Attached files
file | filename |
---|---|
EX-31.2 - Wonder Auto Technology, Inc | v201563_ex31-2.htm |
EX-32.1 - Wonder Auto Technology, Inc | v201563_ex32-1.htm |
EX-31.1 - Wonder Auto Technology, Inc | v201563_ex31-1.htm |
EX-32.2 - Wonder Auto Technology, Inc | v201563_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: September 30, 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: 001-34440
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.
Employer Identification
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)
(Former name, former address and former fiscal year, if changed since last report)
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 stock, as
of November 9, 2010 is as follows:
Class
of Securities
|
Shares
Outstanding
|
|
Common
Stock, $0.001 par value
|
33,859,994
|
TABLE
OF CONTENTS
PART
I
|
||||
FINANCIAL
INFORMATION
|
||||
Item
1.
|
Financial
Statements
|
3
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
41
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
54
|
||
Item
4.
|
Controls
and Procedures
|
55
|
||
PART
II
|
||||
OTHER
INFORMATION
|
||||
Item
1.
|
Legal
Proceedings
|
56
|
||
Item
1A.
|
Risk
Factors
|
56
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
72
|
||
Item
3.
|
Defaults
Upon Senior Securities
|
72
|
||
Item
4.
|
(Removed
and Reserved)
|
73
|
||
Item
5.
|
Other
Information
|
73
|
||
Item
6.
|
Exhibits
|
73
|
2
PART
I
FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
Wonder
Auto Technology, Inc.
Condensed
Consolidated Financial Statements
For the
three and nine months ended
September
30, 2010 and 2009
(Stated
in US dollars)
3
Wonder
Auto Technology, Inc.
Condensed
Consolidated Financial Statements
Three
and nine months ended September 30, 2010 and 2009
Index to
Condensed Consolidated Financial Statements
Pages
|
||
Condensed
Consolidated Statements of Income and Comprehensive Income
|
5 -
6
|
|
Condensed
Consolidated Balance Sheets
|
7 -
8
|
|
Condensed
Consolidated Statements of Cash Flows
|
9 -
11
|
|
Condensed
Consolidated Statement of Equity
|
12
|
|
Notes
to Condensed Consolidated Financial Statements
|
13
- 40
|
4
Wonder
Auto Technology, Inc.
Condensed
Consolidated Statements of Income and Comprehensive Income
For
the three and nine months ended September 30, 2010 and 2009
(Unaudited)
(Stated
in US Dollars)
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales
revenue
|
$ | 78,830,081 | $ | 58,961,604 | $ | 210,909,240 | $ | 148,588,838 | ||||||||
Cost
of sales
|
58,143,590 | 45,007,159 | 157,445,544 | 112,320,802 | ||||||||||||
Gross
profit
|
20,686,491 | 13,954,445 | 53,463,696 | 36,268,036 | ||||||||||||
Other
operating income
|
310,470 | - | 310,470 | - | ||||||||||||
Operating
expenses
|
||||||||||||||||
Administrative
expenses (including share-based compensation of $1,477,694 and $4,433,082
for the three and nine months ended September 30, 2010, respectively, $Nil
for the three and nine months ended September 30, 2009)
|
5,725,170 | 2,594,285 | 15,743,569 | 7,662,331 | ||||||||||||
Research
and development expenses (including share-based compensation of $91,782
and $275,346 for the three and nine months ended September 30, 2010
respectively, $Nil for the three and nine months ended September 30,
2009)
|
1,871,228 | 487,572 | 4,759,547 | 1,408,479 | ||||||||||||
Selling
expenses (including share-based compensation of $65,419 and $196,257 for
the three and nine months ended September 30, 2010 respectively, $Nil for
the three and nine months ended September 30, 2009)
|
2,786,725 | 2,080,438 | 7,241,364 | 4,811,601 | ||||||||||||
10,383,123 | 5,162,295 | 27,744,480 | 13,882,411 | |||||||||||||
Income
from operations
|
10,613,838 | 8,792,150 | 26,029,686 | 22,385,625 | ||||||||||||
Other
income
|
238,750 | 149,146 | 818,859 | 827,043 | ||||||||||||
Government
grants
|
337,484 | 397,277 | 758,175 | 749,815 | ||||||||||||
Gain
on disposal of a non-consolidated affiliate - Note 3(a)
|
5,264,070 | - | 5,264,070 | - | ||||||||||||
Equity
in net income of non-consolidated affiliates
|
(26,264 | ) | - | 755,697 | - | |||||||||||
Net
finance costs - Note 5
|
(2,797,927 | ) | (1,481,640 | ) | (4,509,445 | ) | (3,511,726 | ) | ||||||||
Income
before income taxes and noncontrolling interests
|
13,629,951 | 7,856,933 | 29,117,042 | 20,450,757 | ||||||||||||
Income
taxes - Note 6
|
(1,169,689 | ) | (939,622 | ) | (3,764,878 | ) | (2,492,651 | ) | ||||||||
Net
income before noncontrolling interests
|
12,460,262 | 6,917,311 | 25,352,164 | 17,958,106 | ||||||||||||
Net
income attributable to noncontrolling interests
|
(519,736 | ) | (410,290 | ) | (984,809 | ) | (903,823 | ) | ||||||||
Net
income attributable to Wonder Auto Technology, Inc. common
stockholders
|
$ | 11,940,526 | $ | 6,507,021 | $ | 24,367,355 | $ | 17,054,283 |
See the
accompanying notes to condensed consolidated financial
statements
5
Wonder
Auto Technology, Inc.
Condensed
Consolidated Statements of Income and Comprehensive Income (Cont’d)
For
the three and nine months ended September 30, 2010 and 2009
(Unaudited)
(Stated
in US Dollars)
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income before noncontrolling interests
|
$ | 12,460,262 | $ | 6,917,311 | $ | 25,352,164 | $ | 17,958,106 | ||||||||
Other
comprehensive income
|
||||||||||||||||
Foreign
currency translation adjustments
|
3,308,856 | 167,348 | 3,956,918 | 112,056 | ||||||||||||
Comprehensive
income
|
15,769,118 | 7,084,659 | 29,309,082 | 18,070,162 | ||||||||||||
Comprehensive
income attributable to noncontrolling interests
|
(524,551 | ) | (421,159 | ) | (1,020,239 | ) | (904,590 | ) | ||||||||
Comprehensive
income attributable to Wonder Auto Technology, Inc. common
stockholders
|
$ | 15,244,567 | $ | 6,663,500 | $ | 28,288,843 | $ | 17,165,572 | ||||||||
Earnings
per share attributable to Wonder Auto Technology, Inc. common stockholders
:- basic and diluted - Note 7
|
$ | 0.35 | $ | 0.24 | $ | 0.72 | $ | 0.63 | ||||||||
Weighted
average number of shares outstanding :-
|
||||||||||||||||
basic
and diluted
|
33,859,994 | 26,959,994 | 33,859,994 | 26,959,994 |
See the
accompanying notes to condensed consolidated financial statements
6
Wonder
Auto Technology, Inc.
Condensed
Consolidated Balance Sheets
As
of September 30, 2010 and December 31, 2009
(Stated
in US Dollars)
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 60,584,677 | $ | 82,414,287 | ||||
Restricted
cash
|
61,397,716 | 15,753,748 | ||||||
Trade
receivables, net
|
99,576,892 | 49,522,583 | ||||||
Bills
receivable
|
29,407,254 | 21,965,065 | ||||||
Other
receivables, prepayments and deposits
|
26,849,488 | 14,826,460 | ||||||
Inventories
- Note 8
|
82,597,331 | 51,119,562 | ||||||
Amounts
due from related companies - Note 9
|
10,705,234 | - | ||||||
Deferred
taxes
|
1,359,564 | 1,186,410 | ||||||
Total
current assets
|
372,478,156 | 236,788,115 | ||||||
Restricted
cash
|
586,800 | - | ||||||
Intangible
assets, net - Note 10
|
169,498,636 | 32,907,720 | ||||||
Property,
plant and equipment, net - Note 11
|
115,524,991 | 73,770,329 | ||||||
Land
use rights
|
16,055,135 | 10,618,853 | ||||||
Deposits
for acquisition of property, plant and equipment
|
6,267,490 | 7,435,563 | ||||||
Investment
in a non-consolidated affiliate
|
482,044 | - | ||||||
Deferred
taxes
|
- | 731,575 | ||||||
TOTAL
ASSETS
|
$ | 680,893,252 | $ | 362,252,155 |
See the
accompanying notes to condensed consolidated financial
statements
7
Wonder
Auto Technology, Inc.
Condensed
Consolidated Balance Sheets (Cont’d)
As
of September 30, 2010 and December 31, 2009
(Stated
in US Dollars)
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
LIABILITIES
AND EQUITY
|
||||||||
LIABILITIES
|
||||||||
Current
liabilities
|
||||||||
Trade
payables
|
$ | 75,676,958 | $ | 34,126,534 | ||||
Bills
payable
|
80,533,510 | 29,388,653 | ||||||
Other
payables and accrued expenses
|
19,928,937 | 14,886,909 | ||||||
Provision
for warranty - Note 12
|
2,963,394 | 2,272,322 | ||||||
Income
tax payable
|
1,698,611 | 892,340 | ||||||
Secured
borrowings - Note 13
|
118,407,527 | 57,082,779 | ||||||
Payable
to Jinheng Holdings - Note 14
|
109,455,856 | - | ||||||
Payable
to Achieve Gain - Note 14
|
6,328,380 | - | ||||||
Early
retirement benefits cost
|
364,319 | 353,584 | ||||||
Total
current liabilities
|
415,357,492 | 139,003,121 | ||||||
Secured
borrowings - Note 13
|
20,879,357 | 20,908,721 | ||||||
Deferred
revenue - government grants
|
3,046,527 | 3,315,762 | ||||||
Early
retirement benefits cost
|
317,543 | 550,397 | ||||||
Deferred
tax
|
1,960,309 | - | ||||||
TOTAL
LIABILITIES
|
441,561,228 | 163,778,001 | ||||||
COMMITMENTS AND CONTINGENCIES
- Note 16
|
||||||||
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
|
142,447,387 | 137,542,702 | ||||||
Statutory
and other reserves
|
10,186,701 | 10,186,701 | ||||||
Accumulated
other comprehensive income
|
13,568,539 | 9,647,051 | ||||||
Retained
earnings
|
59,637,951 | 35,270,596 | ||||||
TOTAL WONDER AUTO TECHNOLOGY,
INC. STOCKHOLDERS’ EQUITY
|
225,843,964 | 192,650,436 | ||||||
NONCONTROLLING
INTERESTS
|
13,488,060 | 5,823,718 | ||||||
TOTAL
EQUITY
|
239,332,024 | 198,474,154 | ||||||
TOTAL
LIABILITIES AND EQUITY
|
$ | 680,893,252 | $ | 362,252,155 |
See the
accompanying notes to condensed consolidated financial
statements
8
Wonder
Auto Technology, Inc.
Condensed
Consolidated Statements of Cash Flows
For
the nine months ended September 30, 2010 and 2009
(Unaudited)
(Stated
in US Dollars)
Nine months ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income before noncontrolling interests
|
$ | 25,352,164 | $ | 17,958,106 | ||||
Adjustments
to reconcile net income before noncontrolling interests to net cash
provided by operating activities :
|
||||||||
Depreciation
|
5,548,149 | 4,239,790 | ||||||
Amortization
of intangible assets and land use rights
|
1,255,735 | 297,888 | ||||||
Share-based
compensation - Note 15
|
4,904,685 | - | ||||||
Deferred
taxes
|
(220,804 | ) | 111,617 | |||||
Loss
on disposal of property, plant and equipment
|
150,342 | 59,490 | ||||||
Gain
on disposal of investment in a non-consolidated affiliate
|
(5,264,070 | ) | - | |||||
(Recovery)
provision for doubtful debts
|
(145,514 | ) | 303,738 | |||||
Provision
for obsolete inventories
|
318,509 | 26,149 | ||||||
Exchange
gain on translation of monetary assets and liabilities
|
351,488 | 387,701 | ||||||
Equity
in net income of non-consolidated affiliates
|
(755,697 | ) | - | |||||
Deferred
revenue amortized
|
(331,228 | ) | (193,408 | ) | ||||
Changes
in operating assets and liabilities :-
|
||||||||
Trade
receivables
|
(12,041,879 | ) | (4,366,425 | ) | ||||
Bills
receivable
|
(5,570,898 | ) | (11,649,801 | ) | ||||
Other
receivables, prepayments and deposits
|
(8,546,131 | ) | 1,694,880 | |||||
Inventories
|
(3,604,756 | ) | (2,926,673 | ) | ||||
Amounts
due from related companies
|
1,774,567 | - | ||||||
Trade
payables
|
(1,164,201 | ) | 9,010,565 | |||||
Other
payables and accrued expenses
|
2,187,827 | (4,604,814 | ) | |||||
Early
retirement benefits costs
|
(236,423 | ) | (325,977 | ) | ||||
Provision
for warranty
|
632,762 | 203,981 | ||||||
Income
tax payable
|
807,815 | 886,176 | ||||||
Net
cash flows provided by operating activities
|
$ | 5,402,442 | $ | 11,112,983 |
See the
accompanying notes to condensed consolidated financial
statements
9
Wonder
Auto Technology, Inc.
Condensed
Consolidated Statements of Cash Flows (Cont’d)
For
the nine months ended September 30, 2010 and 2009
(Unaudited)
(Stated
in US Dollars)
Nine months ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from investing activities
|
||||||||
Payments
to acquire intangible assets
|
$ | (7,838 | ) | $ | (146,600 | ) | ||
Payments
to acquire and for deposits for acquisition of property, plant and
equipment and land use right
|
(14,656,971 | ) | (6,463,215 | ) | ||||
Proceeds
from sales of property, plant and equipment
|
- | 29,125 | ||||||
Proceeds
from sales of Money Victory Limited
|
- | 5,950,000 | ||||||
Net
cash paid to acquire Applaud - Note 3(a)
|
(14,862,577 | ) | - | |||||
Net
cash inflow from disposal of Applaud - Note 3(a)
|
20,849,393 | - | ||||||
Net
cash paid to acquire Jinheng BVI - Note 3(a)
|
(40,944,167 | ) | - | |||||
Net
cash inflow from disposal of Jinzhou Jiade - Note 3(b)
|
2,866,442 | - | ||||||
Net
cash paid to acquire Wonder Auto Parts - Note 3(c)
|
(376,285 | ) | - | |||||
Net
cash paid to acquire of Vital Glee - Note 3(d)
|
(7,996,011 | ) | - | |||||
Capital
contribution to Wonder Auto Parts
|
(64,337 | ) | ||||||
Settlement
of advance to Winning
|
8,013,693 | - | ||||||
Net
cash paid to acquire Yearcity
|
- | (9,936,057 | ) | |||||
Net
cash paid to acquire Jinzhou Wanyou
|
- | (1,705,437 | ) | |||||
Net
cash flows used in investing activities
|
(47,178,658 | ) | (12,272,184 | ) | ||||
Cash
flows from financing activities
|
||||||||
Government
grants received
|
- | 769,006 | ||||||
Increase
(decrease) in bills payable
|
42,282,319 | (1,381,350 | ) | |||||
(Increase)
decrease in restricted cash
|
(41,812,861 | ) | 2,888,474 | |||||
Proceeds
from secured borrowings
|
88,142,550 | 64,274,001 | ||||||
Repayment
of secured borrowings
|
(69,554,771 | ) | (52,193,550 | ) | ||||
|
||||||||
Net
cash flows provided by financing activities
|
19,057,237 | 14,356,581 | ||||||
|
||||||||
Effect
of foreign currency translation on cash and cash
equivalents
|
889,369 | 63,215 | ||||||
Net
(decrease) increase in cash and cash equivalents
|
(21,829,610 | ) | 13,260,595 | |||||
Cash
and cash equivalents - beginning of period
|
82,414,287 | 8,159,156 | ||||||
Cash
and cash equivalents - end of period
|
$ | 60,584,677 | $ | 21,419,751 |
See the
accompanying notes to condensed consolidated financial
statements
10
Wonder
Auto Technology, Inc.
Condensed
Consolidated Statements of Cash Flows (Cont’d)
For
the nine months ended September 30, 2010 and 2009
(Unaudited)
(Stated
in US Dollars)
Nine months ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Supplemental
disclosures for cash flow information :
|
||||||||
Cash
paid for :
|
||||||||
Interest
|
$ | 3,851,198 | $ | 3,382,425 | ||||
Income
taxes
|
$ | 2,955,401 | $ | 1,489,450 | ||||
Cash
investing activities :
|
||||||||
Acquisitions
(Note 3)
|
||||||||
Fair
value of assets acquired
|
$ | 167,695,922 | $ | - | ||||
Fair
value of liabilities assumed
|
$ | 101,845,650 | $ | - | ||||
Non-cash
investing and financing activities :
|
||||||||
Acquisition
of Yearcity by offsetting with receivable from disposal of an
non-consolidated 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
11
Wonder
Auto Technology, Inc.
Condensed
Consolidated Statement 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 | |||||||||||||||||
Noncontrolling
interests arising from acquisition
of Jinheng BVI
|
- | - | - | - | - | - | 4,174,053 | 4,174,053 | ||||||||||||||||||||||||
Noncontrolling
interests arising from Jinzhou
Huayi
|
- | - | - | - | - | - | 2,470,050 | 2,470,050 | ||||||||||||||||||||||||
Net
income
|
- | - | - | - | - | 24,367,355 | 984,809 | 25,352,164 | ||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 3,921,488 | - | 35,430 | 3,956,918 | ||||||||||||||||||||||||
Share-based
compensation - Note 15
|
- | - | 4,904,685 | - | - | - | - | 4,904,685 | ||||||||||||||||||||||||
Balance,
September 30, 2010
|
33,859,994 | $ | 3,386 | $ | 142,447,387 | $ | 10,186,701 | $ | 13,568,539 | $ | 59,637,951 | $ | 13,488,060 | $ | 239,332,024 |
See the
accompanying notes to condensed consolidated financial
statements
12
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
1.
|
Basis
of presentation
|
The
accompanying unaudited condensed consolidated financial statements of Wonder
Auto Technology, Inc. (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 (USGAAP) 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-months and nine-months periods have been made. Results for the
interim periods presented are not necessarily indicative of the results that
might be expected for the entire fiscal year.
2.
|
Corporate
information and description of
business
|
The
Company was incorporated in the State of Nevada on June 8, 2000. The Company’s
shares are listed 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,
manufacturing of engine valves and tappets and automotive safety products 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
manufactured and sold 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.
13
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
2.
|
Corporate
information and description of business
(Cont’d)
|
As of
September 30, 2010, the Company has twenty-two 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
|
||||||
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 fully paid up
|
Manufacturing
and selling of accessories of alternators
|
14
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
2.
|
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
|
||||||
Yearcity
Limited (“Yearcity”)
|
BVI
/
March
10, 2005
|
100 | % |
Authorized:
50,000 shares of $1 each, Paid up: 100 shares 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
|
|||||
Vital
Glee Development Limited (“Vital Glee”)
|
BVI
/
November
30, 2009
|
100 | % |
Registered
capital of $50,000 and fully paid up
|
Investment
holding
|
|||||
Jinzhou
Lide Shock Absorber Co., Ltd. (“Jinzhou Lide”)
|
The
PRC /
April
26, 2010
|
100 | % |
Registered
capital of $1,200,000 and fully paid up
|
Manufacturing
and selling of automotive shock absorber manufacturing
business
|
|||||
Jinzhou
Huayi Spinning Technology Co., Ltd. (“Jinzhou Huayi”)
|
The
PRC /
August
25, 2010
|
45 | %* |
Registered
capital of RMB30,000,000 and fully paid up
|
Manufacturing
and selling of accessories of alternators
|
|||||
Jinheng
(BVI) Limited (“Jinzhou BVI”)
|
BVI
/ October 14, 2003
|
100 | % |
Ordinary
shares: Authorized :100,000 shares of HK$0.01 each
Paid
up: 10,309 shares of $0.01 each
|
Investment
holding
|
|||||
Jinheng
(Hong Kong) Ltd. (“Jinheng HK”)
|
Hong
Kong /
March
28, 2003
|
100 | % |
Ordinary
shares: Authorized: 1,000 shares of HK$1 each
Paid
up: 70 shares of HK$1 each
|
Investment
holding
|
15
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
2.
|
Corporate
information and description of business
(Cont’d)
|
Jinzhou
Jinheng Automotive Safety System Co., Ltd. (“Jinheng
Automotive”)
|
The
PRC /
January
3, 1997
|
100 | % |
Registered
capital of HK$185,000,000 and fully paid up
|
Manufacture
and sales of automotive safety products
|
||||||
Shenyang
Jinbei Jinheng Automotive Safety System Co., Ltd. (“Shenyang
Jinbei”)
|
The
PRC /
November
23, 2003
|
55.56 | % |
Registered
capital of RMB27,000,000 and fully paid up
|
Manufacture
and sales of automotive safety products
|
||||||
Beijing
Jinheng Sega Automotive Spare Parts Ltd. (“Beijing Sega”)
|
The
PRC /
October
14, 2005
|
100 | % |
Registered
capital RMB20,000,000 and fully paid up
|
Manufacture
and sales of automotive safety products
|
||||||
Harbin
Hafei Jinheng Automotive Safety System Co., Ltd. (“Hafei
Jinheng”)
|
The
PRC /
December
3, 2003
|
90 | % |
Registered
capital of RMB13,000,000 and fully paid up
|
Manufacture
and sales of automotive safety products
|
|
*
|
The
Company obtained the control over those subsidiaries by appointing more
than half of the 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.
|
3.
|
Acquisitions
and dispositions
|
|
(a)
|
Acquisition and
disposition of Applaud and acquisition of Jinheng
BVI
|
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.
