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+ + UNITED STATES SECURITIES AND EXCHANGE COMMISSION + Washington, D.C. 20549 + + FORM 10-K + +[_] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF + 1934 + +For the Fiscal Year Ended: + +[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT + OF 1934 + +For the Transition Period from April 2, 2000 to December 30, 2000 + +Commission File Number: 1-11064 + + BRITESMILE, INC. + ---------------- + (Exact name of small business issuer as specified in its charter) + + + UTAH 87-0410364 +- -------------------------------------- ----------------------------- + (State or other jurisdiction (IRS employer + of incorporation or organization) identification no.) + + + 490 North Wiget Lane + Walnut Creek, California 94598 + ----------------------------- +(Address of principal executive offices) (Zip Code) + + + + (925) 941-6260 + -------------- + (Issuer's telephone number, including area code) + + +Securities registered pursuant to Name of each exchange + Section 12(b) of the Act: on which registered: +- ------------------------------------- ---------------------------- + None Not Applicable + + Securities registered pursuant to Section 12(g) of the Act: + ----------------------------------------------------------- + Common Stock, par value $.001 + +Check whether the issuer (1) filed all reports required to be filed by Section +13 or 15(d) of the Securities Exchange Act during the past 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 ___ + --- + +Check if there is no disclosure of delinquent filers in response to Item 405 of +Regulation S-K contained in this form, and no disclosure will be contained, to +the best of the registrant's knowledge, in definitive proxy or information +statements incorporated by reference in Part III of this Form 10-K or any +amendment to this Form 10-K. [_] + +The aggregate market value of the registrant's Common Stock held by +non-affiliates as of March 15, 2001 was approximately $38,289,651 based on the +closing sale price of the issuer's stock as reported by the NASDAQ NMS on such +date. + +The number of shares of common stock of the Registrant outstanding as of March +26, 2001 was 28,816,515. DOCUMENTS INCORPORATED BY REFERENCE: None. + + + BRITESMILE, INC. AND SUBSIDIARIES + + TABLE OF CONTENTS + + +
+PART I. +- ------- + +Item 1. Business............................................................................................. 3 + +Item 2. Properties........................................................................................... 11 + +Item 3. Legal Proceedings.................................................................................... 11 + +Item 4. Submission of Matters to a Vote of Security Holders.................................................. 12 + + +PART II. +- -------- + +Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 12 + +Item 6. Selected Financial Data.............................................................................. 15 + +Item 7. Management's Discussion and Analysis of Financial Condition + and Results of Operations............................................................................ 16 + +Item 8. Financial Statements and Supplementary Data.......................................................... 32 + +Item 9. Changes in and Disagreements with Accountants on Accounting + and Financial Disclosure............................................................................. 32 + +PART III. +- --------- +Item 10. Directors and Executive Officers of the Registrant................................................... 32 + +Item 11. Executive Compensation............................................................................... 36 + +Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 37 + +Item 13. Certain Relationships and Related Transactions....................................................... 42 + +Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................... 45 +
+ + 2 + + +PART I + +ITEM 1. DESCRIPTION OF BUSINESS + +THIS ANNUAL REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, +FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTANTIES. THE +COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED BY +THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD +CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED BELOW IN THE SECTION +ENTITLED "FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS ANNUAL REPORT. THE +FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR FINANCIAL STATEMENTS AND +RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS DOCUMENT. + +During the fourth quarter of the Company's fiscal year ended April 1, 2000 +("Fiscal April 2000"), the Company adopted a 52/53-week (4 week - 4 week - 5 +week quarter) fiscal calendar. This change necessitated adding one day to the +Fiscal April 2000 year. In addition, the Company changed its year end from March +to December. Data in this Report reflects the consolidated results of the +Company for the 39 week transition period ended December 30, 2000 (The +"Transition Period"), and the 39 week period ended December 30, 1999, and for +the 52 weeks ended April 1, 2000 and March 31, 1999, respectively. + +ALL DOLLAR AMOUNTS, EXCEPT PER SHARE AMOUNTS, THROUGHOUT THIS REPORT ARE +EXPRESSED IN THOUSANDS. + +Introduction + +BriteSmile, Inc., a Utah corporation (the "Company" or "BriteSmile"), and its +affiliates develop, produce, sell and lease advanced teeth whitening products, +services and technology. BriteSmile's operations include the development of +technologically advanced teeth whitening processes that are distributed in +professional salon-like settings known as BriteSmile Professional Teeth +Whitening Centers ("Centers"), and in existing dental offices known as +BriteSmile Professional Teeth Whitening Associated Centers ("Associated +Centers"). + +BriteSmile offers consumers a new, simple and safe way to return teeth to their +optimal natural whiteness in just one visit to a BriteSmile Center or BriteSmile +Associated Center. The BriteSmile teeth whitening system utilizes a combination +of its proprietary gas plasma light technology and wavelength specific gel. The +power level is well below that used in other bleaching systems, resulting in +greater comfort to consumers without sacrificing the speed of the whitening +process. BriteSmile's unique fiberoptic delivery arm permits blue-green light to +reach all 16 front teeth simultaneously, whitening the teeth by activating the +wavelength specific gel, which is applied to the teeth during three consecutive +twenty-minute sessions. Including the time necessary for initial customer +evaluation and consultation, prep work and clean up, the customer can complete +an entire teeth whitening visit in approximately 90 minutes. The result is +immediate superior teeth whitening - a clinically proven average of 8-9 shades +whiter - and a patient satisfaction rate of over 98%. + +BriteSmile developed its light-activated teeth whitening ("LATW") technology in +the fiscal year ended March 31, 1999 ("Fiscal 1999"), and in February 1999 began +placement of its BS2000 LATW System (the "BS2000") in both Centers and +Associated Centers. Currently, the BS2000 is used exclusively in Centers to +perform the LATW procedure. In November 1999, BriteSmile introduced its BS3000 +LATW keycard system (the "BS3000") into Associated Centers. The BS3000, a +compact and mobile version of the BS2000, can be installed more quickly and +provides the flexibility and mobility required in dental offices. The BS3000 +incorporates a keycard system, which enables the dentists to pay for their use +of the machine on a per procedure basis. The Company is continuing its research +and development efforts to improve its current LATW systems in order to maintain +and strengthen its competitive advantage. + + 3 + + +Centers are located in major metropolitan areas nationwide. Centers offer +customers a salon-like environment dedicated solely to the business of teeth +whitening and are staffed by licensed dentists and trained dental assistants. +Alternatively, consumers can visit an Associated Center, where a local dentist +supervises the BriteSmile procedure in his or her dental office. + +On February 15, 1999, BriteSmile introduced the BS2000 at its Walnut Creek +Center. As of March 1, 2001, BriteSmile had 14 Centers operating in the +following locations: Beverly Hills, Irvine, Walnut Creek, Palo Alto and La +Jolla, CA; Chicago, IL; Phoenix, AZ; Boca Raton, FL; Honolulu, HI; Atlanta, GA; +Houston, TX; Denver, CO; Boston, MA; and New York, NY. The Centers serve as the +anchor in 12 major U.S. markets, with the geographically contiguous Associated +Centers providing consumers with multiple location options. This "cluster" of +Associated Centers surrounding a BriteSmile Center allows the Company to have +maximum impact in a market, while at the same time leveraging marketing and +advertising dollars, and optimizing consumer exposure to the BriteSmile brand. + +As of March 1, 2001, BriteSmile has contracted with dentists to operate +approximately 1,800 Associated Centers, of which 1,383 are in operation +throughout the United States and around the world in countries including +Argentina, Belgium, France, Italy, Japan, the Netherlands, Singapore and +Switzerland. BriteSmile plans to open additional Associated Centers in the +United States and in select foreign locations in the future. + +The Company also sells BriteSmile brand post-whitening maintenance products, +including toothpaste and electric toothbrushes, to consumers in Centers, +Associated Centers, and on its e-Commerce Internet site. The Company is +currently developing other BriteSmile brand post-whitening products, including +mouthwash, toothbrushes, chewing gum, travel kits and breath mints. + +The Company operates in one reportable segment. The Company's chief operating +decision-maker has determined the operating segment based upon how the business +is managed and operated. Geographical segments are not material as of December +30, 2000. + +Recent Business Developments + +Expansion and Revenue Growth +- ---------------------------- + +During the 39-week transition period ended December 30, 2000 (the "Transition +Period") and through the date of this Report, the Company opened new Centers in +New York, NY, Chicago, IL and Phoenix, AZ. In addition, BriteSmile continues to +aggressively identify and recruit dentists practicing in both Center and +non-Center Markets to establish complementary BriteSmile Associated Centers in +their respective markets. + +To date, BriteSmile has contracted with dentists to operate over 1800 Associated +Centers, of which 1,383 were in operation as of March 1, 2001. This compares to +only 203 Associated Centers in operation at the same time last year. During the +quarter ended December 30, 2000, the Company placed into operation 268 new +Associated Centers, of which 30 were in international locations. + +In addition, the Company is aggressively expanding distribution of its services +and products through its strategic relationships with Orthodontic Centers of +America ("OCA"), the leading provider of orthodontic practice management +services in the United States, and Blatchford Solutions, one of the largest +dental practice management organizations in the United States, and continues to +pursue other strategic partnerships. The Company is also expanding its domestic +direct selling teams to expand its network of Associated Centers. Overall, the +Company has planned openings (combined domestic and international) of +approximately 1,500 additional Associated Centers over the next 12 months. There +can be no guarantee that the Company will be successful in executing its +business plan, including opening the total additional Associated Centers +described above. + +Revenues for the Transition Period increased by approximately $12,100, or 258%, +to approximately $16,800, from approximately $4,700 in the 39 weeks ended +December 30, 1999. Of the total Transition Period revenues, approximately +$10,300 was attributable to Center operations, and approximately $6,500 was +attributable to the + + 4 + + +Associated Centers. + +Strategic Partnerships and Alliances +- ------------------------------------ + +On June 3, 1999, the Company and OCA announced an agreement to provide +BriteSmile LATW in certain OCA facilities. During February 2000, BriteSmile and +OCA expanded this relationship resulting in contracts to place BS3000 systems in +approximately 99 OCA locations in the United States. As of March 1, 2001, OCA +had 387 affiliated orthodontists and 566 orthodontic centers in 43 states, +Japan, Mexico and Puerto Rico. The strategic relationship between OCA and +BriteSmile provides BriteSmile with access to a large existing customer base and +provides OCA with the best in teeth whitening technology to complement its +orthodontic services. + +The Company recently formed an alliance with Blatchford Solutions to offer +BriteSmile's LATW systems to Blatchford's consulting network of approximately +1,000 dental clients in the United States and Canada. In addition to placing the +proprietary BriteSmile teeth whitening technology with dentists, Blatchford +Solutions is also working with dentists to develop marketing strategies that +will maximize the number of procedures performed. + +International Expansion +- ----------------------- + +In May 1999, the Company established BriteSmile International, a Dublin, +Ireland-based subsidiary, to facilitate international distribution of the +BS3000. BriteSmile International has since introduced the BS3000 to markets in +Argentina, Belgium, France, Germany, Italy, Japan, the Netherlands, Singapore +and Switzerland. BriteSmile International is continuing to explore additional +international opportunities for distribution of the Company's technology in +Europe, Latin America and Asia. + +Internal Infrastructure +- ----------------------- + +In addition to external expansion, the Company is actively building its internal +infrastructure to provide the finest consumer experience in teeth whitening. In +February 1999, BriteSmile established a national Call Center in order to +efficiently handle incoming consumer inquiries and to book appointments via the +Company's proprietary web-based scheduling system (the "Scheduler"). The Call +Center, located at the Company's corporate headquarters in Walnut Creek, +California, is equipped with advanced telephone and computer equipment to +service consumers calling BriteSmile's toll free telephone numbers. The +Scheduler is a custom-developed software solution capable of tracking incoming +calls as well as customer appointments, treatments performed and payments. The +Scheduler provides the Call Center, each BriteSmile Center and BriteSmile +Associated Centers with the capability of viewing and interacting on a real-time +basis with dentists' schedules while enabling management to closely monitor +performance of advertising campaigns, sales agents, and the operational and +financial results of Centers and Associated Centers. + +Year 2000 Note Purchase Financings +- ---------------------------------- + +On June 29 and August 3, 2000, the Company sold to eleven investors (the +"Investors") in a private placement its 5% Subordinated Convertible Notes due +June 29, 2005 (the "August 2000 Notes") in the aggregate principal amount of +$20,000. + +Initially, the August 2000 Notes were convertible into shares of the Company's +Common Stock at a per share conversion price of $6.18, which was 120% of the +average of the closing bid price of the Common Stock during the ten-day trading +period immediately prior to June 27, 2000, the date the transaction documents +were signed. The Company also issued to the Investors, pro rata, warrants (the +"Warrants") to purchase a total of 1,618,121 shares of Common Stock, which have +a term of five years and initially had an exercise price of $7.21 per share. + +Pursuant to Registration Rights Agreements between the Investors and the +Company, the Company has registered Commission, +effective August 25, 2000, the shares of Common Stock underlying the August 2000 +Notes and Warrants for resale under the Securities Act. + + 5 + + +Seven of the Investors, who purchased an aggregate amount of $15,700 of the +August 2000 Notes, are affiliates of the Company. The affiliated Investors +include LCO Investments Limited ("LCO," the principal shareholder of the Company +and affiliated with director Anthony Pilaro), John Reed (shareholder, CEO and +director), Dr. Gasper Lazzara, Jr. (director), Andrew McKelvey (shareholder and +affiliated with director Bradford Peters), and Pequot Private Equity Fund II, +L.P., Pequot International Fund, Inc., and Pequot Partners Fund, L.P. +(shareholders and affiliated with director Gerald Poch). + +Four of the Investors, who purchased a total of $4,300 principal amount of the +August 2000 Notes, are unaffiliated with the Company. These unaffiliated +investors are CapEx, L.P., Pacific Mezzanine Fund, VenCap Opportunities Fund, +L.P., and Wendell Starke. + +On December 5, 2000, the Company sold to LCO Investments Ltd in a private +placement a Convertible Promissory Note (the "December 2000 Note") in the +aggregate principal amount of $5,000. This December 2000 Note is convertible +into shares of Common Stock of the Company at a conversion price of $5.00 per +share and, as of the date of this Report, has not been converted. In conjunction +with the placement of the December 2000 Note, LCO was granted warrants for +250,000 shares at $5.00 per share. + +As a result of the issuance of the December 2000 Note, the conversion price of +the August 2000 Notes, and the exercise price of the Warrants, was automatically +adjusted to $5.00 per share. + +In December 2000, LCO, the Company's principal shareholder, and John Reed, the +Company's Chief Executive Officer, converted their original August 2000 Notes, +together with accrued interest, into an aggregate of 1,122,323 shares of Common +Stock. This conversion was effected at the $5.00 conversion price. + +Subsequently, effective December 14, 2000, certain of the original Investors +other than LCO and Mr. Reed, agreed with the Company to convert an aggregate of +$13,642 in principal amount of their August 2000 Notes, together with accrued +interest, into 3,568,560 shares of Common Stock at an amended conversion price +of $3.8625 per share. + +Of the original principal amount of $20,000 of August 2000 Notes, as of the date +of this Report, $800 in principal amount has not been converted and remains +outstanding. The current conversion price of such outstanding August 2000 Notes +is $5.00 per share. + +Of the original Warrants issued in the August 2000 Note offering, all 1,618,121 +Warrants remain outstanding and unexercised, at an exercise price of $5.00 per +share. + +The conversion price of the remaining August 2000 Notes, and the exercise price +of the Warrants, continues to be subject to additional adjustments from time to +time upon the occurrence of certain other events described in the August 2000 +Notes and Warrants, including future issuances of Common Stock for consideration +less than the conversion price then in effect, stock splits or reverse stock +splits, and the occurrence of certain major corporate events such as mergers, +sale of assets, tender offers or exchange offers. + +At any time after the third anniversary of the issuance date of the August 2000 +Notes, the Note holder has the right, but not the obligation, to elect to cause +the Company to redeem all or a portion of its August 2000 Notes. + +EVL Lease Agreement +- ------------------- + +On December 29, 2000, as amended in February 2001, the Company secured a lease +line of credit of up to $15,000 from Excimer Vision Leasing L.P. ("EVL"). EVL +leases laser vision correction equipment to ophthalmologists. + +In addition to providing working capital to the Company, the lease line of +credit will enable the Company to place up to 1,755 new BriteSmile teeth +whitening devices in Associated Centers in the US, enhancing the Company's +ability to meet its strategic objective of establishing approximately 3,700 +Associated Centers by year end 2001. Pursuant to the lease line agreement, EVL +purchased from the Company 1,245 BriteSmile 3000 teeth-whitening devices +currently used in various BriteSmile Associated Centers in the United States for +$5,000. The agreement + + 6 + + +also provides that EVL will subsequently spend up to an additional $10,000 +towards the purchase of 1,755 BriteSmile 3000 systems. If the purchase price of +the additional 1,755 devices exceeds $10,000, the Company will pay the +difference. EVL will lease all devices to the Company for a term of five years. +The Company will pay EVL a monthly rental for each device consisting of a fixed +amount (ranging from twenty dollars to thirty dollars), plus one hundred twenty- +five dollars for each key card which enables Associated Center dentists to +perform 5 teeth whitening procedures. + +EVL Loan Agreement +- ------------------ + +Effective March 1, 2001, the Company borrowed $2,500 from EVL for general +working capital. The loan matures on May 10, 2006, and is not prepayable. +Payments under the loan consist of "fixed payments" of interest, "variable +payments" of principal, and a "final payment" of principal. An initial fixed +payment of $10 is due on April 1, 2001, followed by monthly fixed payments of +$13 during the term of the loan. Variable payments are $25.00 for each +BriteSmile teeth whitening procedure performed at the Company's 14 current +whitening Centers. The final payment, due at maturity, will be the amount by +which the aggregate of variable payments paid during the term of the loan is +less than the original $2,500 principal amount of the loan. + +Management +- ---------- + +Effective March 6, 2000, the Company appointed Dennis F. Hightower, a former +senior executive with Walt Disney and professor at Harvard Business School, to +the Company's Board of Directors. Most recently Mr. Hightower served as the +Chief Executive Officer of Europe Online, a privately-held broadband company +based in Luxemborg. He has also served as a senior executive with the Walt +Disney Company. He was President of Walt Disney Television and +Telecommunications, which at the time was the largest division in terms of +revenues and operating income. Previously he was based in Paris as President of +Disney Consumer Products for Europe, the Middle East, and Africa. + +On March 6, 2000 the Company also announced the appointment of Peter Hausback as +the Company's new CFO. Mr. Hausback will assume his responsibilities as CFO +effective April 2, 2001. Mr. Hausback replaces Paul Boyer, who recently left the +Company to pursue other opportunities. Mr. Hausback served as the CFO, +VP-Finance and Secretary for Il Fornaio, a $125 million, multi-state fine dining +and commercial bakery company. While at Il Fornaio, Mr. Hausback was responsible +for planning, directing and managing human resources, MIS and all financial +functions, including budget and analysis, SEC reporting, accounting, cost, +treasury, cash, credit and tax functions. Mr. Hausback also previously served as +a manager at Price Waterhouse LLP in San Francisco, and as a senior auditor with +Security Pacific Corporation in Los Angeles. + +Market for Products and Services + +The Company estimates, based upon a study conducted by Dental Products Report, +that approximately $1,300,000 was spent in the United States during 2000 for +professionally prescribed bleaching products and services, up from approximately +$150,000 spent in 1990, as estimated by the American Dental Association. In +addition, the consumer market for retail whitening toothpaste is substantial, +with an estimated $380,000 spent in the United States in 1998, an increase of +185% from 1995. The Company believes that the concept of teeth whitening is +becoming increasingly accepted in developed nations around the world. +Accordingly, the Company believes that the market for the Company's services +includes consumers in the United States and abroad that are inclined to whiten +their teeth and have sufficient disposable income to pay the suggested retail +price of five hundred dollars for the LATW process. + +Marketing and Distribution + +BriteSmile's services are marketed primarily via consumer advertising. The +Company uses radio, newsprint, magazines, the Internet and television to market +its LATW procedure. On October 20, 2000 the Company began airing 30-minute +infomercials regarding its products and services in all Center markets. The +Company tailors its marketing and advertising programs to each of its respective +markets. All forms of Company advertising include a toll free telephone number, +which routes incoming calls to BriteSmile's Call Center where the LATW procedure +is further described, and a consultation appointment can be scheduled. The +Company has retained the services of + + 7 + + +various advertising agencies to produce and place its advertising, and to +evaluate its effectiveness. The Company has also retained a nationally +recognized public relations firm to assist in the implementation of its public +relations strategy, which consists principally of building public awareness and +establishing brand recognition in areas where Centers and Associated Centers are +located. + +The Company's LATW services are distributed through retail locations known as +"BriteSmile Professional Tooth Whitening Centers" and "BriteSmile Professional +Tooth Whitening Associated Centers." Licensed dentists and trained dental +assistants provide the LATW service directly to consumers at Centers. Other +staff members at Centers are responsible for sales and administrative functions. +Associated Centers are located within existing dental offices. The dentist who +operates the Associated Center and his staff provide the BriteSmile LATW +services at that location. No customer accounted for more than 10% of net sales +of the Company during the transition period ended December 30, 2000 or the +fiscal years ended April 1, 2000 and March 31, 1999. + +Prior to the end of calendar year 1999 the Company marketed and sold its +laser-based systems and bleaching chemicals directly to dentists through the +Company's internal sales staff, domestic and foreign independent representatives +and dental dealers. Sales to consumers were made through dentists who prescribed +and administered tooth-whitening treatments. The Company used trade journal +advertising, brochures, mailings, trade shows, and high profile dentists to +promote its products. + +Competition + +The Company's LATW process competes with all teeth whitening products and +services. Generally, competing products consist of bleaching treatments +performed within dental offices, take-home bleaching systems offered by +dentists, and over-the-counter bleaching products, including pastes and gels. +These traditional whitening products and procedures involve inconvenient and +time consuming methods and generally yield mediocre results. Standard tray +systems, which make up approximately 80% of the market, offered through dentists +and over-the-counter, require a high level of consumer compliance over a period +of several weeks. The BriteSmile LATW procedure, however, safely produces +superior whitening results in approximately 90 minutes. + +Clinical studies conducted at the University of Medicine and Dentistry of New +Jersey, and confirmed by researchers at New York University, indicate that the +Company's LATW procedure, which incorporates a neutral pH and lower levels of +hydrogen peroxide in the Company's proprietary whitening gel, will not soften +tooth enamel or damage existing fillings, and is neither caustic nor corrosive. +Further independent clinical studies, recently released by the Boston-based +Forsyth Institute, found that the Company's LATW procedure resulted in an +average whitening effect of 8.34 shades of improvement. The Forsyth study found +that the combination of the proprietary BriteSmile light and gel resulted in a +significant improvement in teeth whitening not achieved by either peroxide or +light alone. + +The Company has established a selling price within the range of most +professionally administered whitening processes. The Company`s Centers offer +whitening service in uniform and attractive salon-type settings intended to +differentiate and brand the Company's whitening service as well as create a more +enjoyable experience for the consumer. Additionally, the Company is continuing +research and development efforts to improve and expand its current LATW system +in order to maintain and improve competitive advantages. + +Competition from dentist-prescribed home bleaching products is from Opalescence +(Ultradent), Nite White (Discus Dental), Platinum (Colgate), NuProGold +(Dentsply), Perfecta (American Dental Hygienics), and Rembrandt (DenMat). There +continue to be numerous entrants into the in-office tooth whitening market, +including Dental/Medical Diagnostic Systems Inc., Kreative, Shafu and DenMat, +which also offer both curing light-activated devices and gels. Competition for +over-the-counter whitening kits is from Natural White and DenMat, as well as +whitening toothpaste producers. Some of the Company's current and potential +competitors may have greater financial and marketing resources available to them +than the Company. + + 8 + + +Sources of Supply + +The Company has subcontracted the manufacturing of the LATW system with a single +manufacturer, Boyd Industries, Tampa Florida. Effective April, 2001, all +manufacturing of the Company's BriteSmile 3000 system will be pursuant to a new +manufacturing contract between the Company and Peak Industries located in +Frederick, Colorado. The Company leases all LATW systems used in Associated +Centers from EVL pursuant to the $15,000 lease line of credit entered into on +December 29, 2000. See Item 1--"Business, Recent Business Developments, EVL +Lease Agreement," above. The Company anticipates that there may be an +approximate two to three weeks delay in April 2001 between the date of final +shipments of LATW systems produced by our current manufacturer, and shipments of +LATW devices manufactured by Peak. Any such delays could delay receipt of +revenues from Associated Centers who receive systems from the new manufacturer. +The Company also produces or assembles its own proprietary disposable goods used +in the whitening process. Goods purchased to produce the LATW system and equip +the Centers and Associated Centers are in some cases unique and purchased from a +single vendor. In those cases the Company believes it could purchase items +meeting its design specifications from other vendors within the industry. +Overall, the Company believes it has access to sufficient quantities of goods +and materials at competitive prices to enable it to operate effectively. + +Organizational Structure of Centers + +A licensed dentist and licensed dental assistants administer the Company's LATW +process at Centers. Generally, the dentist creates a professional corporation +(the "PC"), which enters into various agreements with the Company relating to +the Center. Pursuant to such agreements, the licensed dentist has exclusive +authority regarding dental matters, including administering of the LATW. A +Deficit Funding Agreement between the Company and the PC obligates the Company +to fund any Center losses by lending necessary funds to the PC which are +repayable solely from the assets of the PC, and without recourse against any +officer, director, or shareholder of the PC. Under a Security Agreement between +the Company and the PC, the PC grants to the Company a security interest in all +of the PC's accounts, general intangibles, equipment, and fixtures to secure the +PC's obligations under the Deficit Funding Agreement. Pursuant to a Management +Agreement between the Company and the PC, the Company manages the business and +marketing aspects of the Center including providing furnishings, equipment, +advertising and office space, and maintaining, repairing, and replacing +furnishings as necessary. + +Organizational Structure of Associated Centers + +Associated Centers are located within existing dental offices pursuant to a +BriteSmile Systems Agreement (the "Systems Agreement") between the Company and a +dentist (the "Associated Center Dentist"). The Systems Agreement specifies the +number of systems to be located at the Associated Center, the compensation to be +paid to the Company by the Associated Center Dentist, the marketing and +promotional activities of the parties, and the obligations of both parties with +respect to use and maintenance of the LATW equipment. + +Patents, Trademarks and Licenses + +The Company has filed a number of patent applications related to the LATW system +which are currently pending, including patent applications related to the +composition of the Company's whitening gel, methods of whitening teeth with +light tissue isolation barriers, the Company's business method and the Company's +unique system of delivery of light to all teeth simultaneously through the +Company's gas-plasma light activating device. In addition, the Company has +ongoing research and development efforts to improve and expand the Company's +current technology, and to develop new tooth whitening compositions and light +devices. + +Since, December 30, 2000, patents have been issued to the Company related to a +method for light-activated tooth whitening, and a design for a device that +provides light to teeth for whitening procedures. + +Although the Company intends to continue to apply for patents as advised by +patent counsel, there can be no assurance that such patents will be issued or +that, when they are issued, they will not be infringed upon by third parties or +that they will cover all aspects of the product or system to which they relate. +Management generally believes that the Company's success depends more on its +ability to maintain state-of-the-art technology and to market its products on a +price-competitive and value-added basis, than on any legal protection that +patents may + + 9 + + +provide. The Company relies, and will continue to rely, on trade secrets, know- +how and other unpatented proprietary information in its business. Certain key +employees of the Company are required to enter into confidentiality and non- +competition agreements to protect the confidential information of the Company. +However, there is no assurance that these agreements would be enforceable if +they are breached or, if enforced, that they would adequately protect the +Company or provide an adequate remedy for the damage that may be caused by such +a breach. The Company incurred $1,811, $1,748 and $3,201 of research and +development expenses during the Transition Period and the Fiscal Years ended +April 1, 2000 and March 31, 1999, respectively. + +The Company owns the rights to the registered trademarks and service marks +"BriteSmile" (name and logo). + +Government Regulation + +The Company's business operations are subject to certain federal, state and +local statutes, regulations and ordinances (collectively, "government +regulations"), including those governing health and safety. The LATW system is +categorized as a Class 1 Medical Device as defined by the Food and Drug +Administration ("FDA"). The LATW device is utilized specifically to perform +cosmetic dental procedures (teeth whitening); as such, the Company's LATW device +is not subject to the customary rules, regulations and oversight by the FDA. +There can be no assurance that some or all of the existing government +regulations will not change significantly or adversely in the future, or that +the Company will not become subject to compliance with additional and stricter +government regulations. + +In most states the Company's teeth whitening procedure is deemed to be a part of +the practice of dentistry. Generally, states impose licensing and other +requirements on the practice of dentistry. In addition, some states prohibit +general business corporations (such as the Company) from engaging in the +practice of dentistry. In some states the BriteSmile corporate structure and +contractual relationships with PCs that provide LATW services to consumers must +be reviewed by, and require the express approval of, that state's agency +governing the practice of dentistry (such as a Board of Dental Examiners). In +those states, approval is necessary for the Company's operation of Centers, and +there is no assurance that such approvals will be obtained. If such approvals +cannot be obtained, the Company will be limited to offering its LATW procedure +through Associated Centers. The Company intends to continue to cooperate with +state regulatory agencies, and obtain all necessary governmental approvals. Even +with such approvals there can be no assurance that future enactments, +amendments, or interpretations of government regulations will not be more +stringent, and will not require structural, organizational, and operational +modifications of the Company's existing and future contractual relationships +with PCs which provide LATW services. However, management believes that its +present and contemplated operation of Centers is and will be in compliance in +all material respects with applicable federal, state and local regulations. + +The Company regularly monitors developments in government regulations relating +to the practice of dentistry. The Company plans to structure all of its +agreements, operations and marketing in accordance with applicable government +regulations, although there can be no assurance that its arrangements will not +be successfully challenged or that required changes may not have a material +adverse effect on the Company's operations or profitability. + +Product Liability + +The Company may become subject from time to time, to suits alleging negligence, +product liability or related causes of action, although no such action is +currently pending. The Company maintains product liability insurance coverage +for its products and services. While the Company intends to continue to insure +against such actions, there can be no assurance that the Company will be +successful in maintaining such coverage or that the limits of such policies will +be adequate or renewable at prices or on terms that are sufficient for the +Company's business. A successful claim against the Company in excess of any +insurance coverage could have a material adverse effect upon the Company and its +financial condition. Claims against the Company, regardless of the merit or +eventual outcome of such claims, also may have a material adverse effect on the +Company's reputation and business. Product liability insurance for the +nine-month Transition Period ended December 30, 2000, and the Fiscal Year ended +April 1, 2000, cost the Company approximately $30 and $16, respectively. + + 10 + + +Employees + +As of March 1, 2001, the Company had 125 full-time employees and 25 part-time +employees. None of the Company's employees are represented by a union and the +Company is not aware of any efforts to unionize any employees. The Company +believes its labor relations are satisfactory. + +ITEM 2. DESCRIPTION OF PROPERTY + +In November 1999 the Company relocated its corporate offices from Lester, +Pennsylvania to Walnut Creek, California. As of September 27, 1999, the Company +entered into a lease agreement through April 2007 for its 13,746 square foot +corporate office facility in Walnut Creek, California. Approximately 11,246 +square feet of the building are used for administration, Call Center and office +space, and 2,500 square feet are used for product assembly and warehousing. +Aggregate lease payments under the Walnut Creek lease through 2007 are $1,654. + +The Company's facilities in Walnut Creek, California are in good repair. + +As of the date of this Report, the Company has fourteen 14 Centers operating +under lease agreements in the following locations: + + Lease Site Lease Term Aggregate Lease Payments + ---------- ---------- ------------------------ + + Atlanta, GA 5 $ 687 + Beverly Hills, CA 10 1,500 + Boca Raton, FL 5 926 + Boston, MA 5 1,075 + Chicago, IL 10 2,017 + Denver, CO 10 1,551 + Honolulu, HI 5 482 + Houston, TX 6 552 + Irvine, CA 10 870 + LaJolla, CA 10 1,018 + New York, NY 10 4,754 + Palo Alto, CA 5 468 + Phoenix, AZ 6 900 + Walnut Creek, CA 5 1,580 + +Each Center lease covers prime street level, retail spaces, approximately +3,000-7,000 square feet each, with improvements to create attractive salon +settings. Equipment available at each Center includes BriteSmile LATW devices, +dental chairs and dental cabinetry and equipment, all in excellent condition. + +Recently the Company has closed three of its less productive Centers which +operated under the following lease agreements. At present, the Company remains +obligated under these leases, and plans to sub-lease and/or negotiate +termination of the leases. + + Lease Site Lease Term Aggregate Lease Payments + ---------- ---------- ------------------------ + + Coral Gables, FL 5 277 + Ft. Lauderdale, FL 7 592 + Pasadena, CA 5 393 + + +ITEM 3. LEGAL PROCEEDINGS + +The Company is involved in various other claims and legal actions arising in the +ordinary course of business. In the opinion of management, the ultimate +disposition of these other matters will not have a material adverse effect on +the + + 11 + + +Company's operations or financial condition. + +ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS + +No matters were submitted to a vote of security holders during the last quarter +of the Transition Period covered by this Report. + +PART II + +ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS + +On April 7, 2000, the Common Stock of the Company commenced trading on the +NASDAQ National Market System under the Symbol "BSML". Prior to its listing on +NASDAQ, from 1995 to April 2000, the Company's Common Stock was listed for +trading on the American Stock Exchange (AMEX: BWT). The following table sets +forth, for each full quarterly period during the past two fiscal years, and the +Transition Period covered by this Report, high and low sales price information +as reported by Nasdaq, AMEX, or other electronic services, as the case may be. + + High Low + ---- --- + + Fiscal Year Ended March 31, 1999 + -------------------------------- + June 30, 1998 $ 3.000 $1.0000 + September 30, 1998 $ 3.375 $0.6875 + December 31, 1998 $ 3.000 $0.8750 + March 31, 1999 $ 7.375 $2.0625 + + Fiscal Year Ended April 1, 2000 + ------------------------------- + June 30, 1999 $ 17.250 $ 4.125 + September 30, 1999 $ 12.000 $ 8.625 + December 31, 1999 $11.1875 $ 5.625 + April 1, 2000 $ 13.625 $ 7.125 + + Transition Period Ended December 30, 2000 + ----------------------------------------- + July 1, 2000 $10.875 $ 3.281 + September 30, 2000 $ 9.812 $ 3.250 + December 30, 2000 $ 8.281 $ 2.187 + +As of March 26, 2001, there were 291 holders of record of the Company's stock. +This number excludes any estimate by the Company of the number of beneficial +owners of shares held in street name, the accuracy of which cannot be +guaranteed. + +Dividends + +The Company has not paid any cash dividends on its Common Stock since its +inception. The policy of the Board of Directors is to retain earnings to support +growth; therefore, the Company does not anticipate paying any cash dividends on +its Common Stock in the foreseeable future. + +Recent Sales of Unregistered Securities + +In addition to the issuance of shares upon exercise of options or otherwise as +reported elsewhere in this Report, within the past three years the Company has +issued securities in transactions summarized below without registration of the +securities under the Securities Act of 1933, as amended (the "1933 Act"). + + 12 + + +Fiscal Year Ending March 31, 1999 + +On May 5, 1998, the Company sold 1,860,465 shares of restricted Common Stock to +LCO Investments Limited ("LCO") for $5,000. In connection with the sale, the +Company also agreed to reprice options to purchase up to 1,173,334 shares of +Common Stock previously granted to LCO, such that the purchase price of the +shares underlying the then-existing options was changed from $9.00 per share to +$4.50 per share. 773,334 of said options are exercisable through March 31, 2006. +400,000 of said options are exercisable through May 1, 2007. + +On December 7, 1998, the Company sold 9,302,326 shares of restricted Common +Stock to LCO in a private placement for $10,000. Under an amendment to a prior +registration agreement, LCO acquired certain registration rights with respect to +these shares. + +Fiscal Year Ending April 1, 2000 + +Effective June 4, 1999, the Company sold 1,355,555 shares of restricted Common +Stock in a private placement for $15,000. 1,004,043 of the shares were sold to +nine private investors, including LCO, for $11,120. The remaining 351,512 shares +were sold to a group of 18 individuals, including members of senior management, +the Company's Board of Directors, and key consultants ("Management Purchasers") +for $3,880. The purchase price was $10.95 per share. However, four of the +purchasers, including three non-employee directors of the Company and LCO, +purchased at $11.525 per share. CAP Advisers Limited, an entity affiliated with +LCO, provided financing for the Management Purchasers. All purchasers acquired +certain registration rights. + +Effective January 12, 2000, the Company sold 77,318 shares of Common Stock in a +private placement to Andrew J. McKelvey for cash proceeds of $464, or $6.00 per +share. Mr. McKelvey also acquired certain registration rights with respect to +the shares. Bradford Peters, a director of the Company, shares in the economic +benefits of any appreciation in the shares acquired by Mr. McKelvey. Mr. Peters +also shares with Mr. McKelvey authority to dispose of the shares. See "Certain +Relationships and Related Transactions," Item 13, below. + +Effective January 12, 2000, the Company sold in a private placement a total of +30,927 shares of Common Stock to Quota Rabbicco II, Ltd., Argonaut Partnership, +L.P., and David E. Gerstenhaber for $186, or $6.00 per share. The three +purchasers also acquired certain registration rights with respect to the shares. + +On January 18, 2000, the Company sold in a private placement 3,333,333 shares of +its Common Stock, representing 14.2 percent of the Company's total shares then +outstanding, for aggregate proceeds of $20,000. The purchase price was $6.00 per +share. The shares were issued to three private investors, Pequot Private Equity +Fund II, L.P. (1,666,667 shares), Pequot Partners Fund, L.P. (833,333 shares), +and Pequot International Fund, Inc. (833,333 shares)(collectively, the "Pequot +Investors"). Pursuant to a Registration Rights Agreement entered into with the +Company, the Pequot Investors acquired both demand and piggyback registration +rights to cause the Company to register their new shares for offer and sale +under the 1933 Act. Pursuant to a Voting and Co-Sale Agreement entered into +between the Company, the Pequot Investors, and LCO, the Company granted to the +Pequot Investors the right to designate one person to be appointed to the Board +of Directors of the Company, and to be nominated for election as a director in +any shareholders meeting at which directors are elected. The Pequot Investors +appointed Mr. Gerald Poch to serve as their designee on the Company's Board of +Directors. + +Transition Period Ended December 30, 2000 + +On June 29 and August 3, 2000, the Company sold to eleven investors (the +"Investors") in a private placement its 5% Subordinated Convertible Notes due +June 29, 2005 (the "August 2000 Notes") in the aggregate principal amount of +$20,000. + +Initially, the August 2000 Notes were convertible into shares of the Company's +Common Stock at a per share conversion price of $6.18, which was 120% of the +average of the closing bid price of the Common Stock during the ten-day trading +period immediately prior to June 27, 2000, the date the transaction documents +were signed. The Company also issued to the Investors, pro rata, warrants (the +"Warrants") for the purchase a total of 1,618,121 shares of Common Stock, which +have a term of five years and initially had an exercise price of $7.21 per +share. + + 13 + + +Pursuant to Registration Rights Agreements between the Investors and the +Company, the Company has registered with the Securities and Exchange Commission, +effective August 25, 2000, the shares of Common Stock underlying the August 2000 +Notes and Warrants for resale under the Securities Act. + +Seven of the Investors, who purchased an aggregate amount of $15,700 of the +August 2000 Notes, are affiliates of the Company. The affiliated Investors +include LCO (the principal shareholder of the Company and affiliated with +director Anthony Pilaro), John Reed (shareholder, CEO and director), Dr. Gasper +Lazzara, Jr. (director), Andrew McKelvey (shareholder and affiliated with +director Bradford Peters), and Pequot Private Equity Fund II, L.P., Pequot +International Fund, Inc., and Pequot Partners Fund, L.P. (shareholders and +affiliated with director Gerald Poch). + +Four of the Investors, who purchased a total of $4,300 principal amount of the +August 2000 Notes, are unaffiliated with the Company. These unaffiliated +investors are CapEx, L.P., Pacific Mezzanine Fund, VenCap Opportunities Fund, +L.P., and Wendell Starke. + +On December 5, 2000, the Company sold to LCO Investments Ltd in a private +placement a Convertible Promissory Note (the "December 2000 Note") in the +aggregate principal amount of $5,000. This December 2000 Note is convertible +into shares of Common Stock of the Company at a conversion price of $5.00 per +share and, as of the date of this Report, has not been converted. In conjunction +with the placement of the December 2000 Note, LCO was granted warrants for +250,000 shares at $5.00 per share. + +As a result of the issuance of the December 2000 Note, the conversion price of +the August 2000 Notes, and the exercise price of the Warrants, was automatically +adjusted to $5.00 per share. + +In December 2000, LCO, the Company's principal shareholder, and John Reed, the +Company's Chief Executive Officer, converted their original August 2000 Notes, +together with accrued interest, into an aggregate of 1,122,323 shares of Common +Stock. This conversion was effected at the $5.00 conversion price. + +Subsequently, effective December 14, 2000, certain of the original Investors +other than LCO and Mr. Reed, agreed with the Company to convert an aggregate of +$13,642 in principal amount of their August 2000 Notes, together with interest, +into 3,568,560 shares of Common Stock at an amended conversion price of $3.8625 +per share. + +Of the original principal amount of $20,000 of August 2000 Notes, as of the date +of this Report, $800 in principal amount has not been converted and remains +outstanding. The current conversion price of such outstanding August 2000 Notes +is $5.00 per share. + +Of the original Warrants issued in the August 2000 Note offering, all 1,618,121 +Warrants remain outstanding and unexercised, at an exercise price of $5.00 per +share. + +The conversion price of the remaining August 2000 Notes, and the exercise price +of the Warrants, continues to be subject to additional adjustments from time to +time upon the occurrence of certain other events described in the August 2000 +Notes and Warrants, including future issuances of Common Stock for consideration +less than the conversion price then in effect, stock splits or reverse stock +splits, and the occurrence of certain major corporate events such as mergers, +sale of assets, tender offers or exchange offers. + +At any time after the third anniversary of the issuance date of the August 2000 +Notes, the Note holder has the right, but not the obligation, to elect to cause +the Company to redeem all or a portion of its August 2000 Notes. + +With respect to all of the foregoing offers and sales of restricted and +unregistered securities by the Company, the Company relied on the provisions of +Sections 3(b) and 4(2) of the 1933 Act and rules and regulations promulgated +thereunder, and upon Regulation S promulgated by the Securities and Exchange +Commission, including, but not limited to Rules 505 and 506 of Regulation D, in +that such transactions did not involve any public offering of securities and +were exempt from registration under the 1933 Act. The offer and sale of the +securities in each instance was not made by any means of general solicitation; +the securities were acquired by the investors without a view toward +distribution; and all purchasers represented to the Company that they were +sophisticated and experienced in such transactions and investments and able to +bear the economic risk of their investment. A legend + + 14 + + +was placed on the certificates and instruments representing these securities +stating that the securities evidenced by such certificates or instruments, as +the case may be, have not been registered under the 1933 Act and setting forth +the restrictions on their transfer and sale. Each investor also signed a written +agreement, or agreed to so sign upon exercise of their options, that the +securities would not be sold without registration under the 1933 Act or pursuant +to an applicable exemption from such registration. + +Stock Options + +Since March 31, 1998, the Company has granted options to purchase shares of +common stock to approximately 100 employees, directors, or key consultants +pursuant to the Company's 1997 Stock Option and Incentive Plan (the "1997 +Plan"). Of the 6,032,600 options granted, as of March 15, 2001, 466,000 have +been forfeited and 150,000 have been exercised. Additional options for +approximately 1,627,333 shares have been granted to certain vendors and +consultants outside the 1997 Plan of which 303,000 options have been forfeited +and 373,000 options have been exercised. The exercise price of the options +granted during that period ranges from $1.00 to $13.75 per share. Most of the +options vest and become exercisable in increments over time. + +The Company has registered with the Securities and Exchange Commission, on Form +S-8, up to 4,000,000 million shares of Common Stock subject to stock options +which have been or may in the future be granted under the Company's 1997 Plan, +and up to 675,000 shares of Common Stock subject to stock options or warrants +which have been granted to consultants or advisers outside the 1997 Plan. The +Company intends to register with the SEC on Form S-8 such additional shares of +Common Stock as will be necessary to cover any additional options granted or to +be granted under the Company's 1997 Plan. + +ITEM 6. SELECTED FINANCIAL DATA + +The selected consolidated financial data set forth below with respect to the +Company's consolidated statements of earnings and consolidated balance sheets +for the periods indicated are derived from the consolidated financial statements +of the Company. The data set forth should be read in conjunction with +"Management's Discussion and Analysis of Financial Condition and Results of +Operations," and the audited consolidated financial statements and related notes +thereto. + + +
