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EX-31.1 - Wonder Auto Technology, Incv184121_ex31-1.htm
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EX-32.2 - Wonder Auto Technology, Incv184121_ex32-2.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10−Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2010

¨ 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: 001-33648

WONDER AUTO TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
88-0495105
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Empl. Ident. No.)

No. 16 Yulu Street
Taihe District, Jinzhou City, Liaoning
People’s Republic of China, 121013
(Address of principal executive offices, Zip Code)

(86) 416-518-6632
 


(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                Yes  x No  ¨

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 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.

Large Accelerated Filer   
¨
 
Accelerated Filer
x
Non-Accelerated Filer  
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨ No x

The number of shares outstanding of each of the issuer’s classes of common equity, as of May 9, 2010 is as follows:

Class of Securities
 
Shares Outstanding
Common Stock, $0.0001 par value
 
33,859,994
 
 
 

 
 

 
TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
       
Item 1.
 
Financial Statements
1
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
40
Item 4.
 
Controls and Procedures
41
       
PART II
OTHER INFORMATION
       
Item 1.
 
Legal Proceedings
42
Item 1A.
 
Risk Factors
42
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
42
Item 3.
 
Defaults Upon Senior Securities
42
Item 4.
 
(Removed and Reserved)
42
Item 5.
 
Other Information
42
Item 6.
 
Exhibits
42

 
 

 
 

 
PART I
FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS.
 

 

Wonder Auto Technology, Inc.

Condensed Consolidated Financial Statements
For the three months ended
March 31, 2010 and 2009
(Stated in US dollars)

 
 

 

Wonder Auto Technology, Inc.
Condensed Consolidated Financial Statements
Three months ended March 31, 2010 and 2009

Index to Condensed Consolidated Financial Statements

   
Pages
     
Condensed Consolidated Statements of Income and Comprehensive Income
 
1
     
Condensed Consolidated Balance Sheets
 
3 - 4
     
Condensed Consolidated Statements of Cash Flows
 
5 - 6
     
Condensed Consolidated Statements of Equity
 
7
     
Notes to Condensed Consolidated Financial Statements
 
8 - 28

 
 

 

Wonder Auto Technology, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
For the three months ended March 31, 2010 and 2009
(Unaudited)
(Stated in US Dollars)

   
Three months ended
 
   
March 31,
 
   
2010
   
2009
 
             
Sales revenue
  $ 63,620,565     $ 39,976,020  
Cost of sales
    47,994,842       29,881,662  
                 
Gross profit
    15,625,723       10,094,358  
                 
Operating expenses
               
Administrative expenses (included share-based compensation of $1,477,694 in 2010, $Nil in 2009)
    5,078,798       2,315,992  
Research and development expenses (included share-based compensation of $91,782 in 2010, $Nil in 2009)
    1,349,529       456,232  
Selling expenses (included share-based compensation of $65,419 in 2010, $Nil in 2009)
    2,408,261       1,212,659  
                 
      8,836,588       3,984,883  
                 
Income from operations
    6,789,135       6,109,475  
Other income
    528,795       114,516  
Government grants
    201,511       175,062  
Equity in net income of an non-consolidated affiliate - Note 2
    548,792       -  
Net finance costs - Note 6
    (630,828 )     (83,989 )
                 
Income before income taxes and noncontrolling interests
    7,437,405       6,315,064  
Income taxes - Note 7
    (1,448,090 )     (920,005 )
                 
Net income before noncontrolling interests
    5,989,315       5,395,059  
Net income attributable to noncontrolling interests
    (208,238 )     (223,435 )
                 
Net income attributable to Wonder Auto Technology, Inc.
               
common stockholders
  $ 5,781,077     $ 5,171,624  
                 
Net income before noncontrolling interests
  $ 5,989,315     $ 5,395,059  
Other comprehensive income
               
Foreign currency translation adjustments
    (4 )     (65,109 )
                 
Comprehensive income
    5,989,311       5,329,950  
Comprehensive income attributable to noncontrolling interests
    (208,238 )     (208,020 )
                 
Comprehensive income attributable to Wonder Auto
               
Technology, Inc. common stockholders
  $ 5,781,073     $ 5,121,930  
                 
Earnings per share attributable to Wonder Auto Technology, Inc.
               
common stockholders:
               
basic and diluted - Note 8
  $ 0.17     $ 0.19  


 
- 1 -

 

Wonder Auto Technology, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income (Cont’d)
For the three months ended March 31, 2010 and 2009
(Unaudited)
(Stated in US Dollars)

 
Three months ended
 
March 31,
 
2010
 
2009
       
Weighted average number of shares outstanding:
     
basic and diluted
33,859,994
 
26,959,994

See the accompanying notes to condensed consolidated financial statements

 
- 2 -

 

Wonder Auto Technology, Inc.
Condensed Consolidated Balance Sheets
As of March 31, 2010 and December 31, 2009
(Stated in US Dollars)

   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
             
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 68,548,780     $ 82,414,287  
Restricted cash
    11,803,871       15,753,748  
Trade receivables, net
    48,280,371       49,522,583  
Bills receivable
    30,069,035       21,965,065  
Other receivables, prepayments and deposits
    13,112,782       14,826,460  
Inventories - Note 9
    55,024,719       51,119,562  
Deferred taxes
    1,063,524       1,186,410  
                 