16
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
3.
|
Acquisitions
and dispositions (Cont’d)
|
|
(a)
|
Acquisition and
disposition of Applaud and acquisition of Jinheng BVI
(Cont’d)
|
On July
10, 2010, Wonder and Yearcity entered into a conditional sale and purchase
agreement (the “Disposal Agreement”) with Jin Ying Limited (“Jin Ying”), a
company incorporated in BVI, pursuant to which Wonder and Yearcity agreed to
dispose 38.36% total equity interest in Applaud at a total consideration of
HK$162 million (equivalent to approximately $20.85 million). The
completion of the Disposal Agreement is conditioned upon the completion of a
conditional acquisition agreement entered into between Vital Glee and Jinheng
Holdings on July 10, 2010 (the “Acquisition Agreement”) pursuant to which Vital
Glee agreed to acquire Jinheng Holdings’s 100% equity interest in Jinheng BVI,
at a cash consideration of HK$1,130 million (approximately $145.43 million). The
consideration is scheduled to be paid by Vital Glee in four installments. The
Company obtained control over Jinheng BVI on September 10, 2010 by appointing
the sole director to Jinheng BVI. Jinheng BVI is an investment holding company
and through its subsidiaries engages in manufacture and sales of automotive
safety products.
In
accordance with the Acquisition Agreement, both parties agreed that Jinheng
BVI’s equity interests in Shanxi Winner Auto-Parts Limited (“Shanxi Winner”) and
Shenyang Jinheng Jinsida Automobile Electronic Co., Ltd. (“Jinsida”) was
transferred to Jinheng Holdings or its subsidiaries and all the non-trade
current accounts with Jinheng Holdings or its subsidiaries were written off as
part of the transactions contemplated by the Acquisition Agreement before the
acquisition by Vital Glee.
Since Mr.
Zhao, a director and a shareholder of the Company, is the director and
shareholder of Jinheng Holdings, the acquisition of 100% equity interest in
Jinheng BVI from Jinheng Holdings constituted as a related party
transaction.
The
management considers the disposal of Applaud and acquisition of Jinheng BVI as
business combination achieved in stages. According to ASC 805-10-25-10, the
Company should remeasure its previously held equity interest in Applaud at its
acquisition date fair value and recognized the resulting gain in the statements
of income and comprehensive income. Accordingly, the fair value of the Company’s
interest in Applaud amounting to $20.85 million, representing 19.42% effective
interest in Jinhneg Holdings, was determined with reference to the market
capitalization of Jinheng Holdings at the date of acquisition. Upon the
completion of the disposal in September 2010, the Company recorded a gain on
disposal of a non-consolidated affiliate of $5,264,070 in the condensed
consolidated statements of income and comprehensive income.
17
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
3.
|
Acquisitions
and dispositions (Cont’d)
|
|
(a)
|
Acquisition and
disposition of Applaud and acquisition of Jinheng BVI
(Cont’d)
|
Condensed
financial data of Applaud up to the date of disposal is as follows
:-
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Summary
of Operations:-
|
||||||||||||||||
Revenues
|
$ | 24,845,691 | $ | - | $ | 102,704,666 | $ | - | ||||||||
Gross
profit
|
3,136,291 | - | 20,009,885 | - | ||||||||||||
Income
from operations
|
76,814 | - | 6,352,567 | - | ||||||||||||
Net
(loss) income
|
$ | (96,468 | ) | $ | - | $ | 1,884,199 | $ | - | |||||||
Net
(loss) income attributable to
the Company
|
$ | (37,004 | ) | $ | - | $ | 722,753 | $ | - |
The
following table summarizes the allocation of the purchase price reflecting the
amounts assigned to each of Jinheng BVI’s major classes of assets acquired and
liabilities assumed at the date of acquisition :-
September
10,
|
||||
2010
|
||||
Current
assets
|
$ | 56,186,018 | ||
Property,
plant and equipment, net
|
34,027,386 | |||
Inventories
|
27,155,484 | |||
Land
use rights
|
5,917,440 | |||
Intangible
asset - Trademark
|
19,235,942 | |||
Intangible
asset - Patented technical know-how
|
11,077,828 | |||
Other
intangible assets
|
2,914,025 | |||
Goodwill
|
89,974,694 | |||
Current
liabilities
|
(85,801,178 | ) | ||
Dividend
payable to Jinheng Holdings
|
(7,458,800 | ) | ||
Long-term
debts
|
(1,967,580 | ) | ||
Deferred
income taxes
|
(1,661,674 | ) | ||
Noncontrolling
interests
|
(4,174,053 | ) | ||
Net
assets acquired
|
$ | 145,425,532 |
18
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
3.
|
Acquisitions
and dispositions (Cont’d)
|
|
(a)
|
Acquisition and
disposition of Applaud and acquisition of Jinheng BVI
(Cont’d)
|
Satisfied
by:-
Cash
payment
|
$ | 44,612,275 | ||
Outstanding
amount
|
100,813,257 | |||
$ | 145,425,532 | |||
Analysis
of net outflow of cash and cash equivalents in respect of acquisition of a
subsidiary :
|
$ | 44,612,275 | ||
Cash payment | ||||
Cash
and cash equivalents acquired
|
(3,668,108 | ) | ||
Net
cash outflow
|
$ | 40,944,167 |
The
trademark is deemed to have an infinite life and is not being
amortized. The patented technical know-how is amortized on a
straight-line basis over its estimated useful life of 10 years from the date of
acquisition.
As of
September 30, 2010, the condensed consolidated balance sheets include goodwill
identified upon the acquisition of 100% equity interest in Jinheng BVI amounting
to $90 million which represents the excess of the initial purchase price of
$145.4 million over the attributable share of fair value of acquired
identifiable net assets of Jinheng BVI of $55.4 million at the time of
acquisition on September 10, 2010. None of the goodwill recognized is expected
to be deductible for income tax purposes. The Company acquired Jinheng BVI to
enter the new automotive spare parts market and enjoy the growth opportunity of
this business segment in future.
Based on
an independent third-party appraisal, there were no other significant
identifiable intangible assets (such as favorable or unfavorable lease
arrangements) noted. The excess of purchase price over the fair value
of net tangible and intangible assets acquired, representing consideration paid
for intangible assets which do not meet either the separability criterion or the
contractual-legal criterion in accordance with ASC 805, was recorded as
goodwill.
The
following unaudited pro forma financial information presents the combined
results of operations of the Company with the operations of Jinheng BVI for nine
months ended September 30, 2010, as if the acquisition had occurred as of the
beginning of fiscal year 2009:
(Pro Forma)
|
||||||||
Nine months ended September 30
|
||||||||
2010
|
2009
|
|||||||
Revenue
|
$ | 310,309,097 | $ | 226,061,942 | ||||
Net
income attributable to Wonder Auto Technology, Inc. common
stockholders
|
$ | 26,114,507 | $ | 28,242,708 | ||||
Earnings
per share: basic and diluted
|
$ | 0.77 | $ | 1.05 |
19
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
3.
|
Acquisitions
and dispositions (Cont’d)
|
|
(a)
|
Acquisition and
disposition of Applaud and acquisition of Jinheng BVI
(Cont’d)
|
This
unaudited pro forma financial information is presented for informational
purposes only. The unaudited pro forma financial information may not
necessarily reflect the future results of operations or the results of
operations had the Company owned and operated this business as of the beginning
of the period presented.
(b)
|
Disposition of Jinzhou
Jiade
|
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 which was settled in June, 2010. The
following table summarizes the net assets of Jinzhou Jiade disposed of during
the nine months ended September 30, 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 | ) | ||
Net
cash inflow
|
$ | 2,866,442 |
(c)
|
Acquisition of Wonder
Auto Parts
|
On March
28, 2010, Jinzhou Halla entered into an equity transfer agreement (the “Equity
Transfer Agreement”) with Jinzhou Economic and Technological Development Zone
Bohai Iron Core Centre, a company incorporated in PRC for acquisition of its 25%
equity interest in Jinzhou Wonder Auto Parts Co., Ltd (“Wonder Auto Parts”) at a
consideration of RMB2,565,000 (equivalent to approximately $0.38 million). The
consideration was settled in June, 2010. Wonder Auto Parts is engaged
in manufacturing and selling iron core for alternators.
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 investment in Wonder Auto Parts is reported
in the condensed consolidated balance sheets as investment in a non-consolidated
affiliate.
20
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
3.
|
Acquisitions
and dispositions (Cont’d)
|
(c) Acquisition of Wonder Auto
Parts (Cont’d)
Condensed
financial data of Wonder Auto Parts is as follows :-
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Summary
of Operations:-
|
||||||||||||||||
Revenues
|
$ | 1,017,399 | $ | - | $ | 1,961,993 | $ | - | ||||||||
Gross
profit
|
175,779 | - | 368,918 | - | ||||||||||||
Income
from operations
|
53,825 | - | 129,532 | - | ||||||||||||
Net
income
|
$ | 42,960 | $ | - | $ | 131,775 | $ | - | ||||||||
Net
income attributable to
the Company
|
$ | 10,740 | $ | - | $ | 32,944 | $ | - |
|
(d)
|
Acquisition of Vital
Glee
|
On June
24, 2010, Friend Birch entered into a purchase agreement with Achieve Gain Group
Limited (“Achieve Gain”), a company incorporated in BVI, pursuant to which
Friend Birch agreed to acquire 100% equity interest in Vital Glee, for a total
consideration of $15 million of which $8.7 million was settled in June 2010. The
remaining consideration will be divided into 2 equal installments and will be
settled by December 31, 2010 and June 30, 2011 respectively. The Company
obtained control over Vital Glee on July 1, 2010 by appointing the sole director
to Vital Glee. Vital Glee is an investment holding company and through its
subsidiary, Jinzhou Lide engaged in automotive shock absorber manufacturing
business.
The
following table summarizes the allocation of the purchase price reflecting the
amounts assigned to each of Vital Glee’s major classes of assets acquired and
liabilities assumed at the date of acquisition :-
July
1,
|
||||
2010
|
||||
Current
assets
|
$ | 613,756 | ||
Property,
plant and equipment, net
|
480,890 | |||
Intangible
asset - Trademark
|
6,457,707 | |||
Intangible
asset - Customer contracts
|
1,909,036 | |||
Intangible
asset - Technical know-how
|
1,220,425 | |||
Goodwill
|
5,100,551 | |||
Deferred
income taxes
|
(782,365 | ) | ||
Net
assets acquired
|
$ | 15,000,000 |
21
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
3.
|
Acquisitions
and dispositions (Cont’d)
|
(d)
|
Acquisition of Vital
Glee (Cont’d)
|
Satisfied
by:-
Cash
payment
|
$ |
8,700,000
|
||
Outstanding
amount
|
6,300,000
|
|||
$ |
15,000,000
|
|||
Analysis
of net outflow of cash and cash equivalents in respect of
acquisition of a subsidiary :
|
||||
Cash
payment
|
$ |
8,700,000
|
||
Cash
and cash equivalents acquired
|
(703,989
|
)
|
||
Net
cash outflow
|
$ |
7,996,011
|
The
trademark is deemed to have an infinite life and not being
amortized. The customer contracts and technical know-how are
amortized on a straight-line basis over their estimated useful lives of 10 years
from the date of acquisition.
As of
September 30, 2010, the condensed consolidated balance sheets include goodwill
identified upon the acquisition of 100% equity interest in Vital Glee amounting
to $5.1 million which represents the excess of the initial purchase price of
$15.0 million over the attributable share of fair value of acquired identifiable
net assets of Vital Glee of $9.9 million at the time of acquisition on June 30,
2010. None of the goodwill recognized is expected to be deductible for income
tax purposes. The Company acquired Vital Glee to obtain the production know-how
related to shock absorbers and the trademark of WATG.
Based on
an independent third-party appraisal, there were no other significant
identifiable intangible assets (such as favorable or unfavorable lease
arrangements) noted. The excess of purchase price over the fair value
of net tangible and intangible assets acquired, representing consideration paid
for intangible assets which do not meet either the separability criterion or the
contractual-legal criterion in accordance with ASC 805, was recorded as
goodwill.
No
unaudited pro forma financial information was presented as Vital Glee and its
subsidiaries did not have any operations before acquisition by the
Company.
22
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
4.
|
Summary of significant
accounting policies
|
Principles of
consolidation
The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Customer
Contracts
Customer
contracts are stated at cost less accumulated amortization. Amortization is
provided on a straight-line basis over their estimated useful lives of 1 to 10
years from the date of acquisition.
Know-how
Know-how
with infinite useful life is determined to have an indefinite useful life
pursuant to the purchase contracts. It is not subject to amortization
until its useful life is determined to be no longer indefinite.
Know-how
with infinite useful life is stated at cost of purchase less any identified
impairment losses in the annual impairment test.
Know-how
with finite useful life is stated at cost less accumulated
amortization. Amortization is provided on a straight-line basis over
their estimated useful lives of 5-10 years.
Concentrations of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents, restricted cash
and trade and bills receivables. As of September 30, 2010,
substantially all of the Company’s cash and cash equivalents and restricted cash
for issuing bills 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 bill’s 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.
23
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
4.
|
Summary
of significant accounting policies
(Cont’d)
|
Concentrations of credit
risk (Cont’d)
During
the reporting periods, customers representing 10% or more of the Company’s
consolidated sales are :-
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Harbin
Dongan Automotive Engine Manufacturing Company Limited
|
$ | 2,944,342 | $ | 6,252,524 | $ | 15,331,153 | $ | 15,863,696 | ||||||||
Beijing
Hyundai Motor Company
|
4,386,480 | 9,313,686 | 13,270,843 | 23,416,316 | ||||||||||||
$ | 7,330,822 | $ | 15,566,210 | $ | 28,601,996 | $ | 39,280,012 |
Impairment of long-lived
assets
Long-lived
assets are tested for impairment in accordance with ASC 360-10-45 “Impairment or
Disposal of Long-Lived Assets” (previously SFAS No. 144). The Company
periodically evaluates potential impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. The Company recognizes impairment of long-lived assets
and investment in an affiliate in the event that the net book values of such
assets exceed the future undiscounted cashflows attributable to such
assets. During the reporting periods, the Company has not identified
any indicators that would require testing for impairment.
Fair value of financial
instruments
ASC 820
requires the disclosure of the estimated fair value of financial instruments
including those financial instruments for which the 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 because the applicable interest rates
approximate the current market rates :-
As
of September 30, 2010
|
As
of December 31, 2009
|
|||||||||||||||
(Unaudited)
|
(Audited)
|
|||||||||||||||
Carrying
|
Carrying
|
|||||||||||||||
amount
|
Fair
value
|
amount
|
Fair
value
|
|||||||||||||
Secured
borrowings
|
$ | 139,286,884 | $ | 139,608,235 | $ | 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.
24
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
4.
|
Summary
of significant accounting policies
(Cont’d)
|
Recently issued accounting
pronouncements
Accounting
for Transfers of Financial Assets (Included in amended Topic ASC 860 “Transfers
and Servicing”, previously Statement of Financial Accounting Standards (“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.
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 on the Company’s financial statements.
25
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
4.
|
Summary
of significant accounting policies
(Cont’d)
|
Recently issued accounting
pronouncements (Cont’d)
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 disclosure requirements related to
purchases, sales, issuances and settlements of recurring Level 3 measurements on
the Company’s financial statements is currently not yet in a position to
determine such effects.
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. The adoption
of this ASU has no material impact on the Company’s financial
statements.
26
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
5.
|
Net
finance costs
|
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Interest
income
|
$ | (300,775 | ) | $ | (178,901 | ) | $ | (495,451 | ) | $ | (669,569 | ) | ||||
Interest
expenses
|
1,387,940 | 1,052,799 | 3,934,307 | 3,260,773 | ||||||||||||
Bills
discounting charges
|
960,201 | 39,951 | 1,067,246 | 358,779 | ||||||||||||
Bank
charges
|
55,106 | 135,080 | 139,556 | 316,170 | ||||||||||||
Net
exchange loss (gain)
|
681,670 | 413,808 | (180,711 | ) | 183,292 | |||||||||||
Finance
charges from early retirement benefits cost
|
13,785 | 18,903 | 44,498 | 62,281 | ||||||||||||
$ | 2,797,927 | $ | 1,481,640 | $ | 4,509,445 | $ | 3,511,726 |
6.
|
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 US federal income taxes has been made
as the Company had no taxable income in this jurisdiction for the reporting
period.
BVI
Wonder,
Yearcity, Vital Glee and Jinheng BVI were incorporated in the BVI and, under the
current laws of the BVI, are not subject to income taxes.
Hong
Kong
Jinheng
HK and Friend Birch are incorporated in Hong Kong and subject to profit tax rate
of 16.5% on the assessable profits during the reporting period.
PRC
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.
27
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
6.
|
Income
taxes (Cont’d)
|
PRC
(cont’d)
Pursuant
to the income tax rules and regulations of the PRC, provision for PRC income tax
of the PRC subsidiaries is calculated based on the following rates :
-
Period
ended September 30,
|
||||||||||
Notes:-
|
2010
|
2009
|
||||||||
Jinzhou
Halla and Jinheng Automotive
|
(a)
|
15 | % | 15 | % | |||||
Jinzhou
Wanyou
|
(b)
|
12.5 | % | 12.5 | % | |||||
Jinzhou
Karham
|
(b)
|
12.5 | % | 0 | % | |||||
Fuxin
Huirui
|
(b)
|
12.5 | % | 0 | % | |||||
Jinan
Worldwide
|
(b)
|
12.5 | % | 12.5 | % | |||||
Shenyang
Jinbei
|
(b)
|
12 | % | 10 | % | |||||
Jinzhou
Dongwoo, Wonder Motor, Jinzhou Wonder, Jinzhou Hanhua, Jinzhou Lida,
Jinzhou Lide, Jinzhou Huayi, Beijing Sega and Hafei
Jinheng
|
25 | % | 25 | % |
Notes
:-
|
(a)
|
Jinzhou
Halla and Jinheng Automotive are an “encouraged hi-tech enterprise” and
entitle to reduce the tax rate to 15% from 2009 to
2011.
|
|
(b)
|
Entities
entitled to a tax holiday in which they are fully exempted from the PRC
income tax for 2 years starting from their first profit-making year after
netting off accumulated tax losses, followed by a 50% reduction in the PRC
income tax for the next 3 years (“tax holidays”). Any unutilised tax
holidays will continue until expiry while tax holidays were deemed to
start from January 1, 2008, even if the entity was not yet making profit
after netting off its accumulated tax losses. Jinzhou Karham and Fuxin
Huirui are in the third year of tax holidays. Shenyang Jinbei is in the
fourth year of tax holidays. Jinzhou Wanyou and Jinan Worldwide
are in the fourth year and fifth year of their tax holidays,
respectively.
|
28
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
7.
|
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.
|
8.
|
Inventories
|
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Raw
materials
|
$ | 23,095,886 | $ | 11,018,873 | ||||
Work-in-progress
|
9,019,985 | 5,123,749 | ||||||
Finished
goods
|
52,151,427 | 36,282,415 | ||||||
84,267,298 | 52,425,037 | |||||||
Provision
for obsolete inventories
|
(1,669,967 | ) | (1,305,475 | ) | ||||
Net
|
$ | 82,597,331 | $ | 51,119,562 |
9.
|
Amounts
due from related companies
|
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Shenyang
Brilliance Jinbei Automotive Co., Ltd. (“Brilliance
Jinbei”) - Note 9(a)
|
$ | 9,645,732 | - | |||||
Shenyang
Jinbei Johnson Controls Automotive Interiors
Co., Ltd. (“Jinbei Johnson”) - Note 9(a)
|
374,519 | - | ||||||
Shenyang
Jinbei Vehicle Manufacturing Co.,
Ltd (“Jinbei Vehicle”) - Note 9(a)
|
71,417 | - | ||||||
Hafei
Motor Co., Ltd. (“Hafei Motor”) - Note 9(b)
|
613,566 | - | ||||||
$ | 10,705,234 | $ | - |
Notes
:-
|
(a)
|
Brilliance
Jinbei, Jinbei Johnson and Jinbei Vehicle are the subsidiaries of Shenyang
Jinbei Automotive Company Limited (“Jinbei Automotive”), which is the
minority stockholder of Shenyang
Jinbei.
|
|
(b)
|
Hafei
Motor is the minority stockholder of Hafei
Jinheng.
|
|
(c)
|
All
the amounts due from related companies are trade-related, interest free,
unsecured and expected to be recovered within one
year.
|
29
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
10.
