutory reserve” to be used for future company
development, recovery of losses, and increase of capital, as approved, to expand
production or operations. PRC laws prescribe that an enterprise
operating at a profit, must appropriate, on an annual basis, an amount equal to
10% of its profit. Such an appropriation is necessary until the
reserve reaches a maximum that is equal to 50% of the enterprise’s PRC
registered capital. The Company cannot pay dividends out of statutory
reserves or paid in capital registered in PRC.
F-15
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
(u)
|
Other
Comprehensive Income
|
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements. The Company’s current component of other
comprehensive income is the foreign currency translation
adjustment.
(v)
|
Warranty
Policy
|
The
estimation of warranty obligations is determined in the same period that revenue
from the sale of the related products is recognized. The warranty obligation is
based on historical experience and reflects management’s best estimate of
expected costs at the time products are sold. Warranty accruals are adjusted for
known or anticipated warranty claims as new information becomes available.
Future events and circumstances could materially change the estimates and
require adjustments to the warranty obligation. New product launches require a
greater use of judgment in developing estimates until historical experience
becomes available. See also Note 14 – Warranty
Liability.
(w)
|
Earnings
Per Share
|
Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period. Diluted
earnings per share is computed on the basis of the weighted average number of
shares of common stock plus the effect of dilutive potential common shares
outstanding during the period using the treasury stock method for warrants and
the as-if method for convertible securities. Dilutive potential
common shares include outstanding warrants, and convertible preferred
stock. See also Note 18 – Earnings Per Share.
(x)
|
Financial
Instruments
|
The
Company’s financial instruments are cash and cash equivalents, accounts
receivable, other receivable, advances to suppliers, advances to employees, bank
loans and notes, accounts payable, other payable, dividend payable, accrued
liabilities, and long-term liabilities. The recorded values of cash and cash
equivalents, accounts receivable, other receivable, advances to suppliers,
advances to employees, bank loans and notes, accounts payable, other payable,
dividend payable and accrued liabilities approximate their fair values based on
their short-term nature. The recorded values of long-term liabilities
approximate their fair values, as interest approximates market
rates.
(y)
|
Retirement
Plan
|
The
employees of the Company participate in the defined contribution retirement
plans managed by the local government authorities whereby the Company is
required to contribute to the schemes at fixed rates of the employees’ salary.
The Company’s contributions to this plan are charged to profit or loss when
incurred. The Company has no obligations for the payment of retirement and other
post-retirement benefits of staff other than the contributions described
above.
F-16
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
(z)
|
Recent
Accounting Pronouncements
|
In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS
165”). SFAS 165 establishes general standards of accounting for and disclosing
of events that occur after the balance sheet date but before the financial
statements are issued or are available to be issued. SFAS 165 does not
significantly change the types of subsequent events that an entity reports,
but it requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. SFAS 165 is effective for interim
or annual reporting requirements ending after June 15, 2009. The adoption of
this standard did not have a material impact on our financial position, results
of operations or cash flows of the Company.
In June
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-01, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No.
162 (“ASU 2009-01”). ASU 2009-01 established the
Accounting Standards Codification (the “Codification”) as the source of
authoritative GAAP recognized by the FASB to be applied to
nongovernmental entities. The Codification supersedes all prior non-SEC
accounting and reporting standards.
Following ASU 2009-01, the FASB will not issue new accounting standards in the
form of FASB
Statements, FASB Staff Positions, or Emerging Issues Task Force abstracts. ASU
2009-01 also modifies the existing
hierarchy of GAAP to include only two levels — authoritative and
non-authoritative. ASU 2009-01 is
effective for financial statements issued for interim and annual periods ending
after September
15, 2009, and early adoption was not permitted. The adoption of this standard
did not have an impact on the financial
position, results of operations or cash flows of the Company.
In August
2009, the FASB issued ASU 2009-05, Fair Value Measurements
and Disclosures (Topic
820) - Measuring
Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05 addresses concerns in situations
where there may be a lack of observable market information to measure the fair
value of a
liability, and provides clarification in circumstances where a quoted market
price in an active market for an identical liability
is not available. In these cases, reporting entities should measure fair value
using a valuation
technique that uses the quoted price of the identical liability when that
liability is traded as an asset, quoted prices for
similar liabilities, or another valuation technique, such as an income or market
approach. ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the
transfer of the liability. ASU 2009-05 is effective for the first reporting
period subsequent to August 2009 and the adoption of
this update is not expected to have a material impact on the financial position,
results of operations, or cash flows of the
Company.
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No.
140 (“SFAS 166”). SFAS 166 amends the application and disclosure requirements of SFAS
No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
— a Replacement of FASB
Statement 125
(“SFAS 140”), removes the concept of a “qualifying
special purpose entity” from SFAS 140 and removes the exception from applying
FASB Interpretation (“FIN”)
No. 46(R), Consolidation of
Variable Interest Entities — an Interpretation of
ARB No. 51 (“FIN 46(R)”) to
qualifying special purpose entities. SFAS 166 is effective for the first
annual reporting
period that begins after November 15, 2009, and early adoption is not permitted.
The adoption of this standard is not
anticipated to have a material impact on the financial position, results of
operations or cash
flows of the Company.
In
October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605)
— Multiple-Deliverable Revenue
Arrangements, a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13
addresses the accounting for multiple-deliverable arrangements where products
or services are
accounted for separately rather than as a combined unit, and addresses how to
separate 71 deliverables and how to
measure and allocate arrangement consideration to one or more units of
accounting. Existing GAAP requires
an entity to use vendor-specific objective evidence (“VSOE”) or third-party
evidence of a
selling price to separate deliverables in a multiple-deliverable selling
arrangement. As a result of ASU 2009-13,
multiple-deliverable arrangements will be separated in more circumstances than
under current guidance. ASU 2009-13
establishes a selling price hierarchy for determining the selling price of a
deliverable. The
selling price will be based on VSOE if it is available, on third-party evidence
if VSOE is not available, or on an estimated selling
price if neither VSOE nor third-party evidence is available. ASU 2009-13
also requires that
an entity determine its best estimate of selling price in a manner that is
consistent with that used to determine the
selling price of the deliverable on a stand-alone basis, and increases the
disclosure requirements related to
an entity’s multiple-deliverable revenue arrangements. ASU 2009-13 must be prospectively applied
to all revenue arrangements entered into or materially modified in fiscal
years beginning on
or after June 15, 2010, and early adoption is permitted. Entities may elect, but
are not required, to adopt the amendments
retrospectively for all periods presented. The Company expects to adopt the
provisions of ASU 2009-13 on January 1,
2011 and does not believe that the adoption of this standard will have a
material impact on
the financial position, results of operations, or cash flows of the
Company.
F-17
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810)
— Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. ASU 2009-17 replaces the
quantitative-based risk 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. ASU 2009-17 also
requires additional disclosures about a reporting entity’s involvement in
variable interest entities. The provisions of ASU
2009-17 are to be applied beginning in the first fiscal period beginning
after November 15,
2009. The Company adopted ASU 2009-17 on January 1, 2010 and does not anticipate
that the adoption of this standard will
have a material effect on the financial position, results of operations, or cash
flows of the Company.
In
January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810)
— Accounting and Reporting for
Decreases in Ownership of a Subsidiary — A Scope Clarification.
ASU 2010-02
clarifies that the scope of previous guidance in the accounting and disclosure
requirements related to decreases in ownership
of a subsidiary apply to (i) a subsidiary or a group of assets that is a
business or nonprofit entity; (ii)
a subsidiary that is a business or nonprofit entity that is transferred to an
equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a
noncontrolling interest in an entity. ASU 2010-02 also expands the disclosure
requirements about
deconsolidation of a subsidiary or derecognition of a group of assets to include
(i) the valuation techniques used to
measure the fair value of any retained investment; (ii) the nature of any
continuing involvement with the
subsidiary or entity acquiring a group of assets; and (iii) whether the
transaction that resulted in the
deconsolidation or derecognition was with a related party or whether the former
subsidiary or entity acquiring the
assets will become a related party after the transaction. The provisions of ASU
2010-02 will be
effective for the first reporting period beginning after December 13, 2009. The
Company adopted the provisions of ASU
2010-02 on January 1, 2010 and does not anticipate that the adoption of this
standard will have a material impact on the financial position, results of
operations, or cash flows of the Company.