Total current assets
    227,903,082       236,788,115  
Restricted cash
    586,800       -  
Intangible assets - Note 10
    31,595,891       32,907,720  
Property, plant and equipment, net - Note 11
    72,531,432       73,770,329  
Land use rights
    10,083,377       10,618,853  
Deposits for acquisition of property, plant and equipment
    8,750,363       7,435,563  
Investment in a non-consolidated affiliate - Note 2
    15,411,369       -  
Deferred taxes
    851,496       731,575  
                 
TOTAL ASSETS
  $ 367,713,810     $ 362,252,155  

See the accompanying notes to condensed consolidated financial statements

 
- 3 -

 

Wonder Auto Technology, Inc.
Condensed Consolidated Balance Sheets (Cont’d)
As of March 31, 2010 and December 31, 2009
(Stated in US Dollars)

   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
             
LIABILITIES AND EQUITY
           
             
LIABILITIES
           
Current liabilities
           
Trade payables
  $ 37,830,098     $ 34,126,534  
Bills payable
    19,387,872       29,388,653  
Other payables and accrued expenses
    15,553,707       14,886,909  
Provision for warranty - Note 12
    2,593,327       2,272,322  
Income tax payable
    1,439,306       892,340  
Secured borrowings - Note 13
    58,524,564       57,082,779  
Early retirement benefits cost
    363,831       353,584  
                 
Total current liabilities
    135,692,705       139,003,121  
Secured borrowings - Note 13
    22,252,100       20,908,721  
Deferred revenue - government grants
    3,209,466       3,315,762  
Early retirement benefits cost
    461,179       550,397  
                 
TOTAL LIABILITIES
    161,615,450       163,778,001  
                 
COMMITMENTS AND CONTINGENCIES - Note 15
               
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock: par value $0.0001 per share; authorized 10,000,000 shares in 2010 and 2009; none issued and outstanding
    -       -  
Common stock: par value $0.0001 per share Authorized 90,000,000 shares in 2010 and 2009; issued and outstanding 33,859,994 shares in 2010 and 2009
    3,386       3,386  
Additional paid-in capital
    139,177,597       137,542,702  
Statutory and other reserves
    10,186,701       10,186,701  
Accumulated other comprehensive income
    9,647,047       9,647,051  
Retained earnings
    41,051,673       35,270,596  
                 
TOTAL WONDER AUTO TECHNOLOGY, INC. STOCKHOLDERS’
               
EQUITY
    200,066,404       192,650,436  
                 
NONCONTROLLING INTERESTS
    6,031,956       5,823,718  
                 
TOTAL EQUITY
    206,098,360       198,474,154  
                 
TOTAL LIABILITIES AND EQUITY
  $ 367,713,810     $ 362,252,155  

See the accompanying notes to condensed consolidated financial statements

 
- 4 -

 

Wonder Auto Technology, Inc.
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2010 and 2009
(Unaudited)
(Stated in US Dollars)

   
Three months ended March 31,
 
   
2010
   
2009
 
             
Cash flows from operating activities
           
Net income before noncontrolling interests
  $ 5,989,315     $ 5,395,059  
Adjustments to reconcile net income before noncontrolling interests to net cash (used in) provided by operating activities:
               
Depreciation
    1,668,523       1,373,739  
Amortization of intangible assets and land use rights
    387,015       98,848  
Deferred taxes
    2,964       125,167  
(Recovery of) provision for doubtful accounts
    (102,611 )     10,794  
Provision of obsolete inventories
    71,807       19,498  
Exchange gain on translating of monetary assets and liabilities
    (603,606 )     (762,035 )
Loss (gain) on disposal of property, plant and equipment
    33,066       (296 )
Deferred revenue amortized
    (106,296 )     (61,329 )
Equity in net income of an non-consolidated affiliate
    (548,792 )     -  
Share-based compensation
    1,634,895       -  
Changes in operating assets and liabilities:
               
Trade receivables
    1,344,744       (5,749,760 )
Bills receivable
    (8,123,041 )     2,203,465  
Other receivables, prepayments and deposits
    (2,633,496 )     4,142,968  
Inventories
    (4,626,870 )     2,650,725  
Trade payables
    3,696,142       504,105  
Early retirement benefit costs
    (79,184 )     (107,547 )
Other payables and accrued expenses
    652,579       (2,050,977 )
Provision for warranty
    321,006       190,783  
Income tax payable
    487,524       652,399  
                 
Net cash flows (used in) provided by operating activities
  $ (534,316 )   $ 8,635,606  

See the accompanying notes to condensed consolidated financial statements

 
- 5 -

 

Wonder Auto Technology, Inc.
Condensed Consolidated Statements of Cash Flows (Cont’d)
For the three months ended March 31, 2010 and 2009
(Unaudited)
(Stated in US Dollars)

   
Three months ended March 31,
 
   
2010
   
2009
 
             
Cash flows from investing activities
           
Payments to acquire and for deposits for acquisition of property, plant and equipment
  $ (3,284,627 )   $ (1,422,433 )
Proceeds from sales of property, plant and equipment
    -       5,421  
Net cash received from Winning
    8,013,693       -  
Net cash paid to acquire Applaud - Note 2
    (14,862,577 )     -  
Net cash paid for disposal of Jinzhou Jiade - Note 3
    (114,517 )     -  
Net cash paid to acquire Yearcity
    -       (2,197,500 )
                 
Net cash flows used in investing activities
    (10,248,028 )     (3,614,512 )
                 
