BUSINESS
Through
its 90% ownership of the Ruili Group Ruian Auto Parts Co., Ltd., a sino-foreign
joint venture (the “Joint Venture”), SORL Auto Parts, Inc. (the “Company”)
develops, manufactures and distributes automotive air brake valves and related
components to automotive original equipment manufacturers, or OEMs, and the
related aftermarket both in China and internationally. Installed on the chassis,
air brake valves include a collection of various air brake components using
compressed air and functioning as the execution device for service braking
and
parking braking. The Company’s products are principally used in commercial
vehicles weighing over three tons, such as trucks and buses. Air brake valves
are critical components that ensure driving safety.
The
Joint
Venture was formed in China as a sino-foreign joint venture on January 17,
2004,
pursuant to the terms of a Joint Venture Agreement (the “JV Agreement”) between
the Ruili Group Co., Ltd. (the “Ruili Group”) and Fairford Holdings Limited
(“Fairford”), a wholly owned subsidiary of the Company. The Ruili Group was
incorporated in the PRC in 1987 and specialized in the development, production
and sale of various kinds of automotive parts. Fairford and the Ruili Group
contributed 90% and 10%, respectively, of the paid-in capital of the Joint
Venture, which totaled $43.4 million.
Effective
January 19, 2004 the Joint Venture acquired the business segment of the Ruili
Group relating to the manufacture and sale of various kinds of valves for
automotive brake systems and related operations (the “Transferred Business”).
The Ruili Group began the automotive air brake valve business in 1987. The
acquisition was accomplished by the transfer from the Ruili Group to Fairford
of
the relevant assets and liabilities of the Transferred Business including trade
receivables, inventories and machinery, and the assumption of short and long
term borrowings for a purchase price of $6,390,000. The consideration was based
on a valuation provided by Ruian Ruiyang Assets Valuation Co., Ltd., an
independent PRC valuation firm. Fairford then transferred these assets and
liabilities to the Joint Venture as consideration for its 90% ownership interest
of the Joint Venture. The Ruili Group transferred inventory as its capital
contribution for its 10% interest in the Joint Venture. The assets and
liabilities transferred to the Joint Venture by Fairford and the Ruili Group
represented all the assets and liabilities of the Transferred Business. Certain
historical information of the Transferred Business is based on the operation
of
the Transferred Business when it was owned by the Ruili Group.
On
November 30, 2006, the Company completed a follow-on public offering of
4,285,714 shares of common stock at $7.25 per share. Gross proceeds were
approximately $31.1 million. Net proceeds after approximately $2.2 million
of
underwriters’ commissions and approximately $0.7 million of related offering
expenses were approximately $28.2 million. On December 13, 2006, Maxim Group
LLC, the lead underwriter of offering, exercised its over-allotment option
in
full to purchase an additional 642,857 shares of common stock. After deduction
of underwriter’s discount of approximately from $0.3 million, the Company
received $4.3 million. The aggregate net proceeds to the Company of this
offering was approximately $32.5 million, which included the $4.3 million as
a
result of the exercise of the over-allotment option granted to the
underwriters.
On
December 8 and 26, 2006, through Fairford, the Company invested $32.67 million
in its operating subsidiary, the Ruili Group Ruian Auto Parts Co., Ltd. To
maintain its 10% shareholding in the Joint Venture, the Ruili Group increased
its capital investment by $3.63 million. Accordingly,the Company continues
to
hold a 90% controlling interest in the operating subsidiary.
The
Joint
Venture is located in Ruian City, Wenzhou, Zhejiang Province, People’s Republic
of China. Wenzhou is a southeast coastal city and is a center of automotive
parts manufacturing in China. The Company’s main products include spring brake
chambers, clutch servos, air dryers, and main valves and manual valves, all
of
which are widely used in the brake systems for various types of commercial
vehicles weighing more than three tons such as trucks and buses. Reliable
functioning of those valves is critical to safety both when driving and
parking.
The
Company’s Products
Through
the Joint Venture, the Company manufactures and distributes commercial vehicle
air brake valves and related components in China and internationally. Installed
on the chassis, air brake valves include a collection of various air brake
components using compressed air and functioning as the execution device for
service braking and parking brake. The products are principally used in
commercial vehicles weighing over three tons, such as trucks and buses. Air
brake valves are critical components that ensure driving safety.
The
Joint
Venture makes an extensive range of air brake valves and related products
covering 40 categories and over 1000 specifications, which are widely used
in
different types of commercial vehicles. Additionally, the Joint Venture offers
a
more complete product line including non-valve products, which are sourced
from
the Ruili Group. Such outsourced non-valve products include power steering
pumps
and other pumps, automobile electrical components and auto meters. The Joint
Venture is continually engaged in introducing new products rapidly, maintain
high quality, and provide excellent customer support. When working with a
customer, the Joint Venture’s goal is to understand the design intent and brand
image for each product and leverage the Joint Venture’s extensive experience and
innovative technology to deliver products that enable the customer to
differentiate the air brake valves and related components. The Company supports
its products with a full-range of styling, design, testing and manufacturing
capabilities, including just-in -time and in-sequence delivery.
The
following discussion describes the major products within the operations segment
that the Joint Venture produces as of the date of this report.
|
Product
|
|
Description
|
|
|
|
|
|
RL3530
Series Spring Brake Chamber
|
|
A
spring brake chamber executes the service, parking and emergency
braking,
when the brake system malfunctions, the products can automatically
provide
emergency braking force. The RL3530 series Spring Brake Chamber was
awarded a patent in China. In
2007
,
the Joint Venture produced
1.16
million
units of spring brake chambers, the largest output in China, which
were
supplied to OEM customers such as FAW Qingdao and Dongfeng
Group.
|
|
|
|
|
|
Clutch
Servo
|
|
Clutch
Servos, which are innovative clutch empower devices developed by
the Joint
Venture, was awarded a patent in China. They are used for controlling
the
performance of brake system clutches by means of a pneumatic-driven
hydraulic operation. The features of this product are simpler structure,
smaller size, higher durability and improved effectiveness. With
an output
of
626
thousand
units in
2007
,
clutch servos are currently supplied to OEM customers such as FAW
Qingdao.
|
|
|
|
|
|
RL3511
Series Air Dryer
|
|
Air
dryers dry and purify compressed air. Combined with unloader valves
and
the heating components, this new type of air dryer requires no separate
installation of certain other components. The product has a compact
structure and multiple functions. Furthermore, it improves the reliability
of the use of other air brake system components, enhancing safe driving.
Annual output of these series of products reached
249
thousand
units in
2007
.
The products are supplied to OEM customers such as FAW Qingdao and
Dongfeng Group.
|
|
|
|
|
|
|
|
RL3511
Series Air Dryer has been patented in China.
|
|
|
|
|
|
Relay
Valves
|
|
Electric
control exhaust relay valves greatly shorten the length of pipeline
between the air storing tank and the brake chamber, and, as a result,
enhance the speed to operate the brake system. They are widely used
in
different types of commercial vehicles. Annual output is approximately
714
thousand
units in
2007
.
Also, we have been awarded a patent for the product.
|
|
|
|
|
|
Hand
Brake Valves
|
|
Hand
brake valves serve as an auxiliary device for parking brakes. Current
annual output is about
387
thousand
units. They are supplied to many OEM customers including FAW
Qingdao.
|
The
Company obtained ISO9001/QS9000/VDA6.1 System Certifications in 2001. We passed
the ISO/TS 16949 System Certification test conducted by the TUV CERT
Certification Body of TUV Industrie Service GmbH in 2004, and its annual review
in 2007 The ISO/TS 16949 System, a higher standard replacing the
ISO9001/QS9000/VDA6.1 System, was enacted by the International Automotive Task
Force and is recognized by major automobile manufacturers all over the world.
The annual reviews for other certifications which we passed in 2007 included
ISO14001 on environmental management and OHSAS18001 on health and safety
management, reflecting the Company’s commitment for workplace safety, health and
environmental protection.
CHINA
AUTOMOBILE AND AUTO PARTS INDUSTRY
The
automobile industry is one of China’s key industries, contributing significantly
to the growth of China’s economy. In 2007, China’s automobile output and sales
volume both reached their record high levels of 8.88 million and 8.79 million
units, increasing by 22.02% and 21.79%, respectively, compared to 2006 figures.
The output and sales volume of commercial vehicle increased 22.21% and 22.25%
to
2.50 million units and 2.49 million units, respectively.
The
2007
automotive parts output in China reached $88.6 billion, with a growth rate
of
20% from last year’s $74.2 billion. According to the latest forecast of the
total demand in China’s market conducted by the Industry Economy Research
Department of State Council Development Research Center, inventory of domestic
automobiles will reach 56.69 million units in 2010 and 131.03 million units
in
2020. This figure reflects the potential of the domestic auto market in the
long
run and lays a foundation for the continued development of the auto parts
industry.
