Unassociated Document
Heller Ehrman draft dated May 13, 2008

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
or

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
 
Commission file number: 000-33123
 
China Automotive Systems, Inc.
(Exact name of registrant as specified in its charter)

Delaware
33-0885775
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification number)
 
No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District,
Jing Zhou City, Hubei Province, People’s Republic of China
(Address of principal executive offices)
 
 
Issuer’s telephone number: (86) 716- 832- 9196
Issuer’s fax number: (86) 716-832-9298
 
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No o 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

As of March 31, 2008, the Company had 23,959,702 shares of common stock issued and outstanding.
 

 
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX

   
Page
 
       
Part I — Financial Information
     
   
 
 
Item 1. Financial Statements
       
Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2008 and 2007
   
3
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2008 and 2007
   
4
 
Condensed Consolidated Balance Sheets at March 31, 2008 (Unaudited) and December 31, 2007
   
5
 
Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2008 (Unaudited) and December 31, 2007
   
6
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2008 and 2007
   
7
 
Notes to Condensed Consolidated Financial Statements (Unaudited) for the Three Months Ended March 31, 2008 and 2007
   
9
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
26
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 
   
37
 
Item 4. Controls and Procedures
   
37
 
         
Part II — Other Information
       
Item 1. Legal Proceedings
   
38
 
Item 1A. Risk Factors
   
38
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   
42
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
   
42
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
   
42
 
ITEM 5. OTHER INFORMATION.
   
42
 
Item 6. Exhibits    
   
42
 
Signature
   
45
 

2


PART 1 FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
China Automotive Systems, Inc.
Condensed Consolidated Statements of Operations (Unaudited)

   
Three Months Ended March 31,
 
   
2008
 
2007
 
Net product sales, including $2,051,082 and $902,584 to related parties at March 31, 2008 and 2007
 
$
41,467,043
 
$
28,383,392
 
Cost of product sold, including $1,952,390 and $1,051,480 purchased from related parties at March 31, 2008 and 2007
   
29,254,673
   
19,191,486
 
Gross profit
   
12,212,370
   
9,191,906
 
Add: Gain on other sales
   
134,190
   
112,094
 
Less: Operating expenses-
             
Selling expenses
   
2,475,341
   
1,593,646
 
General and administrative expenses
   
1,616,150
   
1,509,027
 
R&D expenses
   
175,678
   
119,465
 
Depreciation and amortization
   
1,294,727
   
893,251
 
Total Operating expenses
   
5,561,896
   
4,115,389
 
Income from operations
   
6,784,664
   
5,188,611
 
Add: Other income, net (note 19)
   
199,459
   
38,462
 
Financial income (expenses) net (note 20)
   
20,693
   
(394,997
)
Income before income taxes
   
7,004,816
   
4,832,076
 
Less: Income taxes (note 21)
   
824,395
   
1,294,080
 
Income before minority interests
   
6,180,421
   
3,537,996
 
Less: Minority interests
   
1,750,247
   
1,894,895
 
Net income
 
$
4,430,174
 
$
1,643,101
 
Net income per common share-
             
Basic and diluted (note 2)
 
$
0.18
 
$
0.07
 
               
Weighted average number of common shares outstanding –
             
Basic
   
23,959,702
   
23,938,078
 
Diluted
   
25,936,500
   
23,949,809
 

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

3

 
China Automotive Systems, Inc.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)

   
Three Months Ended March 31,
 
   
2008
 
2007
 
Net income
 
$
4,430,174
 
$
1,643,101
 
Other comprehensive income:
             
Foreign currency translation gain
   
2,383,886
   
-
 
Comprehensive income
 
$
6,814,060
 
$
1,643,101
 

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

4


China Automotive Systems, Inc.
Condensed Consolidated Balance Sheets

   
March 31, 2008
 
December 31, 2007
 
   
(Unaudited)
     
ASSETS
           
Current assets:
             
Cash and cash equivalents
 
$
49,962,022
 
$
19,487,159
 
Pledged cash deposits (note 3)
   
5,428,261
   
4,645,644
 
Accounts and notes receivable, net, including $2,943,990 and $1,869,480 from related parties at March 31, 2008 and December 31, 2007, net of an allowance for doubtful accounts of $3,258,368 and $3,827,838 at March 31, 2008 and December 31, 2007 (note 4)
   
96,139,674
   
82,022,643
 
Advance payments and other, including $594,491 and $55,323 to related parties at March 31, 2008 and December 31, 2007
   
2,347,585
   
922,578
 
Inventories (note 6)
   
22,676,585
   
20,193,286
 
Total current assets
 
$
176,554,127
 
$
127,271,310
 
Long-term Assets:
             
Property, plant and equipment, net (note 7)
 
$
47,087,219
 
$
46,585,041
 
Intangible assets, net (note 8)
   
653,871
   
589,713
 
Other receivables, net, including $770,156 and $638,826 from related parties at March 31, 2008 and December 31, 2007, net of an allowance for doubtful accounts of $769,224 and $652,484 at March 31, 2008 and December 31, 2007 (note 5)
   
1,260,335
   
888,697
 
Advance payments for property, plant and equipment, including $2,329,206 and $1,560,378 to related parties at March 31, 2008 and December 31, 2007.
   
8,630,991
   
6,260,443
 
Long-term investments
   
76,934
   
73,973
 
Deferred income tax assets
   
1,477,495
   
1,315,510
 
Total assets
 
$
235,740,972
 
$
182,984,687
 
LIABILITIES AND STOCKHOLDERS' EQUITY
             
Current liabilities:
             
Bank loans (note 9)
 
$
13,819,632
 
$
13,972,603
 
Accounts and notes payable, including $1,578,981 and $1,134,817 to related parties at March 31, 2008 and December 31, 2007 (note 10)
   
54,762,108
   
47,530,383
 
Customer deposits
   
121,406
   
135,627
 
Accrued payroll and related costs
   
2,677,769
   
2,664,464
 
Accrued expenses and other payables, including $33,374,697 and nil from related parties at March 31, 2008 and December 31, 2007 (note 11)
   
48,189,248
   
14,938,055
 
Accrued pension costs (note 12)
   
4,021,656
   
3,622,729
 
Taxes payable (note 13)
   
9,661,988
   
9,080,493
 
Amounts due to shareholders/directors (note 14)
   
253,573
   
304,601
 
Total current liabilities
 
$
133,507,380
 
$
92,248,955
 
Long-term liabilities:
             
Advances payable (note 15)
   
347,995
   
334,600
 
Derivative liabilities
   
3,972,068
   
 
Convertible notes payable, net (note 16)
   
30,722,374
   
 
Total liabilities
 
$
168,549,817
 
$
92,583,555
 
Minority interests (note 17)
 
$
18,650,147
 
$
23,166,270
 
Related Party Translations (note 23)
             
Commitments and contingencies (note 24)
             
Stockholders' equity:
             
Preferred stock, $0.0001 par value - Authorized - 20,000,000 shares Issued and outstanding – None
 
$
 
$
 
Common stock, $0.0001 par value - Authorized - 80,000,000
             
Shares Issued and Outstanding - 23,959,702 shares and 23,959,702 shares at March 31, 2008 and December 31, 2007, respectively
   
2,396
   
2,396
 
Additional paid-in capital (note 18)
   
4,618,037
   
30,125,951
 
Retained earnings-
             
Appropriated
   
7,525,777
   
7,525,777
 
Unappropriated
   
28,021,449
   
23,591,275
 
Accumulated other comprehensive income
   
8,373,349
   
5,989,463
 
Total stockholders' equity
 
$
48,541,008
 
$
67,234,862
 
Total liabilities and stockholders' equity
 
$
235,740,972
 
$
182,984,687
 

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

5


China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Period Ended March 31, 2008 (unaudited) and 2007
 
   
Common Stock
 
Additional Paid-in
 
Retained Earnings
 
Accumulated Other Comprehensive
     
   
Shares
 
Par value
 
Capital
 
Appropriated
 
Unappropriated
 
Income
 
Total
 
Balance at December 31, 2006
   
23,851,581
 
$
2,385
 
$
28,651,959
 
$
6,209,909
 
$
16,047,237
 
$
2,468,800
 
$
53,380,290
 
Foreign currency translation gain
   
   
   