|
Intangible
assets
|
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Costs
:-
|
||||||||
Goodwill
|
$ | 118,300,691 | $ | 24,188,350 | ||||
Customer
contracts
|
1,958,089 | 49,053 | ||||||
Know-how with infinite useful
life
|
1,873,887 | 1,683,645 | ||||||
Know-how with finite useful
life
|
23,149,322 | 7,073,874 | ||||||
Trademarks and
patents
|
25,791,983 | 417,905 | ||||||
171,073,972 | 33,412,827 | |||||||
Accumulated
amortization
|
(1,575,336 | ) | (505,107 | ) | ||||
Net
|
$ | 169,498,636 | $ | 32,907,720 |
11. Property,
plant and equipment
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Costs
:-
|
||||||||
Buildings
|
$ | 47,217,516 | $ | 34,951,440 | ||||
Plant and
machinery
|
65,552,599 | 45,801,702 | ||||||
Furniture, fixtures and
equipment
|
6,881,745 | 1,211,966 | ||||||
Tools and
equipment
|
7,302,079 | 5,898,090 | ||||||
Leasehold
improvements
|
1,236,872 | 1,058,371 | ||||||
Motor vehicles
|
2,380,950 | 1,937,461 | ||||||
130,571,761 | 90,859,030 | |||||||
Accumulated
depreciation
|
(23,792,201 | ) | (19,505,275 | ) | ||||
Construction
in progress
|
8,745,431 | 2,416,574 | ||||||
Net
|
$ | 115,524,991 | $ | 73,770,329 |
|
(i)
|
Pledged
property, plant and equipment
|
As of
September 30, 2010, certain property, plant and equipment with aggregate net
book value of $24,127,164 were 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
|
(1,387,353 | ) | ||
Additional
provision for the period
|
2,020,115 | |||
Translation
adjustments
|
58,310 | |||
Balance
as of September 30, 2010
|
$ | 2,963,394 |
30
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
13.
|
Secured
borrowings
|
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Short-term
borrowings
|
||||||||
Short-term
loans - Note 13(i)
|
$ | 112,156,900 | $ | 53,164,080 | ||||
Long-term
loans - current portion
|
6,250,627 | 3,918,699 | ||||||
118,407,527 | 57,082,779 | |||||||
Long-term
borrowings - Note 13(ii)
|
||||||||
Interest
bearing:-
|
||||||||
-
at 3.50% per annum
|
2,990,480 | - | ||||||
-
at 5.35% per annum
|
1,047,900 | 1,026,900 | ||||||
-
at 5.47% per annum
|
14,820,300 | 13,496,400 | ||||||
-
at 6.95% per annum
|
8,271,304 | 10,304,120 | ||||||
27,129,984 | 24,827,420 | |||||||
Less:
current maturities
|
(6,250,627 | ) | (3,918,699 | ) | ||||
20,879,357 | 20,908,721 | |||||||
$ | 139,286,884 | $ | 77,991,500 |
Notes :-
|
(i)
|
The
weighted-average interest rate for short-term loans as of September 30,
2010 and December 31, 2009, were 4.40% and 5.28%,
respectively.
|
|
(ii)
|
Long
term borrowings are repayable as follows
:-
|
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Within
one year
|
$ | 6,250,627 | $ | 3,918,699 | ||||
After
one year but within two years
|
8,111,477 | 7,109,424 | ||||||
After
two years but within three years
|
6,730,004 | 7,109,424 | ||||||
After
three years but within four years
|
4,313,835 | 3,499,148 | ||||||
After
four years but within five years
|
1,026,438 | 2,163,825 | ||||||
After
five years
|
697,603 | 1,026,900 | ||||||
$ | 27,129,984 | $ | 24,827,420 |
As of
September 30, 2010, the Company’s had total bank lines of credit and borrowings
there under as follows :-
Facilities
granted
|
Granted
|
Amount
utilized
|
Unused
|
|||||||||
Secured
borrowings
|
$ | 168,684,884 | $ | 139,286,884 | $ | 29,398,000 |
31
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
13.
|
Secured
borrowings (Cont’d)
|
The above
secured borrowings were secured by the following :-
|
(a)
|
Property,
plant and equipment with carrying value of $24,127,164 (note
11);
|
|
(b)
|
Land
use rights with carrying value of
$5,170,901;
|
|
(c)
|
Restricted
cash amount of $27,619,650;
|
|
(d)
|
Guarantees
executed by third parties;
|
(e)
|
Guarantees
executed by Jinheng Holdings;
|
(f)
|
Guarantees
executed by Yuncong Ma, the Company’s director;
and
|
|
(g)
|
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.
14.
|
Payable
to Jinheng Holdings and Achieve
Gain
|
|
The
amounts due to Jinheng Holdings and Achieve Gain represent dividend
payable and the outstanding amounts payable for acquiring Jinheng BVI and
Vital Glee. The amounts are interest-free, unsecured and expected to be
settled within one year.
|
15.
|
Share-based
compensation
|
The
Company granted share options to employees, directors and consultants as 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 are set to be $23 million for
fiscal year 2009, $34.5 million for fiscal year 2010 and $42.3 million for
fiscal year 2011.
32
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
15.
|
Share-based
compensation (Cont’d)
|
A summary
of share option plan activity for the nine months ended September 30, 2010 is
presented below :-
Number
of
stock
|
Weighted
average
exercise
price
per
stock
|
Weighted
average
remaining
contractual
|
Aggregate
intrinsic
|
|||||||||||||
options
|
option
|
term
in years
|
value
(1)
|
|||||||||||||
Outstanding
as of December 31, 2009
|
1,674,400 | $ | 11.48 | 1.6 | $ | - | ||||||||||
-
Granted
|
- | - | - | |||||||||||||
-
Exercised
|
- | - | - | |||||||||||||
-
Forfeited
|
- | - | - | |||||||||||||
-
Expired
|
- | - | - | |||||||||||||
Outstanding
as of September 30, 2010
|
1,674,400 | 11.48 | 1.1 | - | ||||||||||||
Exercisable
as of September 30, 2010
|
558,133 | 11.48 | 0.1 | - | ||||||||||||
Options
vested or expected to vest as
of September 30, 2010
|
558,133 | $ | 11.48 | 0.1 | $ | - |
|
(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 as of September
30, 2010 ($8.51).
|
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 and
$4,904,685 arising from abovementioned share options granted was recognized for
three months ended September 30, 2010 and nine months ended September 30, 2010
respectively.
The fair
values of the above option awards were estimated on the date of grant using
theBlack-Scholes Option Valuation Model and graded vesting method together with
the followingassumptions.
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
September 30, 2010, there were unrecognized compensation costs of $4,862,793
relatedto the above non-vested share options which is expected to be recognized
over the 1.6 years.
33
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
16.
|
Commitments
and contingencies
|
|
(a)
|
Capital
commitment
|
As of
September 30, 2010, the Company had capital commitments amounting to $2,932,841
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
September 30, 2010, the Company had no non-cancelable operating leases for its
property, plant and equipment, machineries and office.
The
rental expense relating to the operating leases was $Nil and $499,784 for the
nine months ended September 30, 2010 and 2009 respectively.
|
(c)
|
Guarantee
|
During
the period, the Company has acted as guarantor for bank loans amounting to
approximately $18.0 million granted to two independent third parties. These
third parties also provided guarantees for bank loans amounting to approximately
$15.8 million granted to the Company (Note 13(d)). None of our
directors, director nominees or executive officers are involved in the normal
operation of, or investing in the business of the guaranteed third
parties. All the third parties have a healthy financial position as
of September 30, 2010.
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.
34
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
16.
|
Commitments
and contingencies (Cont’d)
|
|
(c)
|
Guarantee
(Cont’d)
|
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 of September 30,
2010 in relation to the guarantees given to the third parties :-
Guarantee
|
Banking
facilities
date
|
Expiry
date
|
Interest
rate
(per
annum)
|
Loans
amount
|
Principal
repaid
up to
September
30,
2010
|
Outstanding
as
of
September
30,
2010
|
Outstanding
interest
expense
as of
September
30,
2010
|
Interest
expense
from
October
1,
2010
to expiry
date
|
Estimated
maximum
exposure
|
|||||||||||||||||||||||||||
Third
party A
|
5.2010 | 4.2011 | 5.31 | % | $ | 2,994,000 | $ | - | $ | 2,994,000 | $ | 26,497 | $ | 92,739 | $ | 3,113,236 | ||||||||||||||||||||
Third
party B
|
8.2010 | 7.2011 | 5.31 | % | 4,491,000 | - | 4,491,000 | 39,745 | 198,727 | 4,729,472 | ||||||||||||||||||||||||||
1.2010 | 12.2010 | 5.31 | % | 3,742,500 | - | 3,742,500 | 49,682 | 49,682 | 3,841,864 | |||||||||||||||||||||||||||
3.2010 | 2.2011 | 5.31 | % | 4,491,000 | 4,491,000 | 19,873 | 99,363 | 4,610,236 | ||||||||||||||||||||||||||||
11.2009 | 10.2010 | 5.31 | % | 2,245,500 | - | 2,245,500 | 19,873 | 9,936 | 2,275,309 | |||||||||||||||||||||||||||
$ | 17,964,000 | $ | - | $ | 17,964,000 | $ | 155,670 | $ | 450,447 | $ | 18,570,117 |
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 and charges in respect of the
above guarantees were recognized during the reporting periods and as of
September 30, 2010.
The
Company has never incurred costs to settle liabilities in relation to these
guarantee agreements. As of September 30, 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.
35
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
17.
|
Defined
contribution plan
|
Pursuant
to the relevant PRC regulations, the Company is required to make contributions
at a rates 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
$3,250,625 and $2,266,795 for the nine months ended September 30, 2010 and 2009
respectively.
36
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
18.
|
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, rods and shafts, valves and tappets and automotive safety
products 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 valves and tappets and automotive safety products.
Alternators
|
Starters
|
Rods
and shafts
|
Valves
and Tappets
|
Automotive
safety products
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||
Nine
months ended
|
Nine
months ended
|
Nine
months ended
|
Nine
months ended
|
Nine
months ended
|
Nine
months ended
|
|||||||||||||||||||||||||||||||||||||||||||
September
30,
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||||||||||||||||||||||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||||||||||||||
Revenue
from external customers
|
$ | 64,931,638 | $ | 53,010,493 | $ | 64,554,360 | $ | 48,357,149 | $ | 24,413,133 | $ | 14,433,097 | $ | 47,594,072 | $ | 32,788,099 | $ | 9,416,037 | $ | - | $ | 210,909,240 | $ | 148,588,838 | ||||||||||||||||||||||||
Interest
income
|
148,044 | 75,488 | 141,488 | 66,597 | 92,827 | 11,046 | 49,829 | 516,242 | 4,607 | - | 436,795 | 669,373 | ||||||||||||||||||||||||||||||||||||
Interest
expenses
|
1,858,762 | 1,257,505 | 1,716,208 | 1,203,520 | 402,314 | 88,077 | 824,715 | 1,070,450 | 199,554 | - | 5,001,553 | 3,619,552 | ||||||||||||||||||||||||||||||||||||
Amortization
|
110,753 | 109,970 | 92,550 | 82,390 | 909,939 | 1,374 | 88,610 | 88,445 | 9,381 | - | 1,211,233 | 282,179 | ||||||||||||||||||||||||||||||||||||
Depreciation
|
1,279,412 | 1,222,557 | 1,410,197 | 955,531 | 527,968 | 332,057 | 1,794,894 | 1,624,895 | 350,879 | - | 5,363,350 | 4,135,040 | ||||||||||||||||||||||||||||||||||||
Segment
profit
|
8,089,177 | 7,414,933 | 6,426,267 | 5,645,040 | 4,489,760 | 3,249,381 | 9,493,227 | 4,831,344 | 1,479,487 | - | 29,977,918 | 21,140,698 | ||||||||||||||||||||||||||||||||||||
Expenditure
for segment assets
|
$ | 1,580,508 | $ | 2,162,837 | $ | 1,576,916 | $ | 1,904,149 | $ | 3,883,777 | $ | 831,898 | $ | 5,250,273 | $ | 1,308,329 | $ | 1,063,999 | $ | - | $ | 13,355,473 | $ | 6,207,213 |
Alternators
|
Starters
|
Rods
and shafts
|
Valves
and Tappets
|
Automotive
safety
products
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||
Three
months ended
|
Three
months ended
|
Three
months ended
|
Three
months ended
|
Three
months ended
|
Three
months ended
|
|||||||||||||||||||||||||||||||||||||||||||
September
30,
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||||||||||||||||||||||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||||||||||||||
Revenue
from external customers
|
$ | 22,687,922 | $ | 21,201,583 | $ | 23,029,802 | $ | 20,070,969 | $ | 9,364,046 | $ | 4,755,762 | 14,332,274 | $ | 12,933,290 | $ | 9,416,037 | $ | - | $ | 78,830,081 | $ | 58,961,604 | |||||||||||||||||||||||||
Interest
income
|
111,003 | 41,017 | 107,466 | 37,489 | 25,115 | 5,826 | 20,455 | 94,496 | 4,607 | - | 268,646 | 178,828 | ||||||||||||||||||||||||||||||||||||
Interest
expenses
|
890,008 | 405,001 | 860,070 | 457,216 | 139,928 | 27,254 | 258,581 | 203,279 | 199,554 | - | 2,348,141 | 1,092,750 | ||||||||||||||||||||||||||||||||||||
Amortization
|
42,621 | 33,419 | 31,884 | 30,716 | 354,943 | 458 | 29,619 | 29,485 | 9,381 | - | 468,448 | 94,078 | ||||||||||||||||||||||||||||||||||||
Depreciation
|
429,501 | 365,577 | 491,774 | 399,831 | 192,935 | 113,336 | 604,041 | 543,814 | 350,879 | - | 2,069,130 | 1,422,558 | ||||||||||||||||||||||||||||||||||||
Segment
profit
|
2,733,165 | 2,850,327 | 2,042,618 | 2,177,896 | 1,695,581 | 914,798 | 2,921,968 | 2,149,597 | 1,479,487 | - | 10,872,819 | 8,092,618 | ||||||||||||||||||||||||||||||||||||
Expenditure
for segment assets
|
$ | 272,366 | $ | 959,561 | $ | 147,721 | $ | 851,950 | $ | 1,719,008 | $ | 541,006 | $ | 2,027,398 | $ | 737,103 | $ | 1,063,999 | $ | - | $ | 5,230,492 | $ | 3,089,620 |
Alternators
|
Starters
|
Rods
and shafts
|
Valves
and Tappets
|
Automotive
safety products
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||
September
30,
|
December
31,
|
September
30,
|
December
31,
|
September
30,
|
December
31,
|
September
30,
|
December
31,
|
September
30,
|
December
31,
|
September
30,
|
December
31,
|
|||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||||||||||||||
(Unaudited)
|
(Audited)
|
(Unaudited)
|
(Audited)
|
(Unaudited)
|
(Audited)
|
(Unaudited)
|
(Audited)
|
(Unaudited)
|
(Audited)
|
(Unaudited)
|
(Audited)
|
|||||||||||||||||||||||||||||||||||||
Segment
assets
|
$ | 114,145,498 | $ | 99,396,049 | $ | 95,948,121 | $ | 90,140,219 | $ | 88,879,831 | $ | 61,480,760 | $ | 94,472,629 | $ | 71,258,841 | $ | 261,117,066 | $ | - | $ | 654,563,145 | $ | 322,275,869 |
37
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
18.
|
Segment
information (Cont’d)
|
A
reconciliation is provided for unallocated amounts relating to corporate
operations which is not included in the segment information.
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Total
consolidated revenue
|
$ | 78,830,081 | $ | 58,961,604 | $ | 210,909,240 | $ | 148,588,838 | ||||||||
Total
profit for reportable segments
|
$ | 10,872,819 | $ | 8,092,618 | $ | 29,977,918 | $ | 21,140,698 | ||||||||
Unallocated
amounts relating to
|
||||||||||||||||
operations
:
|
||||||||||||||||
Interest
income
|
32,129 | 73 | 58,656 | 196 | ||||||||||||
Equity
in net (loss) income of
|
||||||||||||||||
non-consolidated
affiliates
|
(37,004 | ) | - | 722,754 | - | |||||||||||
Gain
on disposal of a
|
||||||||||||||||
non-consolidated
affiliate
|
5,264,070 | - | 5,264,070 | - | ||||||||||||
Other
income
|
- | 1,744 | - | 3,109 | ||||||||||||
Finance
costs
|
(872 | ) | (412 | ) | (1,513 | ) | (1,277 | ) | ||||||||
Amortization
|
(14,915 | ) | (5,237 | ) | (44,502 | ) | (15,709 | ) | ||||||||
Depreciation
|
(62,331 | ) | (36,089 | ) | (184,799 | ) | (104,750 | ) | ||||||||
Share-based
compensation
|
(1,634,895 | ) | - | (4,904,685 | ) | - | ||||||||||
Other
general expenses
|
(789,050 | ) | (195,764 | ) | (1,770,857 | ) | (571,510 | ) | ||||||||
Income
before income taxes and
|
||||||||||||||||
noncontrolling
interests
|
$ | 13,629,951 | $ | 7,856,933 | $ | 29,117,042 | $ | 20,450,757 |
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Assets
|
||||||||
Total
assets for reportable segments
|
$ | 654,563,145 | $ | 322,275,869 | ||||
Cash
and cash equivalents
|
21,519,418 | 28,037,032 | ||||||
Other
receivables
|
99,779 | 8,177,536 | ||||||
Deposits
for acquisition of property, plant and equipment
|
73,239 | 96,863 | ||||||
Inventories
|
132,882 | 185,354 | ||||||
Intangible
assets
|
362,232 | 383,719 | ||||||
Land
use right
|
931,926 | 927,240 | ||||||
Property,
plant and equipment
|
3,210,631 | 2,168,542 | ||||||
$ | 680,893,252 | $ | 362,252,155 |
38
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
18.
|
Segment
information (Cont’d)
|
All of
the Company’s long-lived assets are located in the PRC. Geographic
information about the revenues, which are classified based on the customers, is
set out as follows :-
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
PRC
|
$ | 70,974,774 | $ | 52,654,205 | $ | 187,573,501 | $ | 132,783,338 | ||||||||
South
Korea
|
1,301,032 | 1,997,778 | 4,469,847 | 4,403,311 | ||||||||||||
Brazil
|
2,551,018 | 1,509,202 | 6,609,562 | 4,873,493 | ||||||||||||
Mexico
|
464,782 | - | 1,734,501 | 10,725 | ||||||||||||
United
States
|
3,053,248 | 524,373 | 9,562,274 | 2,347,994 | ||||||||||||
Others
|
485,227 | 2,276,046 | 959,555 | 4,169,977 | ||||||||||||
Total
|
$ | 78,830,081 | $ | 58,961,604 | $ | 210,909,240 | $ | 148,588,838 |
19.
|
Related
party transactions
|
Apart
from the information as disclosed in notes 3, 9, 13 and 14 to the financial
statements, the Company has entered into following transactions with its related
parties :-
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales
of air bags systems or other automotive components to :-
|
||||||||||||||||
-
Brilliance Jinbei
|
$ | 1,486,954 | $ | - | $ | 1,486,954 | $ | - | ||||||||
-
Jinbei Vehicle
|
$ | 12,249 | $ | - | $ | 12,249 | $ | - | ||||||||
Purchase
of raw materials from:-
|
||||||||||||||||
-
Wonder Auto Parts
|
$ | 639,016 | $ | - | $ | 1,362,179 | $ | - |
39
Wonder
Auto Technology, Inc.
Notes
to Condensed Consolidated Financial Statements
(Stated
in US Dollars)
20.
|
Subsequent
events
|
The
Company evaluated all events or transactions that occurred through the date the
financial statements were issued and have determined that, except for the
transactions described below, there are no material subsequent events or
transactions which would require recognition or disclosure in the condensed
consolidated financial statements.
|
(a)
|
On
November 3, 2010, Yearcity entered into a purchase agreement with two
independent third parties pursuant
to which it agreed to acquire their 65% equity interest in a
company for a total consideration of RMB25,605,100 (equivalent
to approximately $3.83 million) of which RMB12,802,550 (equivalent
approximately to $1.91 million) was settled in November 2010. The
remaining consideration will be settled in December, 2010. This company is
engaged in manufacturing and selling of engine valves for automotive
business.
|
|
(b)
|
On
November 8, 2010, Friend Birch entered into a share purchase agreement
with China Wonder Limited (“China Wonder”), under which Friend Birch
agreed to acquire from China Wonder its 100% equity interest in Creative
Legend Group Limited, a British Virgin Islands corporation (“Creative
Legend”) for a total cash consideration of RMB30 million (equivalent to
approximately $4.48 million). Creative Legend, through its Chinese
subsidiaries, is primarily engaged in the manufacturing of machinery
equipment mainly used in automotive
industry.
|
Since Mr.
Zhao, a director and a shareholder of the Company, is an executive director
and
10.4% stockholder of China Wonder, the acquisition of 100% equity
interest in Creative Legend from China Wonder constituted a related party
transaction and was
approved by the independent members of the Company’s board of
directors.
