UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549





FORM
10-K





(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 REPORT 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    ̈  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   x   No  
 ̈





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 27,046,244 shares of Common Stock outstanding as of February 27,
2010.









CHINA
AUTOMOTIVE SYSTEMS, INC.




FORM
10-K




INDEX




PagePART
      I
                
                3Item
      1. Description of Business
                
                3Item
      1A. Risk Factors
                
                11Item
      1B. Unresolved Staff Comments
                
                17Item
      2. Description of Property
                
                17Item
      3. Legal Proceedings
                
                18Item
      4. Reserved
                
                18PART
      II
                
                18Item
      5. Market for Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                
                18Item
      6. Selected Financial Data
                
                19Item
      7. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                
                19Item
      8. Financial Statements and Supplementary Data
                
                34Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                
                35Item
      9A. Controls and Procedures
                
                35Item
      9B Other Information
                
                35PART
      III
                
                36Item
      10. Directors and Executive Officers, Corporate Governance and Board
      Independence
                
                36Item
      11. Executive Compensation
                
                39Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                
                42Item
      13. Certain Relationships and Related Transactions
                
                42Item
      14. Principal Accountant Fees and Services
                
                43PART
      IV
                
                44Item
      15. Exhibits and Financial Statement Schedules
                
                44Signatures
                
                46Financial
      Statements
                
                47




2




Cautionary
Statement




This
Annual Report on Form 10-K 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 is filed, and the Company does not intend to
update any of the forward-looking statements after the date this Annual Report
on Form 10-K is filed to confirm these statements to actual results, unless
required by law.




PART I




ITEM 1. DESCRIPTION OF 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 eight Sino-foreign
joint ventures in China and a wholly-owned subsidiary in the U.S. set forth
below is an organizational chart as at December 31, 2009.




3




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”↓100.00%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.




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.




4




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).




5




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:




- 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 systemsoroil
      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
                        %




6




The
Company primarily sells its products to the above-mentioned 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.




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, 100,000 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.




7




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.




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.




8




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.




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.




9




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


-
            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.




10




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:




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.




11




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.




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.




12




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, including requiring 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. 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.




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.




13




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.




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.




16




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.





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.   DESCRIPTION OF
PROPERTY.




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
                                              (M
      2)
                                            
                                            
                                            Building Area
                                              (M
      2)
                                            
                                            
                                            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.




17




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.




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.




18




(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.





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




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 is filed, and the
Company does not intend to update any of the forward-looking statements after
the date this Annual Report on Form 10-K 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.




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.




19




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, 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
captial 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.





RESULTS
OF OPERATIONS




The
following table sets forth for the periods indicated certain items from the
Company's Consolidated Statements of Income expressed as a percentage of net
sales and the percentage change in the dollar amount of each such item from that
in the indicated previous year.




20




Percentage on net sales
                                        
                                        
                                        Change in percentageYear Ended December 31
                                        
                                        
                                        Year Ended December 312009
                                        
                                        
                                        2008
                                        
                                        
                                        2009 vs 2008Net
      sales
                                        
                                        
                                        100.00
                                        %
                                        
                                        
                                        100.00
                                        %
                                        
                                        
                                        56.6
                                        %Cost
      of sales
                                        
                                        
                                        71.6
                                        
                                        
                                        
                                        71.0
                                        
                                        
                                        
                                        57.8Gross
      profit
                                        
                                        
                                        28.4
                                        
                                        
                                        
                                        29.0
                                        
                                        
                                        
                                        53.8Gain
      on other sales
                                        
                                        
                                        0.3
                                        
                                        
                                        
                                        0.4
                                        
                                        
                                        
                                        14.2Less:
      operating expensesSelling
      expenses
                                        
                                        
                                        7.1
                                        
                                        
                                        
                                        6.7
                                        
                                        
                                        
                                        66.4General
      and administrative expenses
                                        
                                        
                                        4.8
                                        
                                        
                                        
                                        7.4
                                        
                                        
                                        
                                        1.2R
      & D expenses
                                        
                                        
                                        1.0
                                        
                                        
                                        
                                        1.4
                                        
                                        
                                        
                                        13.5Depreciation
      and amortization
                                        
                                        
                                        1.2
                                        
                                        
                                        
                                        3.6
                                        
                                        
                                        
                                        (49.5
                                        )Total
      operating expenses
                                        
                                        
                                        14.0
                                        
                                        
                                        
                                        19.1
                                        
                                        
                                        
                                        15.4Operating
      income
                                        
                                        
                                        14.7
                                        
                                        
                                        
                                        10.3
                                        
                                        
                                        
                                        122.6Other
      income
                                        
                                        
                                        0.1
                                        
                                        
                                        
                                        0.7
                                        
                                        
                                        
                                        (91.1
                                        )Financial
      expenses
                                        
                                        
                                        (0.8
                                        )
                                        
                                        
                                        (0.8
                                        )
                                        
                                        
                                        53.2Gain
      (loss) on change in fair value of derivative
                                        
                                        
                                        0.2
                                        
                                        
                                        
                                        0.6
                                        
                                        
                                        
                                        (37.4
                                        )Income
      before income tax
                                        
                                        
                                        14.2
                                        
                                        
                                        
                                        10.8
                                        
                                        
                                        
                                        105.7Income
      tax
                                        
                                        
                                        2.0
                                        
                                        
                                        
                                        0.1
                                        
                                        
                                        
                                        2,649.4Net
      income
                                        
                                        
                                        12.2
                                        
                                        
                                        
                                        10.7
                                        
                                        
                                        
                                        78.7Net
      income attributable to noncontrolling interest
                                        
                                        
                                        3.1
                                        
                                        
                                        
                                        3.1
                                        
                                        
                                        
                                        55.2Net
      income attributable to Parent company
                                        
                                        
                                        9.1
                                        %
                                        
                                        
                                        7.6
                                        %
                                        
                                        
                                        88.3
                                        %




RESULTS OF OPERATIONS: 2009 VERSUS
2008




NET
SALES




The
increase in net product sales of the Company is summarized as
follows:




Years Ended December 312009
                        
                        
                        2008
                        
                        
                        Increase (Decrease)
                        
                        
                        PercentageSteering
      gear for commercial vehicles
                        
                        $
                        59,404,649
                        
                        
                        $
                        40,457,552
                        
                        
                        $
                        18,947,097
                        
                        
                        
                        46.8
                        %Steering
      gear for passenger vehicles
                        
                        
                        172,004,635
                        
                        
                        
                        107,219,598
                        
                        
                        
                        64,785,037
                        
                        
                        
                        60.4Steering
      pumps
                        
                        
                        23,810,722
                        
                        
                        
                        15,094,357
                        
                        
                        
                        8,716,365
                        
                        
                        
                        57.7Sensor
      module
                        
                        
                        377,547
                        
                        
                        
                        407,779
                        
                        
                        
                        (30,232
                        )
                        
                        
                        (7.4
                        )Total
                        
                        $
                        255,597,553
                        
                        
                        $
                        163,179,286
                        
                        
                        $
                        92,418,267
                        
                        
                        
                        56.6
                        %




For the
year ended December 31, 2009, net product sales were $255,597,553, compared to
$163,179,286 for the year ended December 31, 2008, an increase of $92,418,267,
or 56.6%. The increase in net sales in 2009 as compared to 2008 was a result of
following factors:




(1)
Increases in the income of Chinese residents and the growth of purchasing power
led to an increase in the sales of passenger vehicles, which led to the increase
in the Company’s sales of steering gear and pumps. During 2009, the output and
sales volume of passenger vehicles in China reached 10,383,800 and 10,331,300
units respectively, with an increase of 54.1% and 52.9% compared with last year.
As a result, net sales of steering gear and pumps for domestic passenger
vehicles for the year ended December 31, 2009 increased 60.4% and 57.7% over the
year 2008, respectively.




21




(2)
Increased national economic investments in China led to an increase in sales of
commercial vehicles, which led to the increase in the Company’s sales of
steering gear for commercial vehicles. During 2009, the output and sales volume
of commercial vehicles reached 3,407,200 and 3,313,500 units respectively with
an increase of 33.0% and 28.4% over last year. For the year ended December 31,
2009, net sales of steering gear and accessories for commercial vehicles
increased by 46.8% compared to the year 2008.





(3) 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 its costs and, correspondingly, its sales prices
which led to increased sales volumes.





COST OF
GOODS SOLD





For the
year ended December 31, 2009, the cost of goods sold was $182,929,833, compared
to $115,920,585 for the year ended December 31, 2008, an increase of
$67,009,248, or 57.8%, as a result of following factors:





(1) The
increased volume of sales led to an increased cost of goods sold. During 2009,
the sales of the Company’s main products, steering gear and accessories for
passenger vehicles, steering gear and accessories for commercial vehicles, and
steering pumps for commercial vehicles, increased 60.4%, 46.8% and 57.5%
compared to 2008, respectively. Accordingly, the cost of goods sold in 2009 has
increased $80,303,098, including $73,494,796 for steering gear and accessories
for passenger vehicles and commercial vehicles, $6,762,545 for steering pumps,
and $45,757 for sensor modular.





(2) The
decreased unit cost for the Company’s main products led to a decrease in cost of
goods sold. During 2009, by optimizing product design and production techniques,
the costs of goods sold was decreased by $13,413,934 compared to 2008, including
$13,341,889 for steering gear and accessories for passenger and commercial
vehicles, and $72,045 for steering pumps.





(3) As
the output of sensor modular has not yet started mass production, and the
production process has not been stable, the cost of goods sold for sensor
modular in 2009 increased $120,084 compared to the year 2008.





GROSS
PROFIT FROM PRODUCT SALES





For the
year ended December 31, 2009, the gross profit was $72,667,720, compared to
$47,258,701 for the year ended December 31, 2008, an increase of $25,409,019, or
53.8%, as a result of following factors:





The
increase in unit sales contributed to an increase of $31,458,666 in gross
profit, while decreases in selling prices resulted in a decrease of $19,343,499
in gross profit, and reductions in unit costs resulted in an increase of
$13,293,852 in gross profit.





Gross
margin was 28.4% for the year ended December 31, 2009, a decrease of 0.6% from
29% for the same period of 2008, because the decline in selling prices was
higher than the unit cost reductions.The Company took the following
measures in 2009 to increase gross profit levels.




(1)
Reduce manufacturing costs by optimizing product design and production
techniques. During 2009, the Company’s technical personnel improved product
design and production techniques to reduce wastage in the production process and
improve manufacturing efficiency, thus reducing costs.




(2)
Reduce the purchase price of sub-components.





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 were $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.




