UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




FORM 10-K/A


Amendment No. 1




(Mark One)


x
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.


For the fiscal year ended December 31, 2009




or




 ̈
TRANSITION RE PORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.


For the transition period from ____________ to ____________





Commission File Number 000-33123





CHINA AUTOMOTIVE SYSTEMS, INC.


(Exact name of Registrant as specified in its charter)





Delaware

33-0885775(State or Other Jurisdiction

of Incorporation or Organization)

(I.R.S. Employer

Identification No.)





No. 1 Henglong Road, Yu Qiao Development Zone

Shashi District, Jing Zhou City Hubei Province, China

434000(Address of Principal Executive Offices)

(Zip Code)





(Registrant’ s Telephone Number, Including Area Code)(86) 716-8329196





Securities registered pursuant to Section 12(b) of the Act:


Common Stock, $0.0001 par value


Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o  No   x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes    ̈  No   x





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   o   No   x





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x





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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large Accelerated Filer  ̈ Accelerated Filer  ̈  Non-Accelerated Filer   ̈Smaller Reporting Company   x





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





Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2009, based upon the closing price of the common stock as reported on the NASDAQ Stock Market under the symbol “CAAS” on such date, was approximately $25,348,004.





The Company has 28,083,534 shares of Common Stock outstanding as of June 24, 2011.





CHINA AUTOMOTIVE SYSTEMS, INC.





FORM 10-K/A





INDEX





PageExplanatory Note

3PART IItem 1. Business

5Item 1A. Risk Factors

11Item 1B. Unresolved Staff Comments

17Item 2. Properties

17Item 3. Legal Proceedings

17Item 4. Reserved

18PART IIItem 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18Item 6. Selected Financial Data

18Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

19Item 8. Financial Statements and Supplementary Data

32Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

34Item 9A. Controls and Procedures

34Item 9B. Other Information

36PART IIIItem 10. Directors, Executive Officers and Corporate Governance

36Item 11. Executive Compensation

40Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

42Item 13. Certain Relationships and Related Transactions, and Director Independence

42Item 14. Principal Accounting Fees and Services

42PART IVItem 15. Exhibits, Financial Statement Schedules

43Signatures

45Financial Statements

47


2


EXPLANATORY NOTE


Restatement of Consolidated Financial Statements




On March 17, 2011, China Automotive Systems, Inc. (the “Company”) announced that it had identified historical accounting errors relating to the accounting treatment of the Company’s convertible notes issued on February 15, 2008 (the “Convertible Notes”). The accounting errors have resulted in the misstatement of certain charges arising from fair value adjustments and other changes to derivative liabilities since the first quarter of 2009. The Company has no evidence that the errors resulted from any fraud or intentional misconduct.




The Company undertook a review to determine the total amount of the errors and the accounting periods in which the errors occurred. The Company’s review determined that the errors resulted from the Company’s failure to properly apply the requirements of Accounting Standard Codification (ASC) 815 (“ASC 815”), which changed the accounting treatment of convertible notes effective January 1, 2009. Additionally, management has also identified accounting errors in accumulated depreciation, deferred tax assets and accrued payroll and its related cost. These flaws represented material weaknesses in the Company’s internal controls over financial reporting as of December 31, 2008 and 2009. Management identified the accounting errors in connection with the 2010 annual audit procedures undertaken by the Company’s newly engaged independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian CPAs Limited Company.




The Company’s review was overseen by the audit committee of the board of directors of the Company (“Audit Committee”) with the assistance of management and accounting consultants engaged by management. The Audit Committee concluded on March 12, 2011 that the Company’s previously issued audited consolidated financial statements as of and for the fiscal year ended December 31, 2009, and related auditors’ report, and unaudited interim consolidated financial statements as of and for the quarterly periods ended March 31, June 30 and September 30, 2010, should no longer be relied upon because of these errors in the financial statements. The Company’s board of directors agreed with the Audit Committee’s conclusions. After analyzing the size and timing of the errors, the Company determined that, in the aggregate, the errors were material and would require the Company to restate certain of its previously issued financial statements.




As more fully described in Note 2 to the accompanying restated consolidated financial statements for the fiscal year ended December 31, 2009, the Company has restated its consolidated financial statements and the related disclosures for the fiscal year ended December 31, 2009, including restated comparative financial statements for 2008. Specifically, the Company has restated its consolidated balance sheets and the related consolidated statements of income, statements of changes in stockholders’ equity and statements of cash flows as of and for the year ended December 31, 2009, including restated comparative financial statements for 2008. The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 has been updated to reflect the effects of the restatement.




In addition, the Company has also corrected other errors in its previously filed Annual Report on Form 10-K for the year ended December 31, 2009, including its consolidated financial statements, for matters related to the following previously reported items: cost of sales and sales expenses due to the reclassification of  warranty expenses, accrued payroll and related costs, financial expenses and related liabilities related to the Convertible Notes, income tax and deferred tax assets. Also, retained earnings and non-controlling equity as at January 1, 2008 were increased by $225,471 and $7,801, respectively, as a result of adjustments to accumulated depreciation and deferred tax assets previously reported and accrued payroll and related costs.




The effect of the adjustments included a decrease of $49,855,134 in net income attributable to parent company for the year ended December 31, 2009, including a decrease of $43,698,892 resulting from loss on the change in fair value of derivative liabilities, a decrease of $5,897,514 from adjustment to financial expenses related to the Convertible Notes and a decrease of $258,728 from adjustments to other items. For the year ended December 31, 2008, the effect of the adjustments included a decrease of $2,191,111 in net income attributable to parent company, including a decrease of $1,752,495 resulting from the increase in financial expenses related to the Convertible Notes, a decrease of $201,365 from adjustments to the change in fair value of derivative liabilities and a decrease of $237,251 from adjustments to other items.




The Company reassessed its evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2009 based on the framework established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of that assessment, management identified control deficiencies that constituted material weaknesses and, accordingly, has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2009. For a description of the material weaknesses identified by management as a result of this review and management’s plan to remediate those material weaknesses, see “Part II—Item 9A—Controls and Procedures.”


3


Except as discussed above, the Company has not modified or updated disclosures presented in its annual report on Form 10-K for the period ended December 31, 2009 filed with the Securities and Exchange Commission on March 25, 2010 (the “Original Filing”), except as required to reflect the effects of the restatement. Accordingly, this amended annual report does not reflect events occurring after the Original Filing or modify or update those disclosures affected by subsequent events, except as specifically referenced herein. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the Original Filing. References to this “annual report on Form 10-K,” this “annual report on Form 10-K/A” and this “amended annual report on Form 10-K/A” herein shall refer to the Original Filing as amended by this amended annual report on Form 10-K/A. The following items have been amended as a result of the restatement:




Part I

Item 1A.

Risk FactorsPart II

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations;Part III

Item 8.

Financial Statements and Supplementary Data;Part III

Item 9A.

Controls and Procedures; andPart IV

Item 15.

Exhibits, Financial Statement Schedules.




Cautionary Statement




This Amendment No. 1 to the Annual Report on Form 10-K/A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-K/A is filed, and the Company does not intend to update any of the forward-looking statements after the date this amended Annual Report on Form 10-K/A is filed to confirm these statements to actual results, unless required by law.


4


PART I





ITEM 1. BUSINESS.





COMPANY HISTORY





China Automotive Systems, Inc., “China Automotive” or the “Company”, was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc.





On or around March 5, 2003, the Company acquired all of the issued and outstanding equity interests of Great Genesis Holdings Limited, “Genesis”, a corporation organized under the laws of the Hong Kong Special Administrative Region, China, by issuance of 20,914,250 shares of common stock to certain sellers. After the acquisition, the Company continued the operations of Genesis. Presently, Genesis owns interests in eight Sino-joint ventures, which manufacture power steering systems and/or related products for different segments of the automobile industry in China.





On May 19, 2003, the Company changed its name from Visions-In-Glass, Inc. to China Automotive Systems, Inc.





Since December 17, 2009, Hanlin Chen, Qizhou Wu, Robert Tung, Bruce C. Richardson, Guangxun Xu, and William E. Thomson began serving their terms as members of the Company’s Board of Directors. The directors appointed Hanlin Chen as the chairman of the Board, Qizhou Wu as the Chief Executive Officer of the Company, and Jie Li as Chief Financial Officer.





BUSINESS OVERVIEW





Unless the context indicates otherwise, the Company uses the terms “the Company”, “we”, “our” and “us” to refer to Genesis and China Automotive collectively on a consolidated basis. The Company is a holding company and has no significant business operations or assets other than its interest in Genesis. Through Genesis, the Company manufactures power steering systems and other component parts for automobiles. All operations are conducted through seven Sino-foreign joint ventures in China and wholly-owned subsidiaries, Hengsheng and Henglong USA set forth below is an organizational chart as at December 31, 2009.





China Automotive Systems, Inc. [NASDAQ:CAAS]↓100%



↓100%Great Genesis Holdings Limited



Henglong USA Corporation↓↓80%

↓81%

↓70%

↓51%

↓83.34%

↓77.33%

↓85%

↓100.00%Jingzhou

Henglong

Automotive

Parts Co.,

Ltd.

Shashi

Jiulong

Power

Steering

Gears

Co., Ltd.

Shenyang Jinbei

Henglong

Automotive

Steering System

Co., Ltd.

Zhejiang

Henglong &

Vie

Pump-Manu

Co., Ltd.

Universal

Sensor

Application,

Inc.

Wuhu

Henglong

Automotive

Steering

System Co.,

Ltd.

Wuhan

Jielong

Electric

Power

Steering Co.,

Ltd

Jingzhou

Hengsheng

Automotive

System

Co., Ltd.“Henglong”

“Jiulong”

“Shenyang”

“Zhejiang”

“USAI”

“Wuhu”

“Jielong”

“Hengsheng”↓80.00%Jingzhou

Henglong

Automotive

Technology (Testing) Center“Testing Center”


Jiulong was established in 1993 and is mainly engaged in the production of integral power steering gear for heavy-duty vehicles.





Henglong was established in 1997 and is mainly engaged in the production of rack and pinion power steering gear for cars and light duty vehicles.


5


On March 31, 2008, the Company’s wholly-owned subsidiary, Genesis, and Wiselink Holdings Limited, “Wiselink”, both controlled by Hanlin Chen and his family, entered into an equity transfer agreement, the “Henglong Agreement”, pursuant to which Wiselink agreed to transfer and assign its 35.5% equity interest in Henglong, one of the Company’s currently consolidated subsidiaries, to Genesis for a total consideration of $32,090,000. The Company now holds an 80% equity interest in Jingzhou Henglong.





In December 2009, Henglong, a subsidiary of Genesis, formed Jingzhou Henglong Automotive Technology (Testing) Center (“Testing Center”), which is mainly engaged in research and development of new products. The registered capital of Testing Center is RMB 30,000,000 ($4,393,544 equivalent).





Under the terms of the Henglong Agreement, Genesis is deemed to be the owner of Jingzhou Henglong commencing from January 1, 2008. The Henglong acquisition is considered as a business combination of companies under common control and is being accounted for in a manner of pooling of interests.





Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.





Zhejiang was established in 2002 to focus on power steering pumps.





USAI was established in 2005 and is mainly engaged in the production and sales of sensor modules.





In 2008, Genesis and Shanghai Hongxi Investment Inc., “Hongxi”, the other shareholder of USAI, agreed to increase USAI’s capital to $2,600,000 from $1,800,000. The increased capital was wholly funded by Genesis. Therefore, the capital contributed by Genesis in USAI increased to $2,166,900 from $1,366,900, accounting for 83.34% of the total capital; while the capital contributed by Hongxi remained unchanged, accounting for 16.66% of the total capital.





Wuhu was established in 2006 and is mainly engaged in the production and sales of automobile steering systems.





Jielong was established in 2006 and is mainly engaged in the production and sales of electric power steering gear, “EPS”.





On March 7, 2007, Genesis established a wholly-owned subsidiary, Jingzhou Hengsheng Automotive System Co., Ltd, “Hengsheng”, to engage in production and sales of automotive steering systems. The registered capital of Hengsheng is $10,000,000.





The Company has business relations with more than sixty vehicle manufacturers, including FAW Group and Dongfeng Auto Group, two of the five largest automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd., the largest light vehicle manufacturer in China; Chery Automobile Co., Ltd, the largest state owned car manufacturer in China, Xi’an BYD Auto Co., Ltd and Zhejiang Geely Automobile Co., Ltd., the largest private owned car manufacturers. From 2008, the Company has supplied power steering pumps and power steering gear to the Sino-Foreign joint ventures established by General Motors (GM), Citroen and Volkswagen. In 2009, the Company began to supply power steering gear to Chrysler North America.





The Company currently owns two trademarks covering automobile parts and twelve Chinese patents covering power steering technology. The Company is in the process of integrating new advanced technologies such as electronic chips in power steering systems into its current production line and is pursuing aggressive strategies in technology to maintain a competitive edge within the automobile industry. In 2001, the Company signed a Ten-Year Licensing Agreement with Bishop Steering Technology Limited, a leader in automotive steering gear technology innovation which offers advanced technology for steering valves within the contract period. In 2003, the Company signed a Technology Transfer Agreement with Nanyang Ind. Co. Ltd., a leading steering column maker, for the technology necessary for electronic power steering (EPS) systems. In addition, the Company established with Tsinghua University a steering systems research institute designed to develop Electronic Power Steering (EPS) and Electronic Hydraulic Steering Systems (EHPS).





STRATEGIC PLAN





The Company’s short to medium term strategic plan is to focus on both domestic and international market expansion. To achieve this goal and higher profitability, the Company focuses on brand recognition, quality control, decreasing costs, research and development and strategic acquisitions. Set forth below are the Company’s programs:


6


- Brand Recognition. Under the Henglong and Jiulong brands, the Company offers four separate series of power steering sets and 310 models of power steering sets, steering columns, steering oil pumps and steering hoses.





-Quality Control. The Henglong and Jiulong manufacturing facilities passed the ISO/TS 16949 System Certification in January 2004, a well-recognized quality control system in the auto industry developed by TUVRheindland of Germany.





- Decrease Cost. By improving the Company’s production ability and enhancing equipment management, optimizing the process and products structure, perfecting the supplier system and cutting production cost, the Company’s goal is to achieve a more competitive profit margin.


- Research and Development. By partnering with Bishop Steering Technology Limited, Nanyang Ind. Co. Ltd. and Tsinghua University for the development of advanced steering systems, the Company’s objective is to gain increased market share in China.


- International Expansion. The Company has entered into agreements with several international vehicle manufacturers and auto parts modules suppliers and carried on preliminary negotiations regarding future development projects.


- Acquisitions. The Company is exploring opportunities to create long-term growth through new ventures or acquisitions of other auto component manufacturers. The Company will seek acquisition targets that fulfill the following criteria: ·




-
companies that can be easily integrated into product manufacturing and corporate management;
 
 -
companies that have strong joint venture partners that would become major customers; and
 
 -
companies involved with power steering systems or oil pump.





CUSTOMERS





The Company’s ten largest customers represent 80.2% of the Company’s total sales for the year ended December 31, 2009. The following table sets forth information regarding the Company’s ten largest customers.





Name of Major Customers

Percentage of Total

Revenue in 2009BYD Auto Co., Ltd


14.8
%Chery Automobile Co., Ltd


12.0
%Beiqi Foton Motor Co., Ltd.


10.4
%Zhejiang Geely Holding Co., Ltd


10.0
%Brilliance China Automotive Holdings Limited


9.2
%Dongfeng Auto Group Co., Ltd


7.8
%China FAW Group Corporation


5.5
%Great Wall Motor Company Limited


4.5
%Chrysler Group LLC


3.8
%Anhui Jianghuai Automobile Group


2.2
%Total


80.2
%





The Company primarily sells its products to the above-mentioned original equipment manufacturing, “OEM” customers; it also has excellent relationships with them, including as their first-ranking supplier and developer for new product development for new models. While the Company intends to continue to focus on retaining and winning this business, it cannot ensure that it will succeed in doing so. It is difficult to keep these contracts as a result of severe price competition and customers’ diversification of their supply base. The Company’s business would be materially and adversely affected if it loses one or more of these major customers.


7


SALES AND MARKETING





The Company’s sales and marketing team has 105 sales persons, which are divided into an original equipment manufacturing, “OEM”, team, a sales service team and a working group dedicated to international business. These sales and marketing teams provide a constant interface with the Company’s key customers. They are located in all major vehicle producing regions to more effectively represent the Company’s customers’ interests within the Company’s organization, to promote their programs and to coordinate their strategies with the goal of enhancing overall service and satisfaction. The Company’s ability to support its customers is further enhanced by its broad presence in terms of sales offices, manufacturing facilities, engineering technology centers and joint ventures.





The Company’s sales and marketing organization and activities are designed to create overall awareness and consideration of, and therefore to increase sales of, the Company’s modular systems and components. To achieve that objective, the Company organized delegations to visit the United States, Korea, India and Japan and has supplied power steering gear to Chrysler North America. Through these activities, the Company has generated potential business interest as a strong base for future development.





DISTRIBUTION





The Company’s distribution system covers all of China. The Company has established sales and service offices with certain significant customers to deal with matters related to such customers in a timely fashion. The Company also established distribution warehouses close to major customers to ensure timely deliveries. The Company maintains strict control over inventories. Each of these sales and service offices sends back to the Company through e-mail or fax information related to the inventory and customers’ needs. The Company guarantees product delivery in 8 hours for those customers who are located within 200 km from the Company’s distribution warehouses, and 24 hours for customers who are located outside of 200 km from the Company’s distribution warehouses. Delivery time is a very important competitive factor in terms of customer decision making, together with quality, pricing and long-term relationships.





EMPLOYEES AND FACILITIES





As of December 31, 2009, the Company employed approximately 2,944 persons, including approximately 1,940 by Henglong and Jiulong, approximately 294 by Shenyang, approximately 293 by Zhejiang, approximately 38 by USAI, approximately 135 by Wuhu, approximately 202 by Hengsheng, and 5 by Henglong USA.





As of December 31, 2009, each of Henglong and Jiulong, Shenyang, Zhejiang, Wuhu, Jielong, and Hengsheng has a manufacturing and administration area of 278,092 square meters, 35,354 square meters, 320,000 square meters, 83,700 square meters, 105,735 square meters, and 170,520 square meters, respectively.





Hubei Province, which is home to Dongfeng, one of the largest automakers in China, provides an ample supply of inexpensive but skilled labor to automotive-related industries. The annual production of the Company’s main product, power steering gear, was approximately 2,200,000 units and 1,290,000 units in 2009 and 2008 respectively. Although the production process continues to rely heavily on manual labor, the Company has invested substantially in high-level production machinery to improve capacity and production quality. Approximately $43.6 million was spent over the last three years on professional-grade equipment and workshops — approximately 87% of which has been used in the production process as of December 31, 2009.





RAW MATERIALS





The Company purchases various manufactured components and raw materials for use in its manufacturing processes. The principal components and raw materials the Company purchases include castings, electronic parts, molded plastic parts, finished sub-components, fabricated metal, aluminum and steel. The most important raw material is steel. The Company enters into purchase agreements with local suppliers. The annual purchase plans are determined at the beginning of the calendar year but are subject to revision every three months as a result of customers’ orders. A purchase order is made according to monthly production plans. This protects the Company from building up inventory when the orders from customers change.


The Company’s purchases from its ten largest suppliers represent in the aggregate 26.4% of all components and raw materials it purchased for the year ended December 31, 2009, and none of them providing more than 10% of total purchases.





All components and raw materials are available from numerous sources. The Company has not, in recent years, experienced any significant shortages of manufactured components or raw materials and normally does not carry inventories of these items in excess of what is reasonably required to meet its production and shipping schedules.


8


RESEARCH AND DEVELOPMENT





The Company has a ten-year consulting and licensing agreement with Bishop Steering Technology Ltd, one of the leading design firms in power steering systems. Bishop’s technology in power steering systems is currently used by carmakers such as BMW and Mercedes Benz. Pursuant to the agreement, the Company has implemented the Bishop steering valve technology into the Henglong brand R&P power steering gear.





The Company owns a Hubei Provincial-Level Technical Center, which has been approved by the Hubei Economic Commission. The center has a staff of 211, including 13 senior engineers, 2 foreign experts and 102 engineers, primarily focused on steering system R&D, tests, production process improvement and new material and production methodology application.


In addition, the Company has partnered with Tsinghua University to establish a steering system research center, called Tsinghua Henglong Automobile Steering Research Institute, for the purposes of R&D and experimentation for Electronic Power Steering, “EPS”.


The Company believes that its engineering and technical expertise, together with its emphasis on continuing research and development, allow it to use the latest technologies, materials and processes to solve problems for its customers and to bring new, innovative products to market. The Company believes that continued research and development activities, including engineering, are critical to maintaining its pipeline of technologically advanced products. The Company has aggressively managed costs in other portions of its business in order to maintain its total expenditures for research and development activities, including engineering, at approximately $2,560,000, $2,260,000, and $1,700,000 for the years ended December 31, 2009, 2008, and 2007, respectively. In 2009, the sales of newly developed products accounted for about 26.7% of total sales.





COMPETITION





The automotive components industry is extremely competitive. Criteria for the Company’s customers include quality, price/cost competitiveness, system and product performance, reliability and timeliness of delivery, new product and technology development capability, excellence and flexibility in operations, degree of global and local presence, effectiveness of customer service and overall management capability. The power steering system market is fragmented in China, and the Company has seven major competitors. Of these competitors, two are Sino-foreign joint ventures while the other five are state-owned. Like many competitive industries, there is downward pressure on selling prices.





The Company’s major competitors, including Shanghai ZF and FKS, are component suppliers to specific automobile manufacturers. Shanghai ZF is the joint venture of SAIC and ZF Germany, which is an exclusive supplier to SAIC-Volkswagen and SAIC-GM. First Auto FKS is a joint venture between First Auto Group and Japan’s Koyo Company and its main customer is FAW-Volkswagen Company.





While the Chinese Government limits foreign ownership of auto assemblers to 50%, there is no analogous limitation in the automotive components industry. Thus, opportunities exist for foreign component suppliers to set up factories in China. These overseas competitors employ technology that may be more advanced and may have existing relationships with global automobile assemblers, but they are generally not as competitive as the Company in China in terms of production cost and flexibility in meeting client requirements.





CHINESE AUTOMOBILE INDUSTRY





The Company is a supplier of automotive parts and most of its operations are located in China. An increase or decrease in the output and sales of Chinese vehicles could result in an increase or decrease of the Company’s results of operations. According to the latest statistics from the China Association of Automobile Manufacturers, “CAAM”, in 2009, the output and sales volume of vehicles in China have reached 13,791,000 and 13,645,000 units respectively, with an increase of 48.3% and 46.2% compared to 2008. The output and sales volume of passenger vehicles have reached 10,384,000 and 10,331,000 units respectively, with an increase of 54.1% and 52.9% compared to 2008. The output and sales volume of commercial vehicles have reached 3,407,200 and 3,313,500 units respectively, with an increase of 33.0% and 28.4% compared to 2008. Accordingly, the Company’s sales of steering gear for passenger vehicles and commercial vehicles and steering pumps in 2009 increased by 60.4%, 46.8% and 57.7% compared with the year 2008.


To bolster auto consumption in China, the government continued a series of stimulus measures including a reduction in purchase taxes of 25% on smaller cars, scrapping some road fees and granting subsidies for farmers who trade in their polluting vehicles for more fuel-efficient ones.


9


CHINESE ECONOMY





Management believes that the most important factor in understanding the Chinese automobile industry is the country’s rapid economic growth. During 2008, Chinese economic growth slowed down, as it suffered from the global financial crisis since the third quarter of 2008. In early 2009, a series of economic stimulation policies were issued by the Chinese Government, which rapidly reversed the great drop on economic growth. According to data from the State Statistical Bureau, Chinese economic growth reached 8.7% in 2009. With incentives provided by Government action, management believes that the investment by Chinese enterprises and consumption by Chinese residents will continue to increase relatively rapidly in 2010.





Management believes that the continued investment and consumption growth will have a favorable effect on the sales of commercial vehicles and passenger vehicles.





HIGHWAY DEVELOPMENT





Management believes that the continuing development of the highway system will have a significant positive impact on the manufacture and sale of private automobiles. Statistics from the Ministry of Communications show that 980,000 kilometers of highway and 4,719 kilometers of expressway were developed in 2009. Total highways and expressways now amount to 3,771,000 kilometers and 65,020 kilometers, respectively.





DOING BUSINESS IN CHINA





CHINESE LEGAL SYSTEM





The practical effect of the Chinese legal system on the Company’s business operations in China can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise Laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of other countries. Similarly, the Chinese accounting laws mandate accounting practices, which are not consistent with US Generally Accepted Accounting Principles. The Chinese accounting laws require that an annual “statutory audit” be performed in accordance with Chinese accounting standards and that the books of account of Foreign Invested Enterprises be maintained in accordance with Chinese accounting laws. Article 14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities. Otherwise, there is risk that its business license will be revoked.





Second, while the enforcement of substantive rights may appear less clear than those in the United States, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies which enjoy the same status as other Chinese registered companies in business dispute resolution. Because the terms of the Company’s various Articles of Association provide that all business disputes pertaining to Foreign Invested Enterprises will be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden applying Chinese substantive law, the Chinese minority partner in the Company’s joint venture companies will not assume any advantageous position regarding such disputes. Any award rendered by this arbitration tribunal is, by the express terms of the various Articles of Association, enforceable in accordance with the “United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).” Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.





ECONOMIC REFORM ISSUES





Although the Chinese Government owns the majority of productive assets in China, in the past several years the Government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there is no assurance that:





-
The Company will be able to capitalize on economic reforms;


-
The Chinese Government will continue its pursuit of economic reform policies;


-
The economic policies, even if pursued, will be successful;


-
Economic policies will not be significantly altered from time to time; and


10


-
Business operations in China will not become subject to the risk of nationalization.





Negative impact resulting from economic reform policies or nationalization could result in a total investment loss in the Company’s common stock.




Since 1979, the Chinese Government has reformed its economic system. Because many reforms are unprecedented or experimental, they are expected to be refined and readjusted. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect the Company’s operations.





Over the last few years, China’s economy has registered a high growth rate. Recently, there have been indications that the rate of inflation has increased. In response, the Chinese Government recently has taken measures to curb the excessively expansive economy. These measures included implementation of a unitary and well-managed floating exchange rate system based on market supply and demand for the exchange rates of Renminbi, restrictions on the availability of domestic credit, reduction of the purchasing capability of its citizens, and centralization of the approval process for purchases of certain limited foreign products. These austerity measures alone may not succeed in slowing down the economy’s excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese Government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets.





To date reforms to China’s economic system have not adversely affected the Company’s operations and are not expected to adversely affect the Company’s operations in the foreseeable future; however, there can be no assurance that reforms to China’s economic system will continue or that the Company will not be adversely affected by changes in China’s political, economic, and social conditions and by changes in policies of the Chinese Government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, reduction in tariff protection and other import restrictions.





ENVIRONMENTAL COMPLIANCE





The Company is subject to the requirements of U.S. federal, state, local and non-U.S., including China’s, environmental and occupational safety and health laws and regulations. These include laws regulating air emissions, water discharge and waste management. The Company has an environmental management structure designed to facilitate and support its compliance with these requirements globally. Although it is the Company’s intent to comply with all such requirements and regulations, it cannot provide assurance that it is at all times in compliance. The Company has made and will continue to make capital and other expenditures to comply with environmental requirements, although such expenditures were not material during the past two years. Environmental requirements are complex, change frequently and have tended to become more stringent over time. Accordingly, the Company cannot assure that environmental requirements will not change or become more stringent over time or that its eventual environmental cleanup costs and liabilities will not be material.





During 2009, the Company did not make any material capital expenditures relating to environmental compliance.





WEB SITE ACCESS TO SEC FILINGS





The Company files electronically with the SEC its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) of the Securities Exchange Act of 1934. The SEC maintains an Internet site that contains reports, proxy information and information statements, and other information regarding issuers that file electronically with the SEC. The address of that website is http://www.sec.gov. The materials are also available at the SEC’s Public Reference Room, located at 100 F Street, Washington, D.C. 20549. The public may obtain information through the public reference room by calling the SEC at 1-800-SEC-0330.





ITEM 1A.      RISK FACTORS





Any investment in the Company’s securities involves a high degree of risk. You should carefully consider the risks described below, together with the information contained elsewhere in this prospectus, before you make a decision to invest in the Company. The Company’s business, financial conditions and results of operations could be materially and adversely affected by many risk factors. Because of these risk factors, actual results might differ significantly from those projected in any forward-looking statements. Factors that might cause such differences include, among others, the following:


11


Risks Related to the Company ` s Business and Industry





Because the Company is a holding company with substantially all of its operations conducted through its subsidiaries, its performance will be affected by the performance of its subsidiaries.





The Company almost has no operations independent of those of Genesis and its subsidiaries, and the Company’s principal assets are its investments in Genesis and its subsidiaries. As a result, the Company is dependent upon the performance of Genesis and its subsidiaries and will be subject to the financial, business and other factors affecting Genesis as well as general economic and financial conditions. As substantially all of the Company’s operations are and will be conducted through its subsidiaries, the Company will be dependent on the cash flow of its subsidiaries to meet its obligations.





Because virtually all of the Company’s assets are and will be held by operating subsidiaries, the claims of the Company’s stockholders will be structurally subordinate to all existing and future liabilities and obligations, and trade payables of such subsidiaries. In the event of the Company’s bankruptcy, liquidation or reorganization, its assets and those of its subsidiaries will be available to satisfy the claims of the Company’s stockholders only after all of its and its subsidiaries’ liabilities and obligations have been paid in full.





The Senior Convertible Notes are the Company’s unsecured obligations, but are not obligations of its subsidiaries. In addition, the Company’s secured commercial debt is senior to the Senior Convertible Notes.





With the automobile parts markets being highly competitive and many of the Company’s competitors having greater resources than it does, the Company may not be able to compete successfully.





The automobile parts industry is a highly competitive business. Criteria for the Company’s customers include:





•
Quality ;


•
Price/cost competitiveness;


•
System and product performance;


•
Reliability and timeliness of delivery;


•
New product and technology development capability;


•
Excellence and flexibility in operations;


•
Degree of global and local presence;


•
Effectiveness of customer service; and


•
Overall management capability.





The Company’s competitors include independent suppliers of parts, as well as suppliers formed by spin-offs from the Company’s customers, who are becoming more aggressive in selling parts to other vehicle manufacturers. Depending on the particular product, the number of the Company’s competitors varies significantly. Many of the Company’s competitors have substantially greater revenues and financial resources than it does, as well as stronger brand names, consumer recognition, business relationships with vehicle manufacturers, and geographic presence than it has. The Company may not be able to compete favorably and increased competition may substantially harm its business, business prospects and results of operations.