The
overall Chinese auto parts industry is highly fragmented. Management believes
that the future trends of China’s auto parts industry will be:
|
|
·
|
To
keep pace with the rapid development of new automobile
technologies.
|
|
|
·
|
To
meet the requirements from increasingly demanding OEM customers,
such as
zero defects, and cost reduction.
|
|
|
·
|
To
partner with OEM customers in the entire process from product design,
development and production to costing, quality control and final
delivery.
|
|
|
·
|
To
implement industry restructuring through integration to form several
large
sized auto parts manufacturing groups capable of competing with
international manufacturers.
|
MARKET
AND CUSTOMERS
The
Joint
Venture is the largest commercial vehicle air brake system manufacturer in
China. In general, our customers are divided into three groups: OEMs in China,
aftermarket distributors in China, and international customers, accounting
for
approximately 35.6%, 26.9% and 37.5%, respectively, of the Company’s annual
sales for 2007.
OEM
Market -
The
Joint Venture has established long-term business relationships with most of
the
major automobile manufacturers in China. The Joint Venture sells its products
to
51 vehicle manufacturers, including all of the key truck manufacturers in China.
In addition to heavy-duty trucks, the valves are also widely used in air brake
systems for buses. Typically, bus manufacturers purchase a chassis from truck
chassis manufacturers which already have incorporated the Joint Venture’s air
brake valves.
The
table
below presents comparative information for 2007 and 2006 on the Company’s top 5
OEM customers.
|
Ranking
|
|
Customer
|
|
%
of
2007
Sales
|
|
Customer
|
|
%
of
2006
Sales
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
FAW
Jiefang Automotive Co., Ltd.
|
|
7.30%
|
|
FAW
Qingdao Automobile Works
|
|
4.56%
|
|
2
|
|
FAW
Qingdao Automobile Works
|
|
4.56%
|
|
First
Auto Group Purchase Dept.
|
|
4.39%
|
|
3
|
|
Dongfeng
Axle Co., Ltd.
|
|
4.18%
|
|
Dongfeng
Axle Co., Ltd.
|
|
3.43%
|
|
4
|
|
Beiqi
Foton Motor Co., Ltd. Zhucheng Automobile Works
|
|
2.85%
|
|
Beiqi
Foton Motor Co., Ltd. Zhucheng Automobile Works
|
|
2.07%
|
|
5
|
|
Beiqi
Foton Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle
Works
|
|
2.57%
|
|
Liuzhou
Special Auto
Manufacturing
Co., Ltd.
|
|
1.71.%
|
A
few of
our principal OEM customers are:
FAW
Group
Corporation: Established in 1953, FAW is the largest automobile manufacturer
in
China. During the past 50 years, its product line has expanded from a single
product for trucks to a full range of light, medium and heavy vehicles, sedans
and buses, with output reaching 6.4 million units. FAW has established joint
ventures with major international firms such as Volkswagen and Toyota, while
expanding within China through a merger with Tianjin Automobile Industry (Group)
Co., Ltd. FAW Jiefang Automotive Co., Ltd. and FAW Qingdao Automotive Works
are
subsidiaries of FAW Group Corporation.
Dongfeng
Axle Co., Ltd.: It is a subsidiary of Dongfeng Motors Group. Established in
1969, Dongfeng ranks among the top three groups in China’s automotive industry.
Its main products include commercial vehicles, passenger cars and automotive
parts.
Beiqi
Foton Motor Co., Ltd.: Headquartered in Chang Ping District, Beijing, Foton
was
founded in 1996. It is a public listed company with majority of state-owned
shares. It possesses total assets exceeding 77 billion RMB and has about 24,000
employees. As China’s largest commercial vehicle manufacturer with a complete
range of types, Foton sells under the brand names of Auman, AUV, View, Saga,
Aumark, Ollin, Sup and Forland.
Aftermarket
-
The
Joint Venture has established sales networks of 28 authorized distributors
covering the following 7 regions nationwide:
|
|
·
|
Northeast
Region (Harbin, Changchun,
Shenyang)
|
|
|
·
|
North
Region (Beijing, Shijiazhuang, Datong,
Tianjin)
|
|
|
·
|
Northwest
Region (Urumchi, Xi’an)
|
|
|
·
|
Southwest
Region (Chongqing, Liuzhou, Kunming,
Chengdu)
|
|
|
·
|
Central
Region (Zhengzhou, Wuhan, Shiyan)
|
|
|
·
|
East
Region (Ji’nan, Qingdao, Hefei, Hangzhou, Nanchang, Quanzhou, Shanghai,
Najing, Xuzhou)
|
|
|
·
|
South
Region (Guangzhou, Changsha)
|
The
28
authorized distributors sell only “SORL” products and in turn channel the
products through over 800 sub-distributors.
International
Market -
Management views the export market as an important growth area. We have signed
agreements with 3 distributors in UAE, Australia, and USA, and begun to supply
our products to the local OEMs in India. We also actively participate in
international trade shows such as those held in Paris, Dubai and Las Vegas,
and
the large-scale domestic trade shows like China Import and Export Fair, and
China International Auto Parts Expo, through which the Company has been able
to
expand its export business to both the aftermarket and OEM segments. In 2007,
export sales accounted for 37.5% of total revenue. Products are exported to
more
than 81 countries and regions in the world. Total export sales in 2007 increased
by 28.1% compared to that in 2006.
|
Ranking
|
|
Country
|
|
Customer
Name
|
|
%
of 2007 Sales
|
|
Country
|
|
Customer
Name
|
|
%
of 2006 Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
United
Arab Emirates
|
|
GOLDEN
DRAGAN AUTO SPARE PARTS
|
|
6.30%
|
|
United
Arab Emirates
|
|
GOLDEN
DRAGAN AUTO SPARE PARTS
|
|
6.24%
|
|
2
|
|
USA
|
|
ITM
|
|
4.59%
|
|
USA
|
|
ITM
|
|
4.50%
|
|
3
|
|
South
Africa
|
|
MICO
|
|
1.10%
|
|
South
Africa
|
|
MICO
|
|
1.83%
|
|
4
|
|
USA
|
|
SAP
|
|
1.02%
|
|
Nigeria
|
|
LIL/MILA
|
|
1.35%
|
|
5
|
|
Poland
|
|
FOTA
|
|
0.98%
|
|
Poland
|
|
MAKROTECH
|
|
0.87%
|
|
6
|
|
South
Africa
|
|
TPE
|
|
0.95%
|
|
South
Africa
|
|
POLMO
|
|
0.73%
|
|
7
|
|
Poland
|
|
MAKROTECH
|
|
0.94%
|
|
Poland
|
|
FOTA
|
|
0.70%
|
COMPETITION
The
Joint
Venture conducts its business in a complex and highly competitive industry.
The
global automotive parts industry principally involves the supply of systems,
modules and components to vehicle manufacturers for the manufacture of new
vehicles. Additionally, suppliers provide components to other suppliers for
use
in their product offerings and to the aftermarket for use as replacement or
enhancement parts for older vehicles. In the current global automotive industry,
vehicle manufacturers generally only engage in assembling but not manufacturing
non-key automotive parts. Rather, they source these components through a global
network of suppliers. As a result, only those automotive parts manufacturers
with large-scale production, advanced technology and the ability of producing
system modules, can supply their products to vehicle manufacturers directly.
The
automotive parts industry in China is fragmented and there are many small
manufacturers which mainly target the aftermarket. However, there are not many
companies who have established both nationwide aftermarket sales networks and
close relationships with leading OEM manufacturers. As the largest commercial
vehicle air brake system manufacturer in China, the Joint Venture has
established long-term business relationships with most of the major automobile
manufacturers in China, such as FAW Group (a.k.a. First Auto Group), Dongfeng
Motors Group, Beiqi Foton Motor Co., Ltd., Baotou North-Benz Heavy Duty Truck
Co., Ltd., Anhui Jianghuai Automobile Co., Ltd. In terms of revenues, the
Company ranks among the top 100 automotive component suppliers in China.
Management believes that the key success factors in the commercial vehicle
air
brake valves segment are product quality, price competitiveness, technical
expertise and development capability, new product innovation, and reliability
and timeliness of delivery, which could be gained by recruiting highly qualified
managers and other employees, developing improved product design capability
and
facilities, and maintaining better customer service.