22




SELLING EXPENSES




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




Years Ended December 312009
                        
                        
                        2008
                        
                        
                        Increase (Decrease)
                        
                        
                        PercentageSalaries
      and wages
                        
                        $
                        2,563,384
                        
                        
                        $
                        1,413,708
                        
                        
                        $
                        1,149,676
                        
                        
                        
                        81.3
                        %Supplies
      expense
                        
                        
                        62,967
                        
                        
                        
                        138,489
                        
                        
                        
                        (75,522
                        )
                        
                        
                        (54.5
                        )Travel
      expense
                        
                        
                        402,708
                        
                        
                        
                        489,872
                        
                        
                        
                        (87,164
                        )
                        
                        
                        (17.8
                        )Transportation
      expense
                        
                        
                        3,867,133
                        
                        
                        
                        2,158,793
                        
                        
                        
                        1,708,340
                        
                        
                        
                        79.1After
      sales service expense
                        
                        
                        10,029,522
                        
                        
                        
                        5,861,783
                        
                        
                        
                        4,167,739
                        
                        
                        
                        71.1Rent
      expense
                        
                        
                        699,206
                        
                        
                        
                        384,167
                        
                        
                        
                        315,039
                        
                        
                        
                        82.0Office
      expense
                        
                        
                        192,947
                        
                        
                        
                        152,179
                        
                        
                        
                        40,768
                        
                        
                        
                        26.8Advertising
      expense
                        
                        
                        14,755
                        
                        
                        
                        10,009
                        
                        
                        
                        4,746
                        
                        
                        
                        47.4Business
      entertainment expense
                        
                        
                        246,093
                        
                        
                        
                        219,787
                        
                        
                        
                        26,306
                        
                        
                        
                        12.0Insurance
      expense
                        
                        
                        5,931
                        
                        
                        
                        16,917
                        
                        
                        
                        (10,986
                        )
                        
                        
                        (64.9
                        )Other
      expense
                        
                        
                        731
                        
                        
                        
                        23,957
                        
                        
                        
                        (23,226
                        )
                        
                        
                        (96.9
                        )Total
                        
                        $
                        18,085,377
                        
                        
                        $
                        10,869,661
                        
                        
                        $
                        7,215,716
                        
                        
                        
                        66.4
                        %




Selling
expenses were $18,085,377 for the year ended December 31, 2009, compared to
$10,869,661 for 2008, an increase of $7,215,716, or 66.4%. Major
items that increased by more than $100,000 in 2009 compared to 2008 were
salaries and wages, transportation expense, after sales service expense, and
rent 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.




After
sales service expense is the cost of product warranties that the Company
estimated, that is, the Company has committed to provide repair and maintenance
services and other services, within a certain period after the Company’s
products were sold. Such estimates of product warranties were based on, among
other things, historical experience, sales volume, material expenses, service
and transportation expenses arising from the manufactured product. Estimates
will be adjusted on the basis of actual expenses provided to repair and
maintenance services and other services. After sales service expense for the
year ended December 31, 2009 increased by $4,167,739, or 71.1%, compared with
the last year, mainly due to the increased product sales and the increased after
sales service offices.





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




23




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
                        
                        $
                        4,439,611
                        
                        
                        $
                        3,929,989
                        
                        
                        $
                        509,622
                        
                        
                        
                        13.0
                        %Travel
      expenses
                        
                        
                        449,171
                        
                        
                        
                        487,690
                        
                        
                        
                        (38,519
                        )
                        
                        
                        (7.9
                        )Office
      expenses
                        
                        
                        527,844
                        
                        
                        
                        551,760
                        
                        
                        
                        (23,916
                        )
                        
                        
                        (4.3Supplies
      expenses
                        
                        
                        516,215
                        
                        
                        
                        611,169
                        
                        
                        
                        (94,954
                        )
                        
                        
                        (15.5
                        )Repairs
      expenses
                        
                        
                        697,945
                        
                        
                        
                        656,886
                        
                        
                        
                        41,059
                        
                        
                        
                        6.3Business
      entertainment expenses
                        
                        
                        212,460
                        
                        
                        
                        363,791
                        
                        
                        
                        (151,331
                        )
                        
                        
                        (41.6
                        )Labor
      insurance expenses
                        
                        
                        2,123,071
                        
                        
                        
                        1,667,287
                        
                        
                        
                        455,784
                        
                        
                        
                        27.3Labor
      union dues expenses
                        
                        
                        106,433
                        
                        
                        
                        108,704
                        
                        
                        
                        (2,271
                        )
                        
                        
                        (2.1
                        )Board
      of directors expense
                        
                        
                        77,587
                        
                        
                        
                        66,920
                        
                        
                        
                        10,667
                        
                        
                        
                        15.9Taxes
                        
                        
                        1,120,948
                        
                        
                        
                        690,918
                        
                        
                        
                        430,030
                        
                        
                        
                        62.2Provision
      for bad debts
                        
                        
                        120,483
                        
                        
                        
                        989,584
                        
                        
                        
                        (869,101
                        )
                        
                        
                        (87.8
                        )Training
      expenses
                        
                        
                        99,120
                        
                        
                        
                        194,954
                        
                        
                        
                        (95,834
                        )
                        
                        
                        (49.2
                        )Listing
      expenses*
                        
                        
                        1,589,236
                        
                        
                        
                        1,624,161
                        
                        
                        
                        (34,925
                        )
                        
                        
                        (2.2
                        )Others
      expenses
                        
                        
                        159,743
                        
                        
                        
                        153,687
                        
                        
                        
                        6,056
                        )
                        
                        
                        3.9Total
                        
                        $
                        12,239,867
                        
                        
                        $
                        12,097,500
                        
                        
                        $
                        142,367
                        
                        
                        
                        1.2
                        %





* Listing
expenses consisted of the costs associated with legal, accounting and auditing
fees for operating a public company.





General
and administrative expenses were $12,239,867 for the year ended December 31,
2009, compared to $12,097,500 for the year ended December 31, 2008, an increase
of $142,367, or 1.2%.




The
expense items that increased more than $100,000 in 2009 compared to 2008 were
salaries and wages, labor insurance expenses, and tax expenses. The expense
items that decreased more than $100,000 in 2009 compared to 2008 were business
entertainment 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 business entertainment 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.
The decrease in provision for bad debts in 2009 was mainly due to decreased
receivables in excess of credit terms, as most domestic automobile manufacturers
were in good financial situation, and paid the Company under their credit
terms.





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%.




24







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.





DEPRECIATION AND
AMORTIZATION EXPENSE




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.




INCOME
FROM OPERATIONS




Income
from operations was $37,664,652 for the year ended December 31, 2009, compared
to $16,923,421 for the year ended December 31, 2008, an increase of
$20,741,231, or 122.6%, mainly consisting of an increase of $25,409,019, or
53.8%, 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 $4,772,230, or
15.4%, 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.




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, 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.




25




FINANCIAL
EXPENSES





Financial
expenses were $ 1,986,200 for the year ended December 31, 2009, compared to
financial expenses of $1,296,218 for the year of 2008, an increase of $689,982,
or 53.2%, primarily as a result of a decrease in interest expense of
$152,383, an increase in convertible notes discount amortization of $294,013 and
an increase in bank service fee of $19,659, as well as a decrease of foreign
currency exchange gain of $295,282 and an increase in notes discount expenses of
$233,411.




The
decrease in interest expense was due to decreased bank loan and convertible
notes. The increase in convertible note discount amortization was due to the
redemption of three Convertible Notes with a total principal amount of
$5,000,000 on March 17, 2009, with unamortized convertible note
discount being written-off on the redemption date. The increase in notes
discount expenses was mainly due to Chinese bank’s increase of its notes
discount rate in 2009.




GAIN ON
CHANGE IN FAIR VALUE OF DERIVATIVE




During
the year ended December 31, 2009, the gain on change in fair value of the
derivatives embedded in the convertible notes was $624,565, as compared to
$998,014 for the year ended December 31, 2008, a decrease of $373,449,
or 37.4%





During
the year ended December 31, 2009, the decrease of change in fair value of the
derivatives resulted from reduced gain on adjustment of fair value of
liabilities in connection with convertible notes, and increased gain on
change in fair value of compound derivatives embedded in the convertible
notes.





During
2008, the opening fair value of warrant liabilities on February 15, 2008 was
$798,626, closing fair value of warrant liabilities on December 31, 2008 was
$1,977, and gain on change in fair value of warrant liabilities was
$796,649. The significant reduction in fair value of warrant liabilities
was due to the reduced remaining term and the significant difference between
trading price of the Company’s common stock ($3.39) and opening trading price
($6.09). During 2009, the opening fair value of warrant liabilities was $1,977,
closing fair value of warrant liabilities on December 31, 2009 was $0. Since the
trading price of the Company’s common stock ($3.30) on exercise date
(February 15, 2009) was significantly below the contractual exercise price
($8.55), no warrant was exercised. The warrant has expired, and its fair
value was zero, and the gain on change in fair value was $1,977. (See Note
15)





During
the year ended December 31, 2009, the gain on change in fair value
of compound derivatives embedded in the convertible notes was $622,588,
compared to $201,365 for the year ended December 31, 2008, an increase of
$421,223, mainly as a result of the recent stock market recovery. The Company’s
stock price rose dramatically. On December 31, 2009, the Company’s stock price
has risen to $18.71, from $3.39 on December 31, 2008, which is 2.64 times the
contractual exercise price ($7.08). The convertible note holders will gain more
potential income if they convert or continue to hold than redeem. Therefore, the
Company estimated the probability of redemption was low, which led to a
decrease in the fair value of derivative liabilities. (See Note 14)





INCOME BEFORE INCOME
TAXES





Income
before income taxes was $36,397,551 for the year ended December 31, 2009,
compared to $17,692,526 for the year ended December 31, 2008, an increase
of $18,705,025, or 105.7%, consisting of increased income from operations of
$20,741,231, decreased other income of $972,775, decreased finance expenses of
$689,982, and decreased gain on change in fair value of derivative of
$373,449.




INCOME
TAXES




Income
tax expense was $5,110,475 for the year ended December 31, 2009, compared to
$185,877 for the year ended December 31, 2008, an increase of $4,924,598,
mainly because of:




(1)
Increased taxable income resulted in an increased tax of
$2,650,717.




(2) The
Company has received $1,053,092 of government income tax benefit during the year
ended December 31, 2009, as compared to $2,762,823 for the year of 2008, a
decrease of $1,709,731. The Chinese Government cancelled the income tax
benefit for purchase of domestically manufactured equipment in
2009.





(3) Decrease
in average income tax rate resulted in decreased income tax expenses of
$333,882.





(4) An
increase in provision for impairment of deferred income taxes assets led to
an increased income tax expenses of $757,359.


26





(5) Other
adjustments led to an increased income tax expenses of $140,673.




NET
INCOME




Net
income was $31,287,076 for the year ended December 31, 2009, compared to
$17,506,649 for the year ended December 31, 2008, an increase of $13,780,427, or
78.7%, consisting of increased income before income taxes of $18,705,025, or
105.7%, and a decrease of $4,924,598 due to increased income tax
expenses.




NET
INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS




The
Company recorded net income attributable to noncontrolling interests of
$7,872,813 for the year ended December 31, 2009, compared to $5,071,408 for
the year ended December 31, 2008, an increase of $2,801,405, or
55.2%.




The
Company owns different equity interests in eight Sino-foreign joint ventures,
through which it conducts its operations. All the operating results of these
eight 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.





NET
INCOME ATTRIBUTABLE TO PARENT COMPANY





Net
income attributable to parent company was $23,414,263 for the year ended
December 31, 2009, compared to $12,435,241 for the year ended December 31, 2008,
an increase of $10,979,022, or 88.3%, consisting of increased net income of
$13,780,427, or 78.7%, and an increased net income attributable to
noncontrolling interests of $2,801,405, or 55.2%.




