EX-99.1 2 exh99-1_17092.htm AUDITED FINANCIAL STATEMENTS AND REPORT THEREON LISTED IN ITEM 9.01(A) exh99-1_17092.htm
EXHIBIT 99.1
 
 

 
 
Index to financial statements
 
 
Report of Independent Registered Public Accounting Firm
2
   
Balance Sheets as of December 31, 2010 and 2009
3
   
Statements of Operations and Comprehensive Income for the years ended December 31, 2010 and 2009
4
   
Statements of Changes in Shareholder’s Equity for the years ended December 31, 2010 and 2009
5
   
Statements of Cash Flows for the years ended December 31, 2010 and 2009
6
   
Notes to Financial Statements
7

 
 
 

 
Report of Independent Registered Public Accounting Firm


Board of Directors
Zhejiang Jonway Automobile Co., Ltd.

We have audited the accompanying balance sheets of Zhejiang Jonway Automobile Co., Ltd. (the “Company”) as of December 31, 2010 and 2009, and the related statements of operations and comprehensive income, changes in shareholders equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.




Grant Thornton
Shanghai, PRC

April 8, 2011

 
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Zhejiang Jonway Automobile Co., Ltd
BALANCE SHEET
 DECEMBER 31, 2010 and 2009
(In thousands)
ASSETS
           
   
12/31/10
   
12/31/09
 
Current assets:
           
Cash and cash equivalents
  $ 5,509     $ 1,391  
Accounts receivable
    2,380       19  
Due from related parties
    1,730       2,536  
Notes receivable
    2,618       3,659  
Inventories- net of reserve of $258 in 2010 and $363 in 2009
    12,828       9,049  
Prepayment to suppliers
    1,197       2,071  
Other Receivables
    867       700  
Deferred tax assets
    339       225  
Total current assets
  $ 27,468     $ 19,650  
Non-current assets
               
Property and equipment, net
    45,561       41,182  
Total assets
  $ 73,029     $ 60,832  
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities:
               
Accounts payable
  $ 13,729     $ 11,448  
Notes payable
    4,239       --  
Due to related parties
    2,698       50,853  
Other payables
    1,025       3,090  
Accrued liabilities
    6,275       3,790  
Advance from customers
    2,016       2,513  
Tax payable
    2,207       1,158  
Total current liabilities
  $ 32,189     $ 72,852  
Non-current liabilities
               
Accrued liabilities
  $ 343     $ 207  
                 
Total liabilities
  $ 32,532     $ 73,059  
                 
Shareholders’ equity (deficit):
               
Registered capital
  $ 11,480     $ 1,230  
Accumulated deficit
    (13,113 )     (12,668 )
Additional paid-in capital
    42,164       --  
Accumulated other comprehensive income (loss)
    (34 )     (789 )
                 
Total shareholders’ equity (deficit)
    40,497       (12,227 )
Total Liabilities and Shareholders’ equity (deficit)
  $ 73,029     $ 60,832  
 
The accompanying notes are an integral part of these financial statements.
 
 
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Zhejiang Jonway Automobile Co., Ltd
STATEMENTS OF OPERATION AND COMPREHENSIVE INCOME
For the year ended December 31, 2010 and 2009
 (In thousands)

   
Year ended December 31,
 
             
   
2010
   
2009
 
Net sales
  $ 74,142     $ 42,212  
Cost of sales
    (64,792 )     (40,324 )
Gross profit
    9,350       1,888  
Operating expenses:
               
Sales and marketing
    (6,869 )     (3,596 )
General and administrative
    (3,872 )     (2,793 )
Research and development
    (888 )     (447 )
                 
Loss from operations
    (2,279 )     (4,948 )
Other income (expense):
               
Interest expense
    (84 )     (1,459 )
Other income, net
    1,813       1,094  
Total other income (expense)
    1,729       (365 )
Loss before income tax
    (550 )     (5,313 )
Income tax benefit
    105       100  
Net loss
  $ (445 )   $ (5,213 )
                 
Other comprehensive income (loss):
               
Foreign currency translation adjustment
    1,240       (5 )
Consideration given in excess of the book value of net assets received
    (485 )     -  
                 
Total other comprehensive income (loss)
  $ 755     $ (5 )
                 
Comprehensive income (loss)    $ 310     $ (5,218 )

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

 
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Zhejiang Jonway Automobile Co., Ltd
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
 (In thousands)