Domestic
Competition -
The
Joint Venture has three major competitors in China: VIE, Weiming and
CAFF.
|
|
·
|
China
VIE Group: Its principal products are main valves and unloader/governors,
with a majority supplied to OEM’s, such as Anhui Jianghuai Automobile Co.,
Ltd., and the remaining portion for aftermarket and
export.
|
|
|
·
|
China
Shandong Weiming Automotive Products Co. Ltd.: This is a joint venture
with WABCO of Germany, and mainly produces air dryers, and ABS, primarily
supplying to truck and bus OEM’s such as China Heavy Duty Truck Group
Corp., Ltd., and some major bus manufacturers in
China..
|
|
|
·
|
Chongqing
CAFF Automobile Braking and Steering Systems Co., Ltd.: Its main
products
are air dryers and main valves. Its principal customer is Chongqing
Heavy
Vehicle Group Co., Ltd.
|
Management
believes the Company has the following advantages:
|
|
·
|
Brand
Name: As China’s largest commercial vehicle air brake valves manufacturer,
the Joint Venture’s “SORL” brand is widely known in the
country.
|
|
|
·
|
Technology:
The Joint Venture views technological innovation and leadership as
the
critical means to enhance its core competence. It owns a technology
center, including a laboratory specializing in the research of automotive
brake controlling technologies and development of air brake system
products. In 2007, we installed or upgraded computerized automated
testing
equipment which ensured high quality of our products.
|
|
|
·
|
Product
Development: Because management believes that products ultimately
define a
manufacturing company’s success, we continue to increase our budget for
research and development activities. Through its international sales
offices in the US, Australia and the Middle East, the Joint Venture
is
able to promptly collect information about the current trends in
automotive technologies, which in turn is applied to our new product
development and used to enhance our capacity of providing domestic
OEMs
with advanced products. In addition, IT application and strict
implementation of ISO/TS16949 standards in the development process
greatly
shorten the development lead time and improve new product
quality.
|
|
|
·
|
Sales
Networks: The Joint Venture has contracted with 28 authorized distributors
covering 7 regions of China. We help train their sales force and
improve
their service quality. These authorized distributors in turn channel
“SORL” products through over 800 sub-distributors throughout
China.
|
|
|
·
|
Production
Management: The Joint Venture continues to improve production methods
in
its manufacturing process. This has resulted in reducing the manufacturing
cycle, reducing waste, enhancing quality consistency and reducing
production cost.
|
International
Competition -
In the
international market, our largest competitors are WABCO and Knorr. While
management believes our current advantage over WABCO and Knorr is
lower
pricing,
management also believes that the Company’s product quality and brand awareness
are improving. The Joint Venture’s competitive advantages over other competitors
in the world market are:
|
|
·
|
Performance-Cost
Ratio: “SORL” products enjoy a much lower production costs leveraging on
the low labor costs in China. Through the Company’s improved product line
as a result of technology and manufacturing improvements, the Joint
Venture products’ performance-cost advantage is
increasing.
|
|
|
·
|
Quick
Adaptation to Local Market: Through its international sales channels
in
the US, Australia and Middle East, the Joint Venture has been able
to
respond to local market needs.
|
|
|
·
|
Diversified
Auto Products: In addition to its air brake valve products, to fully
support existing export customers, the Joint Venture also distributes
a
wide range of non-valve products which are sourced from the Ruili
Group.
This reduces customers’ transaction
costs.
|
SALES
AND MARKETING
To
further increase our market share, in 2007, the Joint Venture expanded its
sales
force to strengthen its sales and marketing efforts. As a result, the headcount
for domestic (PRC) sales and international sales increased to 35 and 37,
respectively, from 27 and 30. Products are sold under the “SORL” trademark which
the Joint Venture licenses on a royalty free basis from the Ruili Group. The
license expires in 2012.
In
China,
the commercial vehicle air brake valve market can be divided into 2 segments:
OEM market and aftermarket.
OEM
Market -
In 2007,
the number of the Joint Venture’s OEM customers increased to 51 from 39 in 2006,
with the expansion of its business into the municipal bus market. Most of these
OEM customers have established long-term relationships with the Joint Venture.
Normally, annual sales contracts with key customers are signed at the beginning
of the calendar year and are revised as needed.
According
to China Association of Automobile Manufacturers, the unit production of the
Chinese heavy duty vehicle and medium vehicle sectors including completive
truck, chassis and semi-trailer, grew over 43.3% in 2007 as compared to
2006.
The
Joint Venture has successfully expanded its production capacity so that it
is
able to utilize the opportunity to increase its sales to the OEM market by
$14.1
million or 52% for the year ended December 31, 2007, as compared to the year
ended December 31, 2006. Such sales growth is the result of its enlarged
customer base and the increasing orders from its existing major
customers.
Aftermarket
-
The
Joint Venture’s products are also sold in the aftermarket for replacement
purposes. With the rapid growth of commercial vehicles output in recent years
and the increasing number of vehicles on the road, demand for replacement parts
has become stronger. Currently, the Company has 28 authorized distributors
covering 7 regions nationwide. These distributors sell only the Joint Ventures
and the Ruili Group’s products under the “SORL” trademark to over 800
distributors. The Joint Venture provides product technical services to these
distributors. The Joint Venture also conducts periodic performance evaluations,
and reserves the right to terminate the distributorship of those with frequent
delinquencies or poor sales records, and to replace them by other selected
firms. For 2007, the Company achieved total revenue of $31.1 million in domestic
aftermarket sales, an increase of 30.3%% from 2006.
International
Markets -
.
The
Joint Venture sells products to over 81 countries and has signed agreements
with
four distributors in UAE, Australia, and USA, sent its engineers to India to
support its sales to the local OEMs. We also actively participate in
international trade shows at Paris, Dubai,Las Vegas, Guangzhou, and Beijing
to
update our knowledge on automobile technology and local market trends and to
acquire new customers and new orders.
DISTRIBUTION
The
Joint
Venture ships finished products directly to OEM customers. The products are
distributed to aftermarket customers in China through a network of 28 authorized
distributors, who also function as the distribution centers for their respective
regions. Shipments are delivered directly to international
customers.
INTELLECTUAL
PROPERTY AND INNOVATION CAPACITY
The
Joint
Venture currently employs 68 technical staff members, including 43 holding
Engineer or Senior Engineer qualifications. Among which, 3 staff members are
for
technological information, 41 for new product development and technique
designing, 9 for measurement and testing, 6 for MIS and the other nine persons
are quality management engineers.
In
addition to its in-house technical force, the Joint Venture has cooperation
arrangements with leading universities in automotive engineering industry,
including:
|
|
·
|
Tongji
University at Shanghai and Harbin Institute of Technology: Contract
for
co-development of electronic control braking system and automotive
master
cable technology; and
|
|
|
·
|
Tsinghua
University E-Tech Technology Co., Ltd. and Zhejiang University: Contract
for MIS projects, including the development of application software
for
product design innovation and production
management.
|
Pursuant
to the arrangements with these universities, we have priority rights to acquire
the intellectual property which is developed. The financial arrangements as
to
amount and terms of payment vary depending on the type of project. Normally,
we
make an initial payment in the form of a research grant and then negotiate
a
payment upon development of the technology.
We
also
consult with the technical staff of the Ruili Group from time to time on a
no-cost basis. We collaborate with other industry research groups such as the
research centers of FAW Group and Dongfeng Group.
Capitalizing
on these resources, we have successfully developed innovative products and
technologies such as a new type of clutch servo with sensor ; a combined air
dryer with build-in temperature-control device and unloader; and an inner-breath
spring chamber which enables internal air circulation.
The
Joint
Venture owns a full range of processing equipment required for development
of
new auto part products, including machines for molding, die casting and cutting
processes. Furthermore, the Joint Venture is capable of designing and making
over 90% of the technical devices such as tools, jigs and molds that are
required for producing prototypes. In addition, the partnership with Tsinghua
University and Zhejiang University in developing software for application in
new
product design system has resulted in substantial savings in the cycle time
for
new product development.
Patented
Technologies
We
have
reinforced our R&D efforts on patented products. Currently the Joint Venture
owns 12 utility patents and has filed applications for 6 other patents in China
and an additional three in the U.S.
Know-how
Based
on
the many years of manufacturing experience, the Joint Venture has accumulated
a
substantial amount of know-how. For instance, the special formula for aluminum
alloy acquired over years of repeating tests considerably improves the
compactness of alloy, hence the strength of casting. The Joint Venture also
possesses a confidential “protection film” processing technique to enhance the
sealability of products.
Currently,
the Joint Venture endeavors to establish and master a lean production system.
The new system has begun to come into effect. Also, in order to ensure the
high
quality of our products, the Joint Venture has successfully replaced the
traditional testing method with computerized testing systems and obtained the
capacity for online quality testing.
The
Joint
Venture has taken numerous steps to protect its proprietary technologies.
Specific staff is assigned to safe keep documents and filings. Critical
employees are required to sign a confidentiality agreement with the Joint
Venture.
Trademarks
Our
principal trademark is “SORL” which we license on a non-exclusive royalty free
basis from the Ruili Group. The license currently expires in 2012 and we have
an
agreement with the Ruili Group that the license will be extended if the
trademark registration for the trade name is extended. The Ruili Group has
obtained a registration for “SORL” from the World Intellectual Property
Organization and, in 2007, registered the trademark in US.
PRODUCTION
The
Joint
Venture owns the largest commercial vehicle air brake valve products
manufacturing base in China. During the 2007 fiscal year , the Joint Venture
added 65 CNC machines, 11 die casting machines, and 15 units of other machines.
Meanwhile,
the
Joint
Venture re-deployed and streamlined its production / assembly lines, enabling
it
to rapidly expand its production capacity to meet increasing market demands
for
its products. The production process includes fixture, jig and die making,
aluminum alloy die casting, metal sheet stamping, numerical control cutting,
melding, numerical control processing, surface treatment, filming,
rubber/plastic processing, final assembly and
packaging.
The Joint Venture possesses state-of-the-art manufacturing and testing
facilities sourced from the US, Korea, Taiwan as well as mainland China,
including CNC processing centers, CNC lathes, casting, stamping and cutting
machines, automatic spraying and electroplating lines, cleaning machines,
automatic assembly lines and 3D COMERO and projectors, etc.