   
   
   
3,520,663
   
3,520,663
 
Sale of common stock
   
108,121
   
11
   
1,199,989
   
   
   
   
1,200,000
 
Cash paid for retaining fee, commissions and placement agent fee in connection with offering
   
   
   
(54,500
)
 
   
   
   
(54,500
)
Increase in connection with minority shareholders’ abandonment of all its right and interest in Joint-venture
   
   
   
174,828
   
   
   
   
174,828
 
Issuance of stock options to independent directors
   
   
   
153,675
                     
153,675
 
Net income for the year ended December 31, 2007
   
   
   
   
   
8,859,906
   
   
8,859,906
 
Appropriation of retained earnings
   
   
   
   
1,315,868
   
(1,315,868
)
 
   
 
Balance at December 31, 2007
   
23,959,702
 
$
2,396
 
$
30,125,951
 
$
7,525,777
 
$
23,591,275
 
$
5,989,463
 
$
67,234,862
 
Foreign currency translation gain
   
   
   
   
   
   
2,383,886
   
2,383,886
 
Difference between the book value of and Consideration paid for the 35.5% equity interest of Henglong
   
   
   
(25,912,921
)
 
   
   
   
(25,912,921
)
Net income for the period ended March 31, 2008
   
   
   
   
   
4,430,174
   
   
4,430,174
 
Issuance of warrants to purchase common stock
   
   
   
405,007
   
   
   
   
405,007
 
Balance at March 31, 2008 (unaudited)
   
23,959,702
 
$
2,396
 
$
4,618,037
 
$
7,525,777
 
$
28,021,449
 
$
8,373,349
 
$
48,541,008
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

 
China Automotive Systems, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)

   
Three Months Ended March 31,
 
   
2008
 
2007
 
Cash flows from operating activities:
             
Net income
 
$
4,430,174
 
$
1,643,101
 
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
             
Minority interests
   
1,750,247
   
1,894,895
 
Depreciation and amortization
   
2,315,922
   
1,827,792
 
Allowance for doubtful accounts (Recovered)
   
(632,095
)
 
(78,495
)
Deferred income taxes assets
   
(109,320
)
 
-
 
Amortization for discount of convertible note payable
   
99,449
   
-
 
Other operating adjustments
   
(16,769
)
 
8,972
 
Changes in operating assets and liabilities:
             
(Increase) decrease in:
             
Pledged deposits
   
(596,632
)
 
499,991
 
Accounts and notes receivable
   
(10,110,607
)
 
(3,365,144
)
Advance payments and other
   
(1,388,073
)
 
(83,843
)
Inventories
   
(1,674,877
)
 
(2,587,186
)
Accounts and notes payable
   
5,328,884
   
894,392
 
Customer deposits
   
(19,651
)
 
(11,254
)
Accrued payroll and related costs
   
(93,253
)
 
104,449
 
Accrued expenses and other payables
   
(29,553
)
 
(151,316
)
Accrued pension costs
   
253,894
   
9,266
 
Taxes payable
   
218,004
   
1,199,976
 
Net cash provided by (used in) operating activities
 
$
(274,256
)
$
1,805,596
 
Cash flows from investing activities:
             
(Increase) decrease in other receivables
   
(427,014
)
 
(264,895
)
Cash received from equipment sales
   
-
   
66,737
 
Cash paid to acquire property, plant and equipment
   
(2,999,504
)
 
(2,533,099
)
Cash paid to acquire intangible assets
   
(99,672
)
 
(12,404
)
Net cash (used in) investing activities
 
$
(3,526,190
)
$
(2,743,661
)
Cash flows from financing activities:
             
(Decrease) in proceeds from bank loans
   
(712,353
)
 
(7,051,282
)
Dividends paid to the minority interest holders of Joint-venture companies
   
(712,352
)
 
(3,172,571
)
(Decrease) in amounts due to shareholders/directors
   
(70,294
)
 
(40,000
)
Proceeds from issuance of common stock
   
-
   
1,145,500
 
Proceeds from issuance of convertible note payable
   
35,000,000
   
-
 
Net cash provided by (used in) financing activities
 
$
33,505,001
 
$
(9,118,353
)
Cash and cash equivalents effected by foreign currency
 
$
770,308
 
$
-
 
Net increase (decrease) in cash and cash equivalents
   
30,474,863
   
(10,056,418
)
Cash and cash equivalents at beginning of period
   
19,487,159
   
27,418,500
 
Cash and cash equivalents at end of period
 
$
49,962,022
 
$
17,362,082
 

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

7


China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
   
Three Months Ended March 31,
 
   
2008
 
2007
 
Cash paid for interest
 
$
257,083
 
$
192,557
 
Cash paid for income taxes
 
$
547,541
 
$
159,059
 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
   
Three Months Ended March 31,
 
   
2008
 
2007
 
           
Transfer and assign a35.5% equity interest in Henglong by minority interest holders ofJoint-venture companies
  $ (6,177,079 )
$
 
Differencebetween the bookvalue ofand Consideration paid for the 35.5% equity interest of Henglong
    (25,912,921 )  
 
Liabilities in connection withacquisition of 35.5% Henglong equity
    32,090,000    
 
Issuance of a warrant to purchase common stock
    405,007    
 
Derivative liabilities
    3,972,068    
 
Additional warranty of common stock and derivative liabilities for issuance of Convertible Debt are considered as discount of Convertible Debt.
    (4,377,075 )  
 
Decreasein minority interests asa result of minority shareholderswithdrawalfromJoint-venture.
   
   
(2,830,545
)
Withdrawal of invested intangible assets byminority shareholder of Joint-venture.
   
   
2,600,204
 
Increasein equity in connection with minority shareholder’swithdrawal from Joint-venmre.
  $
 
$
230,341
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

 
China Automotive Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 2008 and 2007

1. Organization and business
 
China Automotive Systems, Inc., “China Automotive”, was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries and the subsidiaries’ interests in the Sino-foreign joint ventures described below, is referred to herein as the “Company”. The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described below.
 
Great Genesis Holdings Limited, a company incorporated on January 3, 2003 under The Companies Ordinance in Hong Kong as a limited liability company, “Great Genesis”, is a wholly-owned subsidiary of the Company.
 
Henglong USA Corporation, “HLUSA”, which was incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after sales service and research and development support accordingly.
 
The Company owns the following aggregate net interests in seven Sino-foreign joint ventures organized in the PRC as of March 31, 2008 and 2007.
 
   
Percentage Interest
 
Name of Entity
 
March 31, 2008
 
March 31, 2007
 
Shashi Jiulong Power Steering Gears Co., Ltd., ("Jiulong")
   
81.00
%   
 
81.00
%
Jingzhou Henglong Automotive Parts Co., Ltd., ("Henglong")
   
80.00
%
 
44.50
%
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., (“Shenyang")
   
70.00
%
 
70.00
%
Zhejiang Henglong & Vie Pump-Manu Co., Ltd., ("Zhejiang")
   
51.00
%
 
51.00
%
Universal Sensor Application Inc., (“USAI”)
   
75.90
%
 
85.71
%
Wuhan Jielong Electric Power Steering Co., Ltd., (“Jielong”)
   
85.00
%
 
85.00
%
Wuhu HengLong Automotive Steering System Co., Ltd., (“Wuhu”)
   
77.33
%
 
77.33
%
Jingzhou Hengsheng Automotive System Co., Ltd, (“Hengsheng”)
   
100.00
%
 
-
 
 
Jiulong was established in 1993 and mainly engaged in the production of integral power steering gears for heavy-duty vehicles.
 
Henglong was established in 1997 and mainly engaged in the production of rack and pinion power steering gear for cars and light duty vehicles.
 
On March 31, 2008, the Company’s wholly-owned subsidiary, Great Genesis, and Wiselink, both controlled by Hanlin Chen and his family, entered into an equity transfer agreement (the “Henglong Agreement”), pursuant to which Wiselink agreed to transfer and assign its 35.5% equity interest in Jingzhou Henglong, one of the Company’s currently consolidated subsidiaries, to Great Genesis for a total consideration of US$32,090,000. The Company now holds an 80% equity interest in Jingzhou Henglong.
 