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%.




The
Company had working capital of $62,342,953 as of December 31, 2009, compared to
$42,032,901 as of December 31, 2008, an increase of $20,310,052, or
48.3%.




Financing
activities:





The
Company’s main financing activities were bank loans and banker’s acceptance bill
facilities. In such financing 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 the line of credit agreement, such one year facilities can
be extended for another year.


27





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 13 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.





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 loans




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




28




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.





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
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Other
      contractual purchase commitments, including information
      technology
                      
                      
                      10,788,625
                      
                      
                      
                      10,006,373
                      
                      
                      
                      782,252
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      83,956,029
                      
                      
                      $
                      83,173,777
                      
                      
                      $
                      782,252
                      
                      
                      $
                      -
                      
                      
                      $
                      -


29





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 loan 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.




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.




30




Cash
flows:





(a) 
Operating activities




Net cash
generated from operations during the year ended December 31, 2009 was
$34,956,534, compared with $16,373,966 for the year of 2008, an increase of
$18,582,568, primarily due to increased net income.




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.


31





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
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        10,568,625Total
                        
                        $
                        10,006,373
                        
                        
                        $
                        782,252
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        10,788,625




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.


32


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 3 to the accompanying Consolidated Financial Statements under
Item 15 of this Annual Report on Form 10-K 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 claimsProperty,
      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




33




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 forward cash-flow valuation techniques to
      determine fair value of compound derivative liabilities
                  
                  • Expected term
                    • Expected volatility
                    • Risk-free rate
      or market interest rate similar with such instrument
                    •Dividend
      distribution
                    •Common
      stock trading price and exercise price
                    •Credit
      risk
                    •
      Probability of certain default event occurred
                    •
      Derivative liabilities redeemed on a price of exercise plus
      premium




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


34





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





4.
            Consolidated
      Statements of Comprehensive Income 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)
              Selected
      quarterly financial data for the past two years are summarized in the
      following table:





Quarterly Results of OperationsFirst
                        
                        
                        Second
                        
                        
                        Third
                        
                        
                        Fourth2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Net
      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
                        
                        
                        12,197,831
                        
                        
                        
                        12,212,370
                        
                        
                        
                        18,501,732
                        
                        
                        
                        14,463,004
                        
                        
                        
                        17,639,322
                        
                        
                        
                        9,878,223
                        
                        
                        
                        24,328,835
                        
                        
                        
                        10,705,104Operating
      Income
                        
                        
                        7,092,507
                        
                        
                        
                        6,784,664
                        
                        
                        
                        11,660,281
                        
                        
                        
                        5,477,887
                        
                        
                        
                        9,654,436
                        
                        
                        
                        3,697,416
                        
                        
                        
                        9,257,428
                        
                        
                        
                        963,454Net
      Income
                        
                        
                        3,642,509
                        
                        
                        
                        6,180,421
                        
                        
                        
                        8,730,000
                        
                        
                        
                        6,429,358
                        
                        
                        
                        10,593,273
                        
                        
                        
                        3,742,259
                        
                        
                        
                        8,321,294
                        
                        
                        
                        1,154,611Net
      income attributable to noncontrolling interest
                        
                        
                        1,383,697
                        
                        
                        
                        1,750,247
                        
                        
                        
                        2,653,651
                        
                        
                        
                        1,685,003
                        
                        
                        
                        2,036,762
                        
                        
                        
                        983,480
                        
                        
                        
                        1,798,703
                        
                        
                        
                        652,678Net
      income attributable to Parent company
                        
                        
                        2,258,812
                        
                        
                        
                        4,430,174
                        
                        
                        
                        6,076,349
                        
                        
                        
                        4,744,355
                        
                        
                        
                        8,556,511
                        
                        
                        
                        2,758,779
                        
                        
                        
                        6,522,591
                        
                        
                        
                        501,933Earnings
      Per Share attributable to Parent companyBasic
                        
                        $
                        0.08
                        
                        
                        $
                        0.18
                        
                        
                        $
                        0.23
                        
                        
                        $
                        0.19
                        
                        
                        $
                        0.32
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.24
                        
                        
                        $
                        0.01Diluted
                        
                        $
                        0.08
                        
                        
                        $
                        0.18
                        
                        
                        $
                        0.21
                        
                        
                        $
                        0.18
                        
                        
                        $
                        0.28
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.21
                        
                        
                        $
                        0.00





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





Not
applicable.





ITEM
9A.  MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined under Rule 13a-15(f) of the
Securities Exchange Act of 1934. Under the supervision and with the
participation of the principal executive and financial officers of the Company,
an evaluation of the effectiveness of internal control over financial reporting
was conducted based on the framework in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations (“the COSO
Framework”) of the Treadway Commission. Based on the evaluation performed under
the COSO Framework as of December 31, 2009, the management believes that
there was no significant material weakness in the Company’s 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 the annual report.





ITEM 9B.
OTHER INFORMATION.




None.


35





PART
III




ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS, CORPORATE GOVERNANCE AND BOARD
INDEPENDENCE.




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




(a)
            BIOGRAPHIES
      OF DIRECTORS AND EXECUTIVE
OFFICERS:




Hanlin Chen has 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.


36


Jie Li has 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 Andy has 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 Yu has 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 Wang has 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 oftheCompany since December 2009. He
hasalso served as the
generalmanager of the
Henglongsince April
2005.Prior to that
position he served as theVice-G.M. of Henglong from December 2002. Mr. Xia graduated fromWuhan UniversityofWater Transportation
Engineeringwith 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 as an accountant bachelor.




Haimian Cai has 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.


37





Bruce C. Richardson joined 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.





(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.




38




(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. Since December 17, 2009, Mr. Guangxun Xu has been 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, which incorporates it by reference from the Form
10-KSB for year ended December 31, 2003.





(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.


39





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, remaining1/3 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
21.





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
                              
                              
                              $
                              —
                              
                              
                              $
                              
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              100,000Qizhou
      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




40




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 2009must 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.




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.




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*
                      
                      
                      Non-equity
                        incentive
                        plan
                        compensation
                      
                      
                      Change in
                        pension value
                        and
                        nonqualified
                        deferred
                        compensation
                        earnings
                      
                      
                      All other
                        compensation**
                      
                      
                      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
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -





* 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
21.




**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.




For the
information required by Item 13 please refer to Consolidated Financial
Statements notes 2 and 23 “ Certain Relationships And Related Transactions ” and
“ Related Party Transactions ” in the Annual Report on Form 10-K for the year
ended December 31, 2009.


42





ITEM 14.
PRINCIPAL ACCOUNTANT 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




(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.


43


PART
IV




ITEM
15.  EXHIBITS AND 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 for the years ended December 31, 2009 and
      2008




4.
            Consolidated
      Statements of Comprehensive Income 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 Annual Report on Form
10-K. 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 )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.
  44
  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.)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.*21
                
                Schedule
      of Subsidiaries*23
                
                Consent of Schwartz Levitsky
      Feldman LLP., Independent Registered Public Accountant Firm*31.1
                
                Rule
      13a-14(a)
Certification*




45


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:
      March 25, 2010
                          
                          /s/ Qizhou WuName:
                          Qizhou WuTitle:
                          Chief
      Executive Director and
President





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:
      March 25, 2010
                                          
                                          /s/
      Hanlin ChenName:
                                          Hanlin
      ChenTitle:
                                          Chairman
      and DirectorDated:
      March 25, 2010
                                          
                                          /s/
      Qizhou WuName:
                                          Qizhou
      WuTitle:
                                          Chief
      Executive Director,
                                            President
      and DirectorDated:
      March 25, 2010
                                          
                                          /s/
      Jie LiName:
                                          Jie
      LiTitle:
                                          Chief
      Financial OfficerDated:
      March 25, 2010
                                          
                                          /s/
      Daming HuName:
                                          Daming
      HuTitle
                                          Chief
      Accounting OfficerDated:
      March 25, 2010
                                          
                                          /s/
      Robert TungName:
                                          Robert
      TungTitle:
                                          DirectorDated:
      March 25, 2010
                                          
                                          /s/
      Guangxun XuName:
                                          Name:
      Guangxun XuTitle:
                                          DirectorDated:
      March 25, 2010
                                          
                                          /s/
      William E. ThomsonName:
                                          William
      E. ThomsonTitle:
                                          DirectorDated:
      March 25, 2010
                                          
                                          /s/
      Bruce C. RichardsonName:
                                          Bruce
      C. RichardsonTitle:
                                          Director


46


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 consolidated balance sheets of China Automotive
Systems, Inc. and Subsidiaries as at December 31, 2009 and 2008 and the related
consolidated statements of earnings, and comprehensive income, 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.




Toronto,
Ontario, Canada




March 16,
2010




/s/
      Schwartz Levitsky Feldman LLPSchwartz
      Levitsky Feldman LLPChartered
      AccountantsLicensed
      Public Accountants


47


China
Automotive Systems, Inc. and Subsidiaries


Consolidated
Balance Sheets


December
31, 2009 and 2008




December
31,2009
                        
                        
                        2008ASSETSCurrent
    assets:Cash and cash
      equivalents
                        
                        $
                        43,480,176
                        
                        
                        $
                        37,113,375Pledged cash deposits (note
      4)
                        
                        
                        12,742,187
                        
                        
                        
                        6,739,980Accounts and notes receivable,
      net, including $1,441,939and $1,285,110 from related
      parties at December 31, 2009and 2008, net of an allowance for doubtful
      accounts of $5,320,378and $4,910,478 at December 31,
      2009and 2008
                          (note 5)
                        
                        
                        154,863,292
                        
                        
                        
                        96,424,856Advance payments and
      others, including $0and $9,374 to related parties at
      December 31, 2009and 2008
                        
                        
                        2,413,556
                        
                        
                        
                        1,442,614Inventories (note
      7)
                        
                        
                        27,415,697
                        
                        
                        
                        26,571,755Current deferred tax
      assets(note 10)
                        
                        
                        1,381,868
                        
                        
                        
                        -Total current
      assets
                        
                        $
                        242,296,776
                        
                        
                        $
                        168,292,580Long-term
      Assets:Property, plant and equipment, net
      (note 8)
                        
                        $
                        60,489,798
                        
                        
                        $
                        51,978,905Intangible assets, net (note
      9)
                        
                        
                        561,389
                        
                        
                        
                        504,339Other receivables, net, including
      $65,416and $369,365from related parties at December
      31, 2009and 2008, net of an allowance for doubtful
      accounts of $1,295,755and $659,837 at December
      31,2009and 2008(note 6)
                        
                        
                        1,064,224
                        
                        
                        
                        1,349,527Advance payment for property,
      plant and equipment, including $2,579,319and $2,473,320 to related parties
      at December 31, 2009and 2008
                        
                        
                        6,369,043
                        
                        
                        
                        6,459,510Long-term investments
                        
                        
                        79,084
                        
                        
                        
                        79,010Non-current deferred tax assets (note
      10)
                        
                        
                        2,172,643
                        
                        
                        