Cash flows from financing activities
               
Bills payable
    (9,981,710 )     (14,042,025 )
Decrease in restricted cash
    3,363,077       11,092,454  
Repayment of secured borrowings
    (5,779,980 )     (10,662,270 )
Proceeds from secured borrowings
    9,315,450       14,064,001  
                 
Net cash flows (used in) provided by financing activities
    (3,083,163 )     452,160  
                 
Effect of foreign currency translation on cash and cash equivalents
    -       (888 )
                 
Net (decrease) increase in cash and cash equivalents
    (13,865,507 )     5,472,366  
                 
Cash and cash equivalents - beginning of period
    82,414,287       8,159,156  
                 
Cash and cash equivalents - end of period
  $ 68,548,780     $ 13,631,522  
                 
Supplemental disclosures for cash flow information:
               
Cash paid for:
               
Interest
  $ 975,228     $ 923,530  
Income taxes
  $ 908,961     $ 103,140  
                 
Non-cash investing and financing activities:
               
Acquisition of Yearcity by offsetting with receivable from disposal of an unconsolidated affiliate
  $ -     $ 5,950,000  
Settlement of amount due to Hony Capital II, L.P. (“Hony Capital”) by offsetting with amount due from Hony Capital
  $ -     $ 7,626,804  

See the accompanying notes to condensed consolidated financial statements
 
- 6 -

 
Wonder Auto Technology, Inc.
Condensed Consolidated Statements of Equity
(Unaudited)
(Stated in US Dollars)

   
Wonder Auto Technology, Inc. stockholders
             
                           
Accumulated
                   
               
Additional
   
Statutory
   
other
                   
   
Common stock
   
paid-in
   
and other
   
comprehensive
   
Retained
   
Noncontrolling
       
   
No. of shares
   
Amount
   
capital
   
reserves
   
income
   
earnings
   
interests
   
Total
 
                                                 
Balance, December 31, 2009
    33,859,994     $ 3,386     $ 137,542,702     $ 10,186,701     $ 9,647,051     $ 35,270,596     $ 5,823,718     $ 198,474,154  
Net income
    -       -       -       -       -       5,781,077       208,238       5,989,315  
Foreign currency translation adjustments
    -       -       -       -       (4 )     -       -       (4 )
Share-based compensation
    -       -       1,634,895       -       -       -       -       1,634,895  
                                                                 
Balance, March 31, 2010
    33,859,994     $ 3,386     $ 139,177,597     $ 10,186,701     $ 9,647,047     $ 41,051,673     $ 6,031,956     $ 206,098,360  

See the accompanying notes to condensed consolidated financial statements

 
- 7 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

1. 
Corporate information and description of business

Wonder Auto Technology, Inc. (the “Company”) was incorporated in the State of Nevada on June 8, 2000.  The Company’s shares are quoted for trading on the Nasdaq Global Market in the United States.

The Company is principally engaged in the design, development, manufacture and marketing of automotive electrical parts, specifically starters and alternators and manufacturing of engine valves and tappets for motor vehicles mainly in the People’s Republic of China (the “PRC”). The major target markets of the Company’s products are the PRC, South Korea and Brazil.

The products of the Company are suitable for use in a variety of automobiles.  However, most of the Company’s products are used in passenger cars with smaller engines having displacement below 1.6 liters.  The Company has also begun to manufacture and sell rectifier and regulator products for use in alternators as well as various rods and shafts for use in shock absorbers, alternators and starters.

The Company’s customers include automakers, engine manufacturers and, increasingly, auto parts suppliers.

The raw materials used in the Company’s production are mainly divided into four categories, metal parts, semiconductors, chemicals and packaging materials.

Currently the Company has thirteen subsidiaries:
Company name
 
Place/date of 
incorporation or 
establishment
 
The
Company's 
effective
ownership 
interest
 
Common stock/ 
registered capital
 
Principal activities
                 
Wonder Auto Limited (“Wonder”)
 
British Virgin Islands (“BVI”) / April 16, 2004
 
100%
 
Ordinary shares: Authorized: 50,000 shares of $1 each, Paid up: 245 shares of $1 each
 
Investment holding
 
                 
Jinzhou Halla Electrical Equipment Co., Ltd. (“Jinzhou Halla”)
 
The PRC /  March 21, 1996
 
100%
 
Registered capital of $31,900,000 and fully paid up
 
Manufacturing and selling of starters and alternators
                 
Jinzhou Dongwoo Precision Co., Ltd. (“Jinzhou Dongwoo”)
 
The PRC /  April 23, 2003
 
50% *
 
Registered capital of $2,800,000 and fully paid up
 
Manufacturing and selling of accessories of alternators
                 
Jinzhou Wanyou Mechanical Parts Co., Ltd. (“Jinzhou Wanyou”)
 
The PRC / September 21, 2006
 
100%
 
Registered capital $54,950,000 and fully paid up
 
Manufacturing and selling of rods and shafts
 
 
- 8 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

1. 
Corporate information and description of business (Cont’d)

 
Company name
 
Place/date of 
incorporation or 
establishment
 
The
Company's 
effective
ownership 
interest
 
Common stock/ 
registered capital
 
Principal activities
                 
Jinzhou Wonder Motor Co., Ltd. (“Wonder Motor”)
 
The PRC / September 24, 2007
 
100%
 
Registered capital of $3,500,000 and fully paid up
 
Development stage company
                 
Jinzhou Wonder Auto Electrical Equipment Co., Ltd. (“Jinzhou Wonder”)
 