In
January 2010 the FASB issued ASU 2010-06, Fair Value Measurements
and Disclosures (Topic
820) —Improving Disclosures About Fair
Value Measurements. ASU 2010-06 clarifies the requirements for
certain disclosures around fair value measurements and also requires registrants
to provide certain
additional disclosures about those measurements. The new disclosure requirements
include (i) the
significant amounts of transfers into and out of Level 1 and Level 2 fair value
measurements during the period, along with the
reason for those transfers, and (ii) separate presentation of information
about purchases,
sales, issuances and settlements of fair value measurements with significant
unobservable inputs. ASU 2010-06 is
effective for interim and annual reporting periods beginning after December 15,
2009. The Company adopted the provisions
of ASU 2010-06 on January 1, 2010 and does not anticipate that the adoption of
this standard will
have a material impact on the financial position, results of operations, or cash
flows of the Company.
(aa)
|
Subsequent
Event
|
The
Company evaluates subsequent events that have occurred after the consolidated
balance sheet date but before the consolidated financial statements are
issued. There are two types of subsequent
events: (1) recognized, or those that provide additional
evidence with respect to conditions that existed at the date of the balance
sheet, including the estimates inherent in the process of preparing financial
statements, and (2) nonrecognized, or those that provide evidence with
respect to conditions that did not exist at the date of the
balance sheet but arose subsequent to that date. The Company has evaluated
subsequent events, and based on this evaluation, the Company did not identify
any recognized or nonrecognized subsequent events that would have required
adjustments to the consolidated financial statements.
F-18
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
3. RESTRICTED
CASH
Restricted
Cash represents cash placed with banks to secure banking facilities, which are
comprised of loans and notes payables in addition to other
collateral.
4. NOTES
RECEIVABLE
At
|
At
|
|||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Notes
Receivable
|
$ | 28,520 | $ | - | ||||
Less:
Allowance for Bad Debts
|
- | - | ||||||
$ | 28,520 | $ | - |
Notes
Receivable are typically in the form of bank drafts from
customers. Bank drafts are liquid instruments that can be either (a)
endorsed to the Company’s vendors, or (b) discounted to the Company’s own
bank. The Company chooses to carry these instruments as notes
receivable instead of cash primarily because of the associated time element of
these notes, as they are normally due at a later point in time; therefore, these
bank drafts represent different risk and reward characteristics.
5. ACCOUNTS
RECEIVABLE
At
|
At
|
|||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Total
Accounts Receivable-Trade
|
$ | 56,802,317 | $ | 44,619,549 | ||||
Less:
Allowance for Bad Debt
|
(2,840,116 | ) | (3,132,693 | ) | ||||
$ | 53,962,201 | $ | 41,486,856 | |||||
Allowance for Bad Debts
|
||||||||
Beginning
Balance
|
$ | (3,132,693 | ) | $ | (1,245,883 | ) | ||
Allowance
Provided
|
(1,573,535 | ) | (1,886,810 | ) | ||||
Less:
Bad Debt Written Off
|
1,866,112 | - | ||||||
Ending
Balance
|
$ | (2,840,116 | ) | $ | (3,132,693 | ) |
6. INVENTORY
At
|
At
|
|||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Raw
Materials
|
$ | 4,938,537 | $ | 3,951,516 | ||||
Work
in Progress
|
8,319,353 | 4,065,249 | ||||||
Finished
Goods
|
2,372,580 | 2,567,141 | ||||||
$ | 15,630,470 | $ | 10,583,906 |
F-19
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
7. ADVANCES
TO EMPLOYEES
Advances
to Employees of $342,829 and $189,516 as of December 31, 2009 and 2008,
respectively, consisted of advances to salespeople for salary, travel, and
expenses over extended periods as they work to procure new sales contracts or
install and perform on existing contracts. These advances are
deducted from future sales commissions earned by these
salespeople. In the event that a salesperson leaves the Company prior
to earning sales commissions sufficient to offset advances paid to the
salesperson, the Company immediately expenses any outstanding balance to the
income statement. None of the employees who have received these advances is a
director or executive officer of the Company.
8. PROPERTY,
PLANT AND EQUIPMENT
Property,
plant, and equipment, which are stated at cost less depreciation, were composed
of the following:
At
December 31, 2009
|
Wuhan
|
|||||||||||||||
Wuhan
|
Generating
|
Wuhan
|
||||||||||||||
Category of Asset
|
Blower
|
Equipment
|
Sungreen
|
Total
|
||||||||||||
Buildings
|
$ | 13,192,892 | $ | 8,692,905 | $ | - | $ | 21,885,797 | ||||||||
Machinery
& Equipment
|
1,908,216 | 12,343,760 | 2,020,846 | 16,272,822 | ||||||||||||
Furniture
& Fixtures
|
367,993 | 16,666 | 6,607 | 391,266 | ||||||||||||
Auto
|
678,290 | 267,044 | 7,313 | 952,647 | ||||||||||||
Other
|
74,933 | - | - | 74,933 | ||||||||||||
16,222,324 | 21,320,375 | 2,034,766 | 39,577,465 | |||||||||||||
Less: Accumulated
Depreciation
|
||||||||||||||||
Buildings
|
(2,237,889 | ) | (165,239 | ) | - | (2,403,128 | ) | |||||||||
Machinery
& Equipment
|
(811,808 | ) | (2,352,315 | ) | (219,212 | ) | (3,383,335 | ) | ||||||||
Furniture
& Fixtures
|
(278,719 | ) | (6,047 | ) | (1,811 | ) | (286,578 | ) | ||||||||
Auto
|
(487,616 | ) | (86,651 | ) | (579 | ) | (574,913 | ) | ||||||||
Other
|
(21,245 | ) | - | - | (21,245 | ) | ||||||||||
(3,837,277 | ) | (2,610,252 | ) | (221,602 | ) | (6,669,131 | ) | |||||||||
Property,
Plant, & Equipment, Net
|
$ | 12,385,047 | $ | 18,710,123 | $ | 1,813,164 | $ | 32,908,334 |
At
December 31, 2008
|
Wuhan
|
|||||||||||||||
Wuhan
|
Generating
|
Wuhan
|
||||||||||||||
Category of Asset
|
Blower
|
Equipment
|
Sungreen
|
Total
|
||||||||||||
Buildings
|
11,011,657 | - | - | 11,011,657 | ||||||||||||
Machinery
& Equipment
|
1,888,521 | 10,551,443 | 1,916,553 | 14,356,517 | ||||||||||||
Furniture
& Fixtures
|
362,007 | 13,781 | - | 375,788 | ||||||||||||
Auto
|
776,312 | 260,951 | - | 1,037,263 | ||||||||||||
Other
|
74,455 | - | - | 74,455 | ||||||||||||
14,112,952 | 10,826,175 | 1,916,553 | 26,855,680 | |||||||||||||
Less: Accumulated
Depreciation
|
||||||||||||||||
Buildings
|
(1,874,508 | ) | - | - | (1,874,508 | ) | ||||||||||
Machinery
& Equipment
|
(632,150 | ) | (1,260,420 | ) | (32,125 | ) | (1,924,695 | ) | ||||||||
Furniture
& Fixtures
|
(221,068 | ) | (3,826 | ) | - | (224,894 | ) | |||||||||
Auto
|
(501,132 | ) | (49,070 | ) | - | (550,202 | ) | |||||||||
Other
|
(6,830 | ) | - | - | (6,830 | ) | ||||||||||
(3,235,688 | ) | (1,313,316 | ) | (32,125 | ) | (4,581,129 | ) | |||||||||
Property,
Plant, & Equipment, Net
|
$ | 10,877,264 | $ | 9,512,859 | $ | 1,884,428 | $ | 22,274,551 |
F-20
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
The
shared campus of Wuhan Blower and Wuhan Generating Equipment consists of
approximately 440,000 square feet (44,233 square meters) of building floor
space. The Company’s new turbine manufacturing workshop will provide
approximately 215,482 square feet (20,019 square meters) of floor
space. A new office building will house the business operations of
Wuhan Generating Equipment and will provide an additional 134,656 square feet
(12,510 square meters) of floor space.