Under the terms of the Henglong Agreement, Great Genesis is deemed to be the owner of Jingzhou Henglong commencing from January 1, 2008. The Henglong Acquisition is considered as a business combination of companies under common control and is being accounted for in a manner of pooling of interests.
 
Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles. 
 
Zhejiang was established in 2002 to focus on power steering pumps.
 
USAI was established in 2005 and mainly engaged in production and sales of sensor modulars.
 
Jielong was established in 2006 and mainly engaged in production and sales of electric power steering, “EPS”.
 
9

 
Wuhu was established in 2006 and mainly engaged in production and sales of automobile steering systems.
 
Hengsheng was established in 2007 and mainly engaged in production and sales of automobile steering systems.
 
2. Basis of Presentation and Significant Accounting Policies
 
Basis of Presentation - For the three months ended March 31, 2008 and 2007, the accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The subsidiaries include eight Sino-foreign Joint-ventures mentioned in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.
 
Foreign Currencies - The Company maintains its books and records in Renminbi, “RMB”, the currency of the PRC, its functional currency. Foreign currency transactions in RMB are reflected using the temporal method. Under this method, all monetary items are translated into the functional currency at the rate of exchange prevailing at the balance sheet date. Non-monetary items are translated at historical rates. Income and expenses are translated at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period.
 
In translating the financial statements of the Company from its functional currency into its reporting currency in United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in stockholders’ equity.
 
Income Per Share - Basic income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated based on the treasury stock method, assuming the issuance of common shares, if dilutive, resulting from the exercise of warrants.
 
Actual weighted average shares outstanding used in calculating basic and diluted income per share were:
 
   
Three Months Ended March 31,
 
   
2008
 
2007
 
Numerator:
             
Net income
 
$
4,430,174
 
$
1,643,101
 
Add: interest expenses of convertible debt payable
   
131,250
   
-
 
Add: Amortization for discount of convertible note payable
   
99,449
   
-
 
   
$
4,660,873
 
$
1,643,101
 
Denominator:
             
Weighted average shares outstanding
   
23,959,702
   
23,938,078
 
Effect of dilutive securities
   
1,976,798
   
11,731
 
     
25,936,500
     
23,949,809
 
Net income per common share- diluted
 
$
0.18
 
$
0.07
 
 
During the three months ended March 31 2008, the options and warrants outstanding have not been included in the weighted average shares outstanding for the computation of diluted income per share, because such inclusion would have had an anti-dilutive effect. The effect of Convertible Debt has been considered.
 
Stock-Based Compensation - The Company may periodically issue shares of common stock for services rendered or for financing costs. Such shares will be valued based on the market price on the transaction date. The Company may periodically issue stock options to employees and stock options or warrants to non-employees in non-capital raising transactions for services and for financing costs.
 
In July 2004, the Company adopted a stock incentive plan. The maximum number of common shares for issuance under this plan is 2,200,000 with a period of 10 years. The stock incentive plan provides for the issuance, to the Company’s officers, directors, management and employees, of options to purchase shares of the Company’s common stock. As of March 31, 2008, the Company has issued 90,000 stock options under this plan and there remain 2,110,000 stocks issuable in the future.
 
10

 
The Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Accounting for Stock-Based Compensation”, which establishes a fair value method of accounting for stock-based compensation plans. In accordance with SFAS No. 123R, the cost of stock options and warrants issued to employees and non-employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive benefit, which is generally the vesting period.
 
Comprehensive Income - The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”). SFAS No. 130 establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. SFAS No. 130 defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.
 
Estimation -The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Financial instruments - Derivative financial instruments, as defined in Financial Accounting Standard No. 133, Accounting for Derivative Financial Instruments and Hedging Activities (FAS 133), consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.
 
The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as debt financing arrangements that embody features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by FAS 133, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.
 
Registration Payment Arrangements - The Company has entered into registration payment arrangements with certain investors that provide for the payment of damages for failures to register common shares underlying the investor’s financial instruments. FASB Staff Position 00-19-2, Accounting for Registration Payment Arrangements, provides for the exclusion of registration payments, such as the liquidated damages, from the consideration of classification of financial instruments. Rather, such registration payments would be accounted for pursuant to Financial Accounting Standard No. 5 Accounting for Contingencies, which is our current accounting practice. That is, all registration payments will require recognition when they are both probable and reasonably estimable. We do not currently believe that damages are probable.
 
Fair Value Measurements: Effective January 1, 2008, we adopted the provisions of FAS 157, Fair Value Measurements, except as it applies to those nonfinancial assets and nonfinancial liabilities as noted in proposed FSP FAS 157-b. The partial adoption of FAS 157 did not have a material impact on our consolidated financial position, results of operations or cash flows.. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, Effective Date of FASB Statement No.157, which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
 
Comments - The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management of the Company, contain all adjustments, which include normal recurring adjustments, necessary to present fairly the financial position, the results of operations and cash flows for the three months ended March 31, 2008 and 2007.
 
The consolidated balance sheet as of December 31, 2007 is derived from the Company’s audited financial statements.
 
Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company’s management believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s 2007 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.
 
The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2008.
 
3. Pledged cash deposits 

The Company’s pledged cash deposits at March 31, 2008 (unaudited) and December 31,2007 are summarized as follows:

   
March 31, 2008
 
December 31, 2007
 
Pledged as guarantee for the Company's notes payable
 
$
5,428,261
    $
4,645,644
 
Balance at the end of the period
 
$
5,428,261
 
$
4,645,644
 
 
4. Accounts and notes receivable
 
The Company’s accounts receivable at March 31, 2008 (unaudited) and December 31, 2007 are summarized as follows:
 
   
March 31, 2008
 
December 31, 2007
 
Accounts receivable
 
$
57,939,665
 
$
49,605,411
 
Notes receivable
   
41,458,377
   
36,245,070
 
Less: allowance for doubtful accounts
   
(3,258,368
)   
 
(3,827,838
)
Balance at the end of the period
 
$
96,139,674
 
$
82,022,643
 
 
11

 
Notes receivable represent accounts receivable in the form of bills of exchange whose acceptances and settlements are handled by banks.
 
The activity in the Company’s allowance for doubtful accounts during the three months ended March 31, 2008 (unaudited) and the year ended December 31, 2007 are summarized as follows:
 
   
March 31, 2008
 
December 31, 2007
 
Balance at beginning of period
 
$
3,827,838
 
$
4,086,218
 
Less: amounts recovered during the period
   
(722,714
)   
 
(532,392
)
Add: foreign currency translation
   
153,244
   
274,012
 
Balance at the end of the period
 
$
3,258,368
 
$
3,827,838
 
 
5. Other receivables
 
The Company’s other receivables at March 31, 2008 (unaudited) and December 31, 2007 are summarized as follows:
 
   
March 31, 2008
 
December 31, 2007
 
Other receivables
 
$
2,029,560
 
$
1,541,181
 
Less: allowance for doubtful accounts
   
(769,225
)   
 
(652,484
)
Balance at the end of the period
 
$
1,260,335
 
$
888,697
 
 
Other receivables consist of amounts advanced to both related and unrelated parties, primarily as unsecured demand loans, with no stated interest rate or due date.
 