In
September 2007, the Joint Venture purchased land rights, a manufacturing plant
and office building with a total floor area of 712,333 square feet, from Ruili
Group Co., Ltd.. The Joint Veture previously leased part of the facility from
Ruili and occupied approximately 50% of it. As a result of this transaction,
the
additional production space is expected to meet the Company’s growth demand for
the next few years.
ENVIRONMENT
In
2006,
we were granted the certification of ISO14001 on environmental management and
OHSAS18001 on health and safety management, which reflected the Company’s
commitment to workplace safety, health and environmental protection. The Joint
Venture carries out staff training to enhance awareness of environment
protection. It effects controls from the beginning to adopt environment friendly
production, reducing or preventing pollution, as well as saving energy
consumption and manufacturing costs. For example, intensity of noise is listed
as one of the criteria in the selection of new equipment; Waste water is stored,
purified and recycled in the production process; and compressing machines are
used in disposal of aluminum and steel scraps, thereby saving both storage
space
and power consumption.
RAW
MATERIALS
Raw
materials used by the Joint Venture in the manufacture of its products primarily
include steel, aluminum, other metals, rubber and various
components.
All
of
the materials used are generally readily available from numerous sources. We
have not, in recent years, experienced any significant shortages of manufactured
components or raw materials and normally do not carry inventories of these
items
in excess of what is reasonably required to meet our production and shipping
schedules. Critical raw materials are generally sourced from at least two or
more vendors to assure adequate supply and price competition. The Joint Venture
maintains relationships with over twenty material suppliers. In 2007, the three
largest suppliers are
Shanghai
Jinshi Materials Co., Ltd, Shanghai Lutie Metal Trading Co., Ltd. and Shanghai
Jingutong Industry
Development
Co.,Ltd, which together accounted for 26.4% of the aggregate of raw materials
we
purchased.
When
planning a purchase order, with such other terms as quality, delivery and credit
terms being substantially the same, the Joint Venture compares prices quoted
by
different suppliers in an attempt to receive the lowest price. In order to
secure a purchase price and subsequently a predictable cost of sales, the Joint
Venture generally makes a down payment to suppliers.
Normally,
the annual purchase plan for raw materials, such as aluminum ingot and steel
sheet, is determined at the beginning of the calendar year according to our
OEM
customer’s orders and our own forecast for the aftermarket and international
sales. Such purchase plans with key suppliers can be revised quarterly. Our
actual requirements are based on monthly production plans. Management believes
that this arrangement prevents us from having excess inventory when the orders
from customers change.
For
raw
materials other than steel and aluminum, we normally maintain from five to
seven
days of inventory at our warehouse.
STRATEGIC
PLAN
The
Joint
Venture’s strategic plan is to enhance its core competences, maintain steady
business growth and increase its market share both in China and internationally.
In anticipation of a possible slowdown in the global economy in 2008, the Joint
Venture plans to adjust its sales growth rate and its product portfolio and
to
improve profitability through the following:
|
|
·
|
FOCUS
ON QUALITY CONTROL AND COST REDUCTION. We believe that our products
offer
higher quality compared with our competitors in the commercial vehicle
air
brake valve market in China, and a superior performance-cost advantage
in
the international market. To sustain this competitive advantage and
at the
same time obtain higher profit margins, the Joint Venture, based on
its
efficient manufacturing base in China, plans to continue focusing on
quality control and cost reduction, including, for example, reduction
in
spoilage and improvement in manufacturing techniques.
|
|
|
|
|
|
|
·
|
IMPLEMENT
THE BRAND STRATEGY. The Joint Venture plans to focus efforts on promotion
of the “SORL” brand name based on technological innovation.
|
|
|
|
|
|
|
·
|
INVEST
IN NEW PRODUCT DEVELOPMENT. We are investing in the development of
such
new products as electronic braking system which our management believes
has significant market potential.
|
|
|
·
|
EXPAND
PRODUCTION FACILITIES TO MEET FURTHER DEMANDS. Anticipating the increasing
demands for our products, management plans to acquire new facilities
and
procure new equipment, and also to increase the Joint Venture’s sales
force.
|
|
|
·
|
FURTHER
EXPANSION IN THE INTERNATIONAL MARKET. During 2007, the Joint Venture
achieved approximately 28.1% growth in export sales, which accounted
for
37.5% of total sales for the year. Management believes our products
are
competitive in the international market. We plan to set up additional
authorized sales distributors internationally. We also plan to actively
seek strategic partnerships with international distributors and
manufacturers.
|
|
|
·
|
EXPAND
THROUGH STRATEGIC ALLIANCES AND ACQUISITIONS. We are exploring
opportunities to create long-term growth through new joint ventures
or
acquisitions of other automotive parts manufacturers in China, and
of auto
parts distributors or repair factories with established sales networks
outside of China. We will seek synergistic acquisition targets which
can
be easily integrated into our product manufacturing and corporate
management, or companies that have strong joint-venture partners
that
would become major customers.
|
DOING
BUSINESS IN CHINA
CHINA’S
ECONOMY
Management
believes that the most important factor to understand the Chinese automobile
industry is the country’s rapid economic growth. According to China’s Statistics
Bureau, China’s GDP growth rate for 2005, 2006 and 2007 was 9.9%, 11.1% and
11.4% respectively.
One
of
the most important goals for Chinese macro-economic development in 2008 is
to
strike a balance between economic development and inflation control. According
to a Chinese government report, the government set its 2008 goal for GDP growth
at 8 percent and CPI inrease at about 4.8 percent.
THE
CHINESE LEGAL SYSTEM
The
practical effect of the People’s Republic of China legal system on our 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
the
several states. Similarly, the People’s Republic of China accounting laws
mandate accounting practices, which are not consistent with US Generally
Accepted Accounting Principles. The China accounting laws require that an annual
“statutory audit” be performed in accordance with People’s Republic of China
accounting standards and that the books of account of Foreign Invested
Enterprises are maintained in accordance with Chinese accounting
laws.
Second,
while the enforcement of substantive rights may appear less clear than United
States procedures, 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-to-business dispute resolution.
Because the terms of the respective Articles of Association provide that all
business disputes pertaining to Foreign Invested Enterprises are to 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
Joint Venture will not assume a privileged position regarding such disputes.
Any
award rendered by this arbitration tribunal is, by the express terms of the
respective 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 in operation 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 are
no
assurances that:
|
|
·
|
We
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.
|
Since
1979, the Chinese government has reformed its economic systems. Because many
reforms are unprecedented or experimental, they are expected to be refined
and
improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation,
or
in the 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 our operations.
To
date
reforms to China’s economic system have not adversely impacted our operations
and are not expected to adversely impact operations in the foreseeable future;
however, there can be no assurance that the reforms to China’s economic system
will continue or that we 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, and reduction in tariff protection and other import
restrictions.
EMPLOYEES
AND EMPLOYMENT AGREEMENTS
The
Company currently employs 2,005 employees, all of whom are employed full time:
53 for quality control, 68 technical staff, 72 sales and marketing staff, 1,765
production workers and 47 administrative staff. There are employment agreements
with all of the employees whereby administrative staff workers agree to three
years of employment and hourly workers agree to three years. Employment
contracts with all employees comply with relevant laws and regulations of
China.
The
Joint
Venture is subject to the Sino-foreign Equity Joint Venture Enterprise Labour
Management Regulations. In compliance with those regulations, the Joint
Venture’s management may hire and discharge employees and make other
determinations with respect to wages, welfare, insurance and discipline of
employees. The Joint Venture has, as required by law, established special funds
for
enterprise
development, employee welfare and incentives, as well as a general reserve.
In
addition, the Joint Venture is required to provide its employees with facilities
sufficient to enable the employees to carry out trade union
activities.
DESCRIPTION
OF THE JOINT VENTURE
General
The
Joint
Venture was established on January 17, 2004 pursuant to the terms of a Joint
Venture Agreement with the Ruili Group. Below is a description of the material
terms of the Joint Venture.
Management
of the Joint Venture
Pursuant
to the terms of the Joint Venture Agreement, the Board of Directors of the
Joint
Venture consists of three directors; we have the right to designate two members
of the board and the Ruili Group has the right to designate one member and
we
have the authority to appoint the Chairman of the Board. The majority of the
Board has decision-making authority with respect to operating matters. As a
result, we maintain operating control over the Joint Venture. However, at this
time, our two senior executives, Messrs. Xiao Ping Zhang and Xiao Feng Zhang
are
the founders of the Ruili Group, and therefore there is limited independence
between the two entities. The term of the Joint Venture will expire on March
4,
2019 although we anticipate that we will be able to extend such term. Extension
of the agreement will be subject to negotiation with the Ruili Group and
approval of the Chinese government.
JV
DISTRIBUTION OF PROFITS
After
provision for social welfare funds for employees and provision for taxation,
the
profits, if any, of the Joint Venture will be available for distribution to
the
parties in proportion to their respective capital contributions. Any such
distributions must be authorized by the Joint Venture’s Board of Directors. To
date, the Joint Venture has not distributed any profits and does not anticipate
doing so for the near term.
JV
ASSIGNMENT OF INTEREST
Any
assignment of an interest in the Joint Venture must be approved by the Chinese
government. The Chinese joint venture laws also provide for preemptive rights
and the consent of the other joint venture party for any proposed assignments
by
one party to a third party.