The
acquired campus of Wuhan Sungreen will house the following buildings when fully
built out and complete:
Square
Feet
|
Square
Meters
|
|||||||
Workshop
1
|
136,131 | 12,647.00 | ||||||
Workshop
2
|
90,363 | 8,395.00 | ||||||
Workshop
3
|
95,777 | 8,898.00 | ||||||
Dormitories
|
67,662 | 6,286.08 | ||||||
Commercial
Shops
|
5,285 | 491.00 | ||||||
Warehouse
|
102,155 | 9,490.60 | ||||||
Office
Buildings
|
152,994 | 14,213.64 | ||||||
650,367 | 60,421.32 |
The local
government has already approved the architectural plans for all of the
buildings. Currently Workshop 1, Warehouse, Dormitories, and Commercial Shops
have yet to be built. Workshop 2 and Workshop 3 are fully
built. The Office Building is currently under construction but has
yet to be completed.
In order
to complete the campus of Wuhan Sungreen, the Company anticipates incurring
approximately an additional $5.13 million (RMB 35,100,000), which is beyond the
amount originally committed in the asset purchase agreement.
9.
LAND USE RIGHTS
At
December 31, 2009
|
Wuhan
|
|||||||||||||||
Wuhan
|
Generating
|
Wuhan
|
||||||||||||||
Category of Asset
|
Blower
|
Equipment
|
Sungreen
|
Total
|
||||||||||||
Land
Use Rights
|
$ | 2,199,372 | $ | - | $ | 10,499,810 | $ | 12,699,182 | ||||||||
Less: Accumulated
Amortization
|
(276,049 | ) | - | (349,994 | ) | (626,043 | ) | |||||||||
Land
Use Rights, Net
|
$ | 1,923,323 | $ | - | $ | 10,149,816 | $ | 12,073,139 |
F-21
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
At
December 31, 2008
|
Wuhan
|
|||||||||||||||
Wuhan
|
Generating
|
Wuhan
|
||||||||||||||
Category of Asset
|
Blower
|
Equipment
|
Sungreen
|
Total
|
||||||||||||
Land
Use Rights
|
$ | 2,117,709 | $ | - | $ | 10,473,768 | $ | 12,591,477 | ||||||||
Less: Accumulated
Amortization
|
(206,766 | ) | - | (87,282 | ) | (294,048 | ) | |||||||||
Land
Use Rights, Net
|
$ | 1,910,943 | $ | - | $ | 10,386,486 | $ | 12,297,429 |
The
Company acquired through Wuhan Hi-Tech Blower Manufacturing Co. Ltd. (WBM) the
Land Use Rights for three parcels of land totaling 1,170,000 square feet for a
term of 50 years from March 1, 2004 to March 1, 2054 for $1,856,757 (RMB
14,515,200). The land has been used for the Company’s facilities
including the blower manufacturing facilities, turbine manufacturing facility,
warehouses, testing facilities, dormitories, and administrative buildings for
its Wuhan Blower and Wuhan Generating Equipment subsidiaries.
The
parcel of land purchased in the asset acquisition and now carried on the books
of Wuhan Sungreen total 792,547 square feet (73,630.05 square
meters). The land will be used for Wuhan Sungreen’s office building,
workshops, and dormitories. The land use right will be amortized over
30 years.
10.
CONSTRUCTION IN PROGRESS
Construction
in progress represents the direct costs of design, acquisition, building
construction, building improvements, and land improvement. These
costs are capitalized in the Construction-in-Progress account until
substantially all activities necessary to prepare the assets for their intended
use are completed. At such point, the Construction-in-Progress
account is closed and the capitalized costs are transferred to their appropriate
asset classification. No depreciation is provided until it is
completed and ready for the intended use.
The
assets reported under the construction in progress account relate to various
projects at the Company’s operating subsidiaries. All of the
construction projects at Wuhan Blower have been substantially completed. The
assets have been into use. Accordingly, the assets have been moved to
the property, plant, and equipment account. Construction projects as
Wuhan Generating include a new workshop, office building and the installation of
equipment in the workshop. The workshop was completed in the
beginning of 2009. All equipment will be fully installed and
operational by the end of the second quarter of 2010. The structure
of the office building has been substantially completed; however, the necessary
construction of the interior to bring the building into use has been temporarily
stopped. The Company is evaluating its current resources and will
provide an expected completion date when it believes sufficient resources will
be available to complete the construction. The construction projects
at Wuhan Sungreen include a new workshop and office building. The
Company expects construction on both the workshop and office building to be
complete by the end of 2010.
Construction
in progress increased by approximately $18.2 million from December 31, 2007 to
December 31, 2008. Approximately $11.0 million of this increase was
attributable to the acquisition of construction in progress accounts related to
the purchase of Wuhan Sungreen in 2008. Approximately $7.2 million
was attributable to investments in the turbine facility of Wuhan
Generating. Also, during this same period, certain assets that were
completed and put into use were moved from the construction in progress account
to the property, plant and equipment account. From December 31, 2008
to December 31, 2009, Construction in Progress decreased by approximately $10.2
million which reflects those assets being moved from construction in progress
account to the property, plant & equipment account.
The
following table details the assets that are accounted for in the
Construction-in-Progress account at December 31, 2009 and December 31,
2008:
At
|
At
|
|||||||||
December
31,
|
December
31,
|
|||||||||
Subsidiary
|
Description
|
2009
|
2008
|
|||||||
Wuhan
Blower
|
Blower
Workshop
|
$ | - | $ | 631,839 | |||||
Wuhan
Blower
|
Bus
Parking
|
- | 4,377 | |||||||
Wuhan
Blower
|
Dormitory
|
- | 20,425 | |||||||
Wuhan
Blower
|
Landscaping
|
- | 4,934 | |||||||
Wuhan
Blower
|
Office Building
|
- | 471,959 | |||||||
Wuhan
Blower
|
Other
|
- | 391,533 | |||||||
Wuhan
Blower
|
Security
System
|
- | 292 | |||||||
Wuhan
Blower
|
Street
|
- | 584 | |||||||
Wuhan
Blower
|
Testing
Facility
|
- | 11,380 | |||||||
Wuhan
Blower
|
Wall
|
- | 320,468 | |||||||
Wuhan
Blower
|
Warehouse
|
- | 33,518 | |||||||
Wuhan
Blower
|
Badminton
Courts
|
24,133 | - | |||||||
Wuhan
Generating
|
Capitalized
Interest
|
67,561 | 131,622 | |||||||
Wuhan
Generating
|
Equipment
Requiring Installation
|
2,528,256 | 3,374,825 | |||||||
Wuhan
Generating
|
Generating
Workshop
|
- | 5,745,581 | |||||||
Wuhan
Generating
|
Generating
Workshop-Materials
|
- | 2,293,483 | |||||||
Wuhan
Generating
|
Generating
Office Building
|
3,427,899 | 3,346,449 | |||||||
Wuhan
Generating
|
Miscellaneous
|
4,429 | 259 | |||||||
Wuhan
Generating
|
Shipping
Costs
|
- | 10,213 | |||||||
Wuhan Sungreen
|
Landscaping
|
146,280 | 145,917 | |||||||
Wuhan Sungreen
|
Workshop
|
4,849,588 | 4,837,559 | |||||||
Wuhan Sungreen
|
Office Building
|
5,792,300 | 5,289,083 | |||||||
Wuhan Sungreen
|
Utility
Systems Setup
|
1,023,811 | 1,021,272 | |||||||
$ | 17,864,257 | $ | 28,087,572 |
F-22
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
11.