40
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Special
Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q, including the following “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements include,
but are not limited to, statements pertaining to financial items, plans,
strategies or objectives of management for future operations, our financial
condition or prospects, and any other statement that is not historical fact,
including any statement which is preceded by the word “anticipate,” “assume,”
“believe,” “estimate,” “expect,” “intend,” or similar expressions. Specifically,
statements in this Quarterly Report on Form 10-Q relating to the following,
among other things, are forward-looking statements:
·
|
our expectations regarding the
market for our automotive
products;
|
·
|
our expectations regarding the
continued growth of the automotive
industry;
|
·
|
our beliefs regarding the
competitiveness of our automotive
products;
|
·
|
our expectations regarding the
expansion of our manufacturing
capacity;
|
·
|
our expectations with respect to
increased revenue and earnings growth and our ability to increase our
production volumes;
|
·
|
our future business development,
results of operations and financial
condition;
|
·
|
competition from other
manufacturers of automotive electrical
products;
|
·
|
the loss of any member of our
management team;
|
·
|
our ability to integrate acquired
subsidiaries and operations into existing
operations;
|
·
|
market conditions affecting our
equity capital;
|
·
|
our ability to successfully
implement our selective acquisition
strategy;
|
·
|
changes in general economic
conditions; and
|
·
|
changes in accounting rules or
the application of such
rules.
|
For all
forward-looking statements, we claim the protection of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are not
guarantees and are based on our present intentions and on our present
expectations and assumptions. These statements, intentions, expectations and
assumptions involve risks and uncertainties, which are beyond our control, which
could cause actual results or events to differ materially from those we
anticipate or project.
Additional
disclosures regarding factors that could cause our results and performance to
differ from results or performance anticipated by this Report are discussed
below under “Item 1A. – Risk Factors” and in other reports that we file with the
SEC, including without limitation our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009, or the 2009 Form 10-K. Readers are urged to
carefully review and consider the various disclosures made by us in this Report
and our other filings with the SEC. These reports attempt to advise interested
parties of the risks and factors that may affect our business, financial
condition and results of operations and prospects.
Also,
forward-looking statements represent our estimates and assumptions only as of
the date of this report. You should not place undue reliance on these
forward-looking statements, as events described or implied in such statements
may not occur.
We assume
no obligation to update any forward-looking statements publicly even if new
information becomes available in the future.
Certain
Terms
Except as
otherwise indicated by the context, references in this report to “Company,”
“WATG,” “we,” “us” and “our” are references to the combined business of Wonder
Auto Technology, Inc., a Nevada corporation, and its subsidiaries on a
consolidated basis. Unless the context otherwise requires, all references
to:
41
·
|
“Jinzhou
Dongwoo” are references to Jinzhou Dongwoo Precision Co., Ltd., a
corporation incorporated in the People’s Republic of China and an
indirect, 50% owned subsidiary of the
Company;
|
·
|
“Jinzhou
Halla” are references to Jinzhou Halla Electrical Equipment Co., Ltd., a
corporation incorporated in the People’s Republic of China and an
indirect, wholly owned subsidiary of the
Company;
|
·
|
“Jinzhou
Wanyou” are references to Jinzhou Wanyou Mechanical Parts Co., Ltd., a
corporation incorporated in the People’s Republic of China and an
indirect, wholly owned subsidiary of the
Company;
|
·
|
“Jinzhou
Jinheng” are references to Jinzhou Jinheng Automotive Safety System Co.,
Ltd., a corporation incorporated in the People’s Republic of China and an
indirect, wholly owned subsidiary of the
Company;
|
·
|
“Jinan
Worldwide” are references to Jinan Worldwide Auto-Accessory Limited., a
corporation incorporated in the People’s Republic of China and an
indirect, wholly owned subsidiary of the
Company;
|
·
|
“Jinzhou
Lide” are references to Jinzhou Jinzhou Lide Auto Shock Absorber Co., Ltd,
a corporation incorporated in the People’s Republic of China and an
indirect, wholly owned subsidiary of the
Company;
|
·
|
“Jinzhou
Huayi” are references to Jinzhou Huayi Xuanya Technology Co., Ltd, a
corporation incorporated in the People’s Republic of China and an
indirect, 45% owned subsidiary of the
Company;
|
·
|
“Jinbei
Jinheng” are references to Shenyang Jinbei Jinheng Automotive Safety
System Co. Limited, a corporation incorporated in the People’s Republic of
China and an indirect, 45% owned subsidiary of the
Company;
|
·
|
“SEC”
are references to the United States Securities and Exchange
Commission;
|
·
|
“Exchange
Act” are to the Securities Exchange Act of 1934, as
amended.
|
·
|
“China”
and “PRC” are references to People’s Republic of China;
|
·
|
“RMB”
are references to Renminbi, the legal currency of China;
and
|
·
|
“U.S.
dollar,” “$” and “US$” are references to the legal currency of the United
States.
|
Overview
Wonder
Auto Technology, Inc. is a Nevada holding company whose China-based operating
subsidiaries are primarily engaged in business of designing, developing,
manufacturing and selling automotive electric parts, automotive safety products,
suspension products and engine components. Our products include alternators,
starters, airbags and pretensioners, steering wheels, engine valves and tappets,
and rods and shafts for use in shock absorber systems. We have been producing
alternators and starters in China since 1997, and according to the China
Association of Automobile Manufacturers, in 2009 we ranked second and fourth in
sales revenue in the Chinese market for automobile alternators and starters,
respectively. Our subsidiary Jinzhou Jinheng has been designing and developing
airbags for over 10 years. We believe that we are the largest Chinese
brand airbag manufacturer in terms of sales volume in 2009 and the biggest
Chinese brand pretensioner manufacturer. Our subsidiary Jinan Worldwide has been
producing engine valves and tappets for over 50 years. We believe we are now one
of the largest manufacturers of engine valves and tappets in China. Our
subsidiary Jinzhou Wanyou is supplying rods and shafts to suspension system
manufacturers worldwide. We believed that we are one of the largest independent
suppliers of rods and shafts for suspension system manufacturers in the world in
terms of sales volume.
Our
products are used in a wide range of passenger and commercial automobiles, and
we are especially focused on the fast-growing small- to-medium sized engine
passenger vehicle market in China. We sell our products primarily within China
to well-known domestic and international automobile original equipment
manufacturers, or OEMs, engine manufacturers and automotive parts
suppliers. However, we are increasingly exporting our products to
international markets.
42
Business
Segment Information
Our
business operations can be categorized into four segments based on the type of
products we manufacture and sell, specifically (i) alternators, (ii) starters,
(iii) rods and shafts, (iv) engine valves and tappets, and (v) airbags and
pretensioners.
We
manufacture and sell both our alternators and starters using largely the same
facilities, personnel and other resources in our subsidiary Jinzhou Halla. Rods
and shafts are mainly manufactured by our subsidiary Jinzhou Wanyou. Valves and
tappets are manufactured by our subsidiary Jinan Worldwide. Airbags and
pretensioners are developed and manufactured by our subsidiary Jinzhou
Jinheng. Our newly acquired subsidiary Jinheng BVI (defined below)
also primarily manufactures automobile airbags, safety belts and steering
wheels.
Additional
information regarding our products can be found at Note 17 in our unaudited
consolidated financial statements contained under Part I, Item I “FINANCIAL
STATEMENTS” above.
Third
Quarter Financial Performance Highlights
Despite
the overall economic slowdown in the global economy, we continued to experience
strong demand for our products during the third fiscal quarter of 2010, which
resulted in continued growth in our sales revenue and net income. The automobile
market in China, especially the market for small-to-medium engine automobiles,
continued to expand in the third quarter of 2010 due, in part, to the
implementation of new PRC consumption tax regulations and the promulgation of
new regulations which urge government agencies to use tax breaks and incentives
and preferential oil-pricing policies to encourage consumers to buy low-emission
automobiles. We were able to capitalize on these policies and the overall growth
trend in our market segments during the third fiscal quarter of
2010.
The
following are some financial highlights for the third quarter of
2010:
·
|
Sales
revenue increased 33.7% year-over-year to approximately $78.8
million;
|
·
|
Gross
profit rose 48.2% year-over-year to approximately $20.7 million from
approximately $14.0 million;
|
·
|
Net
income attributable to Wonder Auto increased 83.5% year-over-year to
approximately $11.9 million;
|
·
|
EPS
was approximately $0.35, representing a 45.8% increase from approximately
$0.24 compared with the third quarter of
2009;
|
·
|
Non-GAAP
Net income attributable to Wonder Auto increased 108.6% year-over-year to
approximately $13.6 million;
|
·
|
Non-GAAP
EPS was approximately $0.40, representing a 66.1% increase from
approximately $0.24 in the third quarter of
2009;
|
·
|
Sales
revenue in China increased approximately $18.3 million, or 34.8%
year-over-year, from approximately $52.7 million in the third quarter of
2009, or increased to 90.0% of total sales revenue from 89.3% in the third
quarter of 2009.
|
·
|
Sales
revenue from outside the PRC increased approximately $1.5 million, or
24.5% year-over-year, from approximately $6.3 million in the third quarter
of 2009 to approximately $7.9 million for the third quarter of
2010.
|
43
Our net
income for the periods ended September 30, 2010 and 2009 was $11.9 million and
$6.5 million, respectively. Our earnings per share for the periods ended
September 30, 2010 and 2009 was $0.35 and $0.24, respectively. Our net income
and earnings per share were materially impacted by non-cash share-based employee
compensation recognized pursuant to Accounting Standard Codification (“ASC”)
718. On November 24, 2009, we granted options to purchase a total of 1,674,400
shares of our common stock to certain officers, directors and employees with an
exercise price of $11.48 per share. As a result, we incurred a non-cash
share-based employee compensation of $1.6 million and $4.9 million in the three
and nine months ended September 30, 2010, respectively. In the table below, we
have presented a non-GAAP financial disclosure to provide a quantitative
analysis of the impact of the non-cash employee compensation on our net income
and earnings per share. We caution readers that “Non-GAAP net income
attributable to the company” and “Non-GAAP EPS” are non-GAAP measures and do not
purport to be alternatives to operating income, net income or earnings per share
as a measure of operating performance. Management believes that these measures
are useful to investors and other users of our financial information in
evaluating operating profitability because non-cash shared-based employee
compensation does not require the use of current assets and management does not
include it in its analysis of our financial results or how we allocate our
resources. It is management’s intent to provide this non-GAAP financial
information to enhance understanding of our GAAP financial statements and it
should be considered by the reader in addition to, but not instead of, the
financial statements prepared in accordance with GAAP. The non-GAAP measure of
“Non-GAAP net income attributable to the company” and “Non-GAAP EPS” presented
herein may be determined or calculated differently by other
companies.
(all
amounts in thousands of U.S. dollars)
(Unaudited)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income attributable to Wonder Auto Technology, Inc. common
stockholders
|
11,941 | 6,507 | 24,367 | 17,054 | ||||||||||||
Share-based
compensation
|
1,635 | - | 4,905 | - | ||||||||||||
Non-GAAP
net income attributable to Wonder Auto Technology, Inc. common
stockholders
|
13,575 | 6,507 | 29,272 | 17,054 | ||||||||||||
GAAP
EPS
|
0.35 | 0.24 | 0.72 | 0.63 | ||||||||||||
Non-GAAP
EPS
|
0.40 | 0.24 | 0.86 | 0.63 |
Recent
Development
On July
1, 2010, we acquired 100% of the equity interests in Vital Glee Development
Limited, a corporation duly formed under the laws of British Virgin Islands
(“Vital Glee”), for consideration of $15 million. The consideration is
contingent on whether Vital Glee can achieve minimum net income of $1.6 million
in the twelve months following the acquisition date. Vital Glee holds 100% of
the equity interests in Jinzhou Lide, which is a manufacturer of shock absorber
systems based in China. In connection with the acquisition of Vital Glee, we
acquired patents, technical know-how and customer contracts, as well as the use
of rights of the trademark “Wonder” for shock absorbers. In addition as a result
of our acquisition of Vital Glee, we now have direct sales channels to OEMs for
shock absorbers; whereas in the past we sold shock absorbers to distributors
that then resold them to OEMs.
On July
2, 2010, we appointed Mr. Qingdong Zeng as our Chief Strategy
Officer. In such position, Mr. Zeng will oversee daily operations of
our accounting, research and development, legal affairs and human resource
functions and assist our Chief Executive Officer in the development and
implementation of our overall strategies. Mr. Zeng has been our director since
June 10, 2010 and our since December 2009. He has also been the president of our
subsidiary Jinzhou Wanyou Mechanical Parts Co., Ltd. since September
2006.
As previously disclosed, on July 10, 2010, our wholly-owned subsidiary Vital Glee entered into a conditional disposal agreement (the “Conditional Disposal Agreement”) with Jinheng Automotive Safety Technology Holdings Limited (“Jinheng Holdings”), under which Vital Glee agreed to acquire from Jinheng Holdings its 100% equity interest in Jinheng (BVI) Ltd., a British Virgin Islands corporation (“Jinheng BVI”) for a total cash consideration of HK $1,130 million (approximately US$145.43 million). Jinheng BVI, through its Chinese subsidiaries, is primarily engaged in the manufacturing of automobile airbags, safety belts and steering wheels. From January 18, 2010 through July 10, 2010 we had a 20.02% equity interest in Jinheng Holdings through our strategic investment in the Applaud Group Limited (the “Applaud Group”). Additionally, Mr. Qingjie Zhao, our chairman, chief executive officer and president is on the board of directors of Jinheng Holdings. We disposed of our interest in the Applaud Group on July 10, 2010.
On
September 10, 2010, Vital Glee completed the acquisition of Jinheng BVI pursuant
to the terms of the Conditional Disposal Agreement. Under the Conditional
Disposal Agreement, Vital Glee paid HK $348 million (approximately US$44.6
million) and issued three non-interest bearing promissory notes in the
respective amounts of HK $169.5 million (approximately US$21.85 million), HK
$169.5 million (approximately US$21.83 million) and HK $452 million
(approximately US$58.22 million) to Jinheng Holdings, which will become payable
at the 30th, 90th and 180th days after September 14, 2010,
respectively.
44
Results
of Operations
Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009
The
following table sets forth key components of our results of operations for the
periods indicated, in dollars and as a percentage of sales revenue.
(All
amounts, other than percentages, in thousands of U.S. dollars)
Item
|
3-Month Period Ended
September 30, 2010
(Unaudited)
|
3-Month Period Ended
September 30, 2009
(Unaudited)
|
||||||||||||||
In
thousands
|
As a
percentage of
sales revenue
|
In
thousands
|
As a
percentage of
sales revenue
|
|||||||||||||
Sales
revenue
|
$ | 78,830 | 100 | % | $ | 58,962 | 100 | % | ||||||||
Cost
of sales
|
58,144 | 73.8 | % | 45,007 | 76.3 | % | ||||||||||
Gross
profit
|
20,686 | 26.2 | % | 13,954 | 23.7 | % | ||||||||||
Operating
expenses
|
||||||||||||||||
Administrative
expenses (included share-based compensation of $1,478 in 2010, $- in
2009)
|
5,725 | 7.3 | % | 2,594 | 4.4 | % | ||||||||||
Research
and development costs (included share-based compensation of $275 in 2010, $- in
2009)
|
1,871 | 2.4 | % | 488 | 0.8 | % | ||||||||||
Selling
expenses (included share-based compensation of $65 in 2010, $- in
2009)
|
2,787 | 3.5 | % | 2,080 | 3.5 | % | ||||||||||
Total
operating expenses
|
10,383 | 13.5 | % | 5,162 | 8.8 | % | ||||||||||
Income
before income taxes and non-controlling interests
|
13,630 | 17.3 | % | 7,857 | 13.3 | % | ||||||||||
Income
taxes
|
1,170 | 1.5 | % | 940 | 1.6 | % | ||||||||||
Net
income attributable to non-controlling interests
|
520 | 0.7 | % | 410 | 0.7 | % | ||||||||||
Net
Income attributable to Wonder Auto Technology, Inc. common
stockholders
|
11,941 | 15.1 | % | 6,507 | 11.0 | % |
Sales
Revenue. Our sales revenue is generated from sales of our alternator and
starter products, rods and shafts, and engine valves and tappets. Sales revenue
increased by approximately $19.9 million, or 33.7%, to approximately $78.8
million for the three months ended September 30, 2010, compared with
approximately $59.0 million for the same period last year. This
increase was mainly due to the $9.4 million of sales revenue from the
acquisition of Jinheng BVI, and partly attributable to the higher sales volume
resulting from increased sales of our organic products to both new and existing
customers both within and outside China and our expanded manufacturing capacity
which allowed us to meet such increased demand.
45
Sales
revenue from China increased by approximately $18.3 million, or 34.8%, to
approximately $71.0 million in the third quarter of 2010, as compared to
approximately $52.7 million for the same period last year. This increase was
mainly attributable to the higher sales volume driven by the increased market
demand for our products from both new and existing customers in the growing
automobile market in China. Sales revenue outside China increased by
approximately $1.5 million, or 24.5%, to approximately $7.9 million in the third
quarter of 2010, as compared to approximately $6.3 million for the same period
last year. This increase was mainly attributable to the increased volume from
our existing customers’ contracts worldwide as a result of greater customer
acceptance of our products. Export sales accounted for approximately 10% of our
total sales revenue in this quarter.
Sales
Revenue by Product Segments
(all
amounts, other than percentages, in thousands of U.S. dollars)
|
Three Months Ended September 30,
|
Percent change
|
||||||||||
Components of Sales Revenue
|
2010
|
2009
|
2010 v. 2009
|
|||||||||
Alternator
|
$
|
22,688
|
$
|
21,202
|
7.0
|
%
|
||||||
Starter
|
23,030
|
20,071
|
14.7
|
%
|
||||||||
Rod
and shaft
|
9,364
|
4,756
|
96.9
|
%
|
||||||||
Engine
valve and tappet
|
14,332
|
12,933
|
10.8
|
%
|
||||||||
Airbags
and pretensioners
|
9,416
|
-
|
100
|
% | ||||||||
Total
sales revenue
|
78,830
|
58,962
|
33.7
|
%
|
Revenue
By Geographic Areas
(all
amounts in thousands of U.S. dollars)
|
Three Months Ended
September 30,
|
|||||||
2010
|
2009
|
|||||||
PRC
|
$
|
70,975
|
$
|
52,654
|
||||
South
Korea
|
1,301
|
1,998
|
||||||
Brazil
|
2,551
|
1,509
|
||||||
Mexico
|
465
|
-
|
||||||
United
States
|
3,053
|
524
|
||||||
Others
|
485
|
2,276
|
||||||
Total
|
78,830
|
58,962
|
Sales
revenue from alternators and starters was $22.7 million and $23.0 million
respectively, in the three months ended September 30, 2010, as compared to $21.2
million and $20.1 million in the same quarter last year, respectively. Sales in
China continue to be our major source of sales for alternators and starters.
Sales revenue from sales of alternators and starters in China increased by
approximately $5.8 million or 15.0% to approximately $44.4 million in the three
months ended September 30, 2010 from $38.6 million in the same quarter in 2009.
The increase mainly resulted from the overall growth in the automobile market in
China, especially the market for mid-to-small engine automobiles.
Sales
revenue from rods and shafts was $9.4 million in the three months ended
September 30, 2010, an increase of $4.6 million from the same period last year.
The increase was mainly due to export sales increases of approximately $3.0
million. Sales of engine valve and tappet were approximately $14.3 million in
the third quarter of 2010, up $1.4 million from the same period last year.
This increase was mainly attributable to an approximately $918,221 increase in
domestic sales driven by increased sales volume.
Sales
revenue from airbags and pretensioners was $9.4 million in the three months
ended September 30, 2010.
Cost of
Sales. Our cost
of sales is primarily comprised of the costs of our raw materials, labor and
overhead. Our cost of sales increased by approximately $13.1 million, or 29.2%,
to approximately $58.1 million for the three months ended September 30, 2010
from approximately $45.0 million during the same period in 2009. This was
mainly due to the consolidation of Jinheng BVI operating results, and the
increase of our sales volume. As a percentage of sales revenue, the cost of
sales decreased by approximately 2.5% to 73.8 % during the three months ended
September 30, 2010 from 76.3 % for the same period of 2009. The percentage
decrease in the third quarter of 2010 was mainly attributable to the improved
gross margin on sales of our engine valves and tappets products resulting from
the increased percentage of sales to the heavy duty engine sector which demands
products that are usually sold at a higher per unit profit margin as compared
the products used in lighter trucks and partly attributable to the improved
gross margin on sales of rods and shafts.
46
Gross
Profit. Our gross
profit is equal to the difference between our sales revenue and our cost of
sales. Our gross profit increased by approximately $6.7 million, or 48.2%, to
approximately $20.7 million for the three months ended September 30, 2010,
compared with approximately $14.0 million for the same period in 2009 as a
result of increased sales volume driven by the strong market demand for our
products. Gross margin was 26.2% for the three-month period ended
September 30, 2010, as compared to 23.7% of the same period last
year. Such increase was mainly due to the factors as discussed
above.
Total Operating
Expenses. Our
total operating expenses increased by approximately $5.2 million, or 101.1%, to
approximately $10.4 million for the three months ended September 30, 2010, as
compared to approximately $5.2 million for the same period in 2009. As a
percentage of sales revenue, our total expenses increased to 13.2% for the three
months ended September 30, 2010, compared from 8.8% for the same period last
year. The percentage increase was primarily due to the consolidation of Jinheng
BVI for this quarter, and the increase of non-cash share-based compensation, and
research and development expenses as discussed below.