The PRC / September 24, 2007
 
100%
 
Registered capital of $5,500,000 and fully paid up
 
Manufacturing and selling of accessories of starters and alternators
                 
Jinzhou Hanhua Electrical System Co., Ltd. (“Jinzhou Hanhua”)
 
The PRC /  April 23, 2003
 
50% *
 
Registered capital of $2,369,000 and fully paid up
 
Manufacturing and selling of accessories of starters
                 
Jinzhou Karham Electrical Equipment Co., Ltd. (Jinzhou Karham”)
 
The PRC /  May 20, 2006
 
65%
 
Registered capital of $950,000 and fully paid up
 
Manufacturing and selling of accessories of starters
                 
Fuxin Huirui Mechanical Co., Ltd. (“Fuxin Huirui”)
 
The PRC / September 24, 2007
 
100%
 
Registered capital of $3,000,000 and paid up capital of $740,990
 
Manufacturing and selling of accessories of alternators
                 
Yearcity Limited (“Yearcity”)
 
BVI /  March 10, 2005
 
100%
 
Authorized: 50,000 shares of $1 each, Paid up: 100 share of $1 each
 
Investment holding
                 
Jinan Worldwide Auto Accessories Co., Ltd. (“Jinan Worldwide”)
 
The PRC /  February 1956
 
100%
 
Registered capital of $20,700,000 and fully paid up
 
Manufacturing and selling of valves and tappets
                 
Friend Birch Limited (“Friend Birch”)
 
Hong Kong / November 9, 2005
 
100%
 
Ordinary shares: Authorized and fully paid up: 10,000 shares of HK$1 each
 
Investment holding
                 
Jinzhou Lida Auto Parts Co., Ltd. (“Jinzhou Lida”)
 
The PRC /  October 23, 2008
 
100%
 
Registered capital of $1,000,000 and fully paid up
 
Manufacturing and selling of accessories of rods and shafts

The Company obtained the control over those subsidiaries by appointing more than half  of members in the board of directors in accordance with those subsidiaries’  Memorandum and Articles of Association of which a valid board action only  requires the approval of more than half of board members.

 
- 9 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

2. 
Acquisition

On January 18, 2010, Wonder and Yearcity entered into two separate agreements with Novophalt (China) Limited, a company incorporated in BVI, and Wonder Employee Capital Limited (“WECL”), a company incorporated in BVI, for acquisition of their 20.90% and 17.46% equity interests in Applaud Group Limited (“Applaud”) at considerations of HK$62,915,086 (equivalent to approximately $8.12 million) and HK$52,534,672 (equivalent to approximately $6.78 million) respectively.  Both considerations were settled in January, 2010.  Since Mr. Zhao, a director of the Company, is the sole director and owner of WECL, the acquisition of 17.46% equity interest in Applaud from WECL constituted as a related party transaction.

Applaud, a company incorporated in BVI, is an investment holding company which only holds 50.62% equity interest in Jinheng Automotive Safety Technology Holdings Limited (“Jinheng Holdings”).  As a result of acquisition of 38.36% equity interest in Applaud, the Company effectively holds 19.42% equity interest in Jinheng Holdings. Jinheng Holdings is a high-tech automotive parts supplier that is primarily engaged in developing, manufacturing and selling components of automotive passive safety restraint systems (airbag and seatbelt), automotive engine electronic injection management systems (EMS), and components of diesel engines. Jinheng Holdings is listed on the Main Board of Hong Kong Stock Exchange.

Investments in entities over which the Company does not have control, but has significant influence, are accounted for using the equity method of accounting. The Company’s investments in Applaud are reported in the condensed consolidated balance sheets as investment in a non-consolidated affiliate.

Condensed financial data of Applaud was as follows:-

   
Three months ended
 
   
March 31,
 
   
(Unaudited)
 
   
2010
   
2009
 
Summary of Operations:-
           
Revenues
  $ 40,229,986     $ -  
Gross profit
    9,267,668       -  
Income from operations
    4,457,325       -  
Net income
  $ 1,430,687     $ -  
                 
Net income attributable to the Company
  $ 548,792     $ -  
 
 
- 10 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

3.
Disposal of a subsidiary

On March 1, 2010, the Company disposed of its 100% equity interest in Jinzhou Jiade Machinery Co., Ltd. (“Jinzhou Jiade”) to two independent third parties at a total cash consideration of $2,980,959 and [will be paid within 90 days from March 1, 2010]. The following table summarize the net assets of Jinzhou Jiade disposed of during the three moths ended March 31, 2010 :

Net assets disposed of :
 
Unaudited
 
       
Property, plant and equipment, net
  $ 1,709,036  
Land use right
    472,200  
Current assets
    1,693,493  
Current liabilities
    (1,881,860 )
Goodwill
    988,090  
         
      2,980,959  
Gain on disposal of interest in a subsidiary
    -  
         
Total consideration, satisfied by cash
  $ 2,980,959  
         
Analysis of net inflow of cash and cash equivalents in respect of disposal of a subsidiary :
       
Cash consideration
  $ 2,980,959  
Cash and cash equivalents disposed of
    (114,517 )
Outstanding amount included in other receivables, prepayments and deposits
    (2,980,959 )
         
Net cash outflow
  $ (114,517 )

4.
Basis of presentation

The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Regulation S-X.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these statements pursuant to such rules and regulation and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2009, included in our Annual Report on Form 10-K for the year ended December 31, 2009.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month periods have been made.  Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

 
- 11 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

5.
Summary of significant accounting policies

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation.