+ Year Ended 9-Month + Transition + Period Ended + ---------------------------------------------------------------------- + March 31, March 31, March 31, April 1, Dec 30, + 1997 1998 1999 2000 2000 + ---- ---- ---- ---- ---- + (in thousands, except per share data) + +Consolidated Statement of Earnings Data: + +Net sales ................................. $ 7,083 $ 4,609 $ 547 $ 8,044 $ 16,808 +Center selling and occupancy costs......... 4,205 5,813 946 13,849 9,462 +Operating expenses:........................ + Selling, general and administrative..... 3,199 4,508 4,627 14,498 30,556 + Research and Development................ 233 906 3,201 1,748 1,811 + Depreciation and amortization........... 255 422 123 1,457 3,830 + Restructuring expense................... - 2,017 1,030 472 778 + Impairment Charges...................... - - 2,525 - 1,254 + Loss on sale/leaseback transaction...... - - - - 7,138 + ---------- --------- ---------- ---------- ---------- + Total operating expenses.............. 3,687 7,853 11,506 18,175 45,367 + ---------- --------- ---------- ---------- ---------- +Loss from operations....................... (809) (9,057) (11,905) (23,980) (38,021) +Other income (expense), net................ 41 (56) 138 475 (5,961) + ---------- --------- ---------- ---------- ---------- +Earnings before income taxes............... (768) (9,113) (11,767) (23,505) (43,982) +Income taxes .............................. 11 - - 11 26 + ---------- --------- ---------- ---------- ---------- +Net earnings............................... $ (779) $ (9,113) $ (11,767) $ (23,516) $ (44,088) + ========== ========= ========== ========== ========== +
+ + 15 + + + + +Earnings per share - diluted..................... $ (.15) $ (1.62) $ (1.13) $ (1.18) $ (1.80) + ========== ========= ========== ========== ========== + +Weighted average shares outstanding - diluted.... 5,195,000 5,630,000 10,409,212 19,995,796 24,493,676 + ========== ========= ========== ========== ========== +
+ + +
+ March 31, March 31, March 31, April 1, Dec 30, + 1997 1998 1999 2000 2000 + ---- ---- ---- ---- ---- + (in thousands, except per share data) + +Consolidated Balance Sheet Data: + +Cash and cash equivalents ....................... $ 55 $ 503 $ 6,200 $ 10,969 $ 5,701 +Working capital.................................. 3,564 1,198 3,498 10,869 (4,723) +Current assets................................... 4,587 3,082 7,780 15,018 13,257 +Total assets..................................... 9,718 4,662 10,432 32,390 32,169 +Long-term obligations, less current maturities... 846 - - 122 3,894 +Stockholders' equity............................. 7,849 1,847 6,060 28,119 10,295 +
+ +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS + OF OPERATIONS + +THIS ANNUAL REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, +FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTANTIES. THE +COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED BY +THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD +CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED BELOW IN THE SECTION +ENTITLED "FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS ANNUAL REPORT. THE +FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR FINANCIAL STATEMENTS AND +RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS DOCUMENT. + +ALL DOLLAR AMOUNTS THROUGHOUT THIS REPORT ARE EXPRESSED IN THOUSANDS. + +Results of Operations: + +The following table sets forth certain information relating to the growth in the +number of BriteSmile Centers and Associated Centers for the 39 weeks ended +December 30, 2000 compared to the fiscal year ended April 1, 2000: + + +
+ BriteSmile, Inc. Fiscal Year +Roll-out Status Transition Period April 2, 2000 Ended + through December 30, 2000 April 1, 2000 +- ----------------------------------------------------------------------------------------------------- -------------- + Number of Centers at + the Number of Centers Number of Centers + Centers beginning of Period Opened During Period At End of Period Total + ----------------------- ------------------------ ---------------------- ------------------ -------------- + 14 3 17 (1) 14 + + Grand + Associated Centers AC's OCA Total U.S. Int'l Total Total +- ------------------------------------------------------------------------- -------------- ------------ -------------- + +Total Developed............ 1,311 99 1,410 175 1,585 490 + +Contracts Received......... 1,310 98 1,408 175 1,586 375 + +Active - In Business (2)... 887 93 980 175 1,155 235 + +In Process (3)............. 423 5 428 0 428 140 +
+ + 16 + + + (1) Since December 30, 2000, the Company has closed three of its less- + productive Centers. See "Operating Costs and Expenses - Store Closure + Recovery" below. + + (2) The Company deems an Associated Center to be "active-in-business" 45 + days after the Company ships the initial keycard to the Associated + Center. + + (3) Represents Associated Centers for which a contract has been received + but where the dentist who will operate the Associated Center is either + awaiting training or shipment of the BS3000 device. + +The following table sets forth, for the periods indicated, certain information +relating to the operations of the Company. During the fourth quarter of the +Company's fiscal year ended April 1, 2000 ("Fiscal April 2000"), the Company +adopted a 52/53-week (4 week - 4 week - 5 week quarter) fiscal calendar. In +addition, the Company changed its year end from March to December. This change +necessitated adding one day to the Fiscal April 2000 year. Data in the table +reflects the consolidated results of the Company for the 39 week Transition +Period ended December 30, 2000, and the 39 week period ended December 30, 1999, +and for the 52 weeks ended April 1, 2000 and March 31, 1999, respectively. All +amounts, except share data, in the following table and discussion are in +thousands. + + +
+ For the 39 Weeks Ended For the 52 Weeks Ended + ------------------------------------- ---------------------------------- + % of % of + from from + December December 1999 to April March 1999 to + 30, 2000 30, 1999 2000 1, 2000 31, 1999 2000 + -------- -------- ---- ------- -------- ---- + (Unaudited) + +Statement of Operations Data: + + Center whitening fees, net....................... $ 9,315 $ 3,858 141.4% $ 5,838 $ 46 12,591.3% + Associated Center whitening fees, net............ 6,270 742 745.0 1,970 - + Product sales.................................... 1,223 97 1,160.8 236 501 (52.9) + -------- -------- -------- -------- + Total revenues, net...................... 16,808 4,697 257.8 8,044 547 1,370.6 + -------- -------- -------- -------- +Operating Costs and Expenses: + Selling and occupancy costs...................... 9,462 6,731 40.5 13,849 946 1,364.0 + Selling, general and administrative.............. 30,556 12,301 148.4 14,498 4,627 213.3 + Research and development expenses................ 1,811 1,279 41.6 1,748 3,201 (45.4) + Depreciation and amortization.................... 3,830 774 394.8 1,457 123 1,084.6 + Restructuring Expense............................ 778 300 159.3 472 3,555 (86.7) + Impairment charges............................... 1,254 - - - - - + Loss on sale/leaseback transaction............... 7,138 - - - - - + -------- -------- -------- -------- + Total operating costs and Expenses............ 54,829 21,385 156.0 32,024 12,452 157.2 + -------- -------- -------- -------- +Other Income (Expense), net: + Interest expense................................. (6,153) (24) 25,537.5 (26) (102) (74.5) + -------- -------- -------- -------- + Interest income.................................. 192 304 (36.8) 501 240 108.8 + -------- -------- -------- -------- + Income tax expense............................... 26 - - 11 - - + -------- -------- -------- -------- + Net loss........................................ $(44,008) $(16,408) 168.2% $(23,516) $(11,767) 99.8% + ======== ======== ======== ======== +
+ +In its quarterly earnings press release dated March 15, 2001, the Company +included the following table setting forth, for the periods indicated, certain +unaudited information prepared by the Company relating to the operations of the +Company for the 52-week (full calendar) periods ended December 30, 2000 and +December 30, 1999. Although the Company has changed its fiscal reporting to a +new 52 week calendar year-end, the first such 52 week calendar period to be +audited will end in December 2001. The audited financial information in this +Annual Report on Form 10-K includes only the Transition Period (the 39 weeks +ended December 30, 2000), and the 52 weeks ended April 1, 2000, and March 31, +1999. The 52 week calendar year end figures in the following table were prepared +by the Company for the reader's information only, and are not covered by the +auditor's report contained herein. + + 17 + + + +
+ 52 Weeks Ended 52 Weeks Ended + December 30, 2000 December 30, 1999 + (unaudited) (unaudited) + ----------- ----------- + +REVENUES: + Center whitening fees, net................................. $ 11,295 $ 4,047 + Associated Center whitening fees, net...................... 7,498 972 + Product sales.............................................. 1,362 97 + ------------ ------------ + Total revenues, net..................................... 20,155 5,116 + ------------ ------------ +OPERATING COSTS AND EXPENSES + Center selling and occupancy costs......................... 16,580 7,352 + Selling, General and administrative expenses............... 32,753 14,863 + Research and development expenses.......................... 2,280 1,697 + Depreciation and amortization.............................. 4,513 879 + Restructuring expense...................................... 778 -- + Impairment charges......................................... 1,254 -- + Loss on sale/leaseback transaction......................... 7,138 351 + ------------ ------------ + Total operating costs and expenses...................... 65,296 25,142 + ------------ ------------ + Loss from operations................................. (45,141) (20,026) + ------------ ------------ + OTHER INCOME (EXPENSE), net + including debt conversion costs of $5,552 and $0:.. (5,766) 389 + ------------ ------------ + Loss before income tax provision..................... (50,907) (19,637) + +INCOME TAX PROVISION........................................... 26 -- + ------------ ------------ + Net loss............................................. $ (50,933) $ (19,637) + ============ ============ +BASIC AND DILUTED NET LOSS PER SHARE........................... $ (2.10) $ (1.07) + ============ ============ +WEIGHTED AVERAGE SHARES - BASIC AND DILUTED.................... 24,281,863 18,349,297 + ============ ============ +
+ +The following are explanations of significant period-to-period changes for the +39 weeks ended December 30, 2000 and December 30, 1999: + +Revenues + +Total Revenues, net. Total revenues, net increased by $12,111, or 257.8% to +$16,808 for the 39 weeks ended December 30, 2000 from $4,697 for the 39 weeks +ended December 30, 1999. + +Center Whitening Fees, net. Center whitening fees, net increased by $5,457, or +141.4%, to $9,315 for the 39 weeks ended December 30, 2000 from $3,858 for the +39 weeks ended December 30, 1999. This increase was primarily due to the +operation of 17 Centers during the 39 weeks ended December 30, 2000 compared to +8 Centers that were in operation during the 39 weeks ended December 30, 1999. +The Company opened 3 new Centers during the 39 weeks + + 18 + + +ended December 30, 2000. Since December 30, 2000, the Company has closed three +of its less-productive Centers. See "Operating Costs and Expenses - Store +Closure Recovery" below. + +Associated Center Whitening Fees, net. Associated Center whitening fees, net +increased by $5,528, or 745.0% to $6,270 for the 39 weeks ended December 30, +2000 from $742 for the 39 weeks ended December 30, 1999. This increase was +primarily due to the operation of 1,155 Associated Centers at the end of the 39 +weeks ended December 30, 2000 compared to 29 Associated Centers that were in +operation at the end of the 39 weeks ended December 30, 1999. Of the 1,155 +Associated Centers in operation at December 30, 2000, 175 were international +locations. + +During the 39 weeks ended December 30, 2000, the Company opened 1,126 new +Associated Centers, of which 175 were international locations. At December 30, +2000, there were 428 Associated Centers in the process of being placed into +operation, of which none were international locations. Due to training and +shipping requirements, there is approximately 45 days of lead-time between the +signing of an Associated Center agreement and the first paid procedures at an +Associated Center. + +Although the Company does not believe that its business follows seasonal trends, +it has recognized that during the months of July and August and again during +December and January, a substantial number of Associated Center locations (both +domestic and international) shut down their practices for vacation. As a result, +the frequency of key card purchases by Associated Centers during these months +declines as well. In addition, during the 39 weeks ended December 30, 2000, the +Company changed the number of procedures on the key cards sold to Associated +Centers, from 20 procedures to 5 procedures. The Company also modified the +payment terms on the first key card only that is sold to a new Associated Center +location, from Net 30 to Net 60. These changes allow an Associated Center to +have the necessary time to receive both training and the BS3000 device and begin +performing paid procedures. The Company implemented these changes in response to +requests from the Associated Center dentists. + +The Company is aggressively executing its strategic plan of expanding +distribution into the professional dental practice channel through its +Associated Centers. This plan includes the expansion of strategic partnerships +such as the OCA relationship and other special dental groups, identifying and +expanding the international distributor base, and expanding domestic direct +selling teams while enhancing the support of new and existing Associated +Centers. Additionally, the Company anticipates opening approximately 1,500 +additional Associated Centers in domestic and international locations over the +next twelve months. As a result, Associated Center whitening fees are expected +to increase during the next twelve months. There can be no guarantee that the +Company will be successful in executing its business plan. + +Product Sales. Product sales increased by $1,126, or 1,160.8% to $1,223 for the +39 weeks ended December 30, 2000 from $97 for the 39 weeks ended December 30, +1999. Product sales represent the Company's toothpaste and Sonicare toothbrush +products sold at Centers and Associated Centers. Product sales are expected to +increase during the next twelve months as a result of the introduction of +additional oral care products to be sold at Centers, Associated Centers, and +through the company's E-Commerce website. + +Operating Costs and Expenses + +Center Selling and Occupancy Costs. Center selling and occupancy costs increased +by $2,731, or 40.5%, to $9,462 for the 39 weeks ended December 30, 2000 from +$6,731 for the 39 weeks ended December 30, 1999. This increase is primarily due +to the operation of 17 Centers at the end of the 39 weeks ended December 30, +2000 compared to 8 Centers that were in operation at the end of the 39 weeks +ended December 30, 1999. Of this increase, $2,326 related to Center salaries and +benefits, $2,357 related to rent, utilities, repairs and telephone at the 17 +existing Centers, and $529 related to product cost of sales and procedure +supplies as a result of increased sales. + +Center selling and occupancy costs, as a percentage of Center whitening fees, +increased to 101.6% for the 39 weeks ended December 30, 2000 from 98.3% for the +39 weeks ended December 30, 1999. The low operating margins represent newly +opened Centers and partial year results from existing Centers. + +Product cost of sales as a percentage of product sales increased to 34.5% for +the 39 weeks ended December 30, 2000 from 30.0% for the 39 weeks ended December +30, 1999. This increase is primarily due to the introduction of the + + 19 + + +Sonicare toothbrush product during the period which has lower margins. Product +cost of sales consisted primarily of the Company's toothpaste and Sonicare +toothbrush products. + +During September 2000, the Company reduced the number of operating days at 12 of +its 17 Centers, from 6 days to 5 days, eliminating Mondays. This change has not +affected the number of paid procedures performed at its Centers in relationship +to historical trends. + +Selling, General and Administrative Expenses. Selling, general and +administrative expenses increased $18,255, or 148.4%, to $30,557 for the 39 +weeks ended December 30, 2000 from $12,301 for the 39 weeks ended December 30, +1999. During the 39 weeks ended December 30, 2000, the Company added 26 +additional market managers, executive, selling and administrative personnel to +effectively execute the Company's business strategy, including the introduction +of 17 new Centers, the addition of 1,126 Associated Centers, and costs incurred +to open future Centers and Associated Centers. + +Of this increase, $10,297 related to advertising, promotional and call center +costs directed to increase consumer awareness, and sales of the whitening +service to prospective Associated Center dentists, $1,923 to increased salaries +and benefits, $400 to postage, $396 to travel and entertainment and $932 of +professional service costs related to public relations, executing Center and +Associated Center agreements, executing leases, intellectual property +protection, legal fees, employee recruitment and general corporate matters. In +addition, the Company also incurred an incremental $1,566 related to the +development and expansion of international Associated Centers in Japan, +Argentina, Venezuela, Switzerland, Italy, Holland, France, Singapore, Germany, +Netherlands and Belgium. Additionally, management has and is implementing +several cost saving initiatives totaling over $8,400 over the next twelve +months. These cost savings will be achieved in the areas of Center operations, +procedure kit production, legal and consulting fees and management leveraging +its marketing spend more effectively by utilizing smaller media specific +agencies, thereby reducing agency fees. As a result, management expects selling, +general and administrative expenses to be leveraged more efficiently as sales +from Centers and Associated Centers increase in the future. + +Research and Development Expenses. Research and development expenses increased +by $532, to $1,811 for the 39 weeks ended December 30, 2000 from $1,279 for the +39 weeks ended December 30, 1999. Research and development costs incurred during +the 39 weeks ended December 30, 2000 were primarily attributable to the +development of the Company's next generation LATW system. Research and +development costs incurred during the 39 weeks ended December 30, 1999 represent +the development of the BS3000 system and keycard which was introduced into +Associated Centers during November 1999. The Company also incurred additional +expenses related to clinical and efficacy studies and costs incurred in +connection with the Company's efforts to obtain ADA approval. + +Depreciation and Amortization. Depreciation and amortization increased by +$3,056, or 394.8%, to $3,830 for the 39 weeks ended December 30, 2000 from $774 +for the 39 weeks ended December 30, 1999. This increase was primarily +attributable to the operation of 17 existing Centers and the operation of 1,155 +BS3000 systems in Associated Centers. + +Stock Option Expense. During the 39 weeks ended December 30, 2000, the Company +recognized non-cash charges totaling $313 for the fair value of stock options +granted to various consultants to the Company. These expenses have been +allocated to the appropriate expense category on the income statement. + +Restructuring Expense. Restructuring expense increased by $478, to $778 for the +39 weeks ended December 30, 2000 from $300 for the 39 weeks ended December 30, +1999. During the 39 weeks ended December 30, 2000, the Company's Board of +Directors and management decided to close three of its wholly-owned Teeth +Whitening Centers. These Centers are located in Pasadena, CA., Ft. Lauderdale, +FL., and Coral Gables, FL. The Company's decision to close the three was due to +the underperformance of the Centers. In addition, the Company believed that +there was an over saturation of wholly-owned Centers in those markets. As a +result of the Company's decision to close these Centers, it is anticipated that +the remaining wholly-owned Teeth Whitening Centers as well as the Associated +Centers in those areas will pick up the procedures that were being performed in +the closed Centers. These costs consisted primarily of lease termination +accruals, the write-down of leasehold improvements and employee severance. On +February 21, 2001 the Pasadena, CA. Center was closed and on February 28, 2001 +both the Ft. Lauderdale and Coral Gables, FL. Centers were closed. + + 20 + + +Impairment Charges and Loss on Sale/Leaseback Transaction. Impairment charges +and loss on sale/leaseback transaction increased by $8,392 to $8,392 for the 39 +weeks ended December 30, 2000 from $-0- for the 39 weeks ended December 30, +1999. During the 39 weeks ended December 30, 2000, the Company recorded a $7,138 +charge related to the write-down of 1,384 BS3000 devices as a result of entering +into the equipment lease financing arrangement with Excimer Vision Leasing, L.P. +("EVL") on December 29, 2000. In addition, the Company recorded a $1,254 charge +related to the impairment of assets with the closing of the three wholly owned +Teeth Whitening Centers discussed above. + +Interest Expense. Interest expense increased $6,129, or 25,537.5%, to $6,153 for +the 39 weeks ended December 30, 2000 from $24 for the 39 weeks ended December +30, 1999. Interest expense for the 39 weeks ended December 30, 2000 represents a +pro-rata amount of the 5% interest to be accrued and paid on a semi-annual basis +on the outstanding amount of the August 2000 Notes, as well as the amortization +of the fair market value of the warrants issued with the debt. In connection +with Securities Purchase Agreements dated June 27, 2000, as amended August 3, +2000, the Company issued Warrants for 1,618,121 shares of the Company's common +stock to eleven investors in connection with a private placement of Notes. The +fair value of the Warrants was recorded as a discount of the notes and was being +amortized over the life of the notes to interest expense. For the 39 weeks ended +December 30, 2000, the Company recorded $191 of interest expense related to this +amortization. Additionally, upon conversion of the notes, the related +unamortized discount of $2,174 was immediately recorded as interest expense. The +Company also recorded $3,377 of interest expense related to the beneficial +conversion rate offered certain note holders. The beneficial conversion amount +represents the difference between the stated conversion rates of the August 2000 +Notes and the effective conversion rates considering the relative fair value +attributed to the notes and the related warrants. Interest expense for the 39 +weeks ended December 30, 1999 consisted primarily of mortgage interest paid on +the Company's former headquarters facility. The Warrants are presently +exercisable at $5.00 per share and expire on June 29, 2005. + +Interest Income. Interest income decreased $112, or 36.8%, to $192 for the 39 +weeks ended December 30, 2000 from $304 for the 39 weeks ended December 30, +1999. This decrease was primarily related to decreased average available cash +on-hand to invest. + +Net Loss. The net loss increased by $27,601, or 168.2%, to $44,008 for the 39 +weeks ended December 30, 2000 from $16,408 for the 39 weeks ended December 30, +1999 due to a combination of the factors described above. + +The following are explanations of significant period-to-period changes for the +52 weeks ended April 1, 2000 and March 31, 1999: + +Revenues + +Total Revenues, net. Total net revenues increased by $7,497, or 1,370.6%, to +$8,044 for the 52 weeks ended April 1, 2000 from $547 for the 52 weeks ended +March 31, 1999. + +Center Whitening Fees, net. Center whitening fees, net, increased by $5,792 or +12,591.8% to $5,838 for the 52 weeks ended April 1, 2000 from $46 for the 52 +weeks ended March 31, 1999. During the 52 weeks ended April 1, 2000, the Company +opened a total of 13 Centers for a total of 14 compared to 1 Center opened +during the fourth quarter of the 52 weeks ended March 31, 1999. Center whitening +fees are expected to increase during the next twelve months as a result of a +full year operating experience over the next twelve months at existing Centers. +Additionally, the Company will continue to refine its marketing strategy to +expand consumer awareness within each respective market for which a Center or +Centers exist. As a result, management anticipates that the number of procedures +performed at each Center will also increase. However, there can be no guarantee +that the Company will be successful in executing its marketing strategy or that +Center performance will be enhanced. During the 52 weeks ended March 31, 1999, +the Company discontinued its laser-based teeth whitening device business. As a +result, there were no sales of these devices during the 52 weeks ended March 31, +1999. + + 21 + + +Associated Center Whitening Fees. Associated Center whitening fees for the 52 +weeks ended April 1, 2000 totaled $1,970. During the 52 weeks ended April 1, +2000, the Company executed contracts with 490 Associated Center locations of +which 235 were in operation at April 1, 2000. There are generally 45 days of +lead-time between the signing of agreements with Associated Center Dentists and +the performance of paid procedures by the Dentists, due to training and shipping +requirements. The Company had no Associated Center locations sold or open during +the 52 weeks ended March 31, 1999. + +The Company is aggressively executing its strategic plan of expanding +distribution utilizing its Associated Center model. See discussion above under +Revenues - Associated Center Whitening Fees. + +Product Sales. Product sales decreased $265, or 52.9% to $236 for the 52 weeks +ended April 1, 2000 from $501 for the 52 weeks ended March 31, 1999. Product +sales for the 52 weeks ended April 1, 2000 represent the Company's toothpaste +and newly introduced Sonicare toothbrush products sold at Centers. Product sales +for the 52 weeks ended March 31, 1999 represent chemical products related to +laser-based teeth whitening devices that are no longer sold by the Company. + +Operating Costs and Expenses + +Center Selling and Occupancy Costs. Center selling and occupancy costs increased +$12,903, or 1,364.2% to $13,849 for the 52 weeks ended April 1, 2000 from $946 +for the 52 weeks ended March 31, 1999. The increase was primarily the result of +the Company's opening 13 Centers during the 52 weeks ended April 1, 2000, for a +total of 14 Centers, compared to 1 Center opened during the fourth quarter of +the 52 weeks ended March 31, 1999. Of this increase, $7,625 was advertising and +promotional costs directed to increase consumer awareness, $3,251 related to +Center salaries and benefits and $1,259 related to rent at the 14 existing +Centers. Center selling and occupancy costs, as a percentage of Center whitening +fees was 228.2% for the 52 weeks ended April 1, 2000 compared to 1,085.4% for +the 52 weeks ended March 31, 1999. The low operating margins represent newly +opened Centers and partial year results from existing Centers. Product cost of +sales as a percentage of product sales was 33.8% for the 52 weeks ended April 1, +2000. Product cost of sales consisted primarily of the Company's toothpaste and +Sonicare toothbrush products. For the 52 weeks ended March 31, 1999, product +cost of sales represents the chemical products related to the old laser-based +teeth whitening devices that are no longer sold by the Company. + +Selling, General and Administrative Expenses. Selling, general and +administrative expenses increased $9,871, or 213.2%, to $14,498 for the 52 weeks +ended April 2000 from $4,627 for the 52 weeks ended March 31, 1999. The Company +added 53 additional executive, selling and administrative personnel during +Fiscal April 1 2000 to effectively execute the Company's business strategy. +Additionally, during that period the Company introduced 13 new Centers, 490 +Associated Centers, and incurred costs related to the opening of future Centers +and Associated Centers. + +Included in the selling, general and administrative expenses for the 52 weeks +ended April 1, 2000 were $3,505 of advertising, promotional, and call center +costs directed to increase consumer awareness, and sales of the whitening +service to prospective Associated Center dentists. The Company also incurred +$7,649 of professional service costs during the 52 weeks ended April 1, 2000, +related to public relations, executing Center and Associated Center agreements, +executing leases, intellectual property protection, legal fees, employee +recruitment and general corporate matters. Included in professional service +costs are non-cash charges totaling $1,765 for the fair value of stock options +granted to various consultants to the Company. The Company expects to issue +options to consultants in the future at or above fair market value. The Company +also incurred $746 related to the development and expansion of international +Associated Centers in Japan, Argentina, Switzerland, Italy, Holland, France, +Singapore and Belgium. + +During the 52 weeks ended April 1, 2000, the Company consolidated its Call +Center operations from Los Angeles and its general and administrative operations +from Lester, Pennsylvania, to its headquarters facility in Walnut Creek., +California. + +Research and Development Expenses. Research and development expenses decreased +by $1,453, or 45.4%, to + + 22 + + +$1,748 for the 52 weeks ended April 1, 2000 from $3,201 for the 52 weeks ended +March 31, 1999. This decrease was primarily attributable to the development of +the BS3000 LATW system and keycard that was introduced into Associated Centers +during the three months ended December 31, 1999. Research and development +expenses incurred during the 52 weeks ended March 31, 1999 related to the +development of the BS2000 system, which was introduced at the Company's first +Center in Walnut Creek, California in February 1999. The Company also incurred +expenses related to clinical and efficacy studies, and to develop the Company's +next-generation light activated device. + +Depreciation and Amortization. Depreciation and amortization increased by +$1,334, or 1,080.0% to $1,457 for the 52 weeks ended April 1, 2000 from $123 for +the 52 weeks ended March 31, 1999. This increase was primarily attributable to +the 14 Centers, and the introduction of the BS3000 system into 235 Associated +Centers in operation during the 52 weeks ended April 1, 2000. The Company only +had 1 Center in operation during the fourth quarter of the 52 weeks ended March +31, 1999. + +Restructuring Expense. Restructuring expense decreased by $3,083, or 86.7% to +$472 for the 52 weeks ended April 1, 2000 from $3,555 for the 52 weeks ended +March 31, 1999. During the 52 weeks ended April 1, 2000, the Company recorded a +$472 charge related to the relocation of its Lester, Pennsylvania office to +California. These costs consisted primarily of lease termination accruals and +employee severance. + +During the 52 weeks ended March 31, 1999, the Company's Board of Directors and +management decided to close its Utah operating facility, discontinue all +activities related to the industrial and scientific laser lines of business, +discontinue development and sales of its laser-based device, and move its +headquarters to Pennsylvania. As a result of the Company's decision to relocate +its operations to Pennsylvania and to focus exclusively on the tooth whitening +market, nearly all of the Company's 63 employees located in Utah were scheduled +for termination. A termination benefits liability of $200 was established and +charged to expense during the three-month period ended June 30, 1998. At +September 30, 1998, the Company completed its termination plan and paid benefits +of approximately $200 to former employees. In October 1998, the Company +discontinued sales of take-home and in-office tooth whitening chemical products +as a result of management's shift in focus to the LATW technology to be +distributed at Centers and Associated Centers. + +In addition to employee termination costs, the Company recorded other charges of +$2,927 in the 52 weeks ended March 31, 1999. These charges include the +write-down of $418 of inventories classified as cost of products sold, the +impairment and write-down of patents and a joint venture related to discontinued +technology (assets which will provide limited or no future benefit to the +Company) for $657, settlement of canceled purchase commitments for $402, +write-down on assets available for sale at fair value for $367, property +write-downs and losses on sale of properties for $425, and $658 of charges +related to uncollectable accounts receivable and accrued expenses associated +with discontinued product lines. + +Interest Expense. Interest expense decreased $76, or 74.9%, to $26 for the 52 +weeks ended April 1, 2000 from $102 for the 52 weeks ended March 31, 1999. +Interest expense consisted primarily of mortgage interest paid on the Company's +former headquarters facility. + +Interest Income. Interest income increased $261, or 108.6%, to $501 for the 52 +weeks ended April 1, 2000 from $240 for the 52 weeks ended March 31, 1999. This +increase was primarily related to increased average available cash on-hand to +invest. + +Net Loss. The net loss increased by $11,749, or 99.7%, to $23,516 for the 52 +weeks ended April 1, 2000 from $11,676 for the 52 weeks ended March 31, 1999, +due to a combination of the factors described above. + +Liquidity and Capital Resources + +General + +The Company's principal sources of liquidity have been issuances of convertible +debt, common stock and common + + 23 + + +stock equivalents. At December 30, 2000, the Company had $5,701 of cash and cash +equivalents. The Company expects to sign contracts for additional Associated +Centers during the next twelve months. This expansion is contingent upon several +factors, including available cash resources and acceptance by consumers and +Associated Center dentists of the Company's LATW services. The Company expects +that operating losses will continue through most of calendar year ending +December 31, 2001, and that its principal uses of cash will be to provide +working capital, to finance capital expenditures, and to satisfy other general +corporate expenses. In particular, the Company plans to use its cash to finance +its marketing strategy. + +On June 29 and August 3, 2000, the Company sold to eleven investors (the +"Investors") in a private placement its 5% Subordinated Convertible Notes due +June 29, 2005 (the "August 2000 Notes") in the aggregate principal amount of +$20,000. + +Initially, the August 2000 Notes were convertible into shares of the Company's +Common Stock at a per share conversion price of $6.18, which was 120% of the +average of the closing bid price of the Common Stock during the ten-day trading +period immediately prior to June 27, 2000, the date the transaction documents +were signed. The Company also issued to the Investors, pro rata, warrants (the +"Warrants") to purchase a total of 1,618,121 shares of Common Stock, which have +a term of five years and initially had an exercise price of $7.21 per share. + +Pursuant to Registration Rights Agreements between the Investors and the +Company, the Company has registered with the Securities and Exchange Commission, +effective August 25, 2000, the shares of Common Stock underlying the August 2000 +Notes and Warrants for resale under the Securities Act. + +On December 5, 2000, the Company sold to LCO Investments Ltd in a private +placement a Convertible Promissory Note (the "December 5th Note") in the +aggregate principal amount of $5,000. This December 5/th/ Note is convertible +into shares of Common Stock of the Company at a conversion price of $5.00 per +share and, as of the date of this Report, has not been converted. + +As a result of the issuance of the December 5/th/ Note, the conversion price of +the August 2000 Notes, and the exercise price of the Warrants, was automatically +adjusted to $5.00 per share. + +In December 2000, LCO, the Company's principal shareholder, and John Reed, the +Company's Chief Executive Officer, converted their original August 2000 Notes, +together with accrued interest, into an aggregate of 1,122,323 shares of Common +Stock. This conversion was effected at the $5.00 conversion price. + +Subsequently, effective December 14, 2000, certain of the original Investors +other than LCO and Mr. Reed, agreed with the Company to convert an aggregate of +$13,642 in principal amount of their Notes into 3,568,560 shares of Common Stock +at an amended conversion price of $3.8625 per share. + +Of the original principal amount of $20,000 of August 2000 Notes, as of the date +of this Report, $800 in principal amount have not been converted and remain +outstanding. The current conversion price of such outstanding August 2000 Notes +is $5.00 per share. + +Of the original Warrants issued in the Note offering, all 1,618,121 Warrants +remain outstanding and unexercised, at an exercise price of $5.00 per share. + +On December 29, 2000, the Company secured a lease line of credit of up to +$15,000 from Excimer Vision Leasing (EVL). EVL leases laser vision correction +equipment to ophthalmologists. + +In addition to providing working capital to the Company, the lease line of +credit will enable the Company to place up to 1,755 new BriteSmile teeth +whitening devices in Associated Centers in the US, enhancing the Company's +ability to meet its strategic objective of establishing approximately 3,700 +Associated Centers by year end 2001. Pursuant to the lease line agreement, EVL +purchased from the Company 1,245 BriteSmile 3000 teeth-whitening devices +currently used in various BriteSmile Associated Centers in the United States for +$5,000. The agreement also provides that EVL will subsequently purchase 1,755 +additional devices for up to $10,000. EVL will lease all + + 24 + + +devices to the Company for a term of five years. The Company will pay EVL a +monthly rental for each device consisting of a fixed amount (ranging from twenty +to thirty dollars), plus one hundred twenty-five dollars for each key card which +enables Associated Center dentists to perform 5 teeth whitening procedures. + +Effective March 1, 2001, the Company borrowed $2,500 from EVL for general +working capital. The loan matures on May 10, 2006, and is not prepayable. +Payments under the loan consist of "fixed payments" of interest, "variable +payments" of principal, and a "final payment" of principal. An initial fixed +payment of $10 is due on April 1, 2001, followed by monthly fixed payments of +$12.5 during the term of the loan. Variable payments are twenty-five dollars for +each BriteSmile teeth whitening procedure performed at the Company's 14 current +whitening Centers. The final payment, due at maturity, will be the amount by +which the aggregate of variable payments paid during the term of the loan is +less than the original $2,500 principal amount of the loan. + +Management believes that the Company can continue its current operating strategy +with additional funding through current private placements of its equity +securities, new borrowings, and/or cash receipts in excess of current +projections (collectively, "Additional Cash") of approximately $5,000 in 2001. +In that connection, in March 2001 the Company received written commitments +("Commitment Letters") from certain existing shareholders and directors of the +Company (the "Guarantors") to severally purchase on or before December 31, 2001, +shares of Common Stock of the Company (or to otherwise make available funds to +the Company) in an aggregate amount representing the difference between the +Additional Cash realized in 2001, and $5,000. In consideration for the +Guarantors' commitment to purchase Common Stock in the amount of the shortfall, +the Company has agreed to issue to the Guarantors five-year warrants to purchase +an aggregate of 100,000 shares of Common Stock of the Company at an exercise +price of $5.00 per share. In addition, if the Guarantors are required to +purchase shares, or otherwise fund, pursuant to their Commitment Letters, the +Company will issue the Guarantors additional five-year warrants to purchase +shares of Common Stock of the Company at $5.00 per share. The number of +additional warrants issued would equal 50% of the aggregate purchase price paid +by the Guarantors for the Common Stock, divided by five (5). + +Cash flows are difficult to forecast accurately. There can be no assurance that +additional capital, even beyond the $5 million referred to above, will not be +required, or that it will be available on terms that are acceptable to the +Company. Additionally, there can be no assurance that the Company's business +will generate cash flows at or above current levels. Accordingly, the Company +may choose to defer capital expenditure plans. + +On May 26, 2000, the Company entered into a Revolving Credit Line Agreement with +Bank of Hawaii. Under the Credit Facility, the Company may borrow from time to +time through May 25, 2001 up to $2,000. Loan proceeds must be used for working +capital, capital expenditures, and general corporate purposes only, and are +secured by a Letter of Credit from Scotiabank. The Credit Facility requires +monthly payments to the Bank of interest only, with all principal and accrued +interest due May 25, 2001. As of December 30, 2000, the line had not been used. +As of the date of this Report, $700 had been drawn on the line of credit. In +addition, the line expires May 25, 2001. + +December 30, 2000 Compared to April 1, 2000 + +As of December 30, 2000, the Company had liquid assets (cash and cash +equivalents and trade accounts receivable and notes receivable) of $9,166, a +decrease of 24.6%, or $2,984, from April 1, 2000 when liquid assets were +$12,150. Cash and cash equivalents decreased $5,268, or 48.0%, to $5,701 at +December 30, 2000 from $10,969 at April 1, 2000. This decrease in cash was +primarily the result of $44,008 of net loss and $14,968 in capital expenditures, +offset in part by the $20,000 of proceeds from the Notes received in June and +August 2000, the $5,000 of proceeds from the Bridge Loan received on December 7, +2000, and the first tranche of $5,000 proceeds received on December 29, 2000 in +connection with the Company's equipment lease line facility with EVL. Trade +accounts receivable increased $1,949, or 165.0%, to $3,130 at December 30, 2000 +from $1,181 at April 1, 2000. This increase was primarily the result of the +increased number of Associated Centers in operation during the 39 weeks ended +December 30, 2000. Although accounts receivable has increased significantly as a +result of new Associated Centers placed into operation, DSO ("Days Sales +Outstanding", or the amount of time required to collect on an outstanding +invoice) has decreased to 73.4 days at December 30, 2000, from 122.5 days at +April 1, 2000. The Company will continue to aggressively manage its accounts +receivable. + + 25 + + +The Company's working capital decreased by $15,285, or 140.6% to a deficit of +$4,416 at December 30, 2000 from $10,869 at April 1, 2000, for the reasons +described above. Current ratio (current assets divided by current liabilities) +was 0.75:1 at December 30, 2000 compared to 3.62:1 at April 1, 2000. + +Current assets decreased by $1,761, or 11.7%, to $13,257 at December 30, 2000 +from $15,018 at April 1, 2000. The decrease was primarily the result of a +decrease in cash of $5,686 as described above. The decrease was offset by an +increase in accounts receivable of $1,949, described above, as well as an +increase in inventory of $1,174 primarily resulting from increased production of +the BS3000 device being shipped to Associated Center locations. + +Long-term assets decreased by $498, or 2.9%, to $16,874 at December 30, 2000 +from $17,372 at April 1, 2000. This decrease was primarily the result of the +sale of BS3000 device to EVL and offset by leasehold improvements at the 3 +Centers opened during the period, and deferred warrant expense during the 39 +weeks ended December 30, 2000. + +Current liabilities increased by $13,524, or 326.0%, to $17,673 at December 30, +2000 from $4,149 at April 1, 2000. This increase was primarily the result of an +increase in trade payables of $6,565, accrued expenses of $668, accrued gift +certificate liability of $585, store closure reserve of $778 and notes payable +of $4,747. + +The Company used net cash of $20,527 in operating activities during the 39 weeks +ended December 30, 2000, primarily as a result of the net loss incurred during +the period. + +The Company used net cash of $9,968 in investing activities during the 39 weeks +ended December 30, 2000, primarily for capital expenditures relating to the +Company's