                        2,383,065Total
assets
                        
                        $
                        313,032,957
                        
                        
                        $
                        231,046
,936LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent liabilities:Bank loans (note
      11)
                        
                        $
                        5,125,802
                        
                        
                        $
                        7,315,717Accounts and notes payable,
      including $1,537,827and $1,097,641 to related parties
      at December 31, 2009and 2008(note 12)
                        
                        
                        107,495,833
                        
                        
                        
                        59,246,043Convertible notes payable, net,
      including $1,359,245and $2,077,923 for
      discount of convertible note payable at December 31, 2009and 2008 (note
      13)
                        
                        
                        28,640,755
                        
                        
                        
                        32,922,077Compound derivative liabilities (note
      14)
                        
                        
                        880,009
                        
                        
                        
                        1,502,597Customer
      deposits
                        
                        
                        1,918,835
                        
                        
                        
                        236,018Accrued payroll and related
      costs
                        
                        
                        3,040,705
                        
                        
                        
                        2,715,116Accrued expenses and other
      payables (note 15)
                        
                        
                        17,708,681
                        
                        
                        
                        12,460,784Accrued pension costs (note
      16)
                        
                        
                        3,778,187
                        
                        
                        
                        3,806,519Taxes payable (note
      17)
                        
                        
                        11,365,016
                        
                        
                        
                        5,717,438Amounts due to
      shareholders/directors (note 18)
                        
                        
                        -
                        
                        
                        
                        337,370Total current
      liabilities
                        
                        $
                        179,953,823
                        
                        
                        $
                        126,259,679Long-term
      liabilities:Advances payable (note
      19)
                        
                        
                        233,941
                        
                        
                        
                        234,041Total
      liabilities
                        
                        $
                        180,187,764
                        
                        
                        $
                        126,493,720Significant concentrations (note
      28)Relatedpartytransactions (note29)Commitments and contingencies
      (note 30)Subsequent events (note
      32)Stockholders'
      equity:Preferred stock, $0.0001 par value -
      Authorized - 20,000,000 shares
                          Issued and Outstanding–None
                        
                        $
                        —
                        
                        
                        $
                        —Common stock, $0.0001 par value -
      Authorized - 80,000,000 shares
                          Issued and Outstanding–27,046,244shares and 26,983,244 shares at
      December 31,
      2009and 2008, respectively
                          (note 21)
                        
                        
                        2,704
                        
                        
                        
                        2,698Additional paid-in capital (note
      21)
                        
                        
                        27,515,064
                        
                        
                        
                        26,648,154Retained earnings- (note
      22)Appropriated
                        
                        
                        8,324,533
                        
                        
                        
                        7,525,777Unappropriated
                        
                        
                        58,642,023
                        
                        
                        
                        36,026,516Accumulated other comprehensive
      income
                        
                        
                        11,187,744
                        
                        
                        
                        11,127,505--------------
                        
                        
                        
                        --------------Total parent company stockholders'
      equity
                        
                        
                        105,672,068
                        
                        
                        
                        81,330,650Non-controlling interests (note
      20)
                        
                        
                        27,173,125
                        
                        
                        
                        23,222,566Total stockholders'
      equity
                        
                        $
                        132,845,193
                        
                        
                        $
                        104,553,216Total liabilities and
      stockholders' equity
                        
                        $
                        313,032,957
                        
                        
                        $
                        231,046
,936





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


48


China
Automotive Systems, Inc. and Subsidiaries


Consolidated Statements of Earnings


Years
Ended December 31, 2009 and 2008





YearsEndedDecember312009
                  
                  
                  2008Net
      product sales, including $5,892,164 and $4,675,410 to related parties
      for Years Ended December 31,2009
      and 2008
                  
                  $
                  255,597,553
                  
                  
                  $
                  163,179,286Cost
      of product sold, including $13,998,702 and $7,901,944 purchased from
      related parties for Years Ended December 31, 2009 and 2008
                  
                  
                  182,929,833
                  
                  
                  
                  115,920,585Gross
      profit
                  
                  $
                  72,667,720
                  
                  
                  $
                  47,258,701Add:
      Gain on other sales
                  
                  
                  838,505
                  
                  
                  
                  734,063Less:
      Operating expensesSelling
      expenses
                  
                  
                  18,085,377
                  
                  
                  
                  10,869,661General
      and administrative expenses
                  
                  
                  12,239,867
                  
                  
                  
                  12,097,500R&D
      expenses
                  
                  
                  2,561,170
                  
                  
                  
                  2,255,892Depreciation
      and amortization
                  
                  
                  2,955,159
                  
                  
                  
                  5,846,290Total
      Operating expenses
                  
                  
                  35,841,573
                  
                  
                  
                  31,069,343Income
      from operations
                  
                  $
                  37,664,652
                  
                  
                  $
                  16,923,421Add:
      Other income, net (note 23)
                  
                  
                  94,534
                  
                  
                  
                  1,067,309Financial
      income (expenses) (note 24)
                  
                  
                  (1,986,200
                  )
                  
                  
                  (1,296,218
                  )Gain
      (loss) on change in fair value of derivative (note 25)
                  
                  
                  624,565
                  
                  
                  
                  998,014Income
      before income taxes
                  
                  
                  36,397,551
                  
                  
                  
                  17,692,526Less:
      Income taxes (note 26)
                  
                  
                  5,110,475
                  
                  
                  
                  185,877Net
      income
                  
                  
                  31,287,076
                  
                  
                  
                  17,506,649Net
      income attributable to noncontrolling interest
                  
                  
                  7,872,813
                  
                  
                  
                  5,071,4
      08Net
      income attributable to parent company
                  
                  $
                  23,414,263
                  
                  
                  $
                  12,435,241Net
      income per common share attributable to parent
    company–Basic
                  
                  $
                  0.87
                  
                  
                  $
                  0.48Diluted
      (note 27)
                  
                  $
                  0. 78
                  
                  
                  $
                  0.46Weighted
      average number of common shares outstanding –Basic
                  
                  
                  26,990,649
                  
                  
                  
                  25,706,364Diluted
                  
                  
                  31,618,412
                  
                  
                  
                  29,668,726




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


49


China Automotive Systems, Inc. and
Subsidiaries


Consolidated
Statements of Comprehensive Income


Years
Ended December 31, 2009 and 2008





Years Ended December 312009
                      
                      
                      2008Net
      income
                      
                      $
                      31,287,076
                      
                      
                      $
                      17,506,649Other
      comprehensive income:Foreign
      currency translation gain (loss)
                      
                      
                      82,604
                      
                      
                      
                      6,571,019Comprehensive
      income
                      
                      $
                      31,369,680
                      
                      
                      $
                      24,077,668Comprehensive
      income attributable to noncontrolling interest
                      
                      
                      7,895,178
                      
                      
                      
                      6,504,385Comprehensive
      income attributable to parent company
                      
                      $
                      23,474,502
                      
                      
                      $
                      17,573,283




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





Common
                                                          
                                                          Additional
                                                            Paid-in
                                                          
                                                          Retained Earnings
                                                          
                                                          
                                                          Accumulated
                                                            Other
                                                            Comprehensive
                                                          
                                                          Total parent
                                                            company
                                                            stockholders'
                                                          
                                                          Non-controlling
                                                          
                                                          Total
                                                            stockholders'Stock
                                                          
                                                          Capital
                                                          
                                                          Appropriated
                                                          
                                                          Unappropriated
                                                          
                                                          
                                                          Income (Loss)
                                                          
                                                          equity
                                                          
                                                          interests
                                                          
                                                          equityBalance
      at January 1, 2008
                                                          
                                                          $
                                                          2,396
                                                          
                                                          
                                                          $
                                                          30,125,951
                                                          
                                                          
                                                          $
                                                          7,525,777
                                                          
                                                          
                                                          $
                                                          23,591,275
                                                          
                                                          
                                                          $
                                                          5,989,463
                                                          
                                                          
                                                          $
                                                          67,234,862
                                                          
                                                          
                                                          $
                                                          23,166,270
                                                          
                                                          
                                                          $
                                                          90,401,132Foreign 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
                                                          
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          22,090,000Acquirement
      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
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          12,435,241
                                                          
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          12,435,241
                                                          
                                                          
                                                          
                                                          5,071,408
                                                          
                                                          
                                                          
                                                          17,506,649Balance
      at December 31, 2008
                                                          
                                                          $
                                                          2,698
                                                          
                                                          
                                                          $
                                                          26,648,154
                                                          
                                                          
                                                          $
                                                          7,525,777
                                                          
                                                          
                                                          $
                                                          36,026,516
                                                          
                                                          
                                                          $
                                                          11,127,505
                                                          
                                                          
                                                          $
                                                          81,330,650
                                                          
                                                          
                                                          $
                                                          23,222,566
                                                          
                                                          
                                                          $
                                                          104,553,216Foreign
      currency translation gain
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          60,239
                                                          
                                                          
                                                          
                                                          60,239
                                                          
                                                          
                                                          
                                                          22,365
                                                          
                                                          
                                                          
                                                          82,604Exercise
      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 for the year ended December 31, 2009
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          23,414,263
                                                          
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          23,414,263
                                                          
                                                          
                                                          
                                                          7,872,813
                                                          
                                                          
                                                          
                                                          31,287,076Balance
      at December 31, 2009
                                                          
                                                          $
                                                          2,704
                                                          
                                                          
                                                          $
                                                          27,515,064
                                                          
                                                          
                                                          $
                                                          8,324,533
                                                          
                                                          
                                                          $
                                                          58,642,023
                                                          
                                                          
                                                          $
                                                          11,187,744
                                                          
                                                          
                                                          $
                                                          105,672,068
                                                          
                                                          
                                                          $
                                                          27,173,125
                                                          
                                                          
                                                          $
                                                          132,845,193




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
                  
                  
                  2008Cash
      flows from operating activities:Net
      income
                  
                  $
                  31,287,076
                  
                  
                  $
                  17,506,649Adjustments
      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
                  
                  
                  (1,169,108
                  )
                  
                  
                  (974,383
                  )Allowance
      for impairment of asset
                  
                  
                  901,680
                  
                  
                  
                  1,030,738
                  )Amortization
      for discount of convertible note payable
                  
                  
                  718,678
                  
                  
                  
                  424,665(Gain)
      loss on change in fair value of derivative
                  
                  
                  (624,565
                  )
                  
                  
                  (998,014
                  )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
                  
                  
                  322,877
                  
                  
                  
                  (128,344
                  )Accrued
      expenses and other payables
                  
                  
                  5,650,474
                  
                  
                  
                  1,487,900Accrued
      pension costs
                  
                  
                  (31,847
                  )
                  
                  
                  (69,998
                  )Taxes
      payable
                  
                  
                  5,638,359
                  
                  
                  
                  (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:Repayment
      of bank loans
                  
                  $
                  (2,196,367
                  )
                  
                  $
                  (7,567,697
                  )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
      (expenditure) from issuance (redemption) 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.


54





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
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. 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., “JLME”. 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
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. 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.


55





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.




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.