INTANGIBLE ASSETS
The
following categories of assets are stated at cost less accumulated
amortization.
At
|
At
|
|||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Category of Asset
|
||||||||
Trademarks
|
$ | 106,038 | $ | 145,896 | ||||
Mitsubishi
License
|
302,888 | 335,980 | ||||||
Tianyu
CAD License
|
3,958 | 4,450 | ||||||
Sunway
CAD License
|
16,820 | 16,778 | ||||||
Microsoft
License
|
12,222 | 13,934 | ||||||
441,926 | 517,038 | |||||||
Less: Accumulated
Amortization
|
||||||||
Trademarks
|
(62,160 | ) | (32,827 | ) | ||||
Mitsubishi
License
|
(152,862 | ) | (113,599 | ) | ||||
Tianyu
CAD License
|
(2,287 | ) | (1,391 | ) | ||||
Sunway
CAD License
|
(3,915 | ) | (1,119 | ) | ||||
Microsoft
License
|
(7,904 | ) | (4,528 | ) | ||||
(229,128 | ) | (153,464 | ) | |||||
Intangible
Assets, Net
|
$ | 212,798 | $ | 363,574 |
The
weighted average amortization period for the Company’s intangible assets at
December 31, 2009 and 2008 were 12.82 years and 12.82 years,
respectively.
The
weighted average amortization period for the Trademark is 20 years.
The
weighted average amortization period for the Mitsubishi, CAD, and Microsoft
technical licenses is 10 years.
F-23
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
12.
BANK
LOANS AND NOTES
The
following table provides the name of the lender, due date, interest rate, and
amounts outstanding at December 31, 2009 and 2008 for the Company’s bank loans
and notes payable.
Subsidiary
|
Type
|
Name
of Creditor
|
Due
Date
|
Interest
Rate Per Annum
|
At
December 31,
2009
|
At
December 31,
2008
|
||||||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
5/20/2009
|
8.96 | % | $ | - | $ | 729,479 | |||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
5/22/2009
|
8.96 | % | - | 729,479 | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
5/25/2009
|
8.96 | % | - | 729,480 | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
5/27/2009
|
8.96 | % | - | 729,480 | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
5/29/2009
|
8.96 | % | - | 729,480 | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
6/4/2009
|
8.96 | % | - | 729,480 | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
6/23/2009
|
8.96 | % | - | 583,584 | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
8/26/2009
|
8.96 | % | - | 1,167,168 | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
8/24/2009
|
8.96 | % | - | 1,167,168 | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
China
Citic Bank
|
4/19/2010
|
5.31 | % | 3,656,467 | - | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Bank
of China Ltd.
|
3/2/2010
|
5.40 | % | 804,423 | - | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Guangdong
Development Bank
|
6/15/2010
|
6.37 | % | 1,608,846 | - | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Agricultural
Bank of China
|
8/6/2010
|
5.84 | % | 7,312,935 | - | |||||||||||
Wuhan
Blower
|
Bank
Loans
|
Hankou
Bank
|
7/5/2010
|
4.425 | % | 833,675 | - | |||||||||||
subtotal
|
14,216,346 | 7,294,798 | ||||||||||||||||
Wuhan
Blower
|
Notes
Payable
|
China
Minsheng Banking Corp., Ltd.
|
1/22/2009
|
- | 1,458,959 | |||||||||||||
Wuhan
Blower
|
Notes
Payable
|
Citic
Industrial Bank
|
3/27/2009
|
- | 3,647,399 | |||||||||||||
Wuhan
Blower
|
Notes
Payable
|
Industrial
Bank Co., Ltd.
|
2/28/2009
|
- | 1,313,064 | |||||||||||||
Wuhan
Blower
|
Notes
Payable
|
Industrial
Bank Co., Ltd.
|
3/2/2009
|
- | 1,750,751 | |||||||||||||
Wuhan
Blower
|
Notes
Payable
|
Industrial
Bank Co., Ltd.
|
2/28/2009
|
- | 1,313,064 | |||||||||||||
Wuhan
Blower
|
Notes
Payable
|
Shanghai
Pudong Development Bank
|
2/10/2009
|
- | 579,760 | |||||||||||||
Wuhan
Blower
|
Notes
Payable
|
Shanghai
Pudong Development Bank
|
2/18/2009
|
- | 744,069 | |||||||||||||
Wuhan
Blower
|
Notes
Payable
|
Standard
Chartered Bank
|
4/21/2010
|
1,828,234 | - |
F-24
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
Wuhan
Blower
|
Notes
Payable
|
Standard
Chartered Bank
|
3/3/2010
|
417,047 | ||||||||||||||
Wuhan
Blower
|
Notes
Payable
|
Standard
Chartered Bank
|
3/18/2010
|
1,462,587 | ||||||||||||||
Wuhan
Blower
|
Notes
Payable
|
Standard
Chartered Bank
|
2/11/2010
|
731,294 | ||||||||||||||
Wuhan
Blower
|
Notes
Payable
|
Bank
of Communications
|
1/24/2010
|
892,178 | - | |||||||||||||
subtotal
|
5,331,340 | 10,807,067 | ||||||||||||||||
Wuhan
Generating
|
Bank
Loans
|
Citic
Industrial Bank
|
3/2/2009
|
8.22 | % | - | 2,917,919 | |||||||||||
Wuhan
Generating
|
Bank
Loans
|
Shanghai
Pudong Development Bank
|
1/7/2009
|
7.47 | % | - | 1,458,959 | |||||||||||
Wuhan
Generating
|
Bank
Loans
|
Hankou
Bank
|
10/13/2010
|
5.31 | % | 1,462,587 | - | |||||||||||
Wuhan
Generating
|
Bank
Loans
|
Bank
of Communications
|
12/23/2010
|
5.67 | % | 1,462,587 | - | |||||||||||
Wuhan
Generating
|
Bank
Loans
|
Bank
of Communications **
|
12/23/2010
|
5.67 | % | 1,462,587 | 1,458,959 | |||||||||||
subtotal
|
4,387,761 | 5,835,837 | ||||||||||||||||
Wuhan
Generating
|
Long
Term Loan
|
Standard
Chartered Bank
|
12/17/2012
|
9.40 | % | 2,925,714 | - | |||||||||||
Wuhan Blower
|
Long
Term Loan
|
Standard
Chartered Bank
|
12/16/2013
|
9.40 | % | 7,094,145 | - | |||||||||||
Wuhan Sungreen
|
Notes
Payable
|
Various
vendors and individuals
|
On
Demand
|
13,066 | - | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
6/26/2009
|
- | 2,480,231 | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/15/2009
|
- | 1,458,958 | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/16/2009
|
- | 4,376,878 | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
6/24/2009
|
- | 4,376,878 | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/6/2010
|
1,462,587 | - | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/12/2010
|
1,462,587 | - | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/17/2010
|
1,462,587 | - | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
1/22/2010
|
1,462,587 | - | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Hankou
Bank
|
4/13/2010
|
1,462,587 | - | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Hankou
Bank
|
4/21/2010
|
530,188 | - |
F-25
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
Wuhan
Generating
|
Notes
Payable
|
Hankou
Bank
|
4/26/2010
|
917,773 | - | |||||||||||||
Wuhan
Generating
|
Notes
Payable
|
Bank
of Communications
|
4/8/2010
|
3,948,985 | - | |||||||||||||
subtotal
|
12,789,881 | 12,692,947 | ||||||||||||||||
total
|
$ | 46,758,253 | $ | 36,630,649 |
**
|
In
2008, loan was classified as long-term
loan
|
Banking
facilities extended by the CITIC Industrial Bank, Bank of
Communication, Guangdong Development Bank and Agricultural Bank of China
were secured by the Company’s mortgage of real property.