expansion efforts in Centers and Associated Centers. + +The Company provided net cash of $25,227 from financing activities during the 39 +weeks ended December 30, 2000, primarily due to the private placement of $20,000 +of Notes, $5,000 bridge loan and $227 in proceeds from the exercise of stock +options. + +Factors that may affect our performance + +Inflation + +Most of the Company's products are purchased in finished form and packaged by +the supplier or at the Company's headquarters. The Company anticipates usual +inflationary increases in the price of its products and does not intend to pass +these increases along to its customers, primarily as a result of other operating +efficiencies gained through changing the sourcing of certain of its products. In +general, the Company does not believe that inflation has had a material effect +on its results of operations in recent years. However, there can be no assurance +that the Company's business will not be affected by inflation in the future. + +Seasonality + +The Company believes that its business follows seasonal trends due to the +closing of some Associated Center dental offices in July and August, and again +in November and December, for vacations. As a result, the Company's sales +performance could potentially be affected. + +Forward Looking Statements + +The statements contained in this Report that are not purely historical are +"forward-looking statements" within the meaning of the Private Securities +Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act. +These statements relate to the Company's expectations, hopes, beliefs, +anticipations, commitments, intentions and strategies regarding the future. They +may be identified by the use of words or phrases such as "believes," "expects," +"anticipates," "should," "plans," "estimates," and "potential," among others. +Forward-looking statements include, but are not limited to, statements contained +in Management's Discussion and Analysis of Financial Condition and + + 26 + + +Results of Operations regarding the Company's financial performance, revenue and +expense levels in the future and the sufficiency of its existing assets to fund +future operations and capital spending needs. Actual results could differ +materially from the anticipated results or other expectations expressed in such +forward-looking statements. The Company believes that many of the risks set +forth here and in the Company's filings with the Securities and Exchange +Commission are part of doing business in the industry in which the Company +operates and competes and will likely be present in all periods reported. The +forward-looking statements contained in this Report are made as of the date of +this Report and the Company assumes no obligation to update them or to update +the reasons why actual results could differ from those projected in such +forward-looking statements. Among others, risks and uncertainties that may +affect the business, financial condition, performance, development, and results +of operations of the Company include: + +We have a limited operating history upon which to evaluate our likelihood of +success. + +We have only manufactured and distributed our BS2000 since November 1998 and our +BS3000 since November 1999. We opened our first BriteSmile Center in Walnut +Creek, California in February 1999, and BriteSmile Associated Centers began +performing teeth whitening procedures in April 1999. Therefore, we have a +limited relevant operating history upon which to evaluate the likelihood of our +success. Investors must evaluate the likelihood of our success in light of the +risks, expenses and difficulties frequently encountered in the operation and +expansion of a new business and the development and marketing of new products. +We cannot be certain that our business strategy will be successful or that we +will successfully address these risks and difficulties. Our failure to address +any of these risks or difficulties could have a material adverse effect on our +business. + +We have a history of losses and accumulated deficit and this trend of losses may +continue in the future. + +For the Transition Period ended December 30, 2000 we had a net loss of +approximately $44.0 million, and for the full fiscal year ended April 1, 2000 we +had a net loss of approximately $23,500. As of December 30, 2000, our +accumulated deficit was approximately $89,300. Our ability to reach and sustain +profitability will depend, in part, upon the successful marketing of our +existing services and products and the successful and timely introduction of new +services and products. We anticipate that net losses will continue for the +foreseeable future. We can give no assurances that we will achieve profitability +or, if achieved, that we will sustain profitability. + +Our success will depend on acceptance of our LATW process and post-whitening +maintenance products. + +We derive substantially all of our revenues from our LATW procedures, a +relatively new teeth whitening concept for consumers. We have also begun to +market BriteSmile brand toothpaste, electric toothbrushes and post-whitening +procedure touchup kits through our Centers and Associated Centers. We expect to +add other oral care accessories under the BriteSmile brand name to our line of +retail products, including mouthwash, toothbrushes, chewing gum, travel kits and +breath mints. Our success will depend in large part on our ability to +successfully encourage consumers, dentists and dental office employees to switch +from traditional and less expensive bleaching tray whitening methods to our LATW +system, and on our ability to successfully market our line of post-whitening +maintenance products. There can be no assurance that consumers will accept our +procedure or products. Typically, medical and dental insurance policies do not +cover teeth whitening procedures, including the Company's LATW procedure, or +whitening maintenance products, which may have an adverse impact upon the market +acceptance of our products and services. + +Our success will depend on our ability to update our technology to remain +competitive. + +The dental device and supply industry is subject to technological change. As +technological changes occur in the marketplace, we may have to modify our +products in order to become or remain competitive or to ensure that our products +do not become obsolete. While we are continuing our research and development +efforts to improve our current LATW systems in order to strengthen our +competitive advantage, we cannot assure that we will successfully implement +design or technological improvements to our LATW systems on a timely basis, or +at all. If we fail to anticipate or respond in a cost-effective and timely +manner to government requirements, market trends or customer + + 27 + + +demands, or if there are any significant delays in product development or +introduction, our revenues and profit margins may decline which could adversely +affect our cash flows, liquidity and operating results. + +We may have problems financing our future growth. + +Our growth strategy includes investment in and expansion of Centers and +Associated Centers throughout the United States and internationally, increasing +awareness of the BriteSmile brand and developing and marketing our brand name +retail products. To finance our prior growth we have sold debt and equity +securities; however, additional funds are needed in the future for continued +expansion. We cannot assure that additional financing will be available or that, +if available, it will be on terms favorable to us or our stockholders. If needed +funds are not available, we may be required to close existing Centers, and/or +limit or forego the establishment of new Centers or Associated Centers and the +development of new products, or limit the scope of our current operations, which +could have a material adverse effect on our business, operating results and +financial condition. We may be required to take other actions that may lessen +the value of our Common Stock, including borrowing money on terms that are not +favorable to us. Raising the needed funds through the sale of additional shares +of our Common Stock or securities convertible into shares of Common Stock may +result in dilution to current stockholders. + +We are subject to competition. + +The market for teeth whitening products and services is highly competitive. +Competition in the market for teeth whitening products and services may +intensify in the future. Numerous well-established companies and smaller +entrepreneurial companies are focusing significant resources on developing and +marketing products and services that will compete with our products and +services. In addition, many of our current and potential competitors have +greater financial, technical, operational and marketing resources. Teeth +whitening products and services offered by our competitors include traditional +and often less expensive bleaching tray methods and other forms of heat or light +activated curing methods. We may not be able to compete successfully against +these competitors in developing, marketing and distributing our services and +products, which could result in the loss of customers and could have a material +adverse effect on our business. Competitive pressures may also force prices for +teeth whitening services down and such price reductions may adversely affect our +potential future revenue. + +We are susceptible to product liability suits and if a lawsuit is brought +against us it could result in us having to pay large legal expenses and/or +judgments. + +Although no lawsuits have been filed against the Company relating to our +products or services, because of the nature of the dental device industry, there +can be no assurance that we will not be subject to such claims in the future. +Our products come into contact with vulnerable areas of the human body, such as +the mouth, tongue, teeth and gums, and, therefore, the sale and support of +dental products makes us susceptible to the risk of such claims. A successful +product liability claim or claim arising as a result of use of our products or +services brought against us, or the negative publicity brought up by such claim, +could have a material adverse effect on our business. We maintain product +liability insurance with coverage limits of $5,000 per occurrence and $5,000 per +year. While we believe that we maintain adequate insurance coverage that is +reasonable and customary for our business, we cannot assure that the amount of +insurance will be adequate to satisfy claims made against us in the future, or +that we will be able to obtain insurance in the future at satisfactory rates or +in adequate amounts. + +Future growth may place strains on our managerial, operational and financial +resources and we may be unable to recruit and retain qualified personnel. + +If we grow as expected, a significant strain on our managerial, operational and +financial resources may occur. Further, as the number of our Centers, Associated +Centers, customers, advertisers and other business partners grows, we will be +required to manage multiple relationships with various Associated Center +dentists, customers, strategic partners and other third parties. Future growth +or increase in the number of our strategic relationships may strain our +managerial, operational and financial resources, thereby inhibiting our ability +to achieve the rapid execution necessary to successfully implement our business +plan. In addition, our future success will also depend on our + + 28 + + +ability to expand our sales and marketing organization and our support +organization commensurate with the growth of our business. + +We may experience shortages of the supplies we need because we do not have +long-term agreements with suppliers. + +Our success depends to a large degree on our ability to provide our affiliated +dentists with our LATW systems, and a sufficient supply of teeth whitening gels +and maintenance products. Since our BS2000 was first used commercially, we have +relied upon manufacturing and supply agreements with multiple suppliers and a +single manufacturer of our LATW systems, Boyd Industries in Tampa Florida. +Effective April, 2001, the Company's LATW systems will be manufactured by Peak +Industries, Frederick, Colorodo, pursuant to a new agreement between the Company +and Peak. EVL will finance the Company's purchase of the LATW systems, and will +then lease the LATW systems to the Company pursuant to the EVL Lease Line +Agreement described above under Item 1--"Recent Business Developments, EVL Lease +Agreement." We anticipate that there may be an approximate two to three weeks +delay in April 2001 between the date of final shipments of LATW devices produced +by our current manufacturer, and shipments of LATW devices manufactured by Peak. +Any such delays could delay receipt of revenues from Associated Centers who +receive systems from the new manufacturer. We have no long-term purchase +contracts or other contractual assurance of continued supply, pricing or access +to new products. While we believe that we have good relationships with our +suppliers and our manufacturer, if we are unable to extend or secure +manufacturing services or to obtain component parts or finished products from +one or more key vendors on a timely basis and on acceptable commercial terms, +our results of operations could be seriously harmed. + +We need to successfully manage our growth in order for the addition of any new +BriteSmile Centers and Associated Centers to be profitable. + +Even though we have grown significantly in the past two years in terms of +numbers of Centers and Associated Centers opened and in operation, we may not be +able to achieve profitable operations at the Centers. We currently have 14 +Centers in operation. We have no current plans to open additional Centers. +Successful introduction of any new Centers is subject to, among other things, +securing suitable sites on satisfactory terms, hiring, training and retaining +qualified dentists, support staff and other personnel, having adequate capital +resources and successfully integrating new Centers into existing operations. It +is possible that any new Centers, if opened, will not achieve sales levels +comparable to existing Centers. + +Our future growth primarily depends upon expansion of the number of our +Associated Centers. We cannot assure that we will be successful in expanding the +number of Associated Centers, or that such Associated Centers will achieve sales +levels satisfactory to us. + +A large volume of sales of our common stock resulting from the conversion of +notes and/or the exercise of warrants and subsequent resales of those shares, +may result in downward pressure or increased volatility in the trading price of +our common stock. + +Because we have registered for resale the shares of Common Stock issued upon the +conversion in December 2000 of $19,200 in principal amount of Notes originally +granted in June and August 2000, and registered for resale the shares of Common +Stock issuable upon the exercise of the Warrants granted in June and August +2000, the holders thereof who are not in positions of control or management with +the Company may sell without regard to any volume restrictions, including the +volume restrictions set forth in Rule 144 promulgated under the Securities Act. +As a result, resales by the holders of the Notes and the Warrants could lead to +an excess supply of shares of our Common Stock being sold which could, in turn, +result in downward pressure or increased volatility in the trading price of our +Common Stock. + +BriteSmile has certain debt. + +BriteSmile has $5,800 of debt outstanding as of December 30, 2000. The degree to +which BriteSmile is leveraged could have important consequences to the +shareholders, including the following: + + 29 + + + . BriteSmile's ability to obtain additional financing for working capital, + capital expenditures, acquisitions or general corporate purposes may be + impaired; + + . BriteSmile must pay interest on its debt, leaving less funds for other + purposes; + + . BriteSmile may be at a competitive disadvantage to its less leveraged + competitors; and + + . BriteSmile may be more vulnerable to a downturn in general economic + conditions. + +If BriteSmile were to default on its debt obligations for any reason, there can +be no assurance that any assets will remain for BriteSmile's shareholders after +payment of amounts owed to debt holders. + +BriteSmile does not intend to pay dividends. + +BriteSmile does not anticipate paying any cash dividends on its Common Stock to +its shareholders for the foreseeable future. BriteSmile intends to retain future +earnings, if any, for use in the operation and expansion of its business. In +addition, it is possible that any debt financing agreements entered into by +BriteSmile in the future may contain restrictions on BriteSmile's ability to +declare dividends. + +We cannot guarantee that the patents we have applied for will be granted, or +that even if granted, they will not be infringed by competitors. + +In addition to the Company's patent which was granted in January 2001, we have +filed several patent applications related to the LATW systems which are +currently pending, including applications related to the composition of our +whitening gel, tissue isolation barriers useful in light-activated teeth +whitening, our business method and our unique system of delivery of light to all +teeth simultaneously. In addition, we have ongoing research and development +efforts to improve and expand our current technology, and to develop new teeth +whitening compositions and light devices. Although we intend to continue to +apply for patents as advised by patent counsel, there can be no assurance that +such patents will be issued or that, when they are issued, they will not be +infringed upon by third parties or that they will cover all aspects of the +product or system to which they relate. + +The rights we rely upon to protect our intellectual property underlying our +products and services may not be adequate, which could enable third parties to +use our technology and would reduce our ability to compete in the market. + +In addition to patents, we rely on a combination of trade secrets, copyright and +trademark laws, nondisclosure agreements and other contractual provisions and +technical measures to protect our intellectual property rights. Nevertheless, +these measures may not be adequate to safeguard the technology underlying our +products and services. If they do not protect our rights, third parties could +use our technology, and our ability to compete in the market would be reduced. +In addition, employees, consultants and others who participate in the +development of our products and services may breach their agreements with us +regarding our intellectual property, and we may not have adequate remedies for +the breach. We also may not be able to effectively protect our intellectual +property rights in some foreign countries. For a variety of reasons, we may +decide not to file for additional patent, copyright or trademark protection +outside of the United States or in foreign jurisdictions. We also realize that +our trade secrets may become known through other means not currently foreseen by +us. Notwithstanding our efforts to protect our intellectual property, our +competitors may independently develop similar or alternative technologies or +products that are equal or superior to our technology and products without +infringing on any of our intellectual property rights or design around our +proprietary technologies. + +Our products or services could infringe on the intellectual property rights of +others, which may cause us to engage in costly litigation and, if we are not +successful, could also cause us to pay substantial damages and prohibit us from +selling our products or services. + +Third parties may assert infringement or other intellectual property claims +against us. We may have to pay + + 30 + + +substantial damages, including treble damages, for past infringement if it is +ultimately determined that our products or services infringe a third party's +proprietary rights. Further, we may be prohibited from selling our products +before we obtain a license, which, if available at all, may require us to pay +substantial royalties. Even if these claims are without merit, defending a +lawsuit takes significant time, may be expensive and may divert management's +attention from other business concerns. Notwithstanding the foregoing, we are +not aware of any infringement or other intellectual property claims asserted or +threatened against us by others. + +We are subject to government regulation regarding the corporate practice of +dentistry. + +Our corporate structure, operation of Centers and contractual relationships with +the licensed dentists at our Centers are subject to government regulation and +may be reviewed by applicable state agencies governing the practice of dentistry +(such as a Board of Dental Examiners). We believe that our present and +contemplated operation of Centers is and will be in compliance in all material +respects with applicable federal, state and local laws and regulations, and that +favorable review of our corporate structure would be obtained from any state +agency which chooses to review our operational structure. However, we cannot +assure that such favorable review would be obtained in all instances. If we are +unable to obtain favorable review, we may be subject to penalties. Further, if +we are unable to comply with the applicable laws and regulations in any state, +we may be limited in those states to offering our LATW procedure through +Associated Centers. We continue to cooperate with state regulatory agencies to +respond to any requests for information about our business structure and to +obtain any necessary governmental approvals. We cannot assure that future +enactments, amendments or interpretations of government regulations will not be +more stringent, and will not require structural, organizational or operational +modifications to our existing or future contractual relationships with the +licensed dentists at our Centers who provide our services. + +We may become subject to government regulation regarding our teeth whitening +services and products. + +The light used in the LATW systems is categorized as a Class I Medical Device as +defined by the Food and Drug Administration ("FDA"). As long as the light is +used specifically to perform cosmetic dental procedures (teeth whitening), it is +not subject to pre-market notification requirements, although we are subject to +FDA requirements regarding handling of complaints and other general FDA record +keeping standards. There can be no assurance that some or all of the existing +government regulations will not change significantly or adversely in the future, +or that we will not become subject to compliance with additional and stricter +government regulations which could, in the future, affect our potential future +revenue. + +Ownership of our Common Stock is concentrated in a limited number of +shareholders. + +Current directors and executive officers of the Company, or their affiliates, +own and control approximately 80% of our Company and, therefore, have ultimate +authority to make all major decisions affecting our business, including the +identity and make-up of our Board of Directors, and any other matters requiring +approval of the shareholders of the Company. + +Our efforts to build strong brand identity and customer loyalty may not be +successful. + +We believe that establishing and maintaining brand identity and brand loyalty is +critical to attracting customers, dentists and other strategic partners. In +order to attract and retain these groups, and respond to competitive pressures, +we intend to continue substantial spending to create and maintain brand loyalty. +We believe that advertising rates, and the cost of advertising campaigns in +particular, could increase substantially in the future. If our branding efforts +are not successful, our results of operations could be adversely affected. + +Promotion and enhancement of the BriteSmile brand will also depend on our +success in consistently providing a high-quality customer experience for our +teeth whitening services and satisfaction with our products. If customers do not +perceive our service and product offerings to be of high quality, or if we +introduce new services and products that are not favorably received by these +groups, the value of the BriteSmile brand could be harmed. Any brand impairment +or dilution could decrease the attractiveness of BriteSmile to one or more of +these groups which could harm our reputation, reduce our net revenue and cause +us to lose customers. + + 31 + + +Failures in our information technology systems or the systems of third parties +could adversely affect our business and result in a loss of customers. + +Our Company's web site or our Internet-based Scheduler system may experience +slow response times, decreased capacity to accommodate a large number of +customers or a temporary disruption in service for a variety of reasons. +Additionally, power outages and delays in such service may interrupt or prevent +us from immediately coordinating with the schedules of Centers and Associated +Centers, and may interrupt or prevent customers from arranging for our services +or from ordering our products through our e-Commerce Internet site. Any of these +potential problems could have an adverse effect on business. + +Computer hardware and software components to our Scheduler system are located at +our headquarters. In addition, a back-up file server and tape back-ups of the +Scheduler database reside both at our headquarters and off-site. Delays in +scheduling teeth whitening procedures would result if we were required to use +our backup computer hardware and software systems. Nevertheless, natural +disasters such as floods, fires, and power outages, telecommunications failures, +physical or electronic break-ins or vandalism, viruses and other similar events +could damage our hardware and software systems, lead to a loss of data, cause +substantial disruption in our business operations, and have a material adverse +effect on our business. + +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA + +The Company's consolidated financial statements and associated notes are set +forth on pages F-1 through F-28. + +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND +FINANCIAL DISCLOSURE + +None + +PART III + +ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT + +The following sets forth the name, age and position of each director and +executive officer of the Company as of the date of this Report: + +NAME AGE CURRENT POSITION(S) /(1)/ /(2)/ +- ---- --- --------------------------- + +John Reed 59 Chief Executive Officer and Director +Paul Dawson 46 Chief Executive Officer of BriteSmile + International Limited, a subsidiary of the + Company +Linda S. Oubre 42 President, Chief Operating Officer and + Director +Michael Whan 36 President Worldwide Marketing +Stephen Miller 54 Executive Vice-President, Manufacturing and + Distribution +Anthony M. Pilaro 65 Chairman of the Board +R. Eric Montgomery 46 Director +Peter Schechter 41 Director +Bradford G. Peters 33 Director +Harry Thompson 71 Director +Gerald Poch 54 Director +Dr. Gasper Lazzara, Jr. 58 Director +Dennis F. Hightower 59 Director since March, 2001 + +________ + + 32 + + +(1) All directors serve for one year and until their successors are elected and + qualified and, unless otherwise noted, have served as a director during the + entire Transition Period through the date of this Report. All officers + serve at the pleasure of the Board of Directors. There are no family + relationships between any of the officers and directors. + +(2) Paul A. Boyer served as CFO during the Transition Period. Mr. Boyer's + employment with the Company as Chief Financial Officer terminated effective + March 2, 2001. + +John Reed + +Prior to joining the Company as its Chief Executive Officer in June 1999, Mr. +Reed was Chairman of the Pacific Retailing Division of Duty Free Shoppers Group +Limited ("DFS"), the world's leading specialty retailer catering to +international travelers. At DFS he was responsible for the operations of +multiple retail stores, including the largest single, self-standing retail +operation in the world. During his 21-year career at DFS, prior to being named +Chairman of the Pacific Retail Division in 1997, Mr. Reed was President of DFS +Hawaii. From 1982 to 1988, Mr. Reed was President of the DFS U.S. Mainland +Operation. Mr. Reed has also served as Vice President of Merchandising for both +Federated Departments Stores and John Wanamaker. + +Paul Dawson + +Mr. Dawson, prior to joining the Company's subsidiary, BriteSmile International, +as its Chief Executive Officer, was Chief Executive Officer of Camus +International, a global marketer of luxury goods. During his nine-year tenure +with Camus, he spearheaded an aggressive worldwide market expansion program of +the company's premium cognac market. Prior to Camus, Mr. Dawson held the +position of Engagement Manager at McKinsey & Company, an international +consulting firm. While at McKinsey, he advised a broad range of multinational +consumer companies on international expansion strategies. Mr. Dawson has lived +and worked in the United States, Europe, Asia and the Middle East. He holds +masters degrees from Cambridge University and UC Berkeley, and an MBA from +Stanford University. + +Linda S. Oubre + +Linda S. Oubre commenced serving as a director of the Company in May 1998. In +July 1998, she was named to the position of President, Center Division of the +Company. In September 2000, she was named the Company's President, Chief +Operating Officer. Prior to joining the Company, Ms. Oubre served for 3 years as +President of Tri Com Ventures in Walnut Creek, California. Tri Com specialized +in new venture planning and implementation consulting. At Tri Com, Ms. Oubre's +clients included McGraw Hill's Business Week Magazine, Prodigy Online Service, +and the United Nations Business Development Project in the Republic of Belarus. +Prior to starting Tri Com Ventures in 1996, Ms. Oubre was General Manager, New +Business Development, for the Los Angeles Times, and also served as Director of +Operations for Walt Disney's Consumer Products Division and Manager of Financial +Planning for the Times Mirror Company. She has also been a visiting instructor +at the Wharton Business School. Ms. Oubre is a graduate of the University of +California, Los Angeles and received her MBA from the Harvard Business School. + +Stephen Miller + +In October 2000, Stephen Miller was appointed Executive Vice President, +Manufacturing and Distribution. Prior to joining BriteSmile in May 1999 as it +Executive Vice President, Real Estate and Construction, Mr. Miller was for 11 +years Vice President of Facility Development for DFS. While at DFS, Mr. Miller +was responsible for the development of the flagship retail gallerias, high-end +boutiques, duty free stores and entertainment complexes in the U.S., Oceania and +the Pacific. Prior to DFS, Mr. Miller was Senior Vice President of Commercial +and Industrial Development for Castle and Cooke, Inc. where for 17 years he was +responsible for commercial, industrial and retail development for Hawaii's +second largest private landowner. + +Michael P. Whan + +Mr. Whan joined BriteSmile as its President of World Wide Marketing in May 2000. +Prior to joining BriteSmile, Mr. Whan had served as Vice President, General +Manager of Taylor Made Golf from 1996 to 2000. From 1987 to 1995 Mr. Whan held +various posts at Proctor & Gamble Company, including Director of Marketing, oral +care and Brand Manager of Crest toothpaste. Mr. Whan is a graduate of Miami +(Ohio) University. + + 33 + + +Anthony M. Pilaro + +Mr. Pilaro has been a director of the Company since August 1997. Presently, he +serves as Chairman of CAP Advisers Limited, which maintains offices in Dublin, +Ireland. He is also founder and Chairman of Excimer Vision Leasing L.P., a +partnership engaged in the business of leasing Excimer laser systems. Mr. Pilaro +has been involved in private international investment banking. He was a Founding +Director and former Chief Executive Officer of DFS and a founder of the +predecessor of VISX, Inc. A graduate of the University of Virginia `57, and the +University of Virginia Law School `60, Mr. Pilaro practiced law in New York City +through 1964. + +Gerald Poch + +Mr. Poch has served as a director of the Company since May 1999. Mr. Poch has +served as managing director of Pequot Capital Management, Inc., a venture +capital fund management company, since January 2000. From August 1998 through +January 2000, he was a principal of Pequot Capital Management. From August 1996 +to June 1998 he was the chairman, president and chief executive officer of GE +Capital Information Technology Solutions, Inc., a technology solutions provider. +Prior to that, he was a founder, and served as co-chairman and co-president, of +AmeriData Technologies, Inc., a value added reseller and systems integrator of +hardware and software systems. Mr. Poch is co-chairman of MessageMedia, Inc., +and a director of FutureLink Corp., BriteSmile, Inc., and Elastic Networks. + +Dr. Gasper Lazzara, Jr. + +Dr. Gasper Lazzara, Jr. has served as Chairman of the Board and a director of +the Orthodontic Centers of America, Inc. ("OCA") since its inception in July +1994. He has served as Co-Chief Executive Officer of Orthodontic Centers since +September 1998, and he served as Chief Executive Officer of OCA from July 1994 +to September 1998. Dr. Lazzara also served as President of OCA from July 1994 to +June 1997. From 1989 to 1994, Dr. Lazzara served as President or Managing +Partner of certain predecessor entities of OCA. He is a licensed orthodontist +and, prior to founding OCA, maintained a private orthodontic practice for over +25 years. He is a member of the American Association of Orthodontists and is a +Diplomat of the American Board of Orthodontists. + +R. Eric Montgomery + +Mr. Montgomery has been a director of the Company since May 1998. He is an +experienced consultant, researcher and entrepreneur in the oral care and +cosmetic products industries, and has been granted over 65 US and foreign +patents since 1981. Previously, from November 1997 until May 1998, he served as +an independent consultant to the Company through Applied Dental Sciences, Inc. +(Monterey, MA), the oral care products research and development firm of which he +has been President since 1992. Mr. Montgomery is also the Founding Manager and +President of Oraceutical LLC (Lee, MA), an organization dedicated to the +development of innovative products and technologies for dentistry and consumer +oral care. Oraceutical is currently negotiating with the Company to provide +technology development services. Mr. Montgomery's organizations have provided +consulting services to and developed products for companies including The Dial +Corporation, Natural White, Virbac SA, Zila Pharmaceuticals, ProHealth +Laboratories, OPI Products, American Dental Hygienics, Premiere Dental, and +Boots PLC. Mr. Montgomery is also President of IDEX Dental Sciences, Inc. (Lee, +MA), an intellectual property-holding firm established by Mr. Montgomery in +March 1996. + +Brad Peters + +Mr. Peters has been a director of the Company since December 1999. He is the +President of Blackfin Capital, a privately held investment company based in New +York. Prior to founding Blackfin Capital, from July 1993 to June 1998, Mr. +Peters was with Morgan Stanley Private Wealth Management Group. Mr. Peters holds +an MBA degree from Duke University. + +Harry Thompson + +Mr. Thompson has served as a director of the Company since December 1999. Mr. +Thompson is currently the President of The Strategy Group and Managing Director +of Swiss Army Brands, Inc. Prior to founding The Strategy + + 34 + + +Group, Mr. Thompson served in senior management of several core units of the +Interpublic Group of Companies, one of the world's leading advertising groups. +Mr. Thompson also has served as either manager or chairman of several +telecommunication companies of The Galesi Group. Mr. Thompson holds an MBA +degree from Harvard Business School. Currently, Mr. Thompson is a director of +Schwinn/GT Corp. + +Peter Schechter + +Mr. Schechter was appointed a director of the Company in July 1999. Mr. +Schechter is a founder of Chlopak, Leonard, Schechter and Associates, an +international communications consulting firm. Previously, Mr. Schechter was +Managing Director in charge of international business at the Sawyer/Miller +Group, specializing in the management of international financial issues, +political campaigns and country image programs. A graduate of the School of +Advanced International Studies at Johns Hopkins University, Mr. Schechter has +lived in Europe and Latin America and has extensive experience in the area of +governmental relations. He is fluent in six languages. + +Dennis F. Hightower + +Mr. Hightower was named a director of the Company in March 2001. Most recently, +Mr. Hightower served as Chief Executive Officer of Europe Online. Previously, he +was one of the highest-ranking executives at Walt Disney, having served as +President of Walt Disney Television and Telecommunications, and President, +Disney Consumer Products for Europe, Middle East and Africa. He was also +Professor of Management at the Harvard Business School. His career includes +positions with Xerox, McKinsey & Co., General Electric, Mattel and Russell +Reynolds. In addition, he is a member of the Board of Directors of The Gillette +Company, Northwest Airlines, Pan Am Sat Corporation, Phillips Van-Huessen and +the TJX Companies. Mr. Hightower received his MBA from the Harvard Business +School. + +Significant Employees or Consultants +- ------------------------------------ + +Dr. John W. Warner + +Dr. Warner accepted the position of Research and Development Director for the +Company in May 1998. Mr. Warner is an experienced research and technology +consultant and entrepreneur who was one of the leading contributors to the +development of ophthalmic applications of laser technology. Dr. Warner leads the +Company's assessment of existing products and LATW development efforts at +research and development facilities established by the Company in Evanston, +Illinois. Dr. Warner has served as a consultant to Northwestern University in +the areas of technology development and commercialization. From March 1986 to +December 1990 he was the founder and CEO of Taunton Technologies, Inc., a +predecessor of VISX, Inc., engaged in the business of developing and +manufacturing Excimer laser systems to perform ophthalmic surgery. + +Salim A. Nathoo, D.D.S. + +Dr. Nathoo was formerly employed by Colgate-Palmolive Co. as a Senior Researcher +from 1990 to 1998 and was a key member in the successful worldwide launch of the +Colgate Whitening program during his tenure there. Dr. Nathoo has lectured +globally on both the clinical and scientific aspects of teeth whitening, and he +is recognized as one of the leading authorities on the subject. Dr. Nathoo is +one of the founders of Oral Health Clinical Services, LLC ("Oral Health"). The +Company has entered into a consulting agreement with Oral Health in order to +assist the Company in obtaining an American Dental Association ("ADA") seal of +approval for its LATW system. Dr. Nathoo holds both a PhD and DDS from New York +University, and has published over 40 papers in major scientific journals. + + 35 + + +Section 16(a) Beneficial Ownership Reporting Compliance + +Section 16(a) of the Securities Exchange Act of 1934 requires the Company's +officers, directors and persons who beneficially own more than 10 percent of a +registered class of the Company's equity securities to file reports of ownership +and changes in ownership with the Securities and Exchange Commission. Officers, +directors and greater than 10 percent shareholders are required by regulation of +the Securities and Exchange Commission to furnish the Company with copies of all +Section 16(a) forms they file. + +Based solely upon its review of the copies of such forms furnished to it during +the Transition Period, and representations made by certain persons subject to +this obligation that such filings were not required to be made, the Company +believes that all reports required to be filed by these individuals and persons +under Section 16(a) were filed in a timely manner, except as follows (all such +transactions have since been reported to the SEC on Form 5 reports filed in +March 2001): Form 4 report of J. Reed for reporting transaction in December +2000; Form 4 report of G. Lazzara for reporting transaction in December 2000; +Form 4 report of B. Peters for reporting transaction in December 2000; Form 4 +report of R. Montgomery for reporting transactions in December 2000. + +Except as disclosed, the Company is not aware of any transactions in its +outstanding securities by or on behalf of any director, executive officer or 10 +percent holder, which would require the filing of any report pursuant to Section +16(a) during the Transition Period that has not been filed with the Securities +and Exchange Commission. + +ITEM 11. EXECUTIVE COMPENSATION + +The following Summary Compensation Table shows compensation paid by the Company +for services rendered during the nine-month Transition Period, and during the +fiscal years ended March 31, 1999 and April 1, 2000, to John Reed, the Company's +Chief Executive Officer and to the Company's four most highly compensated +executive officers during the Transition Period other than the CEO. Paul Boyer's +employment as CFO of the Company terminated in March 2001. Peter Hausback, the +Company's new CFO, will commence employment in April 2001. + + 36 + + + Summary Compensation Table + + + + +
+ Long Term + Compensation + ---------------------- + Annual + Compensation Awards + ------------------- ---------------------- + + Securities + Underlying +Name and Options/ +Principal Position Period Salary ($) SARs (#) +- -------------------------- ------------------------ ------------------- ---------------------- + +John Reed, CEO Transition Period FY $ 187,500 0 + April 1, 2000 FY March 201,923 250,000/(1)/ + 31, 1999 0/(2)/ 750,000/(2)/ + + +Paul Dawson Transition Period FY $ 150,000 0 +CEO, BriteSmile April 1, 2000 FY March 167,723 320,000/(3)/ +International, Ltd. 31, 1999 0/(4)/ 0 + + +Paul A. Boyer Transition Period FY $ 148,333 0 +Chief Financial April 1, 2000 FY March 67,692 150,000/(5)/ +Officer 31, 1999 0 0 + + +Linda S. Oubre Transition Period FY $ 148,958 0 +President, Chief April 1, 2000 FY March 176,058 25,000/(6)/ +Operating Officer 31, 1999 117,883 200,000/(7)/ + + +Michael P. Whan Transition Period FY $ 428,987/(8)/ 200,000/(9)/ +President, Worldwide April 1, 2000 FY March 0 0 +Marketing 31, 1999 0 0 +
+ + +(1) Options vest 50,000 each year over 5 years beginning on March 24, 2001. + +(2) Mr. Reed received no cash compensation from the Company in fiscal 1999. + Prior to commencing full-time work for the Company at the Company's + offices, Mr. Reed performed occasional services for the Company beginning + January 1999. Mr. Reed's employment contract with the Company provides for + an annual salary of $250,000, commencing June 1999, and options to purchase + 750,000 shares granted January 22 1999, 250,000 of which vested + immediately, and the remainder of which vest 100,000 per year beginning + January 22, 2000. + +(3) Mr. Dawson was granted options to purchase 20,000 shares on November 1, + 1999, which options vested on November 20, 2000, and options to purchase + 300,000 shares on April 19, 1999, of which 100,000 options vested + immediately and the remainder vest 40,000 per year beginning on April 19, + 2000. + +(4) Mr. Dawson received no compensation from the Company in fiscal 1999. Mr. + Dawson's employment commenced with the Company + + 37 + + + effective April 19, 1999. + +(5) 50,000 vested on December 1, 1999, and the remainder vest 20,000 per year + beginning on October 18, 2000. + +(6) Options vested on November 1, 2000. + +(7) 50,000 of the options granted vested immediately, and the remainder vest + 30,000 per year beginning on July 1, 1999. + +(8) Mr. Whan received $200,000 for relocation expenses during the Transition + Period. + +(9) 100,000 of the options granted vested immediately and the remainder vest + 20,000 per year beginning on April 23, 2001. + + +The following table lists individual grants of stock options made during the +Company's last completed fiscal year as compensation for services rendered as an +officer of the Company: + + + OPTION/SAR GRANTS IN TRANSITION PERIOD + + +
+ Potential Realizable + Value at Assumed Annual + Rates of Stock Price + Appreciation for Option + Individual Grants Term + ------------------------------------------------------------------------ -------------------------- + % of Total + Number of Options/SARs + Securities Granted to + Underlying Employees in Exercise or + Options/SARs Transition Base Price Expiration +Name Granted (#) Period ($/Share) Date 5% 10% +- --------------------- ------------- --------------- --------------- -------------- -------------------------- + +John L. Reed 0 N/A N/A N/A N/A N/A +Paul Dawson 0 N/A N/A N/A N/A N/A +Linda S. Oubre 0 N/A N/A N/A N/A N/A +Michael P. Whan 200,000 15.1% 7.391 4-23-10 $929,632 $2,335,870 +Paul A. Boyer 0 N/A N/A N/A N/A N/A +
+ + + AGGREGATED OPTION EXERCISES IN TRANSITION PERIOD + AND DECEMBER 30, 2000 OPTION VALUES + + + +
+ Number of Securities + Underlying Unexercised Value of Unexercised + Shares Options at In the Money Options at + Acquired on Value December 30, 2000 (1) December 30, 2000 (1) +Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable +- ---- ------------ ------------ ------------------------- ------------------------- + +John L. Reed 0 0 350,000 / 650,000 $109,200 / $124,800 + +Paul Dawson 0 0 160,000 / 160,000 0 / 0 + +Linda S. Oubre 0 0 135,000 / 90,000 $143,370 / $95,580 + +Michael P. Whan 0 0 100,000 / 100,000 0 / 0 + +Paul A. Boyer (2) 0 0 70,000 / 80,000 0 / 0 +
+ +1 Potential unrealized value is calculated as the fair market value at + December 30, 2000 ($2.813 per share), less the option exercise price, times + the number of shares. + +2 Mr. Boyer's employment with the Company as Chief Financial Officer + terminated effective March 2, 2001. + + 38 + + + Peter Hausback, Mr. Boyer's successor as Company CFO, will commence + employment on April 1, 2001. + +Compensation of Directors + +Outside directors of the Company (non-employees, non-consultants) receive +options to purchase 20,000 shares of common stock per year for each year during +which they serve as a director. The exercise price of such options is 100% of +the fair market price on the date of grant. Actual expenses incurred by outside +directors are reimbursed. + +Certain directors of the Company have been granted Units of Company equity +participation by LCO. As of May 11, 1998, LCO adopted an Incentive Compensation +Plan (the "LCO Plan"). Under the LCO Plan, certain key employees, consultants or +directors of the Company may be given the opportunity to benefit from the +appreciation in the value of the LCO's present equity holdings in the Company. +Such appreciation rights are granted by way of incentive compensation units +("Units"), whose value is determined by the increase in value of LCO's present +holdings of Company Common Stock above a prescribed base value of $4.75 per +share. Each Unit represents a percentage interest (determined by the total +number of Units granted under the LCO Plan) in such increase in value of LCO's +holdings. LCO has granted Units to the following directors or former directors +of the Company as incentive compensation: John Reed, Brian Delaney, and Linda +Oubre. + +Employment Contracts and Termination of Employment Arrangements + +Certain of the Company's executive officers whose compensation is required to be +reported in the Summary Compensation Table are parties to written employment +agreements with the Company as follows: + +John Reed + +Pursuant to a letter agreement between the Company and John Reed dated January +20, 1999, Mr. Reed agreed to serve as Chief Executive Officer of the Company. +The agreement provides that the Company will pay Mr. Reed $250,000 a year for +his services. Mr. Reed also received options to purchase 750,000 shares of the +Company's common stock at the closing price on the date of the agreement. Mr. +Reed's employment began full-time and on location on June 2, 1999. On March 24, +2000, Mr. Reed was granted options to purchase 250,000 shares of the Company's +common stock at the closing price on that date. + +Linda Oubre + +The Company entered into an employment agreement with Linda Oubre on January 22, +1999. Under the terms of the agreement, Ms. Oubre initially served as President, +Center Division. The agreement expired on June 30, 2000. Her employment with the +Company continues on an at-will basis. She currently serves as President, Chief +Operating Officer of the Company. The Company paid Ms. Oubre $165,000 per annum +from January 22, 1999 through June 30,1999 and $175,000 per annum from July 1, +1999 through June 30, 2000. On July 1, 2000, Ms. Oubre's salary increased to +$200,000 per annum. Ms. Oubre is eligible to receive bonus compensation under +such cash bonus plan as the Company may adopt for its key executives. If no such +plan is adopted, Ms. Oubre will be eligible for bonus compensation based on the +attainment of annual profitability and management objectives relating to the +Company's Center Division as agreed upon by Ms. Oubre and the Company. Ms. Oubre +was also granted options to purchase 200,000 shares of the Company's common +stock at $1.75 per share. Options to purchase 110,000 of the 200,000 shares have +vested and are currently exercisable; the right to purchase an additional 30,000 +of such shares will vest each of July 1, 2001, July 1, 2002 and July 1, 2003 if +Ms. Oubre has remained in the employ of the Company from the date of the +agreement to such date. + +Paul Dawson + +BriteSmile International, Ltd. entered into an employment agreement with Paul +Dawson on April 19, 1999. Under the terms of the agreement, Mr. Dawson has +served as Chief Executive Officer of BriteSmile International, a wholly-owned +subsidiary of the Company. The Company pays Mr. Dawson $16,666 per month for his +services. Mr. Dawson is eligible for a bonus based on the number of paid teeth +whitening procedures performed in a designated international area. The bonus +will be paid in cash and Common Stock of the Company. In addition, Mr. Dawson + + 39 + + +received options to purchase 300,000 shares of the Company's common stock at the +closing price on the date of the agreement. Options to purchase 100,000 shares +vested on the date of the agreement. The remaining 200,000 options vest in equal +installments over the next five years. + +Michael Whan + +Pursuant to a letter agreement between the Company and Michael Whan dated March +17, 2000, Mr. Whan agreed to serve as President, Worldwide Marketing of the +Company. The agreement provides that the Company will pay Mr. Whan a base salary +of $350,000 a year for his services. Mr. Whan also received options to purchase +200,000 shares of the Company's common stock at the closing price on the date of +the agreement. Options for 100,000 shares vested upon commencement of +employment. The remaining 100,000 options vest 20,000 per year over five years. +Mr. Whan is entitled to bonus plan payments based upon the average number of +teeth whitening procedures performed per day per chair at both Centers and +Associated Centers. He is entitled to 12 months severance pay in the event the +Company is sold or otherwise acquired by a new buyer or shareholder group. Mr. +Whan received one-time housing relocation benefits of $200,000. + +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT + +The following table sets forth information as of March 15, 2001 regarding +beneficial stock ownership of (i) all persons known to the Company to be +beneficial owners of more than 5% of the outstanding common stock; (ii) each +director or director nominee, and any other executive officer of the Company +whose compensation is required to be reported in Item 11 of this Report, and +(iii) all officers and directors of the Company as a group. Each of the persons +in the table below has sole voting power and sole dispositive power as to all of +the shares shown as beneficially owned by them, except as otherwise indicated. + + +