Administrative
Expenses. Administrative expenses consist of the costs associated
with staff and support personnel who manage our business activities, and
professional fees paid to third parties. Our administrative expenses increased
by approximately $3.1 million, or 120.7%, to approximately $5.7 million for the
three months ended September 30, 2010, from approximately $2.6 million for the
same period last year. This increases were mainly due to the consolidation of
the operating results of Vital Glee and Jinheng BVI for this quarter, third
party professional fees paid in connection with such acquisitions, and the
non-cash share-based compensation of approximately $1.6 million incurred this
quarter as a result of the employee stock option grants awarded in November
2009, with the remainder being mostly due to the consolidation of Jinzhou Huayi.
As a percentage of sales revenue, administrative expenses increased to 7.3% for
the three months ended September 30, 2010, from 4.4% for same period last year.
The increases were mainly due to the non-cash share-based compensation and the
third party professional fees paid in connection with acquisitions.
Research
and Development Expenses. Research and development expenses consist of
amounts spent on developing new products and enhancing our existing products,
and expenses of the R&D staff and support personnel. Our research and
development expenses increased by approximately $1.4 million, or 283.8%, to
approximately $1.9 million for the three months ended September 30, 2010, from
$487,572 for the same period last year. As a percentage of sales revenue,
research and development expenses increased to 2.4% for the three months ended
September 30, 2010, from 0.8% for the same period last year. The increases were
mainly due to the increased expenses associated with development of alternative
energy vehicle components, with highly integrated automotive safety
technology.
Selling
Expenses. Selling expenses include the cost of salaries and fringe
benefits of sales personnel, provision for products warranties, freight,
warehouse expenses, advertising and promotional materials, sales commissions and
other sales related costs. Our selling expenses increased by approximately
$706,287, or 33.9%, to approximately $2.8 million for the three months ended
September 30, 2010, from approximately $2.1 million for the same period last
year. As a percentage of sales revenue, selling expenses remained stable at 3.5%
for three months ended September 30, 2010 and 2009. The increases were mainly
due to increased freight costs resulting from increased sales volume, as well as
increased salary costs due to additional hires, higher commission costs due to
increased sales and costs associated with advertising and promotional activities
as discussed above, with the remainder being mostly due to the non-cash
share-based compensation of $65,419 as a result of the employee stock option
grants made in November 2009.
Net finance
costs. Net
finance costs include interest income, interest expenses, bill discounting
charges and net exchange (gain) loss. Our net finance costs increased by $1.3
million, or 88.8% to $2.8 million for the three months ended on September 30,
2010 from $1.5 million for the same period last year. The increase of net
finance costs was mainly due to increases in bills discounting charges of
$920,250 and increases in interest expenses of $335,141 as compared to the same
period last year.
Gain on disposal
of Applaud. On July 10, 2010, we
disposed of our investment in the Applaud Group for a total consideration of
approximately $20.9 million which was determined by the current stock price of
the Applaud Group as quoted on the Hong Kong Stock Exchange, and recorded a gain
on disposal of a non-consolidated affiliate of approximately $5.3 million for
the third quarter of 2010.
47
Income before
Income Taxes and Non-controlling Interests. Income before income taxes
and non-controlling interests increased by approximately $5.8 million or 73.5%,
to approximately $13.6 million during the three months ended September 30, 2010
from approximately $7.9 million during the same period in
2009. Income before income taxes as a percentage of sales revenue
increased to 17.3% during the three months ended September 30, 2010, as compared
to 13.3% for the same period last year due to the factors described
above.
Income
taxes. Our
income taxes increased by $230,067, or 24.5%, to approximately $1.2 million for
the three months ended September 30, 2010 from $939,622 for the same period last
year due to our increased sales. Our effective income tax rate was approximately
8.6% for the third quarter in 2010, as compared to 12.0% for the same period
last year. Our income tax rate declined in part because under British
Virgin Islands law we were not required to pay taxes on the $5.3 million gain on
our disposal of the Applaud Group.
Net Income
attributable to Non-controlling Interests. Our financial statements
reflect an adjustment to our consolidated group net income, and our net income
attributable to non-controlling interests increased by $109,446, or 26.7% to
$519,736 for the third quarter in 2010 from $410,290 for the same period last
year, reflecting the net income attributable to non-controlling interests held
by third parties in Jinzhou Dong Woo, Jinzhou Hanhua, Jinzhou Karham, Jinzhou
Huayi and Jinbei Jinheng.
Net Income
attributable to Wonder Auto Technology, Inc. common stockholders. Our net
income attributable to Wonder Auto Technology, Inc. common stockholders
increased by approximately $5.4 million, or 83.5%, to
approximately $11.9 million during the three months ended September 30, 2010
from approximately $6.5 million during the same period last year, as a result of
the factors described above.
Nine
Months Ended September 30, 2010 Compared to Nine months Ended September 30,
2009
The
following table sets forth key components of our results of operations for the
periods indicated, in dollars and as a percentage of sales revenue.
(All
amounts, other than percentages, in thousands of U.S. dollars)
Item
|
9-Month Period Ended
September 30, 2010
(Unaudited)
|
9-Month Period Ended
September 30, 2009
(Unaudited)
|
||||||||||||||
|
In
thousands
|
As a
percentage of
sales revenue
|
In
thousands
|
As a
percentage of
sales revenue
|
||||||||||||
Sales
revenue
|
$ | 210,909 | 100.0 | % | $ | 148,589 | 100.0 | % | ||||||||
Cost
of sales
|
157,446 | 74.7 | % | 112,321 | 75.6 | % | ||||||||||
Gross
profit
|
53,464 | 25.3 | % | 36,268 | 24.4 | % | ||||||||||
Operating
expenses
|
||||||||||||||||
Administrative
expenses (included share-based compensation of 4,433 in 2010, $- in
2009)
|
15,744 | 7.5 | % | 7,662 | 5.2 | % | ||||||||||
Research
and development costs (included share-based compensation of 275 in 2010,
$- in
2009)
|
4,760 | 2.3 | % | 1,408 | 0.9 | % | ||||||||||
Selling
expenses (included share-based compensation of 196 in 2010, $- in
2009)
|
7,241 | 3.4 | % | 4,812 | 3.2 | % | ||||||||||
Total
operating expenses
|
27,744 | 13.2 | % | 13,882 | 9.3 | % | ||||||||||
Income
before income taxes and non-controlling interests
|
29,117 | 13.8 | % | 20,451 | 13.8 | % | ||||||||||
Income
taxes
|
3,765 | 1.8 | % | 2,493 | 1.7 | % | ||||||||||
Net
income attributable to non-controlling interests
|
985 | 0.5 | % | 904 | 0.6 | % | ||||||||||
Net
Income attributable to Wonder Auto Technology, Inc. common
stockholders
|
24,367 | 11.6 | % | 17,054 | 11.5 | % |
48
Sales
Revenue. Sales revenue increased by approximately $62.3 million, or
41.9%, to approximately $210.9 million for the nine months ended September 30,
2010, compared with approximately $148.6 million for the same period last
year. This increase was mainly attributable to the higher sales volumes
resulting from increased sales of our organic products to both new and existing
customers both within and outside China and our expanded manufacturing capacity
which allowed us to meet such increased demand, with the remainder being
attributable to the $9.4 million of sales revenue from acquisition of Jinheng
BVI.
Sales
revenue from China increased by approximately $54.8 million, or 41.3%, to
approximately $187.6 million in the nine months ended September 30, 2010, as
compared to approximately $132.8 million for the same period last year. Sales
revenue outside China increased by approximately $7.5 million, or 47.6%, to
approximately $23.3 million in the nine months ended September 30, 2010,
compared with approximately $15.8 million for the same period last
year.
Sales
Revenue by Product Segments
(all
amounts, other than percentages, in thousands of U.S. dollars)
|
Nine Months Ended September 30,
|
Percent change
|
||||||||||
Components
of Sales Revenue
|
2010
|
2009
|
2010
v. 2009
|
|||||||||
Alternator
|
$
|
64,932
|
$
|
53,010
|
22.5
|
%
|
||||||
Starter
|
64,554
|
48,357
|
33.5
|
%
|
||||||||
Rod
and shaft
|
24,413
|
14,433
|
69.1
|
%
|
||||||||
Engine
valve and tappet
|
47,594
|
32,788
|
45.2
|
%
|
||||||||
Airbag
and pretensioner
|
9,416
|
-
|
100
|
% | ||||||||
Total
sales revenue
|
210,909
|
148,589
|
41.9
|
%
|
Revenue
By Geographic Areas
(all
amounts in thousands of U.S. dollars)
|
Nine Months Ended
September 30,
|
|||||||
2010
|
2009
|
|||||||
PRC
|
$
|
187,574
|
$
|
132,783
|
||||
South
Korea
|
4,470
|
4,403
|
||||||
Brazil
|
6,610
|
4,873
|
||||||
Mexico
|
1,735
|
11
|
||||||
United
States
|
9,562
|
2,348
|
||||||
Others
|
960
|
4,170
|
||||||
Total
|
210,909
|
148,589
|
Sales
revenue from alternators and starters was $64.9 million and $64.6 million
respectively, in the nine months ended September 30, 2010, as compared to $53.0
million and $48.4 million in the same period last year, respectively. Sales in
China continue to be our major source of sales for alternators and starters.
Sales revenue from sales of alternators and starter in China increased by
approximately $28.1 million or 29.4% to approximately $123.6 million in the nine
months ended September 30, 2010 from $95.5 million of the same period in 2009.
The increase mainly resulted from more demands for alternators and
starters for mid-to-small sized engine vehicles.
Sales
revenue from rods and shafts was $24.4 million in the nine months ended
September 30, 2010, an increase of $10.0 million from the same period last year.
The increases in and outside China were approximately $6.1 million and $3.9
million respectively. Sales of engine valve and tappet were approximately $47.6
million in the nine months ended September 30, 2010, up $14.8 million from the
same period last year. The increases in and outside China were approximately
$12.1 million and $2.8 million respectively.
49
Cost of
Sales. Our cost
of sales increased by approximately $45.1 million, or 40.2%, to approximately
$157.4 million for the nine months ended September 30, 2010 from approximately
$112.3 million during the same period in 2009. This increase was
mainly due to the increase of our sales volume, and partly to the consolidation
of operating results of Jinheng BVI. As a percentage of sales revenue, the
cost of sales decreased slightly by approximately 0.9% to 74.7% during the nine
months ended September 30, 2010 from 75.6% for the same period of
2009.
Gross
Profit. Our gross
profit increased by approximately $17.2 million, or 47.4%, to approximately
$53.5 million for the nine months ended September 30, 2010, compared with
approximately $36.3 million for the same period in 2009. Gross margin
was 25.3% for the nine-month period ended September 30, 2010, as compared to
24.4% of the same period last year. Gross margin for our engine
valves and tappets increased for the nine months ended September 30, 2010 due to
the fact that during this period, we sold more engine valves and tappets used in
heavy trucks which generally have higher margins than those used in lighter
trucks. The increase in gross margin for our engine valves and tappets was
offset by a decrease in gross margin for our alternator and starter products.
For this period, more of our sales revenue was derived from sales of alternators
and starters used in engines with mid-to-small displacement, which generally
have a lower per unit profit margin than our alternators and starters made for
engines with larger displacement.
Total Operating
Expenses. Our
total operating expenses increased by approximately $13.9 million, or 99.9%, to
approximately $27.8 million for the nine months ended September 30, 2010, as
compared to approximately $13.9 million for the same period in 2009. As a
percentage of sales revenue, our total expenses increased to 13.2% for the nine
months ended September 30, 2010, compared from 9.3% for the same period last
year. The percentage increase was primarily attributable to the facts as
discussed below.
Administrative
Expenses.
Our administrative expenses increased by approximately $8.1 million, or 105.5%,
to approximately $15.7 million for the nine months ended September 30, 2010,
from approximately $7.7 million for the same period last year. The increases in
amount were mainly due to the non-cash stock-based compensation of approximately
of $4.4 million incurred in the nine months ended September 30, 2010 as a result
of the employee stock option grants made in November 2009, with the remainder
being mostly due to the consolidation of operating results of Vital Glee,
Jinheng BVI, and Jinzhou Huayi, and the increased professional fees related to
our acquisitions. As a percentage of sales revenue, administrative expenses
increased to 7.5% for the nine months ended September 30, 2010, from 5.2% for
same period last year. The increases in percentage were mainly due to the
non-cash stock based compensation and the increase in professional fees paid to
the third parties.
Research
and Development Expenses. Our research and
development expenses increased by $3.4 million, or 237.9%, to approximately $4.8
million for the nine months ended September 30, 2010, from $1.4 million for the
same period last year. As a percentage of sales revenue, research and
development expenses increased to 2.3% for the nine months ended September 30,
2010, from 0.9% for the same period last year. The increases were mainly due to
the increased expenses associated with development of alternative energy vehicle
components, with highly integrated safety technology.
Selling
Expenses.
Our selling expenses increased by approximately $2.4 million, or 50.5%, to
approximately $7.2 million for the nine months ended September 30, 2010, from
approximately $4.8 million for the same period last year. As a percentage of
sales revenue, selling expenses increased to 3.4% for the nine months ended
September 30, 2010, from 3.2% for the same period last year. The increases were
mainly due to increased freight costs resulting from increased sales volume, as
well as increased salary costs due to additional hires, higher commission costs
due to increased sales and costs associated with advertising and promotional
activities, with the remainder being mostly due to the non-cash share-based
compensation of $196,257 as a result of the employee stock option grants made in
November 2009.
Net finance
costs. Our net finance cost increased by $997,719, or 28.4% to $4.5
million for the nine months ended September 30, 2010 from $3.5 million for the
same period last year. The increases in net finance costs were mainly due to
increases in bills discounting charges of $708,467 and increases in interest
expenses of $673,534, which was offset by the net exchange gain of
$364,003.
50
Gain on disposal
of Applaud. On July 10, 2010, we disposed of our investment in the
Applaud Group for a total consideration of approximately $20.9 million, and
recorded a gain on disposal of a non-consolidated affiliate of approximately
$5.3 million for the third quarter 2010.
Income before
Income Taxes and Non-controlling Interests. Income before income taxes
and non-controlling interests increased by approximately $8.7 million or 42.4%, to approximately
$29.1 million during
the nine months ended September 30, 2010 from approximately $20.5 million during
the same period in 2009. Income before income taxes as a percentage
of sales revenue remained stable at 13.8% for the nine months ended September
30, 2010 and 2009, due to the factors described above.
Income taxes.
Our income taxes increased by approximately
$1.3 million, or 51.0%, to approximately
$3.8 million for the
nine months ended September 30, 2010 from $2.5 million for the same
period last year. Our effective income tax rate was approximately 12.9% for the nine months
ended September 30, 2010, as compared to 12.2%
for the same period last year.
Net Income
attributable to Non-controlling Interests. Our financial statements reflect an
adjustment to our consolidated group net income, and our net income attributable
to non-controlling interests increased $80,896, or
9.0%
to $984,809 for
the nine months ended September 30, 2010 from $903,823 for
the same period last year, reflecting the net income attributable
to non-controlling interests held by third parties in Jinzhou Dong Woo, Jinzhou
Hanhua, Jinzhou Karham, Jinzhou Huayi, and Jinbei Jinheng.
Net Income
attributable to Wonder Auto Technology, Inc. common stockholders. Our net
income attributable to Wonder Auto Technology, Inc. common stockholders
increased by approximately $7.3 million, or 42.9%, to
approximately $24.4 million during the nine months ended September 30, 2010 from
approximately $17.1 million during the same period last year, as a result of the
factors described above.
Liquidity
and Capital Resources
As of
September 30, 2010, we had cash and cash equivalents of approximately $60.6
million and restricted cash of $33.8
million. The following table sets forth a summary of our cash flows for
the periods indicated:
Statement
of Cash Flow
(All
amounts in thousands of U.S. dollars)
Nine Months
Ended
|
||||||||
September 30,
|
||||||||
2010
|
2009
|
|||||||
Net
cash (used in) provided by operating activities
|
$ | 5,402 | $ | 11,113 | ||||
Net
cash (used in) investing activities
|
$ | (47,179 | ) | $ | (12,272 | ) | ||
Net
cash (used in) provided by financing activities
|
$ | 19,057 | $ | 14,357 | ||||
Effect
of foreign currency translation on cash and cash
equivalents
|
$ | 889 | $ | 63 | ||||
Net
cash flow
|
$ | (21,830 | ) | $ | 13,261 |
Operating
Activities:
Net cash
provided by operating activities was approximately $5.4 million for the
nine-month period ended September 30, 2010 compared to approximately $11.1
million of net cash provided by operating activities for the same period in
2009. The primary reasons for the decrease in cash provided by operating
activities for the nine months ended September 30, 2010 as compared to the same
period last year were: (1) other receivables, prepayments and deposits decreased
to approximately negative $8.5 million for the nine months ended September 30,
2010, as compared approximately $1.7 million for the same period last year and
(2) trade payables decreased to approximately negative $1.2 million for the nine
months ended September 30, 2010, as compared to approximately $9.0 million for
the same period last year.
51
Investing
Activities:
Our main
uses of cash for investing activities during the nine months ended September 30,
2010 were for the acquisition of property, plant and equipment and the
acquisition of Jinheng BVI.
Net cash
used in investing activities for the nine months ended September 30, 2010 was
approximately $47.2 million as compared to approximately $12.3 million in the
same period in 2009. The increase in the net cash used in investing activities
was mainly due to the approximately $40.9 million used in the acquisition of
Jinheng BVI.
Financing
Activities:
Our
financing activities include new bank loans, repayment of bank loans, settlement
of bills payable, and pledges of restricted cash for issuing bills
payable.
Net cash
provided by financing activities was approximately $19.1 million for the nine
months ended September 30, 2010 as compared to $14.4 million of net cash
provided by financing activities for same period in 2009. The increase in net
cash provided by financing activities were mainly due to: (1) the increase in
bills payable to approximately $42.3 million for the nine months ended September
30, 2010, as compared to approximately negative $1.4 million for the same period
of last year and (2) the increase in proceeds from secured borrowings to
approximately $88.1 million for the nine months ended September 30, 2010, as
compared to approximately $64.2 million for the same period last
year.
Our
debt-to-equity ratio was 58.2% as of September 30,
2010. We plan to maintain our debt-to-equity ratio below 60%, increase long-term
loans, and decrease short-term loans.
As of
September 30, 2010, the amount, maturity date and term of each of our bank loans
are as follows.
(All
amounts in millions of U.S. dollars)
|
Amounts
|
Maturity Date
|
Term
|
||||
Bank
of China*
|
$ | 4.5 |
November
26, 2010
|
1
year
|
|||
Bank
of China*
|
3.0 |
August
15, 2011
|
1
year
|
||||
Bank
of China*†
|
8.8 |
June
28, 2014
|
5
years
|
||||
Bank
of China*
|
1.5 |
May
23, 2011
|
1
year
|
||||
Bank
of China*
|
3.0 |
June
6, 2011
|
1
year
|
||||
Bank
of China*†
|
4.2 |
December
29, 2014
|
5
years
|
||||
Bank
of China*†
|
1.8 |
December
29, 2014
|
5
year
|
||||
Bank
of China*
|
0.6 |
October
21, 2010
|
3
months
|
||||
Bank
of China*
|
0.8 |
October
14, 2010
|
6
months
|
||||
Bank
of China*
|
1.5 |
October
18, 2010
|
6
months
|
||||
Bank
of China*
|
1.5 |
October
25, 2010
|
6
months
|
||||
Bank
of China*
|
0.8 |
December
10, 2010
|
6
months
|
||||
Bank
of China*
|
1.6 |
January
4, 2011
|
6
months
|
||||
Bank
of China*
|
1.6 |
February
14, 2011
|
6
months
|
||||
Bank
of China*†
|
1.3 |
October
8, 2014
|
5
year
|
||||
Bank
of China*†
|
1.7 |
November
18, 2012
|
2
year
|
||||
China
CITIC Bank*
|
3.0 |
October
21, 2010
|
1
year
|
||||
China
construction Bank*
|
2.7 |
Otocber
10,2010
|
1
year
|
||||
China
construction Bank*
|
1.5 |
January
31, 2011
|
1
year
|
||||
China
construction Bank*
|
6.0 |
April
12, 2011
|
1
year
|
||||
China
construction Bank*
|
2.5 |
September
28, 2011
|
1
year
|
||||
DEG
- Deutsche Investitions und
Entwicklungsgesellschaft
MBH **
|
8.3 |
October
15, 2013
|
7
years
|
||||
Bank
of Jinan *
|
4.5 |
May
28, 2011
|
1
year
|
||||
China
CITIC Bank*
|
0.9 |
June
11, 2011
|
1
year
|
||||
Huaxia
Bank*
|
3.0 |
June
28, 2011
|
1
year
|
||||
Huaxia
Bank*
|
3.0 |
August
1, 2011
|
1years
|
||||
SZD
Bank*
|
3.7 |
March
17, 2010
|
1
year
|
||||
Huaxia
Bank*
|
4.5 |
March
31, 2011
|
1
year
|
||||
Huaxia
Bank*
|
1.5 |
January
27, 2011
|
1
year
|
||||
Jinan
Changqing*
|
1.0 |
August
17, 2017
|
6
years
|
||||
Bank
of Jinzhou*
|
1.5 |
November
8, 2011
|
1
year
|
||||
Bank
of Jinzhou*
|
2.2 |
March
14, 2011
|
1
year
|
||||
Bank
of Jinzhou*
|
3.0 |
March
17, 2011
|
1
year
|
||||
Bank
of Jinzhou*
|
0.9 |
December
3, 2010
|
1
year
|
||||
Bank
of Jinzhou*
|
1.5 |
May
27, 2011
|
1
year
|
||||
Bank
of Jinzhou*
|
6.0 |
May
30, 2011
|
1
year
|
||||
Bank
of Jinzhou*
|
4.5 |
September
24, 2011
|
1
year
|
||||
Bank
of Jinzhou*
|
1.5 |
November
8, 2011
|
1
year
|
||||
Bank
of Jinzhou*
|
1.5 |
November
8, 2011
|
1
year
|
||||
Bank
of Jilin*
|
3.0 |
March
17, 2011
|
1
year
|
||||
China
Merchants Bank
|
1.5 |
February
3, 2011
|
1
year
|
||||
Shenyang
Electricity Co.,Ltd.
|
2.2 |
March
14, 2011
|
1
year
|
||||
Bank
of Communications*
|
25.8 |
December
10, 2011
|
1
year
|
||||
Total
|
139.3 |
* The
loans are denominated in RMB, we used the exchange rate of $1 = RMB6.7613
** The
loans are denominated in Euro, we used the exchange rate of 1 Euro = RMB9.1174 and repayment in
semi-annual installment.