Internationally, the Company faces different market dynamics and competition. The Company may not be as successful as its competitors in generating revenues in international markets due to the lack of recognition of its products or other factors. Developing product recognition overseas is expensive and time-consuming and the Company’s international expansion efforts may be more costly and less profitable than it expects. If the Company is not successful in its target markets, its sales could decline, its margins could be negatively impacted and it could lose market share, any of which could materially harm the Company’s business, results of operations and profitability.


12





The cyclical nature of automotive production and sales could result in a reduction in automotive sales, which could adversely affect the Company’s business and results of operations.


The Company’s business relies on automotive vehicle production and sales by its customers, which are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences and the price and availability of gasoline. They also can be affected by labor relations issues, regulatory requirements, and other factors. In addition, in the last two years, the price of automobiles in China has generally declined. As a result, the volume of automotive production in China has fluctuated from year to year, which gives rise to fluctuations in the demand for the Company’s products. Any significant economic decline that results in a reduction in automotive production and sales by the Company’s customers would have a material adverse effect on the Company’s results of operations. Moreover, if the prices of automobiles do not remain low, then demand for automobile parts could fall and result in lower revenues and profitability.





Increasing costs for manufactured components and raw materials may adversely affect the Company’s profitability.





The Company uses a broad range of manufactured components and raw materials in its products, including castings, electronic components, finished sub-components, molded plastic parts, fabricated metal, aluminum and steel, and resins. Because it may be difficult to pass increased prices for these items on to the Company’s customers, a significant increase in the prices of the Company’s components and materials could materially increase the Company’s operating costs and adversely affect its profit margins and profitability.





Pricing pressure by automobile manufacturers on their suppliers may adversely affect the Company’s business and results of operations.





Recently, pricing pressure from automobile manufacturers has been prevalent in the automotive parts industry in China. Virtually all vehicle manufacturers seek price reductions each year. Although the Company has tried to reduce costs and resist price reductions, these reductions have impacted the Company’s sales and profit margins. If the Company cannot offset continued price reductions through improved operating efficiencies and reduced expenditures, price reductions will have a material adverse effect on the Company's results of operations.





The Company’s business, revenues and profitability would be materially and adversely affected if it loses any of its large customers.





For the year ended December 31, 2009, approximately 14.8% of the Company’s sales were to BYD Auto Co., Ltd, approximately 12.0% were to Chery Automobile Co., Ltd, approximately 10.4% were to Beiqi Foton Motor Co., Ltd, and approximately 10.0% were to Zhejiang Geely Holding Co., Ltd, the Company’s four largest customers. The loss of, or significant reduction in purchases by, one or more of these major customers could adversely affect the Company’s business.





The Company may be subject to product liability and warranty and recall claims, which may increase the costs of doing business and adversely affect the Company’s financial condition and liquidity.





The Company may be exposed to product liability and warranty claims if its products actually or allegedly fail to perform as expected or the use of its products results, or is alleged to result, in bodily injury and/or property damage. The Company started to pay some of its customers’ increased after-sales service expenses due to consumer rights protection policies of “recall” issued by the Chinese Government in 2004, such as the recalling flawed vehicles policy. Beginning in 2004, automobile manufacturers unilaterally required their suppliers to pay a “3-R Guarantees” service charge for repair, replacement and refund in an amount of about 1% - 4% of the total amount of parts supplied. Accordingly, the Company has experienced and will continue to experience higher after sales service expenses. Product liability, warranty and recall costs may have a material adverse effect on the Company’s financial condition.





The Company is subject to environmental and safety regulations, which may increase the Company’s compliance costs and may adversely affect its results of operation.





The Company is subject to the requirements of environmental and occupational safety and health laws and regulations in China. The Company cannot provide assurance that it has been or will be at all times in full compliance with all of these requirements, or that it will not incur material costs or liabilities in connection with these requirements. Additionally, these regulations may change in a manner that could have a material adverse effect on the Company’s business, results of operations and financial condition. The capital requirements and other expenditures that may be necessary to comply with environmental requirements could increase and become a material expense of doing business.


13





Non-performance by the Company’s suppliers may adversely affect its operations by delaying delivery or causing delivery failures, which may negatively affect demand, sales and profitability.




The Company purchases various types of equipment, raw materials and manufactured component parts from its suppliers. The Company would be materially and adversely affected by the failure of its suppliers to perform as expected. The Company could experience delivery delays or failures caused by production issues or delivery of non-conforming products if its suppliers fail to perform, and it also faces these risks in the event any of its suppliers becomes insolvent or bankrupt.





The Company’s business and growth may suffer if it fails to attract and retain key personnel.




The Company’s ability to operate its business and implement its strategies effectively depends on the efforts of its executive officers and other key employees. The Company depends on the continued contributions of its senior management and other key personnel. The Company’s future success also depends on its ability to identify, attract and retain highly skilled technical staff, particularly engineers and other employees with mechanics and electronics expertise, and managerial, finance and marketing personnel. The Company does not maintain a key person life insurance policy on Mr. Hanlin Chen or Mr. Qizhou Wu. The loss of the services of any of the Company’s key employees or the failure to attract or retain other qualified personnel could substantially harm the Company’s business.





The Company’s management controls approximately 75.3% of its outstanding common stock and may have conflicts of interest with the Company’s minority stockholders.





As of February 27, 2010, members of the Company’s management beneficially own approximately 75.3% of the outstanding shares of the Company’s common stock. As a result, these majority stockholders have control over decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders, which could result in the approval of transactions that might not maximize stockholders’ value. Additionally, these stockholders control the election of members of the Company’s board, have the ability to appoint new members to the Company’s management team and control the outcome of matters submitted to a vote of the holders of the Company’s common stock. The interests of these majority stockholders may at times conflict with the interests of the Company’s other stockholders. The Henglong Transaction was a transaction involving the Company and a counterparty controlled by Mr. Hanlin Chen, the Company’s Chairman and controlling stockholder. The Company regularly engages in transactions with entities controlled by one or more of its officers and directors.





Covenants contained in the Securities Purchase Agreement and the Senior Convertible Notes restrict the Company’s operating flexibility.




Failure to achieve and maintain effective internal control over financial reporting could have a material adverse effect on the Company’s business, results of operations and the trading price of its shares.
  The Company is subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, the “SEC,” as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management in its annual report that contains an assessment by management of the effectiveness of such company’s internal control over financial reporting. The Company’s management has conducted an evaluation of the effectiveness of its internal control over financial reporting and concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2009 and material weaknesses were noted due to: 1) not having sufficient personnel with appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues, and to prepare and review financial statements and related disclosures under U.S. GAAP; and 2) not having formalized closing procedures and adequate period-end review procedures to ensure a) proper preparation of the period-end financial statement closing entries and b) consistency of application of accounting policies and completeness and accuracy of the financial statement disclosures. If the Company fails to maintain the effectiveness or fails to remediate the deficiencies of its internal control over financial reporting, the Company may not be able to conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act.
  Effective internal controls are necessary for the Company to produce reliable financial reports. For the deficiencies identified in this fiscal year, the Company’s management team is evaluating remediation measures that can be undertaken to address these material weaknesses and will continue such evaluation so that it may institute a comprehensive remediation plan in order to maintain effective internal control over financial reporting. Any failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of the Company’s financial statements, which in turn could negatively impact the trading price of the Company’s shares. Furthermore, the Company may need to incur additional costs and use additional management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going forward.


There is a limited public float of the Company’s common stock, which can result in the Company’s stock price being volatile and prevent the realization of a profit on resale of the Company’s common stock or derivative securities.





There is a limited public float of the Company’s common stock. As of February 27, 2010, approximately 24.7% of the Company’s outstanding common stock is considered part of the public float. The term “public float” refers to shares freely and actively tradable on the NASDAQ Capital Market and not owned by officers, directors or affiliates, as such term is defined under the Securities Act. As a result of the limited public float and the limited trading volume on some days, the market price of the Company’s common stock can be volatile, and relatively small changes in the demand for or supply of the Company’s common stock can have a disproportionate effect on the market price for its common stock. This stock price volatility could prevent a security holder seeking to sell the Company’s common stock or derivative securities from being able to sell them at or above the price at which the stock or derivative securities were bought, or at a price which a fully liquid market would report.





Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware may discourage a takeover attempt.




Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware, the state in which it is organized, could make it difficult for a third party to acquire the Company, even if doing so might be beneficial to the Company’s stockholders. Provisions of the Company’s certificate of incorporation and bylaws impose various procedural and other requirements, which could make it difficult for stockholders to effect certain corporate actions and possibly prevent transactions that would maximize stockholders’ value.





The Company does not pay cash dividends on its common stock.




The Company has never paid common stock cash dividends and does not anticipate doing so in the foreseeable future. In addition, the Securities Purchase Agreement prohibits the Company from paying cash dividends on common stock without the approval of the holders of the Senior Convertible Notes.


14


Risks Related to Doing Business in China and Other Countries Besides the United States





Because the Company’s operations are mostly located outside of the United States and are subject to Chinese laws, any change of Chinese laws may adversely affect its business.





Most of the Company’s operations are outside the United States and in China, which exposes it to risks, such as exchange controls and currency restrictions, currency fluctuations and devaluations, changes in local economic conditions, changes in Chinese laws and regulations, exposure to possible expropriation or other Chinese government actions, and unsettled political conditions. These factors may have a material adverse effect on the Company’s operations or on its business, results of operations and financial condition.





The Company’s international expansion plans subject it to risks inherent in doing business internationally.




The Company’s long-term business strategy relies on the expansion of its international sales outside China by targeting markets, such as the United States. Risks affecting the Company’s international expansion include challenges caused by distance, language and cultural differences, conflicting and changing laws and regulations, foreign laws, international import and export legislation, trading and investment policies, foreign currency fluctuations, the burdens of complying with a wide variety of laws and regulations, protectionist laws and business practices that favor local businesses in some countries, foreign tax consequences, higher costs associated with doing business internationally, restrictions on the export or import of technology, difficulties in staffing and managing international operations, trade and tariff restrictions, and variations in tariffs, quotas, taxes and other market barriers. These risks could harm the Company’s international expansion efforts, which could in turn materially and adversely affect its business, operating results and financial condition.





The Company faces risks associated with currency exchange rate fluctuations; any adverse fluctuation may adversely affect its operating margins.





Although the Company is incorporated in the State of Delaware, in the United States, the majority of its current revenues are in Chinese currency. Conducting business in currencies other than US dollars subjects the Company to fluctuations in currency exchange rates that could have a negative impact on its reported operating results. Fluctuations in the value of the US dollar relative to other currencies impacts the Company’s revenues, cost of revenues and operating margins and results in foreign currency translation gains and losses. Historically, the Company has not engaged in exchange rate hedging activities. Although the Company may implement hedging strategies to mitigate this risk, these strategies may not eliminate its exposure to foreign exchange rate fluctuations and involve costs and risks of their own, such as ongoing management time and expertise requirements, external costs to implement the strategy and potential accounting implications.





If relations between the United States and China worsen, the Company’s stock price may decrease and the Company may have difficulty accessing the U.S. capital markets.





At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China could adversely affect the market price of the Company’s common stock and its ability to access US capital markets.





The Chinese Government could change its policies toward private enterprise, which could adversely affect the Company’s business.





The Company’s business is subject to political and economic uncertainties in China and may be adversely affected by China’s political, economic and social developments. Over the past several years, the Chinese Government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The Chinese Government may not continue to pursue these policies or may alter them to the Company’s detriment from time to time. Changes in policies, laws and regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on the Company’s business. Nationalization or expropriation could result in the total loss of the Company’s investment in China.


15


The economic, political and social conditions in China could affect the Company’s business.





Most of the Company’s business, assets and operations are located in China. The economy of China differs from the economies of most developed countries in many respects, including government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. The economy of China has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese Government has implemented measures recently emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese Government. In addition, the Chinese Government continues to play a significant role in regulating industry by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Therefore, the Chinese Government’s involvement in the economy could adversely affect the Company’s business operations, results of operations and/or financial condition.





The Chinese Government’s macroeconomic policies could have a negative effect on the Company’s business and results of operations.





The Chinese Government has implemented various measures from time to time to control the rate of economic growth. Some of these measures benefit the overall economy of China, but may have a negative effect on the Company.





Government control of currency conversion and future movements in exchange rates may adversely affect the Company’s operations and financial results.





The Company receives substantially most of its revenues in Renminbi, the currency of China. A portion of such revenues will be converted into other currencies to meet the Company’s foreign currency obligations. Foreign exchange transactions under the Company’s capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange in China. These limitations could affect the Company’s ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.





The Chinese Government controls its foreign currency reserves through restrictions on imports and conversion of Renminbi into foreign currency. In July 2005, the Chinese Government has adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate”. During July 2005 to July 2008, the exchange rate between RMB and US dollars has experienced a big fluctuation, for RMB 1.00 to US$0.1205 and RMB 1.00 to US$0.1462, respectively. Since August 2008, the exchange rate has been stable, and was approximately at RMB 1.00 to US$0.1464. There can be no assurance that the exchange rate will remain stable. The Renminbi could appreciate against the US dollar. The Company’s financial condition and results of operations may also be affected by changes in the value of certain currencies other than the Renminbi in which its earnings and obligations are denominated. In particular, an appreciation of the Renminbi is likely to increase the costs of export products and decrease the Company’s cash flow.


Because the Chinese legal system is not fully developed, the Company and its securityholders’ legal protections may be limited.





The Chinese legal system is based on written statutes and their interpretation by the Supreme People’s Court. Although the Chinese government introduced new laws and regulations to modernize its business, securities and tax systems on January 1, 1994, China does not yet possess a comprehensive body of business law. Because Chinese laws and regulations are relatively new, interpretation, implementation and enforcement of these laws and regulations involve uncertainties and inconsistencies and it may be difficult to enforce contracts. In addition, as the Chinese legal system develops, changes in such laws and regulations, their interpretation or their enforcement may have a material adverse effect on the Company’s business operations. Moreover, interpretative case law does not have the same precedential value in China as in the United States, so legal compliance in China may be more difficult or expensive.





It may be difficult to serve the Company with legal process or enforce judgments against its management or the Company.





Most of the Company’s assets are located in China and eleven of its directors and officers are non-residents of the United States, and all or substantial portions of the assets of such non-residents are located outside the United States. As a result, it may not be possible to effect service of process within the United States upon such persons to originate an action in the United States. Moreover, there is uncertainty that the courts of China would enforce judgments of U.S. courts against the Company, its directors or officers based on the civil liability provisions of the securities laws of the United States or any state, or an original action brought in China based upon the securities laws of the United States or any state.


16


The Company may be subject to fines and legal sanctions imposed by State Administration of Foreign Exchange (SAFE) or other Chinese government authorities if it or its Chinese directors or employees fail to comply with recent Chinese regulations relating to employee share options or shares granted by offshore listed companies to Chinese domestic individuals





On December 25, 2006, the People’s Bank of China, or PBOC, issued the Administration Measures on Individual Foreign Exchange Control, and the corresponding Implementation Rules were issued by SAFE on January 5, 2007. Both of these regulations became effective on February 1, 2007. According to these regulations, all foreign exchange matters relating to employee stock holding plans, share option plans or similar plans with Chinese domestic individuals’ participation require approval from the SAFE or its authorized branch. On March 28, 2007, the SAFE issued the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, Chinese domestic individuals who are granted share options or shares by an offshore listed company are required, through a Chinese agent or Chinese subsidiary of the offshore listed company, to register with the SAFE and complete certain other procedures. As the Company is an offshore listed company, its Chinese domestic directors and employees who may be granted share options or shares shall become subject to the Stock Option Rule. Under the Stock Option Rule, employees stock holding plans, share option plans or similar plans of offshore listed companies with Chinese domestic individuals’ participation must be filed with the SAFE. After the Chinese domestic directors or employees exercise their options, they must apply for the amendment to the registration with the SAFE. The Company is reviewing the procedures for such SAFE registration. If the Company or its Chinese domestic directors or employees fail to comply with these regulations, the Company or its Chinese domestic directors or employees may be subject to fines or other legal sanctions imposed by the SAFE or other Chinese government authorities.


ITEM 1B.   UNRESOLVED STAFF COMMENTS.





Not Applicable.





ITEM 2.   PROPERTIES.





The Company’s headquarters are located at No. 1 Henglong Road, Yu Qiao Development Zone Shashi District, Jing Zhou City Hubei Province, the PRC. Set forth below are the manufacturing facilities operated by each joint venture. The Company has forty to fifty years long-term rights to use the lands and buildings.





Name of

Entity

Product

Total Area

(M2)


Building Area

(M2)


Original Cost of

Equipment

SiteHenglong

Automotive Parts


225,221



20,226


$
32,085,220

Jingzhou City, Hubei Province13,393



13,707



-

Wuhan City, Hubei ProvinceJiulong

Power Steering Gear


39,478



23,728



18,907,019

Jingzhou City, Hubei ProvinceShenyang

Automotive Steering Gear


35,354



5,625



3,835,851

Shenyang City, Liaoning ProvinceZhejiang

Steering Pumps


100,000



32,000



7,162,455

Zhuji City, Zhejiang ProvinceUSAI

Sensor Modular


-



-



717,454

Wuhan City, Hubei ProvinceWuhu

Automotive Steering Gear


83,700



12,600



1,888,650

Wuhu City, Anhui ProvinceJielong

Electric Power Steering


105,735



-



1,063,098

Wuhan City, Hubei ProvinceHengsheng

Automotive Steering Gear


170,520



26,000



5,799,143

Jingzhou City, Hubei ProvinceTotal




773,401



133,886


$
71,458,890





The Company is not involved in investments in (i) real estate or interests in real estate, (ii) real estate mortgages, and (iii) securities of or interests in persons primarily engaged in real estate activities, as all of its land rights are used for production purposes.





ITEM 3.  LEGAL PROCEEDINGS.





The Company is not a party to any pending or to the best of the Company’s knowledge, any threatened legal proceedings. No director, officer or affiliate of the Company, or owner of record of more than five percent, 5%, of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.


17


ITEM 4.  RESERVED










PART II





ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.





(a) MARKET PRICES OF COMMON STOCK





The Company’s common stock has been traded on the NASDAQ Capital Market under the symbol “CAAS”. The high and low bid intra-day prices of the common stock in 2009 and 2008 were reported on NASDAQ for the time periods indicated on the table below. Accordingly, the table below contains the high and low bid closing prices of the common stock as reported on the NASDAQ for the time periods indicated.





Price Range2009


2008High


Low


High


LowFirst Quarter

$
3.94


$
2.30


$
7.98


$
4.40Second Quarter


6.64



3.35



7.45



4.85Third Quarter


9.90



5.14



6.69



3.88Fourth Quarter

$
22.49


$
8.00


$
4.20


$
2.01





(b) STOCKHOLDERS





The Company’s common shares are issued in registered form. Securities Transfer Corporation in Frisco, Texas is the registrar and transfer agent for the Company’s common stock. As of February 27, 2010, there were 27,046,244 shares of the Company’s common stock outstanding and the Company had approximately 76 stockholders of record.





(c) DIVIDENDS





The Company has never declared or paid any cash dividends on its common stock and it does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to finance operations and the expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be based upon the Company’s financial condition, operating results, capital requirements, plans for expansion, restrictions imposed by any financing arrangements and any other factors that the Board of Directors deems relevant.





(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





The securities authorized for issuance under equity compensation plans at December 31, 2009 are as follows:





Plan category

Number of securities to

be issued upon exercise

of outstanding options


Weighted average

exercise price of

outstanding options


Number of securities

remaining available

for future issuanceEquity compensation plans approved by security holders


2,200,000


$
3.62



1,766,150





The stock option plan was approved in the 2004 Annual Meeting of Stockholders, and the maximum common shares for issuance under this plan are 2,200,000 with a term of 10 years.





ITEM 6.  SELECTED FINANCIAL DATA





Not applicable.


18


ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.





The following is management’s discussion and analysis of certain significant factors which have affected the Company’s financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of its current management. This report includes forward-looking statements. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update these forward-looking statements. The Company’s expectations are as of the date this Form 10-K/A is filed, and the Company does not intend to update any of the forward-looking statements after the date this amended Annual Report on Form 10-K/A is filed to confirm these statements to actual results, unless required by law.





The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K/A.





GENERAL OVERVIEW:





China Automotive Systems, Inc., including, when the context so requires, its subsidiaries and the subsidiaries’ interests in the Sino-foreign joint ventures described below, is referred to herein as the “Company”. The Company, through its Sino-foreign joint ventures, engages in the manufacture and sales of automotive systems and components in the People’s Republic of China, the “PRC” or “China”, as described below.





Genesis, a company incorporated on January 3, 2003 under The Companies Ordinance in Hong Kong as a limited liability company, is a wholly-owned subsidiary of the Company.





Henglong USA Corporation, “HLUSA”, which was incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after sales service and research and development support accordingly.





The Company owns the following aggregate net interests in eight Sino-foreign joint ventures organized in the PRC as of December 31, 2009 and 2008.





Percentage InterestName of Entity

2009


2008Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong”


80.00
%


80.00
%Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”


81.00
%


81.00
%Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang”


70.00
%


70.00
%Zhejiang Henglong & Vie Pump-Manu Co., Ltd., “Zhejiang”


51.00
%


51.00
%Universal Sensor Application Inc., “USAI”


83.34
%


83.34
%Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”


85.00
%


85.00
%Wuhu HengLong Auto Steering System Co., Ltd., “Wuhu”


77.33
%


77.33
%Jingzhou Hengsheng Automotive System Co., Ltd, “Hengsheng”


100.00
%


100.00
%Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center”


80.00
%


-





Jiulong was established in 1993 and is mainly engaged in the production of integral power steering gear for heavy-duty vehicles.





Henglong was established in 1997 and is mainly engaged in the production of rack and pinion power steering gear for cars and light duty vehicles.


19


On March 31, 2008, the Company’s wholly-owned subsidiary, Genesis, and Wiselink, both controlled by Hanlin Chen and his family, entered into an equity transfer agreement, the “Henglong Agreement”, pursuant to which Wiselink transferred and assigned its 35.5% equity interest in Henglong, one of the Company’s currently consolidated subsidiaries, to Genesis for a total consideration of $32,090,000. The Company now holds an 80% equity interest in Jingzhou Henglong.





In December 2009, Henglong, a subsidiary of Genesis, formed Jingzhou Henglong Automotive Technology (Testing) Center, (“Testing Center”), which is mainly engaged in research and development of new products. The registered capital of Testing Center is RMB 30,000,000 ($4,393,544 equivalent).





Under the terms of the Henglong Agreement, Genesis is deemed to be the owner of Henglong commencing from January 1, 2008. The Henglong Acquisition is considered as a business combination of companies under common control and is being accounted for in a manner of pooling of interests.





Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.





Zhejiang was established in 2002 to focus on power steering pumps.





USAI was established in 2005 and is mainly engaged in production and sales of sensor modules.





In 2008, Genesis and Shanghai Hongxi Investment Inc., “Hongxi”, the other shareholder of USAI, agreed to increase USAI’s capital to $2,600,000 from $1,800,000. The increased capital was wholly funded by Genesis. Therefore, the capital contributed by Genesis in USAI increased to $2,166,900 from $1,366,900, accounting for 83.34% of the total capital; while the capital contributed by Hongxi remained unchanged, accounting for 16.66% of the total capital.





Wuhu was established in 2006 and is mainly engaged in production and sales of automobile steering systems.





Jielong was established in 2006 and is mainly engaged in production and sales of electric power steering, “EPS”.





Hengsheng was established in 2007 and is mainly engaged in production and sales of automobile steering systems.




RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
  On March 17, 2011, the Company announced that it had identified historical accounting errors relating to the accounting treatment of the Company’s Convertible Notes. The accounting errors have resulted in the misstatement of certain charges arising from fair value adjustments and other changes to derivative liabilities since the first quarter of 2009. The Company undertook a review to determine the total amount of the errors and the accounting periods in which the errors occurred. The Company’s review determined that the errors resulted from the Company’s failure to properly apply the requirements of Accounting Standard Codification (ASC) 815 (“ASC 815”), with respect to the conversion feature embedded in the convertible notes, effective January 1, 2009. Additionally, management has also identified accounting errors in accumulated depreciation and deferred tax assets reported and accrued payroll and related costs. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.After analyzing the size and timing of the errors, the Company determined that, in the aggregate, the errors were material and would require the Company to restate certain of its previously issued financial statements, including its previously issued audited consolidated financial statements as of and for the fiscal year ended December 31, 2009, including restated comparative financial statements for 2008, and related auditors’ report, and unaudited interim consolidated financial statements as of and for the quarterly periods ended March 31, June 30 and September 30, 2010.
  The effects of the restatement on selected income statement line items for the years ended December 31, 2009 and 2008, are as follows:
 Increase/(Decrease) in

income statement line items2009


2008Cost of Sales

$
10,925,094


$
5,788,628Gross profit


(10,925,094)



(5,788,628)Selling expenses


(10,192,837)



(5,861,783)Financial income (expenses)


(5,897,514)



(1,752,495)Gain on change in fair value of derivative


(43,698,892)



(201,365)Income before income taxes


(50,328,663)



(1,880,705)Income taxes


(390,462)



269,953Net income attributable to parent company


(49,855,134)



(2,191,111)Income per share – basic


(1.85)



(0.13)Income per share – diluted

$
(1.76)


$
(0.11)





RESULTS OF OPERATIONS: 2009 (AS RESTATED) VERSUS 2008 (AS RESTATED)





NET SALES AND COST OF SALES





For the years ended December 31, 2009 and 2008, net sales and cost of sales are summarized as follows:





Net Sales


Cost of sales2009


2008


Change


2009

As Restated


2008

As Restated


ChangeHenglong

$
153,459,876


$
92,991,655


$
60,468,221



65.0
%

$
112,141,910


$
66,713,130


$
45,428,780



68.1
%Jiulong


61,613,116



42,708,266



18,904,850



44.3



53,368,639



36,518,790



16,849,849



46.1Shenyang


32,492,844



25,007,497



7,485,347



29.9



27,051,979



20,745,291



6,306,688



30.4Zhejiang


24,193,366



15,778,456



8,414,910



53.3



18,926,080



11,532,146



7,393,934



64.1Wuhu


26,496,148



19,953,632



6,542,516



32.8



25,769,456



19,564,043



6,205,413



31.7Other Sectors


10,806,533



901,474



9,905,059



1098.8



7,955,758



271,271



7,684,487



2832.8Other(1)


(53,464,330
)


(34,161,694
)


(19,302,636
)


56.5



(51,358,895
)


(33,635,458
)


(17,723,437
)


52.7Total

$
255,597,553


$
163,179,286


$
92,418,267



56.6
%

$
193,854,927


$
121,709,213


$
72,145,714



59.3
%


(1) Other includes activity not allocated to the product sectors and elimination of inter-sector transactions.


20


NET SALES





Net sales were $255,597,553 for the year ended December 31, 2009, compared with $163,179,286 for the year ended December 31, 2008, an increase of $92,418,267, or 56.6%, mainly due to the increases in the income of Chinese residents and significant government investment leading to an increase in the sales of passenger vehicles and commercial vehicles, and the resultant increase in the Company’s sales of steering gear and pumps; the Company has raised the technological contents in, and production efficiency of, its products as a result of technological improvement to its production lines, allowing the Company to reduce costs and, correspondingly, its sales prices which led to increased sales volumes.





Net sales for Henglong was $153,459,876 for the year ended December 31, 2009, compared with $92,991,655 for the year ended December 31, 2008, representing an increase of $60,468,221, or 65.0%. The net sales increase was mainly due to increased sale volumes with a sales increase of $69,715,775, decreased sales price with a sales decrease of 9,947,637, and the effect of foreign currency translation with a sales increase of $700,083.





Net sales for Jiulong was $61,613,116 for the year ended December 31, 2009, compared with $42,708,266 for the year ended December 31, 2008, representing an increase of $18,904,850, or 44.3%. The net sales increase was mainly due to increased sale volumes with a sales increase of $18,404,951, increased sales price with a sales increase of $130,078, and the effect of foreign currency translation with a sales increase of $369,821.





Net sales for Shenyang was $32,492,844 for the year ended December 31, 2009, compared with $25,007,497 for the year ended December 31, 2008, representing an increase of $7,485,347, or 29.9%. The net sales increase was mainly due to increased sale volumes with a sales increase of $8,377,434, decreased sales price with a sales decrease of $1,080,739, and the effect of foreign currency translation with a sales increase of $188,652.





Net sales for Zhejiang was $24,193,366 for the year ended December 31, 2009, compared with $15,778,456 for the year ended December 31, 2008, representing an increase of $8,414,910, or 53.3%. The net sales increase was mainly due to increased sale volumes with a sales increase of $10,805,036 and decreased sales price with a sales decrease of $2,509,713 and the effect of foreign currency translation with a sales increase of $119,587.





Net sales for Wuhu was $26,496,148 for the year ended December 31, 2009, compared with $19,953,632 for the year ended December 31, 2008, representing an increase of $6,542,516, or 32.8%. The net sales increase was mainly due to increased sale volumes with a sales increase of $7,529,848 and decreased sales price with a sales decrease of $1,316,608 and the effect of foreign currency translation with a sales increase of $329,276.





Net sales for Other Sectors was $10,806,533 for the year ended December 31, 2009, compared with $901,474 for the year ended December 31, 2008, representing an increase of $9,905,059 or 1,098.8%. Net sales increased mainly due to the development of new market. For the U.S. market, net sales for Other Sectors was $6,430,000 in 2009, compared with $490,000 in 2008, representing an increase of $5,940,000; for the China market, net sales for Other Sectors was $4,380,000 in 2009, compared with $410,000 in 2008, representing an increase of $3,970,000.





COST OF SALES





For the year ended December 31, 2009, the cost of sales was $193,854,927, compared with $121,709,213 for the same period of 2008, an increase of $72,145,714, or 59.3%, mainly due to the increase of sales.





Cost of sales for Henglong was $112,141,910 for the year ended December 31, 2009, compared with $66,713,130 for the year ended December 31, 2008, representing an increase of $45,428,780, or 68.1%. The cost of sales increase was mainly due to increased sale volumes with a cost of sales increase of $49,863,805, decreased unit price with a cost of sales decrease of $4,926,540, and the effect of foreign currency translation with a cost increase of $491,515.





Cost of sales for Jiulong was $53,368,639 for the year ended December 31, 2009, compared with $36,518,790 for the year ended December 31, 2008, representing an increase of $16,849,849, or 46.1%. The cost of sales increase was mainly due to increased sales volumes with a cost of sales increase of $16,694,668, decreased unit price with a cost of sales decrease of $149,951, and the effect of foreign currency translation with a cost increase of $305,132.





Cost of sales for Shenyang was $27,051,979 for the year ended December 31, 2009, compared with $20,745,291 for the year ended December 31, 2008, representing an increase of $6,306,688, or 30.4%. The cost of sales increase was mainly due to increased sales volumes with a cost of sales increase of $7,220,078, decreased unit price with a cost of sales decrease of $1,067,236, and the effect of foreign currency translation with a cost increase of $153,846.