+ Number of Percent of + Shares Outstanding + Name and Address Beneficially Shares (2) + Owned (1) + + Executive Officers and Directors + + Paul A. Boyer (former CFO, See Note 16) 92,831/(3)/ * + 490 North Wiget Lane + Walnut Creek, California 94598 + + Paul Dawson 427,397/(4)/ 1.5% + 36 Fitzwilliam Place + Dublin 2, Ireland + + Dr. Gasper Lazzara, Jr. 533,754/(5)/ 1.8% + Orthodontic Centers of America + 500 Sawgrass Village Circle + Ponte Vedra Beach, Florida 32082 + + R. Eric Montgomery 221,250 * + 29 Fairview Road + P. O. Box 487 + Monterey, Massachusetts 01245 + + Linda S. Oubre 180,331/(6)/ * + 490 North Wiget Lane + Walnut Creek, California 94598 + + Bradford Peters 2,086,639/(7)/ 7.2% + Blackfin Capital, LLC + 622 Third Avenue, 38/th/ Floor + New York, New York 10017 + + Anthony M. Pilaro 15,446,294/(8)/ 50.9% + 36 Fitzwilliam Place + Dublin 2, Ireland +
+ + 40 + + + + + Gerald Poch 4,780,426/(9)/ 16.4% + Pequot Capital Management, Inc. + 500 Nyala Farm Road + Westport, Connecticut 06880 + + John L. Reed 1,286,367/(10)/ 4.3% + 490 North Wiget Lane + Walnut Creek, California 94598 + + Peter Schechter 32,000/(11)/ * + Chlopak, Leonard, Schechter & Assoc. + 3021 O Street, N.W. + Washington, D.C. 20007 + + Harry Thompson 100,000/(12)/ * + 169 E. 78th Street + New York, New York 10021 + + Dennis F. Hightower -0- * + + Michael P. Whan 120,000/(13)/ * + 490 North Wiget Lane + Walnut Creek, California 94598 + + All Officers and Directors as a Group (13 persons) 25,396,857/(14)/ 78.4% + + 5% Beneficial Owners + + LCO Investments Limited 15,446,294/(8)/ 50.9% + Canada Court + Upland Road + St. Peter Port + Guernsey + Channel Islands + + Pequot Capital Funds 4,780,426/(9)/ 16.4% + c/o Pequot Capital Management, Inc. + 500 Nyala Farm Road + Westport, CT 06880 + + Andrew J. McKelvey 2,066,639/(15)/ 7.1% + c/o Blackfin Capital, LLC + 622 Third Avenue, 38/th/ Floor + New York, New York 10017 +
+ +* Constitutes less than 1%. + +1 Includes any options or warrants to purchase shares which are presently + exercisable or exercisable within 60 days. + +2 All percentages are calculated based upon a total number of shares + outstanding which includes 28,748,320 shares of the Company issued and + outstanding as of March 15, 2001, plus that number of options or warrants + presently exercisable or exercisable within 60 days by the named security + holder. + +3 Consists of 22,831 shares owned beneficially, and options to purchase + 70,000 shares at $7.25 per share. + +4 Consists of 227,397 shares owned beneficially, options to purchase 180,000 + shares at $6.00 per share, and options to purchase 20,000 shares at $5.88 + per share. + +5 Consists of 392,395 shares held indirectly through OCAI Two Limited + Partnership, warrants to purchase 121,359 shares at $5.00 per share, and + options to purchase 20,000 shares at $9.25 per share. + +6 Consists of 45,331 shares owned beneficially, options to purchase 110,000 + shares at $1.75 per share, options to purchase 25,000 shares at $5.88 per + share. + + 41 + + +7 Consists of 1,704,584 shares held of record by Andrew J. McKelvey in which + Mr. Peters has an economic interest in any appreciation, and in which he + shares control over their disposition, warrants held by Mr. McKelvey to + purchase 362,055 shares at $5.00 per share, and options held by Mr. Peters + to purchase 20,000 shares at 9.38 per share. + +8 Consists of 12,497,497 shares owned of record and beneficially by LCO, + 1,330,000 shares held indirectly through PdeP Tech Limited, a subsidiary of + LCO, 1,000,000 shares issuable upon the conversion of a Convertible + Subordinated Note in the principal amount of $5,000 at a conversion rate of + $5.00 per share, and 618,797 warrants to purchase shares at $5.00 per + share. LCO is a wholly owned subsidiary of the ERSE Trust. The sole trustee + of the ERSE Trust is CAP. Mr. Pilaro, a director of the Company, is + Chairman of CAP. + +9 Consists of 2,211,660 shares held of record by Pequot Private Equity Fund + II, L.P., 1,105,829 shares held of record by Pequot Partners Fund, L.P., + 1,105,829 shares held of record by Pequot International Fund, Inc., + warrants held by Pequot Private Equity Fund II, L.P. to purchase 168,554 + shares at $5.00 per share, warrants held by Pequot Partners Fund, L.P. to + purchase 84,277 shares at $5.00 per share, warrants held by Pequot + International Fund, Inc. to purchase 84,277 shares at $5.00 per share, and + options held by Mr. Poch to purchase 20,000 shares at $11.25 per share. Mr. + Poch is a Managing Director of Pequot Capital Management, Inc., which holds + voting and dispositive power for all shares held of record by the Pequot + Funds. Mr. Poch disclaims beneficial ownership of the shares held by the + Pequot Funds, except to the extent of his pecuniary interest therein. + +10 Consists of 805,461 shares owned beneficially, warrants to purchase 80,906 + shares at $5.00 per share, options to purchase 350,000 shares at $2.50 per + share, and options to purchase 50,000 shares at $9.25 per share. + +11 Consists of 2,000 shares owned beneficially in a Revocable Living Trust, + options to purchase 20,000 shares at $11.25 per share, and options to + purchase 10,000 shares at $4.25 per share. + +12 Consists of options to purchase from LCO 100,000 shares at $1.50 per share. + +13 Consists of options to purchase 120,000 shares at $7.39 per share. + +14 Includes exercisable options and warrants to purchase 3,625,225 shares. + +15 Consists of 1,704,584 shares held of record by Andrew J. McKelvey, and + warrants held by Mr. McKelvey to purchase 362,055 shares at $5.00 per + share. + +16 Mr. Boyer's employment with the Company as Chief Financial Officer + terminated effective March 2, 2001. Peter Hausback, Mr. Boyer's successor + as Company CFO, will commence employment on April 1, 2001. + + +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS + +Year 2000 Note Purchase Financings +- ---------------------------------- + +On June 29 and August 3, 2000, the Company sold to eleven investors (the +"Investors") in a private placement its 5% Subordinated Convertible Notes due +June 29, 2005 (the "August 2000 Notes") in the aggregate principal amount of +$20,000. + +Initially, the August 2000 Notes were convertible into shares of the Company's +Common Stock at a per share conversion price of $6.18, which was 120% of the +average of the closing bid price of the Common Stock during the ten-day trading +period immediately prior to June 27, 2000, the date the transaction documents +were signed. The Company also issued to the Investors, pro rata, warrants (the +"Warrants") to purchase a total of 1,618,121 shares of Common Stock, which have +a term of five years and initially had an exercise price of $7.21 per share. + +Pursuant to Registration Rights Agreements between the Investors and the +Company, the Company has registered + + 42 + + +with the Securities and Exchange Commission, effective August 25, 2000, the +shares of Common Stock underlying the August 2000 Notes and Warrants for resale +under the Securities Act. + +Seven of the Investors, who purchased an aggregate amount of $15,700 of the +August 2000 Notes, are affiliates of the Company. The affiliated Investors +include LCO Investments Limited ("LCO," the principal shareholder of the Company +and affiliated with director Anthony Pilaro), John Reed (shareholder, CEO and +director), Dr. Gasper Lazzara, Jr. (director), Andrew McKelvey (shareholder and +affiliated with director Bradford Peters), and Pequot Private Equity Fund II, +L.P., Pequot International Fund, Inc., and Pequot Partners Fund, L.P. +(shareholders and affiliated with director Gerald Poch). + +Four of the Investors, who purchased a total of $4,300 principal amount of the +August 2000 Notes, are unaffiliated with the Company. These unaffiliated +investors are CapEx, L.P., Pacific Mezzanine Fund, VenCap Opportunities Fund, +L.P., and Wendell Starke. + +On December 5, 2000, the Company sold to LCO Investments Ltd in a private +placement a Convertible Promissory Note (the "December 2000 Note") in the +aggregate principal amount of $5,000. This December 2000 Note is convertible +into shares of Common Stock of the Company at a conversion price of $5.00 per +share and, as of the date of this Report, has not been converted. In conjunction +with the placement of the December 2000 Note, LCO was granted warrants for +250,000 shares at $5.00 per share. + +As a result of the issuance of the December 2000 Note, the conversion price of +the August 2000 Notes, and the exercise price of the Warrants, was automatically +adjusted to $5.00 per share. + +In December 2000, LCO, the Company's principal shareholder, and John Reed, the +Company's Chief Executive Officer, converted their original August 2000 Notes, +together with accrued interest, into an aggregate of 1,122,323 shares of Common +Stock. This conversion was effected at the $5.00 conversion price. + +Subsequently, effective December 14, 2000, certain of the original Investors +other than LCO and Mr. Reed, agreed with the Company to convert an aggregate of +$13,642 in principal amount of their August 2000 Notes into 3,568,560 shares of +Common Stock at an amended conversion price of $3.8625 per share. + +Of the original principal amount of $20,000 of August 2000 Notes, as of the date +of this Report, $800 in principal amount have not been converted and remain +outstanding. This amount is due to non-affiliated parties. The current +conversion price of such outstanding August 2000 Notes is $5.00 per share. + +Of the original Warrants issued in the August 2000 Note offering, all 1,618,121 +Warrants remain outstanding and unexercised, at an exercise price of $5.00 per +share. + +The conversion price of the remaining August 2000 Notes, and the exercise price +of the Warrants, continues to be subject to additional adjustments from time to +time upon the occurrence of certain other events described in the August 2000 +Notes and Warrants, including future issuances of Common Stock for consideration +less than the conversion price then in effect, stock splits or reverse stock +splits, and the occurrence of certain major corporate events such as mergers, +sale of assets, tender offers or exchange offers. + +At any time after the third anniversary of the issuance date of the August 2000 +Notes, the Note holder has the right, but not the obligation, to elect to cause +the Company to redeem all or a portion of its August 2000 Notes. + +EVL Lease Agreement +- ------------------- + +On December 29, 2000, as amended in February 2001, the Company secured a lease +line of credit of up to $15 million from Excimer Vision Leasing L.P. ("EVL"). +EVL is a limited partnership which leases laser vision correction equipment to +ophthalmologists. Anthony Pilaro, the Company's Chairman, serves as Chairman of +EVL. However, he does not directly or indirectly own any interest in EVL or any +of its partners. EVL is owned 78.21 percent by CAP America Trust, the +beneficiary of which is one of Anthony Pilaro's sons. + + 43 + + +In addition to providing working capital to the Company, the lease line of +credit will enable the Company to place up to 1,755 new BriteSmile teeth +whitening devices in Associated Centers in the US, enhancing the Company's +ability to meet its strategic objective of establishing approximately 3,700 +Associated Centers by year end 2001. Pursuant to the lease line agreement, EVL +purchased from the Company 1,245 BriteSmile 3000 teeth-whitening devices +currently used in various BriteSmile Associated Centers in the United States for +$5,000. The agreement also provides that EVL will subsequently spend up to an +additional $10,000 towards the purchase of 1,755 BriteSmile 3000 devices. If the +purchase price of the additional 1,755 devices exceeds $10,000 the Company will +pay the difference. EVL will lease all devices to the Company for a term of five +years. The Company will pay EVL a monthly rental for each device consisting of a +fixed amount (ranging from twenty dollars to thirty dollars) plus one hundred +twenty-five dollars for each key card which enables Associated Center Dentists +to perform 5 teeth whitening procedures. + +EVL Loan Agreement +- ------------------ + +Effective March 1, 2001, the Company borrowed $2,500 from EVL for general +working capital. The loan matures on May 10, 2006, and is not prepayable. +Payments under the loan consist of "fixed payments" of interest, "variable +payments" of principal, and a "final payment" of principal. An initial fixed +payment of $10 is due on April 1, 2001, followed by monthly fixed payments of +$13 during the term of the loan. Variable payments are twenty-five dollars for +each BriteSmile teeth whitening procedure performed at the Company's 14 current +whitening Centers. The final payment, due at maturity, will be the amount by +which the aggregate of variable payments paid during the term of the loan is +less than the original $2,500 principal amount of the loan. + +Guarantees of Working Capital Shortfall +- --------------------------------------- + +Management believes that the Company can continue its current operating strategy +with additional funding through current private placements of its equity +securities, new borrowings, and/or cash receipts in excess of current +projections (collectively, "Additional Cash") of approximately $5,000 in 2001. +In that connection, in March 2001 the Company received written commitments +("Commitment Letters") from certain existing shareholders and directors of the +Company (the "Guarantors") to severally purchase on or before December 31, 2001, +shares of Common Stock of the Company (or to otherwise make available funds to +the Company) in an aggregate amount representing the difference between the +Additional Cash realized in 2001, and $5,000. The Guarantors include LCO; P de P +Tech Limited, a subsidiary of LCO managed by Andrew Pilaro, the son of Company +Chairman Anthony Pilaro; John Reed, the Company's Chief Executive Officer; the +Pequot Investors, affiliated with director Gerald Poch; and Andrew McKelvey, +affiliated with director Bradford Peters. In consideration for the Guarantors' +commitment to purchase Common Stock in the amount of the shortfall, the Company +has agreed to issue to the Guarantors five-year warrants to purchase an +aggregate of 100,000 shares of Common Stock of the Company at an exercise price +of $5.00 per share. If the Guarantors are required to purchase shares or +otherwise fund pursuant to their Commitment Letters, the Company will issue the +Guarantors additional five-year warrants to purchase shares of Common Stock of +the Company at $5.00 per share. The number of additional warrants issued would +equal 50% of the aggregate purchase price paid by the Guarantors for the Common +Stock, divided by five (5). + +LCO Properties Sublease +- ----------------------- + +On December 1, 1999 the Company, as lessee, entered into an Agreement of +Sublease with LCO Properties, Inc., a Delaware corporation, as lessor. LCO +Properties, Inc. is affiliated with the Company's principal shareholder, LCO +Investments Limited. The Sublease covers approximately 4,821 square feet of +space located in the building known as 16-18 West 57th Street in the Borough of +Manhattan, New York City. The sublease term is for ten years and calls for +initial lease payments of $402 per year, subject to increase in the event of +increases in the rent payable under the parent lease for the property between +LCO Properties, Inc. and its lessor. + +Public Relations Services Agreement +- ----------------------------------- + +On April 7, 1999, the Company entered into a Letter Agreement with Chlopak, +Leonard, Schechter and Associates ("CLS") Washington, D.C. Pursuant to the +agreement, CLS provides public relations advice and serves as + + 44 + + +communications counselors to the Company for consideration of $23 per month, +plus expenses. The agreement was entered into for a minimum of six months, and +remains in force. Peter Schechter, a director of the Company, is one of three +managing partners of CLS. + +Oral Health Clinical Services Agreement +- --------------------------------------- + +On March 24, 1999, the Company entered into a Consulting Agreement with Oral +Health Clinical Services, LLC ("Oral Health"), Salim A. Nathoo and R. Eric +Montgomery. Mr. Montgomery is a director of the Company. Pursuant to the +agreement, Oral Health and Dr. Nathoo will devote their services to obtaining +American Dental Association ("ADA") Certification for the BS2000 procedure. The +term of the contract is for two years or until ADA Certification, whichever is +earlier. In consideration for the services, the Company granted 75,000 stock +options to Dr. Nathoo which are vested. The Company will grant up to 225,000 +additional stock options, of which the number and exercise price is dependent +upon obtaining ADA Certification, at the date the certification is obtained. To +date, certification has not been obtained. + +Oraceutical Agreement +- --------------------- + +On May 17, 1998, the Company entered into a Consulting Agreement with +Oraceutical, LLC. R. Eric Montgomery, a director of the Company, is the founding +Manager and President of Oraceutical. Pursuant to the agreement, Oraceutical +provides technology development services to the Company for various +light-activated teeth whitening products and procedures. The Company and +Oraceutical are currently negotiating an extension of their agreement beyond its +original term. In consideration for its services, Oraceutical has been paid $35 +a month, plus options to purchase 200,000 shares of Common Stock, subject to +vesting provisions, exercisable at $1.75 per share. + +ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K + +The following exhibits are filed herewith or are incorporated by reference to +exhibits previously filed with the Commission: + +(a) Exhibits + +Exhibit Number Title of Document +- -------------- ----------------- + + 2 Asset Purchase Agreement and Plan of Reorganization by and + among BriteSmile, Inc., an Alabama corporation, BriteSmile, + Inc., a Utah corporation, and David K. Yarborough, together + with the exhibits and schedules forming part of the Asset + Purchase Agreement (incorporated by reference to the + Company's Current Report on Form 8-K dated March 7, 1996). + + 3.01 Articles of Incorporation and Amendments thereto + (incorporated by reference to the Company's Registration + Statement and Amendments thereto on Form 10 initially filed + August 8, 1990). + + 3.02 Bylaws adopted May 2, 1996, (incorporated by reference to + the Company's Annual Report on Form 10-KSB for the fiscal + year ended March 31, 1996). + + 3.03 Amendment to Bylaws adopted July 23, 1999 (incorporated by + reference to the Company's Quarterly Report on Form 10-QSB + for the quarter ended June 30, 1999). + + 10.01 1990 Stock Option Plan for Employees of the Company + (incorporated by reference to the Company's Annual Report + on Form 10-KSB for the fiscal year ended March 31, 1996). + + 10.02 Securities Purchase Agreement dated April 1, 1996 for + 300,000 shares of Common Stock and Options to Purchase + 1,000,000 shares of Common Stock at $20 per share, between + the Company, LCO Investments Limited, Pinnacle Fund L.P., + and Richard S. Braddock (incorporated by reference to the + Current Report on + + 45 + + + Form 8-K of the Company dated April 1, 1996). + + 10.03 Registration Rights Agreement dated April 1, 1996 between + the Company, LCO Investments Limited, Richard S. Braddock, + and Pinnacle Fund, L.P. (incorporated by reference to the + Current Report on Form 8-K of the Company dated April 1, + 1996). + + 10.04 Securities Purchase Agreement dated May 8, 1997 for 428,572 + shares of Common Stock and Options to Purchase 500,000 + shares of Common Stock at $9.00 per share, among the + Company, LCO Investments Limited, and Richard S. Braddock + (incorporated by reference to the Company's Annual Report + on Form 10-KSB for the fiscal year ended March 31, 1997). + + 10.05 Registration Rights Agreement dated May 8, 1997 among the + Company, LCO Investments Limited, and Richard S. Braddock + (incorporated by reference to the Company's Annual Report + on Form 10-KSB for the fiscal year ended March 31, 1997). + + 10.06 Stock Purchase Agreement dated as of May 4, 1998 for + 1,860,465 shares of Common Stock, between the Company and + LCO Investments Limited (incorporated by reference to the + Company's Annual Report on Form 10-KSB for the fiscal year + ended March 31, 1998). + + 10.07 Registration Rights Agreement dated as of May 4, 1998 + between the Company and LCO Investments Limited + (incorporated by reference to the Company's Annual Report + on Form 10-KSB for the fiscal year ended March 31, 1998). + + 10.08 Employment Letter dated January 20, 1999 (effective June 2, + 1999) between the Company and John L. Reed (incorporated by + reference to the Company's Annual Report on Form 10-KSB for + the year ended March 31, 1999). + + 10.09 LCO Investments Limited Incentive Compensation Plan, dated + as of May 11, 1998 (incorporated by reference to the + Company's Quarterly Report on Form 10-QSB for the quarter + ended June 30, 1998). + + 10.10 Form of Units Agreement between the Company and certain + directors or executive officers of the Company + (incorporated by reference to the Company's Quarterly + Report on Form 10-QSB for the quarter ended June 30, 1998). + + 10.11 Employment Letter dated April 19, 1999 between the + Company's subsidiary, BriteSmile International, Inc., and + Paul Dawson (incorporated by reference to the Company's + Annual Report on Form 10-KSB for the year ended March 31, + 1999). + + 10.12 Revised 1997 Stock Option and Incentive Plan of the + Company, as amended on January 22, 1999 (incorporated by + reference to the Company's Annual Report on Form 10-KSB for + the year ended March 31, 1999). + + 10.13 Form of Stock Purchase Agreement dated as of June 3, 1999, + between the Company and purchasers who acquired shares at a + 5% discount to the 10-day average market price preceding + closing (incorporated by reference to the Company's Current + Report on Form 8-K as filed June 21, 1999). + + 10.14 Registration Rights Agreement dated as of June 3, 1999 + between the Company and the non-management purchasers + (incorporated by reference to the Company's Current Report + on Form 8-K as filed June 21, 1999). + + 10.15 Amended and Restated Registration Rights Agreement dated as + of June 3, 1999 between the Company and the management + purchasers (incorporated by reference to the Company's + Current Report on Form 8-K as filed June 21, 1999). + + 46 + + + 10.16 Form of Stock Purchase Agreement dated as of June 3, 1999 + between the Company and purchasers who acquired shares of + common stock of the Company at a 5% discount to the 10-day + average market price preceding closing (incorporated by + reference to the Company's Current Report on Form 8-K dated + June 4, 1999). + + 10.17 Registration Rights Agreement dated as of June 3, 1999 + between the Company and certain non-management purchasers + in the June 1999 Private Placement (incorporated by + reference to the Company's Current Report on Form 8-K dated + June 4, 1999). + + 10.18 Amended and Restated Registration Rights Agreement dated as + of June 3, 1999 between the Company and certain management + purchasers (incorporated by reference to the Company's + Current Report on Form 8-K as filed June 4, 1999). + + 10.19 Stock Purchase Agreement dated as of January 12, 1999 + between the Company and the Pequot investment funds + ("Pequot Funds") (incorporated by reference to the + Company's Current Report on Form 8-K dated January 18, + 2000). + + 10.20 Registration Rights Agreement dated as of January 18, 2000 + between the Company and the Pequot Funds (incorporated by + reference to the Company's Current Report on Form 8-K dated + January 18, 2000). + + 10.21 Voting and Co-sale Agreement dated as of January 18, 2000 + between the Company, the Pequot Funds and LCO Investments + Ltd. (incorporated by reference to the Company's Current + Report on Form 8-K dated January 18, 2000). + + 10.22 Employment letter dated August 2, 1999 between the Company + and Adam Flint (incorporated by reference to the Company's + Annual Report on Form 10-KSB for the fiscal year ended + April 1, 2000). + + 10.23 Revolving Line of Credit Agreement dated as of May 26, 2000 + between the Company and Bank of Hawaii (incorporated by + reference to the Company's Annual Report on Form 10-KSB for + the fiscal year ended April 1, 2000). + + 10.24 Agreement of Sublease dated December, 1999 between the + Company and LCO Properties, Inc. (incorporated by reference + to the Company's Annual Report on Form 10-KSB for the + fiscal year ended April 1, 2000). + + 10.25 Employment letter dated March 17, 2000 between the Company + and Michael Whan (incorporated by reference to the + Company's Quarterly Report on Form 10-Q for the quarter + ended July 1, 2000). + + 10.26 Securities Purchase Agreement dated as of June 27, 2000 + between the Company and certain purchasers of 5% + Convertible Subordinated Notes (filed herewith). + + 10.27 Form of Convertible Notes issued pursuant to the Securities + Purchase Agreement dated as of June 27, 2000 (filed + herewith). + + 10.28 Form of Warrants granted to note purchasers pursuant to the + Securities Purchase Agreement dated as of June 27, 2000 + (filed herewith). + + 10.29 Form of Registration Rights Agreement between the Company + of the purchasers of Notes pursuant to the Securities + Purchase Agreement dated as of June 27, 2000 (filed + herewith). + + 10.30 Amendment Agreement dated as of August 3, 2000 between the + Company and the purchasers of notes identified therein + (filed herewith). + + 47 + + + 10.31 Note Purchase Agreement dated December 5, 2000 between the + Company and LCO Investments Limited (incorporated by + reference to the Company's Current Report on Form 8-K dated + December 5, 2000). + + 10.32 Convertible Promissory Note dated December 5, 2000 in the + principal amount of $5,000,000 (incorporated by reference + to the Company's Current Report on Form 8-K dated December + 5, 2000). + + 10.33 Warrant to Purchase 250,000 Shares of Common Stock of the + Company dated December 5, 2000 (incorporated by reference + to the Company's Current Report on Form 8-K dated December + 5, 2000). + + 10.34 Amended and Restated Agreement between Excimer Vision + Leasing L.P. and the Company dated February, 2001 (filed + herewith). + + 10.35 Loan Agreement between Excimer Vision Leasing L.P. and the + Company dated as of March 1, 2001 (filed herewith). + + 21 Subsidiaries of the Company (filed herewith). + +(b) Reports on Form 8-K + +The Company filed a Current Report on Form 8-K dated December 5, 2000 for the +purpose of reporting under Item 5 thereof the purchase by LCO Investments Ltd of +a Convertible Promissory Note of the Company in the principal amount of $5,000. +See Part II, Item 5 herein, "Recent Sales of Unregistered Securities." + + 48 + + + SIGNATURES + +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange +Act of 1934, the registrant has duly caused this Report to be signed on its +behalf by the undersigned, thereunto duly authorized. + + + BriteSmile, Inc. + + By: /s/ Dan Cunningham + ------------------ + Dan Cunningham + Controller + + Date: March 27, 2001 + + +Pursuant to the requirements of the Securities Exchange Act of 1934, this Report +has been signed below by the following persons on behalf of the registrant and +in the capacities and on the dates indicated. + + +
+Signature Title Date +- --------- ----- ---- + +/s/ Anthony Pilaro Chairman of the Board of Directors March 23, 2001 +- ----------------------------------------- +Anthony M. Pilaro + +/s/ John L. Reed Chief Executive Officer March 23, 2001 +- ----------------------------------------- and Director (Principal Executive Officer) +John L. Reed + +/s/ Linda S. Oubre Director March 23, 2001 +- ----------------------------------------- +Linda S. Oubre + +/s/ R. Eric Montgomery Director March 23, 2001 +- ----------------------------------------- +R. Eric Montgomery + +/s/ Gerald Poch +- ----------------------------------------- Director March 28, 2001 +Gerald Poch + +/s/ Dr. Gasper Lazzara, Jr. Director March 23, 2001 +- ----------------------------------------- +Dr. Gasper Lazzara, Jr. + +/s/ Brad Peters Director March 23, 2001 +- ----------------------------------------- +Brad Peters + +/s/ Harry Thompson Director March 23, 2001 +- ----------------------------------------- +Harry Thompson + +/s/ Peter Schechter Director March 23, 2001 +- ----------------------------------------- +Peter Schechter + +/s/ Dennis F. Hightower Director March 23, 2001 +- ----------------------------------------- +Dennis F. Hightower +
+ + 49 + + +PART I FINANCIAL INFORMATION + +ITEM 1. FINANCIAL STATEMENTS + + + + BRITESMILE, INC. + INDEX TO CONSOLIDATED FINANCIAL STATEMENTS + + +Report of Independent Auditors............................................ F-2 + +Consolidated Balance Sheets............................................... F-3 + +Consolidated Statements of Operations..................................... F-5 + +Consolidated Statements of Cash Flows..................................... F-7 + +Consolidated Statements of Shareholder's Equity........................... F-10 + +Notes to Consolidated Financial Statements................................ F-11 + + + F-1 + + + + Report of Ernst & Young, LLP, Independent Auditors + + +The Board of Directors and Shareholders, +BriteSmile, Inc. + +We have audited the accompanying consolidated balance sheets of BriteSmile, Inc. +as of December 30, 2000 and April 1, 2000, and the related consolidated +statements of operations, shareholders' equity, and cash flows for the 39 weeks +ended December 30, 2000 and each of the 52 week periods ended April 1, 2000 and +March 31, 1999. These financial statements are the responsibility of BriteSmile +Inc.'s management. Our responsibility is to express an opinion on these +financial statements based on our audits. + +We conducted our audits in accordance with auditing standards generally accepted +in the 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. An audit includes examining, on a test basis, +evidence supporting the amounts and disclosures in the financial statements. An +audit also includes assessing the accounting principles used and significant +estimates made by management, as well as evaluating the overall financial +statement presentation. We believe that our audits provide a reasonable basis +for our opinion. + +In our opinion, the financial statements referred to above present fairly, in +all material respects, the consolidated financial position of BriteSmile, Inc. +at December 30, 2000 and April 1, 2000, and the consolidated results of its +operations and its cash flows for the 39 weeks ended December 30, 2000 and each +of the 52 week periods ended April 1, 2000 and March 31, 1999, in conformity +with accounting principles generally accepted in the United States. + + +/s/ Ernst & Young, LLP + + +March 2, 2001, except for Note 1 as to +which the date is March 28, 2001 +Walnut Creek, California + + + F-2 + + +PART I - FINANCIAL INFORMATION + +ITEM 1. FINANCIAL STATEMENTS + + BRITESMILE, INC. + CONSOLIDATED BALANCE SHEETS + ASSETS + (In Thousands, except share data) + + +
+ December 30, April 1, + 2000 2000 + ---- ---- + +CURRENT ASSETS: + Cash and cash equivalents.................................... $ 5,701 $10,969 + Cash and short term investment, restricted as to use......... 843 843 + Trade accounts receivable, net of allowance for doubtful + accounts of $163 and $83, respectively...................... 3,130 1,181 + + Inventories.................................................. 2,365 1,191 + Prepaid expenses and other................................... 883 834 + Notes receivable-current portion............................. 335 - + ------- + + Total current assets................................. 13,257 15,018 + ------- ------- + +PROPERTY, EQUIPMENT AND IMPROVEMENTS: + Furniture, fixtures and equipment............................ 7,906 7,153 + Leasehold improvements....................................... 10,095 7,605 + ------- ------- + 18,001 14,758 + + Less accumulated depreciation and amortization............... (4,060) (1,700) + ------- ------- + + 13,941 13,058 + ------- ------- + + Construction in progress..................................... 907 2,845 + ------- + + Net property, equipment and improvements............. 14,848 15,903 + ------- ------- + + NOTE RECEIVABLE.............................................. 391 - + ------- + +OTHER ASSETS.................................................. 1,635 1,469 + ------- ------- + + $30,131 $32,390 + ======= ======= +
+ + The accompanying notes to consolidated financial statements + are an integral part of these consolidated statements + + F-3 + + + BRITESMILE, INC. + CONSOLIDATED BALANCE SHEETS (continued) + + LIABILITIES AND SHAREHOLDERS' EQUITY + (In Thousands, except share data) + + +
+ December 30, April 1, + ------------ -------- + 2000 2000 + ---- ---- + +CURRENT LIABILITIES: + Accounts payable............................................... $ 8,429 $ 1,864 + Accrued liabilities............................................ 2,830 2,162 + Accrual for store closures..................................... 778 - + Note payable, net of discount.................................. 4,747 - + Accrued gift certificate liability............................. 708 123 + Capital lease obligation- current portion...................... 181 - + -------- -------- + + Total current liabilities................................ 17,673 4,149 + +LONG TERM LIABILITIES + Subordinated convertible debenture, net of discount...... 709 - + Capital lease obligations................................ 1,018 - + Other long term liabilities.............................. 436 122 + -------- -------- + + Total long term liabilities..................... 2,163 122 + + Total liabilities........................................ 19,836 4,271 + -------- +COMMITMENTS AND CONTINGENCIES + +SHAREHOLDERS' EQUITY: + Common stock, $.001 par value; 50,000,000 shares authorized; + 28,748,323 and 23,860,683 shares issued and outstanding as of + December 30, 2000 and April 1, 2000, respectively 29 24 + Additional paid-in capital..................................... 99,568 73,389 + Accumulated deficit............................................ (89,302) (45,294) + -------- -------- + + Total Shareholders' equity............................... 10,295 28,119 + -------- -------- + + $ 30,131 $ 32,390 + ======== ======== +
+ + The accompanying notes to consolidated financial statements + are an integral part of these consolidated statements + + F-4 + + + BRITESMILE, INC. + CONSOLIDATED STATEMENTS OF OPERATIONS + ------------------------------------- + (In Thousands, except share data) + + +
+ 39 Weeks Ended 39Weeks Ended + December 30, December 30, + ------------ ------------ + 2000 1999 + ---- ---- + (Unaudited) + ----------- + +REVENUES: + Center whitening fees, net........................... $ 9,315 $ 3,858 + Associated Center whitening fees, net................ 6,270 742 + Product sales........................................ 1,223 97 + ----------- ----------- + + Total revenues, net................................ 16,808 4,697 + ----------- ----------- + +OPERATING COSTS AND EXPENSES: + Center selling and occupancy costs................... 9,462 6,731 + Selling, General and administrative expenses......... 30,556 12,301 + Research and development expenses.................... 1,811 1,279 + Depreciation and amortization........................ 3,830 774 + Restructuring expense................................ 778 300 + Impairment charges................................... 1,254 - + Loss on sale/ leaseback transaction.................. 7,138 - + ----------- ----------- + + Total operating costs and expenses................. 54,829 21,385 + ----------- ----------- + + Loss from operations............................. (38,021) (16,688) + ----------- ----------- + +OTHER INCOME (EXPENSE), net: + Interest expense, including $5,552 related to debt + conversion expense for the 39 weeks ended December (6,153) (24) + 30, 2000............................................ + Interest income...................................... 192 304 + ----------- ----------- + + Total other income (expense), net.................. (5,961) 280 + ----------- ----------- + + Loss before income tax provision................. (43,982) (16,408) + +INCOME TAX PROVISION - + ----------- + + Net loss......................................... $ (44,008) $ (16,408) + =========== =========== + +BASIC AND DILUTED NET LOSS PER SHARE.................. $(1.80) $(0.87) + =========== =========== + +WEIGHTED AVERAGE SHARES - BASIC AND DILUTED........... 24,493,676 18,783,918 + =========== =========== +
+ + The accompanying notes to consolidated financial statements + are an integral part of these consolidated statements + + F-5 + + + BRITESMILE, INC. + CONSOLIDATED STATEMENTS OF OPERATIONS + ------------------------------------- + (continued) + + (In Thousands, except share data) + + +
+ + 52 Weeks Ended 52 Weeks Ended + April 1, 2000 March 31, 1999 + ------------- -------------- + +REVENUES: + Center whitening fees, net......................................... $ 5,838 $ 46 + Associated Center whitening fees, net.............................. 1,970 - + Product sales...................................................... 236 501 + ----------- ----------- + + Total revenues, net 8,044 547 + +OPERATING COSTS AND EXPENSES: + Center selling and occupancy costs................................. 13,849 946 + Selling, General and administrative expenses....................... 14,498 4,627 + Research and development expenses.................................. 1,748 3,201 + Depreciation and amortization...................................... 1,457 123 + Restructuring expense.............................................. 472 1,030 + Impairment charges................................................. - 2,525 + Loss on sale/leaseback transaction................................. - - + ----------- ----------- + + Total operating costs and expenses............................... 32,024 12,452 + ----------- ----------- + + (23,980) (11,905) + ----------- ----------- + +OTHER INCOME (EXPENSE), net: + Interest expense................................................... (26) (102) + Interest income.................................................... 501 240 + ----------- ----------- + + Total other income (expense), net................................ 475 138 + ----------- ----------- + + Loss before income tax provision............................... (23,505) (11,767) + +INCOME TAX PROVISION................................................ 11 - + ----------- ----------- + + Net loss....................................................... $ (23,516) $ (11,767) + =========== =========== + +BASIC AND DILUTED NET LOSS PER SHARE................................ $(1.18) $(1.13) + =========== =========== + +WEIGHTED AVERAGE SHARES - BASIC + AND DILUTED........................................................ 19,995,796 10,409,212 + =========== =========== +
+ + The accompanying notes to consolidated financial statements + are an integral part of these consolidated statements. + + F-6 + + + BRITESMILE, INC. AND SUBSIDIARIES + CONSOLIDATED STATEMENTS OF CASH FLOWS + (In Thousands) + + +
+ 39 Weeks 39 Weeks + Ended Ended + December 30, December 30, + 2000 1999 + ---- ---- + (Unaudited) + ------------ + +CASH FLOWS FROM OPERATING ACTIVITIES: + Net loss $(44,008) $(16,408) + Adjustments to reconcile net loss to net cash used in operating activities: + Depreciation and amortization..................................................... 3,830 774 + Amortization of discount on debt.................................................. 198 - + Loss on sale/leaseback transaction................................................ 7,138 - + Impairment charges................................................................ 1,254 - + Debt conversion expense, including accrued interest converted to equity........... 5,736 - + Cost recognized for issuance of stock and stock options........................... 313 1,653 + Changes in assets and liabilities: + Trade accounts receivable...................................................... (1,949) (339) + Inventories.................................................................... (1,174) (117) + Prepaid expenses and other..................................................... (49) (285) + Note receivable................................................................ (726) - + Other assets................................................................... - 40 + Accounts payable............................................................... 6,565 801 + Accrued liabilities............................................................ 1,446 432 + Accrued gift certificate liability............................................. 585 125 + Other long term liabilities.................................................... 314 - + -------- -------- + + Net cash used in operating activities........................................ (20,527) (13,324) + -------- -------- + +CASH FLOWS FROM INVESTING ACTIVITIES: + Proceeds from sale of assets.......................................................... 5,000 462 + Purchase of property and equipment.................................................... (14,968) (11,579) + -------- -------- + + Net cash used in investing activities........................................ (9,968) (11,117) + -------- -------- + +CASH FLOWS FROM FINANCING ACTIVITIES: + Principal payments on long-term debt.................................................. - - + Payments under Letters of Credit...................................................... - - + Proceeds from convertible debentures.................................................. 25,000 - + -------- -------- + Proceeds from common stock offerings.................................................. - 15,707 + -------- -------- + Proceeds from exercise of stock options............................................... 227 5,413 + -------- -------- + + Net cash provided by financing activities.................................... 25,227 21,120 + -------- -------- + +NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................. (5,268) (3,321) + +CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD................................... 10,969 6,200 + -------- -------- + +CASH AND CASH EQUIVALENTS AT END OF THE PERIOD......................................... $ 5,701 $ 2,878 + ======== ======== +
+ + The accompanying notes to consolidated financial statements + are an integral part of these consolidated statements. + + F-7 + + + BRITESMILE, INC. AND SUBSIDIARIES + CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) + (In Thousands) + + +
+ 52 Weeks + 52 Weeks Ended Ended + April 1, March 31, + -------- --------- + 2000 1999 + ---- ---- + + +CASH FLOWS FROM OPERATING ACTIVITIES: + Net loss $(23,516) $(11,767) + Adjustments to reconcile net loss to net cash used in operating + activities: + Depreciation and amortization.................................... 1,457 171 + Loss on sale/leaseback transaction............................... - - + Impairment charges............................................... - 2,525 + Debt conversion expense.......................................... - - + Cost recognized for issuance of stock and stock options.......... 1,765 734 + Gain on sale of assets........................................... - 101 + Changes in assets and liabilities: + Trade accounts receivable..................................... (1,106) 312 + Note receivable............................................... - - + Inventories................................................... (1,175) (113) + Prepaid expenses and other.................................... (515) (270) + Other assets.................................................. 45 - + Accounts payable.............................................. (168) 722 + Accrued liabilities........................................... 688 (85) + Accrued gift certificate liability............................ 123 - + Other long term liabilities................................... 122 - + -------- -------- + + Net cash used in operating activities....................... (22,280) (7,670) + +CASH FLOWS FROM INVESTING ACTIVITIES: + Proceeds from assets held for sale, net.............................. 1,260 146 + Purchase of property and equipment................................... (14,838) (1,564) + + Net cash used in investing activities....................... (13,578) (1,418) + +CASH FLOWS FROM FINANCING ACTIVITIES: + Principal payments on long-term debt................................. (866) (228) + Payments under Letters of Credit..................................... (843) - + Proceeds from convertible debentures................................. - - + -------- -------- + Proceeds from common stock offering.................................. 40,935 14,982 + -------- -------- + Proceeds from exercise of stock option............................... 1,401 31 + -------- -------- + + Net cash provided by financing activities................... 40,627 14,785 + -------- -------- + +NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................. 4,769 5,697 + +CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD.................. 6,200 503 + -------- -------- + +CASH AND CASH EQUIVALENTS AT END OF THE PERIOD........................ $ 10,969 $ 6,200 + ======== ======== +
+ + The accompanying notes to consolidated financial statements + are an integral part of these consolidated statements. + + F-8 + + + BRITESMILE, INC. AND SUBSIDIARIES + CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) + (In Thousands) + + +
+ 39 Weeks 39 Weeks 52 Weeks 52 Weeks + Ended Ended Ended Ended + December 30 December 30 March 31 + 2000 1999 2000 1999 + ---- ---- + (Unaudited) + --------- + +SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: + Cash paid for interest............. $ 232 $ 23 $ 26 $ 101 + ======= ======= ====== ======= + + Cash paid for income taxes $ 26 $ - $ 11 $ - + ======= ======= ====== ======= + +SUPPLEMENTAL DISCLOSURE OF NON CASH ITEMS: + Conversion of debt, including + accrued interest of $195, to + equity............................ $19,395 $ - $ - $ - + ======= ======= ====== ======= + + Stock options issued to + consultants, the fair value of which + was capitalized as other assets $ 352 $ - $1,474 $ - + ======= ======= ====== ======= + + Warrants issued in financing + arrangements, the fair value of + which was capitalized as a + discount on debt $ 2,787 $ - $ - $ - + ======= ======= ====== ======= +
+ + The accompanying notes to consolidated financial statements + are an integral part of these consolidated statements. + + F-9 + + + BRITESMILE, INC. AND SUBSIDIARIES + Consolidated Statements of Shareholders' Equity + (In Thousands) + + +
+ Accumulated + Additional Other Total + Common Shares Paid-In Accumulated Comprehensive Shareholder + Shares Amount Capital Deficit Loss Equity + ---------------------------------------------------------------------------------- + +Balance at March 31, 1998 5,809 $ 6 $ 11,902 $(10,011) $ (50) $ 1,847 + Comprehensive + Loss: + Reclassification adjustment for + amount included in net loss -- -- -- -- 50 50 + Net loss -- -- -- (11,767) -- (11,767) + -------- + (11,717) + Total comprehensive loss + Exercise of Stock Options 28 -- 31 -- -- 31 + Stock option compensation cost -- -- 734 -- -- 734 + Private Placement of common Stock 11,163 11 14,971 -- -- 14,982 + Other issuance of common stock 138 -- 183 -- -- 183 + -------- -------- -------- -------- -------- -------- +Balance at March 31, 1999 17,138 17 27,821 (21,778) -- 6,060 + Exercise of Stock Options 753 1 1,400 -- -- 1,401 + Income tax benefit on exercise + of stock options -- -- 3,005 -- -- 3,005 + Valuation allowance for income + tax benefit on exercise of + stock options -- -- (3,005) -- -- (3,005) + Stock option compensation cost -- -- 3,239 -- -- 3,239 + Private Placement of common + Stock 5,970 6 40,929 -- -- 40,935 + Net loss and comprehensive loss -- -- -- (23,516) -- (23,516) + -------- -------- -------- -------- -------- -------- + +Balance at April 1, 2000 23,861 24 73,389 (45,294) -- 28,119 + Exercise of Stock Options 152 -- 227 -- -- 227 + Beneficial conversion related to debt financing -- -- 3,378 -- -- 3,378 + Income tax benefit on exercise + of stock options -- -- 3,253 -- -- 3,253 + Valuation allowance for income + tax benefit for exercise of + stock option -- -- (3,253) -- -- (3,253) + Stock option compensation cost -- -- 479 -- -- 479 + Conversion of long-term debt to + common stock 4,735 5 19,390 -- -- 19,390 + Issuance of warrants in connection with + financing agreement -- -- 2,705 -- -- 2,705 + Net loss and comprehensive loss -- -- -- (44,008) -- (44,008) + -------- -------- -------- -------- -------- -------- +Balance at December 30, 2000 28,748 29 $ 99,568 $(89,302) $ -- $ 10,295 + ======== ======== ======== ======== -------- ======== +