†
Repayment in annual installment.
52
We repaid
several bank loans in the total amount of approximately $30.0 million in the third
quarter of 2010. We plan to replace these loans with new bank loans in
approximately the same aggregate amounts. We have established strategic
cooperation relationships with two major banks in China, each of which has
agreed to provide us with long-term loans in the total amount of no more than
50% of the total considerations for our acquisitions within the automobile
industry. We believe that our current available working capital, after receiving
the aggregate proceeds of the capital raising activities and bank loans
referenced above, should be adequate to sustain our operations at our current
levels through at least the next twelve months.
Obligations
under Material Contract
Below is a table setting forth our contractual obligations as of September
30, 2010:
(All
amounts in thousands of U.S. dollars)
|
Total
|
Less than
1 year
|
1-3 years
|
3-5 years
|
More than
5 years
|
|||||||||||||||
Long
term debt obligations
|
$ | 27,130 | $ | 6,251 | $ | 14,841 | $ | 5,340 | $ | 698 | ||||||||||
Capital
commitment
|
2,933 | 2,933 | - | - | - | |||||||||||||||
Operating
lease obligations
|
- | - | - | - | - | |||||||||||||||
Purchase
obligations
|
- | - | - | - | - | |||||||||||||||
Total
|
$ | 30,063 | $ | 9,184 | $ | 14,841 | $ | 5,340 | $ | 698 |
53
Critical Accounting
Policies
Our
discussion and analysis of our financial condition and results of operations is
based upon our condensed consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these condensed
consolidated financial statements requires us to make estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the related disclosure of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances. Our estimates form the
basis for our judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates.
An
accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimate that are reasonably
likely to occur, could materially impact the condensed consolidated financial
statements. We believe that our critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of the condensed
consolidated financial statements.
For a
discussion of our critical accounting policies and estimates, see “Critical
Accounting Policies and Estimates” included in our Annual Report on Form 10-K
for the year ended December 31, 2009 under the caption “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” We
have made no significant changes to our critical accounting estimates since
December 31, 2009.
Recently
issued accounting pronouncement
See Note
4, Summary of significant accounting policies, for a discussion of recently
issued accounting pronouncements applicable to us.
Off-Balance Sheet Arrangements
We do not
have any off-balance arrangements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Interest
Rate Risk
We are
exposed to interest rate risk primarily with respect to our short-term bank
loans and long-term bank loans. Although the interest rates, which are based on
the banks’ prime rates with respect to our short-term loans are fixed for the
terms of the loans, the terms are typically three to twelve months for
short-term bank loans and interest rates are subject to change upon
renewal. There were no material changes in interest rates for
short-term bank loans renewed during the three months ended September 30,
2010.
A
hypothetical 1.0% increase in the annual interest rates for all of our credit
facilities under which we had outstanding borrowings at September 30, 2010,
would decrease net income before provision for income taxes by approximately
$1.4 million for the twelve months ended September 30,
2010. Management monitors the banks’ prime rates in conjunction with
our cash requirements to determine the appropriate level of debt balances
relative to other sources of funds. We have not entered into any
hedging transactions in an effort to reduce our exposure to interest rate
risk.
Foreign
Exchange Risk
While our
reporting currency is the U.S. Dollar, all of our consolidated revenues and
consolidated costs and expenses are denominated in Renminbi. All of
our assets are denominated in RMB except for cash. As a result, we
are exposed to foreign exchange risk as our revenues and results of operations
may be affected by fluctuations in the exchange rate between U.S. Dollars and
RMB. If the RMB depreciates against the U.S. Dollar, the value of our
RMB revenues, earnings and assets as expressed in our U.S. Dollar financial
statements will decline. Assets and liabilities are translated at
exchange rates at the balance sheet dates and revenue and expenses are
translated at the average exchange rates and shareholders’ equity is translated
at historical exchange rates. Any resulting translation adjustments
are not included in determining net income but are included in determining other
comprehensive income, a component of shareholders’
equity.
54
The value
of the Renminbi against the U.S. dollar and other currencies is affected by,
among other things, changes in China’s political and economic conditions. Since
July 2005, the Renminbi has not been pegged to the U.S. dollar, but has been
permitted to fluctuate within a narrow and managed band with reference to a
portfolio of currencies. Additionally, the People’s Bank of China regularly
intervenes in the foreign exchange market to prevent significant short-term
fluctuations in the exchange rate, but the Renminbi may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long
term. Moreover, it is possible that in the future, PRC authorities
may lift restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market.
Inflation
Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results. Although we do not believe
that inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net revenues if the
selling prices of our products do not increase with these increased
costs.
ITEMS
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures. We maintain a system of disclosure controls and
procedures. The term “disclosure controls and procedures,” as defined by
regulations of the SEC, means controls and other procedures that are designed to
ensure that information required to be disclosed in the reports that we file or
submit to the SEC under the Exchange Act, is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file or submit to the SEC under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and our principal financial officer, or persons performing
similar functions, as appropriate to allow timely decisions to be made regarding
required disclosure. Each of Qingjie Zhao, our President and Chief Executive
Officer, and Meirong Yuan, our Chief Financial Officer, have evaluated the
design and operating effectiveness of our disclosure controls and procedures as
of September 30, 2010. Based upon their evaluation, these executive officers
have concluded that our disclosure controls and procedures are effective as of
September 30, 2010.
Changes in Internal Control over
Financial Reporting. There has been no change to our internal
control over financial reporting during the quarter ended September 30, 2010
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
55
PART
II
OTHER
INFORMATION
ITEM
1. LEGAL PROCEEDINGS
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have a material
adverse affect on our business, financial condition or operating
results.
ITEM
1A. RISK FACTORS
RISKS
RELATED TO OUR BUSINESS
The
global economic crisis could further impair the automotive industry thereby
limiting demand for our products and affecting the overall availability and cost
of external financing for our operations.
The
continuation or intensification of the recent global economic crisis and turmoil
in the global financial markets may adversely impact our business, the
businesses of our customers and our potential sources of capital financing. Our
automotive parts are primarily sold to automakers, engine manufacturers and auto
parts suppliers. The recent global economic crisis harmed most industries and
has been particularly detrimental to the automotive industry. Since virtually
all of our sales are made to auto industry participants, our sales and business
operations are dependent on the financial health of the automotive industry and
could suffer if our customers experience, or continue to experience, a downturn
in their business. In addition, the lack of availability of credit could lead to
a further weakening of the Chinese and global economies and make capital
financing of our operations more expensive or impossible altogether. Presently,
it is unclear whether and to what extent the economic stimulus measures and
other actions taken or contemplated by the Chinese government and other
governments throughout the world will mitigate the effects of the crisis on the
automotive industry and other industries that affect our business. These
conditions have not presently impaired our ability to access credit markets and
finance our operations. However, the impact of the current crisis on our ability
to obtain capital financing in the future, and the cost and terms of the
financing, is unclear. Furthermore, deteriorating economic conditions including
business layoffs, downsizing, industry slowdowns and other similar factors that
affect our customers could have further negative consequences for the automotive
industry and result in lower sales, price reductions in our products and
declining profit margins. The economic situation also could harm our current or
future lenders or customers, causing them to fail to meet their obligations to
us. No assurances can be given that the effects of the current crisis will not
damage on our business, financial condition and results of
operations.
A
contraction in automotive sales and production could have a material adverse
affect on our results of operations and liquidity and on the viability of our
supply base.
Automotive
sales and production are highly cyclical and depend, among other things, on
general economic conditions and consumer spending and preferences (which can be
affected by a number of issues including fuel costs and the availability of
consumer financing). As the volume of automotive production fluctuates, the
demand for our products also fluctuates. The global automotive sales and
production deteriorated substantially in the second half of 2008 and are not
expected to rebound significantly in the near term. While the China automotive
sales and production maintained modest growth momentum in 2008 and continued to
grow in 2009 and thus far in 2010, the growth rate was down from previous years.
A contraction in automotive sales and production could harm our results of
operations and liquidity. In addition, our suppliers would also be subject to
many of the same consequences which could pressure their results of operations
and liquidity. Depending on an individual supplier’s financial condition and
access to capital, its viability could be challenged which could impact its
ability to perform as we expect and consequently our ability to meet our own
commitments.
56
Escalating
pricing pressures from our customers may adversely affect our
business.
Pricing
pressure in the automotive supply industry has been substantial and is likely to
continue. Many vehicle manufacturers seek price reductions in both the initial
bidding process and during the term of the contract. Price reductions have
impacted our sales and profit margins and are expected to continue to do so in
the future. If we are not able to offset continued price reductions through
improved operating efficiencies and reduced expenditures, those price reductions
may have a material adverse effect on our results of operations.
If
we fail to accurately project market demand for our products, our business
expansion plan could be jeopardized and our financial condition and results of
operations will suffer.
If actual
customer orders are less than our projected market demand, we will likely suffer
overcapacity problems and may have to leave capacity idle, which may reduce our
overall profitability and hurt our financial condition and results of
operations. Even though our business increasingly has included more
international sales, we derive most of our sales revenue from sales of our
products in China. The continued development of our business depends, in large
part, on continued growth in the automotive industry, especially in China.
Although China’s automotive industry has grown rapidly in the past, it may not
continue to grow at the same growth rate or at all in the future. However, the
developments in our industry are, to a large extent, outside of our control and
any reduced demand for automotive parts products and services, any other
downturn or other adverse changes in China’s automotive industry could severely
harm our business.
Our
business is capital intensive and our growth strategy may require additional
capital which may not be available on favorable terms or at all.
We
believe that our current cash and cash flows from operations are sufficient to
meet our present and reasonably anticipated cash needs. We may, however, require
additional cash resources due to changed business conditions, implementation of
our strategy to expand our manufacturing capacity or other investments or
acquisitions we may decide to pursue. If our own financial resources are
insufficient to satisfy our capital requirements, we may seek to sell additional
equity or debt securities or obtain additional credit facilities. The sale of
additional equity securities could result in dilution to our stockholders. The
incurrence of indebtedness would result in increased debt service obligations
and could require us to agree to operating and financial covenants that would
restrict our operations. Given the current global economic crisis, financing may
not be available in amounts or on terms acceptable to us, if at all. Any failure
by us to raise additional funds on terms favorable to us, or at all, could limit
our ability to expand our business operations and could harm our overall
business prospects.
Due
to our rapid growth in recent years, our past results may not be indicative of
our future performance so evaluating our business and prospects may be
difficult.
Our
business has grown and evolved rapidly in recent years as demonstrated by our
growth in annual sales revenue from approximately $48.1 million in 2005 to
$211.0 million in 2009. We may not be able to achieve similar growth in future
periods, and our historical operating results may not provide a meaningful basis
for evaluating our business, financial performance and prospects. Moreover, our
ability to achieve satisfactory manufacturing results at higher volumes is
unproven. Therefore, you should not rely on our past results or our historical
rate of growth as an indication of our future performance.
We
face risks associated with future investments or acquisitions.
An
important element of our growth strategy is to invest in or acquire businesses
that will enable us, among other things, to expand the products we offer to our
existing target customer base, lower our costs for raw materials and components
and capitalize on opportunities to expand into new markets. We recently acquired
controlling interests in several complementary businesses, including Friend
Birch Limited and its subsidiaries and Jinheng BVI which we expect to contribute
to our future growth. In the future, we may be unable to identify other suitable
investment or acquisition candidates or may be unable to make these investments
or acquisitions on commercially reasonable terms, if at all.
If we
complete an investment or acquisition, we may not realize the anticipated
benefits from the transaction. Integrating an acquired business is distracting
and time consuming, as well as a potentially expensive process. We are currently
in the process of integrating our operations with the operations of recently
acquired companies. The successful integration of these companies and any other
acquired businesses require us to:
57
·
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integrate
and retain key management, sales, research and development, production and
other personnel;
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incorporate
the acquired products or capabilities into our offerings from an
engineering, sales and marketing
perspective;
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coordinate
research and development efforts;
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integrate
and support pre-existing supplier, distribution and customer
relationships; and
|
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consolidate
duplicate facilities and functions and combine back office accounting,
order processing and support
functions.
|
Acquisitions
involve a number of risks and present financial, managerial and operational
challenges, including:
·
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successfully
commercializing our strategic
investments;
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increased
expenses, including travel, legal, administrative and compensation
expenses resulting from newly hired
employees;
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increased
costs to integrate personnel, customer base and business practices of the
acquired company with our own;
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adverse
effects on our reported operating results due to possible write-down of
goodwill associated with
acquisitions;
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potential
disputes with sellers of acquired businesses, technologies, services,
products and potential liabilities;
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potential
liabilities as a result of assumption of liabilities of acquired
companies; and
|
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dilution
to our earnings per share if we issue common stock in any
acquisition.
|
Moreover,
geographic distance between business operations, the compatibility of the
technologies and operations being integrated and the disparate corporate
cultures being combined also present significant challenges. Acquired businesses
are likely to have different standards, controls, contracts, procedures and
policies, making it more difficult to implement and harmonize company-wide
financial, accounting, billing, information and other systems. Our focus on
integrating operations may also distract attention from our day-to-day business
and may disrupt key research and development, marketing or sales efforts.
Performance problems with an acquired business, technology, product or service
could also have a material adverse impact on our reputation as a whole. Any
acquired business, technology, product or service could significantly
under-perform relative to our expectations. In addition, although we have
conducted due diligence with respect to our recently acquired companies, there
may still be unidentified issues and hidden liabilities, which could have a
material adverse effect on our business, liquidity, financial condition and
results of operations. If we cannot overcome these challenges, we may not
realize actual benefits from past and future acquisitions, which will impair our
overall business results.
Our
acquisition strategy also depends on our ability to obtain necessary government
approvals. See “–Risks Related to Doing Business in China – We may be unable to
complete a business combination transaction efficiently or on favorable terms
due to complicated merger and acquisition regulations which became effective on
September 8, 2006.”
58
We
may not be able to realize the potential financial or strategic benefits of
strategic acquisitions or investments, which could hurt our ability to grow our
business and harm our financial condition.
As part
of our growth strategy, we will continue to explore and make strategic
investments in businesses that are complementary or additive to our core
business and product offerings. For instance, on September 10, 2010,
through our subsidiary Vital Glee, we acquired Jinheng BVI, which manufactures
airbag safety devices for automobiles. We expect to utilize Jinheng
BVI to further strengthen and broaden our research and development expertise,
expand customer base and improve value-added services. However, the success of
the acquisition depends on various factors over which we may have limited or no
control. Mergers and acquisitions and strategic investments are inherently
subject to significant risks. For instance, the commercial aspects and goals of
our acquisition may not materialize as desired or yield the commercial benefits
sought. Moreover, regardless of whether the commercial aspects and
goals of the acquisition prove to be positive, an acquisition of or a strategic
investment in another company comes with the typical investment risks, such as
the partial or total loss of investment in the worst case. Our
inability to pinpoint and make favorable strategic investments, from both a
commercial and investment perspective and our inability to effectively manage
the associated risks could materially and adversely affect our business,
financial condition and results of operations. In the case of Jinheng BVI, it
may decline in value and/or may not meet our desired objectives. If we do not
successfully manage the risks associated with this and other acquisitions and
strategic investments, our business, financial condition and results of
operations could be materially and adversely affected.
If
we fail to comply with covenants in our loan agreements, our lenders may allege
a breach of a covenant and seek to accelerate the loan or exercise other
remedies, which could strain our cash flow and harm our business, liquidity and
financial condition.
In
connection with loans made to us by several commercial lenders, we have entered
into loan agreements which impose upon us certain financial and operating
covenants. The financial covenants require us to satisfy certain financial
metrics and maintain financial ratios deemed appropriate by our lenders. The
operating covenants often require us to take certain actions, such as keeping
current on our debt payments, delivering reports to our lenders and so forth, or
refraining from taking actions without the lender’s consent or at all, such as
incurring additional debt, making capital expenditures, paying dividends or
distributions or acquiring other businesses or assets. Even though we strive to
comply with our covenants, we have failed in the past, and may fail in the
future, to do so and our lenders may notify us of such non-compliance and seek
to accelerate a loan or exercise other remedies. For instance, under our loan
agreement with DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbH,
or DEG, dated November 24, 2006, we agreed not to make certain acquisitions
without prior consent of DEG. For some of our recent acquisitions, we did not
obtain prior approval from DEG, but instead have subsequently informed DEG about
the acquisitions. We have not received from DEG any written notice of
non-compliance or breach as we believe our subsequent notices have remedied any
problems. However, we cannot assure you that DEG will not, in the future, send a
notice of breach to us and require acceleration of the loan, in which case we
currently believe we have adequate cash to meet the payment obligation. If, in
the future, we fail to comply with our loan agreement covenants, and we receive
a notice of non-compliance or default, we will attempt to cure any
non-compliance and/or negotiate appropriate waivers with our lenders. If we
cannot cure any non-compliance or obtain a waiver, our lenders may declare us to
be in default, which would give them the right to accelerate our outstanding
indebtedness. If any larger amount of our indebtedness is accelerated as a
result of a default, we may be forced to repay our loans earlier than expected,
which would have a material adverse effect on our business, liquidity and
financial condition.
Any
interruption in our production processes could impair our financial performance
and negatively affect our brand.
We
manufacture or assemble our products primarily at our facilities in Jinzhou and
Jinan, China. Our manufacturing operations are complicated and integrated,
involving the coordination of raw material and component sourcing from third
parties, internal production processes and external distribution processes.
While these operations are modified on a regular basis in an effort to improve
manufacturing and distribution efficiency and flexibility, we may experience
difficulties in coordinating the various aspects of our manufacturing processes,
thereby causing downtime and delays. We have also been steadily increasing our
production capacity and have limited experience operating at these higher
production volume levels. In addition, we may encounter interruption in our
manufacturing processes due to a catastrophic loss or events beyond our control,
such as fires, explosions, labor disturbances or violent weather conditions. Any
interruptions in our production or reduction in production capabilities at our
facilities could result in our inability to produce our products, which would
reduce our sales revenue and earnings for the affected period. If there is a
stoppage in production at any of our facilities, even if only temporary, or
delays in delivery times to our customers, our business and reputation could be
severely affected. Any significant delays in deliveries to our customers could
lead to increased returns or cancellations and cause us to lose future sales. We
currently do not have business interruption insurance to offset these potential
losses, delays and risks so a material interruption of our business operations
could severely damage our business.
59
Part
of our strategy involves the development of new products, and if we fail to
timely develop new products or we incorrectly gauge the potential market for new
products, our financial results will be adversely affected.
We plan
to utilize our in-house research and development capabilities to develop new
products that could become new sources of sales revenue for us in the future and
help us to diversify our revenue base. For example, we acquired the research and
development center owned by Friend Birch Limited which is focused on developing
new technology for rods and shafts. Our future research and development efforts
will continue to be focused on expanding our product offerings beyond our
current products into other similar products and components for different
applications, such as hub motors for electric bicycles and electric vehicles. If
we fail to timely develop new products or if we miscalculate market demand for
new products that we develop, we may not be able to grow our sales revenue at
expected growth rates and may incur expenses relating to the development of new
products that are not offset by sufficient sales revenue generated by these new
products.
Exporting
our products outside of China is an important component of our overall growth
strategy, which could subject us to various economic, political, regulatory,
legal and foreign exchange risks.