The Bank
of China Loan is collateralized by the technical license with
Mitsubishi.
Certain
notes payable, as indicated above, do not have a stated rate of
interest. These notes are payable on demand to the Company’s
creditors. The creditors have given extended credit terms secured by
pledge of the Company’s restricted cash.
In 2009,
Standard Chartered Bank granted the Company credit facilities in the amount of
$50,181,361. The Company may borrow at a fixed rate set by the bank.
The credit facilities are secured by the Company’s mortgage of real property,
property, plant and equipment, land use rights, assignment of accounts
receivable, and trademarks.
Credit Facilities from Standard
Chartered Bank at December 31, 2009:
Used
|
Unused
|
Total
Facility
|
||||||||||
Tranche
A
|
$ | 10,019,319 | $ | 20,929,022 | $ | 30,948,341 | ||||||
Tranche
B
|
- | 13,382,671 | 13,382,671 | |||||||||
Notes
Payable
|
4,439,162 | 1,411,186 | 5,850,348 | |||||||||
Total
|
$ | 14,458,481 | $ | 35,722,880 | $ | 50,181,361 |
Subsequent
to December 31, 2009, Standard Chartered Bank disbursed funds under its loan
agreement to the Company’s subsidiaries as detailed in the table
below:
Additional Amount Disbursed under Tranche
A
Borrowing
Subsidiary
|
Disbursement
Date
|
USD
Amount
|
||||
Wuhan
Blower
|
1/29/2010
|
$ | 4,255,530 | |||
Wuhan
Blower
|
1/29/2010
|
7,312,935 | ||||
Wuhan
Generating
|
1/29/2010
|
1,462,587 | ||||
$ | 13,031,052 |
As of
January 29, 2010, the Company’s outstanding principal and repayment schedule
under its loan agreement with Standard Chartered Bank are detailed
below:
Principal
Due
|
Blower
|
Generating
|
Sungreen
|
Total
|
||||||||||||
2010
|
$ | 4,439,162 | $ | - | $ | - | $ | 4,439,162 | ||||||||
2011
|
3,732,522 | 877,552 | - | 4,610,074 | ||||||||||||
2012
|
14,930,088 | 3,510,209 | - | 18,440,297 | ||||||||||||
$ | 23,101,772 | $ | 4,387,761 | $ | - | $ | 27,489,533 |
The
Company’s loan agreement with Standard Chartered Bank contains covenants, which
include, among others: limitation on the incurrence of additional indebtedness;
limitation on guarantees, liens, investments, sale of assets, mergers, change of
control and capital expenditures; and maintenance of specified financial
ratios. The Company filed a copy of this loan agreement with the U.S.
Securities and Exchange Commission on November 17, 2009.
The
Company was in compliance with all loan covenants as of December 31, 2009,
except that the Company did not comply with the days accounts receivable ratio
covenant in its loan agreement with Standard Chartered. This ratio is
calculated by dividing the Company’s 2009 revenue by 360 and then dividing that
number into accounts receivable. At December 31, 2009, the Company’s days
account receivable ratio was 209, which was above the maximum of 180 provided in
the Standard Chartered loan agreement. The Company has requested a waiver
from Standard Chartered for this noncompliance. Based on the
Company's conversations with Standard Chartered, the Company does not believe
that Standard Chartered will take any adverse action against the Company for
noncompliance with this financial covenant.
F-26
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
13.
OTHER PAYABLE
The
Company included certain accruals in “Other Payable” for value added tax
invoices yet to be received from vendors, who have already delivered the goods
or services. The following table details the Company’s Other Payable
line items at December 31, 2009:
Vendor
|
Description
|
Amount
|
||||
Hubei
Gong Chuang
|
Purchase
of Sukong Assets
|
777,475 | ||||
Hubei
Delisen Technology Co., Ltd.
|
Transportation
costs
|
585,034 | ||||
Wuhan
Xiuma Technology Co., Ltd.
|
Transportation
costs
|
585,034 | ||||
Yu,
Shijing
|
Regular
business expenses that have yet to be reimbursed
|
438,776 | ||||
Qiao,
Cunwu
|
Regular
business expenses that have yet to be reimbursed
|
201,402 | ||||
Wuhan
Pengmai Motor Transport Co., Ltd.
|
Transportation
costs
|
192,147 | ||||
Wuhan
Sanhe Vehicle Service Co., Ltd.
|
Transportation
costs
|
140,969 | ||||
Wuhan
Longyang Logistics Co., Ltd
|
Transportation
costs
|
112,624 | ||||
Various
Vendors
|
Miscellaneous
cost and expenses of amounts less than $100,000
|
1,194,581 | ||||
$ | 4,228,042 |
F-27
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
14.
WARRANTY LIABILITY
Warranty
liability is accrued and carried on the balance sheet under Accrued
Liabilities. The Company makes its warranty accrual based on individual
assessment of each contract because terms and conditions vary. The
Company’s typical sales contracts provide for a warranty period of 12-24 months
following product installation.
The
following table summarizes the activity related to the Company’s product
warranty liability for the years ended December 31 2009 and 2008:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Balance
at beginning of period
|
$ | 1,154,613 | $ | 1,541,771 | ||||
Adjustment
|
- | |||||||
Accruals
for current & pre-existing warranties issued during
period
|
371,764 | 469,586 | ||||||
Less: Settlements made
during period
|
(57,019 | ) | (60,291 | ) | ||||
Less: Reversals and
warranty expirations
|
- | (796,453 | ) | |||||
Balance
at end of year
|
$ | 1,469,358 | $ | 1,154,613 |
F-28
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
15.
CAPITALIZATION
At
December 31, 2009, the Company’s outstanding securities are shown in the
following table:
Type
of Security
|
Number
|
Issuance
Date
|
Expiration
Date
|
|||||||||
Common
Stock
|
25,351,950 |
N/A
|
N/A
|
|||||||||
Series
A Preferred
|
6,241,453 |
2/7/2007
|
N/A
|
|||||||||
Series
B Preferred
|
6,354,078 |
9/5/2009
|
N/A
|
|||||||||
Series
A Warrants
|
6,172,531 |
2/7/2007
|
2/6/2012
|
|||||||||
Series
B Warrants
|
3,821,446 |
2/7/2007
|
2/6/2012
|
|||||||||
Series
C Warrants
|
635,710 |
2/7/2007
|
2/6/2017
|
|||||||||
Series
AA Warrants
|
617,253 |
2/7/2007
|
2/6/2017
|
|||||||||
Series
BB Warrants
|
382,145 |
2/7/2007
|
2/6/2017
|
|||||||||
Series
JJ Warrants
|
636,908 |
2/7/2007
|
2/6/2017
|
|||||||||
Series
J Warrants
|
- |
2/7/2007
|
11/7/2008
|
|||||||||
Options
Issued to Directors
|
40,000 |
11/30/2007
|
11/30/2017
|
|||||||||
Options
Issued to Directors
|
40,000 |
1/2/2008
|
1/2/2018
|
|||||||||
Total
Shares on Fully Diluted Basis
|
50,293,474 |
Series A Convertible Preferred
Stock
The
Preferred Stock is convertible into shares of the Company’s common stock on a
one-for-one basis. Holders of Preferred Stock are entitled to a
dividend equal to 5% per annum of the amount invested, subject to
adjustment. These dividends are payable quarterly. In the
event of a voluntary or involuntary liquidation, holders of preferred stock are
entitled to a liquidation preference of $2.33 per share. This amount
is in excess of the stock’s par value of $0.0001. The convertible
preferred stock is cumulative, non-participating, and non-redeemable, and as
such, there is no related sinking fund. On or after February 5, 2010,
the Series A Convertible Preferred Stock will be mandatorily converted into
common stock if the Company’s common stock achieves certain price and volume
requirements.