JV
LIQUIDATION
Under
the
Chinese joint venture laws, the Joint Venture may be liquidated in certain
limited circumstances, including expiration of the ten-year term or any term
of
extension, the inability to continue operations due to severe losses, force
majeure, or the failure of a party to honor its obligations under the joint
venture agreement or the Articles Of Association in such a manner as to impair
the operations of the joint venture. The Chinese joint venture laws provide
that, upon liquidation, the net asset value (based on the prevailing market
value of the assets) of a joint venture shall be distributed to the parties
in
proportion to their respective registered capital in the joint
venture.
JV
RESOLUTION OF DISPUTES
In
the
event of a dispute between the parties, attempts will be made to resolve the
dispute through friendly consultation or mediation. In the absence of a friendly
resolution, the parties have agreed that the matter will first be referred
to
the China International Economic and Trade Arbitration Commission in Beijing,
whose decisions are final and enforceable in Chinese courts.
JV
EXPROPRIATION
The
Chinese joint venture laws provide that China will not nationalize or
requisition enterprises in which foreign funds have been invested. However,
under special circumstances, when public interest requires, enterprises with
foreign capital may be legally requisitioned and appropriate compensation will
be made.
Our
business faces many risks. The risks described below may not be the only risks
we face. Additional risks that we do not yet know of, or that we currently
think
are immaterial, may also impair our business operations or financial results.
If
any of the events or circumstances described in the following risks actually
occurs, our business, financial condition or results of operations could suffer
and the trading price of our common stock could decline.
Our
ability to effectively implement our business strategy depends upon, among
other
factors, the successful recruitment and retention of additional highly skilled
and experienced management and other key personnel and we cannot assure that
we
will be able to hire or retain such employees.
We
must
attract recruit and retain a sizeable workforce of technically competent
employees. Our ability to effectively implement our business strategy will
depend upon, among other factors, the successful recruitment and retention
of
additional highly skilled and experienced management and other key personnel.
These individuals are difficult to find in China and as the economy in China
expands, there is increasing competition for skilled workers. We cannot assure
that we will be able to find, hire or retain such employees, or even if we
are
able to so hire such employees, that the financial costs therefrom will not
adversely affect our net income.
Certain
of our officers and directors have existing responsibilities to other businesses
in addition to our company and as a result, conflicts of interest between us
and
the other activities of those persons may occur from time to
time.
Certain
persons serving as our officers and directors have existing responsibilities
and, in the future, may have additional responsibilities, to provide management
and services to other entities in addition to us. In particular, Mr. Xiao Ping
Zhang, our Chief Executive Officer, and Mr. Xiao Feng Zhang, our Chief Operating
Officer, are officers and principal stockholders of Ruili Group Co. Ltd. which
is engaged in the development, production and sale of various kinds of
automotive parts as well as operating a hotel property and investing in the
development of real property in China. The management of our joint venture
is
shared with the Ruili Group and therefore there may exist conflicts of interest
between us and the Ruili Group in connection with its operation. Our joint
venture agreement provides that the Board of Directors of the Joint Venture
is
comprised of three persons, two of whom are appointed by us. However, at the
present time our two senior executives, Messrs, Xiao Ping Zhang and Xiao Feng
Zhang are the founders of and employed at the Ruili Group. Therefore, the Ruili
Group exercises considerable control over the Joint Venture. There can be no
assurance that in the event of a conflict between us and the Ruili Group that
the operations of the Joint Venture and our interests in the Joint Venture
will
not be adversely affected or that our Company’s interests will always be fairly
represented. The Ruili Group also provides certain services to the Company
in
the form of bank guaranties, licensing of certain technology. The Ruili Group
also sells to us certain non-valve products which allow us to fill out our
product lines which in 2007 represented approximately 23.0% of our sales. As
a
result, conflicts of interest between us and the other activities of those
persons may occur from time to time. Our officers and directors are accountable
to us and our shareholders as fiduciaries, which requires that such officers
and
directors exercise good faith and integrity in handling our affairs. However,
the existing responsibilities limit the amount of time such officers and
directors can spend on our affairs.
We
are and will continue to be under downward pricing pressures on our products
from our customers and competitors which may adversely affect our growth, profit
margins and net income.
We
face
continuing downward pricing pressure from our customers and competitors,
especially in the sales of replacement parts. To retain our existing customers
and gain new ones, we must continue to keep our unit prices low. In view of
our
need to maintain low prices on our products, our growth, profit margins and
net
income will suffer if we cannot effectively continue to control our
manufacturing and other costs.
Our
contracts with our customers are generally short-term and do not require the
purchase of a minimum amount, which may result in periods of time during which
we have limited orders for our products.
Our
customers generally do not provide us with firm, long-term volume purchase
commitments. Although we enter into manufacturing contracts with certain of
our
customers who have continuing demand for a certain product, these contracts
state terms such as payment method, payment period, quality standards and
inspection and similar matters rather than provide firm, long-term commitments
to purchase products from us. As a result of the absence of long term contracts,
we could have periods during which we have no or only limited orders for our
products, but will continue to have to pay the costs to maintain our work force
and our manufacturing facilities and to service our indebtedness without the
benefit of current revenues.
We
consistently face short lead times for delivery of products to customers.
Failure to meet delivery deadlines in our production agreements could result
in
the loss of customers and damage to our reputation and
goodwill.
We
enter
into production agreements with our customers prior to commencing production,
which reduces our risk of cancellations. However, these production agreements
typically contain short lead times for delivery of products, leading to
production schedules that can strain our resources and reduce our profit margins
on the products produced. Although we have increased our manufacturing capacity,
we may lack sufficient capacity at any given time to meet all of our customers’
demands if they exceed the production capacity of levels. We strive for rapid
response to customer demand, which can lead to reduced purchasing efficiency
and
increased material costs. If we are unable to sufficiently meet our customers’
demands, we may lose our customers. Moreover, failure to meet customer demands
may impair our reputation and goodwill.
Because
of the short lead times in our production agreements, we may not be able to
accurately or effectively plan our production or supply
needs.
We
make
significant decisions, including determining the levels of business that we
will
seek and accept, production schedules, component procurement commitments,
facility requirements, personnel needs, and other resource requirements, based
on our production agreements with our customers. Short lead times of our
customers’ commitments to their own customers and the possibility of rapid
changes in demand for their products reduce our ability to estimate accurately
the future requirements of those customers for our products. Because many of
our
costs and operating expenses are fixed, a reduction in customer demand can
harm
our gross margins and operating results. We may also occasionally acquire raw
materials without having customer orders based on a customer’s forecast or in
anticipation of an order and to secure more favorable pricing, delivery or
credit terms in view of the short lead times we often have under our customers’
orders. These purchases can expose us to losses from inventory carrying costs
or
inventory obsolescence.
Our
operations depend highly on Messrs. Xiao Ping Zhang, our Chief Executive
Officer, and Xiao Feng Zhang, our Chief Operating Officer, and a small number
of
other executives and the loss of any such executive could adversely affect
our
ability to conduct our business.
The
success of our operations depends greatly on a small number of key managers,
particularly, Messrs. Xiao Ping Zhang and Xiao Feng Zhang. The loss of the
services of either Mr. Zhang, or any of the other senior executives could
adversely affect our ability to conduct our business. Even if we are able to
find other managers to replace any of these managers, the search for such
managers and the integration of such managers into our business will inevitably
occur only over an extended period of time. During that time the lack of senior
leadership could affect adversely our sales and manufacturing, as well as our
research and development efforts.
We
may not be able to effectively respond to rapid growth in demand for our
products and of our manufacturing operations which could adversely affect our
customer relations and our growth prospects.
If
we
continue to be successful in obtaining rapid market growth of our products,
we
will be required to deliver large volumes of quality products to customers
on a
timely basis at a reasonable cost to those customers. Meeting such increased
demands will require us to expand our manufacturing facilities, to increase
our
ability to purchase raw materials, to increase the size of our work force,
to
expand our quality control capabilities and to increase the scale upon which
we
produce products. Such demands would require more capital and working capital
than we currently have available.
We
extend relatively long payment terms for accounts receivable which can adversely
affect our cash flow.
As
is
customary in China, we currently extend relatively long payment terms to certain
of our China based customers (generally 90-180 days for our OEM customers and
60-90 days for our aftermarket customers). As a result of the size of many
of
our orders, these extended terms adversely affect our cash flow and our ability
to fund our operations out of our operating cash flow. In addition, the reserves
we establish for our receivables may not prove to be adequate in view of actual
levels of bad debts. The failure of our customers to pay us timely would
negatively affect our working capital, which could in turn adversely affect
our
cash flow.
Our
customers often place large orders for products, requiring fast delivery, which
impacts our working capital. If our customers do not incorporate our products
into their products and sell them in a timely fashion, for example, due to
excess inventories, sales slowdowns or other issues, they may not pay us in
a
timely fashion, even on our extended terms. This failure to pay timely may
defer
or delay further product orders from us, which may adversely affect our cash
flows, sales or income in subsequent periods.
We
may not be able to finance the development of new products which could
negatively impact our competitiveness.