56





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:




Category
                  
                  Estimated
      Useful Life (Years)Land
      use rights and buildings:Land
      use rights
                  
                  45-50Buildings
                  
                  25Machinery
      and equipment
                  
                  6Electronic
      equipment
                  
                  4Motor
      vehicles
                  
                  6




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. For example, the interest cost incurred in
connection with specific borrowings for acquisition of Henglong’s equity was
$262,500 and $343,750 in 2008 and 2009, respectively, and such amount can
achieve the expected usage without preparation time. Interest cost incurred in
connection with specific borrowings for construction or installation of
property, plant and equipment was $264,978 and $94,534 in 2008, and 2009,
respectively. Interest cost in preparation time was $$90,000, and $30,000, in
2008 and 2009, respectively.




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.


57





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.





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.


58





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.




Income
Per Share - Basic income per share is calculated by dividing net income
attributable to the parent by the weighted average number of common shares
outstanding during the period. Diluted income per share is calculated based on
the treasury stock method, assuming the issuance of common shares, if dilutive,
resulting from the exercise of options and warrants. The dilutive effect of
convertible securities is reflected in diluted earnings per share by application
of the “if converted” method.




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.




Fair
Value of Financial Instruments -The company follows, “Fair Value Measurements
and Disclosures” (ASC 820-10), which among other things, defines fair value,
establishes a consistent framework for measuring fair value and expands
disclosure for each major asset and liability category measured at fair value on
either a recurring or nonrecurring basis. Fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would in pricing an asset or liability.
As a basis for considering such assumptions, a three-tier fair value hierarchy
has been established, which prioritizes the inputs used in measuring fair value
as follows:
 
 Level 1 –
Inputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date.
 
 Fair
valued assets and liabilities that are generally included in this category are
assets comprised of cash equivalents, restricted cash, accounts and notes
receivable, and liabilities comprised of bank loans, accounts and notes payable,
convertible notes payable, accrued payroll and related costs, accrued expenses
and other payables, accrued pension costs and amounts due to
shareholders/directors.
 
 Level 2 –
Inputs (other than quoted prices included in Level 1) are either directly or
indirectly observable for the asset or liability through correlation with market
data at the measurement date and for the duration of the instrument’s
anticipated life.
 
 At
December 31, 2009 and 2008, the Company did not have any fair value assets or
liabilities classified as Level 2.
 
 Level 3 –
Inputs reflect management’s best estimate of what market participants would use
in pricing the asset or liability at the measurement date. Consideration is
given to the risk inherent in the valuation technique and the risk inherent in
the inputs to the model.
 
 Fair
valued assets and liabilities that are generally included in this category are
assets comprised of other long-term receivables; and liabilities comprised of
advances payable.
 
 Assets
and liabilities measured at fair value as of December 31, 2009 and 2008 are
classified below based on the three fair value hierarchy tiers described
above:
  Fair value measurements
    usingCarrying value
                        
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3December
      31, 2009AssetsCash
      equivalents
                        
                        $
                        43,480,176
                        
                        
                        $
                        43,480,176
                        
                        
                        $
                        -
                        
                        
                        $
                        -Restricted
      cash
                        
                        
                        12,742,187
                        
                        
                        
                        12,742,187
                        
                        
                        
                        -
                        
                        
                        
                        -Accounts
      and notes receivable
                        
                        
                        154,863,292
                        
                        
                        
                        154,863,292
                        
                        
                        
                        -
                        
                        
                        
                        -Other
      long term receivable
                        
                        
                        1,064,224
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,010,000Total
      assets
                        
                        $
                        212,149,879
                        
                        
                        $
                        211,085,655
                        
                        
                        $
                        -
                        
                        
                        $
                        1,010,000LiabilitiesBank
      loans
                        
                        
                        5,125,802
                        
                        
                        
                        5,125,802
                        
                        
                        $
                        -
                        
                        
                        $
                        -Accounts
      and notes payable
                        
                        
                        107,495,833
                        
                        
                        
                        107,495,833
                        
                        
                        
                        -
                        
                        
                        
                        -Convertible
      notes payable
                        
                        
                        28,640,755
                        
                        
                        
                        28,640,755
                        
                        
                        
                        -
                        
                        
                        
                        -Accrued
      payroll and related costs
                        
                        
                        3,040,705
                        
                        
                        
                        3,040,705
                        
                        
                        
                        -
                        
                        
                        
                        -Accrued
      expenses and other payables
                        
                        
                        -
                        
                        
                        
                        17,708,681
                        
                        
                        
                        -
                        
                        
                        
                        -Accrued
      pension costs
                        
                        
                        3,778,187
                        
                        
                        
                        3,778,187
                        
                        
                        
                        -
                        
                        
                        
                        -Advances
      payable
                        
                        
                        233,941
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        220,000Total
      liabilities
                        
                        $
                        166,023,904
                        
                        
                        $
                        165,789,963
                        
                        
                        $
                        -
                        
                        
                        $
                        220,000December
      31, 2008AssetsCash
      equivalents
                        
                        $
                        37,113,375
                        
                        
                        $
                        37,113,375
                        
                        
                        $
                        -
                        
                        
                        $
                        -Restricted
      cash
                        
                        
                        6,739,980
                        
                        
                        
                        6,739,980
                        
                        
                        
                        -
                        
                        
                        
                        -Accounts
      and notes receivable
                        
                        
                        96,424,856
                        
                        
                        
                        96,424,856
                        
                        
                        
                        -
                        
                        
                        
                        -Other
      long term receivable
                        
                        
                        1,349,527
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,270,000Total
      assets
                        
                        $
                        141,627,738
                        
                        
                        $
                        140,278,211
                        
                        
                        $
                        -
                        
                        
                        $
                        1,270,000LiabilitiesBank
      loans
                        
                        $
                        7,315,717
                        
                        
                        $
                        7,315,717
                        
                        
                        $
                        -
                        
                        
                        $
                        -Accounts
      and notes payable
                        
                        
                        59,246,043
                        
                        
                        
                        59,246,043
                        
                        
                        
                        -
                        
                        
                        
                        -Convertible
      notes payable
                        
                        
                        32,922,077
                        
                        
                        
                        32,922,077
                        
                        
                        
                        -
                        
                        
                        
                        -Accrued
      payroll and related costs
                        
                        
                        2,715,116
                        
                        
                        
                        2,715,116
                        
                        
                        
                        -
                        
                        
                        
                        -Accrued
      expenses and other payables
                        
                        
                        12,460,784
                        
                        
                        
                        12,460,784
                        
                        
                        
                        -
                        
                        
                        
                        -Accrued
      pension costs
                        
                        
                        3,806,519
                        
                        
                        
                        3,806,519
                        
                        
                        
                        -
                        
                        
                        
                        -Amounts
      due to shareholders/directors
                        
                        
                        337,370
                        
                        
                        
                        337,370
                        
                        
                        
                        -
                        
                        
                        
                        -Advances
      payable
                        
                        
                        234,041
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        220,000Total
      liabilities
                        
                        $
                        119,037,667
                        
                        
                        $
                        118,803,626
                        
                        
                        $
                        -
                        
                        
                        $
                        220,000


59





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.




Financial
instruments - Derivative financial instruments, as defined in ASC Topic 815
(formerly FAS 133), Accounting for Derivative Financial Instruments and Hedging
Activities (ASC Topic 815), consist of financial instruments or other contracts
that contain a notional amount and one or more underlying, e.g. interest rate,
security price or other variable, require no initial net investment and permit
net settlement. Derivative financial instruments may be free-standing or
embedded in other financial instruments. Further, derivative financial
instruments are initially, and subsequently, measured at fair value and recorded
as liabilities or, in rare instances, assets.




The
Company generally does not use derivative financial instruments to hedge
exposures to cash-flow, market or foreign-currency risks. However, the Company
has entered into certain other financial instruments and contracts, such as debt
financing arrangements that embody features that are either (i) not afforded
equity classification, (ii) embody risks not clearly and closely related to host
contracts, or (iii) may be net-cash settled by the counterparty. As required
by ASC Topic 815 (formerly FAS 133), these instruments are required to be
carried as derivative liabilities, at fair value, in the Company’s financial
statements.




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 Company does not
currently believe that damages are probable.




Fair
Value Measurements - The Company has adopted the provisions of ASC Topic 820
(formerly SFAS 157), “Fair Value Measurements”,except as it applies to
those nonfinancial assets and nonfinancial liabilities. ASC Topic 820 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements.


60





Accounting
for Convertible Debt Instruments That May be Settled in Cash upon Conversion
(Including Partial Cash Settlement) - The Company has adopted the provisions of
ASC Topic 470 (formerly FSP APB 14-1), “Accounting for Convertible Debt
Instruments That May be Settled in Cash upon Conversion (Including Partial Cash
Settlement)”.ASC Topic 470 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity’s non-convertible debt borrowing rate when interest cost is
recognized in subsequent periods. ASC Topic 470 (formerly FSP APB 14-1) is
effective beginning from January 1, 2009 for the Company, and this standard must
be applied on a retrospective basis. Since the Company’s Convertible Notes
agreement do not have a term for cash (or other assets) settlement upon
conversion (Including Partial Cash Settlement), the adoption of ASC 480 did
not have an impact on the Company’s consolidated financial position and results
of operations.




Foreign
Currencies - The Company maintains its books and records in Renminbi, “RMB”, the
currency of the PRC, its 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.




In
translating the financial statements of the Company 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”)


61




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.




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.




3. Recent
Accounting Pronouncements





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 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.


62





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.




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
standards 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.





4. 
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.





5.
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.


63




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





December 31,2009
                    
                    
                    2008Balance
      at beginning of year
                    
                    $
                    4,910,478
                    
                    
                    $
                    3,827,838Amounts
      provided for during the year
                    
                    
                    406,228
                    
                    
                    
                    841,078Add:
      foreign currency translation
                    
                    
                    3,672
                    
                    
                    
                    241,562Balance
      at end of year
                    
                    $
                    5,320,378
                    
                    
                    $
                    4,910,478





6. 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:





December 31,2009
                      
                      
                      2008Balance
      at beginning of the year
                      
                      $
                      659,837
                      
                      
                      $
                      652,484Add:
      amounts provided for during the year
                      
                      
                      79,618
                      
                      
                      
                      (41,264
                      )Add:
      foreign currency translation
                      
                      
                      655
                      
                      
                      
                      48,617Balance
      at end of year
                      
                      $
                      740,110
                      
                      
                      $
                      659,837




7.
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




64





8.
Property, Plant and Equipment




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





December 31,2009
                        
                        
                        2008Costs: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
                        
                        
                        (45,222,243
                        )
                        
                        
                        (37,669,040
                        )Balance
      at end of year
                        
                        $
                        60,489,798
                        
                        
                        $
                        51,978,905




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




9.
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.





10.
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.


65





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




December
      31,2009
                              
                              
                              2008Losses
      carryforward (U.S.)
                              