Concentrations of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade and bills receivables.  As of March 31, 2010, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC, which management believes are of high credit quality.  With respect to trade and bills receivables, the Company extends credit based on an evaluation of the customer’s financial condition.  The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of trade receivables.

Regarding bills receivable, they are undertaken by the banks to honor the payments at maturity and the customers are required to place deposits with the banks equivalent to certain percentage of the bills amount as collateral.  These bills receivable can be sold to any third party at a discount before maturity.  The Company does not maintain allowance for bills receivable in the absence of bad debt experience and the payments are undertaken by the banks.

During the reporting periods, customers representing 10% or more of the Company’s condensed consolidated sales are:

   
Three months ended
 
   
March 31,
 
   
(Unaudited)
 
   
2010
   
2009
 
             
Harbin Dongan Automotive Engine Manufacturing Company Limited
  $ 7,441,654     $ 4,895,844  
Beijing Hyundai Motor Company
    3,764,388       6,825,112  
                 
    $ 11,206,042     $ 11,720,956  


 
- 12 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

5. 
Summary of significant accounting policies (Cont’d)

Fair value of financial instruments

The Company adopted ASC 820 (previously Statement of Financial Accounting Standards (“SFAS”) No. 157) on January 1, 2008. The adoption of ASC 820 did not materially impact the Company’s financial position, results of operations or cash flows.

ASC 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which fair value option was not elected. Except for secured borrowings disclosed as below, the carrying amounts of the financial assets and liabilities approximate to their fair values due to short maturities or the applicable interest rates approximate the current market rates :-


   
As of March 31, 2010
   
As of December 31, 2009
 
   
(Unaudited)
   
(Audited)
 
   
Carrying
amount
   
Fair value
   
Carrying
amount
   
Fair value
 
                         
Secured borrowings
  $ 80,776,664     $ 81,320,036     $ 77,991,500     $ 79,500,520  

The fair values of secured borrowings are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Recently issued accounting pronouncements

Accounting for Transfers of Financial Assets (Included in amended Topic ASC 860 “Transfers and Servicing”, previously SFAS No. 166, “Accounting for Transfers of Financial Assets - an Amendment of Financial Accounting Standard Board (“FASB”) Statement No. 140.”). The amended topic addresses information a reporting entity provides in its financial statements about the transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Also, the amended topic removes the concept of a qualifying special purpose entity, limits the circumstances in which a transferor derecognizes a portion or component of a financial asset, defines participating interest and enhances the information provided to financial statement users to provide greater transparency. The amended topic is effective for the first annual reporting period beginning after November 15, 2009 and was effective for us as of January 1, 2010. The adoption of this amended topic has no material impact on the Company’s financial statements.

 
- 13 -

 
Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

5. 
Summary of significant accounting policies (Cont’d)

Recently issued accounting pronouncements (Cont’d)

Consolidation of Variable Interest Entities - Amended (Included in amended Topic ASC 810 “Consolidation”, previously SFAS 167 “Amendments to FASB Interpretation No. 46(R)”). The amended topic requires an enterprise to perform an analysis to determine the primary beneficiary of a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity. The amended topic also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The amended topic is effective for the first annual reporting period beginning after November 15, 2009 and will be effective for us as of January 1, 2010. The adoption of this amended topic has no material impact on the Company’s financial statements.

The FASB issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force.” This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The management is in the process of evaluating the impact of adopting this ASU update on the Company’s financial statements.

The FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC Topic 820 to require the following additional disclosures regarding fair value measurements: (i) the amounts of transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) reasons for any transfers in or out of Level 3 of the fair value hierarchy and (iii) the inclusion of information about purchases, sales, issuances and settlements in the reconciliation of recurring Level 3 measurements. ASU 2010-06 also amends ASC Topic 820 to clarify existing disclosure requirements, requiring fair value disclosures by class of assets and liabilities rather than by major category and the disclosure of valuation techniques and inputs used to determine the fair value of Level 2 and Level 3 assets and liabilities. With the exception of disclosures relating to purchases, sales, issuances and settlements of recurring Level 3 measurements, ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009. The disclosure requirements related to purchases, sales, issuances and settlements of recurring Level 3 measurements will be effective for financial statements for annual reporting periods beginning after December 15, 2010.  The management is in the process of evaluating the effect of ASC 2010-06 on its financial statements and results of operation and is currently not yet in a position to determine such effects.

 
- 14 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

5. 
Summary of significant accounting policies (Cont’d)

Recently issued accounting pronouncements (Cont’d)

The FASB issued ASU No. 2010-02, “Consolidation (Topic 810) Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification”. This amendment affects entities that have previously adopted Topic 810-10 (formally SFAS 160). It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The adoption of this ASU update has no material impact on the Company’s financial statements.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements, which amends FASB ASC Topic 855, Subsequent Events. The update provides that SEC filers, as defined in ASU 2010-09, are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The update also requires SEC filers to evaluate subsequent events through the date the financial statements are issued rather than the date the financial statements are available to be issued. The Company adopted ASU 2010-09 upon issuance. This update had no material impact on the financial position, results of operations or cash flows of the Company.