We
currently sell most of our products in China. Our overseas sales accounted for
9.6%, 16.2% and 10.7% of our total sales revenue in 2007, 2008 and 2009,
respectively. We plan to selectively enter international markets in which an
opportunity to sell our products has been identified. The marketing,
distribution and sale of our products overseas expose us to a number of risks,
including:
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fluctuations
in currency exchange rates;
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difficulty
in designing products that are compatible with product standards in
foreign countries;
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greater
difficulty in accounts receivable
collection;
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increased
marketing and sales costs;
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difficulty
and costs of compliance with foreign regulatory requirements and different
commercial and legal requirements;
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an
inability to obtain, maintain or enforce intellectual property rights in
foreign countries;
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changes
to import and export regulations, including quotas, tariffs and other
trade barriers, delays or difficulties in obtaining export and import
licenses, repatriation controls on foreign earnings and currency
conversion restrictions; and
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difficulty
in engaging and retaining distributors and agents who are knowledgeable
about, and can function effectively in, overseas
markets.
|
If we
cannot effectively manage these risks, our ability to conduct or expand our
business abroad would be impaired, which may in turn hamper our business,
financial condition and prospects.
If
we cannot keep pace with market changes and produce automotive parts with new
technologies in a timely and cost-efficient manner to meet our customers’
requirements and preferences, the growth and success of our business will be
hindered.
The
automotive parts market in China is characterized by increasing demand for new
and advanced technologies, evolving industry standards, intense competition and
wide fluctuations in product supply and demand. If we cannot keep pace with
market changes and produce automotive parts incorporating new technologies in a
timely and cost-efficient manner to meet our customers’ requirements and
preferences, the growth and success of our business will
suffer.
60
From time
to time, new products, product enhancements or technologies may replace or
shorten the life cycles of our products or cause our customers to defer
purchases of our existing products. Shorter product life cycles may require us
to invest more in developing and designing new products and to introduce new
products more rapidly, which may increase our costs of product development and
decrease our profitability. In addition, we may not be able to make such
additional investments and any additional investments we make in new product
development and introductions may not be successful.
Even if
we develop and introduce new products, their market acceptance is not assured
and depends on:
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the
perceived advantages of our new products over existing competing
products;
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our
ability to attract vehicle manufacturers who are currently using our
competitors’ products;
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product
cost relative to performance; and
|
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the
level of customer service available to support new
products.
|
Therefore,
commercial acceptance by customers of our products may not occur at our expected
rate or level, and we may not be able to successfully adapt existing products to
effectively and economically meet customer demand, thus impairing the return
from our investments. We may also be required under applicable accounting
standards to recognize a charge for the impairment of assets to the extent our
existing products become uncompetitive or obsolete or if any new products fail
to achieve commercial acceptance. Any such charge may jeopardize our ability to
operate profitably.
Failure
to adequately protect our intellectual property rights may undermine our
competitive position, and litigation to protect our intellectual property rights
may be costly.
We strive
to strengthen and differentiate our product portfolio by developing new and
innovative products and product improvements. As a result, we believe that the
protection of our intellectual property will become increasingly important to
our business. Implementation and enforcement of intellectual property-related
laws in China has historically been lacking due primarily to ambiguities in PRC
intellectual property law. Accordingly, protection of intellectual property and
proprietary rights in China may not be as effective as in the United States or
other countries. Currently, we hold 64 PRC patents that relate to various
product configurations and product components. We will continue to rely on a
combination of patents, trade secrets, trademarks and copyrights to provide
protection in this regard, but this protection may be inadequate. For example,
our pending or future patent applications may not be approved or, if allowed,
they may not be of sufficient strength or scope. As a result, third parties may
use the technologies and proprietary processes that we have developed and
compete with us, which could negatively affect any competitive advantage we
enjoy, dilute our brand and harm our operating results.
In
addition, policing the unauthorized use of our proprietary technology can be
difficult and expensive. Litigation may be necessary to enforce our intellectual
property rights and given the relative unpredictability of China’s legal system
and potential difficulties enforcing a court judgment in China, there is no
guarantee litigation would result in an outcome favorable to us. Furthermore,
any such litigation may be costly and may divert management attention away from
our core business. An adverse determination in any lawsuit involving our
intellectual property is likely to jeopardize our business prospects and
reputation. We have no insurance coverage against litigation costs so we would
be forced to bear all litigation costs if we cannot recover them from other
parties. All of the foregoing factors could harm our business and financial
condition.
We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely against us, could disrupt our business and
subject us to significant liability to third parties.
Our
success largely depends on our ability to use and develop our technology,
know-how and product designs without infringing upon the intellectual property
rights of third parties. We may be subject to litigation involving claims of
patent infringement or violation of other intellectual property rights of third
parties. The holders of patents and other intellectual property rights
potentially relevant to our product offerings may be unknown to us or may
otherwise make it difficult for us to acquire a license on commercially
acceptable terms.
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We have
not registered and do not own the logo . Wonder
Auto Group Limited, a Hong Kong company controlled by Mr. Qingjie Zhao, our
chairman, chief executive officer and president that is now dormant, has
registered the “” trademark in Hong Kong.
Jinzhou Wonder Auto Suspension System Co., Ltd. has registered the trademarks
“” and “” in
China. We have not been able to register the logo in China because it is similar to the trademarks registered
by Jinzhou Wonder Auto Suspension System Co., Ltd. An independent third party
entity has registered the “Jinzhou Halla” trademark in China. We currently do
not sell any products or services using the marks similar to the trademarks
registered by Jinzhou Wonder Auto Suspension System Co., Ltd. or the “Jinzhou
Halla” trademarks. We have entered into an agreement with Jinzhou Wonder Auto
Suspension System Co., Ltd. Under this agreement, Jinzhou Wonder Auto Suspension
System Co., Ltd. has agreed not to bring any legal action against us for using
the mark “” in China. However, we cannot assure
you that no action will be brought against us based on our use of “”.
There may
also be technologies licensed to and relied on by us that are subject to
infringement or other corresponding allegations or claims by others which could
damage our ability to rely on such technologies. In addition, although we
endeavor to ensure that companies that work with us possess appropriate
intellectual property rights or licenses, we cannot fully avoid the risks of
intellectual property rights infringement created by suppliers of components
used in our products or by companies with which we work in cooperative research
and development activities.
Our
current or potential competitors, many of which have substantial resources and
have made substantial investments in competing technologies, may have obtained
or may obtain patents that will prevent, limit or interfere with our ability to
make, use or sell our products in China or other countries. The defense of
intellectual property claims, including patent infringement suits, and related
legal and administrative proceedings can be both costly and time consuming, and
may significantly divert the efforts and resources of our technical and
management personnel. Furthermore, an adverse determination in any such
litigation or proceeding to which we may become a party could cause us
to:
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pay
damage awards;
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seek
licenses from third parties;
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pay
additional ongoing royalties, which could decrease our profit
margins;
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redesign
our products; or
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be
restricted by injunctions.
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These
factors could effectively prevent us from pursuing some or all of our business
objectives and result in our customers or potential customers deferring,
canceling or limiting their purchase or use of our products, which could have a
material adverse effect on our financial condition and results of
operations.
We
rely on certain technologies licensed to us from third parties and the loss of
these licenses or failure to renew such licenses on a timely basis could
interrupt our production and have a material adverse impact on our
business.
We rely
on certain technologies licensed to us from third parties for manufacturing our
products. Through our licensing arrangements, we are able to integrate third
party technologies into our products. We can also produce and sell products that
are more suitable for specific types of vehicles utilizing these licensed
technologies. If certain licenses are terminated, or not timely renewed, the
production of our products using the licensed technologies would be disrupted
and our business and financial condition could be damaged. If any of our
licensors is alleged to have infringed on any other party’s proprietary right,
we may be prevented from using the technology in question, thus disrupting our
production.
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We
may be subject to contractual obligations that limit our ability to sell our
automotive parts in certain markets.
When we
enter into commercial arrangements, we strive to negotiate the most favorable
contractual provisions for our company with respect to both pricing and other
terms. In some commercial arrangements, we have negotiated exclusivity,
preferred vendor and non-competition arrangements that are favorable to our
company. In other instances, counterparties to some of our commercial
arrangements have imposed such provisions upon us. For instance, in one of our
commercial arrangements, we are restricted from selling certain products using
intellectual property licensed from the other party to some foreign companies,
joint ventures with foreign companies and companies in countries where the
licensor has business. While we believe that our commercial arrangements, when
considered in their entirety, are favorable to our business, certain commercial
arrangements may restrict our ability to freely sell our products on terms
favorable to us or at all, which could have a negative impact on our sales
revenue and our ability to grow and expand our business.
If
we fail to maintain or improve our market position or respond successfully to
changes in the competitive landscape, our business and results of operations
will suffer.
Our
competition includes a number of global and PRC-based manufacturers and
distributors that produce and sell products similar to ours. We compete
primarily on the basis of quality, technological innovation and price. Our main
competitors include Shanghai Valeo Automotive Electrical Systems Co., Ltd., a
joint venture of Shanghai Auto Industrial Group and Valeo Group, Hubei Shendian
Auto Motor Co., Ltd., a joint venture of Hubei Shendian Auto Electrical
Equipment Co., Ltd., Zhongqi Changdian Co., Ltd. and Remy International, Inc.,
Bosch Group, Mitsubishi Motors Corporation and Denso Corporation. Many of our
competitors have longer operating histories, greater name recognition, larger
global market share, access to larger customer bases and significantly greater
economies of scale, as well as greater financial, sales and marketing,
manufacturing, distribution, technical and other resources than we do. As a
result of these competitive pressures and expected increases in competition, we
may price our products lower than our competitors in order to maintain market
share. Any lower pricing may negatively affect our profit margins. If we fail to
maintain or improve our market position and respond successfully to changes in
the competitive landscape, our business and results of operations may
suffer.
A
large percentage of our sales revenue is derived from sales to a limited number
of customers, and our business will suffer if sales to these customers
decline.
A
significant portion of our sales revenue historically has been derived from a
limited number of customers. Our top five customers accounted for approximately
35.6% of our sales in 2008 and 37.8% in 2009. Any significant reduction in
demand for vehicles manufactured by any of these major customers and any
decrease in their demand for our products could harm our sales and business
operations. The loss of one or more of these customers could damage our
business, financial condition and results of operations.
If
we cannot obtain sufficient raw materials and components at a reasonable cost,
our ability to produce and market our products, and thus our business, could
suffer.
We
purchase raw materials and component parts for our products from various
suppliers located primarily in Asia, most of which are located in China and a
few of which are located in South Korea. The raw materials we use to produce our
starters and alternators fall into four general categories: metal parts,
semiconductors, chemicals, and packaging materials. The main raw materials we
use to produce our rods, shafts, engine valves and tappets are iron and steel
rods. The majority of our raw materials and components are purchased from
suppliers in China, including Jiangsu Senyuan Special Steel Co., Ltd., Yingkou
Die-Casting Products Co., Ltd., Tianjin Jingda Rea Special Enameled Wire Co.
Ltd., Zhejiang Huanfang Auto Electrical Appliance Co. Ltd., and Zhejiang Yuhuan
Solenoid Co., Ltd. Purchases from our top five raw materials and component parts
suppliers accounted for approximately 32% of our total purchases in 2009. We may
experience a shortage in the supply of certain raw materials and components in
the future, and if any such shortage occurs, our manufacturing capabilities and
operating results could be negatively affected. If any supplier is unwilling or
unable to provide us with high-quality raw materials and components in required
quantities and at acceptable costs, we may not be able to find alternative
sources on satisfactory terms in a timely manner, or at all. In addition, some
of our suppliers may fail to meet qualifications and standards required by our
customers now or in the future, which could impact our ability to source raw
materials and components. Our inability to find or develop alternative supply
sources could result in delays or reductions in manufacturing and product
shipments. Moreover, these suppliers may delay shipments or supply us with
inferior quality raw materials and components that may adversely impact the
performance of our products. The prices of raw materials and components needed
for our products could also increase, and we may not be able to pass these price
increases on to our customers. If any of these events occur, our competitive
position, reputation and business could suffer.
63
If
our customers and/or the ultimate consumers of the vehicles that use our
products successfully assert product liability claims against us due to defects
in our products, our operating results may suffer and our reputation may be
harmed.
Our
products are used primarily in low emission passenger vehicles. Significant
property damage, personal injuries and even death can result from malfunctioning
vehicles. If our products are not properly designed, built or installed or if
people are injured because of our products, we could be subject to claims for
damages based on theories of product liability and other legal theories. The
costs and resources to defend such claims could be substantial and, if such
claims are successful, we could be responsible for paying some or all of the
damages. We have maintained product liability insurance only for products
manufactured by Jinzhou Wanyou, which are sold in the United States and Canada.
Negative publicity from such claims may also damage our reputation, regardless
of whether such claims are successful. Any of these consequences resulting from
defects in our products would hurt our operating results and, in turn, the value
of our common stock.
Our
products may become subject to recall in the event of defects or other
performance related issues.
Like many
other participants in the automotive industry, we are at risk for product recall
costs which are costs incurred when, either voluntarily or involuntarily, a
product is recalled through a formal campaign to solicit the return of specific
products due to a known or suspected performance defect. Costs typically include
the cost of the product, part or component being replaced, the cost of the
recall borne by our customers and labor to remove and replace the defective part
or component. Our products have not been the subject of an open recall. If a
recall decision is made, we will need to estimate the cost of the recall and
record a charge to earnings in that period. In making this estimate, judgment is
required as to the quantity or volume to be recalled, the total cost of the
recall campaign, the ultimate negotiated sharing of the cost between us and the
customer and, in some cases, the extent to which the supplier of the part or
component will share in the recall cost. As a result, these estimates are
subject to change. Excessive recall costs or our failure to adequately estimate
these costs may negatively affect our operating results.
We
depend heavily on key personnel, and loss 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 Qingjie Zhao, our chairman, chief executive officer and president,
Meirong Yuan, our director, chief financial officer and treasurer, Yuncong Ma,
our chief operating officer, Qingdong Zeng, our Chief Strategy Officer and
director, Seuk Jun Kim, our vice president of new product development, Yuguo
Zhao, our vice president of sales and marketing and Yongdong Liu, our vice
president of production. 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. Turnover in our senior management could significantly deplete
institutional knowledge held by our existing senior management team and impair
our operations.
In
addition, if any of these key personnel joins a competitor or forms a competing
company, we may lose some of our customers. We have entered into confidentiality
and non-competition agreements with all of these key personnel. However, if any
disputes arise between these key personnel and us, it is not clear, in light of
uncertainties associated with the PRC legal system, what the court decisions
will be and the extent to which these court decisions could be enforced in
China, where all of these key personnel reside and hold some of their assets.
See “– Risks Related to Doing Business in China – Uncertainties with respect to
the PRC legal system could limit the legal protections available to you and
us.”
Certain of our existing stockholders
have substantial influence over our company, and their interests may not be
aligned with the interests of our other
stockholders.
64
Mr.
Qingjie Zhao, our chairman, chief executive officer and president, beneficially
owns approximately 19.4% of our common stock. As a result, he has significant
influence over our business, including decisions regarding mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors and other significant corporate actions. This concentration of
ownership may also have the effect of discouraging, delaying or preventing a
future change of control, which could deprive our stockholders of an opportunity
to receive a premium for their shares as part of a sale of our company and might
reduce the price of our shares.
Mr.
Qingjie Zhao’s association with other businesses could impede his ability to
devote ample time to our business and could pose conflicts of
interest.
Mr.
Qingjie Zhao, our chairman, chief executive officer and president, owns 10.4% of
China Wonder Limited, a company listed on the Alternative Investment Market of
the London Stock Exchange, which is principally engaged in the manufacture and
sale of specialty packaging machinery to the PRC pharmaceutical market. He also
serves as an executive director of Jinheng Holdings, a company listed on the
Hong Kong Stock Exchange in which we had a 20.02% indirect ownership and from
which our subsidiary, Vital Glee, purchased Jinheng BVI. In addition, Mr. Zhao
serves as the chairman of Jinzhou Wonder Alternative Energy Automobile
Technology Co., Ltd., which is principally engaged in the research and
manufacture of electrical vehicles, Jinzhou Qingjie Electrical Power Technology
Co., Ltd., which has no current operations but will engage in the battery
business, and Jinzhou Wonder Packing Machinery Co., Ltd., which is principally
engaged in pharmaceutical packaging. Mr. Zhao devotes most of his business time
to our affairs and the remainder of his business time to the affairs of other
companies. Mr. Zhao’s decision-making responsibilities for these companies are
similar in the areas of public relations, management of human resources, risk
management and strategic planning. Also, we may enter into agreement with these
parties to sell or buy goods and services to or from them. As a result,
conflicts of interest may arise from time to time. We will attempt to resolve
any such conflicts of interest in our favor. Additionally, even though Mr. Zhao
is accountable to us and our stockholders as a fiduciary, which requires that he
exercise good faith and due care in handling our affairs, his existing
responsibilities to other entities may limit the amount of time he can spend on
our affairs.
Problems
with product quality or product performance could result in a decrease in
customers and revenue, unexpected expenses and loss of market
share.
Our
operating results depend, in part, on our ability to deliver quality products on
a timely and cost-effective basis. As our products become more advanced, it may
become more difficult to maintain our quality standards. If we experience
deterioration in the performance or quality of any of our products, it could
result in delays in shipments, cancellations of orders or customer returns and
complaints, loss of goodwill and harm to our brand and reputation. Furthermore,
our products are used together with components and in motor vehicles that have
been developed and maintained by third parties, and when a problem occurs, it
may be difficult to identify the source of the problem. In addition, some
automobile parts and components may not be fully compatible with our products
and may not meet our or our customers’ quality, safety, security or other
standards. The use by customers of our products with incompatible or otherwise
substandard components is largely outside of our control and could result in
malfunctions or defects in our products and result in harm to our brand. These
problems may lead to a decrease in customers and revenue, harm to our brand,
unexpected expenses, loss of market share, the incurrence of significant
warranty and repair costs, diversion of the attention of our engineering
personnel from our product development efforts, customer relation problems or
loss of customers, any one of which could materially adversely affect our
business.
Environmental
claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may harm our results of
operations.
We are
subject to environmental, health and safety laws and regulations that affect our
operations, facilities and products in each of the jurisdictions in which we
operate. Some of our newly incorporated Chinese subsidies have not obtained
pollutant discharge permits required by Chinese laws. Other than the foregoing,
we believe that we are in material compliance with all material environmental,
health and safety laws and regulations related to our products, operations and
business activities. Although we have not suffered material environmental claims
in the past, the failure to comply with any present or future regulations could
result in the assessment of damages or imposition of fines against us,
suspension of production, cessation of our operations or even criminal
sanctions. New regulations could also require us to acquire costly equipment or
to incur other significant expenses. Our failure to control the use of, or
adequately restrict the discharge of, hazardous substances could subject us to
potentially significant monetary damages and fines or suspension of our business
operations, which could cause damage to our business.
65
We
have limited insurance coverage and do not carry any business interruption
insurance, third-party liability insurance for our manufacturing facilities or
insurance that covers the risk of loss of our products in shipment.
Operation
of our facilities involves many risks, including equipment failures, natural
disasters, industrial accidents, power outages, labor disturbances and other
business interruptions. Furthermore, if any of our products are faulty, then we
may become subject to product liability claims or we may have to engage in a
product recall. We do not carry any business interruption insurance, product
recall or third-party liability insurance for our manufacturing facilities or
with respect to our products to cover claims pertaining to personal injury or
property or environmental damage arising from defaults with our products,
product recalls, accidents on our property or damage relating to our operations.
We have obtained product liability insurance only for products manufactured by
Jinzhou Wanyou which are sold to customers in the United States and Canada.
Therefore, our existing insurance coverage may not be sufficient to cover all
risks associated with our business. As a result, we may be required to pay for
financial and other losses, damages and liabilities, including those caused by
natural disasters and other events beyond our control, out of our own funds,
which could have a material adverse effect on our business, financial condition
and results of operations.
Furthermore,
under the shipping terms of some of our customer contracts, we bear the risk of
loss in shipment of our products. We do not insure this risk. While we believe
that the shipping companies that we use carry adequate insurance or are
sufficiently solvent to cover any loss in shipment, but there can be no
assurance that we will be adequately reimbursed upon the loss of a significant
shipment of our products.
Our
holding company structure may hinder the payment of dividends.
Wonder
Auto Technology, Inc. has no direct business operations, other than its
ownership of our subsidiaries. While we have no current intention of paying
dividends, should we decide in the future to do so, as a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiaries and other holdings
and investments. In addition, our operating subsidiaries, from time to time, may
be subject to restrictions on their ability to make distributions to us due to
restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory
restrictions 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.
PRC
regulations currently permit the payment of dividends only out of accumulated
profits as determined in accordance with PRC accounting standards and
regulations. Our subsidiaries in China are also required to set aside a portion
of their after tax profits according to PRC accounting standards and regulations
to fund certain reserve funds. Currently, our subsidiaries in China are the only
sources of sales revenue or investment holdings for the payment of dividends. If
they do not accumulate sufficient profits under PRC accounting standards and
regulations to first fund certain reserve funds as required by PRC accounting
standards, we will be unable to pay any dividends.
China
passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing
rules, both of which became effective on January 1, 2008, which provide that
dividends sourced from China payable to “non-resident enterprises” shall be
subject to Chinese enterprise income tax at a rate of 10%. Such dividend tax
rate may be reduced by applicable tax treaties or arrangements.
Under the
New EIT Law and its implementation rules, dividend payments between qualified
Chinese resident enterprises are exempted from enterprise income tax. However,
due to the short history of the New EIT Law, it remains unclear as to the
detailed qualification requirements for such exemption and whether dividend
payments from our Chinese subsidiaries to us will be exempted from enterprise
income tax if we are considered as a Chinese resident enterprise for tax
purposes.