21


Cost of sales for Zhejiang was $18,926,080 for the year ended December 31, 2009, compared with $11,532,146 for the year ended December 31, 2008, representing an increase of $7,393,934, or 64.1%. The cost of sales increase was mainly due to increased sales volumes with a cost of sales increase of $8.039,211, decreased unit price with a cost of sales decrease of $726,987, and the effect of foreign currency translation with a cost increase of $81,710.





Cost of sales for Wuhu was $25,769,456 for the year ended December 31, 2009, compared with $19,564,043 for the year ended December 31, 2008, representing an increase of $6,205,413, or 31.7%. The cost of sales increase was mainly due to increased sales volumes with a cost of sales increase of $6,879,711, decreased unit price with a cost of sales decrease of $714,992, and the effect of foreign currency translation with a cost increase of $40,694.





Cost of sales for Other Sectors was $7,955,758 for the year ended December 31, 2009, compared with $271,271 for the year ended December 31, 2008, representing an increase of $7,684,487, or 2832.8%. The cost of sales increase was mainly due to increased sales.





Gross margin was 24.2% for the year ended December 31, 2009, a decrease of 1.3% from 25.4% for the same period of 2008, primarily due to declines in unit cost in excess of sales price reductions.





GAIN ON OTHER SALES





Gain on other sales consisted of net amount retained from sales of materials and other assets. For the year ended December 31, 2009, gain on other sales was $838,505, compared to $734,063 for the year ended December 31, 2008, an increase of $104,442, or 14.2%, due to increased sales of materials.





SELLING EXPENSES





For the years ended December 31, 2009 and 2008, selling expenses are summarized as follows:





Years Ended December 312009

As Restated


2008

As Restated


Increase (Decrease)


PercentageSalaries and wages

$
2,563,384


$
1,413,708


$
1,149,676



81.3
%Office expense


841,748



861,838



(20,090
)


-2.3Transportation expense


3,703,818



2,158,793



1,545,025



71.6Rent expense


699,206



384,167



315,039



82.0Other expense


84,384



189,372



(104,988
)


-55.4Total

$
7,892,540


$
5,007,878


$
2,884,662



57.6
%





Selling expenses were $7,892,540 for the year ended December 31, 2009, compared to $5,007,878 for 2008, an increase of $2,884,662, or 57.6%. Major items that increased greatly in 2009 compared to 2008 were salaries and wages, transportation expense, and rent expenses. The major item that decreased greatly was other expenses.





The salaries of salesmen were indexed with their selling performance. During 2009, sales had a 56.6% increase over 2008, correspondingly increasing the salaries of salesmen.





The increase in transportation expense was due to increased sales and a rise in the price of oil, which led to increases in domestic transportation prices.





The increase in rent expense was due to increased marketing activities, which led to increases in the area of product warehouses and offices in different places.




The decrease in other expenses was mainly due to the Company strengthening the control of material consumption in the marketing activities in 2009.


22




GENERAL AND ADMINISTRATIVE EXPENSES





For the years ended December 31, 2009 and 2008, general and administrative expenses are summarized as follows:


Years Ended December 312009


2008


Increase (Decrease)


PercentageSalaries and wages

$
4,623,631


$
4,105,613


$
518,018



12.6
%Labor insurance expenses


2,123,071



1,667,287



455,784



27.3Maintenance and repair expenses


1,214,160



1,268,055



(53,895
)


-4.3Taxes


1,120,948



690,918



430,030



62.2Provision for bad debts


120,483



989,584



(869,101
)


-87.8Office expense


1,189,475



1,403,241



(213,766
)


-15.2Depreciation and amortization expense


2,955,159



5,846,290



(2,891,131
)


-49.5Listing expenses


1,589,236



1,624,161



(34,925
)


-2.2Others expenses


258,863



348,641



(89,778
)


-25.8Total

$
15,195,026


$
17,943,790


$
(2,748,764
)


-15.3
%





General and administrative expenses were $15,195,026 for the year ended December 31, 2009, compared to $17,943,790 for the year ended December 31, 2008, a decrease of $2,748,764, or 15.3%.





The expense items that significantly increased in 2009 compared to 2008 were salaries and wages, labor insurance expenses, and tax expenses. The expense items that significantly decreased were office expenses and provision for bad debts expenses.





The increased salaries and wages were due to increased staff and performance bonuses resulting from enlarged business size and improved earnings.





The Company’s labor insurance expenses were pension, medicare, injury insurance, unemployment insurance, and housing fund expenses. The increase in labor insurance expenses for 2009 was a result of an increase in the number of employees.





The Company’s tax expense was property tax such as land use right, housing property tax, vehicle and vessel usage license plate tax. The increase in tax expense was a result of an increase in the property usage of the Company.





The decrease in office expenses has resulted from the control of such expenses by the Company’s management in 2009.





The Company recorded provision for bad debts based on aging of accounts receivable and specific identification method. The decrease in provision for bad debts in 2009 was mainly due to domestic automobile manufacturers beginning to recover from the financial crisis in 2008 under the support of a series of government policies, and improving their financial situation, and paying the Company under their credit terms, thus decreasing the accounts receivable that exceed the credit terms.





For the year ended December 31, 2009, depreciation and amortization expenses excluded from that recorded under cost of sales were $2,955,159, compared to $5,846,290 for the year ended December 31, 2008, a decrease of $2,891,131, or 49.5%, as a result of the full depreciation of certain fixed assets of the Company.





RESEARCH AND DEVELOPMENT EXPENSES





Research and development expenses were $2,561,170 for the year ended December 31, 2009, compared to $2,255,892 for the year ended December 31, 2008, an increase of $305,278, or 13.5%.





The global automotive parts industry is highly competitive; winning and maintaining new business requires suppliers to rapidly produce new and innovative products on a cost-competitive basis. In order to maintain the Company’s competitiveness, the Company needs to invest in more R & D expenses. In 2009, the Company not only developed new products for foreign OEMs, but also increased R & D expenses for power steering gear for domestic OEMs.


23


INCOME FROM OPERATIONS





Income from operations was $36,932,395 for the year ended December 31, 2009, compared to $16,996,576 for the year ended December 31, 2008, an increase of $19,935,819, or 117.3%, mainly consisting of an increase of $20,272,553, or 48.9%, in gross profit, an increase of $104,442, or 14.2%, in net sales from materials and others, and a decrease of operating income of $441,178, or 1.8%, as a result of increased operating expenses.





OTHER INCOME





Other income was $94,534 for the year ended December 31, 2009, compared to $1,067,309 for the year ended December 31, 2008, a decrease of $972,775, or 91.1%, primarily as a result of decreased government subsidies.





The Company’s government subsidies consisted of interest subsidy and investment subsidy. Interest subsidy is the refund by the Chinese Government of interest charged by banks to companies which are entitled to such subsidies. Investment subsidy is subsidy to encourage foreign investors to set up technologically advanced enterprises in China.





During the year ended December 31, 2009, the Company received $94,534 for interest subsidy, and no investment subsidy. During the year ended December 31, 2008, the Company’s received $264,978 for interest subsidy, and $802,331 for investment subsidy.





Interest subsidies apply only to loan interest related to production facilities expansion. During 2006 and 2007, the Company had used this special loan to improve technologically its production line in order to enlarge capability and enhance quality. The expansion project was completed and new facilities were put into use at the end of 2007 and 2008, respectively.





The Chinese Government also provided incentives to foreign investors for setting up technologically advanced enterprises in China. During 2008, Genesis, a foreign investor, has received $802,331 for re-investment in Jiulong and Henglong with profit distribution because these two entities were technologically advanced enterprises entitled to such subsidies.





Since such government subsidy is similar to an investment income, the Company has recorded it as other income.





FINANCIAL EXPENSES





Financial expenses were $7,883,714 for the year ended December 31, 2009, compared to financial expenses of $3,048,713 for 2008, an increase of $4,835,001, or 158.6%, primarily as a result of an increase in interest expense. Convertible Notes holders are entitled to require the Company to redeem all or any portion of the Convertible Notes in cash, if the weighted average price, “WAP,” is less than $3.187 for twenty (20) consecutive trading days at any time following February 15, 2009. In March 2009, due to a default on the WAP under the aforesaid contractual provision, the “WAP Default,” the Company accrued approximately $3,900,000 of remaining discount on Convertible Notes immediately and accrued an additional $520,000 of interest expenses (see note 14).


GAIN (LOSS) ON CHANGE IN FAIR VALUE OF DERIVATIVE





During the year ended December 31, 2009, the loss on change in fair value of the derivatives embedded in the convertible notes was $43,074,327, as compared to gain on change in fair value of the derivatives of $796,649 for the year ended December 31, 2008, a decrease of $43,870,976.





During the year ended December 31, 2009, the loss on change in fair value of the derivatives resulted from the change in fair value of the compound embedded derivatives in the convertible notes payable.





During the year ended December 31, 2008, the gain on change in fair value of the derivatives resulted from the change in fair value of warrants liabilities.





During the year ended December 31, 2009, the increase in loss on change in fair value of derivatives was primarily due to the increase in the intrinsic value of the embedded conversion feature in the Convertible Notes payable as a result of the increase in the market price of the Company’s common stock which rose from $3.39 at the beginning of 2009 to $18.71 at December 31, 2009. Upon the adoption of ASC 815 on January 1, 2009, the Company is required to bifurcate the embedded conversion feature on the Convertible Note payable.


24


During the year ended December 31, 2008, as the conversion option was not bifurcated, the only derivative liabilities were warrants liabilities. The significant decrease in the fair value of warrants liabilities was due to a reduced remaining term and the fact that the stock price ($3.39) of the Company on the report date was much lower than the warrants exercise price (see note 16).





INCOME (LOSS) BEFORE INCOME TAXES




Loss before income taxes was $13,931,112 for the year ended December 31, 2009, compared to income before income tax of $15,811,821 for the year ended December 31, 2008, a decrease of $29,742,933, or 188.1%, consisting of increased income from operations of $19,935,819, decreased other income of $972,775, increased finance expenses of $4,835,001, and increased loss on change in fair value of derivative of $43,870,976.





INCOME TAXES





Income tax expense was $4,720,013 for the year ended December 31, 2009, compared to $455,830 for the year ended December 31, 2008, an increase of $4,264,183, mainly because of: (1) an increase in income before income tax in the PRC market that was not offset by losses before income tax in the U.S. market and the Company made a provision for deferred income tax assets in the U.S., (2) while there was a loss before income tax in the U.S. mainly due to a change in the fair value of convertible notes; the Company cannot recognize such loss as a deferred income tax asset or a tax benefit as if it was a permanent change; and (3) a decrease of foreign government tax return.For a full reconciliation of the Company’s effective tax rate to the US federal statutory rate of 35% and further explanation of the Company’s provision for taxes, see Note 29 to the consolidated financial statements in Item 8, which is incorporated herein by reference.





NET INCOME





Net loss was $18,651,125 for the year ended December 31, 2009, compared to net income of $15,355,991 for the year ended December 31, 2008, a decrease of $34,007,116, consisting of decreased income before income taxes of $29,742,933, and an increase of $4,264,183 due to increased income tax expenses.





NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS





The Company recorded net income attributable to noncontrolling interests of $7,789,746 for the year ended December 31, 2009, compared to $5,111,861 for the year ended December 31, 2008, an increase of $2,677,885, or 52.4%.





The Company owns different equity interests in eight Sino-foreign joint ventures, through which it conducts its operations. All the operating results of these Foreign Investment Enterprises were consolidated in the Company’s financial statements as of December 31, 2009 and 2008. The Company records the net income attributable to noncontrolling interests of the respective Sino-foreign joint ventures for each period.





In 2009, net income attributable to noncontrolling interests has increased compared to 2008, primarily resulting from increased net income of joint ventures.





NET INCOME ATTRIBUTABLE TO PARENT COMPANY





Net loss attributable to parent company was $26,440,871 for the year ended December 31, 2009, compared to net income attributable to parent company of $10,224,130 for the year ended December 31, 2008, a decrease of $36,685,001, consisting of decreased net income of $34,007,116, and an increased net income attributable to noncontrolling interests of $2,677,885.





LIQUIDITY AND CAPITAL RESOURCES:





Capital resources and use of cash





The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptance, issuances of capital stock and internally generated cash. As of December 31, 2009, the Company had cash and cash equivalents of $43,480,176, compared to $37,113,375 as of December 31, 2008, an increase of $6,366,801, or 17.2%.


25


The Company had working capital of $12,486,023 as of December 31, 2009, compared to $41,805,919 as of December 31, 2008, a decrease of $29,319,896, or 70.1%, mainly because of an increase of operating results by $14,796,662, and a decrease of loss on change in fair value of derivative by $43,074,327, offset by increase in payables, including liabilities associated with the convertible notes.





Capital source:





The Company’s capital source is multifaceted, such as bank loans and banker’s acceptance bill facilities. In financing activities and operation activities, the Company’s banks require the Company to sign documents to repay such facilities within one year. On the condition that the Company can provide adequate mortgage security and has not violated the terms of its line of credit agreement, such one year facilities can be extended for another year.




The Company had bank loans maturing in less than one year of $5,125,802 and bankers’ acceptances of $38,041,602 as of December 31, 2009.





The Company currently expects to be able to obtain similar bank loans and bankers’ acceptance bills in the future if it can provide adequate mortgage security following the termination of the above mentioned agreements (See the table in section (a) Bank loan). If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Owing to depreciation, the value of the mortgages securing the above-mentioned bank loans and banker's acceptance bills will be devalued by approximately $7,965,902. If the Company wishes to obtain the same amount of bank loans and banker's acceptance bills, it will have to provide $7,965,902 additional mortgages as of the maturity date of such agreements (See the table in section (a) Bank loan). The Company still can obtain a reduced line of credit with a reduction of $3,712,000, which is 46.6% (the mortgage rates) of $7,965,902, if it cannot provide additional mortgages. The Company expects that the reduction of bank loans will not have a material adverse effect on its liquidity.





On February 15, 2008, the Company issued $35,000,000 of convertible notes to Lehman Brothers Commercial Corporation Asia Limited, LBCCA, and YA Global Investments, L.P., YA Global, maturing in 5 years. According to the terms of the Senior Convertible Notes (as described in Note 14 of the financial statement), convertible notes may be required to be repaid in cash on or prior to their maturity.  For example, Convertible Note holders are entitled to require the Company redeem all or any portion of the Convertible Notes in cash, if the Weighted Average Price (WAP) for twenty (20) consecutive trading days is less than $3.187 at any time following February 15, 2009, the “WAP Default”, by delivering written redemption notice to the Company within five (5) business days after the receipt of the Company’s notice of the WAP Default.





As a result of the 2008 and 2009 worldwide financial turmoil, the Company’s stock’s WAP for twenty (20) consecutive trading days ended on March 16, 2009 was below $3.187. On March 17, 2009, the Company delivered two WAP Default notices to the Convertible Note holders. On March 27, 2009, the Company received a letter dated March 26, 2009 via fax from YA Global, one of the Convertible Note holders, electing to require the Company to redeem all the three Convertible Notes it held in the total principal amount of $5,000,000, together with interest, late charges, if any, and the Other Make Whole Amount as defined in Section 5(d) of the Convertible Notes. After negotiation, on April 15, 2009, the Company paid YA Global $5,041,667 for the total principal amount ($5,000,000), together with interest and late charges. YA Global has waived its entitlement to the Other Make Whole Amount.





Following the WAP Default notices, the Company received a letter from the provisional liquidator acting on behalf of LBCCA, the “LBCCA Liquidator”, requesting that it be granted an extension until April 24, 2009 to consider its rights under the Convertible Notes.  The Company granted an extension to April 15, 2009.  The LBCCA Liquidator requested another extension to April 24, 2009.  On April 24, 2009, LBCCA’s lawyers sent three Holder Redemption Notices via fax electing to redeem the entire outstanding principal of $30,000,000, together with interest, late charges, if any, and the Other Make Whole Amount, to be paid on July 23, 2009.  The Company discussed settlement with the LBCCA Liquidator, and on or about July 22, 2009, the Company and the LBCCA Liquidator agreed to extend the applicable holder mandatory redemption date for two months to September 23, 2009 to give more time to the Company and the LBCCA Liquidator to pursue settlement discussion. The Company received a letter dated September 22, 2009 from the LBCCA Liquidator stating that upon the Company’s acceptance of the revocation, all holder redemption notices dated April 24, 2009 shall be immediately revoked as if they were never issued, and the letter and the revocation did not purport to amend, restate or supplement any other terms and conditions under the three Notes and Securities Purchase Agreement dated 1 February 2008 between the Company and the LBCCA Liquidator. The Company accepted such revocation on September 23, 2009.


26


The Company’s ability to redeem the Convertible Notes and meet its payment obligations depends on its cash position and its ability to refinance or generate significant cash flow, which is subject to general economic, financial and competition factors and other factors beyond the Company’s control. The Company cannot assure you that it has sufficient funds available or will be able to obtain sufficient funds to meet its payment obligations under the Convertible Notes, and the Company’s redemption of the Convertible Notes would result in a material adverse effect on its liquidity and capital resources, business, results of operations or financial condition.





(a)  Bank arrangements





As of December 31, 2009, the principal outstanding under the Company’s credit facilities and lines of credit was as follows:





Bank

Due Date

Amount

Available


Amount

BorrowedComprehensive credit facilities

Bank of China

Dec-10

$
8,054,831


$
6,639,393Comprehensive credit facilities

China Construction Bank

Oct-10


8,787,089



4,384,757Comprehensive credit facilities

CITIC Industrial Bank

Jul-10


12,079,757



12,079,757Comprehensive credit facilities

Shanghai Pudong Development Bank

Oct-10


6,590,317



-Comprehensive credit facilities

Jingzhou Commercial Bank

Oct-10


9,519,346



8,281,685Comprehensive credit facilities

Industrial and Commercial Bank of China

Sep-10


2,929,030



342,697Comprehensive credit facilities

Bank of Communications Co., Ltd

Sep-10


3,392,502



3,392,502Comprehensive credit facilities

Guangdong Development Bank

Oct-10


4,393,544



1,991,740Comprehensive credit facilities

China Merchants Bank Co. Ltd

Sep-10


6,054,873



6,054,873Total





$
61,801,289


$
43,167,404





The Company may request the banks to issue notes payable or bank loans within its credit line using a 364-day revolving line.





The Company refinanced its short-term debt during early 2009 at annual interest rates of 4.86% to 5.31%, and maturity terms of six to twelve months. Pursuant to the refinancing arrangement, the Company pledged $40,137,786 of equipment, land use rights and buildings as security for its comprehensive credit facility with the Bank of China; pledged $13,510,237 of land use rights and buildings as security for its comprehensive credit facility with Shanghai Pudong Development Bank; pledged $16,644,445 of land use rights and equipment as security for its revolving comprehensive credit facility with Jingzhou Commercial Bank; pledged $2,642,704 of land use rights and buildings as security for its comprehensive credit facility with Industrial and Commercial Bank of China; pledged $13,475,528 of accounts receivable, land use rights and buildings as security for its comprehensive credit facility with China Construction Bank; pledged $17,505,961 of land use rights, notes receivable and buildings as security for its comprehensive credit facility with China CITIC Bank; pledged $5,390,941 of land use rights and buildings as security for its comprehensive credit facility with China Merchants Bank; pledged $6,499,795 of land use rights and buildings as security for its comprehensive credit facility with Bank of Communications Co., Ltd,; and pledged $1,991,740 of accounts receivable as security for its comprehensive credit facility with Guangdong Development Bank.





(b)  Financing from investors:





On February 15, 2008, the Company sold $30,000,000 and $5,000,000 convertible notes to Lehman Brothers Commercial Corporation Asia Limited, LBCCA, and YA Global Investments, L.P., YA Global, respectively, with a scheduled maturity date of February 15, 2013 and an initial conversion price for conversion into the Company’s common stock of $8.8527 per share.





On April 15, 2009, the Company paid YA Global $5,041,667 to redeem the total principal amount ($5,000,000), together with interest, and late charges. YA Global has waived its entitlement to the Other Make Whole Amount.





Cash Requirements:





The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments. The Company has not included information on its recurring purchases of materials for use in its manufacturing operations. These amounts are generally consistent from year to year, closely reflecting the Company’s levels of production, and are not long-term in nature, which are less than three months.


27





Payment Due DatesTotal


Less than 1

year


1-3 years


3-5 years


More than 5

YearsShort-term bank loan

$
5,125,802


$
5,125,802


$
-


$
-


$
-Notes payable


38,041,602



38,041,602



-



-



-Convertible notes payable


30,000,000



30,000,000



-



-



-Interest and make-whole on Convertible Notes


5,750,000



5,750,000



-



-



-Other contractual purchase commitments, including information technology


10,788,625



10,006,373



782,252



-



-Total

$
89,706,029


$
88,923,777


$
782,252


$
-


$
-





Short-term bank loans:





The following table summarizes the contract information of short-term borrowings between the banks and the Company as of December 31, 2009.





Bank

Purpose

Borrowing

Date

Borrowing

Term

(Year)


Annual

Percentage

Rate


Date of

Interest

Payment

Date of

Payment

Amount

Payable on

Due DateBank of China

Working

Capital

10-Nov-09


1



5.31
%

Pay monthly

10-Nov-10

$
2,196,772China Merchants Bank

Working

Capital

5-May-09


1



5.31
%

Pay monthly

5-Apr-10


2,196,772Guangdong Development Bank

Working

Capital

18-Sep-09


0.5



4.86
%

Pay monthly

24-Mar-10


732,258Total















$
5,125,802





The Company must use the loans for the purpose described in the table. If the Company fails, it will be charged a penalty interest at 100% of the specified loan rate. The Company has to pay interest at the interest rate described in the table on the 20th of each month. If the Company fails, it will be charged a compounded interest at the specified rate. The Company has to repay the principal outstanding on the specified date in the table. If it fails, it will be charged a penalty interest at 50% of the specified loan rate. Management believes that the Company had complied with such financial covenants as of December 31, 2009, and will continue to comply with them.





The following table summarizes the contract information of issuing notes payable between the banks and the Company as of December 31, 2009:





Purpose

Term (Month)

Due Date

Amount Payable on Due

DateWorking Capital


3-6

Jan-10

$
3,727,058Working Capital


3-6

Feb-10


5,822,912Working Capital


3-6

Mar-10


6,133,827Working Capital


3-6

Apr-10


5,592,757Working Capital


3-6

May-10


6,802,671Working Capital


3-6

Jun-10


9,962,377Total






$
38,041,602





The Company must use the notes payable for the purpose described in the table. If it fails, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit sufficient cash in the designated account of the bank on the due date of notes payable for payment to the suppliers. If the bank has advanced payment for the Company, it will be charged a penalty interest at 150% of the specified loan rate. Management believes that the Company had complied with such financial covenants as of December 31, 2009, and will continue to comply with them.


28


The Company had approximately $10,788,625 of capital commitment as of December 31, 2009, arising from equipment purchases for expanding production capacity. The Company intends to pay $10,006,373 in 2010 using its working capital. Management believes that it will not have a material adverse effect on the Company’s liquidity.





Cash flows:





(a)  Operating activities





Net cash generated from operations during the year ended December 31, 2009 was $34,956,534, compared with $16,373,965 for the year of 2008, an increase of $18,582,569, primarily due to increased income from operations.





During the year ended December 31, 2009, the most important factor of cash outflow of operation activities is increased accounts receivables, notes receivables, and pledged cash deposits.





First, cash outflow caused by the increased accounts receivable was about $44,000,000, mainly due to increased sales in 2009 than in 2008. The credit terms on sale of goods between customers and the Company generally range from 3 - 4 months, which resulted in increased accounts receivable as sales increased. This is a normal capital circulation and the Company believes that it will not have a material adverse effect on future cash flows. Second, cash outflow caused by increased notes receivable was about $15,000,000, mainly due to the Company having sufficient working capital, thus having less notes receivable discounted during this period. Since the notes receivable were based on bank credit standing, they may turn into cash any time the Company elects. Therefore, the increase of notes receivable will not have a material adverse effect on the Company’s future operating activities. Third, increased pledged cash deposits caused cash outflow of $6,000,000. In order to save interest expenses, the Company arranged interest free banker’s acceptance bill facilities with various banks to facilitate purchasing activities to pay purchase expenditure. Such banker’s acceptance bill facilities required 30%-40% pledged rate for cash deposits, which led to an increased pledged cash deposits for increased purchase expenditure in 2009 than 2008.





(b)  Investing activities:





The Company expended net cash of $17,335,687 in investment activities during the year ended December 31, 2009, as compared to $22,356,060 during the year of 2008, a decrease of $5,020,373, as a result of the following factors:





First, as in 2008, the Company invested cash for equipment purchases and building facilities to expand production to meet market needs. Cash used for equipment purchases and building facilities in 2009 and 2008 were $17,498,957 and $12,245,383, respectively.





Second, the Company acquired a 35.5% equity interest in Henglong, one of the Company’s Joint-Ventures in 2008, while there was no such investing activity in 2009.





On March 31, 2008, the Company’s wholly-owned subsidiary, Genesis and Wiselink, both controlled by Hanlin Chen and his family, entered into an equity transfer agreement, pursuant to which Wiselink transferred and assigned its 35.5% equity interest in Henglong, one of the Company’s currently consolidated subsidiaries, to Genesis for a total consideration of $32,090,000. The Company now holds an 80% equity interest in Henglong.





Under the terms of the Agreement, the Consideration was paid as follows: $10,000,000 cash was paid by Genesis to Wiselink on April 30, 2008, and the balance of the purchase price, $22,090,000, was paid by issuance of 3,023,542 shares of common stock of the Company, in its capacity as the 100% parent company of Genesis.





(c)  Financing activities





During the year ended December 31, 2009, the Company expended net cash of $11,290,625 in financing activities, compared to obtaining net cash of $21,981,953 through financing activities for the same period of 2008, a decrease of $33,272,578 as a result of the following factors:





During the year ended December 31, 2008, the Company sold $30,000,000 and $5,000,000 of convertible notes to Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments, L.P., respectively. During the same period in 2009, there is no such financing activity.


29


The Company repaid YA Global $5,000,000 for its convertible notes upon its request during the year ended December 31, 2009.





During the year 2009 and 2008, the Company had sufficient working capital from its operating activities. To save interest expenses, the Company repaid bank loans of $2,196,367 and $7,567,697 during the year 2009 and 2008, respectively.





OFF-BALANCE SHEET ARRANGEMENTS





At December 31, 2009 and 2008, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.





COMMITMENTS AND CONTINGENCIES





The following table summarizes the Company’s contractual payment obligations and commitments as of December 31, 2009:




Payment Obligations by Period2010


2011


2012


2013


Thereafter


TotalObligations for service agreements

$
110,000


$
110,000


$
—


$
—


$
—


$
220,000Obligations for purchasing agreements


9,896,373



672,252



—



—



—



10,568,625Interest and make-whole on Convertible Notes


5,751,270



—



—



—



—



5,751,270Total

$
15,757,643


$
782,252


$
—


$
—


$
—


$
16,539,895




SUBSEQUENT EVENTS





On January 24, 2010, Genesis entered into a sino-foreign equity joint venture contract with Beijing Hainachuan Auto Parts Co., Ltd., to establish a sino-foreign joint venture company, Beijing Henglong Automotive System Co., Ltd. “Beijing Henglong”, to design, develop and manufacture both hydraulic and electric power steering systems and parts.  Under PRC laws, the establishment of Beijing Henglong and the effectiveness of the equity joint venture contract are subject to the approval by the local Ministry of Commerce and the registration of the same with the local Administration of Industries and Commerce in Beijing.  The Company expects that the approval and registration will be obtained and completed within 2 months from the date of the equity joint venture contract.





Due to the continued increase of market demand for its products, the Company decided to expand its production capacity. On February 24, 2010, the Board of Directors of the Company decided to increase the registered capital of Hengsheng, one of the Company’s subsidiaries, to $16,000,000 from $10,000,000. The additional investment will be used for expansion of plant and purchase of machinery and equipment and will be funded by the Company’s working capital balances. As of the date of this report, the additional investment has been injected into Hengsheng.





INFLATION AND CURRENCY MATTERS





In the most recent decade, the Chinese economy has experienced periods of rapid economic growth as well as relatively high rates of inflation, which in turn has resulted in the periodic adoption by the Chinese Government of various corrective measures designed to regulate growth and contain inflation.





Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, and fluctuations in the relative value of currencies. During 2009, the Company has supplied products to North America and settled in cash in US dollars. As a result, appreciation or currency fluctuation of the RMB against the US$ would increase the cost of export products, thus adversely affect the Company’s financial performance.


30


In July 2005, the Chinese Government adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate”. During July 2005 to July 2008, the exchange rate between RMB and US dollars experienced a big fluctuation, for RMB 1.00 to US$0.1205 and RMB 1.00 to US$0.1462, respectively. Since August 2008, the exchange rate has maintained stable, and was approximately at RMB 1.00 to US$0.1464. There can be no assurance that the exchange rate will remain stable. The Renminbi could appreciate against the US dollar. The Company’s financial condition and results of operations may also be affected by changes in the value of certain currencies other than the Renminbi in which the Company’s earnings and obligations are denominated. In particular, an appreciation of the Renminbi is likely to increase the cost of export products, thus decrease the Company’s cash flow.





RECENT ACCOUNTING PRONOUNCEMENTS





See Note 4 to the accompanying Consolidated Financial Statements under Item 15 of this amended Annual Report on Form 10-K/A for a discussion of recent accounting pronouncements.





SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES





The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.





The Company considers an accounting estimate to be critical if:





• It requires the Company to make assumptions about matters that were uncertain at the time it was making the estimate, and





• Changes in the estimate or different estimates that the Company could have selected would have had a material impact on the Company’s financial condition or results of operations.





The table below presents information about the nature and rationale for the Company critical accounting estimates:





Balance Sheet

Caption

Critical Estimate

Item

Nature of Estimates Required

Assumptions/Approaches

Used

Key FactorsAccrued

liabilities and

other long-term

liabilities

Warranty obligations

Estimating warranty requires the Company to forecast the resolution of existing claims and expected future claims on products sold. VMs are increasingly seeking to hold suppliers responsible for product warranties, which may impact the Company’s exposure to these costs.

The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers.

• VM (Vehicle Manufacturer) sourcing

• VM policy decisions regarding warranty claims

*VMProperty, plant and equipment, intangible assets and other long-term assets

Valuation of long- lived assets and investments

The Company is required from time-to-time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines.

The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.

• Future Production estimates

• Customer preferences and decisions


31





Accounts and notes receivables

Provision for doubtful accounts and notes receivable

Estimating the provision for doubtful accounts and notes receivable require the Company to analyze and monitor each customer’s credit standing and financial condition regularly. The Company grants credit to its customers, generally on an open account basis. It will have material adverse effect on the Company’s cost disclosure if such assessment were improper.