Our
future operating results will depend to a significant extent on our ability
to
continue to provide new products that compare favorably on the basis of cost
and
performance with the products of our competitors. Some of our competitors have
design and manufacturing capabilities and technologies that compete well with
our products, particularly in markets outside of China. We are currently
conducting research and development on a number of new products, activities
requiring a substantial outlay of capital. To remain competitive, we must
continue to incur significant costs in product development, equipment,
facilities and invest in research and development of new products. These costs
may increase, resulting in greater fixed costs and operating expenses. All
of
these factors create pressures on our working capital and ability to fund our
current and future manufacturing activities and the expansion of our
business.
We
receive a significant portion of our revenues from a small number of customers
which may make it difficult to negotiate attractive prices for our products
and
exposes us to risks of substantial losses if we lose certain of these
customers.
Although
no customer individually accounted for more than 8 % of our revenues for the
fiscal year ended December 31, 2007, our three largest customers accounted
for
approximately 18.2% and 15.2% of our revenues in 2007 and 2006 respectively.
Dependence on a few customers could make it
difficult
to negotiate attractive prices for our products and could expose us to the
risk
of substantial losses if a single dominant customer stops purchasing our
products.
Our
business depends on our ability to protect and enforce our intellectual property
effectively which may be difficult particularly in
China.
The
success of our business depends in substantial measure on the legal protection
of proprietary rights in technology we hold. We hold 12 patents in China,have
filed applications for 6 others in China and an additional three in the U.S..
We
claim proprietary rights in various unpatented technologies, know-how, trade
secrets and trademarks relating to products and manufacturing processes. We
protect our proprietary rights in our products and operations through
contractual obligations, including nondisclosure agreements. If these
contractual measures fail to protect our proprietary rights, any advantage
those
proprietary rights provide us would be negated. Monitoring infringement of
intellectual property rights is difficult, and we cannot be certain that the
steps we have taken will prevent unauthorized use of our intellectual property
and know-how, particularly in China and other countries in which the laws may
not protect our proprietary rights as fully as the laws of the United States.
Accordingly, other parties, including competitors, may duplicate our products
using our proprietary technologies. Pursuing legal remedies against persons
infringing our patents or otherwise improperly using our proprietary information
is a costly and time consuming process that would divert management’s attention
and other resources from the conduct of our other business, and could cause
delays and other problems with the marketing and sales of our products, as
well
as delays in deliveries.
It
may be difficult to find or integrate acquisitions which could have an adverse
effect on our expansion plans.
An
important component of our growth strategy is to invest in or acquire companies
such as other automotive parts manufacturers and distribution companies. We
may
be unable to identify suitable investment or acquisition candidates or to make
these investments or acquisitions on a commercially reasonable basis, if at
all.
If we complete an investment or acquisition, we may not realize the anticipated
benefits from the transaction.
Integrating
an acquired company is complex, distracting and time consuming, as well as
a
potentially expensive process. The successful integration of an acquisition
would require us to:
|
|
·
|
integrate
and retain key management, sales, research and development, and other
personnel;
|
|
|
·
|
incorporate
the acquired products or capabilities into our offerings both from
an
engineering and sales and marketing
perspective;
|
|
|
·
|
coordinate
research and development efforts;
|
|
|
·
|
integrate
and support pre-existing supplier, distribution and customer
relationships; and
|
|
|
·
|
consolidate
duplicate facilities and functions and combine back office accounting,
order processing and support
functions.
|
The
geographic distance between the companies, the complexity of the technologies
and operations being integrated and the disparate corporate cultures being
combined may increase the difficulties of combining an acquired company.
Acquired businesses are likely to have different standards, controls, contracts,
procedures and policies, making it more difficult to implement and harmonize
company-wide financial, accounting, billing, information and other systems.
Management’s focus on integrating operations may distract attention from our
day-to-day business and may disrupt key research and development, marketing
or
sales efforts.
With
the automobile parts markets being highly competitive and many of our
competitors having greater resources than we do, we may not be able to compete
successfully.
The
automobile parts industry is a highly competitive business. Criteria for our
customers and potential customers include:
|
|
·
|
Price/cost
competitiveness;
|
|
|
·
|
Reliability
and timeliness of delivery;
|
|
|
·
|
New
product and technology development
capability;
|
|
|
·
|
Degree
of global and local presence;
|
|
|
·
|
Effectiveness
of customer service; and
|
|
|
·
|
Overall
management capability.
|
Depending
on the particular product market (OEM or aftermarket) and geographic market,
the
number of our competitors varies significantly. Many of our competitors have
substantially greater revenues and financial resources than we do, as well
as
stronger brand names, consumer recognition, business relationships with vehicle
manufacturers, and geographic presence than we have, especially where we intend
to enter a new geographic market. We may not be able to compete favorably and
increased competition may substantially harm our competitive
position.
Internationally,
we face different market dynamics and competition. We may not be as successful
as our competitors in generating revenues in international markets due to the
lack of recognition of our brands, products or other factors. Developing product
recognition overseas is expensive and time-consuming and our international
expansion efforts may be more costly and less profitable than we expect. If
we
are not able to execute our business expansion in our target markets, our sales
could decline, our margins could be negatively impacted and we could lose market
share.
A
disruption at our sole manufacturing site would significantly interrupt our
production capabilities, which could have drastic consequences to us, including
threatening our financial viability.
We
currently manufacture all of our products at our sole commercial manufacturing
facility, which is located near Ruian City, Wenzhou, Zhejiang Province, People’s
Republic of China. Accordingly, we face risks inherent in operating a single
manufacturing facility, since any disruption, such as a fire, or natural
disaster, could significantly interrupt our manufacturing capability.
We
currently
do not have alternative production plans in place or disaster-recovery
facilities available. In case of a disruption, we will have to establish
alternative manufacturing sources. This would require substantial capital on
our
part, which we may not be able to obtain on commercially acceptable terms or
at
all. Additionally, we would likely experience months or years of production
delays as we build or locate replacement facilities and seek and obtain
necessary regulatory approvals. If this occurs, we will be unable to satisfy
customer orders on a timely basis, if at all. Also, operating any new facilities
may be more expensive than operating our current facility. For these reasons,
a
significant disruptive event at our manufacturing facility could have drastic
consequences on us, including threatening our financial viability.
The
cyclical nature of commercial vehicle production and sales could result in
a
reduction in automotive sales, which could adversely affect our financial
liquidity.
Our
sales
to OEMs depend on automotive commercial vehicle production and sales by our
customers, which are highly cyclical and affected by general economic conditions
and other factors, including consumer spending and preferences. They also can
be
affected by government policies, labor relations issues, regulatory
requirements, and other factors. In addition, in the last two years, the price
of commercial vehicles in China has generally declined. As a result, the volume
of commercial vehicle production in China has fluctuated from year to year,
which cause fluctuations in the demand for our products.
Increasing
costs for manufactured components and raw materials may adversely affect our
profitability.
We
use a
broad range of manufactured components and raw materials in our 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 our customers,
a
significant increase in the prices of our components and materials could
materially increase our operating costs and adversely affect our profit margins
and profitability.
Longer
product life of parts may reduce aftermarket demand for some of our
products.
In
2007,
approximately 64% of our sales were to the aftermarket. The average useful
life
of original equipment parts has been steadily increasing in recent years due
to
improved quality and innovations in products and technologies. The longer
product lives allow vehicle owners to replace parts of their vehicles less
often. Additional increases in the average useful life of automotive parts
are
likely to adversely affect the demand for our aftermarket
products.
We
may be subject to product liability and warranty and recall claims, which may
increase the costs of doing business and adversely affect our financial
condition and liquidity.
We
face
an inherent business risk of exposure to product liability and warranty claims
if our products actually or allegedly fail to perform as expected or the use
of
our products results, or is alleged to result, in bodily injury and/or property
damage. We have not obtained product liability insurance and therefore may
be
exposed to potential liability without any insurance. We cannot ensure you
that
we will not incur significant costs to defend these claims or that we will
not
experience any product liability losses in the future. In addition, if any
of
our designed products are or are alleged to be defective, we may be required
to
participate in a recall of such products. We cannot assure you that the future
costs associated with providing product warranties and/or bearing the cost
of
repair or replacement of our products will not have an adverse effect on our
financial condition and liquidity.
We
are subject to environmental and safety regulations, which may increase our
compliance costs.
We
are
subject to the requirements of environmental and occupational safety and health
laws and regulations in China and other countries where we sell our products.
To
the extent that we expect to expand our operations into other geographic areas,
we will become subject to such laws and regulations of those countries as well.
We cannot provide assurance that we have been or will be at all times in full
compliance with all of these requirements, or that we will not incur material
costs or liabilities in connection with these requirements. 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 our suppliers may adversely affect our operations by delaying delivery or
causing delivery failures, which may negatively affect demand, sales and
profitability.
We
purchase various types of equipment, raw materials and manufactured component
parts from our suppliers. We would be materially and adversely affected by
the
failure of our suppliers to perform as expected. We could experience delivery
delays or failures caused by production issues or delivery of non-conforming
products if our suppliers failed to perform, and we also face these risks in
the
event any of our suppliers becomes insolvent or bankrupt.
Our
commercial viability depends significantly on our ability to operate without
infringing the patents and other proprietary rights of third
parties.