The activity in the Company’s allowance for doubtful accounts of other receivable during the three months ended March 31, 2008 (unaudited) and the year ended December 31, 2007 are summarized as follows:
 
   
March 31, 2008
 
December 31, 2007
 
Balance at beginning of the period
 
$
652,484
 
$
898,203
 
Add: amounts provided (recovered) during the period
   
90,619
   
(297,870
)
Add: foreign currency translation
   
26,122
   
52,151
 
Balance at the end of the period
 
$
769,225
   
$
652,484
 
 
12

 
6. Inventories
 
The Company’s inventories at March 31, 2008 (Unaudited) and December 31, 2007 consisted of the following:
 
   
March 31, 2008
 
December 31, 2007
 
Raw materials
 
$
8,072,841
 
$
7,904,167
 
Work in process
   
5,084,035
   
4,181,248
 
Finished goods
   
10,932,819
   
9,586,709
 
     
24,089,695
   
21,672,124
 
Less: provision for loss
   
(1,413,110
)   
 
(1,478,838
)
Balance at the end of the period
 
$
22,676,585
 
$
20,193,286
 

7. Property, plant and equipment

The Company’s property, plant and equipment at March 31, 2008 (unaudited) and December 31, 2007 are summarized as follows:

   
March 31, 2008
 
December 31, 2007
 
Land use rights and buildings
 
$
24,197,093
 
$
23,101,634
 
Machinery and equipment
   
45,371,488
   
42,512,900
 
Electronic equipment
   
3,798,820
   
3,480,008
 
Motor vehicles
   
2,458,754
   
2,427,375
 
Construction in progress
   
899,502
   
1,542,865
 
     
76,725,657
   
73,064,782
 
Less: Accumulated depreciation
   
(29,638,438
)   
 
(26,479,741
)
Balance at the end of the period
 
$
47,087,219
 
$
46,585,041
 
 
Depreciation charge for the three months ended March 31, 2008 and the year ended December 31, 2007 are $2,256,799 and $7,079,313 respectively.
 
8. Intangible assets
 
The activities in the Company’s intangible asset account at March 31, 2008 (unaudited) and December 31, 2007 are summarized as follows:
 
   
March 31, 2008
 
December 31, 2007
 
Balance at beginning of period
 
$
589,713
 
$
3,140,548
 
Add: additions during the period–
             
Patent technology
   
   
144,390
 
Management software license
   
99,672
   
143,356
 
Less: decrease during the period
             
Patent technology*
   
-
   
(2,600,204
)
Foreign currency translation
   
23,609
   
31,856
 
     
712,994
   
859,946
 
Less: Amortization at end of the period
   
(59,123
)   
 
(270,233
)
Balance at the end of the period
 
$
653,871
 
$
589,713
 

13

 
*When USAI was established in 2005, Sensor contributed $3,000,000 as capital, being the fair market value of the intangible assets, namely the sensor product and the technology for sensor production, as well as the Joint-venture’s technical personnel training. As of March 20, 2007 Sensor withdrew from USAI, abandoned all its right and interest of the Joint-venture, and repossessed the rights to the intangible assets at the carrying value of the intangible assets was $2,600,204.
 
9. Bank loans
 
At March 31, 2008, the Company, through its Sino-foreign joint ventures, had outstanding fixed-rate short-term bank loans of $13,819,632, with weighted average interest rate at 6.95% per annum. These loans are secured with some of the property and equipment of the Company, and are repayable with one year.
 
At December 31, 2007, the Company, through its Sino-foreign joint ventures, had outstanding fixed-rate short-term bank loans of $13,972,603, with weighted average interest rate at 6.40% per annum. These loans are secured with some of the property and equipment of the Company and are repayable within one year.
 
10. Accounts and notes payable

The Company’s accounts and notes payable at March 31, 2008 (unaudited) and December 31, 2007 are summarized as follows:
 
   
March 31, 2008
 
December 31, 2007
 
Accounts payable
 
$
38,245,926
 
$
32,511,812
 
Notes payable
   
16,516,182
     
15,018,571
 
Balance at the end of the period
 
$
54,762,108
 
$
47,530,383
 
 
Notes payable represent accounts payable in the form of bills of exchange whose acceptances and settlements are handled by banks.
 
The Company has pledged cash deposits, notes receivable and certain property plant and machinery to secure trade financing granted by banks.
 
11. Accrued expenses and other payables

The Company’s accrued expenses and other payables at March 31, 2008 (unaudited) and December 31, 2007 are summarized as follows:
 
   
March 31, 2008
 
December 31, 2007
 
Accrued expenses
 
$
1,806,944
   
$
1,957,146
 
Other payables
   
1,326,438
   
1,340,442
 
Warranty reserves*
   
5,671,440
   
4,919,491
 
Dividend payable to minority interest shareholders of Joint-ventures
   
7,294,426
   
6,720,976
 
Payable for 35.5% Henglong equity acquisition**
   
32,090,000
   
-
 
Balance at the end of the period
 
$
48,189,248
 
$
14,938,055
 
 
*The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties were based on, among other things, historical experience, product changes, material expenses, service and transportation expenses arising from the manufactured product. Estimates will be adjusted on the basis of actual claims and circumstances.
 
14

 
For the three months ended March 31, 2008 (unaudited) and the year ended December 31, 2007, the warranties activities were as follows:
 
   
March 31, 2008
 
December 31, 2007
 
Balance at the beginning of period
 
$
4,919,491
 
$
2,954,326
 
Additions during the period- 
   
1,288,844
   
5,228,556
 
Settlement within period, by cash or actual material
   
(733,843
)   
 
(3,529,875
)
Foreign currency translation
   
196,948
   
266,484
 
Balance at end of period
 
$
5,671,440
 
$
4,919,491
 
 
The Company has recorded $5,671,440 and $ 4,919,491 product warranty reserves for the three months ended March 31, 2008 (unaudited) and the year ended December 31, 2007, which were included in the accrued expenses and other payables in the accompanying unaudited consolidated financial statements.
 
**On March 31, 2008, Wiselink Holdings Limited, “Wiselink”, Great Genesis Holdings Limited, “Great Genesis”, a wholly-owned subsidiary of China Automotive Systems, Inc., “the Company” and other parties entered into an equity transfer transaction documented by an Equity Transfer Agreement, the “Henglong Agreement”, pursuant to which Wiselink agreed to transfer and assign a 35.5% equity interest in Jingzhou Henglong Automotive Parts Co. Ltd., “Jingzhou Henglong,” to Great Genesis for a total consideration of US$32,090,000, the “Consideration”. As a result of the transaction, the Company now holds a 80% equity interest in Jingzhou Henglong.
 
Under the terms of the Henglong Agreement, the Consideration is to be paid as follows: US$10,000,000 cash was paid by Great Genesis to Wiselink on April 30, 2008, and the balance of the purchase price, US$22,090,000, is to be paid, assuming shareholder approval of the full stock issuance as noted below, by issuance of 3,023,542 shares of common stock of the Company, valued at US$7.3060 per share determined as of January 22, 2008, in its capacity as the 100% parent company of Great Genesis.
 
The issuance of 1,170,000 shares of the 3,023,542 shares took place on April 22, 2008. The balance of the shares will be issued upon shareholder approval of the issuance as contemplated by the Henglong Agreement and the rules of the NASDAQ Stock Market. In the event that shareholder approval is not obtained, Great Genesis will issue Wiselink a subordinated non-interest bearing promissory note payable in three years in a principal amount based on 1,853,542 shares multiplied by the volume weighted average price per share of the Company’s common share calculated with respect to the twenty (20) days prior to the one year anniversary of the Henglong Agreement, but in no event greater than US$13,541,978.
 
12. Accrued pension costs
 
Since the Company’s operations are all located in China, all the employees are located in China. The Company records pension costs and various employment benefits in accordance with the relevant Chinese social security laws, which is substantially based on a total of 31% of base salary as required by local governments. Base salary levels are the average salary determined by the local governments.
 
The activities in the Company’s pension account during the three months ended March 31, 2008 (unaudited) and the year ended December 31, 2007 are summarized as follows:
 
   
March 31, 2008
 
December 31, 2007
 
Balance at beginning of the period
 
$
3,622,729
 
$
3,266,867
 
Amounts provided during the period
   
497,150
   
1,286,566
 
Settlement during the period
   
(243,256
)   
 
(1,154,462
)
Foreign currency translation
   
145,033
   
223,758
 
Balance at end of period
 
$
4,021,656
 
$
3,622,729
 
 
15

 
13. Taxes payable

The Company’s taxes payable at March 31, 2008 (unaudited) and December 31, 2007 are summarized as follows:

   
March 31, 2008
 
December 31, 2007
 
Value-added tax payable
 
$
7,259,552
 
$
7,052,682
 
Income tax payable
   
2,340,459
   
1,883,185
 
Other tax payable
   
61,977
     
144,626
 
Balance at end of the period
 
$
9,661,988
 
$
9,080,493
 

14. Amounts due to shareholders/ directors

The activities in the amounts due to shareholders/directors at March 31, 2008 (unaudited) and December 31, 2007 are summarized as follows:

   
March 31, 2008
 
December 31, 2007
 
Balance at the beginning of period
 
$
304,601
 
$
358,065
 
Decrease during the period 
   
(70,294
)   
 
(84,476
)
Foreign currency translation
   
19,266
   
31,012
 
Balance at end of period
 
$
253,573
 
$
304,601
 

The amounts due to shareholders/directors were unsecured, interest-free and repayable on demand.
 