+ + The accompanying notes to consolidated financial statements + are an integral part of these consolidated statements. + + F10 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (in thousands, except share data) + +1. Description of Business + +BriteSmile, Inc., a Utah corporation ("BriteSmile" or the "Company"), and its +affiliates develop, produce sell and lease advanced teeth whitening products, +services and technology. Unless specified to the contrary herein, references to +BriteSmile or to the Company refer to the Company and its subsidiaries on a +consolidated basis. In February 1999 the Company introduced its new Light +Activated Teeth Whitening System technology (the "BriteSmile Light Activated +Teeth Whitening System" or "LATW", patents pending), including its new +BriteSmile 2000 system ("BS2000"), new whitening gel and new whitening process. +The LATW is distributed in Company-owned salon settings known as BriteSmile +Professional Teeth Whitening Centers ("Centers") and in existing dental offices +known as BriteSmile Professional Teeth Whitening Associated Centers ("Associated +Centers"). In November 1999 the Company introduced its new BriteSmile 3000 LATW +keycard system ("BS3000") into Associated Centers. This new mobile version of +the BS2000 can be installed more quickly and provides the needed flexibility and +mobility in dental offices. + +In February 1999 the LATW was introduced in the Company's first Center in Walnut +Creek, California. In March 1999, the Company opened its first Associated Center +in Louisville, Kentucky. As of December 30, 2000, the Company had 17 Centers +and 1,155 Associated Centers in operation. + +The Company is not engaged in the practice of dentistry. Each licensed dentist +who operates a Center or Associated Center maintains full control over dental +matters, including the supervision of dental auxiliaries and the administration +of the LATW procedure. + +Although the Company does not believe that its business follows seasonal trends, +it has recognized that during the months of July and August and again during +December and January, a substantial number of Associated Center locations (both +Domestic and International) shut down their practices for vacation. As a result, +the frequency of key card purchases by Associated Centers during these months +declines as well. + +The Company's principal sources of liquidity have been issuances of convertible +debt, common stock and common stock equivalents. At December 30, 2000, the +Company had $5,701 of cash and cash equivalents. The Company expects to sign +contracts for additional Associated Centers during the next twelve months. This +expansion is contingent upon several factors, including available cash resources +and acceptance by consumers and Associated Center dentists of the Company's LATW +services. The Company expects that operating losses will continue through most +of calendar year ending December 31, 2001, and that its principal uses of cash +will be to provide working capital, to finance capital expenditures, and to +satisfy other general corporate expenses. In particular, the Company plans to +use its cash to finance its marketing strategy. + +Management believes that the Company can continue its current operating strategy +with additional funding through current private placements of its equity +securities, new borrowings, and/or cash receipts in excess of current +projections (collectively, "Additional Cash") of approximately $5,000 in 2001. +In that connection, in March 2001 the Company received written commitments +("Commitment Letters") from certain existing shareholders and directors of the +Company (the "Guarantors") to severally purchase on or before December 31, 2001, +shares of Common Stock of the Company (or to otherwise make available funds) in +an aggregate amount representing the difference between the Additional Cash +realized in 2001, and $5,000. In consideration for the Guarantors' commitment to +purchase Common Stock in the amount of the shortfall, the Company has agreed to +issue to the Guarantors five-year warrants to purchase an aggregate of 100,000 +shares of Common Stock of the Company at an exercise price of $5.00 per share. +In addition, if the Guarantors are required to purchase shares (or to otherwise +fund) pursuant to their Commitment Letters, the Company will issue the +Guarantors additional five-year warrants to purchase shares of Common Stock of +the Company at $5.00 per share. The number of additional warrants issued would +equal 50% of the aggregate purchase price paid by the Guarantors for the Common +Stock, divided by five (5). + + F-11 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (in thousands, except share data + +The Company may choose to defer capital expenditure plans if funding beyond the +Additional Cash is necessary. + +The Company operates in one reportable segment. The Company's chief operating +decision maker has determined the operating segment based upon how the business +is managed and operated. Geographical segments are not material as of December +30, 2000 + + +2. Summary of Significant Accounting Policies + +Basis of Presentation and Principles of Consolidation +- ------------------------------------------------------ + +In 2000, the Company elected to change its fiscal year-end to a 52/53 week +period ending on the last Saturday in December of each year. Consequently, the +accompanying financial statements reflect the financial position and results of +operations of the Company for the nine-month Transition Period ended December +30, 2000. + +The accompanying consolidated financial statements include the accounts of the +Company, its subsidiaries, and entities in which the Company has a controlling +financial interest. All intercompany balances and transactions have been +eliminated in consolidation. + +Use of Estimates +- ---------------- + +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 and 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. + +Cash and Cash Equivalents +- -------------------------- + +The Company considers all highly liquid investments purchased with an original +maturity of three months or less to be cash equivalents. + +Cash and Short-Term Investments, Restricted as to Use +- ----------------------------------------------------- + +At December 30, 2000 and April 1, 2000, $843 of the Company's cash and short- +term investments were used to collateralize letters of credit and is restricted +as to use until September 2008. + +Concentration of Credit Risk +- ---------------------------- + +Financial instruments that potentially subject the Company to significant +concentration of credit risk consist principally of cash and trade accounts +receivable. + +The Company maintains cash and cash equivalents with various financial +institutions. These financial institutions are located throughout the United +States and the Company's policy is designed to limit exposure to any one +institution. The Company performs periodic evaluations of the relative credit +standing of those financial institutions that are considered in the Company's +investment strategy. The Company does not require collateral on these financial +instruments. + +Concentration of credit risk with respect to trade accounts receivable are +limited due to the large number of entities comprising the Company's customer +base. + + F-12 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (in thousands, except share data + +Revenue Recognition +- ------------------- + +The Company recognizes revenue from teeth whitening procedures performed at its +Centers when the procedures have been performed. The Company recognizes revenue +at Associated Centers when the key card for the BS3000 device used at the +Associated Center is shipped. Revenue is reported net of discounts. +Additionally, Associated Center revenue for the 39 weeks ended December 30, 2000 +and December 30, 1999, and the years ended April 1, 2000 and March 31, 1999, has +been reduced by $122, $0 (unaudited), $163 and $0 respectively, due to charges +related to warrants issued to Orthodontic Centers of America ("OCA"). + +Inventories +- ------------ + +Inventories are stated at the lower of cost (first-in, first-out) or market. +Inventories at December 30, 2000 and April 1, 2000 consist primarily of dental +supplies and component parts for the manufacturing of teeth whitening systems, +as follows: + + December 31, 2000 April 1, 2000 + ----------------- ------------- + +Supplies $1,811 $ 290 +Work in Progress 554 901 + ------ ------ + +Total Inventory $2,365 $1,191 + +Advertising +- ----------- + +Costs incurred to produce advertising are expensed the first time the +advertising takes place. Costs incurred to deliver advertising are expensed in +the period the advertising reaches the market. Advertising costs were $16,314, +$5,351 (unaudited), $10,218 and $1,361 for the 39 weeks ended December 30, 2000 +and December 30, 1999, and the years ended April 1, 2000 and March 31, 1999, +respectively, and are included in "Center selling and occupancy cost" and in +"Selling, general and administrative expenses" in the accompanying consolidated +statements of operations. + +Property and Equipment +- ---------------------- + +Property and equipment is stated at the lower of cost or fair market value. +Expenditures for maintenance and repairs are charged to expense as incurred, and +expenditures for additions and betterments are capitalized. Capital lease +equipment and amortization expense is included in depreciation. Equipment, +furniture and fixtures are depreciated for financial reporting purposes over +their estimated useful lives, ranging from three to ten years, using the +straight-line method. Leasehold improvements are amortized for financial +reporting purposes using the straight-line method over the shorter of the +estimated useful life of the asset or the remaining term of the lease. + +Patents +- -------- + +The cost of establishing patents are capitalized and amortized over their +estimated useful lives using the straight-line method. The cost of maintaining +patents is expensed as incurred. + +Stock-Based Compensation +- ------------------------- + +The Company follows Accounting Principles Board Opinion No. 25, "Accounting for +Stock Issued to Employees," and related interpretations in accounting for its +stock-based compensation and has adopted the disclosure only alternative +Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for +Stock-Based Compensation". + + F-13 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (in thousands, except share data + + +Product Development Cost +- ------------------------ + +Costs associated with the development of new products or services are charged to +operations as incurred. These costs are included in "Research and development +expenses" in the accompanying consolidated statements of operations. + +Center Opening Costs +- -------------------- + +Non-capital expenditures incurred in opening a new BriteSmile Professional Teeth +Whitening Center are expensed as incurred. + +Income Taxes +- ------------- + +The Company uses the liability method of accounting for income taxes pursuant to +Statement of Financial Accounting Standards No. 109, "Accounting for Income +Taxes." Under the liability method, deferred tax assets and liabilities are +provided on differences between the financial reporting and taxable loss, using +the enacted tax rates. + +Impairment of Long-Lived Assets +- ------------------------------- + +The Company evaluates its long-lived assets for impairment whenever events or +changes in circumstances indicate that the carrying amount of an asset may not +be recoverable. Recoverability of assets to be held and used is measured by a +comparison of the carrying amount of an asset to future net cash flows expected +to be generated by the assets. If such assets are considered to be impaired, +the impairment to be recognized is measured by the amount by which the carrying +amount of the assets exceeds the fair market value of the asset. Assets to be +disposed of are reported at the lower of the carrying amount or fair value less +costs to sell. + +Fair Value of Financial Instruments +- ----------------------------------- + +The following methods and assumptions were used by the Company in establishing +its fair value disclosures for financial instruments: + +Cash and cash equivalents: The carrying amount reported in the balance sheet +for cash and cash equivalents approximates its fair value. + +Accounts receivable, accounts payable, and accrued liabilities: The carrying +amount reported in the balance sheet for accounts receivable, accounts payable +and accrued liabilities approximates its fair value. + +Long and short-term debt: The carrying amounts of the Company's borrowings +under its short-term revolving credit arrangements approximate their fair value. +The fair values of the Company's long-term debt are estimated using discounted +cash flow analyses, based on the Company's current incremental borrowing rates +for similar types of borrowing arrangements. + +Loss Per Common Share +- --------------------- + +The Company computes loss per common share in accordance with Statement of +Financial Accounting Standards No. 128, "Earnings Per Share." In accordance with +FAS 128, basic net loss per share is calculated as net loss divided by the +weighted-average number of common shares outstanding less shares subject to +repurchase. Diluted net loss per share is computed by dividing net loss by the +weighted-average number of common shares outstanding and dilutive common stock +equivalents outstanding during the period. Commons equivalent shares from stock +options and warrants (using the treasury stock method) and convertible notes +payable have been excluded from the calculation of net loss per share as their +effect is anti-dilutive. + + F-14 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (in thousands, except share data + + +Comprehensive Income +- --------------------- + +In 1999, the Company adopted Statement of Financial Accounting Standards No. +130, "Reporting Comprehensive Income" ("SFAS 130"). This statement establishes +rules for the reporting of comprehensive income and its components. +Comprehensive income consists of net loss and foreign currency translation +adjustments and is presented in the Consolidated Statements of Shareholders' +Equity. The adoption of SFAS 130 had no impact on total shareholders' equity. + +New Accounting Pronouncements +- ----------------------------- + +In June 1998, the Financial Accounting Standards Board issued Statement of +Financial Accounting Standards No. 133, "Accounting for Derivative Instruments +and Hedging Activities" ("FAS 133"). FAS 133 requires that all derivative +instruments be recorded on the balance sheet at their fair market value. +Changes in fair market value of derivatives are recorded each period in current +earnings or other comprehensive income, depending on whether a derivative is +designed as part of a hedge transaction, and if so, the type of hedge +transaction. + +In June 1999, the FASB issued Statement of Financial Accounting Standards No. +137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of +the Effective Date of FASB Statement No. 133" ("FAS 137"), which amends FAS 133 +to be effective for all fiscal quarters or all fiscal years beginning after June +15, 2000. Management does not currently expect that adoption of FAS 137 will +have material impact on the Company's financial position or results of +operations. + + +3. Restructuring and Impairment Charges + +During the 39 weeks ended December 30, 2000, the Company's Board of Directors +and management decided to close three of its less productive wholly-owned +Centers. These Centers are located in Pasadena, CA., Ft. Lauderdale, FL., and +Coral Gables, FL. As a result of the decision to close these locations, the +Company recorded an impairment charge of $1,254 related to leasehold +improvements whose fair value was determined to be $0. The Company also +recorded an accrual of $161 related to severance costs for 12 employees, and an +accrual of $617 related to lease termination costs for the closed Centers. + +During the 52 weeks ended April 1, 2000, the Company incurred termination +expenses of $472 related to the closure of its former headquarters facility in +Lester, PA. + +During the fiscal year ended March 31, 1999, the Company's Board of Directors +and management decided to close its Utah operating facility, discontinue all +activities related to the industrial and scientific laser lines of business, +discontinue development and sales of its laser-based device, and move its +headquarters to Pennsylvania. As a result of the Company's decision to relocate +its operations to Pennsylvania and to focus exclusively on the teeth whitening +market, nearly all of the Company's 63 employees located in Utah were scheduled +for termination. A termination benefits liability of $200 was established and +charged to expense during the three-month period ended June 30, 1998. At +September 30, 1998, the Company completed its termination plan and paid benefits +of approximately $200 to former employees. In October 1998, the Company +discontinued sales of take-home and in-office tooth whitening chemical products +as a result of management's shift in focus to the LATW technology as well as the +BriteSmile Professional Teeth Whitening Centers and Associated Centers. As a +result, the Company recorded charges of $3,355 in the 52 weeks ended March 31, +1999. These charges included contract cancellation and employee termination +costs of $830 and impairment charges of $2,525 based upon the fair value of +assets held for sale. + +4. Sale/Leaseback Transaction + +Effective December 29, 2000, the Company secured a lease line of up to $15,000 +from Excimer Vision Leasing L.P. ("EVL"). Under this agreement, the Company +entered into a sale-leaseback arrangement. The Company sold 1,245 of its BS3000 +whitening devices for $5,000 and leased them back for a period of 5 years. The +leaseback has been accounted for as a capital lease. A loss of $7,138 on this +transaction has + + F-15 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (in thousands, except share data + +been recognized in the period ended December 30, 2000 as the fair market value +of the equipment sold was less than its carrying value. The agreement further +provides that EVL will spend up to an additional $10,000 towards the purchase of +1,755 BS3000 devices. To the extent the purchase price of the additional 1,755 +devices exceeds $10,000, the Company is obligated to pay the difference. EVL +will lease all devices to the Company for a term of five years. The Company will +pay EVL a monthly rental for each device consisting of a fixed amount (ranging +from twenty dollars to thirty dollars) plus one hundred twenty-five dollars for +each key card which enables Associated Center dentists to perform 5 teeth +whitening procedures. + +5. Accrued Liabilities + +Accrued liabilities consist of the following: + + +
+ December 30, April 1, + 2000 2000 + ---- ---- + +Accrued salaries and benefits........................ $ 730 $ 672 +Accrued incentive.................................... 535 266 +Accrued professional services........................ - 572 +Accrued advertising.................................. 579 277 +Other accrued expenses............................... 986 375 + ------ ------ + +Total................................................ $2,830 $2,162 + ====== ====== +
+ + +6. Leases + +The Company leases certain equipment under capital leases. The leases for +equipment require the payment of certain fixed payments and contingent rentals +based on usage. + +Property, equipment and improvements includes the following amounts for leases +that have been capitalized: + + +
+ December 31, 2000 April 1, 2000 + ----------------- ------------- + +Equipment $1,199 $ - + +Less allowance for amortization - - + ------ ------- + $1,199 $ + ====== ======= +
+ +The Company recorded amortization expense of $0 on assets recorded under capital +leases for the 39 weeks ended December 30, 2000 and December 30, 1999, and the +years ended April 1, 2000 and March 31, 1999. + +The Company also leases office and retail space under non-cancelable operating +leases with initial terms of five to ten years, including various renewal +options and escalation clauses. Future minimum payments under capital leases +and noncancelable operating leases with initial terms of one year or more +consisted of the following at December 30, 2000: + + Capital Operating + Leases Leases + ------ ------ +2001 $ 274 $ 2,762 +2002 299 2,894 +2003 299 2,978 +2004 299 2,661 + + F-16 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (in thousands, except share data + + +2005 299 1,971 +Thereafter 25 5,485 + ------ ------- +Total minimum lease payments 1,495 18,751 +Executory cost - +Amount representing interest 296 + ------ +Present value of net minimum + Lease payments 1,199 +Less current portion (181) + ------ +Long-term capital lease obligations 1,018 + ====== + +Rent expense for the 39 weeks ended December 30, 2000 and December 31, 1999, and +the 52 weeks ended April 1, 2000 and March 31, 1999, was $2,627, $748 +(unaudited), $1,420 and $149, respectively. + + +7. Income Taxes + +Deferred income taxes reflect the net tax effects of temporary differences +between the carrying amounts of assets and liabilities for financial purposes +and for income tax purposes. Significant components of the Company's deferred +tax liabilities and assets are as follows: + + +
+Deferred tax assets (liabilities): December 30, April 1, + 2000 2000 + ---- ---- + + Net operating loss carryforwards $ 29,033 $ 15,451 + Research and development and + Other tax credit carryforwards 378 378 + Reserves and accruals 151 292 + Property and Equipment 1,565 331 + Other, net 98 1,587 + -------- -------- +Total deferred tax assets 31,225 18,039 +Valuation allowance for deferred tax assets (31,225) (18,039) + -------- -------- +Net deferred tax assets $ - $ - + ======== ======== +
+ +Significant components of the income tax expense are as follows: + + +
+ 39 weeks 52 weeks + ended 52 weeks ended + December 30, ended April 1, March 31 + 2000 2000 1999 + ---- ---- ---- + +Current: + Federal $ - $ - $ - + State 26 11 - + ----- ----- ------ +Total current 26 11 - + ----- ----- ------ + +Deferred: + Federal $ - $ - $ - + State - - - + ----- ----- ------ +Total deferred - - - + ----- ----- ------ + Total current and deferred 26 11 - + ===== ===== ====== +
+ + + F-17 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (In thousands, except share data) + +The provision for income taxes reconciles to the amounts computed by applying +the statutory federal rate to before taxes as follows: + + + +
+ 52 weeks ended + 39 Weeks + ended + December 30, April 1, March 30, + 2000 2000 1999 + ---- ---- ---- + +Income tax benefit at U.S. statutory rates $(14,956) (7,995) (4,001) +State income tax benefits, net of Federal (2,639) (1,411) (706) +benefit +Non-deductible items 2,219 (2,995) 2,892 +Loss for which no tax benefit is currently + recognizable 15,402 12,412 1,815 + -------- ------ ----- + $ 26 11 0 + ======== ------ ====== +
+ +Realization of deferred tax assets is dependent on future earnings, the timing +and the amount of which are uncertain. Accordingly, a valuation allowance, in +an amount equal to the net deferred tax asset as of December 30, 2000 and April +1, 2000, has been established to reflect these uncertainties. The change in the +valuation allowance was a net increase of approximately $13,186 and $12,094, for +the 39 weeks ended December 30, 2000 and the 52 weeks ended April 1, 2000, +respectively. At December 30, 2000 and April 1, 2000 approximately $3,253 and +$3,005, respectively, of the valuation allowance for deferred tax assets relates +to benefits of stock options deductions which, when recognized, will be +allocated directly to contributed capital. + +The Company has approximately $75,103 and $59,952 of federal and state net +operating loss carryforwards, respectively, that begin to expire in March 31, +2010 for federal income tax purposes and March 31, 2002 for state income tax +purposes. A significant portion of the losses are attributable to professional +corporations formed to comply with the corporate practice of medicine statutes +in the jurisdictions where the Company has operations. These professional +corporations are not consolidated for income tax purposes. + +The Company has approximately $378 of tax credits that under current tax law can +be used to offset future income tax liabilities. These credits will begin +expiring March 31, 2005 if not utilized. Utilization of net operating loss and +tax credit carryforwards may be subject to a substantial annual limitation due +to the ownership change limitation provisions provided by the Internal Revenue +of 1986, as amended, and similar state provisions. The annual limitation may +result in expiration of net operation loss and tax credit carryforwards before +full utilization. + + +8. Note Receivable + +Effective August 22, 2000 the Company entered into a Settlement Agreement in +connection with the full settlement and termination of the lawsuit first filed +by Natural White, Inc. and its affiliated corporations against the Company in +the Supreme Court of the State of New York, Erie County in April 2000. Also +named as a defendant in the original action was R. Eric Montgomery, a director +of the Company and the principal owner of IDEX Dental Sciences ("IDEX"). +BriteSmile removed the case to the United States District Court for the Western +District of New York and filed a motion to dismiss the complaint. + +Pursuant to the Settlement Agreement, Natural White dismissed with prejudice all +claims alleged in the lawsuit. Under the Settlement Agreement, Natural White +purchased from IDEX for the sum of $950 a worldwide, royalty free, fully paid- +up, exclusive license covering the tooth whitening products and technology it is +currently using to manufacture and sell its products outside the professional +field. In order to facilitate Natural White's purchase of its license from IDEX, +the Company made a secured + + F-18 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (In thousands, except share data) + +loan to Natural White in the principal amount of $838 to cover a portion of the +purchase price. Natural White is obligated to repay the loan at the rate of $30 +per month for 30 months, including interest of $2. + +9. Financing Arrangements + +Following is a summary of the Company's long and short term debt financing +arrangements: + + +
+ December 30, 2000 April 1, 2000 + ----------------- ------------- + +5% Subordinated Convertible Notes + due and payable on June 29, 2005 $ 709 $0 + (including discount of $91) + +Convertible Promissory Note due + December 5, 2001, interest at 7.52% + (including discount of $253) $4,747 $0 +
+ + +On June 29 and August 3, 2000, the Company sold to eleven investors (the +"Investors"), in a private placement, its 5% Subordinated Convertible Notes due +June 29, 2005 (the "August 2000 Notes") in the aggregate principal amount +$20,000. + +Initially, the August 2000 Notes were convertible into shares of the Company's +Common Stock at a per share conversion price of $6.18. The Company also issued +to the Investors, pro rata, warrants (the "Warrants") to purchase a total of +1,618,121 shares of Common Stock, which have a term of five years and initially +had an exercise price of $7.21 per share. The fair value of the warrants issued +of $2,085 was recorded as a discount of the August 2000 Notes and was being +amortized over the life of the notes to interest expense. Seven of the +Investors, who purchased an aggregate amount of $15,700 of the August 2000 +Notes, are affiliates of the Company. + +On December 5, 2000, the Company sold to LCO Investments Ltd in a private +placement a Convertible Promissory Note (the "December 2000 Note") in the +aggregate principal amount of $5,000. In conjunction with the issuance of the +December 2000 Note, warrants to purchase 250,000 shares of Common Stock were +issued at an exercise price of 5.00 per share. The warrants have a contractual +life of 5 years. The fair value of the warrants issued of $253 was recorded as +a discount of the December 2000 Note and is being amortized over the life of the +note to interest expense. The December 2000 Note is convertible into shares of +Common Stock of the Company at a conversion price of $5.00 per share and, as of +the date of this Report, has not been converted. + +As a result of the issuance of the December 2000 Note, the conversion price of +the August 2000 Notes, and the exercise price of the Warrants, was automatically +adjusted to $5.00 per share. Additionally, the fair value of the Warrants was +adjusted to $2,267 based upon the change in conversion price and the discount of +the August 2000 Notes was adjusted accordingly. The new fair value of the +warrants was amortized on a straight-line basis over the life of the notes to +interest expense. + +In December 2000, two investors converted their original August 2000 Notes, +together with accrued interest, into an aggregate of 1,122,323 shares of Common +Stock. This conversion was effected at the $5.00 conversion price. + +Subsequently, effective December 14, 2000, certain of the other original +Investors agreed with the Company to convert an aggregate of $13,642 in +principal amount of their August 2000 Notes, together with interest, into +3,568,560 shares of Common Stock at an amended conversion price of $3.8625 per +share. + + F-19 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (In thousands, except share data) + +Upon conversion of the notes, the related unamortized discount of $2,174 arising +from the fair value of the Warrants was immediately recorded as interest +expense. + +As of December 30, 2000, $800 of the original August 2000 Notes remain +outstanding at a conversion price of $5.00 per share. The unamortized discount +on these notes is $91 as of December 30, 2000 and is being amortized over the +life of the notes to interest expense. + +The Company also recorded $314 of additional interest expense related to the +$5.00 per share beneficial conversion rate offered the Investors, and $3,063 of +additional interest expense related to the $3.86 per share inducement to convert +offered to Investors as noted above. The amounts represent the difference +between the stated conversion rates of the August 2000 Notes and the effective +conversion rates considering the relative fair value attributed to the notes and +the related warrants. + +10. Shareholder's Equity + +Effective February 1, 2000, the Company issued an aggregate of 30,927 shares of +restricted common stock to three affiliated purchasers ("Quota Rabbicco II, +Ltd., Argonaut Partnership, L.P. and David E. Gerstenhaber), in a private +placement for cash proceeds to the Company of $186. + +Effective February 1, 2000, the Company issued an aggregate 77,318 shares of +restricted common stock to Andrew J. McKelvey, an affiliated purchaser, in a +private placement for cash proceeds to the Company of $464. + +On January 18, 2000, the Company issued and sold in a private placement +3,333,333 shares of its Common Stock at $6.00 per share for aggregate proceeds +of $20,000. The shares were issued to three private investors, Pequot Private +Equity Fund II, L.P. (1,666,667 shares), Pequot Partners Fund, L.P. (833,333 +shares), and Pequot International Fund, Inc. (833,333 shares). + +On October 29, 1999, LCO Investments Limited ("LCO"), the principal shareholder +of the Company, exercised options to purchase 1,173,334 shares of common stock +of the Company, resulting in proceeds of $5,280 to the Company. The Company +granted the options to LCO in April 1996 and May 1997 in connection with private +placements of the Company's common stock. + +In June 1999 the Company completed a private placement of 1,355,555 shares of +its common stock for $15,000. 1,004,043 shares were sold to private investors, +and the remaining 351,512 were sold to a group of individuals, including members +of senior management, the Company's Board of Directors and key consultants. + +On December 7, 1998, the Company sold 9,302,326 shares of restricted Common +Stock to LCO in a private placement for $10,000. Under an amendment to a prior +registration agreement, LCO acquired certain registration rights with respect to +these shares. + +On May 5, 1998, the Company sold 1,860,465 shares of its Common Stock to LCO for +$5,000 pursuant to a Stock Purchase Agreement dated as of May 4, 1998. Effective +January 12, 2000, the Company sold in a private placement 77,318 shares of +Common Stock to Andrew J. McKelvey for cash proceeds of $464, or $6.00 per +share. Mr. McKelvey also acquired certain registration rights with respect to +the shares. Brad Peters, a director of the Company, shares in the economic +benefits of any appreciation in the shares acquired by Mr. McKelvey. Mr. Peters +also shares with Mr. McKelvey authority to dispose of the shares. + +Stock Option Plans +- ------------------ + +During 1990, the Company adopted the 1990 Stock Option Plan ("1990 Plan"), and +subsequently, in January 1997, adopted the 1997 Stock Option and Incentive Plan +("1997 Plan"). Under the terms of the 1997 Plan, initially up to 2,000,000 +shares of the Company's common stock were reserved for issuance. An additional +3,000,000 shares were reserved for issuance under the 1997 Plan in January 1999. +Options may be granted at exercise prices of no less than the fair market value +on the date of the grant, as + + F-20 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (In thousands, except share data) + + determined by the Board of Directors and quoted market prices. Options + generally vest over a five-year period and have a maximum term of ten + years. + + A summary of the Company's stock option activity and related information + for the 39 weeks ended December 30, 2000 and the 52-weeks ended April 1, + 2000 and March 31, 1999 follows: + + +
+ 39 weeks 52 weeks 52 week + ended ended ended + December April 1, March 31, + 30, 2000 2000 1999 + ------------------------- (restated) (restated) + ------------------------- ----------------------- + Weighted- Weighted- Weighted- + Average Average Average + Exercise Exercise Exercise + Price Price Price + Options Per Share Options Per Share Options Per Share + --------- --------- ---------- --------- --------- --------- + +Outstanding at beginning + of year 6,142,683 $4.78 5,423,267 $2.90 1,781,667 $4.63 +Granted 1,158,000 5.93 3,012,000 8.55 3,657,600 1.98 +Exercised (163,750) 1.51 (2,040,334) 3.17 (16,000) 1.25 +Forfeited/expired (766,000) 6.64 (252,250) 4.77 - - + --------- ---------- ----- --------- ----- +Outstanding at end of year 6,370,933 5.50 614,683 $4.78 5,423,267 $2.90 + ========= ========== ===== ========= ===== +
+ + Exercise prices for outstanding options as of December 30, 2000 ranged from + $1.00 to $13.75 and the weighted-average remaining contractual life of + those options is 8.48 years. The weighted average fair market value of + options granted during the 39 weeks ended December 30, 2000, and the 52 + weeks ended April 1, 2000 and March 31, 1999, were $5.93, $8.55 and $1.98, + respectively. + + A summary of the status of options outstanding at December 30, 2000 + follows: + + +
+ Outstanding Options Exercisable Options + ------------------- ------------------- + Weighted + Average Weighted + Exercise Price Remaining Average Weighted + Range Per Contractual Exercise Price Average Exercise + Share Number Life in Years Per Share Number Price Per Share + -------------- --------- ------------- -------------- ------- ---------------- + + $ 1.00 - $1.75 1,415,000 6.64 1.58 881,000 1.64 + 2.31 - 2.50 969,600 8.08 2.48 489,000 2.46 + 2.63 - 2.94 347,000 8.10 2.75 137,000 2.74 + 3.75 - 5.88 769,000 9.21 5.00 271,000 5.75 + 6.00 - 6.88 628,500 9.03 6.14 217,500 6.20 + 7.13 - 8.88 647,000 8.86 7.59 236,000 7.57 + 9.00 - 10.50 917,833 8.36 9.32 466,483 9.18 + 10.94 - 13.75 677,000 8.82 12.20 145,000 11.71 +
+ + Shares Reserved for Future Issuance + ----------------------------------- + + The Company has reserved shares of common stock for future issuance as + follows: + + +
+ December 30, 2000 April 1, 2000 + ----------------- ------------- + + + Stock options outstanding................................... 5,679,933 5,432,183 + Stock options, available for grant.......................... -0- 1,058,000 + Warrants.................................................... 1,868,123 300,000 +
+ + As of December 30, 2000, options granted to employees and directors for + 2,072,650 shares of common + + F-21 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (In thousands, except share data) + + +stock are exercisable. + +Pro Forma Disclosures of the Effect of Stock-Based Compensation +- --------------------------------------------------------------- + +The Company has elected to follow APB 25 and related interpretations in +accounting for its employee stock options. The alternative fair value +accounting provided for under Financial Accounting Standards Board Statement No. +123, "Accounting for Stock-Based Compensation" ("FAS 123"), requires use of +option valuation models that were not developed for use in valuing employee +stock options. Under APB 25, when the exercise price of the Company's employee +stock options equals the market price of the underlying stock on the date of +grant, no compensation expense is recognized. + +Pro forma information regarding net income (loss) is required by FAS 123, which +also requires that the information be determined as if the Company has accounted +for its employee stock options under the fair value method of FAS 123. The fair +value of these options was estimated at the date of grant using a Black-Scholes +option pricing valuation model with the following weighted-average assumptions: +volatility of 1.31 for the 39 weeks ended December 30, 2000 and 1.28 and 0.99 +for the 52 weeks ended April 1, 2000 and March 31, 1999, respectively; an +average risk-free interest rate of 5.72% for the 39 weeks ended December 30, +2000 and 5.72% and 5.30% for the 52 weeks ended April 1, 2000 and March 31, +1999, respectively; a dividend yield of 0%; and a weighted-average expected life +of the option of 5 years. + +The option valuation models were developed for use in estimating the fair value +of traded options that have no vesting restrictions and are fully transferable. +In addition, option valuation models require the input of highly subjective +assumptions, including the expected life of the option. Because the Company's +employee stock options have characteristics significantly different from those +of traded options and because changes in the subjective input assumptions can +materially affect the fair value estimate, in management's opinion, the existing +models do not necessarily provide a reliable single measure of the fair value of +its employee stock options. + +Had compensation cost for the Company's stock-based compensation plans been +determined using the fair value at the grant dates for awards under those plans +calculated using the Black-Scholes option pricing valuation method, the +Company's historical net loss applicable to common shareholders and basic and +diluted net loss per share would have been increased to the pro forma amounts +indicated below: + + December 30, April 1, March 31, + 2000 2000 1999 + Compensation expense $ 3,641 $ 2,473 $ 1,129 + Pro forma loss $ 47,649 $ 25,989 $ 12,896 + Pro forma basic and diluted loss + per share $ 1.94 $ 1.30 $ 1.24 + +The pro forma impact of compensation expense measured under FAS 123 on the net +loss for the 39 weeks ended December 30, 2000 and the 52 weeks ended April 1, +2000 and March 31, 1999 is not representative of the effects on net income +(loss) for future years, as future years will include the effects of additional +years of stock option grants. + +Options Issued to Non-employees +- ------------------------------- + +For the 39 weeks ended December 30, 2000 and the 52 weeks ended April 1, 2000 +and March 31, 1999, the Company recognized expenses of $313, $1,765 and $734 +related to stock options granted to non-employees. These options generally vest +upon meeting certain performance goals and have contractual terms up to ten +years. Expense related to these stock options is adjusted from time to time +upon attainment of certain performance goals based upon the fair value of the +Company's stock on the date of vesting. As of December 30, 2000, options +granted to non-employees for 770,333 shares of common stock are exercisable. + + F-22 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (In thousands, except share data) + +11. Warrants + +On June 2, 1999, the company issued warrants for 300,000 shares of the Company's +common stock to OCA in consideration for OCA entering into an agreement to +install BS 3000 machines in OCA Centers. The warrants were exercisable at +$11.0625 per share and expired on June 2, 2000. The fair market valve of these +warrants utilizing the Black-Scholes valuation model is $1,632 and is being +amortized over the life of the agreement, which is ten years. The remaining fair +market value is reflected in other assets on the balance sheet. The compensation +expense for the warrants issued to OCA has been offset against Associated Center +Revenue. + + +12. Net Loss Per Share of Common Stock + +The calculation of historical basic and diluted net loss per share is as +follows: + + +
+Historical December 30, 2000 April 1, 2000 March 31, 1999 +- ---------- ------------------ -------------- --------------- + +Net loss...................................................... (44,008) (23,516) (11,767) + +Weighted-average shares of common stock outstanding used in +computing basic and diluted net loss per share ............... 24,493,676 19,995,796 10,409,212 +Basic and diluted net loss per common share .................. (1.80) (1.18) (1.13) +
+ +If the Company had reported net income, the calculation of historical diluted +earnings per share would have included approximately an additional 6,944,977, +5,682,183 and 5,423,267 common equivalent shares related to outstanding stock +options and warrants not included above (determined using the treasury stock +method) for the 39-week period ended December 30, 2000 and the 52 weeks ended +April 1, 2000 and March 31, 1999, respectively. + + +13. Commitments and Contingencies + +Litigation + +The Company is party to certain litigation and claims arising in the normal +course of business. Management believes that such matters will not have a +material impact on the Company's financial position or results of operations. + +Bank Line of Credit + +On May 26, 2000, the Company entered into a Revolving Credit Line Agreement +("Credit Facility") with Bank of Hawaii. Under the terms of the Credit +Facility, the Company may borrow from time to time through May 25, 2001, up to +$2,000. Loan proceeds must be used for working capital, capital expenditures, +and general corporate purposes only, and are secured by a Letter of Credit from +Scotiabank. The Credit Facility requires monthly payments to the bank of +interest only, with all principal and accrued interest due May 25, 2001. As of +December 30, 2000 no amount had been drawn under the Credit Facility. + + +14. Related Party Transactions + +LCO Properties Sublease +- ----------------------- + +On December 1, 1999 the Company, as lessee, entered into an Agreement of +Sublease with LCO Properties, Inc., a Delaware corporation, as lessor. LCO +Properties, Inc. is affiliated with the Company's principal shareholder, LCO +Investments Limited. The Sublease covers approximately 4,821 square feet of +space located in the building known as 16-18 West 57th Street in the Borough of +Manhattan, New York City. The sublease term is for ten years and calls for +initial lease payments of $402 per year, subject to increase in the event of +increases in the rent payable under the parent lease for the property between +LCO and its lessor. + + F-23 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (In thousands, except share data) + + + Harry Thompson Consulting Agreement + ----------------------------------- + + In August 1999 Harry Thompson, a director of the Company, agreed to provide + marketing consulting services to the Company. In consideration for Mr. + Thompson's services to the Company, and pursuant to a letter agreement + dated August 17, 1999, the Company's principal shareholder, LCO granted Mr. + Thompson the right to purchase from LCO up to 100,000 shares of Common + Stock of the Company at a price of $1.50 per share. The option to purchase + from LCO expires on August 31, 2004. + + Public Relations Services Agreement + ----------------------------------- + + On April 7, 1999, the Company entered into a Letter Agreement with Chlopak, + Leonard, Schechter and Associates ("CLS") Washington, D.C. Pursuant to the + agreement, CLS provides public relations advice and serves as + communications counselors to the Company for consideration of $23 per + month, plus expenses. The agreement was entered into for a minimum of six + months, and remains in force. Peter Schechter, a director of the Company, + is one of three managing partners of CLS. + + Oral Health Clinical Services Agreement + --------------------------------------- + + On March 24, 1999, the Company entered into a Consulting Agreement with + Oral Health Clinical Services, LLC, Salim A. Nathoo and R. Eric Montgomery. + Mr. Montgomery is a director of the Company. Pursuant to the agreement, + Oral Health, Nathoo will devote their services to obtaining American Dental + Association (ADA) Certification for the BriteSmile 2000 Tooth Whitening + Procedure. The term of the contract is for two years or until ADA + Certification, whichever is earlier. In consideration for the services, the + Company granted 75,000 stock options to Dr. Nathoo which are vested. The + Company will grant up to 225,000 additional stock options, of which the + number and exercise price is dependent upon obtaining ADA Certification, at + the date the Certification is obtained. To date, certification has not been + obtained. + + Oraceutical Agreement + --------------------- + + On May 17, 1998, the Company entered into a Consulting Agreement with + Oraceutical, LLC. Eric Montgomery, a director of the Company, is the + founding Manager and President of Oraceutical. Pursuant to the agreement, + Oraceutical provides technology development services to the Company for + various light-activated teeth whitening products and procedures. The + Company and Oraceutical are currently negotiating an extension of their + agreement beyond its original term. In consideration for its services, + Oraceutical has been paid $35 a month, plus options to purchase 200,000 + shares of Common Stock, subject to vesting provisions, exercisable at $1.75 + per share. + + + 15. Benefit Plans + + In March 2000, the Company adopted a 401(k) defined contribution plan + covering substantially all employees. Employees become eligible to + participate in the plan beginning the first month following their hire + date. The plan contains provisions for an employer contribution at the + discretion of management. To date, the Company has made no contributions to + the plan. + + + 16. Quarterly Results (unaudited) + + +
+ 13 Weeks Ended 13 Weeks Ended + December 30, 2000 September 30, 2000 + +REVENUES: + Center whitening fees, net.............................. $ 3,851 $ 3,253 + Associated Center whitening fees, net................... 2,870 1,515 + Product sales........................................... 582 411 + ----------- ----------- + + Total revenues, net................................... 7,303 5,179 + ----------- ----------- +
+ + F-24 + + + BriteSmile, Inc. + Notes to Consolidated Financial Statements + (In thousands, except share data) + + + +OPERATING COSTS AND EXPENSES: + Center selling and occupancy costs....................... 6,346 2,774 + Selling, General and administrative expenses............. 9,338 10,350 + Research and development expenses........................ 868 557 + Depreciation and amortization............................ 1,577 1,243 + Restructuring expense.................................... 778 - + Impairment charges....................................... 1,254 - + Loss on sale/leaseback transaction....................... 7,138 - + ----------- ----------- + + Total operating costs and expenses..................... 27,299 14,924 + ----------- ----------- + + Loss from operations................................. (19,996) (9,745) + ----------- ----------- + +OTHER INCOME (EXPENSE), net: + + Total other income (expense), net...................... (5,721) (308) + ----------- ----------- + + Loss before income tax provision..................... (25,717) (10,053) + +INCOME TAX PROVISION...................................... 3 - + ----------- ----------- + + Net loss............................................. $ (25,720) $ (10,053) + =========== =========== + +BASIC AND DILUTED NET LOSS PER SHARE...................... $(1.00) $(0.42) + =========== =========== + +WEIGHTED AVERAGE SHARES - BASIC AND DILUTED............... 25,621,063 23,931,977 + =========== =========== +
+ + F-25
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+