The Company grants credit to its customers for three to four months based on each customer’s current credit standing and financial data. The Company assesses allowance on an individual customer basis, under normal circumstances; the Company does not record any provision for doubtful accounts for those accounts receivable amounts which were in credit terms.  For those receivables out of credit terms, certain proportional provision, namely 25% to 100%, will be recorded based on respective overdue terms.

• Customers’  credit standing and financial conditionDeferred income taxes

Recoverability of deferred tax assets

The Company is required to estimate whether recoverability of its deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction.

The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carryforward period, tax planning opportunities and other relevant considerations.

• Tax law changes

• Variances in future projected profitability, including by taxing entityConvertible notes payable, discount of convertible note payable, warrant liabilities, compound derivative liabilities

Warrant liabilities and compound derivative liabilities

The Company is required to estimate the fair value of warrant liabilities and compound derivative liabilities at conception and completion of each reporting period

The Company uses Black-Scholes option pricing model to determine fair value of warrant; uses Monte Carlo simulation (“MCS”) valuation techniques to determine fair value of compound derivative liabilities

• Volatility

• Risk-free rate

• interest market risk

• Credit risk

• Redemption activities before maturity





In addition, there are other items within the Company’s financial statements that require estimation, but are not as critical as those discussed above. These include the allowance for reserves for excess and obsolete inventory. Although not significant in recent years, changes in estimates used in these and other items could have a significant effect on the Company’s consolidated financial statements.





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.





(a)  FINANCIAL STATEMENTS





The following financial statements are set forth at the end hereof.





1.
Report of Independent Auditors





2.
Consolidated Balance Sheets as of December 31, 2009 and 2008





3.
Consolidated Statements of Income/(Loss) for the years ended December 31, 2009 and 2008





4.
Consolidated Statements of Comprehensive Income/(Loss) for the years ended December 31, 2009 and 2008


32


5.
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2009 and 2008





6.
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008





7.
Notes to Consolidated Financial Statements


33


(b) Selected quarterly financial data for the past two years are summarized in the following table:





Quarterly Results of OperationsFirst


Second


Third


Fourth2009

As Restated


2008

As Restated


2009

As Restated


2008

As Restated


2009

As Restated


2008

As Restated


2009

As Restated


2008

As RestatedNet Sales

$
44,697,446


$
41,467,043


$
62,484,279


$
46,508,340


$
64,654,369


$
36,936,755


$
83,761,459


$
38,267,148Gross Profit


10,903,345



10,923,526



16,305,928



12,956,177



15,485,743



8,635,975



19,047,610



8,954,395Operating Income


7,092,507



6,784,664



11,660,281



5,477,887



9,654,436



3,697,416



8,525,170



1,036,611Net Income


1,901,559



6,012,133



9,925,476



5,150,211



(8,023,843
)


3,125,371



(22,454,317
)


1,068,276Net income attributable to noncontrolling interest


1,383,697



1,750,247



2,653,651



1,685,003



2,036,762



983,480



1,715,636



693,131Net income attributable to Parent company


517,862



4,261,886



7,271,825



3,465,208



(10,060,605
)


2,141,891



(24,169,953
)


375,145Earnings Per Share attributable to Parent companyBasic

$
0.02


$
0.16


$
0.23


$
0.12


$
(0.37
)

$
0.07


$
(0.89
)

$
0.01Diluted

$
0.02


$
0.16


$
0.23


$
0.12


$
(0.37
)

$
0.07


$
(0.89
)

$
0.01


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.





Not applicable.





ITEM 9A.  CONTROLS AND PROCEDURES




(A) Disclosure Controls and Procedures




The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2009, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-K/A, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2009.




The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.




(B) Management’s report on internal control over financial reporting




Management of the Company, under the supervision of the chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting.


34


Internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, is a process designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that:




a.
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;




b.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with U.S. GAAP, and that the Company’s receipts and expenditures are being made only in accordance with appropriate authorization of the Company’s management and board of directors; and




c.
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.




Management has assessed the effectiveness of internal control over financial reporting as of December 31, 2009. In making its assessment of internal control over financial reporting, management, under the supervision and with the participation of the chief executive officer and chief financial officer, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.




On March 17, 2011, the Company announced that it had identified historical accounting errors relating to the accounting treatment of the Company’s Convertible Notes. The accounting errors have resulted in the misstatement of certain charges arising from fair value adjustments and other changes to derivative liabilities since the first quarter of 2009. The Company undertook a review to determine the total amount of the errors and the accounting periods in which the errors occurred. The Company’s review determined that the errors resulted from the Company’s failure to properly apply the requirements of Accounting Standard Codification (ASC) 815 (“ASC 815”), with respect to the conversion feature embedded in the convertible notes, effective January 1, 2009. Additionally, management has also identified accounting errors in accumulated depreciation and deferred tax assets reported and accrued payroll and related costs. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. After analyzing the size and timing of the errors, the Company determined that, in the aggregate, the errors were material and would require the Company to restate certain of its previously issued financial statements, including its previously issued audited consolidated financial statements as of and for the fiscal year ended December 31, 2009, including restated comparative financial statements for 2008, and related auditors’ report, and unaudited interim consolidated financial statements as of and for the quarterly periods ended March 31, June 30 and September 30, 2010.




The following material weaknesses in internal control over financial reporting have been identified as of December 31, 2009.




1.
The Company did not have sufficient personnel with appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues, and to prepare and review financial statements and related disclosures under U.S. GAAP.Specifically, the Company's controls did not operate effectively to ensure the appropriate and timely analysis of and accounting for unusual and non-routine transactions and certain financial statement accounts, including, but not limited to, accounting and disclosure for the convertible notes and accounting for deferred taxes.




2.
The Company did not have formalized closing procedures and adequate period-end review procedures to ensure a) proper preparation of the period-end financial statement closing entries and b) consistency of application of accounting policies and completeness and accuracy of the financial statement disclosures. Specifically, the Company's controls did not operate effectively to ensure the appropriate and timely analysis and monitoring of the underlying information relating to its period-end financial reporting process and preparation of its consolidated financial statements.




These flaws represented material weaknesses in the Company’s internal control over financial reporting as of December 31, 2009. For these reasons, Messrs. Wu and Li concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2009.


35


In order to address the material weaknesses identified above, the Company has taken certain remedial action to strengthen its internal control over financial reporting. The Company has: (a) engaged external consulting professionals in the area of accounting advisory to assist it in reviewing the accounting treatment of the convertible notes;(b) performed additional review of period-end closing procedures by conducting a detailed and extensive review of non-routine and complex transactions and agreements, and carried out more comprehensive accounting reconciliation processes; and (c) required the finance team to perform extensive research to enhance their knowledge on the relevant U.S. GAAP interpretations and application,including, but not limited to, accounting and disclosure for the convertible notes and accounting for deferred taxes. The Company also plans to: (a) hire key individuals in the corporate accounting function with in-depth knowledge and experience in U.S. GAAP; (b) provide more training on U.S. GAAP to accounting and other relevant personnel; and (c) establish and develop comprehensive financial period-end closing procedures to ensure the proper preparation of quarterly and annual consolidated financial statements, note disclosures and related information in compliance with accounting standards and guidance.





Management believes that the measures described above will satisfactorily address the referenced material weaknesses. Under the direction of the Audit Committee, management will continue to review and make necessary changes to the system of internal controls and the control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.




This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.




(C)
Changes in Internal Control Over Financial Reporting




There have been no changes in our internal control over financial reporting during the fourth quarter of the year ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





ITEM 9B. OTHER INFORMATION





None.





PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.





The following table and text set forth the names and ages of all directors and executive officers of the Company as of December 31, 2009. The Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. Also provided herein are brief descriptions of the business experience of each director and executive officer during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the federal securities laws.





Name

Age

Position(s)Hanlin Chen

52

Chairman of the BoardQizhou Wu

45

Chief Executive Officer and DirectorJie Li

40

Chief Financial OfficerTse, Yiu Wong Andy

39

Sr. VPShengbin Yu

56

Sr. VPShaobo Wang

47

Sr. VPYijun Xia

47

VPDaming Hu

51

Chief Accounting OfficerDr. Haimian Cai

46

Former DirectorRobert Tung

53

DirectorGuangxun Xu

59

DirectorBruce C. Richardson

52

DirectorWilliam E. Thomson

68

Director


36


(a)
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS:





Hanlin Chenhas served as Chairman of the Board since March 2003. Mr. Chen is a standing board member of Political Consulting Committee of Jingzhou City and vice president of Foreign Investors Association of Hubei Province. He was the general manager of Shashi Jiulong Power Steering Gears Co., Ltd. from 1993 to 1997. Since 1997, he has been the Chairman of the Board of Henglong Automotive Parts, Ltd. Mr. Hanlin Chen is the brother-in-law of the Company’s Senior Vice President, Mr. Andy Yiu Wong Tse.





Qizhou Wuhas served as an Officer since September 2003 and the Chief Executive Officer since September 2007.  Prior to that position he served as the Chief Operating Officer since March 2003. He was the Executive General Manager of Jiulong from 1993 to 1999 and GM of Henglong Automotive Parts, Ltd. from 1999 to 2002. Mr. Wu graduated from Tsinghua University in Beijing with a Masters degree in Automobile Engineering.





Jie Lihas served as the Chief Financial Officer since September 2007. Prior to that position he served as the Corporate Secretary from December 2004. Prior to joining the Company in September 2003, Mr. Li was the Assistant President of Jingzhou Jiulong Industrial Inc from 1999 to 2003 and the general manger of Jingzhou Tianxin Investment Management Co. Ltd. from 2002 to 2003. Mr. Li has a Bachelor's degree from the University of Science and Technology of China. He also completed his graduate studies in economics and business management at the Hubei Administration Institute.





Tse, Yiu Wong Andyhas served as Sr. VP of the Company since March 2003. He has also served as chairman of the board of Shenyang. He was the vice GM of Jiulong from 1993 to 1997 and the vice GM of Henglong. Mr. Tse has over 10 years of experience in automotive parts sales and strategic development. Mr. Tse has an MBA from the China People University.





Shengbin Yuhas served as Sr. VP of the Company and had overall charge of the production since March 2003. Mr. Yu was the Vice-G.M. of Jiulong from 1993 to 1996 and Executive Vice-G.M. of Henglong from 1997 to 2003.





Shaobo Wanghas served as Sr. VP of the Company and had overall charge of the technology since March 2003. He was the Vice-G.M. of Jiulong from 1993 to 2003. Mr. Wang graduated from Tsinghua University in Beijing with a bachelor degree in Automobile Engineering.





Yijun Xiahas served as VP of the Company since December 2009. He has also served as the general manager of the Henglong since April 2005. Prior to that position he served as the Vice-G.M. of Henglong from December 2002. Mr. Xia graduated from Wuhan University of Water Transportation Engineering with a bachelor degree in Metal Material and Heat Treatment .





Daming Hu has served as the Chief Accounting Officer since September 2007 and had overall charge of the financial report. During March 2003 to August 2007, he served as Chief Financial Officer of the Company. Mr. Hu was the Finance Manager of Jiulong from 1996 to 1999 and Finance Manager of Heng Long from 1999 to 2002. Mr. Hu graduated from Zhongnan University of Economics and Law with a major in accounting.


37


Haimian Caihas been an Independent Director from September 2003 to December 2009, and also a member of the Company’s Audit, Compensation and Nominating Committees. Dr. Cai is a technical specialist in the automotive industry. Prior to that, Dr. Cai was a staff engineer in ITT Automotive Inc. Dr. Cai has written more than fifteen technical papers and co-authored a technical book regarding the Powder Metallurgy industry for automotive application. Dr. Cai has more than ten patents including pending patents. Dr. Cai holds a B.S. Degree in Automotive Engineering from Tsinghua University and a M.S. and Ph. D. in manufacturing engineering from Worcester Polytechnic Institute. Since December 2009, Mr. Cai has not served as Independent Director and a member of the Company’s Audit, Compensation and Nominating Committees, for work reasons.





Robert Tunghas been an Independent Director of the Company since September 2003 and a member of the Company’s Audit, Compensation and Nominating Committees. Mr. Tung is currently the President of Multi-Media Communications, Inc., and Vice President of Herbal Blends International, LLC. Mr. Tung holds a M.S. in Chemical Engineering from the University of Virginia. Since 2003, Mr. Tung has been actively developing business in China. Currently, Mr. Tung is the China Operation Vice President of Iraq Development Company of Canada, a leading North American corporation engaging in oil field and infrastructure development in the Republic of Iraq. In addition, Mr. Tung holds the Grand China sales representative position of TRI Products, Inc., a well known North American iron ores and scrap metals supplier.





Guangxun Xuhas served as an Independent Director of the Company since December 2009. Prior to that, he has been the Chief Representative of NASDAQ in China in the past two years and was a managing director with the NASDAQ Stock Market International, Asia for over 10 years. With a professional career in the finance field spanning over 25 years, Mr. Xu’s practice focuses on providing package services on US and UK listings, advising on and arranging for Private Placements, PIPEs and IPOs, pre-IPO restructuring, M&A, Corporate and Project Finance, corporate governance, post-IPOIR and compliance, Risk Control, etc. He holds an MBA from Middlesex University, London.





William E. Thomson, CA, has been an Independent Director of the Company since September 2003 and is a member of the Company's Audit, Compensation and Nominating Committees. Mr. Thomson's current additional directorships include: Asia Bio Chem (ABC) (Agriculture); China Armco Metals (Scrap Metal); Score Media Inc. (SCR.TO) (Media); Electrical Contacts Ltd. (industrial); Han Wind Energy (Sustainable Energy); Pure Med Laser (Health Care); Summit Energy Management (Oil & Gas Distribution); Integrated Planning & Solution; Wright Environmental Management Inc. (Waste Management Solutions); YTW Growth Capital Management Corp. (CPC Facilitation); and Greater China Capital Inc. Mr. Thomson’s past directorships include: Open EC Technologies (OCE.V); Asia Media Group Corporation; Atlast Pain & Injury Solutions Inc. (TSX U) (Media); Confederation of Italian Entrepreneurs Worldwide Canada (Health Care); Debt Freedom Canada Inc. (Financial); Elegant Communications Ltd. (Environment); Esna Technologies Inc. (Unified Communications Solutions); Industrial Minerals Inc. (IDSM) (Graphite); JITE Technologies Inc. (JTI) (Electronics); Maxus Technology Corp. (eWaste Solutions); Med-Emerg International Inc. (Health Care); Symtech Canada Ltd. (Communications); The Aurora Fund (Financial); TPI Plastics (Plastics); Wiresmith Ltd. (Industrial) and World Educational Services.





Bruce C. Richardsonjoined the Company as an Independent Director in December, 2009. Mr. Richardson joined Redwood Capital as a manager in July 2009.  Prior to joining Redwood Capital, he served as CFO and company secretary of Dalian RINO Environmental Engineering from October 2007 until September 2008, a Managing Director of Xinhua Finance in Shanghai, PRC, from April 2006 until September 2007, and a Senior Analyst at Evolution Securities China Limited in Shanghai from 2004 until March 2006. Mr. Richardson also served as a Director of New Access Capital in Shanghai from June 2003 until January 2004. From 2001 through May 2003, Mr. Richardson was engaged in a private consulting practice centered on Chinese financial markets and institutions.  He began his career with Arthur Andersen in New York, where he worked from 1989 to 1994 before returning to China. Mr. Richardson earned a BA in Classics from the University of Notre Dame in 1980, and graduated with an MA in International Management from the University of Texas at Dallas in 1986. He was awarded a graduate study grant by the US National Academy of Sciences in 1987 and completed a year of post-graduate research on PRC accounting at People’s University in 1988.





BOARD COMPOSITION AND COMMITTEES





(b)
AUDIT COMMITTEE AND INDEPENDENT DIRECTORS





The Company has a standing Audit Committee of the Board of Directors established in accordance with Section 3(a)(58)(A) of the Exchange Act, as amended. The Audit Committee consists of the following individuals, all of whom the Company considers to be independent, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence: Robert Tung, Guangxun Xu, Bruce C. Richardson, and William Thomson. Mr. William Thomson is the Chairman of the Audit Committee. The Board has determined that Mr. William Thomson is the Audit Committee financial expert, as defined in Item 407(d)(5) of Regulation S-K, serving on the Company’s audit committee.


38


(c)
COMPENSATION COMMITTEE





The Company has a standing Compensation Committee of the Board of Directors. The Compensation Committee is responsible for determining compensation for the Company’s executive officers. Four of the Company’s independent directors, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence, Robert Tung, Guangxun Xu, Bruce C. Richardson, and William Thomson, serve on the Compensation Committee. Since December 17, 2009, Mr. Bruce C. Richardson has been the Chairman of the Compensation Committee.





The Company’s Compensation Committee is empowered to review and approve the annual compensation and compensation procedures for the executive officers of the Company. The primary goals of the Compensation Committee of the Company’s Board of Directors with respect to executive compensation are to attract and retain the most talented and dedicated executives possible and to align executives’ incentives with stockholder value creation. The Compensation Committee evaluates individual executive performance with a goal of setting compensation at levels the committee believes are comparable with executives in other companies of similar size and stage of development operating in similar industry while taking into account the Company’s relative performance and its strategic goals.





The Company has not retained a compensation consultant to review its policies and procedures with respect to executive compensation. The Company conducts an annual review of the aggregate level of its executive compensation, as well as the mix of elements used to compensate its executive officers. The Company compares compensation levels with amounts currently being paid to executives in its industry and most importantly with local practices in China. The Company is satisfied that its compensation levels are competitive with local conditions.





(d)
NOMINATING COMMITTEE





The Company has a standing Nominating Committee of the Board of Directors. Director candidates are nominated by the Nominating Committee. The Nominating Committee will consider candidates based upon their business and financial experience, personal characteristics, and expertise that are complementary to the background and experience of other Board members, willingness to devote the required amount of time to carry out the duties and responsibilities of Board membership, willingness to objectively appraise management performance, and any such other qualifications the Nominating Committee deems necessary to ascertain the candidates’ ability to serve on the Board. The Nominating Committee will not consider nominee recommendations from security holders, other than the recommendations received from a security holder or group of security holders that beneficially owned more than five (5) percent of the Company’s outstanding common stock for at least one year as of the date the recommendation is made. Four of the Company’s independent directors, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence, Robert Tung, Guangxun Xu, Bruce C. Richardson, and William Thomson serve on the Nominating Committee. Mr. Guangxun Xu is the Chairman of the Nominating Committee.





(e)
STOCKHOLDER COMMUNICATIONS





Stockholders interested in communicating directly with the Board of Directors, or individual directors, may email the Company’s independent director William Thomson at Bill.Thomson@chl.com.cn. Mr. Thomson will review all such correspondence and will regularly forward to the Board copies of all such correspondence that deals with the functions of the Board or committees thereof or that he otherwise determines requires their attention. Directors may at any time review all of the correspondence received that is addressed to members of the Board of Directors and request copies of such correspondence. Concerns relating to accounting, internal controls or auditing matters will immediately be brought to the attention of the Audit Committee and handled in accordance with procedures established by the Audit Committee with respect to such matters.





(f)
FAMILY RELATIONSHIPS





Mr. Hanlin Chen and Mr. Tse, Yiu Wong Andy are brothers-in-law.





(g)
CODE OF ETHICS AND CONDUCT





The Board of Directors has adopted a Code of Ethics and Conduct which is applicable to all officers, directors and employees. The Code of Ethics and Conduct is filed as an exhibit to this Form 10-K/A, which incorporates it by reference from the Form 10-KSB for year ended December 31, 2003.


39


(h)
SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE





Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers and directors and persons who own more than 10% of a registered class of the Company’s equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of common stock and other of the Company’s equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by Commission regulations to furnish the Company with copies of all Section 16(a) reports they file. To the best of the Company’s knowledge, based solely upon a review of the Form 3, 4 and 5 filed, no officer, director or 10% beneficial shareholder failed to file on a timely basis any reports required by Section 16(a) of the Securities Exchange Act of 1934, as amended.





ITEM 11. EXECUTIVE COMPENSATION





Compensation Committee





The Company has a standing Compensation Committee of the Board of Directors as described under Item 10(c) above.  The Compensation Committee is responsible for determining compensation for the Company’s executive officers. Four of the Company’s independent directors, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence, Robert Tung, Guangxun Xu, Bruce C. Richardson, and William Thomson, serve on the Compensation Committee. Since December 17, 2009, Mr. Bruce C. Richardson has been the Chairman of the Compensation Committee.





Executive compensation consists of salary, stock option awards, and performance bonus in cash.





Salary





The Company’s Board of Directors and Compensation Committee have approved the current salaries for executives: $150,000 for the Chairman, $100,000 for the CEO, and $60,000 for other officers in 2009.





Stock Option Awards





The stock options plan proposed by management, which aims to incentivize and retain core employees, to meet employees’ benefits, the Company’s long term operating goals and shareholder benefits, was approved at the 2004 Annual Meeting of Stockholders, and the maximum common shares for issuance under this plan is 2,200,000 with a period of 10 years.





The Company has not granted any stock option to management in 2009. The stock option granted for management in 2008 was as follows, which was approved by the Board of Directors and Compensation Committee.





a.
Total Number of Options Granted: 298,850


b.
Exercise Price Per Option: $2.93, the closing price of the common shares of the Company on December 9, 2008


c.
Date of Grant: December 10, 2008


d.
Expiration Date: on or before December 9, 2011


e.
Vesting Schedule


(i)
On December 10, 2008, 1/3 of the granted stock option shall be vested and become exercisable


(ii)
On December 10, 2009, another 1/3 of the granted stock option shall be vested and become exercisable


(iii)
On December 10, 2010, remaining 1/3 of the granted stock option shall be vested and become exercisable





In accordance with ASC Topic 718 (formerly SFAS No. 123R), the cost of the above mentioned stock options issued to directors was measured on the grant date based on their fair value. The fair value is determined using the Black-Scholes option pricing model and certain assumptions.  Please see Note 22.





Performance bonus





a.
Grantees: Hanlin Chen, Qizhou Wu, Shengbin Yu, Shaobo Wang, Andy Tse, Jie Li, and Daming Hu;


b.
Conditions: (i) based on the Company’s consolidated financial statements, the year over year growth rates of net sales and net profits for 2009 must exceed 15%; and (ii) the average growth rate of the foregoing indicators must exceed that of the whole industry in 2009 ;


c.
Bonus: 50% of each officer’s annual salary in 2009 .


40


Awards for performance bonus of $275,000 were accrued in 2009 and have not been paid by the end of 2009.





Outstanding Equity Awards at Fiscal Year-End:


Not Applicable.





The compensation that executive officers received for their services for fiscal year 2009 and 2008 were as follows:





Name and

principal

position

Year

Salary


Bonus


Stock

Awards


Option awards


Non-equity

incentive plan

Compensation


Change in

pension value

and

non-qualified

deferred

compensation

Earnings


All other

Compensation


TotalHanlin Chen

2009

$
150,000


$
75,000


$



$
—


$
—


$
—


$
—


$
225,000(Chairman)

2008

$
150,000


$
—


$



$
—


$
—


$
—


$
—


$
150,000Qizhou Wu

2009

$
100,000


$
50,000


$



$
—


$
—


$
—


$
—


$
150,000(CEO)

2008

$
100,000


$
—


$



$
—


$
—


$
—


$
—


$
100,000Jie Li

2009

$
60,000


$
30,000


$



$
—


$
—


$
—


$
—


$
90,000(CFO)

2008

$
60,000


$
—


$



$
38,654


$
—


$
—


$
—


$
98,654


Compensation for Directors





Based on the number of the board of directors’ service years, workload and performance, the Company decides on their pay. The management believes that the pay for the members of the Board of Directors was appropriate as of December 31, 2009.





The compensation that directors received for serving on the Board of Directors for fiscal year 2009 was as follows:





Name

Fees

earned or

paid in

cash


Stock

Awards


Option

Awards (1)


Non-equity

incentive

plan

compensation


Change in

pension value

and

nonqualified

deferred

compensation

earnings


All other

Compensation (2)


TotalHaimian Cai

$
40,000


$
-


$
65,550


$
-


$
-


$
96,000


$
201,550William E. Thomson

$
46,000


$
-


$
65,550


$
-


$
-


$
-


$
111,550Robert Tung

$
40,000


$
-


$
65,550


$
-


$
-


$
-


$
105,550Guangxun Xu

$
-


$
-


$
-


$
-


$
-


$
-


$
-Bruce C. Richardson

$
-


$
-


$
-


$
-


$
-


$
-


$
-


(1)  Other than the cash payment based on the number of a director’s service years, workload and performance, the Company grants 7,500 option awards to each director every year.





In accordance with ASC Topic 220 (formerly SFAS No. 123R), the cost of the above mentioned stock options issued to directors was measured on the grant date based on their fair value. The fair value is determined using the Black-Scholes option pricing model and certain assumptions.  Please see Note 22.





(2)  The cost of the above mentioned compensation paid to directors was measured based on investment, operating, technology, and consulting services they provided.





During the year 2009, Mr. Haimian Cai provided additional investment and technology consulting services.





All other directors did not receive compensation for their service on the Board of Directors, except the first three independent directors mentioned above.


41


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as consisting of sole or shared voting power, including the power to vote or direct the vote, and/or sole or shared investment power, including the power to dispose of or direct the disposition of, with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable. The percentage ownership is based on 27,046,244 shares of common stock outstanding at February 27, 2010.





Name/Title

Total Number of Shares


Percentage OwnershipHanlin Chen,  Chairman (1)


15,144,526



55.99
%Qizhou Wu, CEO, President and Director


1,641,396



6.06
%Jie Li, CFO


-



-
%Li Ping Xie(2)


15,144,526



55.99
%Tse, Yiu Wong Andy, Sr. VP, Director


472,704



1.74
%Shaobo Wang, Sr. VP


165,104



0.61
%Shengbin Yu, Sr. VP


216,429



0.80
%Yijun Xia, VP


-



-
%Daming Hu, CAO


9,000



0.03
%Robert Tung, Director


-



-
%Dr. Haimian Cai, Director


3,750



0.01
%William E. Thomson, Director


-



-
%Wiselink Holdings Limited (3)


3,023,542



11.17
%All Directors and Executive

Officers (10 persons) (4)


20,374,097



75.33
%





(1)Includes 1,491,425 shares of common stock beneficially owned by Mr. Chen’s wife, Ms. Xie and 302,354 shares indirectly held in Wiselink Holdings Limited.





(2)Includes 13,653,101 shares of common stock beneficially owned by Ms. Xie’s husband, Mr. Chen.





(3)Wiselink Holdings Limited is a company controlled by Mr. Chen and other executive officers.





(4)Excludes 302,354 shares indirectly held by Mr. Chen in Wiselink Holdings Limited. Hanlin Chen, Chairman, owns 55.99% of the common stock of the Company and has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.





ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.





For the information required by Item 13 please refer to Consolidated Financial Statements notes 3 and 24 “ Certain Relationships And Related Transactions ” and “ Related Party Transactions ” in the amended Annual Report on Form 10-K/A for the year ended December 31, 2009.





ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.





The following table sets forth the aggregate fees for professional audit services rendered by Schwartz Levitsky Feldman LLP for the audit of the Company’s annual financial statements, and fees billed for other services for the fiscal years 2009 and 2008. The Audit Committee has approved all of the following fees.





Fiscal Year Ended2009


2008Audit Fees

$
265,000


$
285,000Audit-Related Fees(1)

—



24,100Tax Fees (2)


8,400



8,400Total Fees Paid

$
273,400


$
317,500


42





(1)
Includes accounting and reporting consultations related to financing and internal control procedures.





(2)
Includes fees for service related to tax compliance services, preparation and filing of tax returns and tax consulting services.





Audit Committee’s Pre-Approval Policy





During fiscal years ended December 31, 2009 and 2008, the Audit Committee of the Board of Directors adopted policies and procedures for the pre-approval of all audit and non-audit services to be provided by the Company’s independent auditor and for the prohibition of certain services from being provided by the independent auditor. The Company may not engage the Company’s independent auditor to render any audit or non-audit service unless the service is approved in advance by the Audit Committee or the engagement to render the service is entered into pursuant to the Audit Committee’s pre-approval policies and procedures. On an annual basis, the Audit Committee may pre-approve services that are expected to be provided to the Company by the independent auditor during the fiscal year. At the time such pre-approval is granted, the Audit Committee specifies the pre-approved services and establishes a monetary limit with respect to each particular pre-approved service, which limit may not be exceeded without obtaining further pre-approval under the policy. For any pre-approval, the Audit Committee considers whether such services are consistent with the rules of the Securities and Exchange Commission on auditor independence.





PART IV





ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.





(a) List of Financial Statements/Schedules





1.
Report of Independent Registered Public Accounting Firm





2.
Consolidated Balance Sheets as of December 31, 2009 and 2008





3.
Consolidated Statements of Earnings (Operations) for the years ended December 31, 2009 and 2008





4.
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2009 and 2008





5.
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2009 and 2008





6.
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008





7.
Notes to Consolidated Financial Statements





(b) EXHIBITS





The following is a list of exhibits filed as part of this amended Annual Report on Form 10-K/A. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference.





Exhibit

Number

Description3.1(i)

Certificate of Incorporation (incorporated by reference from the filing on Form 10KSB File No. 000-33123.)3.1(ii)

Bylaws (incorporated by reference from the Form 10KSB for the year ended December 31, 2002.)10.5

Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to the exhibit 10.8 to the Company’s Form 10Q Quarterly Report on May 10, 2006 )


43





10.6

Securities Purchase Agreement dated February 1, 2008 among us, Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.7

Securities Purchase Agreement dated February 15, 2008 between the Company and the investors. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.8

Escrow Agreement dated February 15, 2008 among us, U.S. Bank National Association, Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.10.9

Registration Rights Agreement dated February 15, 2008 among us, Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.10

Senior Convertible Note dated February 15, 2008 in the original principal amount of $8,571,429 issued by the Company in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.11

Senior Convertible Note dated February 15, 2008 in the original principal amount of $6,428,571 issued by the Company in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.12

Senior Convertible Note dated February 15, 2008 in the original principal amount of $15,000,000 issued by the Company in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.13

Closing Warrant to purchase 564,799 shares of common stock at $8.8527 per share, dated February 15, 2008, issued by the Company in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.14

Escrow Warrant to purchase 564,799 shares of common stock at $8.8527 per share, dated February 15, 2008, issued by the Company in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.15

Senior Convertible Note dated February 15, 2008 in the original principal amount of $1,428,571 issued by the Company in favor of YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.16

Senior Convertible Note dated February 15, 2008 in the original principal amount of $1,071,429 issued by the Company in favor of YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.17

Senior Convertible Note dated February 15, 2008 in the original principal amount of $2,500,000 issued by the Company in favor of YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.18

Closing Warrant to purchase 94,133 shares of common stock at $8.8527 per share, dated February 15, 2008, issued by the Company in favor of YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.19

Escrow Warrant to purchase 94,133 shares of common stock at $8.8527 per share, dated February 15, 2008, issued by the Company in favor of YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)


44





10.20

Translation of the Equity Transfer Agreement dated March 31, 2008 in English (incorporated by reference to exhibit 99.1 of the Company’s Form 8-K filed on April 2, 2008)10.21

English Translation of the Sino-Foreign Equity Joint Venture Contract dated January 24, 2010 between Great Genesis Holdings Limited and Beijing Hainachuan Auto Parts Co., Ltd.(incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2009 filed on March 25, 2010)21

Schedule of Subsidiaries (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2009 filed on March 25, 2010)23

Consent of Schwartz Levitsky Feldman LLP., Independent Registered Public Accounting Firm31.1

Rule 13a-14(a) Certification*31.2

Rule 13a-14(a) Certification*32.1

Section 1350 Certification*32.2

Section 1350 Certification*





* Filed herewith





SIGNATURES





In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





CHINA AUTOMOTIVE SYSTEMS, INC.Dated: June 24, 2011

/s/ Qizhou WuName:
Qizhou WuTitle:
Chief Executive Officer and President




45


In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.