15. Advances payable
 
The amounts mainly represent advances made by the Chinese government to the Company as subsidy on interest on loans related to production facilities expansion. 
 
The balances are unsecured, interest-free and will be repayable to the Chinese government if the usage of such advance does not continue to qualify for the subsidy (see notes-19).

16. Convertible debt payable
 
In February 2008, the Company sold to two accredited institutional investors $35 million of convertible debt, the "Convertible Debt", to be repaid by the expiry of February 15, 2013 in cash or registered common stocks of the Company. The Convertible Debt is convertible into common shares of the Company at a conversion price of $8.8527 per share, subject to adjustment upon the occurrence of certain events.
 
16

 
The Convertible Debt bears annual interest rates of 3%, 3.5%, 4%, 4.5% and 5% for each year of 2008, 2009, 2010, 2011 and 2012. The interest on the Convertible Debt shall be computed commencing from the issuance date and shall be payable in cash in arrears semi-annually on January 15, and July 15 of each year with the first interest payable date being July 15, 2008. Prior to the payment of the interest on each interest payable date, the interest on the Convertible Debt shall be accrued at the above specified interest rate and be payable by way of inclusion of the interest in the conversion amount defined as the sum of the portion of the principal to be converted and accrued and unpaid interest pursuant to the relevant Convertible Debts agreements. From and after the occurrence and during the continuance of an Event of Default defined in the relevant Convertible Debt agreements, the interest rate then in effect shall be increased by two percent (2%) until the event of default is remedied .
 
The holders of the Convertible Debt shall be entitled to convert any portion of the conversion amount into shares of common stock at the conversion price at any time or times on or after the thirtieth (30th) day after the issuance date and prior to the thirtieth (30th) Business Day prior to the expiry date of the Convertible Debt. A damage penalty will be paid if the delivery of share certificates occurs upon the share conversion.
 
The Company shall have the right to require the Convertible Debt holders to convert all or any portion of the conversion amount then remaining under the Convertible Debt obligation into shares of common stock, “ Mandatory Conversion”, if at any time during a six-month period ending on the six-month anniversary of the Closing Date, the beginning day of each such six-month period, a “Mandatory Conversion Period Start Date”, (1) the arithmetic average of the weighted average price of the common stock for a period of at least thirty (30) consecutive trading days following the Mandatory Conversion Period Start Date equals or exceeds the percentage of the conversion price on the Convertible Debt issuance date set forth in the chart below as applicable to the indicated six month period and to the Mandatory Conversion Measuring Period related thereto:
 
0-6 months: 125%
6-12 months: 125%
12-18 months: 135%
18-24 months: 135%
24-30 months: 145%
30-36 months: 145%
36-42 months: 155%
42-48 months: 155%
 
On each six month anniversary of the issuance date beginning August 15, 2008, the conversion price shall be adjusted downward to the Reset Reference Price, as defined below, if the weighted average price for the twenty (20) consecutive trading days immediately prior to the applicable six month anniversary, the “Reset Reference Price”, is less than 95% of the conversion price in effect as of such applicable six month anniversary date, as adjusted pursuant to a formula as defined in the relevant Convertible Debt agreements. The foregoing notwithstanding, the conversion price shall not be reduced to less than 80% of the conversion price in effect on the issuance date, and in no event shall the conversion price be reduced to less than $6.7417.
 
The Company shall not effect any conversion of the Convertible Debt, and each holder of the Convertible Debt shall not have the right to convert any portion of the Convertible Debt to the extent that after giving effect to such conversion, each of these two holders would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion.
 
The Company shall not effect a Mandatory Conversion of more than twelve percent (12%) of the original principal amount of the Convertible Debt, with the applicable accrued but unpaid Interest, in any six month period or twenty-four percent (24%) of the original principal amount of the Convertible Debt, with the applicable accrued but unpaid Interest, in any twelve (12) month period.
 
Upon the occurrence of an event of default with respect to the Convertible Debt, the Convertible Debt holders may require the Company to redeem all or any portion of the Convertible Debt. Each portion of the Convertible Debt subject to redemption by the Company shall be redeemed by the Company at a price equal to the sum of (i) the conversion amount to be redeemed and (ii) the Other Make Whole Amount. The “Other Make Whole Amount” shall mean a premium to the conversion amount such that the total amount received by the Convertible Debt holder upon redemption represents a gross yield to the Convertible Debt holders on the original principal amount as of the redemption date equal to thirteen percent (13%), with interest computed on the basis of actual number of days elapsed over a 360-day year. The events of default includes the Company’s failure to cure a conversion failure by delivery of the required number of shares of Common Stock, the Company’s failure to pay to the Convertible Debt holder any amount of principal, interest, late charges or other amounts when and as due under the Convertible Debt and other events as defined in the Convertible Debt Agreements.
 
Upon the consummation of the change of control as defined in the Convertible Debt Agreements, the Convertible Debt holder may require the Company to redeem all or any portion of the Convertible Debt. The portion of the Convertible Debt subject to redemption shall be redeemed by the Company in cash at a price equal to the sum of the conversion amount of being redeemed and the Other Make Whole Amount as defined above.
 
17

 
On each of February 15, 2010 and February 15, 2011, the Convertible Debt holders shall have the right, in their sole discretion, to require that the Company redeem the Convertible Debt in whole but not in part, by delivering written notice thereof to the Company. The portion of this Convertible Debt subject to redemption pursuant to this annual redemption right shall be redeemed by the Company in cash at a price equal to the sum of the conversion amount being redeemed and the Annual Redemption Make Whole Amount. The “Annual Redemption Make Whole Amount” shall mean a premium to the conversion amount such that the total amount received by the Convertible holder upon any annual redemption represents a gross yield on the original principal amount of ten percent (10%), if the redemption date occurs during 2009, eleven percent (11%), if the redemption date occurs during 2010 or 2011, and thirteen percent (13%), if the redemption date occurs during 2012, in each case with interest computed on the basis of actual number of days elapsed over a 360-day year.
 
In the event that the Company has not completed the necessary filings to list the conversion shares on its principal market by the date that is ninety (90) days after the issuance date or has not so listed the conversion shares by the date that is ninety (90) days after the issuance date or the shares of the Company’s common stock are terminated from registration under the Securities Act of 1933, the Convertible Debt holders shall have the right, in its sole discretion, to require that the Company redeem all or any portion of the Convertible Debt. The portion of the Convertible Debt subject to redemption in connection with this listing default shall be redeemed by the Company in cash at a price equal to the sum of the conversion amount being redeemed and the Other Make Whole Amount as mentioned above.
 
At anytime following the first anniversary of the issuance date, if the weighted average for twenty (20) consecutive trading days is less than forty-five percent (45%) of the conversion price in effect on the issuance date, the Convertible Debt holder shall have the right, in its sole discretion, to require that the Company redeem all or any portion of the Convertible Debt. The portion of this Convertible Debt subject to redemption in connection with the share price change of the underlying common stock shall be redeemed by the Company in cash at a price equal to the sum of the conversion amount being redeemed and the Other Make Whole Amount as mentioned above.
 
If and whenever on or after the issuance date, the Company issues or sells its shares of Common Stock or other convertible securities for a consideration per share less than a price equal to the conversion price in effect on the issuance date immediately prior to such issue or sale, the original conversion price then in effect shall be adjusted.
 
In connection with the Convertible Debt, the Company issued 1,317,864 of detachable warrants, the “Warrants,” to purchase from the Company shares of common stock of the Company at the exercise price of $8.8527 per share, subject to adjustments upon the occurrence of certain events. The Warrants are exercisable immediately and will expire by February 15, 2009 with one year term. The warrants were allocated value in the financing arrangement based upon their relative fair value to the total financing fair value. On this basis, $405,007 was recorded as a component of stockholders’ equity, because the warrants achieve all of the requisite conditions for equity classification.
 