In
the
event that our technologies infringe or violate the patent or other proprietary
rights of third parties, we may be prevented from pursuing product development,
manufacturing or commercialization of our products that utilize such
technologies. There may be patents held by others of which we are unaware that
contain claims that our products or operations infringe. In addition, given
the
complexities and uncertainties of patent laws, there may be patents of which
we
know that we may ultimately be held to infringe, particularly if the claims
of
the patent are determined to be broader than we believe them to be. As a result,
avoiding patent infringement may be difficult.
If
a third party claims that we infringe its patents, any of the following may
occur:
|
|
·
|
we
may become liable for substantial damages for past infringement if
a court
decides that our technologies infringe upon a competitor’s
patent;
|
|
|
·
|
a
court may prohibit us from selling or licensing our product without
a
license from the patent holder, which may not be available on commercially
acceptable terms or at all, or which may require us to pay substantial
royalties or grant cross-licenses to our patents;
and
|
|
|
·
|
we
may have to redesign our product so that it does not infringe upon
others’
patent rights, which may not be possible or could require substantial
funds or time.
|
In
addition, employees, consultants, contractors and others may use the trade
secret information of others in their work for us or disclose our trade secret
information to others. Either of these events could lead to disputes over the
ownership of inventions derived from that information or expose us to potential
damages or other penalties. If any of these events occurs, our business will
suffer and the market price of our common stock will likely
decline.
Our
international expansion plans subject us to risks inherent in doing business
internationally.
Our
long-term business strategy relies on the expansion of our international sales
outside China by targeting markets, such as Europe and the United States. Risks
affecting our international expansion include challenges caused by distance,
language and cultural differences, conflicting and changing laws and
regulations, 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 our international expansion efforts, which could in turn materially and
adversely affect our business, operating results and financial
condition.
If
we cannot continue to satisfy the Nasdaq Global Market’s listing maintenance
requirements and other Nasdaq rules, our common stock could be delisted, which
could negatively affect the price of our ordinary shares and your ability to
sell them.
In
order
to maintain our listing on the Nasdaq Global Market, we will be required to
comply with Nasdaq rules which include rules regarding minimum shareholders’
equity, minimum share price, and certain corporate governance requirements.
We
may not be able to continue to satisfy the listing maintenance requirements
of
the Nasdaq Global Market and other applicable Nasdaq rules. If we are unable
to
satisfy the Nasdaq criteria for maintaining listing, our common stock could
be
subject to delisting. If our common stock is delisted, trading, if any, of
our
common stock would thereafter be conducted in the over-the-counter market,
in
the so-called “pink sheets” or on the National Association of Securities
Dealers, Inc.’s “electronic bulletin board.” As a consequence of any such
delisting, our share price could be negatively affected and our stockholders
would likely find it more difficult to dispose of, or to obtain accurate
quotations as to the prices of, our common stock.
We
do not intend to pay dividends on shares of our common stock in the foreseeable
future.
We
have
never paid cash dividends on our common stock. Our current Board of Directors
does not anticipate that we will pay cash dividends in the foreseeable future.
Instead, we intend to retain future earnings for reinvestment in our business
and/or to fund future acquisitions. Determination of net income under PRC
accounting standards and regulations may differ from determination under U.S.
GAAP in significant aspects, such as the use of different principles for
recognition of revenues and expenses. Under PRC law, our PRC joint venture
is
required to set aside a portion of its net income each year to fund designated
statutory reserve funds.
Risks
Related to Doing Business in China
We
operate from facilities that are located in China. Our principal operating
subsidiary, Ruili Group Ruian Auto Parts Co., Ltd., is a sino-foreign joint
venture organized under the laws of the PRC.
Changes
in China’s political and economic policies and conditions could cause a
substantial decline in the demand for our products and
services.
Historically,
we have derived a substantial portion of our revenues from China. We anticipate
that China will continue to be our primary production and an important sales
base in the near future and currently almost all of our assets are located
in
China. While the PRC government has pursued economic reforms to transform its
economy from a planned economy to a market-oriented economy since 1978, a large
part of the PRC economy is still being operated under varying degrees of control
by the PRC government. By imposing industrial policies and other economic
measures, such as restrictions on lending to certain sectors of the economy,
control of foreign exchange, taxation and restrictions on foreign participation
in the domestic market of various industries, the PRC government exerts
considerable direct and indirect influence on the development of the PRC
economy. Many of the economic reforms carried out by the PRC government are
unprecedented or experimental and are expected to be refined and improved.
Other
political, economic and social factors may also lead to further adjustments
of
the PRC reform measures. This refining and adjustment process may not
necessarily have a positive effect on our operations and our future business
development. For example, the PRC government has in the past implemented a
number of measures intended to slow down certain segments of the PRC economy
that the government believed to be overheating, including placing additional
limitation on the ability of commercial banks to make loans by raising bank
reserve-against-deposit rates. Historically, this restrictive policy on loans
had the effect of decreasing infrastructure projects resulting in a decrease
in
demand for heavy trucks, thus adversely impacting our product sales to our
OEM
Customers. Because of the negative impact of the Chinese government policies
on
the truck manufacturers, we also were required to extend our normal credit
terms
to certain of these manufacturers. Our operating results may be materially
and
adversely affected by changes in the PRC economic and social conditions and
by
changes in the policies of the PRC government, such as measures to control
inflation, changes in the rates or method of taxation and the imposition of
additional restrictions on currency conversion.
Changes
in foreign exchange regulation in China may affect our ability to pay dividends
in foreign currencies.
Currently,
the RMB is not a freely convertible currency and the restrictions on currency
exchanges in China may limit our ability to use revenues generated in RMB to
fund our business activities outside China or to make dividends or other
payments in U.S. dollars. The PRC government strictly regulates conversion
of
RMB into foreign currencies. Over the years, the PRC government has
significantly reduced its control over routine foreign exchange transactions
under current accounts, including trade-and service-related foreign exchange
transactions, foreign debt service and payment of dividends. In accordance
with
the existing foreign exchange regulations in China, our PRC joint venture may
pay dividends in foreign currencies, without prior approval from the PRC State
Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. The PRC government may, however, at its discretion,
restrict access in the future to foreign currencies for current account
transactions and prohibit us from converting our RMB-denominated earnings into
foreign currencies. If this occurs, our PRC joint venture may not be able to
pay
us dividends in foreign currency without prior approval from SAFE. In addition,
conversion of RMB for most capital account
items,
including direct investments, is still subject to government approval in China
and companies are required to open and maintain separate foreign exchange
accounts for capital account items.
Fluctuation
in the value of RMB could adversely affect the value of, and dividends payable
on, our shares in foreign currency terms.
The
value
of RMB is subject to changes in PRC government policies and depends to a large
extent on China’s domestic and international economic, financial and political
developments, as well as the currency’s supply and demand in the local market.
For over a decade from 1994, the conversion of RMB into foreign currencies,
including the U.S. dollar, was based on exchange rates set and published daily
by the People’s Bank of China, the PRC central bank, based on the previous day’s
interbank foreign exchange market rates in China and exchange rates on the
world
financial markets. The official exchange rate for the conversion of RMB into
U.S. dollars remained stable until RMB was revalued in July 2005 and allowed
to
fluctuate by reference to a basket of foreign currencies, including the U.S.
dollar. Under the new policy, RMB will be permitted to fluctuate within a band
against a basket of foreign currencies. This change in policy resulted initially
in an approximately 6.5% appreciation in the value of Renminbi against the
U.S.
dollar. There remains significant international pressure on the PRC government
to adopt a substantially more liberalized currency policy, which could result
in
a further and more significant appreciation in the value of RMB against the
U.S.
dollar. Further revaluations of RMB against the U.S. dollar may also occur
in
the future.
The
uncertain legal environment in China could limit the legal protections available
to you.
The
PRC
legal system is a civil law system based on written statutes. Unlike the
common-law system, the civil law system is a system in which decided legal
cases
have little precedential value. In the late 1970s, the PRC government began
to
promulgate a comprehensive system of laws and regulations to provide general
guidance on economic and business practices in China and to regulate foreign
investment. Our PRC joint venture is a Sino-foreign joint venture and is subject
to laws and regulations applicable to foreign investment in China in general
and
laws and regulations applicable to foreign-invested enterprises in particular.
China has made significant progress in the promulgation of laws and regulations
dealing with economic matters such as corporate organization and governance,
foreign investment, commerce, taxation and trade. However, the promulgation
of
new laws, changes of existing laws and abrogation of local regulations by
national laws may have a negative impact on our business and prospects. In
addition, as these laws, regulations and legal requirements are relatively
recent and because of the limited volume of published cases and their
non-binding nature, the interpretation and enforcement of those laws,
regulations and legal requirements involve significant uncertainties. These
uncertainties could limit the legal protections available to foreign investors,
including you. For example, it is not clear if a PRC court would enforce in
China a foreign court decision brought by you against us in shareholders’
derivative actions.
Moreover,
the enforceability of contracts in China, especially with governmental entities,
is relatively uncertain. If counterparties repudiated our contracts or defaulted
on their obligations, we might not have adequate remedies. Such uncertainties
or
inability to enforce our contracts could materially and adversely affect our
revenues and earnings.