Dated: June 24, 2011

/s/ Hanlin ChenName:
Hanlin ChenTitle:
Chairman and DirectorDated: June 24, 2011

/s/ Qizhou WuName:
Qizhou WuTitle:
Chief Executive Officer,

President and DirectorDated: June24, 2011

/s/ Jie LiName:
Jie LiTitle:
Chief Financial OfficerDated: June 24, 2011

/s/ Daming HuName:
Daming HuTitle
Chief Accounting OfficerDated: June 24, 2011

/s/ Robert TungName:
Robert TungTitle:
DirectorDated: June 24, 2011

/s/ Guangxun XuName:
Guangxun XuTitle:
DirectorDated: June 24, 2011

/s/ William E. ThomsonName:
William E. ThomsonTitle:
DirectorDated: June 24, 2011

/s/ Bruce C. RichardsonName:
Bruce C. RichardsonTitle:
Director


46





Schwartz Levitsky Feldman llp


CHARTERED ACCOUNTANTS


LICENSED PUBLIC ACCOUNTANTS


TORONTO· MONTREAL


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors and Stockholders of
 China Automotive Systems, Inc. and Subsidiaries
 
 We have audited the accompanying restated consolidated balance sheets of China Automotive Systems, Inc. and subsidiaries as at December 31, 2009 and 2008 and the related restated consolidated statements of earnings (operations), comprehensive income (loss), cash flows and changes in stockholders’ equity for the years ended December 31, 2009 and 2008.  These consolidated financial statements are the responsibility of the management of China Automotive Systems, Inc.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
 The company is not required to have nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal controls over financing reporting.  Accordingly, we express no such opinion.
 
 In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Automotive Systems, Inc. and subsidiaries as of December 31, 2009 and 2008 and the results of its earnings and its cash flows for the years ended December 31, 2009 and 2008 in conformity with generally accepted accounting principles in the United States of America.
  /s/ Schwartz Levitsky Feldman LLP“SCHWARTZ LEVITSKY FELDMAN LLP”


Toronto, Ontario, Canada
Chartered AccountantsMarch 16, 2010 except for note 2
Licensed Public Accountantswhich is as of June 23, 2011




1167 Caledonia RoadToronto, Ontario M6A 2X1Tel:  416 785 5353Fax:  416 785 5663





47


China Automotive Systems, Inc. and Subsidiaries


Consolidated Balance Sheets


December 31, 2009 and 2008




December 31,2009


2008As Restated–

note 2


As Restated–

note 2ASSETSCurrent assets:Cash and cash equivalents

$
43,480,176


$
37,113,375Pledged cash deposits (note 5)


12,742,187



6,739,980Accounts and notes receivable, net, including $ 1,441,939 and $1,285,110 from related parties at December 31, 2009 and 2008 , net of an allowance for doubtful accounts of $5,320,378 and $4,910,478 at December 31, 2009 and 2008 (note 6)


154,863,292



96,424,856Advance payments and others, including $0 and $9,374 to related parties at December 31, 2009 and 2008


2,413,556



1,442,614Inventories (note 8)


27,415,697



26,571,755Current deferred tax assets (note 11)


3,866,353



2,531,609Total current assets

$
244,781,261


$
170,824,189Long-term Assets:Property, plant and equipment, net (note 9)

$
58,529,447


$
50,020,390Intangible assets, net (note 10)


561,389



504,339Other receivables, net, including $65,416 and $369,365 from related parties on December 31, 2009 and 2008 , net of an allowance for doubtful accounts of $740,110 and $659,837 on December 31, 2009 and 2008 (note 7)


1,064,224



1,349,527Advance payment for property, plant and equipment, including $2,579,319 and $2,473,320 to related parties on December 31, 2009 and 2008


6,369,043



6,459,510Long-term investments


79,084



79,010Non-current deferred tax assets (note 11)


2,998,124



2,651,176Total assets

$
314,382,572


$
231,888 ,141LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Bank loans (note 12)

$
5,125,802


$
7,315,717Accounts and notes payable, including $1,537,827 and $1,097,642 to related parties on December 31, 2009 and 2008 (note 13)


107,495,833



59,246,043Convertible notes payable, net (note 14)


30,000,000



34,339,807Compound derivative liabilities (note 15)


45,443,506



—Customer deposits


1,918,835



236,018Accrued payroll and related costs


4,578,446



3,519,845Accrued expenses and other payables (note 16)


22,472,452



14,499,513Accrued pension costs (note 17)


3,778,187



3,806,519Taxes payable (note 18)


11,482,177



5,717,438Amounts due to shareholders/directors (note 19)


-



337,370Total current liabilities

$
232,295,238


$
129,018,270Long-term liabilities:Advances payable (note 20)


233,941



234,041Total liabilities

$
232,529,179


$
129,252,311Significant concentrations (note 29)Related party transactions (note 30)Commitments and contingencies (note 31 )Subsequent events (note 33)Stockholders' equity:Preferred stock, $0.0001 par value - Authorized - 20,000,000 sharesIssued and Outstanding – None

$
—


$
—Common stock, $0.0001 par value - Authorized - 80,000,000 sharesIssued and Outstanding – 27,046,244 shares and 26,983,244 shares on December 31, 2009 and 2008 , respectively


2,704



2,698Additional paid-in capital (note 22)


27,515,064



26,648,154Retained earnings- (note 23)Appropriated


8,324,533



7,525,777Unappropriated


7,685,002



34,060,876Accumulated other comprehensive income


11,187,733



11,127,505Total parent company stockholders' equity


54,715,036



79,365,010Non-controlling interests (note 21 )


27,138,357



23,270,820Total stockholders' equity

$
81,853,393


$
102,635,830Total liabilities and stockholders' equity

$
314,382,572


$
231,888,141





The accompanying notes are an integral part of these consolidated financial statements.


48


China Automotive Systems, Inc. and Subsidiaries


Consolidated Statements of Income (Operations)


Years Ended December 31, 2009 and 2008





Years Ended December 312009


2008As Restated– note 2


As Restated– note 2Net product salesUnrelated parties

$
249,705,389


$
158,503,876Related parties


5,892,164



4,675,410255,597,553



163,179,286Cost of product soldUnrelated parties


179,856,225



113,807,269Related parties


13,998,702



7,901,944193,854,927



121,709,213Gross profit

$
61,742,626


$
41,470,073Add: Gain on other sales


838,505



734,063Less: Operating expensesSelling expenses


7,892,540



5,007,878General and administrative expenses


15,195,026



17,943,790R&D expenses


2,561,170



2,255,892Total Operating expenses


25,648,736



25,207,560Income from operations

$
36,932,395


$
16,996,576Add: Other income, net (note 24)


94,534



1,067,309Financial income (expenses) (note 25)


(7,883,714
)


(3,048,713
)Gain (loss) on change in fair value of derivative (note 26)


(43,074,327
)


796,649Income (loss) before income taxes


(13,931,112
)


15,811,821Less: Income taxes (note 27)


4,720,013



455,830Net income (loss)


(18,651,125
)


15,355,991Net income (loss) attributable to noncontrolling interest


7,789,746



5,111,861Net income (loss) attributable to parent company

$
(26,440,871
)

$
10,244,130Allocation to convertible notes holders


-



(1,328,374
)Net income (loss) attributable to parent company’s common shareholders

$
(26,440,871
)

$
8,915,756Net income (loss) attributable to parent company’s common shareholders per share –Basic

$
(0.98
)

$
0.35Diluted (note 28)

$
(0.98
)

$
0.35Weighted average number of common shares outstanding –Basic


26,990,649



25,706,364Diluted


26,990,649



25,706,453





The accompanying notes are an integral part of these consolidated financial statements.


49


China Automotive Systems, Inc. and Subsidiaries


Consolidated Statements of Comprehensive Income (Loss)


Years Ended December 31, 2009 and 2008





Years Ended December 312009


2008As Restated– note 2


As Restated– note 2Net income (loss)

$
(18,651,125
)

$
15,355,991Other comprehensive income:Foreign currency translation gain (loss)


82,638



6,571,019Comprehensive income (loss)

$
(18,568,487
)

$
21,927,010Comprehensive income attributable to noncontrolling interest


7,812,156



6,544,838Comprehensive income (loss) attributable to parent company

$
(26,380,643
)

$
15,382,172





The accompanying notes are an integral part of these consolidated financial statements.


50


China Automotive Systems, Inc. and Subsidiaries


Consolidated Statements of Stockholders’ Equity


Years Ended December 31, 2009 and 2008








Accumulated


Total parentAdditional








Other


company





TotalCommon


Paid-in


Retained Earnings


Comprehensive


stockholders’


Non-controlling


stockholders’Stock


Capital


Appropriated


Unappropriated


Income (Loss)


Equity


interests


equityBalance at January 1, 2008  -previously reported

$
2,396


$
30,125,951


$
7,525,777


$
23,591,275


$
5,989,463


$
67,234,862


$
23,166,270


$
90,401,132Prior year adjustments to retained earnings

$
—



—



—



225,471



—



225,471



7,801


$
233.272Balance at January 1, 2008  - restated

$
2,396


$
30,125,951


$
7,525,777


$
23,816,746


$
5,989,463


$
67,460,333


$
23,174,071


$
90,634,404Foreign currency translation gain


–



–



–



–



5,138,042



5,138,042



1,432,977



6,571,019Issuance of common stock


302



22,089,698



–



–



–



22,090,000



–



22,090,000Acquisition of the 35.5% equity interest of Henglong


-



(25,912,921
)


–



–



–



(25,912,921
)


(6,177,079
)


(32,090,000
)Appropriation of retained earnings


























(1,016,733
)


(1,016,733
)Capital contribution


























745,723



745,723Issuance of stock options to independent directors and management


-



345,426



–



–



–



345,426



–



345,426Net income for the year ended December 31, 2008- restated  (note 2)

$
–



–



–



10,244,130



–



10,244,130



5,111,861


$
15,355,991Balance at December 31, 2008- restated

$
2,698


$
26,648,154


$
7,525,777


$
34,060,876


$
11,127,505


$
79,365,010


$
23,270,820


$
102,635,830Accumulated effect of adopted ASC815-40 (note 23)


–



–



–



863,753



–



863,753



–



863,753Balance at December 31, 2008 – as further restated


2,698


$
26,648,154


$
7,525,777


$
34,924,629


$
11,127,505


$
80,228,763


$
23,270,820


$
103,499,583Foreign currency translation gain- restated (note 2)


–



–



–



–



60,228



60,228



22,410



82,638Exercise of stock options


6



420,234



–



–



–



420,240



–



420,240Issuance of stock options to independent directors and management


-



446,676



–



–



–



446,676



–



446,676Appropriation of retained earnings


-







798,756



(798,756
)


–



–



(3,944,619
)


(3,944,619
)Net income (loss) for the year ended December 31, 2009- restated (note 2)


–



–



–



(26,440,871
)


–



(26,440,871
)


7,789,746



(18,651,125
)Balance at December 31, 2009 - restated

$
2,704


$
27,515,064


$
8,324,533


$
7,685,002


$
11,187,733


$
54,715,036


$
27,138,357


$
81,853,393





The accompanying notes are an integral part of these consolidated financial statements.


51


China Automotive Systems, Inc. and Subsidiaries


Consolidated Statements of Cash Flows


Years Ended December 31, 2009 and 2008





Years Ended December 312009


2008As Restated– note 2


As Restated– note 2Cash flows from operating activities:Net income (loss)

$
(18,651,125
)

$
15,355,991Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:Stock-based compensation


446,676



345,426Depreciation and amortization


8,684,169



9,924,992Deferred income taxes


(1,676,731
)


(704,430
)Allowance for impairment of asset


901,680



1,030,738Amortization for discount of convertible note payable


3,891,148



138,432(Gain) loss on change in fair value of derivative


43,074,327



(796,649
)Other operating adjustments


(212,106)



2,533Changes in operating assets and liabilities:(Increase) decrease in:Pledged cash deposits


(5,994,298
)


(1,776,424
)Accounts and notes receivable


(58,735,311
)


(9,335,776
)Advance payments and other


(968,719
)


(417,973
)Inventories


(817,828
)


(4,955,085
)Increase (decrease) in:Accounts and notes payable


48,178,260



8,319,472Customer deposits


1,682,384



89,046Accrued payroll and related costs


1,055,134



(201,499
)Accrued expenses and other payables


8,375,518



3,526,628Accrued pension costs


(31,847
)


(69,998
)Taxes payable


5,755,520



(3,974,905
)Advances payable


(317
)


(126,553
)Net cash provided by operating activities

$
34,956,534


$
16,373,966Cash flows from investing activities:(Increase) decrease in other receivables


207,014



(353,834
)Cash received from equipment sales


280,270



368,707Cash paid to acquire property, plant and equipment


(17,498,957
)


(12,245,383
)Cash paid to acquire intangible assets


(324,014
)


(125,550
)Cash paid for the acquisition of 35.5% of Henglong equity

-



(10,000,000
)Net cash used in investing activities

$
(17,335,687
)

$
(22,356,060
)Cash flows from financing activities:Bank loans borrowed


6,590,317



5,545,314Repayment of bank loans


(8,786,684
)


(13,113,011
)Dividends paid to the minority interest holders of Joint-venture companies


(4,176,583
)


(6,198,489
)Increase (decrease) in amounts due to shareholders/directors


(337,915
)


2,416Proceeds on exercise of stock options


420,240


-Capital Contribution from the minority interest holders of Joint-venture companies

-



745,723Proceeds from issuance (Redemption repayment) of convertible note payable


(5,000,000
)


35,000,000Net cash provided by (used in) financing activities

$
(11,290,625
)

$
21,981,953Cash and cash equivalents affected by foreign currency

$
36,579


$
1,626,357Net change in cash and cash equivalentsNet increase in cash and cash equivalents

$
6,366,801


$
17,626,216Cash and cash equivalents, at beginning of year


37,113,375



19,487,159Cash and cash equivalents, at end of year

$
43,480,176


$
37,113,375





The accompanying notes are an integral part of these consolidated financial statements


52


China Automotive Systems, Inc. and Subsidiaries


Consolidated Statements of Cash Flows (continued)


Years Ended December 31, 2009 and 2008





SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:





Years Ended December 312009


2008Cash paid for interest

$
1,475,307


$
1,266,204Cash paid for income taxes

$
4,048,120


$
4,126,048





SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:





Years Ended December 312009


2008Acquisition of 35.5% of Henglong equity from the minority shareholder on a cashless basis

$
-


$
(22,090,000
)Liability resulted from issuance of common stock to acquire 35.5% of Henglong's equity

$
-


$
22,090,000





The accompanying notes are an integral part of these consolidated financial statements.


53


China Automotive Systems, Inc. and Subsidiaries


Notes to Consolidated Financial Statements


Years Ended December 31, 2009 and 2008





1.  Organization and Business





China Automotive Systems, Inc., “ China Automotive”, was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries and the subsidiaries’ interests in the Sino-foreign joint ventures described below, is referred to herein as the “Company”. The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described below.





Great Genesis Holdings Limited, a company incorporated on January 3, 2003 under The Companies Ordinance in Hong Kong as a limited liability company, “Genesis”, is a wholly-owned subsidiary of the Company.





Henglong USA Corporation, “HLUSA”, which was incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after sales service and research and development support accordingly.





The Company owns the following aggregate net interests in eight Sino-foreign joint ventures organized in the PRC as of December 31, 2009 and 2008.





Percentage InterestName of Entity

2009


2008Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong”


80.00
%


80.00
%Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”


81.00
%


81.00
%Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang”


70.00
%


70.00
%Zhejiang Henglong & Vie Pump-Manu Co., Ltd., “Zhejiang”


51.00
%


51.00
%Universal Sensor Application Inc., “USAI”


83.34
%


83.34
%Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”


85.00
%


85.00
%Wuhu HengLong Auto Steering System Co., Ltd., “Wuhu”


77.33
%


77.33
%Jingzhou Hengsheng Automotive System Co., Ltd., “Hengsheng”


100.00
%


100.00
%Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center”


80.00
%


-





Jiulong was established in 1993 and is mainly engaged in the production of integral power steering gear for heavy-duty vehicles.





Henglong was established in 1997 and is mainly engaged in the production of rack and pinion power steering gear for cars and light duty vehicles.





On March 31, 2008, the Company’s wholly-owned subsidiary, Genesis, and Wiselink Holdings Limited, “Wiselink”, both controlled by Hanlin Chen and his family, entered into an equity transfer agreement, the “Henglong Agreement”, pursuant to which Wiselink agreed to transfer and assign its 35.5% equity interest in Henglong, one of the Company’s currently consolidated subsidiaries, to Genesis for a total consideration of $32,090,000. The Company now holds an 80% equity interest in Henglong.





In December 2009, Henglong, a subsidiary of Genesis, formed Jingzhou Henglong Automotive Technology (Testing) Center (“Testing Center”), which is mainly engaged in research and development of new products. The registered capital of Testing Center is RMB 30,000,000 ($4,393,544 equivalent).





Under the terms of the Henglong Agreement, Genesis is deemed to be the owner of Henglong commencing from January 1, 2008. The Henglong acquisition is considered as a business combination of companies under common control and is being accounted for in a manner similar to that of pooling of interests.





Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.





Zhejiang was established in 2002 to focus on power steering pumps.


54





USAI was established in 2005 and is mainly engaged in the production and sales of sensor modulars.





In 2008, Genesis and Shanghai Hongxi Investment Inc., “Hongxi”, the other shareholder of USAI, agreed to increase USAI’s capital to $2,600,000 from $1,800,000. The increased capital was wholly funded by Genesis. Therefore, the capital contributed by Genesis in USAI increased to $2,166,900 from $1,366,900, accounting for 83.34% of the total capital; while the capital contributed by Hongxi remained unchanged, accounting for 16.66% of the total capital.




Wuhu was established in 2006 and is mainly engaged in the production and sales of automobile steering systems.





Jielong was established in 2006 and is mainly engaged in the production and sales of electric power steering gear (“EPS”).





On March 7, 2007, Genesis established a wholly-owned subsidiary, Jingzhou Hengsheng Automotive System Co., Ltd, “Hengsheng”, to engage in production and sales of automotive steering systems. The registered capital of Hengsheng is $10,000,000.





2.  Restatement of Previously Issued Consolidated Financial Statements





The Company has restated its previously issued Annual Report on Form 10-K for the year ended December 31, 2009, including its consolidated financial statements, for matters related to the following previously reported items: cost of sales and sales expenses, accrued payroll and related costs, financial expenses and related liabilities (Convertible Notes payable and accrued interest); gain (loss) on the change in fair value of derivative liabilities; and derivative liabilities. The accompanying financial statements for the year ended December 31, 2009 (with comparative figures for the year ended December 31, 2008) have been restated to reflect those corrections. Prior to January 1, 2008, adjustments were made to accumulated depreciation, deferred tax assets and accrued payroll and its related cost. As these accounts were immaterial in the aggregate, the retained earnings and non-controlling interest as of January 1, 2008 had been adjusted.





The following table reconciles previously reported net income attributable to parent company to the restated amounts:





Year Ended

December 31,

2009


Year Ended

December 31,

2008


Total Cumulative

Adjustments

December31,

2009Net income - As Previously Reported

$
23,414,263


$
12,435,241Increase in previously reported cost of sales due to warranty expenses reclassification (1)

$
(10,192,837
)

$
(5,788,628
)

$
(15,981,465
)Decrease in selling expenses due to warranty expenses reclassification (1)

$
10,192,837


$
5,788,628


$
15,981,465Decrease (Increase) in cost of sales due to the increase of accrued payroll and related costs (2)

$
(732,257
)

$
73,155


$
(659,102
)Increase in financial expenses, increase of related liabilities (Convertible Notes payable and accrued interest) (3)

$
(5,897,514
)

$
(1,752,495
)

$
(7,650,009
)Increase in loss on the change in fair value of derivative liabilities, increase of derivative liabilities (3)

$
(43,698,892
)

$
(201,365
)

$
(43,900,257
)Subtotal

$
(50,328,663
)

$
(1,880,705
)

$
(52,209,368
)Increase in Income tax benefit (expense) (4)

$
390,462


$
(269,953
)

$
120,509Decrease in net income attributable to non-controlling interest due to the effect of restatement (5)

$
83,067


$
(40,453
)

$
42,614Total reduction in net income attributable to parent company for the year ended December 31, 2009 and 2008

$
(49,855,134
)

$
(2,191,111
)

$
(52,046,245
)As Restated

$
(26,440,871
)

$
10,244,130


55





(1) Previously, the warranty expenses were recorded as selling expenses. As restated, they were recorded as cost of sales. These adjustments caused an increase in cost of sales and a corresponding decrease in selling expenses of $10,192,837 and $5,788,628 in 2009 and 2008 respectively. These reclassifications did not have any impact on the Company’s consolidated net income (loss), as restated, for the years ended December 31, 2008 and 2009.


(2)  The Company’s Joint Venture subsidiaries, Jingzhou Henglong, Shashi Jiulong and Wuhu Henglong, recorded payroll and bonus expenses on a cash basis. As restated, these expenses were recorded under the accrual basis. This payroll payable cut-off caused an increase in $732,257 of cost of sales in 2009 and a decrease of $73,155 of cost of sales in 2008.





(3)  Previously, the conversion feature embedded in the Company’s Convertible Notes was not bifurcated as a derivative. In accordance with the guidance set forth under ASC 815-40-15 (formerly EITF 07-05, effective on January 1, 2009), as in the Company’s Convertible Notes agreement there are non-standard anti-dilution provisions that give investors a level of protection that is not afforded to typical holders of outstanding shares and is not based on inputs to fair value of a “fixed for fixed” option, and as the conversion feature in the Company’s Convertible Notes is not considered to be indexed to its own stock, thus, it does not fall within the scope exception criteria included in ASC 815-10-15-74. As a result, the embedded conversion feature required bifurcation, classification in liabilities and measurement at fair value. According to ASC 815, the Company is required to re-measure the bifurcated derivative at fair value from the issuance date of Convertible Notes payable (February 15, 2008), with changes reflected in its income, until the Convertible Notes are settled. This adjustment caused an increase of $43,698,892 in loss on the change in fair value of derivative liabilities for 2009. The Company has also accounted for this change in accounting principle by reflecting the cumulative effect as an adjustment to its beginning retained earnings on January 1, 2009. The cumulative effect adjustment that the Company made is the difference between the amounts that the Company recognized related to the Convertible Notes Payable before the initial application of the amended principle and the amounts that would have been recognized if the amended standard had been applied from the issuance date of the Convertible Notes Payable, which was February 15, 2008 (See Note 3).





Additionally, the Company has reviewed the various puts that were embedded in the Convertible Notes and concluded that these puts were not required to be bifurcated as the payoff was based on interest rates and not indexed to anything else. This adjustment caused a decrease of $201,365 in gain on the change in fair value of derivative liabilities in 2008.





As result of the combined effect of the above-mentioned factors, in 2008, the adjustment for the financial expenses was an increase of $1,752,495, mainly due to the provision for the annual redemption which was the difference between the coupon interest (3%) amount and the annual redemption interest (11%) amount due on the first annual redemption date (February 15, 2010) using the effective interest rate method. In 2009, the financial expenses adjustment was an increase of $5,897,514, comprising of an increase in amortization expenses of $3,172,470 and an increase of $2,725,044 in interest expenses for the provision for the annual redemption.




(4) Tax adjustment was an increase in income tax benefit of $390,462 in 2009 and an increase in income tax expense in $269,953 in 2008. The breakdown is as follows:


56





A.
Deferred Tax Assets related to Accounts Receivable Provision





Previously, as of December 31, 2008 and 2009, deferred tax assets related to the Company’s accounts receivable provision were not recorded. As the doubtful debt provisions were either reversed subsequently when the related receivables had been collected, or the related tax benefits had been realized when the bad debts were subsequently approved by the tax bureau for PRC tax deduction purposes, the doubtful debt provision should be treated as temporary difference as of December 31, 2008 and 2009.  As the Company has been consistently profitable, the deferred tax assets related to accounts receivable provision should be recorded.





B.  Prepaid income tax for Unrealized Profit





Previously, the Company did not account for the income tax paid for its intra-group unrealized profits as a deferred charge in its 2008 and 2009 financial statements. The prepaid tax as a result of the intra-group unrealized profits at year end should be recorded as a deferred charge in the consolidated financial statements.





C.   Withholding Tax





According to PRC tax law, from January 1, 2008, withholding taxes are levied on dividends distributed by domestic companies to its foreign investors when the dividends are remitted out of China. Accordingly, deferred tax liability against the distribution of post January 1, 2008 earned profit is required in accordance with ASC 740 Income Taxes, unless the “indefinite reversal criterion” under ASC 740-30-25 is met. Therefore, deferred tax liability was provided against earned profit after January 1, 2008 for PRC Joint Ventures, based on the Company’s best estimates.





D.  Deferred tax assets or liability





Deferred tax assets arising from accrued interest relates to the Company’s operations in the U.S. Based on the Company’s current operations in the U.S., the management believes that the deferred tax assets in the U.S. are not likely to be realized in the future. Accordingly, a valuation allowance has been provided against the deferred tax assets.





Gain (loss) on the change in fair value of the Company’s derivatives was a permanent difference, and not deferred tax assets or liability, thus, there was no effect on income tax.





Deferred tax assets that arise from payroll accruals relate to PRC Joint Venture subsidiaries.





Prior to the restatement, the Company did not appropriately accrue the withholding taxes for the distribution of post January 1, 2008 earned profit in PRC Joint Venture subsidiaries in 2008 and 2009. As part of these retained profits will be distributed to the Company, such withholding taxes should be accrued.





As a result of the above adjustments, the effects on income tax benefits (expenses) for 2009 are summarized as follows:





Deferred

tax assets

and related

liabilities


Valuation

allowance


Effect

on income

tax benefit

(expense)Deferred tax assets related to accounts receivable provision (A)

$
(66,579
)

$
-


$
(66,579
)Deferred tax assets related to intra-group unrealized profits for purchases and sales (B)


339,584



-



339,584Deferred tax liability related to the withholding taxes for the Company’s PRC subsidiaries distribution of dividends to its foreign investors (C)


(184,477
)


-



(184,477
)Deferred tax assets related to accrued provision (A)


226,268



-



226,268Income tax for paid(D)


75,666



-



75,666Deferred tax assets related to accrued interest of Convertible Notes (D)


953,765



(953,765
)


-Total

$
1,344,227


$
(953,765
)

$
390,462


57





As a result of the above adjustments, the effects on income tax benefit (expense) for 2008 are summarized as follows:





Deferred

tax assets

and related

liabilities


Valuation

allowance


Effect

on income

tax benefit

(expense)Deferred tax assets related to accounts receivable provision

$
127,977


$
-


$
127,977Deferred tax assets related to intra-group unrealized profits for purchases and sales


(25,366
)


-



(25,366
)Deferred tax liability related to the withholding taxes for the Company’s PRC subsidiaries distribution of dividends to its foreign investors


(372,564
)


-



(372,564
)Deferred tax assets related to accrued interest of Convertible Notes


713,555



(713,555
)


-Total

$
443,602


$
(713,555
)

$
(269,953
)




(5)As a result of the above adjustments, Net income attributable to noncontrolling interest decreased by $83,067 in 2009 and increased by $40,453 in 2008.