The Company has evaluated the convertible notes for terms and conditions that are not clearly and closely associated with the risks of the debt-type host instrument. Generally, such features require separation from the host contract and treatment as derivative financial instruments. Certain features, such as the conversion option, were found to be exempt. Other features, such as puts and redemption features were found to require bifurcation and recognition as derivative liabilities. These derivative liabilities are recognized initially at fair value, using forward cash-flow valuation techniques. As of March 31, 2007, the compound derivative value amounted to $3,972,068. This derivative will be adjusted to its estimated fair value at the completion of each reporting period until the debt arrangement is ultimately settled, converted or paid.
 
Allocation of basis in the financing arrangement to the warrants and the derivative liability has resulted in an original issue discount to the face value of the convertible notes in the amount of $4,377,075, which amount is subject to amortization over the term using the effective method. The Company recorded amortization expense during the three months ended March 31, 2007 of $99,499.
 
18

 
17. Minority interests
 
The Company’s activities in respect of the amounts of the minority interests’ equity at March 31, 2008 (unaudited) and December 31, 2007 are summarized as follows:
 
   
March 31, 2008
 
December 31, 2007
 
   
 
 
 
 
Balance at beginning of the period
 
$
23,166,270
 
$
23,112,667
 
Add: Additions during the period–
             
Minority interest’s income
   
1,750,247
   
9,646,339
 
Increase in connection with minority shareholders’ abandonment of all its right and interest in Joint-venture.
   
   
55,512
 
Foreign currency translation
   
927,443
   
1,650,869
 
Less: decrease during the period–
             
dividends declared to the minority interest holders of Joint-venture companies
   
(1,016,734
)
 
(8,468,572
)
Decrease in minority interests as a result of minority shareholder, Sensor’s withdrawal from Joint-venture..
   
   
(2,830,545
)
Transfer and assign a 35.5% equity interest in Henglong by minority interest holders of Joint-venture companies*
   
(6,177,079
)
 
 
Balance at end of period
 
$
18,650,147
 
$
23,166,270
 
 
*On March 31, 2008, the Company’s wholly-owned subsidiary, Great Genesis and Wiselink, both controlled by Hanlin Chen and his family, entered into an equity transfer agreement, pursuant to which Wiselink agreed to transfer and assign its 35.5% equity interest in Jingzhou Henglong, one of the Company’s currently consolidated subsidiaries, to Great Genesis for a total consideration of US$32,090,000.
 
Under the terms of the above agreement, Great Genesis is deemed to be the owner of the equity concerned commencing from January 1, 2008. In accordance with FASB 141 and APB 14, the acquisition is considered as a business combination of companies under common control and is being accounted for in a manner of pooling of interests.
 
As of January 1, 2008, the net book value of 35.5% equity of Henglong, which was transferred from minority shareholders, was $6,177,079.
 
18. Additional paid-in capital
 
The Company’s activities in the Company’s additional paid-in capital account during the three months ended March 31, 2008 (unaudited) and the year ended December 31, 2007 are summarized as follows:
 
   
March 31, 2008
 
December 31, 2007
 
Balance at beginning of the period
 
$
30,125,951
 
$
28,651,959
 
Add: Additions during the period–
           
Issuance of common stock for cash in accordance with the standby equity distribution agreement with Cornell Capital Partners, LP.
   
   
1,199,989
 
Issuance of stock options to independent directors, LP
   
   
153,675
 
Issuance of warrants to purchase common stock (Please see Note 16)*
   
405,007
   
 
Increase in connection with minority shareholders’ abandonment of all its right and interest in Joint-venture.
   
   
174,828
 
Less: decrease during the period–
             
Cash paid for retaining fee, commissions and placement agent fee in connection with offering.
   
   
(54,500
)
35.5% Henglong equity acquisition**
   
(25,912,921
)
 
 
Balance at end of period
 
$
4,618,037
 
$
30,125,951
 
 
19

 
*In connection with the Convertible Debt, the Company issued 1,317,864 of detachable warrants (“Warrants”) to purchase from the Company shares of common stock at the exercise price of US$ 8.8527 per share, subject to adjustments upon certain events occurring. The Warrants are exercisable immediately and will expire on February 15, 2009.

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

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

If and whenever on or after the issuance date, the Company issues or sells its shares of common stock or other convertible securities for a consideration per share less than a price equal to the exercise price of a Warrant in effect on the issuance date immediately prior to such issue or sale, the exercise price of such Warrant then in effect shall be adjusted.
 
20

 
**On March 31, 2008, the Company’s wholly-owned subsidiary, Great Genesis and Wiselink, both controlled by Hanlin Chen and his family, entered into an equity transfer agreement, pursuant to which Wiselink agreed to transfer and assign its 35.5% equity interest in Jingzhou Henglong, one of the Company’s currently consolidated subsidiaries, to Great Genesis for a total consideration of US$32,090,000.
 
Under the terms of the above agreement, Great Genesis is deemed to be the owner of the equity concerned commencing from January 1, 2008. In accordance with FASB 141 and APB 14, the above acquisition is considered as a business combination of companies under common control and is being accounted for in a manner of pooling of interests.
 
As of January 1, 2008, the book value of 35.5% equity of Henglong was $6,177,079. The difference between the acquisition consideration of US$32,090,000 and 35.5% equity of Henglong, which was $25,912,921, has been debited to additional paid-in capital.
 
19 .Other Income
 
During the three months ended March 31, 2008 and 2007, the Company recorded other income, government subsidies, of $199,459 and $38,462, respectively . 
 
Government subsidies represent refunds by the Chinese Government of interest paid to banks by companies entitled to such subsidies. This applies only to interest on loans related to production facilities expansion. Commencing in 2004 and 2005, the Company had used this type of special loan to improve its production lines by increasing capability and enhancing quality. The expansion was completed and began to operate at the end of 2005 and 2006. During 2007 and 2006, the Chinese Government sent experts to review and assess the Company’s usage of its improved production facilities on site to confirm that the Company’s improvements had achieved its goals and thereby qualify for the subsidy. The Company recorded the refunded interest which achieved its goals into Other income, and refunded interest which has not achieved its goals into advances payable.
 
20. Financial income (expenses)

During the three months ended March 31, 2008 and December 31,2007, the Company recorded financial income (expenses) which is summarized as follows:

   
Three Months Ended March 31,
 
   
2008
 
2007
 
Interest income(expenses),net
 
$
(263,769
)
$
(202,328
)
Foreign currency translation gain (loss), net
   
376,638
   
(133,147
)
Income (loss) of note discount, net
   
18,036
   
(51,678
)
Amortization for discount of convertible note payable
   
(99,449
)
 
-
 
Handling charge
   
(10,763
)
 
(7,845
)
Total
 
$
20,693
 
$
(394,997
)

21. Income Taxes
 
The Company’s subsidiaries registered in the PRC are subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested enterprise. The Company’s PRC subsidiaries are generally subject to enterprise income tax at a statutory rate of 33%, which comprises 30% national income tax and 3% local income tax.
 
On January 1, 2007, one of the subsidiaries of the Company, Jiulong, has used up its enterprise income tax exemption. During 2007, Jiulong was subject to enterprise income tax at a rate of 30%, and 25% for 2008.
 
On January 1, 1999, one of the subsidiaries of the Company, Henglong, was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 1999, and a 50% enterprise national income tax deduction and a 100% local income tax deduction for the next nine years thereafter, from 2001 to 2009, for income tax purposes. Henglong is subject to enterprise national income tax at a rate of 15% for 2008 and 2009, and is subject to enterprise income tax at a rate of 25% commencing from January 1, 2010.
 
21

 
On January 1, 2003, one of the subsidiaries of the Company, Shenyang, was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 2003, a 75% enterprise national income tax deduction and a 100% local income tax deduction for the next three years thereafter, from 2005 to 2007, and a 50% enterprise national income tax deduction, from January 1, 2008, for income tax purposes. During 2008, Shenyang is subject to enterprise income tax at a rate of 18%, which comprises of 15% enterprise national income tax and 3% local income tax.
 