66
RISKS
RELATED TO DOING BUSINESS IN CHINA
Adverse
changes in political and economic policies of the PRC government could impede
the overall economic growth of China, which could reduce the demand for our
products and damage our business.
We
conduct substantially all of our operations and generate most of our revenue in
China. Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The PRC economy differs from the economies of most
developed countries in many respects, including:
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the
higher level of government
involvement;
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the
early stage of development of the market-oriented sector of the
economy;
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the
rapid growth rate;
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the
higher level of control over foreign exchange;
and
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the
allocation of resources.
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As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us.
Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.
Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
automotive investments and expenditures in China, which in turn could lead to a
reduction in demand for our products and consequently have a material adverse
effect on our business and prospects.
Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
We
conduct substantially all of our business through our operating subsidiaries in
China. Our operating subsidiaries are generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable
to foreign-invested enterprises. The PRC legal system is based on written
statutes, and prior court decisions may be cited for reference, but have limited
precedential value. Since 1979, a series of new PRC laws and regulations have
significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In addition, all of
our executive officers and all but one of our directors are residents of China
and not of the United States, and substantially all the assets of these persons
are located outside the United States. As a result, it could be difficult for
investors to effect service of process in the United States or to enforce a
judgment obtained in the United States against our Chinese officers, directors
and subsidiaries.
The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.
The PRC
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
policies, 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.
67
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Restrictions
on currency exchange may limit our ability to receive and use our sales revenue
effectively.
Most of
our sales revenue and expenses are denominated in Renminbi. Under PRC law, the
Renminbi is currently convertible under the “current account,” which includes
dividends and trade and service-related foreign exchange transactions, but not
under the “capital account,” which includes foreign direct investment and loans.
Currently, our PRC operating subsidiaries may purchase foreign currencies for
settlement of current account transactions, including payments of dividends to
us, without the approval of the State Administration of Foreign Exchange, or
SAFE, by complying with certain procedural requirements. However, the relevant
PRC government authorities may limit or eliminate our ability to purchase
foreign currencies in the future. Since a significant amount of our future
revenue will be denominated in Renminbi, any existing and future restrictions on
currency exchange may limit our ability to utilize revenue generated in Renminbi
to fund our business activities outside China that are denominated in foreign
currencies.
Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including SAFE.
In particular, if our PRC operating subsidiaries borrow foreign currency through
loans from us or foreign lenders, these loans must be registered with SAFE, and
if we finance the subsidiaries by means of additional capital contributions,
these capital contributions must be approved by certain government authorities,
including the Ministry of Commerce, or their respective local counterparts.
These limitations could affect our PRC operating subsidiaries’ ability to obtain
foreign exchange through debt or equity financing.
Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.
The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and the Renminbi and between those currencies and other
currencies in which our sales may be denominated. Because substantially all of
our earnings and cash assets are denominated in Renminbi and our financial
results are reported in U.S. dollars, fluctuations in the exchange rate between
the U.S. dollar and the Renminbi will affect our balance sheet and our earnings
per share in U.S. dollars. In addition, appreciation or depreciation in the
value of the Renminbi relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying
change in our business or results of operations. Fluctuations in the exchange
rate will also affect the relative value of any dividend we issue that will be
exchanged into U.S. dollars and earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.
Since
July 2005, the Renminbi has no longer been pegged to the U.S. dollar, but is
permitted to fluctuate within a narrow and managed band with reference to a
portfolio of currencies. Additionally, the People’s Bank of China regularly
intervenes in the foreign exchange market to prevent significant short-term
fluctuations in the exchange rate, but the Renminbi may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term.
Moreover, it is possible that in the future the PRC authorities may lift
restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign
currencies.
Currently,
some of our raw materials, components and major equipment are imported. In the
event that the U.S. dollars appreciate against Renminbi, our costs will
increase. If we cannot pass the resulting cost increases on to our customers,
our profitability and operating results will suffer. In addition, since our
sales to international customers are growing, we are increasingly subject to the
risk of foreign currency depreciation.
68
Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident stockholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries' ability to
distribute profits to us or otherwise materially adversely affect
us.
In
October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire “control” over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC resident's funds used to establish or acquire the offshore entity; (3)
covering the use of existing offshore entities for offshore financings; (4)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (5) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under Circular 75 are
required in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations, and
Notice 106 makes the offshore SPV jointly responsible for these filings. In the
case of an SPV which was established, and which acquired a related domestic
company or assets, before the implementation date of Circular 75, a retroactive
SAFE registration was required to have been completed before March 31, 2006;
this date was subsequently extended indefinitely by Notice 106, which also
required that the registrant establish that all foreign exchange transactions
undertaken by the SPV and its affiliates were in compliance with applicable laws
and regulations. Failure to comply with the requirements of Circular 75, as
applied by SAFE in accordance with Notice 106, may result in fines and other
penalties under PRC laws for evasion of applicable foreign exchange
restrictions. Any such failure could also result in the SPV's affiliates being
impeded or prevented from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.
We
recently acquired Yearcity Limited and its subsidiary Jinan Worldwide, as well
as Fuxin Huirui and have not registered these companies with the relevant branch
of SAFE, as currently required. We plan to make the proper registration in the
next few months. We have asked our stockholders who are PRC residents
as defined in Circular 75 to register with the relevant branch of SAFE, as
currently required, in connection with their equity interests in us and our
acquisitions of equity interests in our PRC subsidiaries. However, we cannot
provide any assurances that they can obtain the above SAFE registrations
required by Circular 75 and Notice 106. Moreover, because of uncertainty over
how Circular 75 will be interpreted and implemented, and how or whether SAFE
will apply it to us, we cannot predict how it will affect our business
operations or future strategies. For example, our present and prospective PRC
subsidiaries’ ability to conduct foreign exchange activities, such as the
remittance of dividends and foreign currency-denominated borrowings, may be
subject to compliance with Circular 75 and Notice 106 by our PRC resident
beneficial holders.
In
addition, such PRC residents may not always be able to complete the necessary
registration procedures required by Circular 75 and Notice 106. We also have
little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident stockholders to comply
with Circular 75 and Notice 106, if SAFE requires it, could subject these PRC
resident beneficial holders to fines or legal sanctions, restrict our overseas
or cross-border investment activities, limit our subsidiaries' ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.
We
may be unable to complete a business combination transaction efficiently or on
favorable terms due to complicated merger and acquisition regulations which
became effective on September 8, 2006.
69
On August
8, 2006, six Chinese regulatory agencies promulgated the Regulation on Mergers
and Acquisitions of Domestic Companies by Foreign Investors, which became
effective on September 8, 2006, or the M&A Regulations. The M&A
Regulations, among other things, govern the approval process by which a Chinese
company may participate in an acquisition of assets or equity interests.
Depending on the structure of the transaction, the regulations will require the
Chinese parties to make a series of applications and supplemental applications
to government agencies. In some instances, the application process may require
the presentation of economic data concerning a transaction, including appraisals
of the target business and evaluations of the acquirer, which are designed to
allow the government to assess the transaction. Government approvals will have
expiration dates by which a transaction must be completed and reported to the
government agencies. Compliance with the regulations is likely to be more time
consuming and expensive than in the past and the government can now exert more
control over the combination of two businesses. Accordingly, due to the M&A
Regulations, our ability to engage in business combination transactions has
become significantly more complicated, time consuming and expensive, and we may
not be able to negotiate a transaction that is acceptable to our stockholders or
sufficiently protect their interests in a transaction.
The
M&A Regulations allow Chinese government agencies to assess the economic
terms of a business combination transaction. Parties to a business combination
transaction may have to submit to the Ministry of Commerce and other relevant
government agencies an appraisal report, an evaluation report and the
acquisition agreement, all of which form part of the application for approval,
depending on the structure of the transaction. The regulations also prohibit a
transaction at an acquisition price obviously lower than the appraised value of
the PRC business or assets and in certain transaction structures, require that
consideration must be paid within defined periods, generally not in excess of a
year. The regulations also limit our ability to negotiate various terms of an
acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited.
Therefore, the M&A Regulations may impede our ability to negotiate and
complete a business combination transaction on financial terms that satisfy our
investors and protect our stockholders’ economic interests.
In
addition to the above risks, in many instances, we will seek to structure
transactions in a manner that avoids the need to make applications or a series
of applications with Chinese regulatory authorities under the M&A
Regulations. If we fail to effectively structure an acquisition in a manner that
avoids the need for such applications or if the Chinese government interprets
the requirements of the M&A Regulations in a manner different from our
understanding of such regulations, then acquisitions that we have effected may
be unwound or subject to rescission. Also, if the Chinese government determines
that the structure of any of our acquisitions does not comply with these
regulations, then we may also be subject to fines and penalties.
Failure
to comply with Chinese regulations regarding the registration requirements for
employee stock ownership plans or share option plans may subject the PRC plan
participants or us to fines and other legal or administrative
sanctions.
In
December 2006, the People’s Bank of China promulgated the Administrative
Measures for Individual Foreign Exchange, which set forth the respective
requirements for foreign exchange transactions by Chinese individuals under
either the current account or the capital account. In January 2007, SAFE issued
the Implementation Rules of the Administrative Measures for Individual Foreign
Exchange, which, among other things, specified approval requirements for certain
capital account transactions such as a Chinese citizen’s participation in the
employee stock ownership plans or stock option plans of an overseas
publicly-listed company. On March 28, 2007, SAFE promulgated the Processing
Guidance on Foreign Exchange Administration for Domestic Individuals
Participating in Employee Stock Holding Plans or Stock Option Plans of
Overseas-Listed Companies. Under this rule, PRC citizens who are granted stock
options by an overseas publicly-listed company are required, through a qualified
PRC domestic agent or PRC subsidiary of such overseas publicly-listed company,
to register with SAFE and complete certain other procedures. We and our Chinese
employees who receive stock option grants will be subject to this rule. Our
board of directors has adopted the Wonder Auto Technology, Inc. 2008 Equity
Incentive Plan. If we or the Chinese optionees fail to comply with these
regulations, we or these optionees may be subject to fines and other legal or
administrative sanctions.
PRC
regulation of loans and direct investment by offshore holding companies to PRC
entities may delay or prevent us from making loans or additional capital
contributions to our PRC operating subsidiaries.
70
As an
offshore holding company of our PRC operating subsidiaries, we may make loans to
our PRC subsidiaries. Any loans to our PRC subsidiaries are subject to approval
by relevant governmental authorities in China and other requirements under
relevant PRC regulations.
We may
also decide to finance our PRC subsidiaries by means of capital contributions.
According to the relevant PRC regulations on foreign-invested enterprises in
China, depending on the amount of total investment and the type of business in
which a foreign-invested enterprise is engaged, capital contributions to
foreign-invested enterprises in China are subject to approval by the Ministry of
Commerce or its local branches. We may not obtain these government approvals on
a timely basis, if at all, with respect to future capital contributions by us to
our PRC subsidiaries. If we fail to receive such approvals, our ability to
capitalize our PRC operations may be negatively affected, which could materially
and adversely affect our liquidity and our ability to fund and expand our
business.
Under
the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC stockholders.
On March
16, 2007, the National People’s Congress of China passed the New EIT Law, and on
November 28, 2007, the State Council of China passed the New EIT Law
Implementing Rules which took effect on January 1, 2008. Under the New EIT Law,
an enterprise established outside of China with “de facto management bodies”
within China is considered a “resident enterprise,” meaning that it can be
treated in a manner similar to a Chinese enterprise for enterprise income tax
purposes. The implementing rules of the New EIT Law define de facto
management as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation for a non-Chinese
enterprise or group of controlled offshore entities. Pursuant to the
Notice, an enterprise incorporated in an offshore jurisdiction and controlled by
a Chinese enterprise or group will be classified as a “non-domestically
incorporated 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) its substantial assets and properties, accounting books, corporate
chops, board and shareholder minutes are kept in China; and (iv) at least half
of its directors with voting rights or senior management are resident in
China. A resident enterprise would be subject to an enterprise income
tax rate of 25% on its worldwide income and must pay a withholding tax at a rate
of 10% when paying dividends to its non-PRC shareholders. However, it
remains unclear as to whether the Notice is applicable to an offshore enterprise
incorporated by a Chinese natural person. Nor are detailed measures
on imposition of tax from non-domestically incorporated resident enterprises are
available. Therefore, it is unclear how tax authorities will determine tax
residency based on the facts of each case.
We may be
deemed to be a resident enterprise by Chinese tax authorities. If the
PRC tax authorities determine that we are a “resident enterprise” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we may be subject to the enterprise income tax at a rate of
25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as interest
on financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the New EIT Law
and its implementing rules dividends paid to us from our PRC subsidiaries would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax
purposes. Finally, it is possible that future guidance issued with
respect to the new “resident enterprise” classification could result in a
situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC shareholders and with respect to gains derived by our non-PRC
shareholders from transferring our shares. We are actively monitoring
the possibility of “resident enterprise” treatment for the 2010 tax year and are
evaluating appropriate organizational changes to avoid this treatment, to the
extent possible.
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
71
RISKS
RELATED TO THE MARKET FOR OUR STOCK GENERALLY
The
price of our common stock may fluctuate significantly, which could negatively
affect us and holders of our common stock.
The
trading price of our common stock may fluctuate significantly in response to a
number of factors, many of which are beyond our control. For instance, if our
financial results are below the expectations of securities analysts and
investors, the market price of our common stock could decrease, perhaps
significantly. Other factors that may affect the market price of our common
stock include announcements relating to significant corporate transactions;
fluctuations in our quarterly and annual financial results; operating and stock
price performance of companies that investors deem comparable to us; and changes
in government regulation or proposals relating to us. In addition, since the
middle of 2008, the U.S. securities markets have experienced significant price
and volume fluctuations. These fluctuations often have been unrelated to the
operating performance of companies in these markets. Market fluctuations and
broad market, economic and industry factors may negatively affect the price of
our common stock, regardless of our operating performance. You may not be able
to sell your shares of our common stock at or above your purchase price, or at
all. Any volatility of or a significant decrease in the market price of our
common stock could also negatively affect our ability to make acquisitions using
common stock. Further, if we were to be the object of securities class action
litigation as a result of volatility in our common stock price or for other
reasons, it could result in substantial costs and diversion of our management’s
attention and resources, which could negatively affect our financial
results.
The
market price of our stock may be affected by low volume.
Our
common stock has a relatively low average daily volume. Reported average daily
trading volume in our common stock for the three month period ended November 1,
2010, was approximately 0.5 million shares. Without a significantly larger
average trading volume, our common stock will be less liquid than the common
stock of companies with higher trading volume, as a result, the trading prices
for our common stock may be more volatile.
We
do not intend to pay dividends on shares of our common stock for the foreseeable
future.
We have
never declared or paid any cash dividends on shares of our common stock. We
intend to retain any future earnings to fund the operation and expansion of our
business and, therefore, we do not anticipate paying cash dividends on shares of
our common stock in the foreseeable future.
Certain
provisions of our Articles of Incorporation may make it more difficult for a
third party to effect a change-of-control.
Our
Articles of Incorporation authorizes the board of directors to issue up to
10,000,000 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 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 us or effect a
change-in-control, which in turn could prevent our 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.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During
the three-month period ended September 30, 2010, we made no unregistered sales
of our equity securities.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
72
ITEM
4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
EXHIBITS.
3.1
|
Articles
of Incorporation of the Company as filed with the Secretary of State of
Nevada. Incorporated by reference to Exhibit 3.1 to the Company’s
registration statement on Form SB-2 filed on December 11, 2001 in
commission file number 333-74914.
|
|
3.2
|
Certificate
of Amendment to Articles of Incorporation. Incorporated by reference to
Exhibit 3.1 to the Company’s current report on Form 8-K filed on February
13, 2006.
|
|
3.3
|
Certificate
of Amendment to Articles of Incorporation. Incorporated by reference to
appendix A to the Company’s definitive information statement on Schedule
14C filed on July 31, 2006.
|
|
3.4
|
Amended
and Restated Bylaws of the Company. Incorporated by reference to Exhibit
3.2 to the Company’s current report on Form 8-K filed on July 9,
2007.
|
|
10.1
|
Employment
Contract, dated July 2, 2010, by and between the Company and Qingdong
Zeng. Incorporated by reference to Exhibit 10.1 to the
Company’s current report on Form 8-K filed on July 7,
2010.
|
|
10.2
|
English
Summary of the conditional sale and purchase agreement, dated July 10,
2010, by and among Wonder Auto Limited, Yearcity Limited and Jin Ying
Limited. Incorporated by reference to Exhibit 10.1 to the Company’s
current report on Form 8-K filed on July 13, 2010.
|
|
10.3
|
English
Summary of the conditional disposal agreement, dated July 10, 2010, by and
among Vital Glee Development Limited and Jinheng Automotive Safety
Technology Holdings Limited. Incorporated by reference to Exhibit 10.2 to
the Company’s current report on Form 8-K filed on July 13,
2010.
|
|
10.4
|
English
Summary of the trademark license agreement, dated July 10, 2010, by and
between Jinheng Automotive Electronic (Hong Kong) Limited and Jinzhou
Jinheng Automobile Safety System Co., Ltd. Incorporated by reference to
Exhibit 10.3 to the Company’s current report on Form 8-K filed on July 13,
2010.
|
|
10.5
|
English
Summary of the supply agreement, dated July 10, 2010, by and between
Beijing Jinheng Great Idea Automotive Electronic Systems Co., Ltd. and
Jinzhou Jinheng Automobile Safety System Co., Ltd. Incorporated by
reference to Exhibit 10.4 to the Company’s current report on Form 8-K
filed on July 13, 2010.
|
|
10.6
|
English
Summary of the supply agreement, dated July 10, 2010, by and between
Shanxi Winner Auto-Parts Limited and Jinzhou Jinheng Automobile Safety
System Co., Ltd. Incorporated by reference to Exhibit 10.5 to the
Company’s current report on Form 8-K filed on July 13,
2010.
|
|
31.1*
|
Certification
of Principal Executive Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2*
|
Certification
of Principal Financial Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1*
|
Certification
of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2*
|
Certification
of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
* Filed
herewith.
73
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
DATED:
November 9, 2010
WONDER
AUTO TECHNOLOGY, INC.
|
||
/s/ Meirong Yuan
|
||
Meirong
Yuan
|
||
Chief
Financial Officer
|
||
(On
behalf of the Registrant and as
|
||
Principal
Financial Officer)
|
74
EXHIBIT
INDEX
3.1
|
Articles
of Incorporation of the Company as filed with the Secretary of State of
Nevada. Incorporated by reference to Exhibit 3.1 to the Company’s
registration statement on Form SB-2 filed on December 11, 2001 in
commission file number 333-74914.
|
|
3.2
|
Certificate
of Amendment to Articles of Incorporation. Incorporated by reference to
Exhibit 3.1 to the Company’s current report on Form 8-K filed on February
13, 2006.
|
|
3.3
|
Certificate
of Amendment to Articles of Incorporation. Incorporated by reference to
appendix A to the Company’s definitive information statement on Schedule
14C filed on July 31, 2006.
|
|
3.4
|
Amended
and Restated Bylaws of the Company. Incorporated by reference to Exhibit
3.2 to the Company’s current report on Form 8-K filed on July 9,
2007.
|
|
10.1
|
Employment
Contract, dated July 2, 2010, by and between the Company and Qingdong
Zeng. Incorporated by reference to Exhibit 10.1 to the
Company’s current report on Form 8-K filed on July 7,
2010.
|
|
10.2
|
English
Summary of the conditional sale and purchase agreement, dated July 10,
2010, by and among Wonder Auto Limited, Yearcity Limited and Jin Ying
Limited. Incorporated by reference to Exhibit 10.1 to the Company’s
current report on Form 8-K filed on July 13, 2010.
|
|
10.3
|
English
Summary of the conditional disposal agreement, dated July 10, 2010, by and
among Vital Glee Development Limited and Jinheng Automotive Safety
Technology Holdings Limited. Incorporated by reference to Exhibit 10.2 to
the Company’s current report on Form 8-K filed on July 13,
2010.
|
|
10.4
|
English
Summary of the trademark license agreement, dated July 10, 2010, by and
between Jinheng Automotive Electronic (Hong Kong) Limited and Jinzhou
Jinheng Automobile Safety System Co., Ltd. Incorporated by reference to
Exhibit 10.3 to the Company’s current report on Form 8-K filed on July 13,
2010.
|
|
10.5
|
English
Summary of the supply agreement, dated July 10, 2010, by and between
Beijing Jinheng Great Idea Automotive Electronic Systems Co., Ltd. and
Jinzhou Jinheng Automobile Safety System Co., Ltd. Incorporated by
reference to Exhibit 10.4 to the Company’s current report on Form 8-K
filed on July 13, 2010.
|
|
10.6
|
English
Summary of the supply agreement, dated July 10, 2010, by and between
Shanxi Winner Auto-Parts Limited and Jinzhou Jinheng Automobile Safety
System Co., Ltd. Incorporated by reference to Exhibit 10.5 to the
Company’s current report on Form 8-K filed on July 13,
2010.
|
|
31.1*
|
Certification
of Principal Executive Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2*
|
Certification
of Principal Financial Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1*
|
Certification
of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2*
|
Certification
of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
* Filed
herewith.
75