   
Registered
Capital
   
Additional
Paid-in Capital
   
Accumulated
Deficit
   
Other
comprehensive
income/(loss)
   
Total
 
                               
Balance at December 31, 2008
  $ 1,230     $ -     $ (7,455 )   $ (784 )   $ (7,009 )
                                         
 
                                       
 
                                       
Foreign currency translation adjustment
                            (5 )     (5 )
Net loss
                    (5,213 )             (5,213 )
Balance at December 31, 2009
  $ 1,230     $ -     $ (12,668 )   $ (789 )     (12,227 )
                                         
                                         
Increase in registered capital
    10,250                               10,250  
Additional paid-in capital
            42,164                       42,164  
Foreign currency translation adjustment
                            1,240       1,240  
Consideration given in excess of the book value of net assets received
                            (485 )     (485 )
Net loss
                    (445 )             (445 )
Balance at December 31, 2010
  $ 11,480     $ 42,164     $ (13,113   $ (34 )     40,497  
                                         
                                                                                     

The accompanying notes are an integral part of these financial statements.
 
 
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Zhejiang Jonway Automobile Co., Ltd
STATEMENT OF CASH FLOWS
 (In thousands)
 
   
Year ended December 31,
 
   
2010
   
2009
 
   
(in thousands)
 
Operating activities:
           
Net loss
  $ (445 )   $ (5,213 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    4,583       3,136  
Inventory reserve
    48       39  
Loss on disposal of property and equipment
    18       4  
Deferred tax
    (105 )     (100 )
                 
Other changes in assets and liabilities:
               
Accounts receivable
    (2,529 )     (1,147 )
Notes receivable
    1,041       (3,630 )
Inventories
    (3,827 )     (5,687 )
Prepayment to suppliers
    937       -  
Other receivables
    1,193       (310 )
Accounts payable
    2,312       8,080  
Notes payable
    5,119       (1,053 )
Tax payable
    1,059       445  
Advance from customers
    (497 )     6,433  
Other payables
    (5,998 )     1,138  
Accrued liabilities
    2,448       63  
Cash used for operating activities
    5,357       2,198  
Investing activities:
               
Purchase of property and equipment
    (4,522 )     (4,835 )
Proceeds from disposal of property and equipment
    83       12  
Cash used for investing activities
    (4,439 )     (4,823 )
Financing activities:
               
Proceeds from short term loan
    1,812       --  
Prepayment of short term loan
    (1,812 )     --  
Proceeds from related party
    5,710       7,792  
Repayment to related party
    (7,361 )     (4,966 )
Proceeds from paid in capital
    4,691       --  
Cash provided by financing activities
    3,040       2,826  
                 
Effect of exchange rate changes on cash
    160       (3 )
Increase in cash
    4,118       198  
                 
Cash at beginning of year
    1,391       1,193  
                 
Cash at end of year
    5,509       1,391  
                 
Supplementary disclosure of cash flow information
               
                 
Interest expenses paid
  $ (67 )   $ --  
 
The accompanying notes are an integral part of these financial statements.
 
 
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Zhejiang Jonway Automobile Co., Ltd
 
NOTES TO FINANCIAL STATEMENTS
 
NOTE 1 - ORGANIZATION AND OPERATIONS:
 
Zhejiang Jonway Automobile Co., Ltd. (“Jonway” or “the Company”) is a limited liability company incorporated in Sanmen County, Zhejiang Province of the People’s Republic of China (“the PRC”) on April 28, 2004 by Jonway Group Co., Ltd. (“Jonway Group”) and two individuals. Jonway Group is ownered by three individuals, Wang Huaiyi, Wang Gang (son of Wang Huaiyi) and Wang Xiao Ying (daughter of Wang Huaiyi) (collectively referred to as “Wang Family”). Jonway has an approved operating period of 10 years.
 
On January 14, 2010, net assets of Sanmen Li Te Rotating Machinery Co., Ltd., Sanmen Jonway Motorcycle Spare Parts Co., Ltd. and Sanmen Shenke Motorcycle Co., Ltd., which were owned by Wang Family, were injected to the registered capital of Jonway. The amount of this capital injection was in excess of the book value of the net assets by $485,000.
 