On January 1, 2004, one of the subsidiaries of the Company, Zhejiang, was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 2004, and a 50% enterprise national income tax deduction, and a 50% local income tax deduction for the next three years thereafter, from 2006 to 2008, for income tax purposes. During 2008, Zhejiang is subject to enterprise income tax at a rate of 16.5%, which comprises of 15% enterprise national income tax and 1.5% local income tax, and is subject to enterprise income tax at a rate of 25% commencing from January 1, 2009.
 
USAI, Wuhu, Jielong and Hengsheng are at their start up stage in 2008 and 2007, accordingly, there is no assessable profit for the three months ended March 31, 2008 subject to PRC enterprise income tax. They have an enterprise income tax exemption in 2008 and 2009, and are subject to enterprise income tax at a rate of 16.5% for the next three years thereafter, from 2010 to 2012, and a 25% enterprise national income tax for the years commencing from January 1, 2013.
 
No provision for Hong Kong tax is made as Great Genesis is an investment holding company, and has no assessable income in Hong Kong for the three months ended March 31, 2008 and 2007. The enterprise income tax of Hong Kong is 17.5%.
 
No provision for US tax is made as the Company has no assessable income in the US for the three months ended March 31, 2008 and 2007. The enterprise income tax of US is 30%.
 
The account of income tax as of the March 31, 2008 and 2007 is summarized as follows:
 
   
Three Months Ended March 31,
 
   
2008
 
2007
 
           
Current tax provision
 
$
1,254,224
 
$
1,294,080
 
Income tax refund*
   
(267,844
)
 
-
 
Deferred tax (benefit) relating to the origination and reversal of temporary differences
   
(161,985
)
 
 
Income tax
 
$
824,395
 
$
1,294,080
 
 
*For the three months ended March 31, 2008 and 2007, two of the Company’s Sino-foreign joint ventures received an income tax benefit of $267,844 and nil, respectively, for purchase of domestic equipment, which has been reflected as a reduction to income tax expense in the respective period of the Company’s consolidated statements of operations.
 
22. Significant concentrations
 
The Company grants credit to its customers, generally on an open account basis.  The Company’s customers are all located in the PRC.
 
During the three months ended March 31, 2008 (unaudited), the Company’s ten largest customers accounted for 67.7% of the Company’s consolidated net sales, with each of four customers individually accounting for more than 10% of consolidated net sales, i.e. 13.1%, 11.5%, 11.3% and 10.2% individually, or an aggregate of 46.2%.  At March 31, 2008, approximately 33.4% of accounts receivable were from trade transactions with the aforementioned four customers.
 
22

 
During the three months ended March 31, 2007 (unaudited), the Company’s ten largest customers accounted for 75.5% of the Company’s consolidated net sales, with each of four customers individually accounting for more than 10% of consolidated net sales, i.e. 15.7%, 13.0%, 11.7% and 11.4% individually, or an aggregate of 51.8%.  At March 31, 2007, approximately 34.0% of accounts receivable were from trade transactions with the aforementioned four customers.
 
23. Related party transactions and balances

Related party transactions with companies with common directors are as follows:

Related sales (unaudited):
 
   
Three Months Ended March 31,
 
   
2008
 
2007
 
Merchandise Sold to Related Parties
 
$
2,051,082
 
$
902,584
 

Related purchases (unaudited):
 
   
Three Months Ended March 31,
 
   
2008
 
2007
 
Materials Purchased from Related Parties
 
$
1,952,390
 
$
1,051,480
 
Technology Purchased from Related Parties
   
-
   
64,103
 
Equipment Purchased from Related Parties
   
417,438
   
181,218
 
Total
 
$
2,369,828
 
$
1,296,801
 

Related receivables (March 31, 2008 unaudited):
 
   
March 31,2008
 
December 31, 2007
 
Accounts receivable
 
$
2,943,990
 
$
1,869,480
 
Other receivables
   
770,156
 
$
638,826
 
Total
 
$
3,714,146
 
$
2,508,306
 

Related advances (March 31, 2008 unaudited):
 
   
March 31,2008
 
December 31, 2007
 
Advanced Equipment Payment to Related Parties
 
$
2,329,206
 
$
1,560,378
 
Advanced Expenses and Others to Related Parties
   
594,491
 
$
55,323
 
Total
 
$
2,923,697
 
$
1615701
 
 
23

 
Related payables (March 31, 2008 unaudited)
 
   
March 31,2008
 
December 31, 2007
 
Accounts payable:
 
$
1,578,981
 
$
1,134,817
 
Other payables*
   
32,090,000
   
-
 
Total
 
$
33,668,981
 
$
1,134,817
 
 
*On March 31, 2008, the Company’s wholly-owned subsidiary, Great Genesis, and Wiselink, both controlled by Hanlin Chen and his family, entered into an equity transfer agreement, pursuant to which Wiselink agreed to transfer and assign its 35.5% equity interest in Jingzhou Henglong, one of the Company’s currently consolidated subsidiaries, to Great Genesis for a total consideration of US$32,090,000. The consideration is based on its respective fair market value as determined by an independent appraisal firm, and approved by the dependent directors.
 
These transactions were consummated under similar terms as those with the Company's customers and suppliers.
 
24. Commitments and contingencies:
 
Legal Proceedings - The Company is not currently a party to any threatened or pending legal proceedings, other than incidental litigation arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
 
The following table summarizes the Company’s major contractual payment obligations and commitments as of March 31, 2008 (unaudited):
 
   
Payment Obligations by Period
 
   
2008 (a)
 
2009
 
2010
 
2011
 
Thereafter
 
Total
 
Obligations for service agreements
 
$
-
 
$
110,000
 
$
110,000
 
$
110,000
 
$
-
 
$
330,000
 
Obligations for purchasing agreements
   
15,679,351
   
864,374
 
$
 
$
   
-
   
16,543,725
 
Total
 
$
15,679,351
 
$
974,374
 
$
110,000
 
$
110,000
 
$
-
 
$
16,873,725
 

(a) Remaining 9 months in 2008

25. Off-balance sheet arrangements
 
At March 31, 2008 and 2007, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
 
26. Segment reporting
 
The accounting policies of the product sectors are the same as those described in the summary of significant accounting policies except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter segment sales and transfers as if the sales or transfers were to third parties, at current market prices.
 
24

 
During the period ended March 31, 2008 and 2007, the Company had nine product sectors, five of them were principal profit makers, which were reported as separate sectors which engaged in the production and sales of power steering (Henglong), power steering (Jiulong), power steering (Shenyang), power pumps (Zhejiang), and power steering (Wuhu). The other four sectors which were established in 2005, 2006 and 2007 respectively, engaged in the production and sales of sensor modular (USAI), electronic power steering (Jielong), power steering (Hengsheng), and provider of after sales and R&D services (HLUSA).Since the revenues, net income and net assets of these four sectors are less than 10% of its segment in the consolidated financial statements, the Company incorporated these four sectors into “other sectors”.
 
The Company’s product sectors information is as follows:
 
   
Henglong
 
Jiulong
 
Shenyang
 
Zhejiang
 
Wuhu
 
Other sector
 
Other (1)
 
Total
 
For the Three Months Ended:
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
March 31, 2008
                                 
Revenue
                                 
Net product sales – external
 
$
14,925,533
 
$
11,269,992
 
$
6,212,496
 
$
3,724,796
 
$
5,295,038
 
$
39,188
   
 
$
41,467,043
 
Net product sales – internal
   
7,363,909
   
598,839
   
418,131
   
276,836
   
   
   
(8,657,715
)
 
 
Gain on other sales
   
105,119
   
(8,611
)  
 
31,323
   
(4,172
)  
 
12,894
   
(898
)
 
(1,465
)
 
134,190
 
Total revenue
 
$
22,394,561
   
$
11,860,220
 
$
6,661,950
 
$
3,997,460
 
$
5,307,932
 
$
38,290
  $
(8,659,180
)
$
41,601,233
 
Net income
 
$
3,708,778
 
$
653,294
 
$
557,154
   
$
410,556
  $
(213,117
)  
$
(225,865
)  
$
(460,626
)  
$
4,430,174
 
 
   
Henglong
 
Jiulong
 
Shenyang
 
Zhejiang
 
Wuhu
 
Other sector
 
Other (1)
 
Total
 
For the Three Months Ended:
 
      
 
      
 
      
 
      
 
      
 
 
 
      
 
      
 
March 31, 2007
                                 
Revenue
                                 
Net product sales – external
 
$
10,545,718
 
$
7,421,381
 
$
3,317,584
 
$
3,257,331
 
$
3,829,849
 
$
11,529
  $
 
$
28,383,392
 
                                                   
Net product sales – internal
   
6,379,077
   
1,094,395
   
603,268
   
8,729
   
   
   
(8,085,469
)
 
 
                                                   
Gain on other sales
   
114,177
   
32,050
   
8,193
   
(2,546
)
 
   
   
(1,318
)
 
150,556
 
                                                   
Total revenue
 
$
17,038,972
 
$
8,547,826
 
$
3,929,045
 
$
3,263,514
 
$
3,829,849
 
$
11,529
 
$
(8,086,787
)
$
28,533,948
 
                                                   
Net income
 
$
1,450,313
 
$
772,381
 
$
358,006
 
$
279,858
 
$
(305,945
)
$
(70,067
)
$
(841,445
)
$
1,643,101
 

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

27. Subsequent events

None.
 