Series B Convertible
Preferred Stock
On
September 5, 2008, the Company entered into an Agreement to Amend Series J
Warrants of the Company with holders of warrants exercisable for a majority of
the shares of warrant stock issuable under the Company’s Series A, B and J
warrants. This agreement amended the Series J Warrants so that such warrants are
exercisable for shares of the Company’s Series B Convertible Preferred Stock,
par value $0.0001 per share (the “Series B Preferred Stock”). Prior to this
agreement, such warrants were exercisable for shares of the Company’s common
stock.
In
connection with this agreement, the Company designated 9,358,370 shares of
preferred stock as “Series B Convertible Preferred Stock, par value $0.0001 per
share” with those rights and preferences as set forth in the Certificate of
Designation of the Relative Rights and Preferences of the Series B Preferred
Stock of the Company. The Series B Preferred Stock ranks senior to the Company’s
common stock and junior to the Company’s Series A Convertible Preferred Stock,
par value $0.0001 per share. The shares of Series B Preferred Stock are
convertible on a one-for-one basis into shares of the Company’s common
stock. Except with respect to specified transactions that may affect
the rights, preferences, privileges or voting power of the Series B Preferred
Stock and except as otherwise required by Nevada law, the Series B Preferred
Stock has no voting rights. The Series B Preferred Stock is
non-redeemable and is not entitled to dividends. When accounting for
the Series B Preferred Stock, the Company determined that they qualified as
equity because the aforementioned characteristics made them akin to common
stock.
F-29
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
Investors
holding the amended Series J Warrants exercised their right to purchase Series B
Preferred Stock at $2.33 per share. For the year ended December 31,
2008, certain investors exercised their amended Series J Warrants for a total of
6,369,078 shares of Series B Preferred Stock. The Company received gross
proceeds of $14,839,952 for the issuance of those shares in connection with the
exercise of the Series J Warrants. The total amount of commission
paid to the placement agent, 1st Bridgehouse Securities, was 10% of the gross
proceeds, or $1,483,995. The Company also paid a total of $274,480
for other financing related expenses. The net proceeds from the
transactions, after accounting for placement agent commissions and other related
financing expenses, was $13,081,477.
Simultaneously
with the exercise of a portion of the Series J Warrants, a corresponding portion
of the Series B and Series JJ Warrants became exercisable. Accordingly, the
Company accounted for the net proceeds of this issuance by allocating to Par
Value, Additional Paid in Capital attributable to Series B Preferred Stock, and
Additional Paid in Capital attributable to Series B and JJ
Warrants. The Company determined that the Series B Preferred Stock
had a beneficial conversion feature (BCF). Accordingly, the Company
accounted for this BCF as a constructive preferred dividend, which is a charge
that reduces retained earnings and increases additional paid in capital
attributable to the Series B Preferred Stock. The Company also
transferred a prorated portion of proceeds previously recorded under Warrants A,
J, B, and C to the Additional Paid in Capital of Series B Preferred Stock to
reflect the exercise of the amended Series J Warrants.
In
accordance to EITF 00-27 and EITF 98-5, the Company accounted for the
modification of the Series J warrants as capital transaction because the
modification of the warrants was concurrent with the Company’s investors
contributing more working capital to the Company through the exercise of the
Series J warrants. In consideration of SFAS 123(R), the Company does
not believe there is additional incremental value that should be charged to
earnings because the fair value assigned to the Series B Convertible Preferred
Stock was less than the fair value of the Company’s common stock based on the
market’s closing price on September 5, 2008 and the valuation provided by
investment bankers on September 3, 2008. The Series J warrant holders
did not receive any additional value as a result of the amendment.
Penalty
Shares
Certain
investors were issued shares of common stock as a penalty for the Company’s
failure to achieve listing status on NASDAQ by a predetermined date, which was a
term stipulated in the Stock Purchase Agreement dated February 7,
2007. During the years ended December 31, 2009 and 2008, certain
investors were awarded an aggregate of 529,787 and 863,894 shares of common
stock, respectively. The Company recorded expenses to its statements
of income for the issuance of these shares totaling $1,153,439 and $5,355,233,
respectively. The Company used a price of $2.30 for the 312,891
shares issued on April 8, 2009 and used a price of $2.00 for the 216,896 shares
that were issued on April 16, 2009. These prices were the quoted
closing market prices for the Company’s common stock on those corresponding
dates. Spring House Capital provided the valuation of the shares for
the expenses recorded in the year ended December 31, 2008. The prices
used in determining the amount of expense was $6.35, $7.83, and $5.30, which
relate to March 18, 2008, May 30, 2008, and September 3, 2008,
respectively. These were the dates of issuance of the penalty
shares.
Exercise of Series C
Warrants
During
the year ended December 31, 2009, holders of Series C Warrants exercised the
right to purchase 187,294 shares of common stock. The transaction was
a cashless exercise. Accordingly, the Company issued to the holder
69,361 shares of common stock and cancelled warrants with the rights to purchase
117,933 of common stock.
F-30
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
16.
COMMITMENTS OF STATUTORY RESERVE
In
compliance with PRC laws, the Company is required to appropriate 10% of its net
income to its statutory reserve up to a maximum of 50% of an enterprise’s
registered Paid-in capital. The Company had future unfunded
commitments, as provided below.
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Unadjusted
Registered Capital in PRC
|
$ | 52,575,256 | $ | 43,826,004 | ||||
50%
maximum thereof
|
26,287,628 | 21,913,001 | ||||||
Less: Amounts
Appropriated to Statutory Reserve
|
(4,563,593 | ) | (3,271,511 | ) | ||||
Unfunded
Commitment
|
$ | 21,724,035 | $ | 18,641,490 |
17.
INCOME TAXES
On
February 7, 2007, income from the Company’s foreign subsidiaries became subject
to U.S. income tax liability; however, this tax is deferred until foreign source
income is repatriated to the Company from earnings and profits after foreign
income taxes, which has not yet occurred.
The
Company has engaged a U.S. CPA firm to prepare its U.S. income tax returns in
order to maintain a high level of compliance with U.S. tax laws.
All of
the Company’s operations are in the PRC, and in accordance with the relevant tax
laws and regulations of PRC, the corporate income tax rate is 25%. As
a business incentive, the Company was approved as a foreign investment
enterprise in March 2007, and in accordance with the relevant regulations
regarding the favorable tax treatment for a foreign investment enterprise, the
Company was entitled to a two-year tax exemption followed by a three-year half
exemption. For the years ended December 31, 2008 and 2007, the
Company was still within the two year tax exemption period, and accordingly,
made no provision for income taxes. For the year ended December 31,
2009, Wuhan Blower and Wuhan Generating were subject to a 12.5% tax rate and
Wuhan Sungreen was subject to a 25% tax rate.
Effective
January 1, 2008, the PRC income tax rules were changed. The PRC
government implemented a new 25% tax rate for all enterprises whether domestic
or foreign enterprise, and abolished the tax holiday. However,
the PRC government has established grandfathering transition rules that permit
enterprises that had received an income tax exemption prior to January 1, 2008
to continue to enjoy the exemption until the original expiration
date.
The
provision for income taxes in the PRC for China sourced net income amounted to
$1,502,884 and $0 for the years ended December 31, 2009 and 2008,
respectively.
Income
before taxes and the provision for taxes consists of the following:
December
31,
2009
|
December
31,
2008
|
|||||||
Income
(loss) before taxes:
|
||||||||
US
|
$ | (2,475,455 | ) | $ | - | |||
BVI
|
(27,927 | ) | - | |||||
PRC
|
12,412,787 | 16,148,092 | ||||||
Total
income before taxes
|
$ | 9,909,405 | $ | 16,148,092 |
Provision
for taxes:
|
||||||||
Current:
|
||||||||
U.S.