                              $
                              3,855,426
                              
                              
                              $
                              2,300,322Losses
      carryforward (PRC)
                              
                              
                              421,629
                              
                              
                              
                              287,285Product
      warranties and other reserves
                              
                              
                              2,313,728
                              
                              
                              
                              1,737,052Property,
      plant and equipment
                              
                              
                              2,818,497
                              
                              
                              
                              2,471,716Bonus
      accrual
                              
                              
                              306,030
                              
                              
                              
                              297,208All
      other
                              
                              
                              395,649
                              
                              
                              
                              154,34810,110,959
                              
                              
                              
                              7,247,931Valuation
      allowance *
                              
                              
                              (6,556,448
                              )
                              
                              
                              (4,864,866
                              )Total
      deferred tax assets
                              
                              $
                              3,554,511
                              
                              
                              $
                              2,383,065





*As of
December 31, 2009, valuation allowance was $6,556,448, including $3,855,426
allowance for the Company’s deferred tax assets in the U.S. and $2,701,022
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.




**Approximately $2,172,643and $2,383,065ofdeferred income tax assetas ofDecember 31, 2009and2008, respectively, is included innon-current deferred tax
assetsin the accompanying
consolidated balance sheets. The remaining $1,381,868and $ nil ofdeferred income tax assetas ofDecember 31, 2009 and 2008 respectively, is included in thecurrent deferred tax assets.




The
estimated losses available to reduce taxable income in future years will expire
as follows:





Years
      ending December 31,2029
                  
                  $
                  3,260,6522028
                  
                  
                  2,179,3052027
                  
                  
                  779,3882026
                  
                  
                  1,044,3632025
                  
                  
                  471,6232024
                  
                  
                  933,3082023
                  
                  
                  2,259,7532014
                  
                  
                  632,2722013
                  
                  
                  65,2672012
                  
                  
                  709,0992011
                  
                  
                  653,016Total
                  
                  $
                  12,988,046




11. 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.


66





12.
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.




13.
            Convertible
      notes payable




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





December 31,2009
                                    
                                    
                                    2008Convertible
      notes payable, face value
                                    
                                    $
                                    30,000,000
                                    
                                    
                                    $
                                    35,000,000Less:
      discount of Convertible notes payable
                                    
                                    
                                    (1,359,245
                                    )
                                    
                                    
                                    (2,077,923
                                    )Convertible
      notes payable, net of discount
                                    
                                    $
                                    28,640,755
                                    
                                    
                                    $
                                    32,922,077





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





December 31,2009
                      
                      
                      2008Balance
      at beginning of year
                      
                      $
                      2,077,923
                      
                      
                      $
                      2,502,588Less:
      amortization
                      
                      
                      (718,678
                      )
                      
                      
                      (424,665
                      )Balance
      at end year
                      
                      $
                      1,359,245
                      
                      
                      $
                      2,077,923





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.





The
holders of the Convertible Notes will be entitled to convert any portion of the
conversion amount 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.


67




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
                        %




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.





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.





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.





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.


68


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.





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.





The
Company has evaluated the convertible notes for terms and conditions that are
not clearly and closely associated with the risks of the debt-type host
instrument. Generally, such features require separation from the host contract
and treatment as derivative financial instruments. Certain features, such
as the conversion option, were found to be exempt. Other features, such as puts
and redemption features, were found to require bifurcation and recognition as
derivative liabilities. These derivative liabilities are recognized initially at
fair value, using forward cash-flow valuation techniques. As of February
15, 2008, the compound derivative value amounted to $1,703,962. This derivative
will be adjusted to its estimated fair value at the completion of each reporting
period until the debt arrangement is ultimately settled, converted or
paid.


69





When a
financial instrument contains embedded derivatives that require bifurcation,
such as the redemption put, and freestanding instruments that are recorded at
fair value each period, such as the warrants, the accounting is to record the
embedded derivative and the freestanding instruments at fair value on inception
and the residual proceeds are allocated to the debt instrument. Based on this
premise, upon inception of the debt instruments, the Company recorded the
redemption put at fair value $1,703,962 and the Company recorded the warrants at
fair value $798,626. The remaining proceeds were then allocated to the debt
instrument.





The
Company has adopted the provisions of ASC Topic 470 (originally issued as FSP
APB 14-1), “Accounting for Convertible Debt Instruments That May be Settled
in Cash upon Conversion (Including Partial Cash Settlement). ASC Topic 470
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
non-convertible debt borrowing rate when interest cost is recognized in
subsequent periods. ASC Topic 470 (formerly FSP APB 14-1) is effective beginning
from January 1, 2009 for the Company, and this standard must be applied on a
retrospective basis. Since the Company’s Convertible Notes agreement do not have
a term for cash (or other assets) settlement upon conversion (Including Partial
Cash Settlement), the adoption of ASC 480 did not have an impact on the
Company’s consolidated financial position and results of
operations.





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.  This
difference was recorded in equity as a beneficial conversion feature (“BCF”) and
the related discount reduced the carrying value of the note and is being
amortized over the remaining life of the instrument.




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.





On the
date of inception, allocation of basis in the financing arrangement to the
warrants and derivative liability has resulted in an original issue discount to
the face value of the convertible notes in the amount of $2,502,588, which
amount is subject to amortization over the Convertible Note’s term using the
effective method. As of December 31, 2009, the amortization expense balance
recorded by the Company was $1,143,343 (including unamortized discount on
the YA Global Convertible Note $276,448, which has been written off after its
redemption. As the YA Global convertible note has been elected by its holder to
be redeemed, the unamortized discount on the convertible note has been written
off as expense on the redemption date), remaining $1,359,245 will be
amortized over the remaining life of the instrument.





14.
            Compound
      derivative liabilities





The
Company has evaluated the convertible notes for terms and conditions that are
not clearly and closely associated with the risks of the debt-type host
instrument (see Note 13). Generally, such features require separation from the
host contract and treatment as derivative financial instruments. Certain
features, such as the conversion option, were found to be exempt, as they
satisfied the conditions
for equity classification in ASC Topic 815 (formerly the paragraph 11(a) of
SFAS 133) for instruments (1) indexed with the Company’s own stock, and (2)
classified as equity in financial position statement. Other features, such as
puts and redemption features were found to require bifurcation and recognition
as derivative liabilities based on the provision of ASC Topic 815 (formerly the
paragraph 12 of SFAS 133). These derivative liabilities are recognized
both at inception and the end of each reporting period at fair value,
using forward cash-flow valuation techniques, until such liabilities arrangement
are eventually settled, converted or paid. As of February 15, 2008, the compound
derivative value amounted to $1,703,962. As of December 31, 2009 and 2008, the
compound derivative value amounted to $880,009 and $1,502,597. The income from
adjustment of fair value of compound derivative has been recorded in the income
statement as gain or loss on change in fair value of derivative. (See note
13 and 25)





The fair
value of compound derivative liabilities at inception and the end of each
reporting period was calculated based on the following
assumptions:


70




(1)Credit risk adjusted based on publicly available
research/investigation: The Company develops credit risk assumptions by
reference to corporate bond spreads in the market that the Company's equity
security trades.Bond
yields were selected as the principal market indicator because such yields are
presumed to provide information that assigns yields directly to anycompany's
assumed credit rating. Credit ratings are established through formal analysis of
bond inception and trading activity by Standard & Poor, Moody'sand
Fitch. The Company believes that it is likely that a market-participant would
look to this indicator for purposes of assessing the credit risk associatedwith
the investment. The calculation of the risk adjusted yield requires its
measurement against a risk-free rate. The Company has chosen the publicly
quotedyields
on zero-coupon US Government Securities.





(2)
Probability of certain default event occurred: Compound derivatives are
bifurcated pursuant to SFAS 133.12. The fair value of compound derivatives is
predicated on a probability assessment of the likelihood of a triggering event
and the incremental value embodied in the hybrid instrument (See Note 13
regarding the assessment of compound derivatives. For example: mandatory
redemption requires the gross yield arrived at 13% and annual redemption
requires the gross yield arrived at 11%. ). The Company has assessed the
probability of the likelihood of a triggering event at inception and completion
of each reporting period:





February 15, 2008
                                                  (Inception)
                                                
                                                
                                                December 31,
                                                  2008
                                                
                                                
                                                December 31,
                                                  2009
                                                
                                                
                                                CommentsDefault
    put:
                                                
                                                0.0%
                                                
                                                
                                                0.0%
                                                
                                                
                                                0.0%Service
      default
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                The
      Company has an established history of debt service and projections
      indicate ability to service.Bankruptcy/liquidation
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                This
      event is within the Company's control.Material
      judgments
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                The
      Company is not aware of any asserted or unasserted claims that would
      trigger such event.Suspension
      of listing*
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                The
      Company is not aware of any indications that would result in
      suspension.Non-registration
      events:
                                                
                                                0.5%
                                                
                                                
                                                0.5%
                                                
                                                
                                                0.5%Filing*
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                The
      filing of a registration statement is highly probable.Effectiveness*
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                Management
      has a history of making its filings and maintaining listing of its
      securities.Continuous
      Effectiveness*
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                Management
      has a history of making its filings and maintaining listing of its
      securities.Share
      non-delivery
                                                
                                                0.5%
                                                
                                                
                                                0.5%
                                                
                                                
                                                0.5%
                                                
                                                
                                                The
      risk is low because delivery is within the Company's
    control.Mandatory
      redemption put:
                                                
                                                4.0%
                                                
                                                
                                                15.0%
                                                
                                                
                                                1.5%Maintenance
      of share price at a certain level**
                                                
                                                4.0%
                                                
                                                
                                                15.0%
                                                
                                                
                                                1.5%
                                                
                                                
                                                This
      is not within the Company’s control. This put is only available subsequent
      to February 15, 2009 and only if the stock price is <45% of the
      conversion price for 20 trading days. Therefore, the risk of mandatory
      redemption was low at February 15, 2008 (Inception date). On December 31,
      2008, the stock price has maintained a value barely above 45% of the
      adjusted conversion price, so the risk of mandatory redemption was high.
      On December 31, 2009, the stock price was 164% above the adjusted
      conversion price, so the risk of mandatory redemption was
    low.Suspension
      of listing and non-registration events*
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                Low
                                                
                                                
                                                The
      Company is not aware of any indications that would result in
      suspension,and
      filing of a registration statement is highly probable.Annual
      Redemption Rights:
                                                
                                                25.0%
                                                
                                                
                                                30.0%
                                                
                                                
                                                11.7%Allows
      for redemption rights on specific dates**
                                                
                                                25.0%
                                                
                                                
                                                30.0%
                                                
                                                
                                                11.7%
                                                
                                                
                                                This
      is not within the Company’s control. On February 15, 2008 (Inception) and
      December 31, 2008, the stock prices were below the adjusted conversion
      price, so the risk of annual redemption was high. On December 31, 2009,
      the stock price was 164% above the adjusted conversion price, so the risk
      of annual redemption was
low.


71





Optional
      Redemption Feature:
                          
                          0.0%
                          
                          
                          0.0%
                          
                          
                          0.0%Allows
      for redemption if < 10% of note is outstanding
                          
                          Low
                          
                          
                          Low
                          
                          
                          Low
                          
                          
                          This
      is at the Company's option.Henglong
      Make Whole Amount and Redemption Right
                          
                          Low
                          
                          
                          Low
                          
                          
                          Low
                          
                          
                          This
      is not within the Company's control, however, the funds related to the
      Henglong transaction were held in an escrow account until March 31, 2008
      at which time the Henglong transaction was completed. The Henglong Make
      Whole and Redemption amounts were not applicable unless the Company did
      not consummate the Henglong transaction by April 15th. Since the
      transaction did consummate prior to April 15, 2008 and the funds were held
      in escrow prior to that time, there was no value assigned to the puts
      associated with the Henglong transaction.Change
      in Control Put:
                          
                          0.5%
                          
                          
                          0.5%
                          
                          
                          0.5%Change
      in control*
                          
                          0.5%
                          
                          
                          0.5%
                          
                          
                          0.5%
                          
                          
                          Not
      within Company's control- however, there are no impending or planned
      events.