25

 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
 
This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  Generally, the words “believes”, “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements which include, but are not limited to, statements concerning the Company’s expectations regarding its working capital requirements, financing requirements, business prospects, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts.  Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected.  Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof.  The Company undertakes no obligation to update these forward-looking statements.  In addition, the forward-looking statements in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 involve known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to differ materially from those expressed in or implied by the forward-looking statements contained herein.  Please see the discussion on risk factors in Item 1A of Part II of this quarterly report on Form 10-Q.
 
GENERAL OVERVIEW:
 
China Automotive Systems, Inc., including, when the context so requires, its subsidiaries and the subsidiaries’ interests in the Sino-foreign joint ventures described below, is referred to herein as the “Company”. The Company, through its Sino-foreign joint ventures, engages in the manufacture and sales of automotive systems and components in the People’s Republic of China, the “PRC” or “China”, as described below.
 
Great Genesis Holdings Limited, a company incorporated on January 3, 2003 under The Companies Ordinance in Hong Kong as a limited liability company, “Great Genesis”, is a wholly-owned subsidiary of the Company.
 
Henglong USA Corporation, “HLUSA”, which was incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after sales service and research and development support accordingly.
 
The Company owns the following aggregate net interests in seven Sino-foreign joint ventures organized in the PRC as of March 31, 2008 and 2007 (unaudited).
 
   
Percentage Interest
 
Name of Entity
 
March 31,2008
 
March 31,2007
 
Shashi Jiulong Power Steering Gears Co., Ltd., ("Jiulong")
   
81.00
%
 
81.00
%
Jingzhou Henglong Automotive Parts Co., Ltd., ("Henglong")
   
80.00
%
 
44.50
%
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., (“Shenyang")
   
70.00
%
 
70.00
%
Zhejiang Henglong & Vie Pump-Manu Co., Ltd., ("Zhejiang")
   
51.00
%
 
51.00
%
Universal Sensor Application Inc., (“USAI”)
   
75.90
%
 
85.71
%
Wuhan Jielong Electric Power Steering Co., Ltd., (“Jielong”)
   
85.00
%
 
85.00
%
Wuhu HengLong Automotive Steering System Co., Ltd., (“Wuhu”)
   
77.33
%
 
77.33
%
Jingzhou Hengsheng Automotive System Co., Ltd, (“Hengsheng”)
   
100.00
%
 
-
 
 
Jiulong was established in 1993 and mainly engaged in the production of integral power steering gears for heavy-duty vehicles.
 
Henglong was established in 1997 and mainly engaged in the production of rack and pinion power steering gears for cars and light duty vehicles.
 
26

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

Under the terms of the above agreement, Great Genesis is deemed to be the owner of the equity concerned commencing from January 1, 2008. The Acquisition is considered as a business combination of companies under common control and is being accounted for in a manner of pooling of interests.
 
Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles. 
 
Zhejiang was established in 2002 to focus on power steering pumps.
 
USAI was established in 2005 and mainly engaged in production and sales of sensor modulars.

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

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

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

CRITICAL ACCOUNTING POLICIES:
 
The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.
 
We consider an accounting estimate to be critical if:
 
• It requires us to make assumptions about matters that were uncertain at the time we were making the estimate, and
 
• Changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.
 
The table below presents information about the nature and rationale for the Company critical accounting estimates:
 
Balance Sheet
Caption
 
Critical Estimate
Item
 
Nature of Estimates
Required
 
Assumptions/Approaches
Used
 
Key Factors
Accrued liabilities and other long-term liabilities
 
Warranty
obligations
 
Estimating warranty requires us to forecast the resolution of existing claims and expected future claims on products sold. VMs are increasingly seeking to hold suppliers responsible for product warranties, which may impact our exposure to these costs.
 
We base our estimate on historical trends of units sold and payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers.
 
• VM (Vehicle Manufacturer) sourcing
• VM policy decisions regarding warranty claims
·VMs
 
27

 
Property, plant and equipment, intangible assets and other long-term assets
 
Valuation of long- lived assets and investments
 
We are required from time-to-time to review the recoverability of certain of our assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines.
 
We estimate cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.
 
• Future Production estimates
•Customer preferences and decisions
                 
Accounts and notes receivables
 
Provision for doubtful accounts and notes receivable
 
Estimating the provision for doubtful accounts and notes receivable require the Company to analyze and monitor each customer’s credit standing and financial condition regularly. The Company grants credit to its customers, generally on an open account basis. It will have material adverse effect on the Company’s cost disclosure if such assessment were improper.
 
The Company grants credit to its customers for three to four months based on each customer’s current credit standing and financial data. The Company assesses an allowance on an individual customer basis, under normal circumstances; the Company does not record any provision for doubtful accounts for those accounts receivable amounts which were in credit terms. For those receivables out of credit terms, certain proportional provision, namely 25% to 100%, will be recorded based on respective overdue terms.
 
•Customers’ credit standing and financial condition
                 
Deferred income taxes
 
Recoverability of deferred tax assets
 
We are required to estimate whether recoverability of our deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction.
 
We use historical and projected future operating results, based upon approved business plans, including a review of the eligible carryforward period, tax planning opportunities and other relevant considerations.
 
• Tax law changes
• Variances in future projected profitability, including by taxing entity
 
In addition, there are other items within our financial statements that require estimation, but are not as critical as those discussed above. These include the allowance for reserves for excess and obsolete inventory. Although not significant in recent years, changes in estimates used in these and other items could have a significant effect on our consolidated financial statements.
 
RESULTS OF OPERATIONS——THREE MONTHS ENDED MARCH 31, 2008 AND 2007:
 
The following table sets forth for the periods indicated certain items from the Company's Consolidated Statements of Income expressed as a percentage of net sales and the percentage change in the dollar amount of each such item from that in the indicated previous year.
 
28

 
   
Percentage on net sales
 
Change in percentage
 
   
2008
 
2007
 
2007 to 2008
 
Net sales
   
100.0
%
 
100.0
%
 
46.1
%
Cost of sales
   
70.5
   
67.6
   
52.4
 
Gross profit
   
29.5
   
32.4
   
32.9
 
Gain on other sales (a)
   
0.3
   
0.4
   
19.7
 
Less: operating expenses
                   
Selling expenses
   
6.0
   
5.6
   
55.3
 
General and administrative expenses
   
3.9
   
5.3
   
7.1
 
R & D expenses
   
0.4
   
0.4
   
47.1
 
Depreciation and amortization
   
3.1
   
3.1
   
44.9
 
Total operating expenses
   
13.4
   
14.5
   
35.1
 
Operating income
   
16.4
   
18.3
   
30.8
 
Other income
   
0.5
   
0.1
   
418.6
 
Financial income (expenses)
   
-
   
(1.4
)
 
(105.2
)
Income before income tax
   
16.9
   
17.0
   
45.0
 
Income tax
   
2.0
   
4.6
   
(36.3
)
Income before minority interests
   
14.9
   
12.5
   
74.7
 
Minority interests
   
4.2
   
6.7
   
(7.6