6.
Net finance costs
   
Three months ended
 
   
March 31,
 
   
(Unaudited)
 
   
2010
   
2009
 
             
Interest income
  $ (89,518 )   $ (318,548 )
Interest expenses
    1,137,642       999,024  
Bills discounting charges
    24,412       178,789  
Bank charges
    30,967       74,115  
Net exchange gain
    (488,235 )     (869,606 )
Finance charges from early retirement benefits cost
    15,560       20,215  
                 
    $ 630,828     $ 83,989  
 
 
- 15 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

7.
Income taxes

United States

Wonder Auto Technology, Inc. is subject to the United States of America Tax law at tax rate of 34%.  No provision for the US federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting period.

BVI

Wonder and Yearcity were incorporated in the BVI and, under the current laws of the BVI, are not subject to income taxes.

 
- 16 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

7. 
Income taxes (Cont’d)

PRC

Corporate income tax (“CIT”) to Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Hanhua, Jinzhou Karham, Fuxin Huirui and Jinan Worldwide in the PRC was charged at 27%, of which 24% is for national tax and 3% is for local tax, of the assessable profits before 2008.  The PRC’s legislative body, the National People’s Congress, adopted the unified CIT Law on March 16, 2007.  This new tax law replaces the existing separate income tax laws for domestic enterprises and foreign-invested enterprises and became effective on January 1, 2008.  Under the new tax law, a unified income tax rates is set at 25% for both domestic enterprises and foreign-invested enterprises.  However, there will be a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential tax treatments granted by relevant tax authorities.  Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and will transit into the new tax rate over a five year period beginning on the effective date of the CIT Law.  Enterprises that are currently entitled to exemptions for a fixed term will continue to enjoy such treatment until the exemption term expires.  Preferential tax treatment will continue to be granted to industries and projects that qualify for such preferential treatments under the new tax law.  As approved by the relevant tax authority in the PRC, Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Hanhua, Jinzhou Karham, Fuxin Huirui and Jinan Worldwide were entitled to two years’ exemption from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by a 50% tax reduction for the immediate next three calendar years (“tax holiday”).  The tax holiday of Jinzhou Halla commenced in the fiscal financial year of 2001.  Accordingly, Jinzhou Halla was subject to tax rate of 13.5% for 2003, 2004 and 2005.  Furthermore, Jinzhou Halla, being a Foreign Investment Enterprise (“FIE”), engaged in an advanced technology industry, was approved to enjoy a further three years’ 50% tax reduction for 2006, 2007 and 2008 and thereafter subject to a rate of 15%. The tax holiday of Jinzhou Dongwoo commenced in the fiscal year 2004.  Accordingly, Jinzhou Dongwoo was subject to tax rate of 13.5% for 2006 and 2007, and subject to a tax rate of 12.5% for 2008 and 25% for 2009 and thereafter subject to a rate of 25%. Jinzhou Wanyou has elected to commence the tax holiday in the fiscal year 2007.  Accordingly, Jinzhou Wanyou will be exempted from CIT for 2007 and 2008 and thereafter entitled to a 50% reduction on CIT tax rate to 12.5% for 2009, 2010 and 2011.  The tax holiday of Jinzhou Hanhua commenced in the fiscal year 2005.  Accordingly, Jinzhou Hanhua was subject to tax rate of 13.5% for 2007, and subject to a tax rate of 12.5% for 2008 and 2009 and thereafter subject to a rate of 25%. Jinzhou Karham has elected to commence the tax holiday in the fiscal year 2008.  Accordingly, Jinzhou Karham will be exempted from CIT for 2008 and 2009 and thereafter entitled to a 50% reduction on CIT tax rate 12.5% for 2010, 2011 and 2012.  The tax holiday of Fuxin Huirui commenced in the fiscal year 2008.  Accordingly, Fuxin Huirui will be exempted from CIT for 2008 and 2009 and thereafter entitled to a 50% reduction on CIT tax rate 12.5% for 2010, 2011 and 2012.  The tax holiday of Jinan Worldwide commenced in the fiscal year of 2006.  Accordingly, Jinan Worldwide was subject to tax rate of 12.5% for 2008, 2009 and 2010.  Wonder Motor, Jinzhou Wonder, Jinzhou Jiade and Jinzhou Lida is subject to a tax rate of 25%.

 
- 17 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

8.
Earnings per share

During the reporting periods, certain share-based awards were not included in the computation of diluted earnings per share because they were anti-dilutive. Accordingly, the basic and diluted earnings per share are the same.

9. 
Inventories
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
             
Raw materials
  $ 12,176,199     $ 11,018,873  
Work-in-progress
    8,333,674       5,123,749  
Finished goods
    35,892,128       36,282,415  
                 
      56,402,001       52,425,037  
Provision for obsolete inventories
    (1,377,282 )     (1,305,475 )
                 
Net
  $ 55,024,719     $ 51,119,562  

10. 
Intangible assets
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
             
Costs:
           
Goodwill
  $ 23,200,260     $ 24,188,350  
Customer contracts
    49,053       49,053  
Unpatented know-how with infinite useful life
    1,683,645       1,683,645  
Unpatented know-how with finite useful life
    7,073,874       7,073,874  
Trademarks and patents
    417,905       417,905  
                 
      32,424,737       33,412,827  
Accumulated amortization
    (828,846 )     (505,107 )
                 
Net
  $ 31,595,891     $ 32,907,720  
 
 
- 18 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

11. 
Property, plant and equipment
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
Costs:
           
Buildings
  $ 33,962,185     $ 34,951,440  
Plant and machinery
    46,813,668       45,801,702  
Furniture, fixtures and equipment
    1,188,794       1,211,966  
Tools and equipment
    6,330,776       5,898,090  
Leasehold improvements
    1,061,463       1,058,371  
Motor vehicles
    2,018,606       1,937,461  
                 
      91,375,492       90,859,030  
Accumulated depreciation
    (20,909,426 )     (19,505,275 )
Construction in progress
    2,065,366       2,416,574  
                 
Net
  $ 72,531,432     $ 73,770,329  

 
(i)
Pledged property, plant and equipment

As of March 31, 2010, certain property, plant and equipment with aggregate net book value of $23,610,739 was pledged to bank to secure general banking facilities (note 13(a)).