On July 8, 2010, ZAP entered into an agreement with Jonway Group for acquisition of 51% equity interests of Jonway. This transaction was approved by Department of Commerce of Zhejiang Province on September 3, 2010. Jonway obtained the Certificate of Approval for Enterprises with Foreign Investment on September 3, 2010 and the updated business license on October 8, 2010. As at January 21, 2011, ZAP completed the 51% equity acquisition of Jonway.
 
Jonway’s approved scope of business operations includes the production and sale of vehicle spare parts, and sale of vehicles of brand UFO. Vehicle spare parts are sold to UFO Sanmen Branch while the vehicles are sold to the dealers.
 
NOTE 2 BASIS OF PREPARATION AND USE OF ESTIMATIONS

The financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).

The reporting currency of the Jonway is the US dollar (USD). The Company uses its local currency, Renminbi (RMB), as its functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of each period. Capital paid in RMB is translated into USD at the historical exchange rates at the contribution dates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of changes in shareholders’ equity. Because cash flows are also translated at average translation rates, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in Jonway’s financial statements and accompanying notes. Estimates were made relating to the useful lives of fixed assets, valuation allowances, impairments of assets. Actual results could differ materially from those estimates.
 
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES
 
Revenue Recognition

Jonway records revenues only upon the occurrence of all of the following conditions:

-Jonway has received a binding purchase order from the customer or distributor authorized by a representative empowered to commit the purchaser (evidence of a sale);

 
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-The purchase price has been fixed, based on the terms of the purchase order;

-Jonway has delivered the product from its factory to a common carrier acceptable to the customer; and

-Jonway deems the collection of the amount invoiced probable.

Jonway provides no price protection. Sales are recognized net of promotional discounts, rebates and return allowances.
 
Fair value of  financial instruments
 
Jonway measures its financial assets and liabilities in accordance with U.S. GAAP. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. For certain of Jonway’s financial instruments, including notes receivable, accounts receivable, prepayment to suppliers, other receivables, notes payable, accounts payable, other payables, advance from customers, due from/(to) related parties and accrued liabilities, the carrying amount approximates fair value because of the short maturities. The fair value of debt is not determinable due to the terms of the debt and the lack of a comparable market for such debt.
Cash
Jonway’s cash refers to all cash in hand and call deposits. Jonway has not experienced any losses in such account and believes it is not exposed to any significant credit risk on cash.

Accounts Receivable

Jonway performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. Jonway maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Jonway’s customers should deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As a result of this analysis, Jonway believes that no allowance for doubtful accounts is required at December 31, 2010 and 2009.
 
Inventories

Inventories consist primarily of Sports Utility Vehicles (“SUV”), parts and supplies and work in progress and are carried at the lower of cost (weighted average method) or market. Jonway maintains reserves for estimated excess, obsolete and damaged inventory based on projected future shipments using historical selling rates, and taking into account market conditions, inventory on-hand, purchase commitments, product development plans and life expectancy, and competitive factors. If markets for Jonway’s products and corresponding demand were to decline, then additional reserves may be deemed necessary.
 
Property and equipment
 
Property and equipment consists of land, building and improvements, machinery and equipment, office furniture and equipment and vehicles. Property and equipment is stated at cost and is depreciated or amortized using straight-line method over the asset’s estimated useful life. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows:

Machinery and equipment
10 years
Computer equipment and software
3-10 years
Office furniture and equipment
5 years
Vehicles
5 years
Building and improvements
20 years
Land
50 years

 
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Long-lived assets
 
Long-lived assets are consisted of property and equipment and intangible assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or by the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flow and fundamental analysis. Jonway reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.
 
Notes payable
 
These are bankers’ acceptance for payment of goods as at December 31, 2010 and 2009.
 
Advertising cost
 
The cost of advertising is expensed as incurred. Advertising and marketing expenses amounted to $ 2,778,000 and $1,172,000 for the years ended December 31, 2010 and 2009, respectively.
 
Product warranty cost

Jonway has provided a 2-year or 60,000 kilometers mileage warranty for its SUV products. Jonway records the estimated cost of the product warranties at the time of sale using the estimated cost of product warranties based on historical results. The estimated cost of warranties has not been significant to date. Should actual failure rates and material usage differ from our estimates, revisions to the warranty obligation may be required.
 
Research and development
 
Research and product development costs are expensed as incurred.
 
Comprehensive loss
 
The Company has no components of comprehensive loss other than its net loss, foreign currency translation adjustment and consideration given in excess of the book value of net assets received.