*Represent
the event is not within the Company's control, but the probability of a
triggering event is low.


**Represent
the event is not within the Company's control, and the probability of a
triggering event is high. The assessment of such probability was based on the
probability of the historical trading price of the Company's common stock above
or under Strike price for previous periods (same with the remaining period of
the instruments). For example, the triggering event of maintaining the stock
price at a certain level, is the Company's stock weighted average price for
twenty (20) consecutive trading days below $3.187, which is 45% of the reset
Conversion Price of $7.0822. The triggering event allows for redemption rights
on specific dates, is maintaining the stock price at $8.6 or lower.





According
to the analysis and data above, change of the fair value of compound derivative
liabilities for the reporting period was mainly based on the price change of the
Company’s trading common stock. It was estimated that, if the probability of the
stock price above $8.6 was high, the probability of redemption was low, because
the Convertible notes holders would gain 11% or more income by converting into
common stock at this price level, which was higher than the income from bond
market or redemption of Convertible notes upon any occurrence of triggering
events as defined in the debt agreement. As of December 31, 2009, the fair value
of compound derivative liabilities was $880,009, significantly lower than
$1,502,597 on December 31, 2008, mainly as a result of the recent market
recovery, the Company’s stock price rose dramatically, the probability of the
Company’s stock price trading above $8.6 rose, accordingly, the probability of
redemption declined.





15.
            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
                                
                                2008Accrued
      expenses
                                $
                                4,160,433
                                
                                $
                                2,441,352Other
      payables
                                
                                2,694,447
                                
                                
                                1,690,046Warranty
      reserves*
                                
                                9,092,462
                                
                                
                                6,335,613Dividend
      payable to minority interest shareholders of
Joint-ventures
                                
                                1,761,339
                                
                                
                                1,991,796Liabilities
      in connection with warrants**
                                
                                -
                                
                                
                                1,977Balance
      at end of year
                                $
                                17,708,681
                                
                                $
                                12,460,784





*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.


72


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





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










**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 25)





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:


73





February 15, 2008
                              
                              
                              August 15, 2008
                              
                              
                              August 15, 2008
                              
                              
                              December
      31,
                              
                              
                              February 15, 2009Issuance Date
                              
                              
                              Prior to reset
                              
                              
                              Subsequent toreset
                              
                              
                              2008
                              
                              
                              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*
                              
                              $
                              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)**
                              
                              
                              1.00
                              
                              
                              
                              0.50
                              
                              
                              
                              0.50
                              
                              
                              
                              0.13
                              
                              
                              
                              0.00Volatility Historical
      volatility for effective term***
                              
                              
                              54.60
                              %
                              
                              
                              64.00
                              %
                              
                              
                              64.00
                              %
                              
                              
                              92.36
                              %
                              
                              
                              0.00
                              %Risk-free
      rate****
                              
                              
                              2.02
                              %
                              
                              
                              1.99
                              %
                              
                              
                              1.99
                              %
                              
                              
                              0.11
                              %
                              
                              
                              0.00
                              %Dividend
      yield rates*****
                              
                              
                              0.00
                              %
                              
                              
                              0.00
                              %
                              
                              
                              0.00
                              %
                              
                              
                              0.00
                              %
                              
                              
                              0.00
                              %Fair
      value of warrants
                              
                              $
                              798,626
                              
                              
                              $
                              489,718
                              
                              
                              $
                              551,131
                              
                              
                              $
                              1,977
                              
                              
                              $
                              0


*
Using the Company’s common stock trading price.


** Same
with the remaining contractual term.


*** The
volatility for the remaining contractual term was calculated and was consistent
with historical term.


**** 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.


***** 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.





16.
            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


74


17.
            Taxes
      payable




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





December 31,2009
                      
                      
                      2008Value-added
      tax payable
                      
                      $
                      9,290,149
                      
                      
                      $
                      6,279,089Income
      tax payable (recoverable)*
                      
                      
                      1,733,942
                      
                      
                      
                      (652,865
                      )Other
      tax payable
                      
                      
                      340,925
                      
                      
                      
                      91,214Balance
      at end of year
                      
                      $
                      11,365,016
                      
                      
                      $
                      5,717,438





* 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.




18.
            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




19.
            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 23 and 30).





20.
            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
                            
                            
                            2008Balance
      at beginning of year
                            $
                            23,222,566
                            
                            
                            $
                            23,166,270Add:
      Additions during the year-Income
      attributable to non-controlling interests
                            
                            7,872,813
                            
                            
                            
                            5,071,408Capital
      Contribution from the non-controlling interest holders of
      Joint-venture companies
                            
                            -
                            
                            
                            
                            745,723Less:
      decrease during the yearDividends
      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*
                            
                            -
                            
                            
                            
                            (6,177,079
                            )Foreign
      currency translation
                            
                            22,365
                            
                            
                            
                            1,432,977Balance
      at end of year
                            $
                            27,173,125
                            
                            
                            $
                            23,222,566


75


*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 21)





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.





21.
            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-in
                                capitalShares
                              
                              
                              Par
      ValueBalance
      at January 1, 2008
                              
                              
                              23,959,702
                              
                              
                              $
                              2,396
                              
                              
                              $
                              30,125,951Issuance
      of common stock*
                              
                              
                              3,023,542
                              
                              
                              
                              302
                              
                              
                              
                              22,089,698Decrease
      in additional paid-in capital in connection with Henglong equity
      acquisition **
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (25,912,921
                              )Issuance
      of stock options to independent directors and
management***
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              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***
                              
                              -
                              
                              
                              -
                              
                              
                              
                              446,676Balance
      at December 31, 2009
                              
                              
                              27,046,244
                              
                              
                              $
                              2,704
                              
                              
                              $
                              27,515,064





*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).


76


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. A summary of the comparative statement for the previous
periods is set out below.  For detailed information, please see the
disclosures in Form 8-K filed by the Company on May 8,
2008.





The
following is a summary of the comparative statement of the consolidated income
statement for previous years:





For the year ended December 31,2007Historical
                  statement
                
                
                comparative
                  statement
                
                
                2008
                
                
                2009Net
      sales
                
                $
                133,597,003
                
                
                $
                133,597,003
                
                
                $
                163,179,286
                
                
                $
                255,597,553Cost
      of product sold
                
                
                88,273,955
                
                
                
                88,273,955
                
                
                
                115,920,585
                
                
                
                182,929,833Gross
      profit
                
                
                45,323,048
                
                
                
                45,323,048
                
                
                
                47,258,701
                
                
                
                72,667,720Add:
      gain on other sales
                
                
                554,150
                
                
                
                554,150
                
                
                
                734,063
                
                
                
                838,505Total
      operating expense
                
                
                24,611,397
                
                
                
                24,611,397
                
                
                
                31,069,343
                
                
                
                35,841,573Income
      from operations
                
                
                21,265,801
                
                
                
                21,265,801
                
                
                
                16,923,421
                
                
                
                37,664,652Other
      income, net
                
                
                38,462
                
                
                
                38,462
                
                
                
                1,067,309
                
                
                
                94,534Financial
      (expenses)
                
                
                (566,986
                )
                
                
                (566,986
                )
                
                
                (1,296,218
                )
                
                
                (1,986,200
                )Gain  on
      change in fair value of derivative
                
                
                -
                
                
                
                -
                
                
                
                998,014
                
                
                
                624,565Income
      before income taxes
                
                
                20,737,277
                
                
                
                20,737,277
                
                
                
                17,692,526
                
                
                
                36,397,551Income
      taxes
                
                
                2,231,032
                
                
                
                2,231,032
                
                
                
                185,877
                
                
                
                5,110,475Net
      income
                
                
                18,506,245
                
                
                
                18,506,245
                
                
                
                17,506,649
                
                
                
                31,287,076Net
      income attributable to noncontrolling interest
                
                
                9,646,339
                
                
                
                4,945,372
                
                
                
                5,071,408
                
                
                
                7,872,813Net
      income attributable to parent company
                
                $
                8,859,906
                
                
                $
                13,560,873
                
                
                $
                12,435,241
                
                
                $
                23,414,263Net
      income per common share attributable to parent company–Basic
                
                $
                0.37
                
                
                $
                0.50
                
                
                $
                0. 4 8
                
                
                $
                0. 87Diluted
                
                $
                0.37
                
                
                $
                0.50
                
                
                $
                0. 4 6
                
                
                $
                0. 78


77


The
following is a summary of the comparative statement of the consolidated balance
sheet for previous years:





December 31,2007Historical statement
                  
                  
                  Comparative
                    statement
                  
                  
                  2008
                  
                  
                  2009Total
      assets
                  
                  $
                  182,984,687
                  
                  
                  $
                  172,984,687
                  
                  
                  $
                  231,046,936
                  
                  
                  $
                  313,032,957Total
      liabilities
                  
                  
                  92,583,555
                  
                  
                  
                  88,693,144
                  
                  
                  
                  126,493,720
                  
                  
                  
                  180,187,764Non-controlling
      interests
                  
                  
                  23,166,270
                  
                  
                  
                  13,652,651
                  
                  
                  
                  23,222,566
                  
                  
                  
                  27,173,125Total
      parent company stockholders' equity
                  
                  
                  67,234,862
                  
                  
                  
                  70,638,892
                  
                  
                  
                  81,330,650
                  
                  
                  
                  105,672,068Total
      stockholders' equity
                  
                  
                  90,401,132
                  
                  
                  
                  84,291,543
                  
                  
                  
                  104,553,216
                  
                  
                  
                  132,845,193Total
      liabilities and stockholders' equity
                  
                  $
                  182,984,687
                  
                  
                  $
                  172,984,687
                  
                  
                  $
                  231,046,936
                  
                  
                  $
                  313,032,957





***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.


78





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





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, as the fair value of the Company’s stock options that were
outstanding and exercisable were both probable and reasonably estimable, the
Company did not assess their intrinsic value. The average weighted fair
value of stock options granted were $2.63 and $8.74 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 15)





22 .Retained earnings





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%.





The
Company recorded $798,756 statutory surplus reserve for the year
2009.




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.




Net
income as reported in the US GAAP financial statements differs from that
reported in the PRC statutory financial statements. In accordance with relevant
laws and regulations in the PRC, profits available for distribution are based on
the statutory financial statements. If the Company has foreign currency
available after meeting its operational needs, the Company may make its profit
distributions in foreign currency to the extent foreign currency is available.
Otherwise, it is necessary to obtain approval and convert such distributions at
an authorized bank.


79


23. 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.