 
(ii)
Construction in Progress

Construction in progress mainly comprises capital expenditures for construction of the Company’s new offices and factories.

12. 
Provision for warranty
   
(Unaudited)
 
       
Balance as of January 1, 2010
  $ 2,272,322  
Claims paid for the period
    (329,209 )
Additional provision for the period
    650,214  
         
Balance as of March 31, 2010
  $ 2,593,327  

 
- 19 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

13. 
Secured borrowings
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
Short-term borrowings
           
Short-term loans - Note 13(i)
  $ 54,792,450     $ 53,164,080  
Long-term loans - current portion
    3,732,114       3,918,699  
                 
      58,524,564       57,082,779  
Long-term borrowings - Note 13(ii)
               
Interest bearing :-
               
- at 5.35% per annum
    1,026,900       1,026,900  
- at 5.47% per annum
    15,256,800       13,496,400  
- at 6.95% per annum
    9,700,514       10,304,120  
                 
      25,984,214       24,827,420  
Less : current maturities
    (3,732,114 )     (3,918,699 )
                 
      22,252,100       20,908,721  
                 
    $ 80,776,664     $ 77,991,500  
 
 
- 20 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
 
13. 
Secured borrowings (Cont'd)

Notes :-

 
(i)
The weighted-average interest rate for short-term loans as of March 31, 2010 and December 31, 2009, were 5.51% and 5.28%, respectively.

 
(ii)
Long-term borrowings are repayable as follows :-

   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
             
Within one year
  $ 3,732,114     $ 3,918,699  
After one year but within two years
    6,922,838       7,109,424  
After two years but within three years
    6,922,838       7,109,424  
After three years but within four years
    4,628,900       3,499,148  
After four years but within five years
    2,750,624       2,163,825  
After five years
    1,026,900       1,026,900  
                 
    $ 25,984,214     $ 24,827,420  

As of March 31, 2010, the Company’s had total bank lines of credit and borrowings there under as follows :-

Facilities granted
 
Granted
   
Amount utilized
   
Unused
 
                   
Secured borrowings
  $ 88,111,664     $ 80,776,664     $ 7,335,000  

The above secured borrowings were secured by the following :-

 
(a)
Property, plant and equipment with carrying value of $23,610,739 (note 11);

 
(b)
Land use right with carrying value of $4,834,509;

 
(c)
Guarantees executed by third parties;

 
(d)
Guarantees executed by Yuncong Ma, the Company’s director; and

 
(e)
Guarantees executed by a related company of which Mr. Qingjie Zhao (“Mr. Zhao”), a director of the Company, is a director and a shareholder.

During the reporting periods, there was no covenant requirement under the banking facilities granted to the Company.

 
- 21 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

14. 
Share-based compensation

The Company granted share options to employees, directors and consultants to reward for services.

Stock option plan

In November 24, 2009, the Board of Directors approved the Wonder Auto Technology, Inc. 2009 Equity Incentive Plan (the “2009 Plan”). The exercise price of the options granted, pursuant to the 2009 Plan, must be at least equal to the fair market value of the Company’s common stock at the date of grant. The 2009 plan will terminate on November 25, 2012.

Pursuant to the 2009 Plan, the Company issued 1,674,400 options with an exercise price of $11.48 per share on November 24, 2009.  One third of the options will vest and become exercisable on each of the filing dates of the Company’s Annual Reports on Form 10-K for fiscal years 2009, 2010 and 2011, respectively, upon the achievement of certain income thresholds which set to be $23 million for fiscal year 2009, $34.5 million for fiscal year 2010 and $42.3 million for fiscal year 2011.

A summary of share option plan activity for the three-months ended March 31, 2010 is presented below:

             
Remaining
 
Aggregate
 
   
Number of
   
Exercise price
 
contractual
 
intrinsic
 
   
shares
   
per share
 
Term
 
value (1)
 
                     
Outstanding as of January 1, 2010
    1,674,400     $ 11.48          
Granted
    -       -          
Exercised
    -       -          
Forfeited
    -       -          
Cancelled
    -       -          
                         
Outstanding as of March 31, 2010
    1,674,400     $ 11.48  
2 years
  $ -  
                           
Exercisable as of March 31, 2010
    -     $ -  
-
  $ -  

 
(1)
No aggregate intrinsic value as the exercise price of options ($11.48) is in excess of the values of the Company’s closing stock price on March 31, 2010 ($10.58).

The grant-date fair values of options granted for 2009, 2010 and 2011 are $3.47, $7.22 and $8.91 per share respectively. Compensation expense of $1,634,895 arising from abovementioned share options granted was recognized for three months ended March 31, 2010.