The effects of the adjustments on the Company’s previously issued 2009 consolidated financial statement are summarized as follows:
 
 Selected Consolidated Balance Sheet information as of December 31, 2009


Previously

Reported


Increase

(Decrease)


RestatedCurrent Assets:Current deferred tax assets

$
1,381,868


$
2,484,485


$
3,866,353Total current assets

$
242,296,776


$
2,484,485


$
244,781,261Long-term Assets:Property, plant and equipment, net


60,489,798



(1,960,351
)


58,529,447Non-current deferred tax assets


2,172,643



825,481



2,998,124Total Assets


313,032,957



1,349,615



314,382,572Current Liabilities:Convertible Notes payable


28,640,755



1,359,245



30,000,000Compound derivative liabilities


880,009



44,563,497



45,443,506Accrued payroll and related costs


3,040,705



1,537,741



4,578,446Accrued expenses and other payables


17,708,681



4,763,771



22,472,452Taxes payable


11,365,016



117,161



11,482,177Total current liabilities


179,953,823



52,341,415



232,295,238Total Liabilities


180,187,764



52,341,415



232,529,179Stockholders’ equity:Retained earnings-Unappropriated- January 1, 2009


36,026,516



(1,965,640
)


34,060,876Accumulated effect of adoption of ASC 815-40


—



863,753



863,753Net income (loss) attributable to parent company- for the year ended December 31, 2009


23,414,263



(49,855,134
)


(26,440,871
)Unappropriated-December 31, 2009


58,642,023



(50,957,021
)


7,685,002Foreign currency translation gain –December 31, 2009


60,239



(11
)


60,228Accumulated other comprehensive income-December 31, 2009


11,187,744



(11
)


11,187,733Total parent company stockholders' equity


105,672,068



(50,957,032
)


54,715,036Non-controlling interests January 1, 2009


23,222,566



48,254



23,270,820Net income attributable to noncontrolling interest- December 31, 2009


7,872,813



(83,067
)


7,789,746Foreign currency translation gain (loss) - December 31, 2009


22,365



45



22,410Non-controlling interests-December 31, 2009


27,173,125



(34,768
)


27,138,357Total stockholders' equity


132,845,193



(50,991,800
)


81,853,393Total liabilities and stockholders' equity

$
313,032,957


$
1,349,615


$
314,382,572


58




Selected Consolidated Statement of income (loss) information for the year ended December 31, 2009





Previously

Reported


Increase

(Decrease)


RestatedCost of product sold

$
182,929,833


$
10,925,094


$
193,854,927Gross profit


72,667,720



(10,925,094
)


61,742,626Selling expenses


18,085,377



(10,192,837
)


7,892,540Income from operations


37,664,652



(732,257
)


36,932,395Financial income (expenses)


(1,986,200
)


(5,897,514
)


(7,883,714
)Gain (loss) on change in fair value of derivative


624,565



(43,698,892
)


(43,074,327
)Income (loss) before income taxes


36,397,551



(50,328,663
)


(13,931,112
)Income taxes


5,110,475



(390,462
)


4,720,013Net income (loss)


31,287,076



(49,938,201
)


(18,651,125
)Net income attributable to noncontrolling interest


7,872,813



(83,067
)


7,789,746Net income (loss) attributable to parent company

$
23,414,263


$
(49,855,134
)

$
(26,440,871
)Income (loss) per share – basic

$
0.87


$
(1.85
)

$
(0.98
)Income (loss) per share – diluted

$
0.78


$
(1.76
)

$
(0.98
)





Selected Consolidated Statements of Cash Flows information for the year ended December 31, 2009





Previously

Reported


Increase

(Decrease)


RestatedOperating activities:Net income (loss)

$
31,287,076


$
(49,938,201
)

$
(18,651,125
)Deferred income taxes


(1,169,108
)


(507,623
)


(1,676,731
)Amortization for discount of convertible note payable


718,678



3,172,470



3,891,148(Gain) loss on change in fair value of derivative


(624,565
)


43,698,892



43,074,327Accrued payroll and related costs


322,877



732,257



1,055,134Accrued expenses and other payables


5,650,474



2,725,044



8,375,518Taxes payable


5,638,359



117,161



5,755,520


59





Selected Consolidated Balance Sheet information as of December 31, 2008





Previously

Reported


Increase

(Decrease)


RestatedCurrent Assets :Current deferred tax assets

$
-


$
2,531,609


$
2,531,609Total current assets


168,292,580



2,531,609



170,824,189Long-term Assets:Property, plant and equipment, net


51,978,905



(1,958,515
)


50,020,390Non current deferred tax assets


2,383,065



268,111



2,651,176Total Assets


231,046,936



841,205



231,888,141Current Liabilities:Convertible Notes payable


32,922,077



1,417,730



34,339,807Compound derivative liabilities


1,502,597



(1,502,597
)


-Accrued payroll and related costs


2,715,116



804,729



3,519,845Accrued expenses and other payables


12,460,784



2,038,729



14,499,513Total current liabilities


126,259,679



2,758,591



129,018,270Total Liabilities


126,493,720



2,758,591



129,252,311Stockholders’ equity:Retained earnings-Unappropriated- January 1, 2008


23,591,275



225,471



23,816,746Net income attributable to parent company-December 31, 2008


12,435,241



(2,191,111
)


10,244,130Unappropriated-December 31, 2008


36,026,516



(1,965,640
)


34,060,876Total parent company stockholders' equity


81,330,650



(1,965,640
)


79,365,010Non-controlling interests January 1, 2008


23,166,270



7,801



23,174,071Net income attributable to noncontrolling interest- December 31, 2008


5,071,408



40,453



5,111,861Non-controlling interests-December 31, 2008


23,222,566



48,254



23,270,820Total stockholders' equity


104,553,216



(1,917,386
)


102,635,830Total liabilities and stockholders' equity

$
231,046,936


$
841,205


$
231,888,141





Selected Consolidated Statement of income (loss) information for the year ended December 31, 2008





Previously

Reported


Increase

(Decrease)


RestatedCost of product sold

$
115,920,585


$
5,788,628


$
121,709,213Gross profit


47,258,701



(5,788,628
)


41,470,073Selling expenses


10,869,661



(5,861,783
)


5,007,878Income from operations


16,923,421



73,155



16,996,576Financial income (expenses)


(1,296,218
)


(1,752,495
)


(3,048,713
)Gain (loss) on change in fair value of derivative


998,014



(201,365
)


796,649Income (loss) before income taxes


17,692,526



(1,880,705
)


15,811,821Income taxes


185,877



269,953



455,830Net income


17,506,649



(2,150,658
)


15,355,991Net income attributable to noncontrolling interest


5,071,408



40,453



5,111,861Net income (loss) attributable to parent company

$
12,435,241


$
(2,191,111
)

$
10,244,130Income (loss) per share – basic

$
0.48


$
(0.13
)

$
0.35Income (loss) per share – diluted

$
0.46


$
(0.11
)

$
0.35


60





Selected Consolidated Statements of Cash Flows information for the year ended December 31, 2008





Previously

Reported


Increase

(Decrease)


RestatedOperating activities:Net income

$
17,506,649


$
(2,150,658
)

$
15,355,991Deferred income taxes


(974,383
)


269,953



(704,430
)Amortization for discount of convertible note payable


424,665



(286,233
)


138,432(Gain) loss on change in fair value of derivative


(998,014
)


201,365



(796,649
)Accrued payroll and related costs


(128,344
)


(73,155
)


(201,499
)Accrued expenses and other payables


1,487,900



2,038,728



3,526,628





3. Basis of Presentation and Significant Accounting Policies




Basis of Presentation - For the year ended December 31, 2009 and 2008, the accompanying consolidated financial statements include the accounts of the Company and its two subsidiaries and eight joint ventures, which are described in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.





During early 2003, the Directors of the Company and the other joint venture partners in the Company’s Sino-foreign joint ventures executed “Act in Concert” agreements, resulting in the Company having voting control in such Sino-foreign joint ventures. Consequently, effective January 1, 2003, the Company changed from equity accounting to consolidation accounting for its investments in Sino-foreign joint ventures for the year ended December 31, 2003. Prior to January 1, 2003, the Company used the equity method pursuant to the provision in ASC Topic 810 (formerly EITF 96-16). as described as follows.





Henglong was formed in 1997. The Company increased its shareholdings from 44.5% to 80% in 2008 and the remaining 20% is owned by Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd., “Jiulong”. The highest authority of the joint venture is the Board of Directors, which is comprised of five directors, four of which, 80%, are appointed by the Company, and one of which, 20%, is appointed by Jiulong. As for day-to-day operating matters, approval by more than two-thirds of the members of the Board of Directors, 67%, is required. Both the Chairman of the Board of Directors and general manager are appointed by the Company.





Jiulong was formed in 1993, with 81% owned by the Company, 10% owned by Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd., “JLME”, and 9% owned by Jingzhou Tianxin Investment Consulting Co., Ltd., “Tianxin”. The highest authority of the joint venture is the Board of Directors, which is comprised of five directors, four of which, 80%, are appointed by the Company, and one of whom, 20%, is appointed by JLME. As for day-to-day operating matters, approval by more than two-thirds of the members of the Board of Directors, 67%, is required. The Chairman of the Board of Directors is appointed by JLME. The general manager is appointed by the Company.





Shenyang was formed in 2002, with 70% owned by the Company, and 30% owned by Shenyang Automotive Industry Investment Corporation, “JB Investment”. The highest authority of the joint venture is the Board of Directors, which is comprised of seven directors, four of whom, 57%, are appointed by the Company, and three of whom, 43%, are appointed by JB Investment. As for day-to-day operating matters, approval by more than two-thirds of the members of the Board of Directors, 67%, is required. The Chairman of the Board of Directors is appointed by the Company. The general manager is appointed by the Company.





Zhejiang was formed in 2002, with 51% owned by Genesis and 49% owned by Zhejiang Vie Group, “ZVG”. The highest authority of the joint venture is the Board of Directors, which is comprised of seven directors, four of whom, 57%, are appointed by the Company and three of whom, 43%, are appointed by ZVG. As for day-to-day operating matters, approval by more than two-thirds of the members of the Board of Directors, 67%, is required. The Chairman of the Board of Directors is appointed by ZVG. The general manager is appointed by the Company.


61





USAI was formed in 2005. As at December 31, 2008, 83.34% was owned by the Company. The highest authority of the joint venture is the Board of Directors, which is comprised of three directors, two of whom, 67%, are appointed by the Company, one of whom, 33%, is appointed by Hongxi. As for day-to-day operating matters, approval by more than two-thirds of the members of the Board of Directors, 67%, is required. The Chairman of the Board of Directors is appointed by the Company. The general manager is appointed by the Company.





Jielong was formed in April 2006, with 85% owned by the Company, and 15% owned by Hong Kong Tongda, “Tongda”. The highest authority of the joint venture is the Board of Directors, which is comprised of three directors, two of whom, 67%, are appointed by the Company, and one of whom, 33%, is appointed by Tongda. As for day-to-day operating matters, approval by more than two-thirds of the members of the Board of Directors, 67%, is required. The Chairman of the Board of Directors is appointed by the Company. The general manager is appointed by the Company.


Wuhu was formed in May 2006, with 77.33% owned by the Company, and 22.67% owned by Wuhu Chery Technology Co., Ltd., “Chery Technology”. The highest authority of the joint venture is the Board of Directors, which is comprised of five directors, three of whom, 60%, are appointed by the Company, and two of whom, 40%, are appointed by Chery Technology. As for day-to-day operating matters, approval by more than two-thirds of the members of the Board of Directors, 67%, is required. The directors of the Company and the other joint venture partner of Wuhu executed “Act in Concert” agreement, resulting in the Company having voting control in the joint venture. The Chairman of the Board of Directors is appointed by the Company. The general manager is appointed by the Company.





The minority partners of each of the joint ventures are all private companies not controlled, directly or indirectly, by any PRC municipal government or other similar government entity.





Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The Company is of an opinion that the significant items were warranty reserves, long term assets and investment, the realizable value of accounts receivable and inventories, useful lives of property, plant and equipment, accruals warranty liabilities and deferred tax assets. Actual results could differ from those estimates.





Cash and Cash Equivalents - Cash and cash equivalents include all highly-liquid investments with an original maturity of three months or less at the date of purchase.





Pledged Cash Deposits - The Company has pledged cash deposits to secure trade financing provided by banks.





Accounts Receivable - In order to determine the value of the Company’s accounts receivable, the Company records a provision for doubtful accounts to cover estimated credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectability of outstanding accounts receivable. The Company evaluates the credit risk of its customers utilizing historical data and estimates of future performance.





Inventories - Inventories are stated at the lower of cost and net realizable value. Cost is calculated on the moving-average, first-in-first-out basis and includes all costs to acquire and other costs to bring the inventories to their present location and condition. The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed moving-average cost if it exceeds the net realizable value.





Advance Payments - These amounts represent advances or prepayments to acquire various assets to be utilized in the future in the Company’s normal business operations. Such amounts are paid according to their respective contract terms and are classified as a current asset in the consolidated balance sheet.





Property, Plant and Equipment – Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized; minor replacements and maintenance and repairs are charged to operations. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets as follows:


62





Category

Estimated Useful Life (Years)Land use rights and buildings:Land use rights

45-50Buildings

25Machinery and equipment

6Electronic equipment

4Motor vehicles

8





Assets under construction- represent buildings under construction and plant and equipment pending installation— are stated at cost. Cost includes construction and acquisitions, and interest charges arising from borrowings used to finance assets during the period of construction or installation and testing. No provision for depreciation is made on assets under construction until such time as the relevant assets are completed and ready for their intended commercial use.





Gains or losses on disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the relevant asset, and are recognized in the consolidated statements of operations on the date of disposal.





Interest Costs Capitalized - Interest costs incurred in connection with specific borrowings for the acquisition, construction or installation of property, plant and equipment are capitalized (if significant) and depreciated as part of the asset’s total cost when the respective asset is placed into service.





However, for the fiscal year ended December 31, 2009, interest costs which were incurred before achieving the expected usage as result of using such specific borrowings for the acquisition, construction or installation of property, plant and equipment were not significant, so there are no interest costs capitalized.





Intangible Assets - Intangible assets, representing patents and technical know-how acquired, are stated at cost less accumulated amortization and impairment losses. Amortization is calculated on the straight-line method over the estimated useful life of 5 to 15 years.





In January 2002, the Company has adopted the provisions of ASC Topic 350 (formerly SFAS No. 142), “Goodwill and Other Intangible Assets”. The Company did not have any goodwill at December 31, 2009 and 2008.





Long-Lived Assets - The Company has adopted the provisions of ASC Topic 360 (formerly SFAS No. 144), “Accounting for the Impairment or Disposal of Long-Lived Assets”. Property, plant and equipment and intangible assets are reviewed periodically for impairment losses whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If required, an impairment loss is recognized as the difference between the carrying value and the fair value of the assets.




In assessing long-lived assets for impairment, management considered the Company’s product line portfolio, customers and related commercial agreements, labor agreements and other factors in grouping assets and liabilities at the lowest level for which identifiable cash flows are largely independent. The Company considers projected future undiscounted cash flows, trends and other factors in its assessment of whether impairment conditions exist. Whilst the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such factors as future automotive production volumes, customer pricing, economics and productivity and cost saving initiatives, could significantly affect its estimates. In determining fair value of long-lived assets, management uses appraisals, management estimates or discounted cash flow calculations.





The Company recorded asset impairment charges of $781,373 for the year ended December 31, 2009, to adjust certain long-lived assets to their estimated fair values and included such charges in other sales income in the income statement.





During 2009, the Company recorded impairment charges of $383,434 to reduce the net book value of long-lived assets associated with the Company’s sensor products to their estimated fair value. This amount was recorded pursuant to impairment indicators including lower than anticipated current and near term future customer volumes, the related impact on the Company’s current and projected operating results and cash flows resulting from a change in product technology.





During 2009, the Company planned to sell the idle and unused machinery equipment of Henglong. The Company determined to fully write off these machinery and equipment.  This results in asset impairment charges of approximately $397,939.





Long-Term Investments - Investments in which the Company owns less than 20% of the investee company and does not have the ability to exert significant influence are stated at cost, and are reviewed periodically for realizability.


63





Revenue from Product Sales Recognition - The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to PRC law, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, sales and value added tax laws have been complied with, and collectability is probable. The Company recognizes product sales generally at the time the product is shipped. Concurrent with the recognition of revenue, the Company reduces revenue for estimated product returns. Shipping and handling costs are included in cost of goods sold. Revenue is presented net of any sales tax and value added tax.





Revenue from Materials and Other Assets Sales Recognition – Normally, the Company purchases materials only for its production. Occasionally, some materials will be sold to other suppliers in case of temporary inventory overage of such materials and to make a profit on any price difference. The Company is essentially the agent in these transactions because it does not have any risk of product return. When there is any quality or quantity loss, the suppliers are obligated to restitution. Income generated from selling materials is recorded as the net amount retained, that is, the amount billed to the customers less the amount paid to suppliers, in the consolidated statement of operations in accordance with the provisions of ASC Topic 350 (formerly EITF 99-19).





Revenue from other asset sales represents gains or losses from other assets, for example, used equipment. Income generated from selling other assets is recorded as the sales amount less cost of the assets. The Company has classified such revenue from materials and other asset sales into gain on other sales in its consolidated statement of operations.





Sales Taxes - The Company is subject to value added tax, “VAT”. The applicable VAT tax rate is 17% for products sold in the PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold less VAT paid on purchases made with the relevant supporting invoices. VAT is collected from customers by the Company on behalf of the PRC tax authorities and is therefore not charged to the consolidated statements of operations.





Product Warranties - The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties were based on, among other things, historical experience, product changes, material expenses, service and transportation expenses arising from the manufactured product. Estimates will be adjusted on the basis of actual claims and circumstances.





Pension - All the employees are located in China. The Company records pension costs and various employment benefits in accordance with the relevant Chinese social security laws, which is approximately at a total of 31% of salary as required by local governments. Base salary levels are the average salary determined by the local governments.





Concentration of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations with respect to the financial condition of its debtors, but does not require collateral. In order to determine the value of the Company’s accounts receivable, the Company records a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectability of outstanding accounts receivable.





Interest Rate Risk- Bank loans are charged at fixed interest rates.





Income Taxes - The Company accounts for income taxes using the liability method whereby deferred income taxes are recognized for the tax consequences of temporary differences by applying statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of certain assets and liabilities, changes in deferred tax assets and liabilities, if any, include the impact of any tax rate changes enacted during the year. ASC Topic 350 (formerly SFAS No. 109), “Accounting for Income Taxes,” requires that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. If the amount of the Company’s taxable income or income tax liability is a determinant of the amount of a grant, the grant is treated as a reduction of the income tax provision in the year the grant is realized.





Research and Development Costs - Research and development costs are expensed as incurred.





Advertising, Shipping and Handling Costs - Advertising, shipping and handling costs are expensed as incurred.


64





Income Per Share - Basic income per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income is allocated between ordinary shares and other participating securities based on their participating rights. Diluted income per share is calculated by dividing net income attributable to ordinary shareholders, as adjusted for the effect on income of the participating securities as if they were dilutive ordinary shares,by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of ordinary shares issuable upon the conversion of the Convertible Notes using the if-converted method, and shares issuable upon the exercise of stock options and warrants for the purchase of ordinary shares using the treasury method. Ordinary equivalent shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be antidilutive.





Comprehensive Income - The Company has adopted ASC Topic 220 (formerly SFAS No. 130), “Reporting Comprehensive Income”. ASC Topic 220 establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. ASC Topic 220 defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.





Financial Instruments–Financial instruments consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Inputs to the valuation methodology for Level I are quoted prices (unadjusted) for identical assets or liabilities in active markets. Inputs to the valuation methodology Level 2 include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. Inputs to the valuation methodology for Level 3 are unobservable and significant to the fair value. Consideration is also given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model





Effective January 1, 2009, the Company adopted and applied the amendments to ASC 815 Derivatives and Hedging Activities that revised the definition of “indexed to a company’s own stock” for purposes of continuing classification of the Company’s derivative financial instruments that are linked to the Company’s common stock. Derivative financial instruments, including those that are embedded in other financial instruments, may be classified in equity only when they both are indexed to the Company’s common stock and meet certain conditions for equity classification. Under the revised definition, an instrument (or embedded feature) is indexed to an entity's own stock if its settlement amount will equal the difference between the fair value of a fixed number of the entity's equity shares and a fixed monetary amount. On the effective date of the amendment, the embedded conversion option that is embedded in the Company’s Convertible Notes Payable (see Note 14) no longer met the definition because it embodied certain anti-dilution protections that did not achieve the fixed-for-fixed criteria described above. As a result, the embedded conversion feature required bifurcation, classification in liabilities and measurement at fair value. According to ASC 815, the Company will be required to re-measure the bifurcated derivative at fair value from the issuance date of Convertible Notes payable (February 15, 2008), with changes reflected in its income, until the Convertible Notes are settled.





The Company has accounted for this change in accounting principle by reflecting the cumulative effect as an adjustment to its beginning retained earnings during the year ended December 31, 2009. The cumulative effect adjustment that the Company made is the difference between the amounts that the Company recognized related to the Convertible Notes Payable before the initial application of the amended principle and the amounts that would have been recognized if the amended standard had been applied from the issuance date of the Convertible Notes Payable, which was February 15, 2008. The following table illustrates the differences that comprise the cumulative effect:





(Effective Date January 1, 2009)Financial Instrument:

As

Recorded


As

Adjusted


Cumulative

EffectConvertible Notes Payable

$
34,339,807


$
31,108,852


$
3,230,955Derivative liabilities


-



2,367,202



(2,367,202
)$
34,339,807


$
33,476,054


$
863,753


65





The cumulative effect gives effect to the reallocation of proceeds that arose from the February 15, 2008 financing transaction as discussed in Note 14 on the financing date. The following table illustrates the reallocation as if the amended provisions of ASC 815 had been in effect on the financing date:





Financing Date February 15, 2008Financial Instrument:

Original

Allocation


Amended

Allocation


DifferenceConvertible Notes Payable

$
34,201,374


$
28,379,704


$
5,821,670Derivative liabilities


-



5,821,670



(5,821,670
)Warrants


798,626



798,626



-$
35,000,000


$
35,000,000


$
-





The cumulative change in accounting principle on the effective date reflects (i) the difference in the financing date allocation of proceeds, (ii) the resulting change in the amortization of the debt discount that results from the revised allocation and (iii) the changes in the fair values of the derivative liabilities that would have been recorded had the amended standard been in effect since the financing date.





Fair Value Measurements – For purposes of fair value measurements, the Company applies the applicable provisions of ASC 820 Fair Value Measurements. Accordingly, fair value for the Company’s financial accounting and reporting purposes represents the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the designated measurement date. With an objective to increase consistency and comparability in fair value measurements and related disclosures, the Financial Accounting Standard Board established the fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.





Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. As of December 31, 2008 and 2009, the Company did not have any assets or liabilities classified as level 1.




Level 2 Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. As of December 31, 2008 and 2009, the Company did not have any assets or liabilities classified as level 2.





Level 3 Inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs shall reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). Accordingly, the Compound derivative liabilities are classified as Level 3 as the inputs reflected management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.




The following table presents information about the Company’s financial liabilities classified as Level 3 as of December 31, 2008 and December 31, 2009.





Balance as of December 31, 2009 – As RestatedCarryingValue


Fair Value Measurements

Using Fair Value HierarchyLevel 1


Level 2


Level 3Derivative liability, current

$
45,443,506


$
-


$
-


$
45,443,506





66




Balance as of December 31, 2008 – As RestatedCarryingValue


Fair Value Measurements

Using Fair Value HierarchyLevel 1


Level 2


Level 3Derivative liability, non-current

$
-


$
-


$
-


$
-





For a summary of changes in Level 3 derivative liabilities for the years ended December 31, 2008 and 2009, please see note 15.





The following presents the carry value and the estimated value of the other receivables and advance payable at December 31, 2009:





Carry Value


Fair ValueConvertible Note

$
30,000,000


$
30,000,000Other receivables

$
1,064,224


$
1,010,000Advance payable

$
233,941


$
220,000





Other receivables and advance payable are recorded at cost, which is discounted from the contractual balance. The carrying value of other receivables and advance payable, which is estimated based upon future cash flows, approximates fair value at December 31, 2009.





Stock-Based Compensation - The Company may issue stock options to employees and stock options or warrants to non-employees in non-capital raising transactions for services and for financing costs.





In July 2004, the Company adopted a stock incentive plan. The maximum number of common shares for issuance under this plan is 2,200,000 with a period of 10 years. The stock incentive plan provides for the issuance, to the Company’s officers, directors, management and employees, of options to purchase shares of the Company’s common stock. Since the adoption of the stock incentive plan, the Company has issued 433,850 stock options and 1,766,150 stock options remain to be issuable in the future. As of December 31, 2009, the Company had 343,850 stock options outstanding.




The Company has adopted ASC Topic 718 (formerly SFAS 123R), “Accounting for Stock-Based Compensation”, which establishes a fair value method of accounting for stock-based compensation plans. In accordance with guidance now incorporated in ASC Topic 718, the cost of stock options and warrants issued to employees and non-employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period.




Registration Payment Arrangements - The Company has entered into registration payment arrangements with certain investors that provide for the payment of damages for failures to register common shares underlying the investor’s financial instruments. ASC Topic 825 (formerly FASB Staff Position 00-19-2), Accounting for Registration Payment Arrangements, provides for the exclusion of registration payments, such as the liquidated damages, from the consideration of classification of financial instruments. Rather, such registration payments would be accounted for pursuant to ASC Topic 450 (formerly FASB No. 5), “Accounting for Contingencies”, which is the Company’s current accounting practice. That is, all registration payments will require recognition when they are both probable and reasonably estimable. The investors may sell the Convertible Notes and shares underlying the Convertible Notes freely pursuant to Rule 144, thus no liquidated damages.





Foreign Currencies - The Company’s subsidiaries based in PRC maintain their books and records in Renminbi, “RMB”, the currency of the PRC, their functional currency. In accordance with guidance now incorporated in ASC Topic 830 (formerly FAS 52), foreign currency transactions in RMB are reflected using the temporal method. Under this method, all monetary items are translated into the functional currency at the rate of exchange prevailing at the balance sheet date. Non-monetary items are translated at historical rates. Income and expenses are translated at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period. The parent company (CAAS) Genesis and Henglong USA Corporation (HLUSA), maintain their books and records in US dollars, “USD”, the currency of U.S.A., their functional currency.


67




In translating the financial statements of the Company’s China subsidiaries from its functional currency into its reporting currency of United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in stockholders’ equity.





Certain Relationships And Related Transactions-





The following related parties are related through common ownership with the major shareholders of the Company:





Jingzhou Henglong Fulida Textile Co., Ltd. (“Jingzhou”)





Xiamen Joylon Co., Ltd. (“Xiamen Joylon”)





Shanghai Tianxiang Automotive Parts Co., Ltd. (“Shanghai Tianxiang”)





Shanghai Fenglong Materials Co., Ltd. (“Shanghai Fenglong”)





Changchun Hualong Automotive Technology Co., Ltd. (“Changchun Hualong”)





Jiangling Tongchuang Machining Co., Ltd. (“Jiangling Tongchuang”)





Beijing Hualong Century Digital S&T Development Co., Ltd. (“Beijing Hualong”)





Jingzhou Jiulong Material Co., Ltd. (“Jiulong Material”)





Shanghai Hongxi Investment Inc. (“Hongxi”)





Hubei Wiselink Equipment Manufacturing Co., Ltd. (“Hubei Wiselink”)





Jingzhou Tongyi Special Parts Co., Ltd. (“Jingzhou Tongyi”)





Jingzhou Derun Agricultural S&T Development Co., Ltd. (“Jingzhou Derun”)





Jingzhou Tongying Alloys Materials Co., Ltd. (“Jingzhou Tongying”)





WuHan Dida Information S&T Development Co., Ltd. (“WuHan Dida”)





Hubei Wanlong Investment Co., Ltd. (“Hubei Wanlong”).





Jiangling Yude Machining Co., Ltd. (“Jiangling Yude”)




Wiselink Holdings Limited. (“Wiselink”)





Principal policies of the Company in connection with transaction with related parties are as follows:





Products sold to related parties – The Company sold products to related parties at fair market prices, and also granted them credit of three to four months on an open account basis. These transactions were consummated under similar terms as the Company's other customers.





Materials purchases from related parities – The Company purchased materials from related parties at fair market prices, and also received from them credit of three to four months on an open account basis. These transactions were consummated under similar terms as the Company's other suppliers.


68


Equipment and production technology purchased from related parties - The Company purchased equipment and production technology from related parties at fair market prices, and was required to pay in advance based on the purchase agreement between the two parties, because such equipment manufacturing and technology development was required for a long period. These transactions were consummated under similar terms as the Company's other suppliers.





4. Recent Accounting Pronouncements




In June 2008, the FASB’s Emerging Issues Task Force reached a consensus regarding ASC 815-40 (formerly EITF 07-5), “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (ASC 815-40, formerly EITF 07-5).  ASC 815-40 (formerly EITF 07-5) outlines a two-step approach to evaluate the instrument’s contingent exercise provisions, if any, and to evaluate the instrument’s settlement provisions when determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. ASC 815-40 (formerly EITF 07-5) is effective for fiscal years beginning after December 15, 2008 and must be applied to outstanding instruments as of the beginning of the fiscal year of adoption as a cumulative-effect adjustment to the opening balance of retained earnings. Early adoption is not permitted. The adoption of EITF 07-5 had a material impact on the Company’s consolidated financial statements (Note 2).





The Financial Accounting Standards Board (FASB) launched its Accounting Standards Codification (ASC or the Codification), the single source of nongovernmental authoritative generally accepted accounting principles in the United States (U.S. GAAP), and was effective for interim and annual periods ending after September 15, 2009. The Codification is a reorganization of U.S. GAAP into a topical format that eliminates the previous U.S. GAAP hierarchy. References to accounting standards in this Form 10-K/A refer to the relevant ASC topic. As the Codification was not intended to change or alter existing GAAP, it did not impact the Company’s financial condition, results of operations, or cash flows.





Effective January 1, 2009, the Company adopted guidance (originally issued as SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51) amending existing GAAP to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The adopted guidance, now included in ASC Topic 810, Consolidation (ASC 810), clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity and should be reported as equity on the financial statements. ASC 810 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. Furthermore, disclosure of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest is required on the face of the financial statements. The adoption of the guidance did not have a material impact on the Company’s consolidated finance position and result of operation.





In April 2009, the FASB issued three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second update, as codified in ASC 320-10-65 established a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when recognize a write-down through earnings. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal year and interim periods ending after June 15, 2009. There was no impact to the Company’s consolidated financial statements as a result of the adoption of these standards.





In the second quarter of 2009, the Company adopted a new accounting standard for subsequent events, as codified in ASC 855-10. The updated modifies the names of the two types of subsequent events either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). The update did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption did not have an impact on the Company’s financial condition, results of operations, or cash flows.





In February 2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. All of the amendments in ASU 2010-09 are effective upon issuance of the final ASU, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company adopted ASU 2010-09 in February 2010 and did not disclose the date through which subsequent events have been evaluated.


69





In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13 Revenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangement,which changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence (VSOE) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE or third-party evidence is available. ASU 2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. The Company is currently assessing the impact to its financial condition, results of operations or cash flows.





In January 2010, the FASB issued new standards in ASC 820, Fair Value Measurements and Disclosures.These standard required new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. The standards also require disclosure of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements. The standard also clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. The new disclosures regarding Level 1 and 2 fair value measurements and clarification of existing disclosures are effective for the Company beginning with its first interim filing in 2010. The disclosures about the rollforward of information in Level 3 are required for the Company with its first interim filing in 2011. The Company is currently evaluating the impact these standards will have on its financial condition, results of operations, or cash flows.





In January 2010, the FASB issued ASU No. 2010-01, Equity (ASC 505):Accounting for distributions to Shareholders with Components of Stock and Cash(A Consensus of the FASB Emerging Issues Task Force). This amendment to ASC 505 clarifies the stock portion of a distribution to shareholders that allow them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying ASC 505 and 260. Effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The Company does not expect the provisions of ASU No. 2010-01 to have a material effect on the financial position, results of operations or cash flows of the Company.





5.  Pledged cash deposits





Pledged as guarantee for the Company's notes payable, the Company regularly pays some of its suppliers by bank notes. The Company (the drawer) has to deposit a cash deposit, equivalent to 10%- 40% of the face value of the relevant bank note, in a bank (the drawer) in order to obtain the bank note.





6. Accounts Receivable and Notes Receivable





The Company’s accounts receivable at December 31, 2009 and 2008 are summarized as follows:





December 31,2009


2008Accounts receivable

$
104,120,926


$
60,345,494Notes receivable


56,062,744



40,989,840160,183,670



101,335,334Less: allowance for doubtful accounts


(5,320,378
)


(4,910,478
)Balance at end of year

$
154,863,292


$
96,424,856





Notes receivable represent accounts receivable in the form of bills of exchange whose acceptances and settlements are handled by banks.





The activities in the Company’s allowance for doubtful accounts of accounts receivable during the years ended December 31, 2009 and 2008 are summarized as follows:





Years Ended December 31,2009


2008Balance at beginning of year

$
4,910,478


$
3,827,838Amounts provided for during the year


1,171,429



1,670,964Amounts reversed of collection during the year


(765,201
)


(829,886
)Foreign currency translation


3,672



241,562Balance at end of year

$
5,320,378


$
4,910,478


70





7. Other Receivables





The Company’s other receivables at December 31, 2009 and 2008 are summarized as follows:





December 31,2009


2008Other receivables

$
1,804,334


$
2,009,364Less: allowance for doubtful accounts


(740,110
)


(659,837
)Balance at end of year

$
1,064,224


$
1,349,527





Other receivables consist of amounts advanced to both related and unrelated parties, primarily as unsecured demand loans, with no stated interest rate or due date.