Federal
|
- | - | ||||||
State
|
- | - | ||||||
China
|
2,195,828 | - | ||||||
Currency
effect
|
403 | |||||||
$ | 2,196,231 | $ | - | |||||
Deferred:
|
||||||||
U.S.
Federal
|
- | - | ||||||
China
|
(749,031 | ) | - | |||||
(749,031 | ) | - | ||||||
Total
provision for taxes
|
$ | 1,447,200 | $ | - | ||||
Effective
tax rate
|
14.60 | % | N/A |
F-31
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts for income tax purposes. Significant components of our deferred tax
assets and liabilities at December 31, 2009 and December 31, 2008 are as
follows:
December
31,
2009
|
December
31,
2008
|
|||||||
Deferred
tax assets
|
||||||||
Bad
debt expense & accrual expense
|
$ | 749,031 | $ | - | ||||
749,031 | - | |||||||
Valuation
allowance
|
- | - | ||||||
Total
deferred tax assets
|
749,031 | - | ||||||
Deferred tax
liabilities
|
||||||||
Total
deferred tax liabilities
|
- | - | ||||||
Net
deferred tax assets
|
749,031 | - | ||||||
Reported
as:
|
||||||||
Current
deferred tax assets
|
749,031 | - | ||||||
Non-current
deferred tax assets
|
- | - | ||||||
Non-current
deferred tax liabilities
|
- | - | ||||||
Net
deferred taxes
|
$ | 749,031 | $ | - |
The
differences between the U.S. federal statutory income tax rates and the
Company's effective tax rate for the years ended December 31, 2009 and 2008 are
shown in the following table:
2009
|
2008
|
|||||||
U.S.
federal statutory income tax rate
|
34.00 | % | 35 | % | ||||
Lower
rates in PRC, net
|
-9.00 | % | -10 | % | ||||
Accruals
in foreign jurisdictions
|
2.10 | % | 0 | % | ||||
Tax
holiday
|
-12.50 | % | -25 | % | ||||
Effective
tax rate
|
14.60 | % | 0.00 | % |
F-32
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
18.
EARNINGS
PER SHARE
Components
of basic and diluted earnings per share were as follows:
12
months
|
12
months
|
|||||||
ended
|
ended
|
|||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Basic
Earnings Per Share Numerator
|
||||||||
Net
Income
|
$ | 8,462,206 | $ | 16,148,092 | ||||
Less:
|
||||||||
Preferred
Dividends
|
727,129 | 927,102 | ||||||
Series
A Constructive Preferred Dividend
|
- | - | ||||||
Series
B Constructive Preferred Dividend
|
- | 4,032,656 | ||||||
Income
Available to Common Stockholders
|
$ | 7,735,077 | $ | 11,188,334 | ||||
Diluted
Earnings Per Share Numerator
|
||||||||
Income
Available to Common Stockholders
|
$ | 7,735,077 | $ | 11,188,334 | ||||
Add:
|
||||||||
Preferred
Dividends
|
727,129 | 927,102 | ||||||
Income
Available to Common Stockholders on Converted Basis
|
$ | 8,462,206 | $ | 12,115,436 | ||||
Original
Shares:
|
||||||||
Additions
from Actual Events
|
||||||||
-Issuance
of Common Stock
|
24,752,802 | 19,712,446 | ||||||
-Conversion
of Series A Preferred Stock into Common Stock
|
- | 2,329,527 | ||||||
-Conversion
of Series B Preferred Stock into Common Stock
|
- | 2,219 | ||||||
-Issuance
of Common Stock resulting from the Exercise of Warrants
|
40,355 | 115,361 | ||||||
-Issuance
of Penalty Shares
|
382,869 | 515,979 | ||||||
Basic
Weighted Average Shares Outstanding
|
25,176,026 | 22,675,532 | ||||||
Dilutive
Shares:
|
||||||||
Additions
from Potential Events
|
||||||||
-Conversion
of Series A Preferred Stock
|
6,241,453 | 7,958,027 | ||||||
-Conversion
of Series B Preferred Stock
|
6,354,078 | 1,507,851 | ||||||
-Exercise
of Investor Warrants & Placement Agent Warrants
|
38,881 | 14,943,638 | ||||||
-Exercise
of Employee & Director Stock Options
|
- | - | ||||||
Diluted
Weighted Average Shares Outstanding:
|
37,810,439 | 47,085,048 | ||||||
Earnings
Per Share
|
||||||||
-
Basic
|
$ | 0.31 | $ | 0.49 | ||||
-
Diluted
|
$ | 0.22 | $ | 0.26 | ||||
Weighted
Average Shares Outstanding
|
||||||||
-
Basic
|
25,176,026 | 22,675,532 | ||||||
-
Diluted
|
37,810,439 | 47,085,048 |
F-33
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
19. OPERATING
SEGMENTS
The
Company individually tracks the performance of its three operating subsidiaries:
Wuhan Blower, Wuhan Generating Equipment, and Wuhan Sungreen. Wuhan
Blower is primarily engaged in the design, manufacture, installation, and
service of blowers. Wuhan Generating Equipment is primarily engaged
in the design, manufacture, installation, and service of power generating
equipment. Wuhan Sungreen is in the business of design, production,
and sale of blower silencers, connectors, and other general spare parts for
blowers and electrical equipment. Below is a presentation of the
Company’s results of operations and financial position for its operating
subsidiaries at December 31, 2009 and 2008, and for the years then
ended.
Results
of Operations
|
Wuhan
|
Company,
|
||||||||||||||||||
For
the year ended
|
Wuhan
|
Generating
|
Wuhan
|
UFG,
|
||||||||||||||||
December
31, 2009
|
Blower
|
Equipment
|
Sungreen
|
Adjustments
|
Total
|
|||||||||||||||
Sales
|
$ | 48,160,348 | $ | 44,176,236 | $ | 743,171 | $ | - | $ | 93,079,755 | ||||||||||
Cost
of Sales
|
36,981,602 | 32,127,881 | 611,145 | - | 69,720,628 | |||||||||||||||
Gross
Profit
|
11,178,746 | 12,048,356 | 132,026 | - | 23,359,128 | |||||||||||||||
Operating
Expenses
|
5,467,358 | 1,918,573 | 838,357 | 1,349,943 | 9,574,231 | |||||||||||||||
Other
Income (Expenses)
|
(2,080,210 | ) | (495,027 | ) | (146,816 | ) | (1,153,439 | ) | (3,875,492 | ) | ||||||||||
Earnings
before Taxes
|
3,631,178 | 9,634,756 | (853,147 | ) | - | 9,909,405 | ||||||||||||||
Taxes/(Deferred
Tax Benefit)
|
453,897 | 1,204,345 | (211,042 | ) | - | 1,447,200 | ||||||||||||||
Net
Income
|
$ | 3,177,281 | $ | 8,430,412 | $ | (642,105 | ) | $ | (2,503,382 | ) | $ | 8,462,206 |
Financial
Position
|
Wuhan
|
Company,
|
||||||||||||||||||
At
|
Wuhan
|
Generating
|
Wuhan
|
UFG,
|
||||||||||||||||
December
31, 2009
|
Blower
|
Equipment
|
Sungreen
|
Adjustments
|
Total
|
|||||||||||||||
Current
Assets
|
$ | 76,072,289 | $ | 58,026,006 | $ | 1,606,646 | $ | (26,049,354 | ) | $ | 109,655,587 | |||||||||
Non
Current Assets
|
48,160,407 | 24,738,269 | 23,774,958 | (32,511,993 | ) | 64,161,641 | ||||||||||||||
Total
Assets
|
124,232,696 | 82,764,275 | 25,381,604 | (58,561,347 | ) | 173,817,228 | ||||||||||||||
Current
Liabilities
|
39,083,033 | 41,069,298 | 1,279,778 | (21,760,479 | ) | 59,671,630 | ||||||||||||||
Total
Long Term Liabilities
|
7,094,145 | 4,387,761 | - | - | 11,481,906 | |||||||||||||||
Total
Liabilities
|
46,177,178 | 45,457,059 | 1,279,778 | (21,760,479 | ) | 71,153,536 | ||||||||||||||
Net
Assets
|
78,055,518 | 37,307,216 | 24,101,826 | (36,800,868 | ) | 102,663,692 | ||||||||||||||
Total
Liabilities & Net Assets
|
$ | 124,232,696 | $ | 82,764,275 | $ | 25,381,604 | $ | (58,561,347 | ) | $ | 173,817,228 |
F-34
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
Results
of Operations
|
Wuhan
|
Company,
|
||||||||||||||||||
For
the year ended
|
Wuhan
|
Generating
|
Wuhan
|
UFG,
|
||||||||||||||||
December