 
- 22 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
 
14. 
Share-based compensation (Cont’d)

The fair values of the above option awards were estimated on the date of grant using the Black-Scholes Option Valuation Model and graded vesting method together with the following assumptions.

   
2009
   
2010
   
2011
 
                   
Expected volatility
    80.02 %     127.81 %     140.72 %
Expected dividends
 
Nil
   
Nil
   
Nil
 
Expected life
 
1.4 years
   
2.4 years
   
3.4 years
 
Risk-free interest rate
    0.28 %     0.73 %     1.22 %

As of March 31, 2010, there were unrecognized compensation costs of $8,132,583 related to the above non-vested share options which is expected to be recognized over the 2 years.

15.
Commitments and contingencies

 
(a)
Capital commitment

As of March 31, 2010, the Company had capital commitments amounting to $4,176,741 in respect of the acquisition of property, plant and equipment which were contracted for but not provided in the financial statements.

 
(b)
Operating lease arrangement

As of March 31, 2010, the Company had no non-cancelable operating leases for its property, plant and equipment.

The rental expense relating to the operating leases was $Nil and $108,055 for the three months ended March 31, 2010 and 2009 respectively.

(c) 
Guarantee

During the year, the Company has acted as guarantor for bank loans amounting to approximately $14,670,000 granted to two independence third parties. These two third parties also provided guarantees for bank loans amounting to approximately $13.5 million granted to the Company (Note 13(c)).  None of our directors, director nominees or executive officers is involved in normal operation or investing in the business of the guaranteed third parties.  All the third parties have a healthy financial position as of March 31, 2010.

 
- 23 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

15.
Commitments and contingencies (Cont’d)

 
(c)
Guarantee (cont’d)

All the above guarantees have no recourse provision that would enable the Company to recover from third parties of any amounts paid under the guarantees and any assets held either as collateral or by third parties that the Company can obtain or liquidate to recover all or a portion of the amounts paid under the guarantees.

If the third parties fail to perform under their contractual obligation, the Company will make future payments including the contractual principal amounts, related interests and penalties.

The following table summarizes the Company’s maximum exposure as for March 31, 2010 in relation to the guarantee given to the third parties:-
 
Guarantee
 
Bank
facilities
date
   
 
Expiry
date
   
Interest
rate (per
annum)
   
Loan/bills
amount
   
Principal
repaid up to
March 31,
2010
   
Outstanding as
of March 31,
2010
   
Outstanding
interest as of
March 31, 2010
   
 
Estimated
exposure
 
                                                 
Third party A- Note
    5.2009       5.2010       5.31 %   $ 2,934,000       -     $ 2,934,000     $ 25,966     $ 2,959,966  
      7.2009       7.2010       5.31 %     2,934,000       -       2,934,000       51,932       2,985,932  
      12.2009       6.2010    
Nil
      1,467,000       -       1,467,000       -       1,467,000  
Third party B- Note
    6.2009       6.2010       5.31 %     4,401,000       -       4,401,000       58,423       4,459,423  
      5.2009       5.2010       5.31 %     2,934,000       -       2,934,000       25,966       2,959,966  
                                                                 
                            $ 14,670,000       -     $ 14,670,000     $ 162,287     $ 14,832,287  
                                                                 
Maximum exposure
                                                    $ 14,832,287  

Management has assessed the fair value of the obligation arising from the above financial guarantees and considered it is immaterial to the consolidated financial statements. Therefore, no obligations in respect of the above guarantees were recognized as of March 31, 2010.

The Company has never incurred costs to settle liabilities in relation to these guarantee agreements. As of March 31, 2010, the Company had not accrued a liability for these guarantees because the likelihood of incurring a payment obligation in connection with these guarantees is remote.

 
- 24 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

16.
Defined contribution plan

Pursuant to the relevant PRC regulations, the Company is required to make contributions at a rate of 30.6% to 45% of employees’ salaries and wages to a defined contribution retirement scheme organized by a state-sponsored social insurance plan in respect of the retirement benefits for the Company’s employees in the PRC.  The only obligation of the Company with respect to retirement scheme is to make the required contributions under the plan.  No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the condensed consolidated statements of income.  The Company contributed $1,030,671 and $537,577 for the three months ended March 31, 2010 and 2009 respectively.

 
- 25 -

 

Wonder Auto Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

17.
Segment information

The Company uses the “management approach” in determining reportable operating segments.  The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments.  Management, including the chief operating decision maker, reviews operating results solely by monthly revenue of alternators, starters and rods and shafts and operating results of the Company and, as such, the Company has determined that the Company has four operating segments as defined by ASC 280, “Segments Reporting” (previously SFAS 131): Alternators, starters, rods and shafts and valves and tappets.

   
Alternators
   
Starters
   
Rods and shafts
   
Valves and Tappets
   
Total
 
   
Three months ended
   
Three months ended
   
Three months ended
   
Three months ended
   
Three months ended
 
   
March 31,
   
March 31,
   
March 31,
   
March 31,
   
March 31,
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
                                                             
Revenue from external customers
  $ 19,480,288     $ 14,381,141     $ 20,094,847     $ 13,292,274     $ 7,366,654     $ 4,987,442     $ 16,678,776     $ 7,315,163     $ 63,620,565     $ 39,976,020  
Interest income
    29,411       29,974       27,672       24,841       9,352       1,129       11,272       262,516       77,707       318,460  
Interest expenses
    429,648       396,997       413,951       350,903       129,380       28,727       189,075       401,186       1,162,054       1,177,813