The activity in the Company’s allowance for doubtful accounts of other receivable during the year ended December 31, 2009 and 2008 are summarized as follows:




Years Ended December 31,2009


2008Balance at beginning of year

$
659,837


$
652,484Amounts provided for during the year


113,905



62,856Amounts reversed of collection during the year


(34,287
)


(104,120
)Foreign currency translation


655



48,617Balance at end of year

$
740,110


$
659,837





8. Inventories





The Company’s inventories at December 31, 2009 and 2008 consisted of the following:





December 31,2009


2008Raw materials

$
10,683,448


$
8,354,397Work in process


6,824,137



4,466,720Finished goods


12,017,195



14,826,96129,524,780



27,648,078Less: provision for loss


(2,109,083
)


(1,076,323
)Balance at end of year

$
27,415,697


$
26,571,755





Provision for inventories valuation amounted to $1 million and $0.02 million for the year ended December 31, 2009 and 2008, respectively.




9. Property, Plant and Equipment





The Company’s property, plant and equipment at December 31, 2009 and 2008 are summarized as follows:


71





December 31,2009

As Restated


2008

As RestatedCosts:Land use rights and buildings

$
33,100,702


$
27,416,977Machinery and equipment


62,982,885



54,405,700Electronic equipment


5,054,502



4,356,475Motor vehicles


2,634,696



2,461,378Construction in progress


1,939,256



1,007,415105,712,041



89,647,945Less: Accumulated depreciation


(47,182,594
)


(39,627,555
)Balance at end of year

$
58,529,447


$
50,020,390





Depreciation charge for the years ended December 31, 2009 and 2008 were $8,429,863 and $9,672,948, respectively.





10. Intangible Assets





The activity in the Company’s intangible asset account during the years ended December 31, 2009 and 2008 are summarized as follows:





December 31,2009


2008Costs:Patent technology

$
1,384,037


$
1,090,112Management software license


438,359



423,0141,822,396



1,513,126Less: Accumulated amortization


(1,261,007
)


(1,008,787
)Balance at end of the year

$
561,389


$
504,339





The estimated aggregated amortization expense for each of the five succeeding years is $174,384, $143,807, $136,383, $77,112, and $16,633 respectively.





11. Deferred Income Tax Assets





In accordance with the provisions of ASC Topic 740 “Income Taxes” (formerly SFAS 109), the Company assesses, on a quarterly basis, its ability to realize its deferred tax assets. Based on the more likely than not standard in the guidance and the weight of available evidence, the Company believes a valuation allowance against its deferred tax assets is necessary. In determining the need for a valuation allowance, the Company considered the following significant factors: an assessment of recent years’ profitability and losses; the Company’s expectation of profits based on margins and volumes expected to be realized (which are based on current pricing and volume trends); the long period - ten years or more in all significant operating jurisdictions — before the expiry of net operating losses, noting further that a portion of the deferred tax asset is composed of deductible temporary differences that are subject to an expiry period until realized under tax law. The Company will continue to evaluate the provision of valuation allowance in future periods.





The components of deferred income tax assets at December 31, 2009 and 2008 were as follows:





December 31,2009

As Restated


2008

As RestatedLosses carryforward (U.S.)

$
2,089,985


$
1,902,911Losses carryforward (PRC)


659,774



484,029Product warranties and other reserves


3,164,674



2,080,053Property, plant and equipment


3,112,550



2,765,494Accrued make-whole interest expense for convertible notes


1,667,320



713,555Stock-based compensation


289,705



244,851Bonus accrual


306,030



297,208All other


395,649



154,34811,685,687



8,642,449Valuation allowance (1)


(4,821,210
)


(3,459,664
)Total deferred tax assets (2)

$
6,864,477


$
5,182,785


72





(1) As of December 31, 2009, valuation allowance was $4,821,210, including $4,047,010 allowance for the Company’s deferred tax assets in the U.S. and $774,200 allowance for the Company’s non-U.S. deferred tax assets. Based on the Company’s current operations in the U.S., the management believes that the deferred tax assets in the US are not likely to be realized in the future. For the non-U.S. deferred tax assets, pursuant to certain tax laws and regulations in China, the management believes such amount will not be used to offset future taxable income.





(2)  Approximately $2,998,124 and $2,651,176 of deferred income tax asset as of December 31, 2009 and 2008, respectively, is included in non-current deferred tax assets in the accompanying consolidated balance sheets. The remaining $3,866,353 and $2,531,609 of deferred income tax asset as of December 31, 2009 and 2008 respectively, is included in the current deferred tax assets.




The activity in the Company’s valuation allowance for deferred tax assets during the year ended December 31, 2009 and 2008 are summarized as follows:





Year Ended December 312009


2009Balance at beginning of year

$
3,459,664


$
1,921,954Amounts provided for during the year


1,452,022



1,545,976Amounts recovered during the year


(91,037
)


(27,020
)Foreign currency translation


561



18,754Balance at end of year

$
4,821,210


$
3,459,664




12. Bank Loans





At December 31, 2009, the Company, through its Sino-foreign joint ventures, had outstanding fixed-rate short-term bank loans of $5,125,802, with weighted average interest rate at 5.68% per annum. These loans are secured with some of the property and equipment of the Company and are repayable within one year.





At December 31, 2008, the Company, through its Sino-foreign joint ventures, had outstanding fixed-rate short-term bank loans of $7,315,717, with weighted average interest rate at 6.17% per annum. These loans are secured with some of the property and equipment of the Company and are repayable within one year.





13. Accounts and notes payable





The Company’s accounts and notes payable at December 31, 2009 and 2008 are summarized as follows:





December 31,2009


2008Accounts payable

$
69,454,231


$
38,595,446Notes payable


38,041,602



20,650,597Balance at end of year

$
107,495,833


$
59,246,043





Notes payable represent accounts payable in the form of bills of exchange whose acceptances and settlements are handled by banks.





The Company has pledged cash deposits, notes receivable and certain property plant and machinery to secure trade financing granted by banks.





14.  Convertible Notes payable





In February 2008, the Company sold to two accredited institutional investors $35 million of convertible notes, the "Convertible Notes," with a scheduled maturity date of February 15, 2013. The Convertible Notes, including any accrued but unpaid interest, are convertible into common shares of the Company at a conversion price of $8.8527 per share, subject to adjustment upon the occurrence of certain events.





The Convertible Notes bear annual interest rates of 3%, 3.5%, 4%, 4.5% and 5% for each year of 2008, 2009, 2010, 2011 and 2012. The interest on the Convertible Notes shall be computed commencing from the issuance date and will be payable in cash in arrears semi-annually on January 15, and July 15 of each year with the first interest payable date being July 15, 2008. From and after the occurrence and during the continuance of an Event of Default defined in the relevant Convertible Note agreements, the interest rate then in effect shall be increased by two percent (2%) until the event of default is remedied.


73





The holders of the Convertible Notes will be entitled to convert any portion of the conversion notes into shares of common stock at the conversion price at any time or times on or after the thirtieth (30th) day after the issuance date and prior to the thirtieth (30th) Business Day prior to the expiry date of the Convertible Notes. A damage penalty will be paid if share certificates are not delivered timely after any conversion.





The Company will have the right to require the Convertible Note holders to convert all or any portion of the conversion amount then remaining under the Convertible Note obligation into shares of common stock, “ Mandatory Conversion”, if at any time during a six-month period, the beginning day of each such six-month period, a “Mandatory Conversion Period Start Date”, the arithmetic average of the weighted average price of the common stock for a period of at least thirty (30) consecutive trading days following the Mandatory Conversion Period Start Date equals or exceeds the percentage of $8.8527 set forth in the chart below as applicable to the indicated six month period:





0-6 months:


125
%6-12 months:


125
%12-18 months:


135
%18-24 months:


135
%24-30 months:


145
%30-36 months:


145
%36-42 months:


155
%42-48 months:


155
%




The Company will not effect a Mandatory Conversion of more than twelve percent (12%) of the original principal amount of the Convertible Notes, with the applicable accrued but unpaid interest, in any six month period or twenty-four percent (24%) of the original principal amount of the Convertible Notes, with the applicable accrued but unpaid interest, in any twelve (12) month period.





On each six month anniversary of the issuance date beginning August 15, 2008, the conversion price will be adjusted downward to the Reset Reference Price, as defined below, if the weighted average price for the twenty (20) consecutive trading days immediately prior to the applicable six month anniversary, the “Reset Reference Price”, is less than 95% of the conversion price in effect as of such applicable six month anniversary date. The foregoing notwithstanding, the conversion price will not be reduced via such reset provision to less than $7.0822. The conversion price is also subject to weighted-average antidilution adjustments, but in no event will the conversion price be reduced to less than $6.7417. If and whenever on or after the issuance date, the Company issues or sells its shares of Common Stock or other convertible securities, except for certain defined exempt issuances, for a consideration per share less than a price equal to the conversion price in effect on the issuance date immediately prior to such issue or sale, the original conversion price then in effect shall be adjusted by a weighted-average antidilution formula, but in no event to a new conversion price less than $6.4717.





The Company will not effect any conversion of the Convertible Notes, and each holder of the Convertible Notes will not have the right to convert any portion of the Convertible Notes to the extent that after giving effect to such conversion, such holders would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion.





As indicated above, according to the terms of the Convertible Notes, the conversion price was reset to $7.0822 as of August 15, 2008 based on the weighted average price of the stock on that date.  In accordance with ASC Topic 470 (formerly EITF 00-27), a contingency feature that cannot be measured at inception of the instrument should be recorded when the contingent event occurs.  Therefore, on the date of the reset, the difference in the number of indexed shares prior to the reset was compared to the indexed shares subsequent to the reset and this incremental number of shares was multiplied by the commitment date stock price to determine the incremental intrinsic value that resulted from the adjustment to the conversion price. At the commitment date, as the effective conversion price was higher than the market value of the stock, no beneficial conversion feature was present and therefore, no beneficial conversion charge was recorded.




As of August 15, 2008, the number of indexed shares was 3,953,596 and 4,941,967 at the inception conversion price and reset conversion price, respectively. At the commitment date, the stock price was $6.09, and the “effective” conversion price was $6.93. Accordingly, since the effective conversion price was higher than the market value of the stock, the debt instruments are not considered "in the money" and no beneficial conversion feature is present.


74





Upon the occurrence of an event of default with respect to the Convertible Notes, the Convertible Note holders may require the Company to redeem all or any portion of the Convertible Notes. Each portion of the Convertible Notes subject to redemption by the Company will be redeemed by the Company at a price equal to the sum of (i) the conversion amount to be redeemed and (ii) the Other Make Whole Amount. The “Other Make Whole Amount” will mean a premium to the conversion amount such that the total amount received by the Convertible Note holder upon redemption represents a gross yield to the Convertible Note holders on the original principal amount as of the redemption date equal to thirteen percent (13%), with interest computed on the basis of actual number of days elapsed over a 360-day year. The events of default includes the Company’s failure to cure a conversion failure by delivery of the required number of shares of Common Stock, the Company’s failure to pay to the Convertible Note holder any amount of principal, interest, late charges or other amounts when and as due under the Convertible Notes and other events as defined in the Convertible Note agreements. Any amount of principal, interest or other amount due under the Convertible Notes which is not paid when due shall result in a late charge of 18% being incurred and payable by the Company until such amount has been paid.





Upon the consummation of a change of control as defined in the Convertible Note agreements, the Convertible Note holder may require the Company to redeem all or any portion of the Convertible Notes. The portion of the Convertible Notes subject to redemption shall be redeemed by the Company in cash at a price equal to the sum of the conversion amount of being redeemed and the Other Make Whole Amount as defined above.





On each of February 15, 2010 and February 15, 2011, the Convertible Note holders will have the right, in their sole discretion, to require that the Company redeem the Convertible Notes in whole but not in part, by delivering written notice thereof to the Company. The portion of this Convertible Note subject to redemption pursuant to this annual redemption right will be redeemed by the Company in cash at a price equal to the sum of the conversion amount being redeemed and the Annual Redemption Make Whole Amount. The “Annual Redemption Make Whole Amount” will mean a premium to the conversion amount such that the total amount received by the Convertible Note holder upon any annual redemption represents a gross yield on the original principal amount of eleven percent (11%), with interest computed on the basis of actual number of days elapsed over a 360-day year.





In the event that the Company has not completed the necessary filings to list the conversion shares on its principal market by the date that is ninety (90) days after the issuance date or has not so listed the conversion shares by the date that is ninety (90) days after the issuance date or the shares of the Company’s common stock are terminated from registration under the Securities Act of 1933, the Convertible Note holders will have the right, in its sole discretion, to require that the Company redeem all or any portion of the Convertible Notes. The portion of the Convertible Notes subject to redemption in connection with this listing default will be redeemed by the Company in cash at a price equal to the sum of the conversion amount being redeemed and the Other Make Whole Amount as mentioned above.





At any time following February 15, 2009, if the Weighted Average Price (WAP) for twenty (20) consecutive trading days is less than 45% of the Conversion Price in effect on the Issuance Date, as adjusted, namely $3.187, the Convertible Note holder shall have the right, in its sole discretion, to require that the Company redeem all or any portion of the Convertible Notes. The portion of this Convertible Note subject to redemption in connection with the share price change of the underlying common stock will be redeemed by the Company in cash at a price equal to the sum of the conversion amount being redeemed and the Other Make Whole Amount as mentioned above.





Since the Company’s stock Weighted Average Price for twenty (20) consecutive trading days ended on March 16, 2009 was below $3.187, which is less than 45% of the Conversion Price in effect as of the Issuance Date, as adjusted, the “ WAP Default” , each Convertible Note holder had the right, at its sole discretion, to require that the Company redeem all or any portion of the Convertible Notes by delivering written redemption notice to the Company within five (5) business days after the receipt of the Company’s notice of the WAP Default.





On March 17, 2009, the Company delivered two WAP Default notices to the Convertible Note holders.  On March 27, 2009, the Company received a letter from YA Global, one of the Convertible Note holders, electing to require the Company to redeem all the three Convertible Notes it held in the total principal amount of $5,000,000, together with interest, late charges, and the Other Make Whole Amount as defined in Section 5(d) of the Convertible Notes. After negotiation, the Company and YA Global reached a settlement agreement on April 8, 2009 and under the terms of the settlement agreement, the Company paid on April 15, 2009 a redemption amount of $5,041,667 to YA Global and YA Global waived its entitlement to the Other Make Whole Amount.


75





Following the WAP Default notices, the Company received a letter from the provisional liquidator acting on behalf of Lehman Brothers Commercial Corporation Asia Limited, the “LBCCA Liquidator”, the other Convertible Note holder, requesting an extension until April 24, 2009 to consider its rights under the Convertible Notes. The Company granted an extension to April 15, 2009. The LBCCA Liquidator further requested another extension to April 24, 2009.  On April 24, 2009, LBCCA’s lawyers sent three Holder Redemption Notices via fax electing to redeem the entire outstanding principal of $30,000,000, together with interest, late charges, if any, and the Other Make Whole Amount, to be paid on July 23, 2009. The Company discussed settlement with the LBCCA Liquidator, and on or about July 22, 2009, the Company and the LBCCA Liquidator agreed to extend the applicable holder mandatory redemption date for two months to September 23, 2009 to give more time to pursue settlement discussion. The Company received a letter dated September 22, 2009 from the LBCCA Liquidator stating that upon the Company’s acceptance of the revocation, all holder redemption notices dated April 24, 2009 shall be immediately revoked as if they were never issued, and the letter and the revocation did not purport to amend, restate or supplement any other terms and conditions under the three Notes and the Securities Purchase Agreement dated 1 February 2008 between the Company and LBCCA Liquidator. The Company accepted such revocation on September 23, 2009.




In connection with the Convertible Notes, the Company issued 1,317,864 detachable warrants, the “Warrants,” to purchase from the Company shares of common stock of the Company at the exercise price of $8.8527 per share. The Warrants are exercisable immediately and expired on February 15, 2009. The Warrants require net cash settlement in the event that there is a fundamental transaction, contractually defined as a merger, sale of substantially all assets, tender offer or share exchange. Due to this contingent redemption provision, in accordance with guidance now incorporated in ASC Topic 480 (formerly SFAS 150), the warrants require liability classification and must be recorded at fair value each reporting period. As of the issuance date, i.e., February 15, 2008, the fair value of warrants was $798,626, which was determined using the Black-Scholes option pricing model.





On the issuance date, February 15, 2008, the Company has evaluated the Convertible Notes for terms and conditions that would be considered to be features of embedded derivatives.  Generally, such features would be required to be separated from the host contract and accounted for as derivative financial instruments when certain conditions are met. Certain features, such as the conversion option, were found to be exempt, as they satisfied the conditions as set forth in ASC Topic 815 (formerly the paragraph 11(a) of SFAS 133) for instruments that are being (1) indexed with the Company’s own stock, and (2) classified as equity in financial position statement. Other features, such as puts were not required to be bifurcated from the debt host as they are clearly and closely associated with the risk of the debt-type host instrument





As more fully discussed in Note 3, as of January 1, 2009, the Company adopted and applied the amendments to ASC 815 Derivatives and Hedging Activities (effective on January 1, 2009), and changed its accounting to conform to the amended rules in ASC 815-40 (formerly was EITF 07-5) relating to the classification of derivative financial instruments. As a result of adopting the amended provisions of ASC 815-40, the Company was required to bifurcate the embedded conversion feature from the Convertible Debt and classify the liabilities of the financial instrument at fair value. Accounting for the cumulative effect change in this accounting principle required the Company to record an adjustment to its beginning retained earnings during the year ended December 31, 2009 which is the difference between the amounts that it recognized related to the Convertible Notes Payable before the initial application of the amended guidance and the amounts that would have been recognized if the amended guidance had been applied from the issuance date of the Convertible Notes Payable, which was February 15, 2008. The following table illustrates the differences that comprise the cumulative effect:





Convertible notes payableOriginal Allocation


Revised AllocationValue allocated to debt

$
34,201,374


$
28,379,704Warrants


798,626



798,626Compound Embedded Derivative


-



5,821,670Face value of Convertible Notes payable

$
35,000,000


$
35,000,000Unamortized discount


660,193



3,891,148Unamortized value as of December 31, 2008

$
34,339,807



-Fair value as of January 1, 2009


-


$
31,108,852





As indicated above, on the date of the Convertible Note issuance, allocation of basis in the financing arrangement to the warrants has resulted in an original issue discount to the face value of the Convertible Notes in the amount of $798,626, of which the amount will be accrued to its face value over the term of Convertible Note using the effective interest method. As of December 31, 2008, the amortization expense recorded by the Company was $138,433 and unamortized discount was $660,193. On January 1, 2009, the Company adopted and applied the provision of ASC 815 Derivatives and Hedging Activities (effective on January 1, 2009), with the accounting for the cumulative effect of the change in this accounting principle resulting in a discount of $6,620,296, including $798,626 discount resulting from Warrants and $5,821,670 from the embedded conversion feature of the original unamortized discount and the subsequent amortization using the effective interest method. On January 1, 2009, unamortized discount was $3,891,148.


76





As indicated above, on March 17, 2009, as a result of the Company’s WAP Default, the Convertible Note holders have the option to elect to exercise their rights to require the Company to redeem the Convertible Notes. The remaining amount of $3,891,148 unamortized discount was recorded to its full face value, including make-whole, of the Convertible Notes. On April 8, 2009, the Company and YA Global reached a settlement agreement, and the Company paid a redemption amount of $5,000,000 of the principal and $41,667 of interest to YA Global. On September 22, 2009, LBCCA Liquidator revoked the redemption notices that were sent on April 24, 2009, and continued to hold the Company’s Convertible Notes, of which the face value was $30,000,000. The Company accepted such revocation on September 23, 2009.





On December 31, 2009 and 2008, the carrying value of the Company’s Convertible Notes payable, including the redemption make-whole amount, was $34,763,771 and $ 36,378,534, respectively.





15.      Compound derivative liabilities





Effective on January 1, 2009, the Company adopted the provisions of ASC 815 Derivatives and Hedging Activities that addresses the determination of whether an instrument meets the definition of a derivative being indexed to a company’s own stock for purposes of applying the scope exception as provided for in accordance with ASC 815-15. Upon adoption of the standard on the effective date, the embedded conversion option that is embedded in the Company’s Convertible Notes Payable (see Note 14) no longer met the definition because it embodied certain anti-dilution protections that are not based on inputs to the fair value of a fixed-for-fixed option. As a result, the embedded conversion feature required bifurcation, classification in liabilities and measurement at fair value at each reporting period, with changes reflected in earnings, until the Convertible Notes are settled.





The Company’s derivative financial instruments (liabilities) consisted of a compound embedded derivative that originated in connection with the Convertible Note Payable and Warrant Financing Arrangement. Derivative liabilities are carried at fair value.





The following table summarizes the fair value of derivative liabilities as of December 31, 2009 and 2008:





December 31,2009

As Restated


2008

As RestatedDerivative liability

$
45,443,506


$
-Common shares linked to the derivative liability


4,235,972



—





Changes in the fair value of derivative liabilities are recorded in gain (loss) on change in fair value of derivative column in the income statement. The following table summarizes the components of gain (loss) on change in fair value of derivative arising from fair value adjustments and other changes to derivative liabilities during the years ended December 31, 2009 and 2008:





Years Ended December 31,2009

As Restated


2008

As RestatedBalances at January 1

$
-


$
-Cumulative effect upon adoption of ASC815-40


2,367,202



-Fair value adjustments during the year


43,076,304



-Balances at December 31

$
45,443,506


$
-





Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock, which has high estimated volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these estimate and assumption changes.


77





The following table sets forth (i) the range of inputs for each significant assumption and (ii) the equivalent, or averages, of each significant assumption as of December 31, 2009 and January 1, 2009 (the effective date of ASC815-40):





RangeDecember 31, 2009 Assumptions:

Low


High


EquivalentVolatility


68.86
%


81.94
%


76.71
%Market adjusted interest rates


6.40
%


7.87
%


7.05
%Credit risk adjusted rates


13.39
%


14.20
%


13.63
%Implied expected life (years)


-



-



1.96





RangeJanuary 1, 2009 Assumptions:

Low


High


EquivalentVolatility


63.09
%


91.15
%


74.02
%Market adjusted interest rates


4.14
%


17.01
%


7.15
%Credit risk adjusted rates


21.58
%


24.97
%


23.20
%Implied expected life (years)


-



-



4.27





The Monte Carlo Simulations technique requires the use of inputs that range across all levels in the fair value hierarchy. As a result, the technique is a Level 3 valuation technique in its entirety. The calculations of fair value utilized the Company’s trading market values on the calculation dates. The contractual conversion prices were adjusted to give effect to the value associated with the down-round, anti-dilution protection. Expected volatility for each interval in the Monte Carlo Simulations process was established based upon the Company’s historical volatility for historical periods consistent with the term of each interval in the calculation. Market adjusted interest rates give effect to expected trends or changes in market interest rates by reference to historical trends in LIBOR. Credit risk adjusted rates, or yields, were developed using bond curves, risk free rates, market and industry adjustment factors for companies with similar credit standings as the Company’s.





16.      Accrued expenses and other payables





The Company’s accrued expenses and other payables at December 31, 2009 and 2008 are summarized as follows:





December 31,2009

As Restated


2008

As RestatedAccrued expenses

$
4,160,433


$
2,441,354Accrued interest (1)


5,751,270



2,519,976Other payables


1,706,946



1,208,797Warranty reserves (2)


9,092,464



6,335,613Liabilities in connection with warrants (3)


—



1,977Dividend payable to minority interest shareholders of Joint-ventures


1,761,339



1,991,796Balance at end of year

$
22,472,452


$
14,499,513





(1) On December 31, 2009 and 2008, the Company’s balance of accrued interest was $5,751,270 and $2,519,976, respectively, consisting of $4,763,771 and $2,038,727 of an accrued provision on make-whole redemption interest pursuant to the term of Convertible Notes. Remaining interest was accrued interest, including coupon interest of Convertible Notes and bank loans interest.





(2) The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties were based on, among other things, historical experience, product changes, material expenses, service and transportation expenses arising from the manufactured product. Estimates will be adjusted on the basis of actual claims and circumstances.





For the years ended December 31, 2009 and 2008, the warranties activities were as follows:


78





December 31,2009


2008Balance at the beginning of year

$
6,335,613


$
4,919,491Additions during the year


10,192,749



5,861,782Settlement within the year


(7,442,984
)


(4,797,457
)Foreign currency translation


7,084



351,797Balance at end of year

$
9,092,462


$
6,335,613





The Company has recorded $9,092,462 and $6,335,613 product warranty reserves as at December 31, 2009 and 2008, which were included in the accrued expenses and other payables in the accompanying consolidated financial statements.





(3) In connection with the Convertible Debt, the Company issued 1,317,864 of detachable warrants, “Warrants,” to purchase from the Company shares of common stock at the exercise price of $ 8.8527 per share, subject to adjustments upon certain events occurring as defined in the debt agreement. The Warrants were exercisable immediately and expired on February 15, 2009.





The exercise price or the number of shares to be converted by the Warrant will be adjusted in the event of no effective Registration Statement or delayed effectiveness of the Registration Statement. In addition a damage penalty will be paid if the delivery of share certificates occurs upon the Warrants conversion.





The Company will not effect any conversion of a Warrant, and each holder of any Warrant will not have the right to convert any portion of such Warrant to the extent that after giving effect to such conversion, each of these two holders would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion.





If and whenever on or after the issuance date, the Company issues or sells its shares of common stock or other convertible securities for a consideration per share less than a price equal to the exercise price of a Warrant in effect on the issuance date immediately prior to such issue or sale, the exercise price of such Warrant then in effect will be adjusted.





The warrants issued in connection with the financial arrangement were derivative instruments. The warrants require net cash settlement in the event that there is a fundamental transaction, contractually defined as a merger, sale of substantially all assets, tender offer or share exchange.





In accordance with guidance now incorporated in ASC Topic 480 (formerly SFAS 150), it appears that the warrants require liability classification due to the possible cash redemption upon the event of an all cash acquisition. The FSP clarifies that warrants that contain any redemption features, including contingent redemption features, must be recorded as liabilities and marked to fair value each reporting period. As of the issuance date, i.e., February 15, 2008, the fair value of warrants was $798,626. Such warrant liabilities will be adjusted to its estimated fair value at the completion of each reporting period until the maturity of February 15, 2009.





The warrant agreements contain strike price adjustment provisions. In accordance with Section 8(iii), if the rate at which any Convertible Instruments are convertible into changes at any time, the warrant exercise price in effect at the time of the change will be adjusted based on the formula provided in Section 8(a) of the warrant agreement.  Accordingly, the warrants will be valued at the exercise price of $8.55 as of August 15, 2008 and thereafter.





As of August 15, 2008, the Company valued the warrant using conversion price at inception and reset respectively. The fair value of the warrant is $489,719 at the inception conversion price of $8.8527, and $551,131 at the reset conversion price of $8.55, respectively.





As of December 31, 2009 and 2008, the fair value of warrant was $0 and $1,977, respectively. On February 15, 2009, the warrant matured and was unexercised, and the right of exercising the warrants was forfeited. The income from adjustment of fair value of liabilities in connection with warrants has been recorded in the income statement as gain or loss on change in fair value of derivative. (See note 26)





As of Issuance Date (February 15, 2008), Reset date (August 15, 2008) and the end of each reporting period, the fair value of liabilities in connection with warrants was calculated using Black-Scholes option pricing model and based on the following assumptions:


79





February

15, 2008


August 15,

2008


August 15,

2008


December

31, 2008


February

15, 2009Issuance

Date


Prior to

reset


Subsequent

to reset





Maturity

dateWarrants indexed to common stock


1,317,864



1,317,864



1,317,864



1,317,864



1,317,864Strike price

Trading market price (1)

$
6.09


$
6.03


$
6.03


$
3.39


$
3.30Strike price

$
8.8527


$
8.8527


$
8.8527


$
8.8527


$
8.8527Strike price adjustment


-



-


$
(0.3027
)

$
(0.3027
)

$
(0.3027
)Effective strike for BSM

$
8.8527


$
8.8527


$
8.5500


$
8.5500


$
8.5500Term:Estimated Term (Year) (2)


1.00



0.50



0.50



0.13



0.00Volatility Historical volatility for effective term (3)


54.60
%


64.00
%


64.00
%


92.36
%


0.00
%Risk-free rate (4)


2.02
%


1.99
%


1.99
%


0.11
%


0.00
%Dividend yield rates (5)


0.00
%


0.00
%


0.00
%


0.00
%


0.00
%Fair value of warrants

$
798,626


$
489,718


$
551,131


$
1,977


$
0





(1) Using the Company’s common stock trading price.


(2) Same with the remaining contractual term.


(3) The volatility for the remaining contractual term was calculated and was consistent with historical term.


(4) The Risk-free rate elected was zero-coupon US Government Securities, and have the same term as the remaining contractual term. Is was considered an appropriate index because it is a general index that a market participant will used to trade in the Company’s common stock market.


(5) It was estimated that the Company would not distribute any dividend.





As above, the significant change in fair value of warrant between reporting period and inception, primarily due to a decrease of trading price of the Company’s common stock and a decrease of days for contract execution deadline or un-exercised on maturity date (February 15, 2009), the right of warrant forfeited.





17.     Accrued pension costs





All the employees are located in China. The Company records pension costs and various employment benefits in accordance with the relevant Chinese social security laws, which is approximately a total of 31% of salary as required by local governments. Base salary levels are the average salary determined by the local governments.





The activities in the Company’s pension account during the year ended December 31, 2009 and 2008 are summarized as follows:





December 31,2009


2008Balance at beginning of year

$
3,806,519


$
3,622,729Amounts provided during year


3,738,373



2,311,049Settlement during the year


(3,770,220
)


(2,381,047
)Foreign currency translation


3,515



253,788Balance at end of year

$
3,778,187


$
3,806,519


80





18.  Taxes payable





The Company’s taxes payable at December 31, 2009 and 2008 are summarized as follows:





December 31,2009

As Restated


2008

As RestatedValue-added tax payable

$
9,290,149


$
6,279,089Income tax payable (recoverable) (1)


1,851,103



(652,865
)Other tax payable


340,925



91,214Balance at end of year

$
11,482,177


$
5,717,438





(1)  At the end of the fiscal year of 2008, the Company paid income tax in advance, and the government has settled with the Company during 2009.





19.   Amounts Due to Shareholders/Directors





The activity in the amounts due to shareholders/directors during the years ended December 31, 2009 and 2008 is summarized as follows:





December 31,2009


2008Balance at beginning of the year

$
337,370


$
304,601Increase (decrease) during the year


(337,915
)


2,415Foreign currency translation


545



30,354Balance at end of year

$
-


$
337,370





20.  Advances payable





The amounts mainly represent advances made by the Chinese government to the Company as subsidy on interest on loans related to production facilities expansion.