Income taxes

Under the relevant regulations of the Corporate Income Tax Law in the PRC, the corporate income tax rate applicable to the Company is 25%.

Jonway accounts for income taxes using an asset and liability method for financial accounting and reporting purposes. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, operating loss and tax credit carry-forwards and are measured using the currently enacted tax rates and laws. Jonway has made no provision for income taxes in any period presented in the accompanying financial statements because it incurred operating losses in each of these periods.

Jonway analyzes its deferred tax assets with regard to potential realization.  Jonway has established a valuation allowance on its deferred tax assets to the extent that management has determined that it is more likely than not that some portion or all of the deferred tax asset will not be realized based upon the uncertainty of their realization.  Jonway has considered estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance.
 
 
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NOTE 4 - INVENTORIES
 
Inventories at December 31, 2010 and 2009 are summarized as follows (in thousands):

   
2010
   
2009
 
 
           
     Parts and supplies
  $ 5,536     $ 2,680  
    Work in progress
    2,047       1,200  
    Finished goods-SUVs
    5,503       5,532  
      13,086       9,412  
     Less - inventory reserve
    (258 )     (363 )
    $ 12,828     $ 9,049  

Changes in Jonway’s inventory reserve during the years ended December 31, 2010 and 2009 are as follows (in thousands):


   
2010
   
2009
 
Balance as of January 1,
  $ 363     $ 328  
Provision for slow moving inventories
    48       39  
Write-off of slow moving inventories
    (153 )     (4 )
Balance as of December 31,
  $ 258     $ 363  
 
NOTE 5 - PROPERTY AND EQUIPMENT
 
Property and equipment at December 31, 2010 and 2009 are summarized as follows (in thousands):
 
   
2010
   
2009
 
Land
  $ 4,404     $ 1,232  
Buildings and improvements
    16,823       15,197  
Machinery and equipment
    33,390       30,099  
Computer equipment and software
    210       132  
Office furniture and equipment
    2       2  
Vehicles
    337       284  
      55,166       46,946  
Less - accumulated depreciation and amortization
    (9,605 )     (5,764 )
 
               
    $ 45,561     $ 41,182  

As at December 31, 2009, part of Jonway’s buildings were constructed on the lands totaling 62,853 square meters, of which the land use rights were under the title of three related companies owned by Wang Family, Sanmen Li Te Rotating Machinery Co., Ltd., Sanmen Jonway Motorcycle Spare Parts Co., Ltd. and Sanmen Shenke Motorcycle Co., Ltd. These lands were occupied by Jonway for free before the land use rights were transferred to Jonway upon
 
 
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the capital injection on January 14, 2010. As at December 31, 2010, Jonway was in the process of obtaining certificates of property for all its buildings. Depreciation and amortization expense for the years ended December 31, 2010 and 2009 was $4,583,068 and $3,136,302, respectively.

NOTE 6 - ACCRUED LIABILITIES
 
Accrued liabilities at December 31, 2010 and 2009 consisted of the following (in thousands):
 
   
2010
   
2009
 
Current liabilities:
           
Accrued contractual fees due to UFO
  $ 1,274     $ 842  
Accrued sales rebate
    2,561       1,322  
Accrued employee bonus
    799       598  
Customer deposits
    652       480  
Warrant liabilities
    247       40  
Accrued transportation fee
    742       508  
    $ 6,275     $ 3,790  
                 
Non-current liabilities:
               
Warrant liabilities
  $ 343     $ 207  
 
NOTE 7 - INCOME TAXES
 
Jonway has not provided for any enterprise income taxes since it has no taxable income in each year.
 
The tax effect of temporary differences that gave rise to significant portions of the deferred tax assets at December 31, 2010 and 2009 is presented below (in thousand):

   
2010
   
2009
 
Deferred tax assets:
           
Property and equipment, due to differences in depreciation
  $ 127     $ 72  
Inventories, due to impairment
    65       91  
Accrued liabilities
    147       62  
 
               
Total deferred tax assets, gross
    339       225  
Valuation allowance
    -       -  
Deferred tax assets, net of valuation allowance
  $ 339     $ 225  
 
No deferred tax assets associated with tax losses were recognized during the years as it is uncertain Jonway has adequate taxable profits in the foreseeable future.
 