 

UNITED STATES

+

SECURITIES AND EXCHANGE COMMISSION

+

Washington, D.C. 20549

 

+

 

FORM 10-K +

 

 

+

(Mark One)

+ + + +
☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. +

For the fiscal year ended December 31, 2020.

+

or

 

+ + + +
☐

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

For the transition period from +                     to +                    .

 

+

 

DRIVE AUTO +RECEIVABLES TRUST 2018-5

(Exact name of issuing entity as specified in its charter)

+

Commission file number of the issuing entity: 333-215494-08

+

Central Index Key Number of issuing entity: 0001757404

+

SANTANDER DRIVE AUTO RECEIVABLES LLC

+

(Exact name of depositor as specified in its charter)

+

Commission file number of depositor: 333-215494

+

Central Index Key Number of depositor: 0001383094

+

SANTANDER CONSUMER USA INC.

+

(Exact name of sponsor as specified in its charter)

+

Central Index Key Number of sponsor: 0001540151

 

+

 

Delaware +

(State or other jurisdiction of incorporation or organization of the issuing entity)

+

83-6270467

(I.R.S. +Employer Identification No. of the issuing entity)

c/o Santander Drive Auto Receivables LLC

+

1601 Elm Street, Suite 800

+

Dallas, Texas 75201

+

(Address of principal executive offices)

+

(214) 292-1930

+

(Telephone number, including area code)

+

Securities Registered Pursuant to Section 12 (b) of the Securities Exchange Act of 1934: None

+

Securities Registered Pursuant to Section 12 (g) of the Securities Exchange Act of 1934: None

+

 

 

+

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

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

+

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange +Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 +days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has +submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such +shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

+

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

+

 

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Large accelerated filer ☐  Accelerated filer ☐
Non-accelerated filer ☒  Smaller reporting company ☐
   Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period +for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

+

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal +control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

+

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

State the aggregate market value of the voting and +non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently +completed second fiscal quarter.

Not applicable

+

List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g. Part I, Part II, etc.) into which the document is +incorporated: (1) Any annual report to security holders; (2) Any proxy information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.

+

The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, +1980).

None

 

+

 

 

+ +

+

+ +

PART I

+

The following items have been omitted in accordance with General Instruction J to Form 10-K:

+

 

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Item 1:  Business
Item 1A:  Risk Factors
Item 2:  Properties
Item 3:        Legal Proceedings
Item 4:  Mine Safety Disclosures

Item 1B. Unresolved Staff Comments

+

Nothing to report.

Substitute information provided in +accordance with General Instruction J to Form 10-K:

Item 1112(b) of Regulation AB. Significant Obligors of Pool Assets (Financial Information) +

Nothing to report.

Item 1114(b)(2) of +Regulation AB. Credit Enhancement and Other Support, Except for Certain Derivatives Instruments (Information Regarding Significant Enhancement Providers)

+

Nothing to report.

Item 1115(b) of Regulation AB. +Certain Derivatives Instruments (Financial Information)

Nothing to report.

+

Item 1117 of Regulation AB. Legal Proceedings

+

Nothing to report.

+

 

2

+ + +

+

+ +

PART II

+

The following items have been omitted in accordance with General Instruction J to Form 10-K:

+

 

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Item 5:  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6:  Selected Financial Data
Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A:        Quantitative and Qualitative Disclosures about Market Risk
Item 8:  Financial Statements and Supplementary Data
Item 9:  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A:  Controls and Procedures

Item 9B. Other Information

+

Santander Consumer USA Inc. (“SC”) is a wholly-owned subsidiary of Santander Consumer USA Holdings Inc. (“SC Holdings”). On +February 24, 2021, SC Holdings filed its Annual Report on Form 10-K for the year ended December 31, 2020 and disclosed certain legal and regulatory matters. Additional information about SC Holdings and its consolidated subsidiaries, +including information contained in required annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, is on file with the SEC under the name “Santander Consumer USA Holdings Inc.” and file number +001-36270.

+

 

3

+ + +

+

+ +

PART III

+

The following items have been omitted in accordance with General Instruction J to Form 10-K:

+

 

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
Item 10:  Directors, Executive Officers, and Corporate Governance
Item 11:  Executive Compensation
Item 12:        Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13:  Certain Relationships and Related Transactions, and Director Independence
Item 14:  Principal Accounting Fees and Services

Substitute information provided in accordance with General Instruction J to Form 10-K:

+

Item 1119 of Regulation AB. Affiliations and Certain Relationships and Related Transactions

+

Information required by Item 1119 of Regulation AB has been omitted from this report on Form 10-K in reliance on the Instruction to Item 1119.

+

Item 1122 of Regulation AB. Compliance with Applicable Servicing Criteria

+

Each of SC and Wilmington Trust, National Association (each, a “Servicing Participant”) have been identified by the issuing entity as parties +participating in the servicing function with respect to the pool assets held by the issuing entity. Each of the Servicing Participants has completed a report on an assessment of compliance with the servicing criteria applicable to it (each, a +“Report on Assessment”), which Reports on Assessment are attached as exhibits to this Form 10-K. In addition, each of the Servicing Participants has provided an attestation report (each, an “Attestation Report”) by one or more +registered public accounting firms, which reports are also attached as exhibits to this Form 10-K.

None of the Reports on Assessment or the related +Attestation Reports has identified any material instances of noncompliance with the servicing criteria described in the related Report on Assessment as being applicable to such Servicing Participant.

+

Item 1123 of Regulation AB. Servicer Compliance Statements

+

SC has been identified by the issuing entity as the servicer with respect to the asset pool held by the issuing entity. SC has completed a statement of +compliance with applicable servicing criteria signed by an authorized officer. The Compliance Statement is attached as an exhibit to this Form 10-K.

+

 

4

+ + +

+

+ +

PART IV

+

Item 15. Exhibits and Financial Statement Schedules

 

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
(a)(1)  Not Applicable.
(a)(2)    Not Applicable.
(a)(3)  See Item 15(b) below.

 

+ + + +
(b)

Exhibits

+

The exhibits listed below are either included or incorporated by reference as indicated:

+

 

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +

Exhibit No.

  

Description

1.1  Underwriting Agreement, dated as of November 15, 2018, among Santander Drive Auto Receivables LLC (“Santander Drive”), Santander Consumer + USA Inc. (“SC”) and Citigroup Global Markets Inc., as representative of the several underwriters (incorporated by reference to Exhibit 1.1 of Form 8-K filed by the Issuer (Commission File No. 333-215494-08) with the Securities and +Exchange Commission on November 16, 2018)
3.1  Amended and Restated Limited Liability Company Agreement of Santander Drive dated as of March 7, 2007 (incorporated by reference to Exhibit 3.1 + of Form SF-3 filed by Santander Drive (Commission File No. 333-215494) with the Securities and Exchange Commission on January 10, 2017)
3.2  First Amendment to Amended and Restated Limited Liability Company Agreement, dated as of February 28, 2017, by SC, as sole equity member (incorporated + by reference to Exhibit 3.2 of Form SF-3/A filed by Santander Drive (Commission File No. 333-215494) with the Securities and Exchange Commission on May 31, 2017)
4.1  Indenture, dated as of November 20, 2018, between Drive Auto Receivables Trust 2018-5, as issuer (the “Issuer”), and Wilmington Trust, + National Association, as indenture trustee (the “Indenture Trustee”) (incorporated by reference to Exhibit 4.1 of Form 8-K filed by the Issuer (Commission File No. 333-215494-08) with the Securities and Exchange Commission on November 20, +2018)
10.1  Purchase Agreement, dated as of November 20, 2018, between SC and Santander Drive (incorporated by reference to Exhibit 10.1 of Form 8-K filed + by the Issuer (Commission File No. 333-215494-08) with the Securities and Exchange Commission on November 20, 2018)
10.2  Sale and Servicing Agreement, dated as of November 20, 2018, among the Issuer, Santander Drive, SC and the Indenture Trustee (incorporated by +reference to Exhibit 10.2 of Form 8-K filed by the Issuer (Commission File No. 333-215494-08) with the Securities and Exchange Commission on November 20, 2018)
10.3  Administration Agreement, dated as of November 20, 2018, among the Issuer, SC, as administrator, and the Indenture Trustee (incorporated by reference + to Exhibit 10.3 of Form 8-K filed by the Issuer (Commission File No. 333-215494-08) with the Securities and Exchange Commission on November 20, 2018)
10.4  Amended and Restated Trust Agreement, dated as of November 20, 2018, between Santander Drive and Wells Fargo Delaware Trust Company, N.A, not + in its individual capacity but solely as owner trustee for the Issuer (incorporated by reference to Exhibit 10.4 of Form 8-K filed by the Issuer (Commission File No. 333-215494-08) with the Securities and Exchange Commission on November 20, 2018) +
+

 

5

+ + +

+

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
10.5  Asset Representations Review Agreement, dated as of November  +20, 2018, among the Issuer, SC, as sponsor and servicer, and Clayton Fixed Income Services LLC, as asset representations reviewer (incorporated by reference to Exhibit 10.5 of Form 8-K filed by the Issuer (Commission File No. 333-215494-08) with the Securities + and Exchange Commission on November 20, 2018)
31.1  Certification (Santander Drive)
33.1  Management’s Assessment of Compliance with SEC Regulation AB Servicing Criteria (SC)
33.2  Assessment of Compliance with the Applicable Servicing Criteria (Indenture Trustee)
34.1  Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP with respect to SC)
34.2  Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP with respect to the Indenture Trustee)
35.1  Servicer Compliance Statement (SC)

 

+ + + +
(c)

Not Applicable.

+

Item 16. Form 10-K Summary

None.

+

Supplemental information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities +Pursuant to Section 12 of the Act

No annual report, proxy statement, form of proxy or other proxy soliciting material has been sent to +certificateholders, and the registrant does not presently contemplate sending any such materials subsequent to the filing of this report.

+

 

6

+ + +

+

+ +

SIGNATURES

+

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to +be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 31, 2021

+

 

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + +
SANTANDER DRIVE AUTO RECEIVABLES LLC, as depositor
By: 

/s/ Corey Henry

Name: Corey Henry
Title: 

President and Chief Executive Officer

(senior +officer in charge of securitization of the depositor)

+

 

7

+ + \ No newline at end of file diff --git a/tests/fixtures/parity_gate/20-F/0001144204-10-017467.html b/tests/fixtures/parity_gate/20-F/0001144204-10-017467.html new file mode 100644 index 000000000..b2af0d202 --- /dev/null +++ b/tests/fixtures/parity_gate/20-F/0001144204-10-017467.html @@ -0,0 +1,37889 @@ + + + Unassociated Document + + + + + +
+
+
+
+
+
UNITED +STATES
+
SECURITIES +AND EXCHANGE COMMISSION
+
WASHINGTON, +D.C. 20549
+
  + +
+
+
+
+
FORM +20-F + +
+
+
+
+
 
+
(Mark +One)
+
 
+
+ + + + + +
+
¨
+ 		+
REGISTRATION + STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE + ACT OF 1934
+
+
+
 
+
OR
+
 
+
+ + + + + +
+
x
+ 		+
ANNUAL REPORT PURSUANT TO SECTION + 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF + 1934
+
+
+
 
+
For the fiscal year +ended December 31, 2009
+
 
+
OR
+
 
+
+ + + + + +
+
¨
+ 		+
TRANSITION + REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF + 1934
+
+
+
 
+
OR
+
 
+
+ + + + + +
+
¨
+ 		+
SHELL + COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE + ACT OF 1934
+
+
+

+
Date of event +requiring this shell company report
+

+
For the transition +period from +             to +            . 
+
 
+
Commission +file number:  001-33820
+
 
+
A-POWER +ENERGY GENERATION SYSTEMS, LTD.
+
(Exact +name of Registrant as specified in its charter)
+
 
+
N/A
+
(Translation +of Registrant’s name into English)
+
 
+
British +Virgin Islands
+
(Jurisdiction +of incorporation or organization)
+
 
+
No. +44 Jingxing North Street
+
Tiexi +District
+
Shenyang, +Liaoning, China 110021
+
(Address +of principal executive offices)
+
 
+
+
Jinxiang +Lu
+
Chief +Executive Officer
+
Tel: +(86) 0-24-8561-7788  Fax: (86)-0-24-2585-9298
+
No. +44 Jingxing North Street
+
Tiexi +District
+
Shenyang, +Liaoning, China 110021
+
(Name, +telephone, e-mail and/or facsimile number and address of company contact +person)
+
 
+
+
Securities +registered or to be registered pursuant to Section 12(b) of the +Act.
+
 
+
+
+
+
+ + + + + + + + + + + +
+
Title of each class
+ 		  + +
Name of each exchange on which registered
+
+
Common Shares, par value US$0.0001 per share
+ 		  + +
NASDAQ Global Select Market
+
+
+
+
+
+
 
+
Securities registered +or to be registered pursuant to Section 12(g) of the Act.
+
 
+
NONE
+
(Title of +Class)
+
 
+
Securities +for which there is a reporting obligation pursuant to Section 15(d) of the +Act.
+
 
+
NONE
+
(Title of +Class)
+
 
+
Indicate +the number of outstanding shares of each of the issuer’s classes of capital or +common stock as of the close of the period covered by the annual +report: 39,585,706 common shares, par value US$0.0001 per share, as of +December 31, 2009.
+
 
+
Indicate +by check mark if the registrant is a well-known seasoned issuer, as defined in +Rule 405 of the Securities Act.  ¨   Yes  x  No
+
 
+
If this +annual report is an annual or transition report, indicate by check mark if the +registrant is not required to file reports pursuant to Section 13 or 15(d) +of the Securities Exchange Act of 1934.  ¨ Yes    x   No
+
 
+
Indicate +by check mark whether the registrant (1) has filed all reports required to +be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 +during the preceding 12 months (or for such shorter period that the registrant +was required to file such reports), and (2) has been subject to such filing +requirements for the past 90 days.  x   Yes    +¨   +No
+
 
+
Indicate +by check mark whether the registrant has submitted electronically and posted on +its corporate web site, if any, every Interactive Data File required to be +submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this +Chapter) during the preceding 12 months (or for such shorter period that the +registrant was required to submit and post such files.) ¨   Yes  ¨   No
+
 
+
Indicate +by check mark whether the registrant is a large accelerated filer, an +accelerated filer, or a non-accelerated filer. See definition of “accelerated +filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  +(Check one):
+
 
+
¨   Large +accelerated filer    x   Accelerated +filer    ¨   Non-accelerated +filer
+
 
+
Indicate +by check mark which basis of accounting the registrant has used to prepare the +financial statements included in this filing:
+
 
+
x   U.S. GAAP  +  ¨   +International Financial Reporting Standards as issued by the International +Accounting Standards Board    ¨   +Other
+
 
+
If +“Other” has been checked in response to the previous question, indicate by check +mark which financial statement item the registrant has elected to follow.  +  ¨   +Item 17    ¨   +Item 18
+
 
+
If this +is an annual report, indicate by check mark whether the registrant is a shell +company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
+
 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
 
+
TABLE +OF CONTENTS
+
 
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
INTRODUCTION
+ 		  + +
3
+
  +   +   +
+
FORWARD + LOOKING INFORMATION
+ 		  + +
4
+
  +   +   +   +
+
PART + I
+ 		  +   + +
5
+
+
ITEM 1.
+ 		+
IDENTITY + OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
+ 		  + +
5
+
+
ITEM 2.
+ 		+
OFFER + STATISTICS AND EXPECTED TIMETABLE
+ 		  + +
5
+
+
ITEM 3.
+ 		+
KEY + INFORMATION
+ 		  + +
5
+
+
ITEM 4.
+ 		+
INFORMATION + ON THE COMPANY
+ 		  + +
25
+
+
ITEM 4A.
+ 		+
UNRESOLVED + STAFF COMMENTS
+ 		  + +
47
+
+
ITEM 5.
+ 		+
OPERATING + AND FINANCIAL REVIEW AND PROSPECTS
+ 		  + +
47
+
+
ITEM 6.
+ 		+
DIRECTORS, + SENIOR MANAGEMENT AND EMPLOYEES
+ 		  + +
64
+
+
ITEM 7.
+ 		+
MAJOR + SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
+ 		  + +
74
+
+
ITEM 8.
+ 		+
FINANCIAL + INFORMATION
+ 		  + +
75
+
+
ITEM 9.
+ 		+
THE + OFFER AND LISTING
+ 		  + +
76
+
+
ITEM 10.
+ 		+
ADDITIONAL + INFORMATION
+ 		  + +
77
+
+
ITEM 11.
+ 		+
QUANTITATIVE + AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
+ 		  + +
85
+
+
ITEM 12.
+ 		+
DESCRIPTION + OF SECURITIES OTHER THAN EQUITY SECURITIES
+ 		  + +
86
+
  +   +   +   +
+
PART + II
+ 		  +   + +
86
+
+
ITEM 13.
+ 		+
DEFAULTS, + DIVIDEND ARREARAGES AND DELINQUENCIES
+ 		  + +
86
+
+
ITEM 14.
+ 		+
MATERIAL + MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF + PROCEEDS
+ 		  + +
86
+
+
ITEM 15.
+ 		+
CONTROLS + AND PROCEDURES
+ 		  + +
87
+
+
ITEM 16A.
+ 		+
AUDIT + COMMITTEE FINANCIAL EXPERT
+ 		  + +
89
+
+
ITEM 16B.
+ 		+
CODE + OF ETHICS
+ 		  + +
89
+
+
ITEM 16C.
+ 		+
PRINCIPAL + ACCOUNTANT FEES AND SERVICES
+ 		  + +
90
+
+
ITEM 16D.
+ 		+
EXEMPTIONS + FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
+ 		  + +
+
90
+
+
+
ITEM 16E.
+ 		+
PURCHASES + OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED + PURCHASERS
+ 		  + +
+
90
+
+
+
ITEM 16F.
+ 		+
CHANGE + IN REGISTRANT’S CERTIFYING ACCOUNTANT
+ 		  + +
+
90
+
+
+
ITEM 16G.
+ 		+
CORPORATE + GOVERNANCE
+ 		  + +
+
90
+
+
  +   +   +   +
+
PART + III
+ 		  +   + +
91
+
+
ITEM 17.
+ 		+
FINANCIAL + STATEMENTS
+ 		  + +
+
91
+
+
+
ITEM 18.
+ 		+
FINANCIAL + STATEMENTS
+ 		  + +
+
+
91
+
+
+
+
ITEM 19.
+ 		+
EXHIBITS
+ 		  + +
+
91
+
+
+
+
+
+
+
 