The balances are unsecured, interest-free and will be repayable to the Chinese government if the usage of such advance does not continue to qualify for the subsidy (see notes 24 and 31).





21.  Non-controlling interests





The Company’s activities in respect of the amounts of non-controlling interests at December 31, 2009 and 2008 are summarized as follows:





December 31,2009

As Restated


2008

As RestatedBalance at beginning of year

$
23,270,820


$
23,166,270Adjustment of retained earnings for previous years(1)


—



7,801Income attributable to non-controlling interests


7,789,746



5,111,861Capital Contribution from the non-controlling interest holders of Joint-venture companies


—



745,723Dividends declared to the non-controlling interest holders of Joint-venture companies


(3,944,619
)


(1,016,733
)Transfer equity interest in Henglong by non-controlling interest holders of Joint-venture company (2)


-



(6,177,079
)Foreign currency translation


22,410



1,432,977Balance at end of year

$
27,138,357


$
23,270,820





(1) Adjustment of retained earnings for previous year mainly is the Company’s reduction of accrued depreciation on fixed assets and deferred income tax assets in the initial listing.


81





(2) On March 31, 2008, the Company’s wholly-owned subsidiary, Genesis, and Wiselink, both controlled by Hanlin Chen and his family, entered into an equity transfer agreement, pursuant to which Wiselink agreed to transfer and assign its 35.5% equity interest in Jingzhou Henglong, one of the Company’s currently consolidated subsidiaries, to Genesis for a total consideration of $32,090,000.





Under the terms of the above agreement, Genesis is deemed to be the owner of the equity concerned commencing from January 1, 2008. In accordance with ASC Topic 805 (formerly SFAS 141(R)), the acquisition is considered as a business combination of companies under common control and is being accounted for in a manner similar to that of pooling of interests. (See Note 22)





As of January 1, 2008, the net book value of 35.5% equity of Henglong, which was transferred from minority shareholders, was $6,177,079.





22.  Share Capital and Additional paid-in capital





The activities in the Company’s share capital and Additional paid-in capital account during the years ended December 31, 2009 and 2008 are summarized as follows:





Share Capital


Additional paid-inShares


Par Value


capitalBalance at January 1, 2008


23,959,702


$
2,396


$
30,125,951Issuance of common stock (1)


3,023,542



302



22,089,698Decrease in additional paid-in capital in connection with Henglong equity acquisition  (2)


-



-



(25,912,921
)Issuance of stock options to independent directors and management (3)


-



-



345,426Balance at December 31, 2008


26,983,244



2,698



26,648,154Exercise of stock option by independent directors and management


63,000



6



420,234Issuance of stock options to independent directors and management (3)

-


-



446,676Balance at December 31, 2009


27,046,244


$
2,704


$
27,515,064





(1) On March 31, 2008, Wiselink Holdings Limited, “Wiselink”, Great Genesis Holdings Limited, “Genesis”, a wholly-owned subsidiary of China Automotive Systems, Inc., “the Company” and other parties entered into an equity transfer transaction, the “Acquisition”, documented by an Equity Transfer Agreement, the “Agreement”, pursuant to which Wiselink agreed to transfer and assign a 35.5% equity interest in Jingzhou Henglong Automotive Parts Co. Ltd., “Henglong” to Genesis for a total consideration of $32,090,000, the “Consideration”.





Under the terms of the Agreement, the Consideration is to be paid as follows: $10,000,000 cash was paid by Genesis to Wiselink on April 30, 2008, and the balance of the purchase price ($22,090,000) was paid by issuance of 3,023,542 shares of common stock of the Registrant, in its capacity as the 100% parent company of Genesis.





On April 22 and June 30, 2008, the Company issued 1,170,000 and 1,853,542 shares of common stock, respectively, at an issuance price of $7.3060, par value of $0.0001. The difference between issuance price and par value was credited into additional paid-in capital.





Under the terms of the Agreement, 3,023,542 shares of common stock were paid as the portion of 35.5% equity of Henglong’s consideration and the value per share was $7.3060, which was calculated based on the Volume Weighted Average Price (VWAP) for twenty (20) consecutive trading days prior to the announcement date (January 22, 2008).





(2) In accordance with ASC Topic 805 (formerly SFAS 141(R)), the above acquisition is considered as a business combination of companies under common control and is being accounted for in a manner similar to that of pooling of interests. The Company’s consolidated financial statement recognizes Henglong’s 35.5% equity form January 1, 2008. The net book value of 35.5% equity of Henglong was $6,177,079. The difference between the acquisition consideration of $32,090,000 and 35.5% equity of Henglong, which was $25,912,921, has been debited to additional paid-in capital. Since Henglong has been a consolidated subsidiary of the Company, the historical consolidated financial statement of the Company has contained the assets, liabilities and other financial data of Henglong. Comparative statements in previous periods are mainly about the adjustment of noncontrolling interest. For detailed information, please see the disclosures in Form 8-K filed by the Company on May 8, 2008.


82





(3) In July 2004, the Company adopted a stock incentive plan. The maximum number of common shares for issuance under this plan is 2,200,000 with a period of 10 years. The stock incentive plan provides for the issuance, to the Company’s officers, directors, management and employees who served over three years or have given outstanding performance, of options to purchase shares of the Company’s common stock. Since the adoption of the stock incentive plan, the Company has issued 433,850 stock options under this plan, and there remain 1,766,150 stock options issuable in the future as of December 31, 2009.





Stock options granted under the aforementioned plans have an exercise price equal to the closing price of the Company’s common stock  traded on NASDAQ on the date of grant, and will expire two to five years after the grant date. Except for the 298,850 options granted to management on December 2008, which become exercisable on a ratable basis over the vesting period, the others were exercisable immediately on the grant date. Stock options will be settled in shares of the Company’s common stock upon exercise and are recorded in the Company’s consolidated balance sheets under the caption “Additional paid-in capital.” As of December 31, 2009, the Company has sufficient unissued registered common stock for settlement of stock incentive plan mentioned above.





The fair value of stock option was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield. The expected term represents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instrument. The dividend yield assumption is based on historical patterns and future expectations for the Company dividends.





Assumption used to estimate the fair value of stock options on the granted date are as follows:





Issuance Date

Expected volatility


Risk-free rate


Expected term (years)


Dividend yieldSeptember 10, 2009


153.6
%


2.38
%

5



0.00
%December 10, 2008


134.39
%


1.21
%

3



0.00
%June 25, 2008


98.29
%


3.34
%

5



0.00
%





The stock options granted during 2009 were exercisable immediately, the fair value on the grant date using the Black-Scholes option pricing model was $196,650, and have been recorded as compensation costs.





The stock options granted during 2008 were partially exercisable immediately, and partially exercisable pro rata during the grant term. The stock options' fair value on the grant date using the Black-Scholes option pricing model was $845,478, of which $345,426 have been recorded as compensation costs. $250,026 of the remaining unrecognized cost of $500,052 has been recognized in 2009, and thereafter the remaining unrecognized cost of $250,026 will be recognized in 2010.





The activities of stock options are summarized as follows, including granted, exercised and forfeited.





Shares


Weighted-Average

Exercise Price


Weighted-Average

Contractual

Term (years)Outstanding - January 1, 2008


67,500


$
7.26



4.7Granted


321,350



3.12



3.1Exercised


—



—



—Cancelled


—



—



—Outstanding - December 31, 2008


388,850


$
3.84



3.4Granted


22,500



8.45



5Exercised


(63,000
)


6.67



4.7Cancelled


(4,500
)


2.93



3Outstanding - December 31, 2009


343,850


$
3.67



3.3




83




The following is a summary of the range of exercise prices for stock options that are outstanding and exercisable at December 31, 2009:





Range of Exercise Prices

Outstanding Stock

Options


Weighted Average

Remaining Life


Weighted Average

Exercise Price


Number of Stock

Options Exercisable$2.00 - $4.49


291,350



1.94


$
2.93



194,733$4.50 - $10.00


52,500



3.05


$
7.54



52,500343,850











247,233





As of December 31, 2009 and 2008, the total intrinsic value of the Company’s stock options that were outstanding was $5,171,504 and $86,765, respectively; and the total intrinsic value of Company’s stock options that were exercisable was $3,611,947 and $45,824, respectively. There was no intrinsic value for all the options on the grant date as their exercise prices were the market prices. The average weighted fair value for each stock option granted was $8.74 and $2.63 in 2009 and 2008, respectively.




As of March 20, 2006 and February 15, 2008, the Company issued 156,250 shares and 1,317,864 shares of warrant to different investors, with term of three years and one year, respectively. Such warrants have not been exercised on March 20, 2009 and February 15, 2009 (their maturity dates), and the right of warrants was forfeited. As of December 31, 2009, the Company did not have any warrant outstanding. The fair value of warrant was determined on the date of issuance using the Black-Scholes option pricing model. (See Note 16)





23.     Retained earnings —





Appropriated





Pursuant to the relevant PRC laws and regulations of Sino-foreign joint venture enterprises, the profits distribution of the Company’s Sino-foreign subsidiaries, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10%.





When the statutory surplus reserve reaches 50% of the registered capital of a company, additional reserve is no longer required. However, the reserve cannot be distributed to joint venture partners. Based on the business licenses of the Sino-foreign joint ventures, the registered capital of Henglong, Jiulong, Shenyang, Zhejiang, USAI, Jielong, Wuhu, and Hengsheng are $10,000,000, $4,283,170 (RMB35,000,000), $8,132,530 (RMB67,500,000), $7,000,000, $2,600,000, $6,000,000, $3,750,387 (RMB30,000,000), and $10,000,000 respectively.





The Company recorded $798,756 statutory surplus reserve for the year 2009. The Company did not record statutory surplus reserve for the year 2008 as statutory surplus reserve reached 50% of the registered capital of subsidiaries for distribution of profit.





Unappropriated





Following are the changes in unappropriated retained earnings for the years ended December 31, 2009 and 2008:





2009

As Restated


2008

As RestatedBalance at beginning of the year

$
34,060,876


$
23,591,275Adjustment of retained earnings for previous years (1)


-



225,471Accumulated effect of adopting ASC815-40 (2)


863,753



-Net income ( loss)


(26,440,871
)


10,244,130Appropriation of retained earnings


(798,756
)


—Balance at end of year

$
7,685,002


$
34,060,876


84




(1) Adjustment of retained earnings for previous years mainly is the Company’s reduction of accrued depreciation on fixed assets and deferred income tax assets in the initial listing.


(2) As discussed in Note 3, effective January 1, 2009, the Company adopted and applied the amendments to ASC 815 Derivatives and Hedging Activities. The accumulated effect of adopting ASC815-40 was $863,753.





24.   Other Income





Other income was $94,534 for the year ended December 31, 2009, compared to $1,067,309 for the year ended December 31, 2008, a decrease of $972,775, or 91.1%, primarily as a result of decreased government subsidies.





The Company’s government subsidies consisted of interest subsidy and investment subsidy. Interest subsidy is the refund by the Chinese Government of interest charged by banks to companies which are entitled to such subsidies. Investment subsidy is subsidy to encourage foreign investors to set up technologically advanced enterprises in China.





During the year ended December 31, 2009, the Company received $94,534 for interest subsidy, and had no investment subsidy. During the year ended December 31, 2008, the Company received $264,978 for interest subsidy, and $802,331 for reinvestment subsidy.





Interest subsidies apply only to loan interest related to production facilities expansion. During 2006 and 2007, the Company had used this special loan to improve technologically its production line in order to enlarge capability and enhance quality. The expansion project was completed and new facilities were put into use at the end of 2007 and 2008, respectively.





During 2009 and 2008, the experts sent by the Chinese Government reviewed and assessed the actual usage of technologically improved production facilities on site in order to confirm whether the improvement has achieved its expected goal of production expansion and quality enhancement. Whether or not a company can receive interest subsidies from the Chinese Government depends on the company’s achieving the two goals set forth above after the technological improvement.





Chinese government also provided incentives to foreign investors for setting up technologically advanced enterprises in China. During 2008, Genesis, as a foreign investor, has received $802,331 for re-investment in Jiulong and Henglong with their profit distribution, and those entities were technologically advanced enterprises and entitled to such subsidies.





Since such government subsidy is similar to an investment income, the Company has recorded it as other income.





25.   Financial income (expenses)





During the years ended December 31, 2009 and 2008, the Company recorded financial income (expenses) which were summarized as follows:





Years Ended December 31,2009

As Restated


2008

As RestatedInterest income(expenses), net

$
(3,811,426
)

$
(3,277,492
)Foreign exchange gain (loss), net


10,296



305,578Income (loss) of note discount, net


(82,757
)


150,654Amortization for discount of Convertible Note payable, net


(3,891,148
)


(138,433
)Handling charge


(108,679
)


(89,020
)Total

$
(7,883,714
)

$
(3,048,713
)


(1)
Interest expenses mainly are accrued provisions on make-whole redemption interest pursuant to the term of the Convertible Notes. For the years ended December 31, 2009, and 2008, the Company accrued provisions on make-whole redemption interest were $2,725,042, and $2,038,729, respectively.


(2)  On March 17, 2009, as a result of the Company’s WAP Default, the Convertible Notes holder required the Make Whole redemption, and $3,891,148 was recorded as unamortized discount to accrue the Convertible Notes to their fair value over the term of the Convertible Notes (see note 14).


85





26.  Gain on change in fair value of derivative





As of December 31, 2009 and 2008, following is the summary of the Company’s recorded gain (loss) on change in fair value of derivatives:





Years Ended December 31,2009

As Restated

2008

As RestatedIncome from adjustment of fair value of liabilities in connection with warrants
$
1,977

$
796,649Loss from adjustment of fair value of compound derivative liabilities

(43,076,304
)

-Total
$
(43,074,327
)
$
796,649





Gain (loss) on the change of the fair value of warrant liability and compound derivative liabilities mentioned above, see note 15 and 16.





27.  Income Taxes





The Company’s subsidiaries registered in the PRC are subject to state and local income taxes within the PRC at the applicable tax rate of 25% on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested enterprise. The Company’s PRC subsidiaries, which are in the stage of its enterprise income tax exemption currently, are to remain subject to enterprise fixed income tax at a statutory rate of 33%, which comprises 30% national income tax and 3% local income tax.





On January 1, 2007, Jiulong has used up its enterprise income tax exemption. During 2008, Jiulong was subject to enterprise income tax at a rate of 15%. During 2009, Jiulong was awarded the status of Advanced Technology Enterprises, and subject to enterprise income tax at a rate of 15% for 2009.





On January 1, 1999, Henglong was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 1999, and a 50% enterprise national income tax deduction and a 100% local income tax deduction for the next nine years thereafter, from 2001 to 2009, for income tax purposes. During 2008, Henglong was awarded the status of Advanced Technology Enterprises, and subject to enterprise income tax at a rate of 15% for 2009 and 2008.





On January 1, 2003, Shenyang was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 2003, a 75% enterprise national income tax deduction and a 100% local income tax deduction for the next three years thereafter, from 2005 to 2007, and a 50% enterprise national income tax deduction, and enterprise income tax at a rate of 18% in 2008. During 2009, Shenyang was awarded the status of Advanced Technology Enterprises, and subject to enterprise income tax at a rate of 15% for 2009.





On January 1, 2004, Zhejiang was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 2004, and a 50% enterprise national income tax deduction, and a 50% local income tax deduction for the next three years thereafter, from 2006 to 2008, for income tax purposes. During 2008, Zhejiang was subject to enterprise income tax at a rate of 16.5%, which comprises of 15% enterprise national income tax and 1.5% local income tax. During 2009, Zhejiang was awarded the status of Advanced Technology Enterprises, and is subject to enterprise income tax at a rate of 15% commencing in 2009.





Wuhu, Jielong and Hengsheng have an enterprise income tax exemption in 2008 and 2009, and Wuhu is subject to income tax at a rate of 11%, 12%, and 12.5% for the next three years thereafter, from 2010 to 2012, and Jielong and Hengsheng are subject to 12.5% for the next three years thereafter, from 2010 to 2012.





USAI is at start up stage in 2009 and 2008, accordingly, there is no assessable profit for these periods. It has an enterprise income tax exemption in 2008 and 2009, and is subject to income tax at a rate of 12.5% for the next three years thereafter, from 2010 to 2012, and a 25% enterprise national income tax for the years commencing from January 1, 2013.





No provision for Hong Kong tax is made as Genesis is an investment holding company, and has no assessable income in Hong Kong for the years 2009 and 2008. The enterprise income tax of Hong Kong is 16.5%.


86





No provision for US tax is made as the Company has no assessable income in the US for the years of 2009 and 2008. The enterprise income tax of US is 35%.





The provision for income tax differs from the provision computed at statutory rates as follows:





Years Ended December 31,2009

As Restated


2008

As RestatedTax rate


35
%


35
%Income (loss) before income taxes

$
(13,931,112
)

$
15,811,821Federal tax (benefit) at statutory rate


(4,875,889
)


5,534,137Fair value change in convertible bond


13,866,951



(278,827
)Deemed accumulated Imputed interest


2,268,652



48,451Other permanent differences


(136,657
)


(52,996
)Effect of differences in foreign tax rate


(6,711,498
)


(3,569,821
)Tax benefit from income tax return


(1,053,092
)


(2,762,823
)Provision on deferred income tax – US


1,185,693



1,214,786Provision on deferred income tax – PRC


175,853



322,923Total income tax expenses

$
4,720,013


$
455,830





28.   Income (loss) Per Share





The calculations of diluted income (loss) per share attributable to Parent company were:





Years Ended December 31,2009


2008Numerator:Net income (loss) attributable to Parent company

$
(26,440,871
)

$
10,244,130Allocation to convertible notes holders


-



(1,328,374
)Net income (loss) attributable to the parent Company’s common shareholders – Basic

$
(26,440,871
)

$
8,915,756Dilutive effect of:Add back allocation to convertible notes holders


-



1,328,374Net income (loss) attributable to the parent Company’s common shareholders - Diluted

$
(26,440,871
)

$
10,244,130Denominator:Weighted average shares outstanding – Basic


26,990,649



25,706,364Shares issuable under stock options


-



89Denominator for dilutive income/(loss) per share


26,990,649



25,706,453Net income (loss) per common share attributable to Parent company—Basic

$
(0.98
)

$
0.35Diluted

$
(0.98
)

$
0.35





The following table summarizes potential common shares outstanding excluded from the calculation of diluted income (loss) per share for the years ended December 31, 2009 and 2008, because such an inclusion would have an anti-dilutive effect:





Years Ended December 31,2009


2008Shares issuable under stock options


343,850



366,350Shares issuable under stock warrant


-



1,474,114Shares issuable pursuant to convertible senior notes


4,235,972



4,941,967Total


4,579,822



6,782,431


87





29.  Significant Concentrations





The Company grants credit to its customers, generally on an open account basis. The Company’s customers are mostly located in the PRC.





In 2009, the Company’s ten largest customers accounted for 80.2% of the Company’s consolidated sales, with four customers accounting for more than 10% of consolidated sales, i.e. 14.8%, 12.0%, 10.4% and 10.0% of consolidated sales, or an aggregate of 47.2% of consolidated sales.





In 2008, the Company’s ten largest customers accounted for 78.4% of the Company’s consolidated sales, with four customers accounting for in excess of 10% of consolidated sales, i.e. 15.1%, 11.9%, 11.4% and 10.6% of consolidated sales, or an aggregate of 49.1% of consolidated sales.





At December 31, 2009 and 2008, approximately 31.9% and 34.2% of accounts receivable were from trade transactions with the aforementioned customers.





30.  Related Party Transactions





The Company’s related party transactions include product sales, material purchases and purchases of equipment and technology. These transactions were consummated under similar terms as those with the Company's customers and suppliers. On some occasions, the Company’s related party transactions also include purchase/sale of capital stock of the joint ventures and sale of property, plant and equipment.





Related sales and purchases: During the years ended December 31, 2009 and 2008, the joint-ventures entered into related party transactions with companies with common directors as shown below:





Merchandise Sold to Related Parties





Years Ended December 31,2009


2008$
4,850,977


$
2,143,418Shanghai Fenglong


400,001



166,885Jiangling Yude


641,186



2,365,107Total

$
5,892,164


$
4,675,410





Materials Purchased from Related Parties





Years Ended December 31,2009


2008Xiamen Joylon

$
-


$
9,547Shanghai Fenglong


17,273



136,990Jiangling Tongchuang


7,078,698



5,485,206Jingzhou Tongyi


489,116



285,347Jingzhou Tongying


6,216,739



1,984,854Hubei Wiselink


196,876



-Total

$
13,998,702


$
7,901,944





Technology Purchased from Related Parties





Years Ended December 31,2009


2008Changchun Hualong

$
248,916


$
321,892


88




Equipment Purchased from Related Parties





Years Ended December 31,2009


2008Hubei Wiselink

$
3,962,690


$
3,031,072





Purchase of 35.5% equity interest in Jinzhou Henglong during the year ended December 31, 2008 (refer to note 21).





Related receivables, advance payments and account payable: As at December 31, 2009 and 2008, accounts receivables, advance payments and account payable between the Company and related parties are as shown below:





Due from Related Parties





December 31,2009


2008Xiamen Joylon

$
1,214,682


$
1,077,659Shanghai Fenglong


193,595



207,451Jiangling Yude


33,662



-Total

$
1,441,939


$
1,285,110





Other Receivables from Related Parties





December 31,2009


2008Jiangling Tongchuang

$
3,515


$
3,511WuHan Dida


61,901



141,560Jiulong Material


537,300



534,369Changchun Hualong


-



224,234Total


602,716



903,674Less: provisions for bad debts


(537,300
)


(534,309
)Balance at end of year

$
65,416


$
369,365





Other receivables from related parties are primarily unsecured demand loans, with no stated interest rate or due date.





Due to Related Parties





December 31,2009


2008Shanghai Tianxiang

$
610,246


$
609,675Shanghai Fenglong


-



38,063Jiangling Tongchuang


63,314



206,039Hubei Wiselink


328,366



159,482Jingzhou Tongyi


9,136



17,377Jingzhou Tongying


526,765



67,006Total

$
1,537,827


$
1,097,642





Advanced Equipment Payment to Related Parties





December 31,2009


2008Hubei Wiselink

$
2,579,319


$
2,473,320





As of February 27, 2010, the date the Company issued this financial statement, Hanlin Chen, Chairman, owns 55.99% of the common stock of the Company and has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.


89





31.  Commitments and Contingencies





Legal Proceedings - The Company is not currently a party to any threatened or pending legal proceedings, other than incidental litigation arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.





The following table summarizes the Company‘s major contractual payment obligations and commitments as of December 31, 2009:


Payment Obligations by Period2010


2011


2012


2013


Thereafter


TotalObligations for service agreements

$
110,000


$
110,000


$
—


$
—


$
—


$
220,000Obligations for purchasing agreements


9,896,373



672,252



—



—



—



10,568,625Interest and make-whole on Convertible Notes


5,751,270



—



—



—



—



5,751,270Total

$
15,757,643


$
782,252


$
—


$
—


$
—


$
16,539,895


32. Off-Balance Sheet Arrangements





At December 31, 2009 and 2008, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.





33.  Subsequent Events





On January 24, 2010, Genesis entered into a sino-foreign equity joint venture contract with Beijing Hainachuan Auto Parts Co., Ltd., to establish a sino-foreign joint venture company, Beijing Henglong Automotive System Co., Ltd. “Beijing Henglong”, to design, develop and manufacture both hydraulic and electric power steering systems and parts. Under PRC laws, the establishment of Beijing Henglong and the effectiveness of the equity joint venture contract are subject to the approval by the local Ministry of Commerce and the registration of the same with the local Administration of Industries and Commerce in Beijing.  As of the date of releasing this report, the approval has not been obtained.





On February 24, 2010, the Board of Directors of the Company resolved to increase the registered capital of Hengsheng, one of the Company’s subsidiaries, to $16,000,000 from $10,000,000. The additional investment will be used for expansion of plant and purchase of machinery and equipment and will be funded by the Company’s working capital balances. As of the date of this report, the additional investment has been injected into Hengsheng.





34.  Segment reporting





The accounting policies of the product sectors are the same as those described in the summary of significant accounting policies except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter segment sales and transfers as if the sales or transfers were to third parties, at current market prices.





During the years ended December 31, 2009 and 2008, the Company had nine product sectors, five of them were principal profit makers, which were reported as separate sectors which engaged in the production and sales of power steering (Henglong), power steering (Jiulong), power steering (Shenyang), power pumps (Zhejiang), and power steering (Wuhu). The other four sectors which were established in 2005, 2006 and 2007 respectively, engaged in the production and sales of sensor modular (USAI), electronic power steering (Jielong), power steering (Hengsheng), and provider of after sales and R&D services (HLUSA). Since the revenues, net income and net assets of these four sectors are less than 10% of its segment in the consolidated financial statements, the Company incorporated these four sectors into “other sectors”.


90





The Company’s product sectors information is as follows:





For the year ended December 31, 2009 – As Restated





Henglong


Jiulong


Shenyang


Zhejiang


Wuhu


Other Sectors


Eliminations (a)


TotalRevenueNet product sales –external

$
117,527,054


$
59,404,637


$
27,765,261


$
23,810,721


$
26,496,148


$
593,732


$
—


$
255,597,553Net product sales – internal


35,932,821



2,208,479



4,727,583



382,646



-



10,212,802



(53,464,331
)


-Gain on other sales and other income – external


(95,523
)


150,980



216,560



73,677



(15,337
)


511,790



(3,642
)


838,505Total revenue

$
153,364,352


$
61,764,096


$
32,709,404


$
24,267,044


$
26,480,811


$
11,318,324


$
(53,467,973
)

$
256,436,058Net income (loss)


25,922,760



3,463,037



2,874,063



2,998,220



47,270



1,303,104



(55,259,579
)


(18,651,125
)Net income (loss) attributable to non-controlling interest


5,151,997



657,533



862,219



1,469,128



10,716



( 166,688
)


( 195,159
)


7,889,746Net income (loss) attributable to Parent company

$
20,770,763


$
2,805,504


$
2,011,844


$
1,529,092


$
36,554


$
1,469,792


$
(55,064,420
)

$
(26,440,871
)Depreciation and amortization


3,777,978



2,068,581



543,930



895,241



352,770



974,832



70,837



8,684,169Total assets


156,393,126



59,675,929



32,163,383



25,955,363



18,182,769



27,593,057



(5,581,055
)


314,382,572Capital expenditures

$
5,378,814


$
1,671,141


$
218,297


$
2,486,501


$
150,212


$
7,918,006


$
-


$
17,822,971





For the year ended December 31, 2008 - As Restated





Henglong


Jiulong


Shenyang


Zhejiang


Wuhu


Other Sectors


Other (a)


TotalRevenueNet product

sales –

external

$
65,903,560


$
40,457,552


$
21,360,581


$
15,094,357


$
19,953,632


$
409,604


$
—


$
163,179,286Net product sales – internal


27,088,095



2,250,714



3,646,916



684,098



-



491,871



(34,161,694
)


-Gain on other sales and other income – external


317,477



73,819



156,743



33,930



134,472



21,217



(3,595
)


734,063Total revenue

$
93,309,132


$
42,782,085


$
25,164,240


$
15,812,385


$
20,088,104


$
922,692


$
(34,165,289
)

$
163,913,349Net income (loss)


14,917,965



534,665



2,110,574



2,749,649



(473,960
)


(816,507
)


(3,666,395
)


15,355,991Net income attributable to noncontrolling interest


2,986,936



103,227



633,173



1,347,329



(107,447
)


(24,274
)


172,917



5,111,861Net income (loss) attributable to Parent company

$
11,931,029


$
431,438


$
1,477,401


$
1,402,320


$
(366,513
)

$
(792,233
)

$
(3,839,312
)

$
10,244,130Depreciation and amortization


4,575,115



2,569,716



701,120



1,147,517



401,379



416,957



113,188



9,924,992Total assets


108,162,809



47,408,460



23,524,620



23,868,680



10,182,645



18,757,115



(16,188
)


231,888,141Capital expenditures

$
2,277,253


$
3,407,505


$
269,207


$
501,557


$
716,239


$
5,199,172


$
10,000,000


$
22,370,933





(a)
Other includes activity at the corporate level, unrealized income between product companies (sectors), and elimination of inter-sector transactions.


91


EXHIBIT INDEX


Exhibit

Number

Description3.1(i)

Certificate of Incorporation (incorporated by reference from the filing on Form 10KSB File No. 000-33123.)3.1(ii)

Bylaws (incorporated by reference from the Form 10KSB for the year ended December 31, 2002.)10.5

Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to the exhibit 10.8 to the Company’s Form 10Q Quarterly Report on May 10, 2006 )10.6

Securities Purchase Agreement dated February 1, 2008 among us, Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.7

Securities Purchase Agreement dated February 15, 2008 between the Company and the investors. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.8

Escrow Agreement dated February 15, 2008 among us, U.S. Bank National Association, Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.10.9

Registration Rights Agreement dated February 15, 2008 among us, Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.10

Senior Convertible Note dated February 15, 2008 in the original principal amount of $8,571,429 issued by the Company in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.11

Senior Convertible Note dated February 15, 2008 in the original principal amount of $6,428,571 issued by the Company in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.12

Senior Convertible Note dated February 15, 2008 in the original principal amount of $15,000,000 issued by the Company in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.13

Closing Warrant to purchase 564,799 shares of common stock at $8.8527 per share, dated February 15, 2008, issued by the Company in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.14

Escrow Warrant to purchase 564,799 shares of common stock at $8.8527 per share, dated February 15, 2008, issued by the Company in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.15

Senior Convertible Note dated February 15, 2008 in the original principal amount of $1,428,571 issued by the Company in favor of YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.16

Senior Convertible Note dated February 15, 2008 in the original principal amount of $1,071,429 issued by the Company in favor of YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)


92





10.17

Senior Convertible Note dated February 15, 2008 in the original principal amount of $2,500,000 issued by the Company in favor of YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.18

Closing Warrant to purchase 94,133 shares of common stock at $8.8527 per share, dated February 15, 2008, issued by the Company in favor of YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.19

Escrow Warrant to purchase 94,133 shares of common stock at $8.8527 per share, dated February 15, 2008, issued by the Company in favor of YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)10.20

Translation of the Equity Transfer Agreement dated March 31, 2008 in English (incorporated by reference to exhibit 99.1 of the Company’s Form 8-K filed on April 2, 2008)10.21

English Translation of the Sino-Foreign Equity Joint Venture Contract dated January 24, 2010 between Great Genesis Holdings Limited and Beijing Hainachuan Auto Parts Co., Ltd. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2009 filed on March 25, 2010)21

Schedule of Subsidiaries (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2009)23

Consent of Schwartz Levitsky Feldman LLP., Independent Registered Public Accounting Firm31.1

Rule 13a-14(a) Certification*31.2

Rule 13a-14(a) Certification*32.1

Section 1350 Certification*32.2

Section 1350 Certification*


93