24.
            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
                      
                      
                      2008Interest
      income(expenses), net
                      
                      $
                      (1,086,381
                      )
                      
                      $
                      (1,238,764
                      )Foreign
      exchange gain (loss), net
                      
                      
                      10,295
                      
                      
                      
                      305,578Income
      (loss) of note discount, net
                      
                      
                      (82,757
                      )
                      
                      
                      150,654Amortization
      for discount of convertible note payable, net
                      
                      
                      (718,678
                      )
                      
                      
                      (424,665
                      )Handling
      charge
                      
                      
                      (108,679
                      )
                      
                      
                      (89,021
                      )Total
                      
                      $
                      (1,986,200
                      )
                      
                      $
                      (1,296,218
                      )


80


25.
            Gain
      on change in fair value of
derivative





Years Ended December 31,2009
                                          
                                          2008Income
      from adjustment of fair value of liabilities in connection with
      warrants
                                          $
                                          1,977
                                          
                                          $
                                          796,649Income
      from adjustment of fair value of compound derivative
      liabilities
                                          
                                          622,588
                                          
                                          
                                          201,365Total
                                          $
                                          624,565
                                          
                                          $
                                          998,014





Gain on
the change of the fair value of warrant liability and compound
derivative liabilities mentioned above, see note 14 and
15.





26.
            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 25%. 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. Henglong is subject to enterprise national 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 and
Hengsheng have an enterprise income tax exemption in 2008 and 2009, and are
subject to income tax at a rate of 15% for the next three years thereafter, from
2010 to 2012, and a 25% enterprise national income tax commencing from
January 1, 2013.





USAI and
Jielong are at their start up stage in 2009 and 2008, accordingly, there is
no assessable profit for these periods. They have an enterprise income tax
exemption in 2008 and 2009, and are subject to income tax at a rate of 15% 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 17.5%.





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:


81





Years
      Ended December 31,2009
                                
                                2008Average
      tax rate *
                                $
                                13.25
                                %
                                $
                                14.17
                                %Computed
      income tax provision
                                
                                4,824,194
                                
                                
                                2,507,295Permanent
      Differences:Income
      tax refund**
                                
                                (1,053,092
                                )
                                
                                (2,762,823
                                )Deferred
      tax provision
                                
                                1,691,582
                                
                                
                                934,224Other
      reconciling items
                                
                                (352,209
                                )
                                
                                (492,819
                                )Total
      current and deferred tax expense
                                
                                5,110,475
                                
                                
                                185,877




*Average
tax rate = sum of statutory tariff for each subsidiary×weight (weight=
net income before income tax for each subsidiary / sum of net income before
income tax)


**For the
years ended December 31, 2009 and 2008, the income tax refund mainly includes
the income tax benefit received by the Company's Sino-foreign joint ventures
for purchase of domestically manufactured equipments, and other tax
reduction or exemption.




27.
            Income
      Per Share




Basic
income per share attributable to Parent company is calculated by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted income per share is calculated based on the treasury stock
method, assuming the issuance of common shares, if dilutive, resulting from the
exercise of warrants.




The
calculations of diluted income per share attributable to Parent company
were:





Years
      Ended December 31,2009
                                
                                
                                2008Numerator:Net
      income attributable to Parent company
                                
                                $
                                23,414,263
                                
                                
                                $
                                12,435,241Add:
      interest expenses of convertible notes payable, net of tax
                                
                                
                                696,719
                                
                                
                                
                                918,750Add:
      Amortization for discount of convertible notes payable, net of
      tax
                                
                                
                                467,141
                                
                                
                                
                                424,665$
                                24,578,123
                                
                                
                                $
                                13,778,656Denominator:Weighted
      average shares outstanding
                                
                                
                                26,990,649
                                
                                
                                
                                25,706,364Effect
      of dilutive securities
                                
                                
                                4,627,763
                                
                                
                                
                                3,962,36231,618,412
                                
                                
                                
                                29,668,726Net
      income per common share attributable to Parent company-
      diluted
                                
                                $
                                0.78
                                
                                
                                $
                                0.46





During
the year ended December 31, 2008, the options and warrants outstanding have not
been included in the computation of diluted income per share, except the options
issued on December 10, 2008, because such inclusion would have had an
anti-dilutive effect. The shares issuable upon conversion of Convertible Notes
have been included in the computation.





During
the year ended December 31, 2009, the options outstanding have been included in
the computation of diluted income per share, except the options issued on
July 6, 2006, because such inclusion would have had an anti-dilutive
effect. The shares issuable upon conversion of Convertible Debt have been
included in the computation.




28.
            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.


82


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.




29.
            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
                                
                                2008Xiamen
      Joylon
                                $
                                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


83


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 20).




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


84


Advanced
Equipment Payment to Related Parties





December
      31,2009
                        
                        2008Hubei
      Wiselink
                        $
                        2,579,319
                        
                        $
                        2,473,320





30.
            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
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        10,568,625Total
                        
                        $
                        10,006,373
                        
                        
                        $
                        782,252
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        10,788,625





31.
            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.





32. 
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.


85


33.
            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”.




The
Company’s product sectors information is as follows:





For the
year ended December 31, 2009




Henglong
                  
                  
                  Jiulong
                  
                  
                  Shenyang
                  
                  
                  Zhejiang
                  
                  
                  Wuhu
                  
                  
                  Other
      Sectors
                  
                  
                  Other
      (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)
                  
                  
                  26,057,787
                  
                  
                  
                  3,747,039
                  
                  
                  
                  2,844,943
                  
                  
                  
                  2,922,034
                  
                  
                  
                  111,483
                  
                  
                  
                  1,158,152
                  
                  
                  
                  (5,554,362
                  )
                  
                  
                  31,287,076Net
      income attributable to noncontrolling interest
                  
                  
                  5,211557
                  
                  
                  
                  711,937
                  
                  
                  
                  853,483
                  
                  
                  
                  1,431,797
                  
                  
                  
                  25,274
                  
                  
                  
                  (166,077
                  )
                  
                  
                  (195,158
                  )
                  
                  
                  7,872,813Net
      income attributable to Parent company
                  
                  $
                  20,846230
                  
                  
                  $
                  3,035,102
                  
                  
                  $
                  1,991,460
                  
                  
                  $
                  1,490,237
                  
                  
                  $
                  86,209
                  
                  
                  $
                  1,324,229
                  
                  
                  $
                  (5,359,204
                  )
                  
                  $
                  23,414,263Depreciation
      and amortization
                  
                  
                  3,777,978
                  
                  
                  
                  2,068,581
                  
                  
                  
                  543,930
                  
                  
                  
                  895,241
                  
                  
                  
                  352,770
                  
                  
                  
                  974,832
                  
                  
                  
                  70,837
                  
                  
                  
                  8,684,169Total
      assets
                  
                  
                  155,983,242
                  
                  
                  
                  58,798,859
                  
                  
                  
                  32,070,205
                  
                  
                  
                  25,917,543
                  
                  
                  
                  18,074,164
                  
                  
                  
                  27,405,436
                  
                  
                  
                  (5,216,492
                  )
                  
                  
                  313,032,957Capital
      expenditures
                  
                  $
                  5,378,814
                  
                  
                  $
                  1,671,139
                  
                  
                  $
                  218,297
                  
                  
                  $
                  2,486,501
                  
                  
                  $
                  150,212
                  
                  
                  $
                  7,918,008
                  
                  
                  $
                  -
                  
                  
                  $
                  17,822,971





For the
year ended December 31, 2008




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)
                    
                    
                    14,986,412
                    
                    
                    
                    353,549
                    
                    
                    
                    2,092,311
                    
                    
                    
                    2,733,364
                    
                    
                    
                    (477,293
                    )
                    
                    
                    (841,725
                    )
                    
                    
                    (1,339,969
                    )
                    
                    
                    17,506,649Net
      income attributable to noncontrolling interest
                    
                    
                    2,997,282
                    
                    
                    
                    67,173
                    
                    
                    
                    627,694
                    
                    
                    
                    1,339,349
                    
                    
                    
                    (108,203
                    )
                    
                    
                    (24,804
                    )
                    
                    
                    172,917
                    
                    
                    
                    5,071,408Net
      income attributable to Parent company
                    
                    $
                    11,989,130
                    
                    
                    $
                    286,376
                    
                    
                    $
                    1,464,617
                    
                    
                    $
                    1,394,015
                    
                    
                    $
                    (369,090
                    )
                    
                    $
                    (816,921
                    )
                    
                    $
                    (1,512,886
                    )
                    
                    $
                    12,435,241Depreciation
      and amortization
                    
                    
                    4,575,115
                    
                    
                    
                    2,569,716
                    
                    
                    
                    701,120
                    
                    
                    
                    1,147,517
                    
                    
                    
                    401,379
                    
                    
                    
                    416,957
                    
                    
                    
                    113,188
                    
                    
                    
                    9,924,992Total
      assets
                    
                    
                    107,998,822
                    
                    
                    
                    46,541,107
                    
                    
                    
                    23,460,621
                    
                    
                    
                    23,907,010
                    
                    
                    
                    10,068,515
                    
                    
                    
                    18,714,486
                    
                    
                    
                    856,427
                    
                    
                    
                    231,546,988Capital
      expenditures
                    
                    $
                    2,277,253
                    
                    
                    $
                    3,407,505
                    
                    
                    $
                    269,207
                    
                    
                    $
                    501,557
                    
                    
                    $
                    716,239
                    
                    
                    $
                    5,199,172
                    
                    
                    $
                    10,000,000
                    
                    
                    $
                    22,370,933


86


(a)
              Other
      includes activity at the corporate level, unrealized income between
      product companies (sectors), and elimination of inter-sector
      transactions.




34.
Reclassification





Certain
prior period balances have been reclassified to conform with the current period
presentation.





87


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.)10.1
                    
                    Registration
      Rights Agreement dated March 20, 2006 between the Company and Cornell
      Capital Partners, LP (incorporated by reference to the Company’s Form S-3
      Registration Statement (File No. 333 - 133331) filed on April 17,
      2006)10.2
                    
                    Investor
      Registration Rights Agreement dated March 20, 2006 between the Company and
      Cornell Capital Partners, LP. (incorporated by reference to the Company’s
      Form S-3 Registration Statement (File No. 333 - 133331) filed on April 17,
      2006)10.3
                    
                    Warrant
      to purchase 86,806 shares of common stock at $14.40 per share, issued to
      Cornell Capital Partners, LP. (incorporated by reference to the Company’s
      Form S-3 Registration Statement (File No. 333 - 133331) filed on April 17,
      2006 )10.4
                    
                    Warrant
      to purchase 69,444 shares of common stock at $18.00 per share, issued to
      Cornell Capital Partners, LP. (incorporated by reference to the Company’s
      Form S-3 Registration Statement (File No. 333 - 133331) filed on April 17,
      2006 )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.)


88





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.)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.*21
                
                Schedule
      of Subsidiaries*23
                
                Consent of Schwartz Levitsky
      Feldman LLP., Independent Registered Public Accountant Firm*31.1
                
                Rule
      13a-14(a) Certification*31.2
                
                Rule
      13a-14(a) Certification*32.1
                
                Section
      1350 Certification*32.2
                
                Section
      1350 Certification*


89