+
+
+
+
+
+
+
2
+
+
+
+
+
+
+
+
+
+
 
+
INTRODUCTION
+
 
+
In this +Annual Report on Form 20-F, unless otherwise indicated,
+
 
+
(1) +“Chardan” refers to Chardan South China Acquisition Corporation and its +predecessor entities and subsidiaries;
+

+
(2) +“China” and “PRC” refer to the People’s Republic of China and, solely for the +purpose of this Annual Report on Form 20-F, such references exclude Taiwan, Hong +Kong and Macau;
+

+
(3) “Easy +Flow “ refers to Easy Flow Ltd., our wholly owned subsidiary and its +subsidiaries;
+

+
(4) +“Evatech” refers to EVATECH Co., Ltd.;
+

+
(5) +“Fuhrländer” refers to Fuhrländer AG;
+

+
(6) +“GaoKe” refers to GaoKe Energy, GaoKe Design and LICEG Ltd.;
+

+
(7) +“GaoKe Design” refers to Liaoning GaoKe (High-Tech) Energy Saving and +Thermoelectricity Design Research Institute, 51% of which is owned by GaoKe +Energy, 36% of which is owned by Mr. Jinxiang Lu, our Chairman and Chief +Executive Officer, and 13% of which is owned by Mr. Lu’s spouse;
+

+
(8) +“GaoKe Energy” refers to Liaoning GaoKe Energy Group Company Limited, the wholly +owned subsidiary of Head Dragon Holdings, and GaoKe Energy’s +subsidiaries;
+
+
 
+
(9) “GE +Drivetrain” refers to GE Drivetrain Technologies (Shenyang) Co., +Ltd.;
+
 
+
+
(10) “GE +Electronic” refers to GE Electronic (China) Co. Ltd.;
+
+
 
+
(11) “GW” +are references to gigawatts (one gigawatt equaling 1,000,000,000 +watts);
+
+

+
(12) +“Head Dragon Holdings” refers to Head Dragon Holdings Limited, our wholly-owned +subsidiary, and its subsidiaries;
+

+
(13) +“Jiangsu Miracle” refers to Jiangsu Miracle Logistics System Engineering Co. +Ltd.;
+

+
(14) +“Jinxiang” refers to Shenyang (Jinxiang) Gold Luck Electric Power Equipment Co., +Ltd.;
+

+
(15) “kW” +are references to kilowatts (one kilowatt equaling 1,000 watts);
+

+
(16) +“LICEG” refers to Liaoning International Construction and Engineering Group, our +joint venture partner in LICEG Ltd.;
+

+
(17) +“LICEG Ltd.” refers to Liaoning International Construction and Engineering Group +Limited, 90% of which is owned by GaoKe Energy and 10% of which is owned by our +joint venture partner, Liaoning International Construction and Engineering +Group;
+

+
(18) “MW” +are references to megawatts (one megawatt equaling 1,000,000 +watts);
+

+
(19) +“Norwin” refers to Norwin S/A;
+
 
+
(20) +“PV” refers to +photovoltaic;
+
 
+
(21) +“Ruixiang” refers to Shenyang (Ruixiang) Lucky Wind Power Equipments Co., +Ltd.;
+

+
(22) +“Shenyang Huaren” refers to Shenyang Huaren Wind Power Technology Development +Co., Ltd.;
+

+
(23) +“Shenyang Power Group” refers to Shenyang Power Group Ltd.;
+

+
+
(24) +“Texas A Wind” refers to Texas A Wind LLC;
+
 
+
+
(25) +“USREG Wind” refers to United States Renewable Energy Group Wind Partners I, +LLC;
+

+
(26) +“U.S. GAAP” refers to generally accepted accounting principles in the United +States;
+
 
+
+
(27) +“Yixiang” refers to Shenyang Yixiang Wind Power Equipment +Limited;
+
+

+
(28) +“we,” “us,” “our company” “the company,” “our” and “A-Power” refer to A-Power +Energy Generation Systems, Ltd. (formerly known as China Energy Technology +Limited), its predecessor entities and subsidiaries; and
+

+
(29) all +references to “RMB” and “Renminbi” are to the legal currency of China, all +references to “U.S. dollars,” “US$,” “dollars” and “$” are to the legal currency +of the United States, and all references to Euro are to the legal currency of +the European Union.
+
 
+
+
+
+
+
+
+
3
+
+
+
+
+
+
+
+
+
+
 
+
Under the +laws of the British Virgin Islands and our memorandum of association, the +holders of our common shares are referred to as “members” rather than +“shareholders.” In this Annual Report on Form 20-F , references that would +otherwise be to members are made to shareholders, which is a term more familiar +to investors trading on the NASDAQ Global Select Market, the exchange on which +our shares are listed, with the exception of our financial statements, which +refer to “stockholders’ +equity.”
+
 
+
Any +discrepancies in any table between the amounts identified as total amounts and +the sum of the amounts listed therein are due to rounding.
+
 
+
+
We were +formed under the corporate name A-Power Energy Generation Systems, Ltd. We were +incorporated in the British Virgin Islands on May 17, 2007, under the BVI +Business Companies Act, 2004 and CT Corporation System, 111 Eighth Avenue, New +York, NY 11011 (212) 894-8539 is our agent in connection with our filings under +the Securities Act of 1933, as amended. Our principal executive offices are +located in the People’s Republic of China at No. 44 Jingxing North Street, Tiexi +District, Shenyang, Liaoning, China 110021 and our telephone number is (86) +10-24-85617888.
+
 
+
+
In +January 2008, A-Power acquired all of the issued and outstanding common stock of +Head Dragon Holdings, a Hong Kong company that owns a controlling interest in +three operating subsidiaries in the PRC, collectively known as GaoKe. In +addition, A-Power holds 100% of Head Dragon Holdings, which holds our +distributed power generation systems business through GaoKe. A-Power also holds +100% of Easy Flow, which owns a controlling interest in two operating +subsidiaries in the PRC through which we conduct our wind energy business. +
+

+
At the +time of the Head Dragon acquisition, A-Power was a wholly-owned subsidiary of +Chardan, a blank check company with no operations that had been formed as a +vehicle for an acquisition of an operating business in China. Immediately +following the purchase of GaoKe, Chardan merged with and into A-Power for the +purpose of changing its domicile.  As a result of the merger, each +outstanding share of Chardan common stock automatically converted into one +common share of A-Power, each outstanding Chardan warrant automatically +converted into one A-Power warrant and each outstanding Chardan unit +automatically converted into one A-Power unit.
+

+
On January 22, 2008, A-Power’s common +shares began trading on the NASDAQ Capital Market, and on June 2, 2008, +A-Power’s common shares began trading on the NASDAQ Global Select +Market.
+

+
FORWARD-LOOKING +INFORMATION
+
 
+
This +Annual Report on Form 20-F contains forward-looking statements made under the +“safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of +1995. These statements relate to, among other matters:
+
 
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
our future business development, + results of operations and financial + condition;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
our projected revenues, profits, + earnings and other estimated financial + information;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
our anticipated levels of capital + expenditures during the next +year;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
our belief that we have + sufficient liquidity during the next 12 months; + and
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
our anticipated growth + strategies, including our expansion in the international distributed power + generation and micro power grid market and the wind energy + business.
+
+
+
 
+
You can +generally identify these forward-looking statements by terminology such as +“may,” “will,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” +“estimate,” “is/are likely to” or other and similar expressions regarding future +periods or the negative of such expressions. We have based these forward-looking +statements largely on our current expectations and projections about future +events and financial trends that we believe may affect our financial condition, +results of operations, business strategy and financial needs. The accuracy of +these statements may be affected by inaccurate assumptions we might have made or +by known or unknown risks, uncertainties or other factors, including the risk +factors described under Item 3.D, “Key Information —Risk +Factors,” of this Annual Report on Form 20-F , which may cause our actual +results to differ materially from the from those anticipated or implied by the +forward-looking statements. The following are among the key risks and other +factors to consider in evaluating our forward-looking statements:
+
 
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
+
our + limited operating history and recent entrance into new markets, especially + our limited experience in the wind and solar energy markets, as well as + international markets outside of China may make it difficult for you to + evaluate our business and future prospects and are subject to certain + risks;
+
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
a decrease in economic growth or + an economic downturn in the PRC or globally, which could adversely affect + our growth and +profitability;
+
+
+
 
+
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
limited + experience in producing wind turbines and the risks with expanding our + wind power business in China and +overseas;
+
+
+
+
 
+
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
competition + in the alternative energy products and systems industry, and failure to + adapt to changing market conditions and to compete + successfully;
+
+
+
+
 
+
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
dependence + on gaining new customers and project +contracts;
+
+
+
+
 
+
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
continued + requirements of certain licenses, registrations and + certificates;
+
+
+
+
 
+
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
our + backlog, which may not indicate future performance of + contracts;
+
+
+
 
+
+
+
+
+
+
+
+
+
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
difficulty in sourcing + components;
+
+
+
 
+
+
+
+
+
+
+
4
+
+
+
+
+
+
+
+
+
+
 
+
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
material + weaknesses in our internal controls, which we are still in the process of + remediating;
+
+
+
 
+
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
difficulty establishing adequate + management, legal and financial controls in the PRC, which could result in + misconduct and difficulty in complying with applicable laws and + requirements;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
a change in the PRC’s economic, + fiscal, monetary or political policies, as well as nationalization of + private enterprises;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
potential trade barriers in + markets we attempt to enter outside the + PRC;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
continued compliance with + government regulations in the PRC and elsewhere and adverse regulatory + changes in the PRC on companies that develop power grids, power generation + systems, wind energy and solar +energy;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
ability to attract and retain key + executives and affordable engineering + talent;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
difficulty in managing rapid + growth or our acquisitions;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
difficulty in managing our + relationships with licensing partners, project owners, subcontractors or + other third-parties;
+
+
+
 
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
our + need for capital to finance our growth and capital + expenditures;
+
+
+
 
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
a decrease in the growth of + demand for electricity;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
intensity of competition from or + introduction of new and superior products by other providers of + distributed power generation, wind energy; and solar energy and other + energy generation technologies; +and
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
geopolitical events and + regulatory changes.
+
+
+
 
+
This list +of risks is not exhaustive. Other sections of this Annual Report on Form 20-F +include additional factors that could adversely impact our business and +financial performance. You should read these statements in conjunction with the +risk factors disclosed in Item 3.D., “Key Information — Risk +Factors,” of this Annual Report on Form 20-F and the other risks and +factors outlined in this Annual Report and our other filings with the Securities +and Exchange Commission.
+
 
+
Forward-looking +statements contained herein speak only as of the date of the Annual Report. You +should not rely upon forward-looking statements as predictions of future events. +Except as may be required by applicable law, we do not intend to update or +revise any forward-looking statements in the Annual Report , whether as a result +of new information, future events or otherwise.
+
 
+
PART +I
+
 
+
+ + + + + +
+
ITEM 1.
+ 		+
IDENTITY OF DIRECTORS, SENIOR + MANAGEMENT AND ADVISERS
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
ITEM 2.
+ 		+
OFFER STATISTICS AND EXPECTED + TIMETABLE
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
ITEM 3.
+ 		+
KEY + INFORMATION
+
+
+
 
+
+ + + + + +
+
A.
+ 		+
A. Selected Financial + Data
+
+
+
 
+
The +following tables present our selected historical consolidated financial +data.
+
 
+
The +selected consolidated statement of operations data for the years ended December +31, 2007, 2008 and 2009 and the selected consolidated balance sheet data as of +December 31, 2008 and 2009 have been derived from our audited consolidated +financial statements included elsewhere in this Annual Report on Form 20-F and +should be read in conjunction with those financial statements and the +accompanying notes and Item 5 — “Operating and Financial Review and +Prospects.” Our selected consolidated statement of operations data for +the years ended December 31, 2005 and 2006 and our selected consolidated balance +sheet data as of December 31, 2005, 2006 and 2007 has been derived from our +audited consolidated financial statements for these periods and dates, which are +not included in this Annual Report on Form 20-F.
+
 
+
+
+
+
+
+
+
5
+
+
+
+
+
+
+
+
+
+
 
+
Our +financial statements were prepared and are presented in accordance with U.S. +GAAP. Our historical results included below and elsewhere in this Annual Report +on Form 20-F are not necessarily indicative of our future +performance.
+
 
+
Selected +Statement of Operations Data
+

+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   +
For the year ended December 31,
+ 		 
  +   +
2009 + (2)
+ 		   +
2008
+ 		   +
2007
+ 		   +
2006
+ 		   +
2005
+ 		 
  +   +
(in thousands, except for + share and per share data)
+ 		 
+
Revenue
+ 		 $311,252  $264,866  $152,544  $98,705  $75,452 
+
Cost + of sales and business taxes
+ 		  260,167   227,990   131,987   85,915   66,946 
+
Gross + profit
+ 		  51,085   36,876   20,557   12,790   8,506 
+
Income + from operations
+ 		  38,240   28,176   17,075   10,890   6,584 
+
Net + (loss) income (1)
+ 		  (16,692)  28,516   15,214   7,510   4,378 
+
Foreign + currency translation adjustment
+ 		  (119)  4,562   1,542   162   354 
+
Comprehensive + (loss) income
+ 		  (16,811)  33,078   16,756   7,672   4,732 
  +                     
+
Net + (Loss)/Earnings per share:
+ 		                    
+
Basic
+ 		  (0.49)  0.96   1.17   0.58   0.34 
+
Diluted
+ 		  (0.49)  0.94   1.17   0.58   0.34 
  +                     
+
Weighted + average number of shares outstanding:
+ 		                    
+
Basic
+ 		  34,199,100   29,824,158   13,000,000   13,000,000   13,000,000 
+
Diluted
+ 		  34,199,100   30,432,434   13,000,000   13,000,000   13,000,000 
  +                     
+
Cash + dividend per share:
+ 		                    
+
US$
+ 		  -   -   -   0.39   - 
+
RMB
+ 		  -   -   -   3.08   - 
+
+
+
+
+
+
+
 
+
+ + + + + +
+
(1)
+ 		+
We + had no discontinued operations.
+
+
+
+
+
+
+
+ + + + + +
+
+
(2)
+
+ 		+
+
Net + (loss) income and comprehensive (loss) income for the year ended December + 31, 2009 includes $52.8 million of expenses related to the accounting for + and conversion of Convertible +Debt.
+
+
+
+
 
 +
Selected +Consolidated Balance Sheet Data
+
 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   +
As of December 31,
+ 		 
  +   +
2009
+ 		   +
2008
+ 		   +
2007
+ 		   +
2006
+ 		   +
2005
+ 		 
  +   +
(in thousands, except for number of common + shares)
+ 		 
+
Current + Assets
+ 		 $258,189  $146,323  $60,691  $32,396  $24,170 
+
Total + assets
+ 		  355,357   205,537   69,177   37,957   29,844 
  +                     
+
Current + liabilities
+ 		  102,719   49,570   37,643   25,943   13,818 
+
Total + liabilities
+ 		  102,719   49,570   37,643   25,943   13,818 
                     
Stockholders’ equity (net + assets)  252,638   155,967   31,328   25,122   25,073 
                     
Capital + stock  4   3   1   1   1 
                     
Number + of common shares issued and outstanding  39,585,706   33,706,938   13,000,000   13,000,000   13,000,000 
+
+
 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
Exchange +Rate Information
+
 
+
+
The +functional currency of our operating subsidiaries in the PRC is the Renminbi, +and our functional currency and our holding company subsidiaries’ functional +currency is the U.S. dollar. The accompanying consolidated financial statements +have been translated as necessary and presented in U.S. dollars according to +U.S. GAAP and the accounting standard on “Foreign Currency +Translation”.  In +accordance with this accounting standard, all assets and liabilities were +translated at the current exchange rate at the balance sheet date, stockholders’ +equity was translated at the historical rates, and the consolidated statement of +income and consolidated statement of cash flows were translated at the average +exchange rate for the period. At December 31, 2009, the assets and liabilities +of the Company maintained in Renminbi were translated to U.S. dollars at US$1.00 += RMB6.8259, and the consolidated statement of income of the Company maintained +in Renminbi was translated to U.S. dollars at US$1.00 = RMB6.8307.  The +foreign currency translation adjustment of $119,000 for the year ended December +31, 2009 has been reported as accumulated other comprehensive income in the +consolidated statement of stockholders’ equity and comprehensive +income.
+
  
+
+
+
+
+
+
+
+
6
+
+
+
+
+
+
+
+
+
+
 
+
We make +no representation that any RMB or U.S. dollar amounts could have been, or could +be, converted into U.S. dollars or RMB, as the case may be, at any particular +rate, the rates stated below, or at all. The RMB is not freely convertible into +foreign currency. The PRC government imposes control over its foreign currency +reserves in part through direct regulation of the conversion of the RMB into +foreign exchange and through restrictions on foreign trade. Since January 1, +1994, the People’s Bank of China, or the PBOC, has set and published daily a +base exchange rate with reference primarily to the supply and demand of RMB +against the U.S. dollar in the market during the prior day. On July 21, 2005, +the PBOC announced a reform of its exchange rate system and revalued the RMB to +RMB8.11 to US$1.00. Under the reform, the RMB is no longer effectively linked to +the U.S. dollar but instead is allowed to fluctuate within a narrow and managed +band against a basket of foreign currencies, according to market demand and +supply conditions. The PBOC announces the RMB closing price each day and that +rate serves as the mid-point of the next day’s trading band.
+
 
+
The +following table sets forth information concerning exchange rates between the RMB +and the U.S. dollar for the periods indicated. These rates are provided solely +for your convenience and are not necessarily the exchange rates that we used in +this Annual Report on Form 20-F or will use in the preparation of our periodic +reports or any other information to be provided to you. The source of these +rates is the Federal Reserve Bank of New York for the periods through December +2008 and the Federal Reserve H.10 Statistical Release for the periods beginning +on or after January 1, 2009. As of March 26, 2010, the RMB: US$ exchange rate +was 6.8269.
+
 
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Period
+ 		  +
Period End
+ 		   +
Average
+ 		   +
Low
+ 		   +
High
+ 		 
  +   +
(RMB per US$1.00)
+ 		 
+
2005
+ 		  8.0702   8.1940   8.2765   8.0702 
+
2006
+ 		  7.8041   7.9723   8.0702   7.8041 
+
2007
+ 		  7.2946   7.6072   7.8127   7.2946 
+
2008
+ 		  6.8225   6.9477   7.2946   6.7800 
+
2009
+ 		  6.8259   6.8307   6.8176   6.8470 
+
September
+ 		  6.8262   6.8277   6.8247   6.8303 
+
October
+ 		  6.8264   6.8267   6.8248   6.8292 
+
November
+ 		  6.8265   6.8271   6.8255   6.8300 
+
December
+ 		  6.8259   6.8275   6.8244   6.8299 
+
2010
+ 		                
+
January
+ 		  6.8268   6.8269   6.8258   6.8295 
+
February
+ 		  6.8258   6.8285   6.8258   6.8330 
+
March + (through March 26)
+ 		  6.8259   6.8262   6.8254   6.8270 
+
+
+
+
+
+
+

+
+ + + + + +
+
(1)
+ 		+
Annual averages are calculated by + using the average of the noon buying exchange rates for each trading day + during the annual period.
+
+
+
 
+
+
+
+
+
+
+
7
+
+
+
+
+
+
+
+
+
+
 
+
+ + + + + +
+
B.
+ 		+
Capitalization and + Indebtedness
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
C.
+ 		+
Reasons for the Offer and Use of + Proceeds
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
D.
+ 		+
Risk + Factors
+
+
+

+
Risks +related to our business
+
 
+
Our +limited operating history and recent entrance into new business lines, +especially our limited experience in the wind energy and solar energy markets, +as well as our entrance into international markets outside of China, may make it +difficult for you to evaluate our business and future prospects, and are subject +to certain risks.
+

+
We have a +limited operating history. GaoKe commenced operations in 2003 and to date we +have conducted nearly all of our business within China through GaoKe. +Accordingly, our operating history upon which you can evaluate the viability and +sustainability of our business and its acceptance by industry participants is +limited. Thus, it may be difficult for you to evaluate our business and future +prospects, and you should not rely on our past results or our historic growth +rate as an indication of our future performance.
+

+
In +addition, we have expanded our operations rapidly during the last three years +and we plan to continue our expansion efforts by capitalizing on the +accelerating industrialization of China’s inland regions and other areas poorly +served by the existing national power grid, targeting customers outside of +China, increasing our investments in wind energy and our ability to produce +wind turbines and diversifying our portfolio of alternative energy offerings. We +recently acquired Evatech, a producer of manufacturing equipment for thin-film +silicone amorphous PV cells and solar panels, which we believe will enhance our +product offerings, improve our market opportunities and diversify our business. +While we have completed construction of our wind turbine production facility in +Shenyang, we only began assembly of wind turbines in June 2009 and, as of the +date of this Annual Report on Form 20-F, we have generated only limited revenues +from our wind energy business and no material revenues from our newly-acquired +solar energy business. Furthermore, our expansion may have created, and may +continue to create, significant demands on our corporate, administrative, +operational and financial personnel and other human resources. In addition, this +expansion into existing and new markets and new lines of business could strain +our management and operational resources and will increase our need for capital, +which may result in cash flow shortages. Our resources may not be adequate to +support our desired expansion. Our current and planned operations, personnel, +systems, internal procedures and controls may not be adequate to support the +integration of Evatech or any other planned future growth. Consequently, our +ability to take advantage of market demand for our products and services and to +maintain and increase our profitability may be materially hindered or +impeded
+

+
In addition +to our entrance into the wind energy and solar energy markets, our business +model has also evolved with our expansion of our businesses internationally, +which will also require significant amounts of management time and +attention. Our products and our overall approach to the distributed power +generation, micro grid, wind power and solar energy may not be accepted in other +markets to the extent needed to make that effort profitable. In addition, the +additional demands on our management from these activities may detract from +their efforts in the Chinese market, causing the operating results in our +principal customer market to be adversely affected. There are risks inherent in +conducting business internationally, including:
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
exchange + rate fluctuations;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
political, + economic, legal or other developments affecting target markets, including + changes or developments in tax regimes or regulations relating to our + industry; and
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
potential + tariff and trade barriers in target markets resulting in additional costs + for our business and products.
+
+
+

+
Our +business continues to evolve in conjunction with the evolution of the +alternative energy market in China and globally. In addition, due to the +forgoing risks, we cannot assure that we will successfully grow or manage our +expansion into new business lines or international markets.
+
 
+
+
+
+
+
+
+
8
+
+
+
+
+
+
+
+
+
+
 
+
We +have limited or no experience producing wind turbines, which is a critical +component of our growth and overall business strategy.
+

+
We began +production of wind turbines only in June 2009, and as of the date of this Annual +Report on Form 20-F, we have generated limited revenue from the assembly +of ten 2.7 MW wind turbines for use +in 49.5 MW and 19.5 MW wind farm projects in Saiwusu, Inner Mongolia and +Donggang, Shandong Province. The production of wind turbines is a key +element of our business strategy and growth plans. However, it is a new line of +business for us and one in which we have limited experience. Additionally, our +wind energy operations will continue to be subject to risks inherent in the +establishment of a new business, including, among other things, efficiently +deploying our capital, sourcing components, developing our production facilities +and product and service offerings, maintaining quality controls, adapting to +individual customer specifications, developing and implementing our marketing +campaigns and strategies and developing awareness and acceptance of our +products. Our ability to generate future revenues from these operations will be +dependent on a number of factors, many of which are beyond our control. To be +successful, we must, among other things, demonstrate the stability of our wind +turbines and establish market recognition in this business. This will require us +to expend significant resources, including capital and management time and we +cannot give any assurance that this aspect of our business will be successful. +For +more information, please see Item 4.B – “Business Overview – Competition – +Wind Power,” to this Annual Report on Form 20-F.
+
 
+
Our +alternative energy products and systems compete with different products and +systems as well as other renewable energy sources in the alternative energy +market. If we fail to adapt to changing market conditions and to compete +successfully with existing or new competitors, our business prospects and +results of operations would be materially and adversely affected.
+
 
+
We +operate in an industry that is intensely competitive and developing rapidly. If +we fail to attract and retain customers in our target markets for our current +and future products and systems, we will be unable to increase our revenues and +market share.
+
 
+
We often +compete with local and international producers of alternative energy systems and +products that are substantially larger than us, including the divisions of large +international conglomerates. We may also face competition from new entrants to +the market for alternative energy systems and products, including those that +offer more advanced or different technological solutions or that have greater +financial resources. A significant number of potential competitors are +developing or currently producing products based on advanced technologies which +may eventually offer cost advantages over our products, systems and +technologies. A widespread adoption of any of these competitive technologies +could result in a rapid decline in our position in the renewable energy market +and our revenues if we fail to adopt such technologies. Furthermore, the entire +alternative energy industry also faces competition from conventional energy and +non-renewable energy providers.
+
 
+
+
+
Many of +our existing and potential competitors have substantially greater financial, +technical, manufacturing and other resources than we do. This is particularly +the case with respect to our wind energy business. The greater size of many of +our competitors provides them with cost advantages as a result of their +economies of scale and their ability to obtain volume discounts and purchase raw +materials at lower prices. As a result, such competitors may have stronger +bargaining power with their suppliers and have an advantage over us in pricing +as well as securing sufficient supply of required components during times of +shortage. Many of our competitors also have better brand name recognition, more +established distribution networks, larger customer bases or more in-depth +knowledge of the target markets. As a result, they may be able to devote greater +resources to the research and development, promotion and sale of their products +and respond more quickly to evolving industry standards and changes in market +conditions as compared to us. Our failure to adapt to changing market conditions +and to compete successfully with existing or future competitors could have a +material adverse effect on our business, prospects and results of +operations.
+
 
+
For more information, please see Item 4.B – “Business Overview – Competition – +Distributed Power Generation,” to this Annual Report on Form 20-F.
+
 
+
+
Our +revenue from our distributed power generation business segment depends on +gaining new customers and project contracts, and we do not have long-term +purchase commitments from our customers.
+
 
+
Currently +and historically, we have only had a limited amount of projects in process at +any time. For +example, we completed six distributed power generation projects in 2009 and +have 12 distributed power generation projects in process. Thus, our +revenues have historically resulted, and are expected to continue in +the immediate future to result, primarily from performing individual +contracts in our power distribution generation and micro-grid system business +that, once completed, typically produce only a limited amount of ongoing revenue +for maintenance and other services. Customers may also change or +delay orders for any number of reasons, such as force majeure or +seasonality factors that are unrelated to us. As a result, in order to maintain +and expand our business, we must be able to replenish the orders in our pipeline +on a continuous basis. However, it is difficult to predict whether and when we +will receive such orders or project contracts due to the lengthy and complex +bidding and selection process, which is affected by factors that we do not +control, such as market and economic conditions, financing arrangements, +commodity prices, environmental issues and government approvals. In addition, we +may experience delays or failures in receiving payments and therefore our +revenues and profits may be reduced. Furthermore, our results of operations may +fluctuate from quarter-to-quarter and year-to-year depending on whether and when +we receive such orders or project contracts, as well as the commencement and +progress of work under such contracts. It is also possible that some of our +potential customers could choose the products of our competitors instead, any +number of whom may supply products with larger generating capacity than products +which we produce.  Should they do so, or if any of the foregoing risks +materialize, we could suffer a significant and material decline in our revenues +and profitability.
+
 
+
+
Our projects +and business operations will require significant amounts of working +capital. If we or our customers cannot satisfy these working capital +requirements, the growth and development of our business could suffer +materially.
+
  
+
+
Our wind turbine business is capital +intensive and our success depends to a significant degree on our ability to +develop and market innovative products and to update our facilities and +technology. We may require additional capital in the future to finance our +future growth and development, implement further marketing and sales activities, +fund our ongoing research and development activities and meet our general +working capital needs. Our capital requirements will depend on many factors, +including acceptance of and demand for our products and services, the extent to +which we invest in new technology and research and development projects, and the +status and timing of competitive developments. However, additional financing may +not be available when needed on terms favorable to us or at all. If we are +unable to obtain adequate funds on acceptable terms, we may be unable to develop +or enhance our products, take advantage of future opportunities or respond to +competitive pressures, which could adversely affect our business, financial +condition and results of operation.
+
  
+
+
Our +distributed power generation business is capital-intensive. The required +capital is generally provided by contractual payments by our customers and +customer-arranged financing. Our customers may not be able to obtain new capital +on reasonable commercial terms, or at all. Our customers’ ability to arrange +financing and the cost of such financing depends on numerous factors, including +general economic and capital markets conditions, credit availability from banks, +institutions or other lenders, and investor confidence in our customers and the +projects we will undertake for them. If our customers are unable to obtain +capital on reasonable commercial terms, our project costs could increase or our +customers could decline to engage us for distributed power generation projects, +as a result of which our business and operations could be materially and +adversely affected.
+
 
+
Our +working capital is necessary to fund our general business +operations.  Such working capital presently includes cash on hand and +from operations, the net proceeds of the Company’s $83 million equity financing +in January 2010, and anticipated rebates from the PRC and Chinese local +governments in the amount of $22 million for the Evatech +acquisition.  Although we believe we have sufficient capital on hand +for the next 12 months, we cannot predict the amount or timing of additional +funds that may be needed under changed circumstances, or those requirements +linked to certain contingent events.  In addition, various +opportunities may arise, such as significant business development transactions, +new product development projects, changes to our capital structure, acquisition +opportunities or other factors, which may affect our working capital +requirements.  As a result, we may be required to seek internal or +external sources of financing, either through the debt and/or capital markets or +other financing sources, in which case, the availability of financing will +depend on future credit and capital markets conditions which we cannot +control.  The continuing uncertainty and volatility of the credit and +capital markets may limit our access to additional funding and we may not be +able to secure financing on favorable terms to us, or at all.  We +cannot assure you that we will not experience unexpected changes in capital +requirements resulting from opportunities, or the realization of certain +contingent events such as future commitments and joint venture agreements, or +the unavailability of financing.  Any of these possible developments +could have a material adverse impact on our liquidity and capital +resources.
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Investor +confidence and the market price of our common shares may be adversely impacted +if we fail to establish and maintain effective internal control over financial +reporting.
+

+
As a +public company, we are subject to reporting obligations under the U.S. +securities laws. The SEC as required by the Sarbanes-Oxley Act, or SOX, adopted +rules requiring most public companies to include a management report on such +company’s internal control over financial reporting in its annual report, which +contains management’s assessment of the effectiveness of the company’s internal +control over financial reporting. In addition, the company’s independent +registered public accounting firm must attest to and report on the effectiveness +of the company’s internal control over financial reporting. Our management may +conclude that our internal controls are not effective. Moreover, even if our +management concludes that our internal controls are effective, our independent +registered public accounting firm may disagree. If our independent registered +public accounting firm is not satisfied with our internal control over financial +reporting or the level at which our internal control over financial reporting is +documented, designed, operated or reviewed, or if the independent registered +public accounting firm interprets the requirements, rules or regulations +differently than we do, then they may issue an adverse or qualified +opinion.
+
 
+
Historically, +our business has been conducted as a private company and we have had limited +accounting personnel and other resources with which to address our internal +controls and procedures. In 2008 and 2009, we identified material weaknesses in +our internal control over financial reporting. We have endeavored to remediate +the weaknesses we identified in our internal control over financial reporting, +and we have completed the work we believe is required to remediate the +weaknesses identified with respect to (1) oversight of financial reporting, (2) +communication of appropriate business practices and standards, (3) written +policies and procedures, (4) +effective procedures to ensure that risks related to financial reporting are +assessed in a timely manner, (5) monitoring of internal controls, and (6) +the financial reporting process and the underlying accounting processes. We +presently expect to complete our remediation activities with respect to +weaknesses in our internal control relating to the assessment of business risks +and the monitoring of internal controls by June 2010, which +include (1) hiring a vice president to help us improve our internal control by +leading our internal control project team and helping headquarters, subsidiaries +and business departments improve internal control, (2) performance of risk +assessment in a timely manner and better communication on business practices, +standards and risks, (3) assessment of key policies and processes and (4) +monitoring of internal controls by our Audit Committee and management. +However, we +cannot assure you that such measures will be successful. If we fail to +timely achieve and maintain the adequacy of our internal controls, we may not be +able to conclude that we have effective internal control over financial +reporting for subsequent years. Moreover effective internal controls over +financial reporting are necessary for us to produce reliable financial reports +and are important to help prevent fraud. Our failure to achieve and maintain +effective internal control over financial reporting could result in the loss of +investor confidence in the reliability and completeness of our financial +statements, which in turn could harm our business and materially and adversely +impact the trading price of our common shares.
+
 
+
Further +we cannot assure you that we will be able to establish Section 404 compliant +internal controls at our recently acquired Evatech subsidiary or, if we are able +to establish such controls, how long it will take us to do so.
+
 
+
Decreases +in the price of oil and gas and a decline in popular support for “green” +energy technologies could reduce demand for our distributed power generation and +wind turbine systems, which could materially harm our ability to grow our +business.
+
 
+
Higher +oil and gas prices provide incentives for customers to invest in “green” energy +technologies such as distributed power generation, wind turbine systems biomass +power plants and solar systems that reduce their need for petroleum-based fuels. +Conversely, lower oil and gas prices would tend to reduce the incentive for +customers to invest in capital equipment to produce electrical power or seek out +alternative energy. Demand for our products and services depend in part on the +current and future commodity prices of oil and gas. We have no control over the +current or future prices of oil and gas.
+

+
In +addition, popular support by governments, corporations and individuals for +“green” energy technologies may change. Because of the ongoing development of, +and the possible change in support for,“green” energy technologies we cannot +assure you that negative changes to this industry will not occur. Changes +in government or popular support for “green” energy technologies could have a +material adverse effect on our business, prospects and results of +operations.
+
 
+
Changes +in the growth of demand for electricity could reduce demand for our distributed +power generation and wind turbine systems, which could materially harm our +ability to grow our business.
+
 
+
According +to the National Bureau of Statistics of the PRC, domestic electricity +consumption grew at a rate of 6.3% in 2009. The China Electricity Council has +forecast that the rate of growth in China’s electricity demand will continue to +increase in 2010 as the growth in electricity consumption increases due to the +continued development of the Chinese economy. However, such growth is +unpredictable and depends on general economic conditions and consumer demand, +both of which are beyond our control. Such changes in the demand for electricity +may affect demand for our distributed power generation and wind turbine systems, +and therefore, could materially harm our ability to grow our +business.
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Our +distributed power generation business and operating entities require certain +licenses, registrations and certificates.
+

+
Our distributed power generation +business is subject to various rules and regulations in the PRC. In order to +construct, implement and test our power generation systems and micro grids, we +are required to have the right to use or possess relevant licenses, such as the +Class A license issued by the Ministry of Construction of the PRC, or Ministry +of Construction, which includes a construction permit and design permit that +allow holders to undertake and construct various power systems, energy and +infrastructure projects of any size in China. In 2009, +through our joint venture company, LICEG Ltd., in which we hold 90% of the +ownership interest, we had the full right to use a Class A License held by +LICEG, a construction company established by the Liaoning provincial government, +which holds the remaining 10% interest.  In early 2010, we obtained +ownership of the Class A License as it is currently in the process of being +transferred from LICEG to LICEG Ltd. In addition, we are required to hold +a Class B License, which allows us to undertake certain construction projects of +a smaller size, as well as the PRC Overseas Project Contracting Business +Qualification License, issued by the Ministry of Commerce of the PRC, or MOFCOM, +which allows us to undertake overseas construction projects. In addition, our +operating entities require certain business licenses and registrations. +Currently, the terms of our operating entities range from 5 years to 30 years +and must be renewed before their expiry. Renewal procedures generally entail the +submission of certain applications, supporting materials and fees to the +relevant PRC government entity that supervises the entity. However, if any such +license or registration were revoked or suspended, or if we experience delays or +fail or are unable to renew such licenses or registrations upon expiry or are +unable to obtain new licenses and registrations required by the PRC laws, our +business and operations could be materially and adversely affected.
+

+
We +are dependent on our licensing partners, and events involving these licensing +partners or any future licensing partners could prevent us from developing our +wind turbine business.
+
 
+
The +success of our current business strategy will depend in part on our ability to +successfully perform under and manage strategic licensing partnerships. Since we +do not currently possess the technology necessary to independently develop and +assemble wind turbines, we may need to enter into additional collaborative +agreements to assist in the development of wind turbines in certain markets for +a particular customer. Establishing strategic partnerships is difficult and +time-consuming. Potential partners may reject collaborations based upon their +assessment of our financial, regulatory or intellectual property position, and +our discussions with potential partners may not lead to the establishment of new +partnerships on acceptable terms. We and our present and future partners may +fail to develop or effectively commercialize products covered by our present and +future collaborations.
+
 
+
With +respect to our licensing agreement with Norwin, we agreed to pay the balance of +the licensing fee of $1.7 million to Norwin in installments based on the number +of 750 kW and 225 kW wind turbines we produce, provided that this amount was +paid by February 15, 2009. As of the date of this Annual Report, we have yet to +start producing any 750 kW or 225 kW wind turbines and have not paid a balance +of $0.55 million of such amount to Norwin; however, Norwin has provided us +written confirmation dated May 31, 2009 that the agreement we have with them is +still valid and both we and Norwin continue to perform our obligations under +this agreement.
+
 
+
+
+
+
In May 2007, we entered into a license +agreement with Fuhrländer, that gave us an exclusive right to sell and a +non-exclusive right to produce Fuhrländer’s 2.5 MW series wind turbines in +Liaoning and Hebei provinces of China and a non-exclusive right to produce and +sell Fuhrländer’s 2.5 MW series wind turbines in nine other PRC provinces. In +January 2009, this license agreement was amended to upgrade the wind turbine +series from 2.5 MW wind turbines to 2.7 MW wind turbines. The largely non-exclusive nature of +this license agreement reduces barriers to entry and could result in increased +competition and/or the entrance of new direct or indirect competitors with our +wind turbine business, which could have a material adverse effect on our +business and results of operations. There are certain disputes between +us and Fuhrländer concerning payment and performance under this license +agreement. We are currently attempting to rectify this situation and are +also negotiating an amendment to the license agreement to broaden the scope of +our rights to use the technology licensed thereunder. There can be no assurance, +however, that the parties will succeed in resolving the issues between them. If +we are unable to rectify this situation, this could have a material adverse +effect on our business and results of operations.
+
  