31, 2008
|
Blower
|
Equipment
|
Sungreen
|
Adjustments
|
Total
|
|||||||||||||||
Sales
|
$ | 58,820,320 | $ | 59,813,513 | $ | - | $ | - | $ | 118,633,833 | ||||||||||
Cost
of Sales
|
41,372,480 | 43,069,798 | - | - | 84,442,278 | |||||||||||||||
Gross
Profit
|
17,447,840 | 16,743,715 | - | - | 34,191,555 | |||||||||||||||
Operating
Expenses
|
6,292,955 | 3,469,376 | 117,553 | 1,689,451 | 11,569,335 | |||||||||||||||
Other
Income (Expenses)
|
(742,736 | ) | (416,748 | ) | - | (5,314,644 | ) | (6,474,128 | ) | |||||||||||
Earnings
before Taxes
|
10,412,149 | 12,857,591 | (117,553 | ) | (7,004,095 | ) | 16,148,092 | |||||||||||||
Taxes
|
- | - | - | - | - | |||||||||||||||
Net
Income
|
$ | 10,412,149 | $ | 12,857,591 | $ | (117,553 | ) | $ | (7,004,095 | ) | $ | 16,148,092 |
Financial
Position
|
Wuhan
|
Company,
|
||||||||||||||||||
At
|
Wuhan
|
Generating
|
Wuhan
|
UFG,
|
||||||||||||||||
December
31, 2008
|
Blower
|
Equipment
|
Sungreen
|
Adjustments
|
Total
|
|||||||||||||||
Current
Assets
|
$ | 64,326,040 | 48,151,218 | $ | 1,293,482 | (22,821,873 | ) | 90,948,867 | ||||||||||||
Non
Current Assets
|
47,991,237 | 24,415,293 | 23,564,745 | (31,847,772 | ) | 64,123,502 | ||||||||||||||
Total
Assets
|
112,317,277 | 72,566,511 | 24,858,227 | (54,669,647 | ) | 155,072,368 | ||||||||||||||
Current
Liabilities
|
37,626,457 | 42,306,896 | 467,114 | (20,376,496 | ) | 60,023,971 | ||||||||||||||
Total
Long Term Liabilities
|
- | 1,458,959 | - | - | 1,458,959 | |||||||||||||||
Total
Liabilities
|
37,626,457 | 43,765,855 | 467,114 | (20,376,496 | ) | 61,482,930 | ||||||||||||||
Net
Assets
|
74,690,820 | 28,800,656 | 24,391,113 | (34,293,151 | ) | 93,589,438 | ||||||||||||||
Total
Liabilities & Net Assets
|
$ | 112,317,277 | $ | 72,566,511 | $ | 24,858,227 | $ | (54,669,647 | ) | $ | 155,072,368 |
The
amounts carried in the column for the Company, UFG and adjustments reflect the
corporate expenses of the Company and its wholly owned subsidiary, Universe
Faith Group, Ltd., which has no operations and only serves to hold the Company’s
operating subsidiaries. Our corporate expenses include the costs for
professional fees related to corporate matters and compliance
efforts. The majority of the costs are directly a result of the
Company being a U.S. public company. The Company believes that these
costs are not costs which are directly attributable to the operations of our
operating segments and thus any allocation of these costs would be discretionary
and may misrepresent the performance of our operating segments. We
discuss the reasons for the fluctuation in these costs in our selling and
general and administrative expenses in our MD&A. The adjustments
represent the eliminations necessary to consolidate the financial
statements. See Note 2(b) - Consolidation.
20.
STOCK
COMPENSATION EXPENSE
On
November 30, 2007, the Company’s Board of Directors adopted the Wuhan General
Group (China), Inc. 2007 Stock Option Plan (the “Plan”). The Plan
provides that the maximum number of shares of the Company’s common stock that
may be issued under the Plan is 3,000,000 shares. The Company’s
employees, directors, and service providers are eligible to participate in the
Plan.
F-35
Wuhan
General Group (China), Inc.
For
the years ended December 31, 2009 and 2008
Notes
to Financial Statements
(Stated
in US Dollars)
For the
years ended December 31, 2009 and 2008, the Company recorded $0 and $227,603 of
stock compensation expense, respectively. The entire stock option
compensation expenses were recorded as general and administrative expenses given
the nature of the work contribution of the grantees.
The range
of the exercise prices of the stock options granted since inception of the plan
are shown in the following table:
Price Range
|
Number of Shares
|
||
$ | 0 - $9.99 |
80,000
shares
|
|
$ | 10.00 - $19.99 |
0
shares
|
|
$ | 20.00 - $29.99 |
0
shares
|
The
Company has not accrued or realized tax benefit related to the expense of stock
options in the United States because it does not currently have a plan to
repatriate its earnings.
The
Company used the Black-Scholes Model to value the options
granted. The following shows the weighted average fair value of the
grants as of December 31, 2009 and 2008 and the assumptions that were employed
in the model:
2009
|
2008
|
|||||||
Weighted-average
fair value of grants:
|
$ | 0.0000 | $ | 0.8665 | ||||
Risk-free
interest rate:
|
2.69 | % | 3.97 | % | ||||
Expected
volatility:
|
7.51 | % | 20.00 | % | ||||
Expected
life in months:
|
95.50 | 107.50 |
21.
CONCENTRATION
OF CREDIT RISK AND OTHER RISKS
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents, accounts receivable, other
receivable, and advances to suppliers. The Company maintains cash and cash
equivalents with several financial institutions. It invests with high credit
quality financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. Receivables are from
customers and suppliers and concentrated in the People’s Republic of
China. The Company performs ongoing credit evaluations of its
customers and suppliers. The Company generally does not require
collateral, but in most cases can place liens against the property, plant, or
equipment constructed or terminate the contract if a material default occurs.
The Company maintains an allowance for doubtful accounts which has been within
management’s expectations.
The
Company is subject to the concentration of supply risk because it contracted
with a single vendor, Hubei Gongchuang Real Estate Co., Ltd. to perform all of
the construction of its two campuses detailed in Note 8 - Property, Plant and
Equipment.
22.
CONSTRUCTIVE PREFERRED DIVIDEND
In
accordance with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, EITF 98-95 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, and EITF 00-27 Application of Issue No. 98-5 to
Certain Convertible Instruments, the Company has recorded two non-cash
preferred dividends against the companies retained earnings in the amounts of $0
and $4,032,656 in 2009, and 2008, respectively. These constructive
preferred dividends reflect the amortizations of the beneficial conversion
feature of both the Series A Preferred Stock, and Series B Preferred Stock
issued by the Company in its private placement financing transactions in
February of 2007, and October and November of 2008. The beneficial
conversion features are considered returns of capital to the investors in the
private placements. Since the two series of preferred stock were
convertible upon issuance the Company recognized the entire dividend at
inception. The beneficial conversion features arose from the
aggregate value of the differences between the effective conversion prices of
the securities and the contractual conversion prices of the stock issuances in
the financing transactions.
F-36