Our
primary source of funds for dividend and other distributions from our operating
subsidiary in China is subject to various legal and contractual restrictions
and
uncertainties as well as the practice of such subsidiary in declaring dividends,
and our ability to pay dividends or make other distributions to our shareholders
is negatively affected by those restrictions, uncertainties and dividend
practices.
We
conduct our core business operations through our PRC joint venture. As a result,
our profits available for distribution to our shareholders are dependent on
the
profits available for distribution from our PRC joint venture. Under current
PRC
law, our PRC joint venture is regarded as a foreign-invested enterprise in
China. Although dividends paid by foreign invested enterprises are not subject
to any PRC corporate withholding tax, PRC law permits payment of dividends
only
out of net income as determined in accordance with PRC accounting standards
and
regulations. Determination of net income under PRC accounting standards and
regulations may differ from determination under U.S. generally accepted
accounting principles in significant aspects, such as the use of different
principles for recognition of revenues and expenses. Under PRC law, our PRC
joint venture is required to set aside 10% of its net income each year to fund
a
designated statutory reserve fund until such funds reach 50% of registered
share
capital. These reserves are not distributable as cash dividends. As a result,
our primary internal source of funds for dividend payments is subject to these
and other legal and contractual restrictions and uncertainties, which in turn
may limit or impair our ability to pay dividends to our shareholders although
we
do not presently anticipate paying any dividends. Moreover, any transfer of
funds from us to our PRC joint venture, either as a shareholder loan or as
an
increase in registered capital, is subject to registration with or approval
by
PRC governmental authorities. These limitations on the flow of funds between
us
and our PRC joint venture could restrict our ability to act in response to
changing market conditions. Additionally to date, our PRC Joint Venture has
not
distributed any profits and does not anticipate doing so for the near term.
PRC
economic reform policies or nationalization could result in a total investment
loss in our common stock.
Since
1979, the Chinese government has reformed its economic systems. Because many
reforms are unprecedented or experimental, they are expected to be refined
and
improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation,
or
in the 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 our operations.
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 are
no
assurances that:
|
|
·
|
We
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.
|
Over
the
last few years, China’s economy has registered a high growth rate. However, as a
result of an increase in China’s rate of inflation in 2007, the Chinese
government recently has implemented tighter monetary policy. These measures
have
included further increasing deposit reserve requirement ratio, conducting more
open market operations, and raising base interest rates. These measures alone
may not succeed in slowing down the economy’s excessive expansion or control
inflation, and may result in significant dislocations in the Chinese
economy.
The
Chinese government may adopt additional measure to further combat inflation,
including the establishment of freezes or restraints on certain projects or
markets. These measures may adversely affect our operations. For example, we
believe that certain macroeconomic measures adopted by the Chinese government
negatively impacted the demand for trucks in 2005, thus decreasing the demand
from Chinese truck manufacturers for our products.
There
can
be no assurance that the reforms to China’s economic system will continue or
that we 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, and reduction in tariff protection and other import restrictions. A
material change in reforms on economic policy could cause instability or other
harmful results.
Because
our principal operating company is organized under the laws of China, and
substantially all of our assets are located in China, you may experience
difficulties in effecting service of legal process, enforcing foreign judgments
or bringing original actions in China based on U.S. or other foreign law against
our management and us.
Our
joint
venture operating company is incorporated under the laws of China and
substantially all of our assets are located in China. In addition, all of our
directors and executive officers reside within China, and substantially all
of
the assets of these persons are located within China. As a result, it may not
be
possible to effect service of process within the United States or elsewhere
outside China upon certain directors or executive officers, including with
respect to matters arising under U.S. federal securities laws or applicable
state securities laws. Moreover, China does not have treaties providing for
the
reciprocal recognition and enforcement of judgments of courts with the United
States, the United Kingdom, Japan or many other countries. As a result,
recognition and enforcement in China of judgments of a court in the United
States and any of the other jurisdictions mentioned above in relation to any
matter may be difficult or impossible. Furthermore, an original action may
be
brought in China against us, our directors, managers, or executive officers
only
if the actions are not required to be arbitrated by Chinese law and only if
the
facts alleged in the complaint give rise to a cause of action under PRC law.
In
connection with any such original action, a Chinese court may award civil
liability, including monetary damages.
Any
occurrence of serious infectious diseases, such as recurrence of severe acute
respiratory syndrome (SARS) causing widespread public health problems, could
adversely affect our business operations.
A
renewed
outbreak of SARS or other widespread public health problems in China, where
a
substantial portion of our revenue is derived, and in Ruian City, where our
operations are headquartered, could have a negative effect on our operations.
Our operations may be impacted by a number of public health-related factors,
including the following:
|
|
·
|
quarantines
or closures of our factories or subsidiaries which would severely
disrupt
its operations;
|
|
|
·
|
the
sickness or death of the key officers and employees;
and
|
|
|
·
|
general
slowdown in the Chinese economy resulting from an
outbreak.
|
Any
of
the foregoing events or other unforeseen consequences of public health problems
could result in reduction in net sales of our products.
Because
it is likely that China will adopt additional environmental regulations and
additional or modified regulations relating to the manufacture, transportation,
storage, use and disposal of materials used to manufacture our products or
restricting disposal of any waste will increase our operating
costs.
National,
provincial and local laws impose various environmental controls on the
manufacture of automotive parts and/or of certain materials used in the
manufacture of automotive parts. Although we believe that our operations are
in
substantial compliance with current environmental regulations, there can be
no
assurance that changes in such laws and regulations will not impose costly
compliance requirements on us or otherwise subject us to future liabilities.
In
addition, China is experiencing substantial problems with environmental
pollution. Accordingly, it is likely that the national, provincial and local
governmental agencies will adopt stricter pollution controls. Any such
regulation relating to the manufacture, transportation, storage, use and
disposal of materials used to manufacture our products or restricting disposal
of any waste will increase our operating costs.
Risks
Related to Our Common Stock
The
market price for our common stock may be volatile which could result in a
complete loss of your investment.
The
market price for our common stock may be volatile and subject to fluctuations
in
response to factors including the following:
|
|
·
|
actual
or anticipated fluctuations in our quarterly operating
results,
|
|
|
·
|
announcements
of new products by us or our
competitors,
|
|
|
·
|
changes
in financial estimates by securities
analysts,
|
|
|
·
|
conditions
in the automotive market,
|
|
|
·
|
changes
in the economic performance or market valuations of other companies
involved in the production of automotive
parts,
|
|
|
·
|
announcements
by our competitors of significant acquisitions, strategic partnerships,
joint ventures or capital
commitments,
|
|
|
·
|
additions
or departures of key personnel, or
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
We
may issue additional shares of our capital stock to raise additional cash for
working capital. If we issue additional shares of our capital stock, our
stockholders will experience dilution in their respective percentage ownership
in us.
We
may
seek to further expand our operations and therefore we may issue additional
shares of our capital stock to raise additional cash for working capital. If
we
issue additional shares of our capital stock, our stockholders will experience
dilution in their respective percentage ownership in us.
A
large portion of our common stock is controlled by a small number of
stockholders and as a result, these stockholders are able to influence the
outcome of stockholder votes on various matters.
A
large
portion of our common stock is held by a small number of stockholders. Mr.
Xiao
Ping Zhang, our Company’s Chief Executive Officer, and his brother, Xiao Feng
Zhang, our Chief Operating Officer, hold approximately 49.7% and 6.2%,
respectively, of the Company’s common stock. As a result, these stockholders are
able to control the outcome of stockholder votes on various matters, including
the election of directors and other corporate transactions including business
combinations.
The
occurrence of sales of a large number of shares of our common stock, or the
perception that these sales could occur, may affect our stock price and could
impair our ability to obtain capital through an offering of equity
securities.
The
occurrence of sales of a large number of shares of our common stock, or the
perception that these sales could occur, may affect our stock price and could
impair our ability to obtain capital through an offering of equity securities.
This will have an adverse affect on the business by restricting access to
working capital to fund growth and operations. Furthermore, the current ratios
of ownership of our common stock reduce the public float and liquidity of our
common stock which can in turn affect the market price of our common
stock.
We
are responsible for the indemnification of our officers and directors which
could result in substantial expenditures, which we may be unable to
recoup.
Our
Bylaws provide for the indemnification of our directors, officers, employees,
and agents, under certain circumstances, against attorney’s fees and other
expenses incurred by them in any litigation to which they become a party arising
from their association with or activities on behalf of us. This indemnification
policy could result in substantial expenditures, which we may be unable to
recoup.
Compliance
with the Sarbanes-Oxley act could cost hundreds of thousands of dollars, require
additional personnel and require hundreds of man hours of effort, and there
can
be no assurance that we will have the personnel, financial resources or
expertise to meet requirements of these regulations.
The
US
Public Company Accounting Reform and Investor Protection Act of 2002, better
known as Sarbanes-Oxley, is the most sweeping legislation to affect publicly
traded companies in 70 years. Sarbanes-Oxley created a set of complex and
burdensome regulations. Compliance with such
regulations
requires hundreds of thousands of dollars, additional personnel and hundreds
of
man hours of effort. There can be no assurance that we will have the personnel,
financial resources or expertise to meet requirements of these
regulations.