NOTE 8 – COMMITMENTS
 
Operating lease commitments

The future aggregate minimum lease payments due under non-cancelable operating leases are as follows (in thousands):
 
   
2010
   
2009
 
Less than 1 year:
  $ 2     $ 3  
 
 
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NOTE 9 - SHAREHOLDERS’ EQUITY
Registered Capital

On January 14, 2010, net assets of Sanmen Li Te Rotating Machinery Co., Ltd., Sanmen Jonway Motorcycle Spare Parts Co., Ltd. and Sanmen Shenke Motorcycle Co., Ltd., were injected to the registered capital of Jonway. Jonway’s registered capital increased from USD 1,230,462 to USD 1,817,248. The increase in paid-in capital was contributed by Jonway Group and two individual shareholders, Wang Gang and Wang Xiao Ying, respectively.

Upon approval by the Shareholders Meeting on May 24, 2010, Jonway increased its registered capital from USD 1,817,248 to USD 11,479,791. The additional capital was contributed by Jonway Group by converting Jonway’s payable of USD 9,188,200 due to Jonway Group into capital, and by Wang Gang and Wang Xiao Ying in the form of cash contribution in the amounts of USD 342,581 and USD 131,762, respectively.

On July 8, 2010, ZAP entered into an agreement with Jonway Group for acquisition of 51% equity interests of Jonway. This transaction was approved by Department of Commerce of Zhejiang Province on September 3, 2010. Jonway obtained the Certificate of Approval for Enterprises with Foreign Investment on September 3, 2010 and the updated business license on October 8, 2010. As at January 21, 2011, ZAP completed the final payment for 51% equity acquisition of Jonway.

Additional Paid-in Capital

According to a resolution of the Shareholders Meeting dated May 31, 2010, Jonway’s payables due to Jonway Group of USD 37,947,442 were converted into capital contribution from Jonway Group, which was recorded as additional paid-in capital as at December 31, 2010.

According to the resolution, another two individual shareholders, Wang Gang and Wang Xiao Ying, also made cash contributions of USD 3,373,106 and USD 843,276 to Jonway. Jonway received the cash contributions from Wang Gang and Wang Xiao Ying in October 2010, which was recorded as additional paid-in capital as at December 31, 2010.

NOTE 10 - RELATED PARTY

Contractual arrangements with Zhejiang UFO Automobile Manufacturing Co., Ltd.

Based on a tripartite contract among Zhejiang UFO Automobile Manufacturing Co., Ltd. (“Zhejiang UFO”), Jonway Group and Jonway, Zhejiang UFO authorises Jonway to operate the Sanmen branch of Zhejiang UFO (“UFO Sanmen Branch”) for assembling and sale of the UFO branded SUVs for a period of 10 years starting from January 1, 2006.

According to  the contract, Jonway shall pay Zhejiang UFO a fixed license fee of USD 147,999 per annum plus a variable fee (collectively, the “contractual fee”) which is calculated based on the number of SUVs that UFO Sanmen Branch assembles every year, at the following rates:
 
The first 3,000 vehicles
USD 44 per vehicle
Vehicles from 3,001 to 5,000
USD 30 per vehicle
Vehicles over 5,000
USD 22 per vehicle

As at December 31, 2010 and 2009, Jonway had total contractual fee of USD 1,273,506 and USD 841,818 due to Zhejiang UFO, which Jonway recorded as accrued liabilities in its balance sheet.

Zhejiang UFO is considered as a related party as Wang Family has certain equity interests in Zhejiang UFO.
 
 
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Purchases of raw materials

Jonway purchased raw materials from Jonway Group. The purchase of raw materials was USD 1,468,741 in 2010 and USD 451,367 in 2009.

Plant and equipments lease

According to the contractual arrangement with Zhejiang UFO, Jonway rent a workshop and equipments to Zhejiang UFO from 2006. The lease income was USD 147,999 in both 2010 and 2009.

Borrowings from Jonway Group and Repayment to Jonway Group

Jonway borrowed USD 6 million from Jonway Group and repaid USD 7 million in 2010, and borrowed USD 8 million from Jonway Group and repaid USD 5 million in 2009.

NOTE 12 – LITIGATION

We know of no pending or threatened legal proceeding to which we are or will be a party which, if successful, might result in a material adverse change in our business, properties or financial condition. 

NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
 
A summary of non-cash investing and financing information is as follows (in thousands):

   
Year ended December 31
 
   
2010
   
2009
 
Conversion of payables into paid-in capital
  $ 47,135     $ -  
                 
Capital injection by net assets of related parties
  $ 587     $ -  

 
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