+
+
Moreover, disputes may arise with +respect to the ownership of rights to any technology developed with any current +or future partner. Lengthy negotiations with potential new partners or +disagreements between us and our partners or conflicts among our partners may +lead to termination of our licensing rights or delays in the production of our +wind turbines. If we are not able to establish additional partnerships on terms +that are favorable to us or if our existing partnerships are terminated and we +cannot replace them, we may not be able to develop our wind turbine business. +Any of the foregoing may materially harm our business, financial condition and +results of operations.
+

+
A +lack of adequate grid capacity in China could limit demand for our wind turbines +and materially damage our business prospects.
+
 
+
Our +customers will rely on access to the electrical grid to market the wind power +they generate. In 2009, nearly 13 GW of additional wind power capacity was +installed in China, which accounted for nearly one-third of new global wind +power capacity in 2009, according to the State Electricity Regulatory Commission +of the PRC. Installed wind power capacity is expected to rise to 35-40 GW by +2012. Current grid capabilities might be unable to cope with the expected +increased capacity and it is likely grid bottlenecks will reduce the ability of +wind power to access the market. If our customers are unable to access the +electrical market, the demand for our wind turbines may not develop or may +develop to a significantly lesser extent than we anticipated.
+
 
+
+
+
Projects included +in our backlog may be delayed or cancelled, which could materially adversely +affect our business, financial condition, results of operations and cash +flows.
+
+
+

+
+
 As +of March 31, 2010, our backlog was approximately $367.0 million. Backlog +represents the dollar amount of revenue we expect to realize in the future as a +result of performing work under multi-period contracts that we have entered +into. The dollar amount of backlog does not necessarily indicate future earnings +related to the performance of that work because of changes in customer orders, +project scope, schedule and weather conditions. As a result, we cannot predict +with certainty when or if backlog will be performed or the associated revenue +will be recognized. In addition, even where a project proceeds as scheduled, it +is possible that contracted parties may default and fail to pay amounts owed to +us.  Delays, cancellations or payment defaults could materially and +adversely affect our business, financial condition, results of operations and +cash flows.
+
 
+
+
Systems +that we develop and install may contain design or manufacturing defects, which +could result in reduced demand for our services and customer claims and +uninsured liabilities.
+
 
+
We +design, produce and oversee the construction of relatively large and complex +electric generating, co-generation and micro grid power networks. At times these +systems may contain design or manufacturing errors or defects, including defects +in equipment that we purchase for use with our systems. Any defects in our +systems may result in claims for economic damage, delays in completion, or +reduced or cancelled customer orders. If these types of problems occur, we may +incur additional significant costs, and if they occur frequently, we may sustain +additional significant costs, loss of business reputation and legal +liability.
+
 
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The +liability of product suppliers in China is evolving. Until recently that +liability has been difficult to impose for various reasons, including an +underdeveloped civil justice system. As a result, the need for insurance has not +been substantial, and the types of insurance products that western companies +typically procure to protect against these risks may be difficult or even +impossible to obtain at reasonable cost or any cost. If a litigant were +successful against us it could have a material adverse effect on our business, +financial condition, results of operations and liquidity. Additionally, a +well-publicized actual or perceived problem could materially and adversely +affect our market reputation which could result in a significant decline in +demand for our products.
+

+
We +expect to rely increasingly on our proprietary products and systems and on +technology developed by our licensors. If we or our licensors become involved in +an intellectual property dispute, we could be forced to spend a significant +amount of time and financial resources to resolve such intellectual property +dispute, diverting time and resources away from our business and +operations.
+
 
+
Our +business is based on a number of proprietary products and systems, which we +protect as trade secrets. In addition, we license wind turbine technology +from third parties. We expect that our reliance on these proprietary products, +systems and technology will grow, as the functionality of distributed power +generation and micro power grids increases to meet customer demand, as we +commence and expand our wind turbine business as we try to open new markets for +our products. If a third party should infringe on any of our intellectual +property rights or those of our licensors, we may need to devote significant +time and financial resources to attempt to halt the infringement, and we may not +be successful in such a dispute. In the absence of patent protection for our +trade secrets, if any of these parties are able to “reverse engineer” our +products and systems, we might not have legal recourse against them. Similarly, +in the event of an infringement claim against us or our licensors, we may be +required to spend a significant amount of time and financial resources to +resolve the claim. We may not be successful in defending our position or +negotiating an alternative. Any litigation could result in substantial costs and +diversion of our management resources and could materially and adversely affect +our business, operating results and financial condition.
+
 
+
A +shortage of adequate components could increase our costs or cause a delay in our +ability to fulfill orders, and our failure to estimate customer demand properly +may result in excess component inventories that could adversely affect our +future growth.
+
 
+
Strong +demand for certain component parts for wind turbines, such as gear boxes, +generators and blades, and/or capacity constraints, or other problems +experienced by suppliers, could result in supply shortages or delivery delays +for these components. This is particularly true with respect to component parts +for our 2.7 MW wind turbines that use advanced technology and with respect to +which we compete globally against other wind turbine producers purchasing the +same components. Although we have established joint ventures with GE Electronic +and Jiangsu Miracle to produce and sell key wind turbine components in +China, including wind turbine gearboxes, rotor blades, hubs and nacelle covers, +these joint ventures have not yet commenced production and we currently purchase +component parts for our 2.7 MW wind turbines from overseas suppliers. In order +to reduce costs, we have considered sourcing these components from suppliers +located in China that are price competitive. However, components purchased from +domestic suppliers generally use less advanced technology and may result in +lower quality products when compared to the components that we currently +purchase from our overseas suppliers. In addition, if our licensors do not +approve the locally-sourced components, we could lose certain warranties or +other rights under our licenses. Component parts for our 750 kW and 225 kW wind +turbines are more readily available domestically and internationally. If +shortages or delays persist, the price of these components may increase, or the +components may not be available at all, and we may also encounter shortages if +we do not accurately anticipate our needs. Conversely, we may not be able to +secure enough components at reasonable prices or of acceptable quality to build +new wind turbines in a timely manner in the quantities or configurations needed. +Our operating results could also be materially and adversely affected if, +anticipating greater demand than actually develops, we commit to the purchase of +more components than we need. Furthermore, as a result of binding price or +purchase commitments with suppliers, we may be obligated to purchase components +at prices that are higher than those available in the current market. Given that +many wind farm operators are large state-owned power companies in China with +extensive bargaining power, we may not be able to pass on the increase of costs +of wind turbine components to our customers, thereby reducing our margins and +negatively affecting our results of operations.
+

+
Our +foreign sources of components might not always be reliable, which may result in +a disruption in the supply of parts to our production facilities and cause +delays in our wind turbine assembly. We currently purchase components directly +from foreign suppliers for our wind turbine assembly. Our imports are subject to +existing or potential duties, tariffs and quotas. We also face a variety of +other risks generally associated with doing business with foreign suppliers and +importing components from abroad, such as: (i) political instability; (ii) +security measures at Chinese ports, which could delay delivery of imports; (iii) +imposition of new legislation relating to import quotas that may limit the +quantity of goods which may be imported into China from countries in a region +within which we do business; (iv) imposition of duties, taxes, and other charges +on imports; (v) delayed receipt or non-delivery of goods due to the failure of +foreign-source suppliers to comply with applicable import regulations; (vi) +delayed receipt or non-delivery of goods due to organized labor strikes or +unexpected or significant port congestion at Chinese ports; and (vii) local +business practice and political issues, including issues relating to compliance +with domestic or international labor standards which may result in adverse +publicity. Any inability on our part to rely on our foreign sources of +production due to any of the factors listed above could have a material adverse +effect on our ability to operate our wind turbine production facility and our +business, financial condition and results of operations.
+
 
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+
The +development of our wind energy power plant project in Texas requires significant +development work and capital and entails political risks.
+

+
In +December 2009, Shenyang Power Group entered into an agreement with USREG Wind, +to establish Texas A Wind, a project company to own, design, develop, construct, +manage and operate a US$1.5 billion wind energy power plant. This project is at +an early stage of development and requires significant development work, +including but not limited to, acquiring additional land or land rights, +undertaking feasibility studies and engineering design work, entering into of +utility interconnection arrangements, securing additional permits and obtaining +debt and equity project financing and governmental incentives to cover +development and construction costs. Much of the development work must be +completed before the project can obtain project financing, receive turbines and +equipment, and commence construction.
+

+
The +development of this project may be further complicated by the introduction of +new legislation in the United States. For example, several U.S. senators have +recently introduced legislation that would halt U.S. federal funding of +renewable energy projects until “Buy American” requirements are written into +law. It is uncertain as to whether this legislation will ultimately be passed, +or if passed, the final form it will take. We currently intend that a minimum of +70% of each wind turbine to be supplied in relation to this project would be +manufactured in a new production and assembly plant in the United States, but we +cannot assure you that this plant will be built, or if built, whether it will be +sufficient to satisfy the requirements of such proposed legislation when and if +passed into law. Furthermore, Senator Charles Schumer has specifically urged the +Obama administration to block any stimulus money from financing this project. +While the prospects and progress of this proposed legislation cannot be +predicted, the political and policy priorities in the United States remain +uncertain and we cannot assure you that the introduction of this or other +legislation in the United States will not adversely impact the development of +this project or that U.S. federal funding for this project can or will be +obtained. Our inability to obtain U.S. federal funding for this project would +significantly increase our costs associated with this project.
+

+
Under the +agreement, our indirect, wholly-owned subsidiary, Ruixiang is designated to be +the exclusive manufacturer and supplier of turbines to the power plant and our +indirect, wholly-owned subsidiary GaoKe Energy, is designated to be the +contractor for the project. The development, financing, construction and +operation of the project entails numerous risks, including those referred to +above, and we cannot assure you that the project will secure the project +financing necessary to purchase and pay for the turbines to be provided by +Ruixiang or the construction services to be provided by GaoKe Energy or that all +final land or land rights, permitting and transmission rights and capacity will +be obtained. All such financing and rights must be obtained for the project to +commence commercial operations, generate revenues and achieve economic +success.
+
 
+
We may not be +able to retain, recruit and train adequate technical and management personnel, +and increased competition for qualified personnel in China could result in an +increase in wages that we may not be able to offer in order to stay +competitive.
+
 
+
Our +future success depends, to a significant extent, on our ability to attract, +train and retain qualified technical personnel such as engineers, particularly +those with expertise in the wind power industry. There is substantial +competition for qualified technical personnel, and we cannot give any assurance +that we will be able to attract or retain our qualified technical personnel. If +we are unable to attract and retain qualified technical personnel, our business +may be materially and adversely affected.
+
 
+
We rely +heavily on the continued services of our executive management personnel, who +have contributed to our growth and expansion. Our executive team plays an +important role in our operations and the development of our new products. +Accordingly, the loss of their services, in particular those of Mr. Jinxiang Lu, +our Chairman and Chief Executive Officer, and Mr. John S. Lin, our Chief +Operating Officer, without suitable replacement (which may be difficult to +find), could have a material adverse affect on our operations and future +business prospects. We do not maintain key man life insurance on any of our +executive officers. If one or more of our executive officers are unable or +unwilling to continue in their present positions, we may not be able to replace +them easily or at all. As a result, our business may be severely disrupted and +we may incur additional expenses to recruit and retain new officers. In +addition, if any of our executives joins a competitor or forms a competing +company, we may lose some or all of our customers. We believe our future success +will depend upon our ability to retain these key employees and our ability to +attract and retain other skilled managerial, engineering and sales and marketing +personnel.
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Each of +our executive officers and other key personnel have entered into employment +agreements with us, which contain confidentiality and non-competition +provisions. However, if any disputes arise between our employees and us, we +cannot assure you, in light of uncertainties associated with the PRC legal +system, the extent to which any of these agreements could be enforced in China, +where some of our executive officers reside and hold some of their assets. See +“— Risks Related to Doing +Business in China — Uncertainties with respect to the PRC legal system could +adversely affect us.”
+
 
+
Our +technicians may have difficulty adapting our licensed technology to local +conditions.
+
 
+
In 2007, we entered into licenses to +produce and sell wind turbines based on technology from Germany and Denmark. Our +ability to develop these products depends on our technicians ability to +understand and localize this technology. For example, in Northern China our wind +turbines must be adapted to operate in temperatures that are typically much +colder in the winter than temperatures in Germany and Denmark. If our +technicians fail to understand and localize the technologies we source from +Germany and Denmark to China and other regions where we operate, it may cause +significant delays in the development of our wind turbines and we may be +required to spend a significant amount of time and financial resources to +resolve these technical problems.
+

+
Inclement +weather conditions could materially and adversely affect our operating results +in particular quarters and/or fiscal years.
+
 
+
+
We +recognize revenue on our distributed power generation system projects on a +percentage of completion basis. Historically, we have completed these projects +in 12 to 24 months, depending on the size of the project. However, completion +dates of our distributed power generation projects in Northeastern China, where +a majority of our projects are located, are difficult to predict primarily due +to the unpredictable and potentially harsh weather conditions in this region +from December through March of each year. As a result, a significant amount +of expected revenue could go unrealized in particular quarters and/or fiscal +years. For example, in addition to our expected seasonal slowdown in production +during the winter months, extremely cold and stormy weather conditions in +Northern China can cause unexpected delays in production. With respect to our +wind turbine business, because we recognize revenue for the manufacture and +installation of wind turbines only upon notice of customer acceptance, inclement +weather or other conditions affecting the time of acceptance by our customers +could also affect the timing associated with our recognition of revenues. The +number and length of project delays resulting from adverse weather conditions +are difficult to predict and may materially and adversely affect our operating +results in particular quarters and/or fiscal years.
+

+
Increases +in the price of raw materials and labor for our distributed power generation +business may increase our cost of sales and significantly reduce our +earnings.
+
 
+
We, or +our sub-contractors, typically procure the raw materials used in the +construction of our distributed power generation project developments from third +party suppliers. We also hire contract labor for our projects.  We +usually have provisions in our agreements with our customers that in the event +the prices of raw materials or labor increase beyond a certain threshold +(usually by an increase of 15% or greater), the agreements are subject to +renegotiation to factor in increased prices. In China, raw materials can +fluctuate in price or experience periodic shortages, particularly different +types of steel. Other raw materials, such as diesel fuel, cement and concrete +blocks can also fluctuate. If we are unable to pass on such price increases to +our customers,  our construction costs would increase accordingly and +our earnings could be materially and significantly reduced.
+
 
+
+
We +may experience construction and development delays or operational risks with +respect to our projects which could materially and adversely affect our +financial condition and operating results.
+
 
+
The +construction of distributed power generation systems and other forms of power +plants involves many risks, including shortages of equipment, material and +labor, labor disturbances, accidents, inclement weather, unforeseen engineering, +environmental, geological, delays and other problems and unanticipated cost +increases, any of which could give rise to significant delays and/or cost +overruns. Construction delays may result in significant loss of revenues. We may +commit to a client that we will complete a project by a scheduled date. We may +also commit that a project, when completed, will achieve specified performance +standards. If the project is not completed by the scheduled date or subsequently +fails to meet required performance standards, we may either incur significant +additional costs or be held responsible for the costs incurred by the client to +rectify damages due to late completion or failure to achieve the required +performance standards. Failure to complete construction according to +specifications may result in significant liabilities, decreased efficiency as +well as significantly increased operating costs and reduced earnings. We cannot +give any assurance that construction of future projects will be completed on +schedule or within budget. In addition, the operation of power plants involves +many risks and hazards, including breakdown, failure or substandard performance +of equipment, improper installation or operation of equipment, labor +disturbances, natural disasters, environmental hazards and industrial accidents. +The occurrence of material operational problems, including but not limited to +the above events, may materially and adversely affect the profitability of a +power plant.
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Our +earnings may fluctuate from period to period due to fluctuations in the exchange +rate between the RMB and US dollar or the Euro or Thai baht.
+
 
+
Our +functional currency is the RMB, however, we report our financial information in +US dollars and we conduct and will continue to conduct transactions in +currencies other than RMB, including the Euro and Thai baht. The value of the +RMB fluctuates and is affected by, among other things, changes in the PRC’s +political and economic conditions. The conversion of RMB into foreign currencies +such as the US dollar has been generally based on rates set by the PBOC, which +are set daily based on the previous day’s interbank foreign exchange market +rates and current exchange rates on the world financial markets. While the +official exchange rate had remained stable over the past several years, the PRC +has adopted a floating rate with respect to the RMB, with permitted ranges of +fluctuation.  Since we report our financial information in US +dollar and conduct transactions in currencies other than RMB, including the +Euro and Thai baht, fluctuations between the RMB and US dollar or the Euro +or Thai baht could result in swings in our reported results of +operations.
+
 
+
+
Future +acquisitions may require us to incur costs and liabilities which may adversely +affect our operating results.
+
 
+
In +addition to internal growth, our current strategy involves growth through +acquisitions of complementary technologies, businesses and services and +strategic alliances. Like other companies with similar growth strategies, we may +be unable to continue to implement our growth strategy, and this strategy may be +ultimately unsuccessful. We frequently engage in evaluations of potential +acquisitions and negotiations for possible acquisitions, certain of which, if +consummated, could be significant to us. Any potential acquisitions may result +in material transaction expenses, increased interest and amortization expense, +increased depreciation expense and increased operating expense, any of which +could have a material adverse effect on our operating results and require us to +raise capital to fund these expenses. Acquisitions may entail integration and +management of the new businesses to realize economies of scale and control +costs. In addition, acquisitions involve other risks, including diversion of +management resources otherwise available for ongoing development of our business +and the need to manage relationships with customers and suppliers and risks +associated with entering new markets. We may not be able to identify suitable +acquisition candidates in the future, obtain acceptable financing or consummate +any future acquisitions. Finally, as a result of our acquisitions of other +businesses, we may be subject to the risk of unanticipated business +uncertainties or legal liabilities relating to those acquired businesses for +which the sellers of the acquired businesses may not indemnify us. Future +acquisitions may also result in potentially dilutive issuances of +securities.
+
+
 
+
+
We +might not be able to expand into the solar energy market as +planned.
+

+
We +entered the solar energy market by acquiring Evatech, a business with a limited +track record in the production and sale of equipment for manufacturing +PV cells and solar panels. Before the acquisition, Evatech focused on the +production of equipment and materials for liquid crystal displays, plasma +displays and related products. Evatech previously developed equipment to produce +thin film and PV components but did not commercialize this equipment. As of the +date of this Annual Report on Form 20-F, we have not generated any material +revenue, and have received one purchase order for a set of production equipment +since the completion of the Evatech acquisition in January 2010. In addition to +the risks generally inherent in acquisitions (see – “– Risks related to our business – Future +acquisitions may require us to incur costs and liabilities which may adversely +affect our operating results”), our business strategy to expand into the +solar energy market by acquiring Evatech exposes us to the following +risks:
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
we + might not be able to obtain the necessary approvals and licenses to + produce and market our solar products in China and other target + markets;
+
+
+
 
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
our + evaluation of Evatech’s business, products and prospects as well as its + liabilities may prove inaccurate +and
+
+
+
 
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
we + have made applications for, but have not received, the expected government + rebates representing 45% of the acquisition price of + Evatech.
+
+
+
 
+
If we cannot manage our acquisition +effectively, we might be unable to take advantage of market opportunities or +execute our business strategies with respect to our solar energy business, any +of which could have a material adverse effect on our financial condition, +results of operations, business and prospects.
+

+
We +need support and permission from our licensing partners to use technology in +connection with our wind turbine business in markets outside of China, which may +be difficult to obtain and could materially harm our ability to grow our +business.
+

+
In +connection with our wind turbine business, we currently license technologies +which we are permitted to use in designated territories. We will need technical +support and permission from our licensing partners to use such technology in +territories not currently granted to us in our existing license agreements. We +may be unsuccessful in entering into agreements with our licensing partners in +order to provide this technical support and permission or in negotiating +favorable terms in these agreements. Further, if any negotiations take +considerably longer to conclude than the parties initially anticipate, this +could cause us to enter into agreement terms that are less favorable to us, and +this could materially harm our ability to grow our business.
+
  +
+
+
+
+
+
+
+
15
+
+
+
+
+
+
+
+
+
+
   +
+
+
We use forward foreign purchase instruments +that are subject to conditions outside of +our control.
+
 
+
We +began to use forward foreign purchase instruments to avoid foreign currency +risk in 2009. We believe forward foreign currency purchase instruments +minimize exposures beyond spot contracts, as they allow a purchaser to secure the then exchange rate for +settlement at a future date. We believe this forward +purchase instrument may protect our profit margins by setting anticipated +foreign payables or receivables at present market levels to protect against +currency fluctuations.  For more information, see Item 11 +– +“Quantitative and +Qualitative Disclosures About Market Risk – Foreign currency risk,” to this Annual Report +on Form 20-F.  However, as with all hedging, derivative and related +financial instruments, there are risks arising from foreign exchange market +fluctuations and changes in general economic condition that are outside of our +control.  Market factors may increase or decrease foreign exchange +rates, resulting in unfavorable exchange rates or prices and heightened exposure +to market risks.  We cannot assure you that our purchase +instruments will minimize our foreign currency risks, or at all.  If +we experience losses on our purchase instruments, our financial condition and +results of operations could be materially and adversely affected.
+
 
+
We +are dependent upon third parties to complete many of our contracts.
+

+
Much of +the work performed under for our distributed power generation business is +performed by third-party subcontractors we hire. We also rely on third-party +equipment manufacturers or suppliers to provide much of the equipment, materials +and components used for our distributed power generation projects and wind power +business. In limited instances, we may be responsible for any failure by a +third-party subcontractor to comply with applicable laws, rules and regulations. +If we are unable to hire qualified subcontractors or find qualified equipment +manufacturers or suppliers, our ability to successfully complete a project could +be impaired.  If a supplier, manufacturer or subcontractor fails to +provide supplies, equipment or services as required under a negotiated contract +for any reason, we may be required to source these supplies, equipment or +services on a delayed basis or at a higher price than anticipated, which could +adversely affect contract profitability.

+
Our +use of the “percentage-of-completion” method of accounting for our distributed +power generation business and multi-deliverable revenue arrangement for our wind +turbine business could result in reduction, reversal or an inability to +recoznize revenues and profits
+
   
+
+
A +substantial portion of our revenues and profits are measured and recognized +using the “percentage-of-completion” method of accounting, as discussed in Note +2, “Summary Of Significant Accounting Policies” to our financial statements. Our +use of this method results in recognition of revenues and profits ratably over +the life of a contract, based generally on the proportion of costs incurred to +date to total costs expected to be incurred for the entire project. The effect +of revisions to revenues and estimated costs is recorded when the amounts are +known or can be reasonably estimated. Such revisions could occur in any period +and their effects could be material. Although we have historically made +reasonably reliable estimates of the progress towards completion of long-term +construction contracts in process, the uncertainties inherent in the estimating +process make it possible for actual costs to vary materially from estimates, +including reductions or reversals of previously recorded revenues and profits. +Such revisions may result from uncertainties risks that include, but are not +limited, to (i) engineering design changes; (ii) technical or quality control +issues requiring us to use resources to rectify; (iii) changes in costs of +components, materials and labor; (iv) difficulties in obtaining government +approval; (v) changes in local laws and regulations; (vi) weather delays; and +(vii) suppliers or subcontractors failure to perform.
+
 
+
+
We did +not have any material cost overruns or resulting losses in 2009. Should we +incur cost overruns in performing our distributed power contracts, we will +generally negotiate with our customers to modify our construction contracts to +account for such overruns and to prevent such incidents during the remainder of +that contract. However, if we are unable to accurately estimate and control our +construction contract costs and timelines then we could experience overruns, and +if we are unable to successfully negotiate modifications to our construction +contracts, we would incur losses on our contracts, resulting in decreases +in our operating margins and a significant reduction or elimination of our +profits.
+
  
+
+
If we do +not control our contract costs, we may be unable to maintain positive operating +margins or experience operating losses. Substantially all of our sales have +involved fixed-price contracts. Under fixed-price contracts, we receive a fixed +price, and therefore, we realize a profit only if we control our costs and +prevent cost overruns on the contracts. If our fixed-price contracts are +modified, the fixed price is renegotiated and adjusted upwards accordingly. +Under our fixed-price contracts, if we are unable to estimate and control costs +and/or project timelines, we may incur losses on our contracts, which may result +in decreases in our operating margins and in a significant reduction or +elimination of our profits.
+
 
+
+
+
+
We recognize wind turbine manufacturing +revenue under the guidance found in ASU 2009-13 Multiple-Deliverable Revenue +Arrangement. The +manufacture of wind turbines comprises three stages: (a) manufacture; (b) +installation; and (c) quality assurance and warranty. These three stages +constitute separate units of accounting. We recognize manufacture and +installation stage revenue when we complete manufacture or installation of our +turbines and receive notice of customer acceptance. We defer recognition of 10% +of wind turbine manufacture revenue, which is recognized on a straight-line +basis over a quality assurance and warranty period of 18 months following +execution of contracts associated with the sale of our wind turbines. Any delays +in our ability to complete various stages of production or delays in notice of +acceptance by our customers could prevent us from recognizing revenues and +profits in our wind turbine business.
+
  
+
+
+
Failure by us to +successfully defend against potential claims made against us by project owners, +suppliers or project subcontractors, or failure by us to recover adequately on +potential claims made against project owners, suppliers or subcontractors, could +materially adversely affect our business, financial condition, results of +operations and cash flows.
+
+
+

+
+
+
Our +distributed power generation projects generally involve complex design and +engineering, significant procurement of equipment and supplies and construction +management. We may encounter difficulties in the design or engineering, +equipment and supply delivery, schedule changes and other factors, some of which +are beyond our control, that affect our ability to complete the project in +accordance with the original delivery schedule or to meet the contractual +performance obligations. In addition, we rely on third-party partners, equipment +manufacturers and subcontractors to assist us with the completion of our +contracts. As such, potential claims involving project owners, suppliers and +subcontractors may be brought against us and by us in connection with our +project contracts. Potential claims brought against us may include back charges +for alleged defective or incomplete work, breaches of warranty and/or late +completion of the project work and claims for cancelled projects. The claims and +back charges may involve actual damages, as well as contractually agreed upon +liquidated sums. These potential claims, if not resolved through negotiation, +are often subject to lengthy and expensive litigation or arbitration +proceedings. The possible charges associated with these potential claims could +materially adversely affect our business, financial condition, results of +operations and cash flows.
+
+

+
We are subject to, +and incur costs to comply with, environmental laws.
+

+
Because +we produce air emissions, discharge wastewater, and handle hazardous substances +and solid waste at our distributed power generation project sites and wind +turbine production facility, we are subject to, and incur costs and liabilities +to comply with, environmental laws and regulations. We may incur significant +additional costs as those laws and regulations change in the future or if there +is an accidental release of pollution or hazardous substances into the +environment. Failure to comply with these laws and regulations may trigger a +variety of administrative, civil and criminal enforcement measures, including +the assessment of monetary penalties, the imposition of remedial requirements, +and the issuance of orders enjoining future operations, all of which may affect +our business operations.
+
 
+
+
We +have limited business insurance coverage in China.
+
 
+
+
+
Our +business segments are insured up to the requisite minimum amount as required by +the relevant PRC laws and regulations.  We maintain primary and excess +liability insurance, as well as customary workers’ compensation and +other insurance as required by relevant PRC laws and regulations. We do +not have insurance coverage with regard to property, plant or equipment, nor do +we have business interruption or casualty insurance in China. We have +determined that the difficulties associated with acquiring such insurance on +commercially applicable terms and the nature of the industry makes it +impractical for us to obtain such coverage at this time. Any significant +business disruption, litigation or natural disaster could result in our +incurring substantial uninsured costs and the diversion of our resources, which +could materially and adversely affect our business operations and financial +condition.
+
+
+
+
+
+
+
+
+
16
+
+
+
+
+
+
+
+
+
+
 
+
Risks +related to doing business in China
+
 
+
Changes +in the PRC’s economic, fiscal, monetary, or political policies or factors could +materially affect, directly or indirectly, the Company’s operations and +shareholders.
+
 
+
+
We +conduct substantially all of our operations in China and derive substantially +all of our revenue from our operations in China. Accordingly, our business, +financial condition, results of operations and prospects are affected to a +significant degree by economic, political and social conditions in China. The +PRC economy differs from the economies of most developed countries in many +respects, including the amount of government involvement, level of development, +growth rate, control of foreign exchange and allocation of resources. The PRC +economy has grown significantly in recent years; however, we cannot assure you +that such growth will continue. In response to the global economic slowdown +and market volatility, however, the PRC government in 2008 and early 2009 +lowered interest rates and announced large fiscal stimulus packages to boost the +domestic economy, which include RMB4.0 trillion investments in, among other +things, airports, highways, railways, power grids and other infrastructure +developments, the effects of which cannot yet be fully determined. The PRC +government previously +implemented a series of measures to slow the pace of growth of the PRC +economy by raising interest rates and the deposit reserve rate and issuing +administrative guidelines to control lending to certain industries. There is +evidence that the PRC government may again be taking measures to slow the pace +of growth following the success of the fiscal stimulus packages, including the +reduction in bank lending quotas, an increase in the proportion of banks’ assets +required to be held in the form of reserves, a reduction in maximum +loan-to-valuation ratios for property investment lending and a marginal increase +in short-term interest rate. The aggregate effect of these measures may +adversely impact the ability of industrial companies and governmental entities +to secure bank or other financing for these capital expenditure projects, which +could in turn impact our ability to secure new business.
+
+
  
+
+
In +addition, the PRC government, which regulates the power industry in +China, has adopted laws related to renewable energy, and has adopted policies +for the accelerated development of renewable energy as part of a Development +Plan promulgated on August 31, 2007, as discussed in Item 4C — “Information on the Company— Business Overview— +Regulation”. Meanwhile, the PRC government has introduced certain +policies which may more directly impact our business. For instance, the PRC +government has sought to discourage the use of corn as a raw material for +industrial use by requiring local governments to limit their approvals of new +ethanol projects that process corn. As a result, we have avoided taking on +ethanol based distributed power generation system projects.  If the +government discourages other materials, such as pulp, that are used as inputs in +the distributed power generation systems we build, there could be a material +adverse effect on our business operations. In September 2009, in response to +perceived potential excess capacity in the wind power equipment manufacture +sector, the State Council introduced a policy to reduce excess capacity in this +sector. Pursuant to this policy, government departments at various levels are +required to curb expansion and redundant construction of wind power equipment +manufacture projects and financial institutions are required to adjust and +manage their credit plans to reflect the PRC’s macroeconomic policies. In +addition, pursuant to the Catalogue for the Guidance of Foreign Investment +Industries, effective from December 1, 2007, foreign investment in enterprises +in the PRC engaging in the manufacture of complete sets or key parts of wind +power generation equipment of 1.5 MW or larger is restricted. We believe our +existing PRC subsidiaries engaging in wind power generation are not subject to +such restrictions on foreign investment. However, we cannot assure you that +these restrictions will not be applied to our existing or new subsidiaries in +the future.
+
 
+
Any +adverse change in the economic, political and social conditions or government +policies in China, whether they be general or directly related to our business +segments, could have a material adverse effect on overall economic growth, which +in turn could lead to a reduction in demand for our products and consequently +have a material adverse effect on our business operations and +shareholders.
+
 
+
+
Uncertainties +with respect to the PRC legal system could adversely affect us.
+
 
+
We +conduct our business primarily through our subsidiaries and affiliated entities +in China. Our operations in China are governed by PRC laws and regulations. Our +subsidiaries are generally subject to laws and regulations applicable to foreign +investments in China and, in particular, laws applicable to wholly foreign-owned +enterprises. The PRC legal system is based on written statutes. Prior court +decisions may be cited for reference but have limited precedential +value.
+
 
+
Since +1979, PRC legislation and regulations have significantly enhanced the +protections afforded to various forms of foreign investments in China. However, +China has not developed a fully integrated legal system and recently enacted +laws and regulations may not sufficiently cover all aspects of economic +activities in China. In particular, because these laws and regulations are +relatively new, and because of the limited volume of published decisions and +their non-binding nature, the interpretation and enforcement of these laws and +regulations involve uncertainties. In addition, the PRC legal system is based in +part on government policies and internal rules (some of which are not published +on a timely basis or at all) that may have a retroactive effect. As a result, we +may not be aware of our violation of these policies and rules until sometime +after the violation. In addition, any litigation in China, regardless of +outcome, may be protracted and result in substantial costs and diversion of +resources and management attention.
+
 
+
In +addition, a majority of our material agreements are governed by PRC law. We and +our PRC subsidiaries may not be able to enforce our material agreements, and +remedies may not be available outside of the PRC. The system of laws and the +enforcement of existing laws in the PRC may not be as certain in implementation +and interpretation as in the U.S. The Chinese judiciary is relatively +inexperienced in enforcing corporate and commercial law, leading to a higher +than usual degree of uncertainty as to the outcome of any litigation. The +inability to enforce or obtain a remedy under any of our present or future +agreements could result in a significant loss of business, business +opportunities or capital.
+
 
+
We +may have difficulty establishing adequate management, legal and financial +controls in the PRC, which could result in misconduct and difficulty in +complying with applicable laws and requirements.
+
 
+
Our +operations are conducted through subsidiary operating companies organized under +the laws of the PRC. We acquired these Chinese operating companies in 2008. As +privately held companies in the PRC, they have not historically focused on +establishing Western-style management and financial reporting concepts and +practices, as well as modern banking, computer and other internal control +systems. We may have difficulty in hiring and retaining a sufficient number of +qualified internal control employees to work in the PRC. As a result of these +factors, we may experience difficulty in establishing management, legal and +financial controls, collecting financial data and preparing financial +statements, books of account and corporate records and instituting business +practices that meet Western standards. See “— Risks Related to Our Business— Investor confidence +and the market price of our common shares may be adversely impacted if we fail +to establish and maintain effective internal control over financial +reporting.”
+
 
+
+
+
+
+
+
+
17
+
+
+
+
+
+
+
+
+
+
 
+
If +the PRC does not continue its policy of economic reforms, it could result in an +increase in tariffs and trade restrictions on products we produce or +sell.
+
 
+
The PRC +government has been reforming its economic system since the late 1970s. The +economy of the PRC has historically been a nationalistic, “planned economy,” +meaning it has functioned and produced according to governmental plans and +pre-set targets or quotas.
+
 
+
However, +in recent years, the PRC government has implemented measures emphasizing the +utilization of market forces for economic reform and the reduction of state +ownership in business enterprises. Our business has benefited greatly from that +new outlook. Although we believe that the changes adopted by the PRC government +have had a positive effect on the economic development of the PRC, additional +changes still need to be made. For example, a substantial portion of productive +assets in the PRC are still owned by government entities. Additionally, +governments continue to play a significant role in regulating industrial +development. We cannot predict the timing or extent of any future economic +reforms that may be proposed.
+
 
+
A recent +positive economic change has been the PRC’s entry into the World Trade +Organization, or the WTO, the global international organization dealing with the +rules of trade between nations. Many observers believe that the PRC’s entry will +ultimately result in a reduction of tariffs for industrial products, a reduction +in trade restrictions and an increase in international trade with China. +However, the PRC has not yet fully complied with all of obligations that it must +meet prior to being admitted as a full member of the WTO, including fully +opening its markets to goods from other countries, currency exchange +requirements and other measures designed to ease the current trade imbalance +that China has with many of its trading partners. If the scheduled actions to +rectify these problems are not completed, trade relations between China and some +of its trading partners could be strained. While the majority of our business +currently is conducted solely within China, this may have a negative impact on +China’s economy generally, which would adversely affect our business. It could +also reduce or eliminate any benefits that we hope to achieve by expanding our +business internationally.
+
 
+
The +Chinese government could change its policies toward, or even nationalize, +private enterprise, which could reduce or eliminate the interests we hold in our +Chinese operating subsidiaries.
+
 
+
Over the +past several years, the Chinese government has pursued economic reform policies, +including the encouragement of private economic activities and decentralization +of economic regulation. The Chinese government may not continue to pursue these +policies or may significantly alter them to our detriment from time to time +without notice. Changes in policies by the Chinese government that result in a +change of laws, regulations, their interpretation, or the imposition of high +levels of taxation, restrictions on currency conversion or imports and sources +of supply could materially and adversely affect our business and operating +results. If nationalization of private enterprise were to occur, it is possible +that compensation from the Chinese government would be available to us, however, +the nationalization or other expropriation of private enterprises by the Chinese +government could result in the total loss of our investment in +China.
+
 
+
A +decrease in the rate of growth in Chinese industry and the Chinese economy in +general may lead to a decrease our revenues because industrial companies in +China are our principal current source of revenues.
+
 
+
Industrial +companies operating in China are the principal current source of our revenues. +Our business has benefited in the past from the rapid expansion of China’s +industrial activity, which has created additional demand and led to the +formation of numerous additional companies that have need for our products and +services. China’s industrial expansion has been fueled in large measure by +international demand for the low-cost goods that China is able to produce due to +labor advantages and other comparative advantages, such as governmental +subsidies to offset research and development expenses and taxes and reduced land +use/facilities costs for targeted industries. The Chinese economy may not be +able to sustain this rate of growth in the future and any reduction in the rate +of China’s industrial growth or a shrinking of China’s industrial base could +adversely affect our revenues. The resulting increase in competition for +customers might also cause erosion of profit margins that we have been able to +achieve historically.
+
 
+
+
Any reduction in the prices paid for +electricity generated by wind power projects or further regulatory changes in +relation to wind projects in China may lead to a decrease in our revenues. +
+
 
+
+
Prior to +August 2009, prices for electricity generated by wind power generators were +generally either established by tender under the PRC central government’s +national concession program (for both private and state-owned developers) or +negotiated on a case-by-case basis for individual wind projects that were not +part of the concession program. In addition, provincial governments at times +established various local pricing mechanisms for wind projects. NDRC +regulations previously required that 70% of the value of turbines +installed on PRC wind farms be manufactured in China. However, in July +2009, the NDRC issued a new policy designed to increase the profitability of PRC +wind farms by providing for fixed benchmark feed-in tariffs for new onshore wind +farms established after August 1, 2009. The benchmark feed-in tariffs, which are +determined based on local project construction conditions and the availability +of wind resources in the area in which the wind farm is established, range from +a low of RMB0.51/kWh for high wind resource areas to RMB0.61/kWh for low wind +resource areas. In addition, the local content requirement was removed in +November 2009. Any +reduction in the prices paid for electricity generated by wind power projects or +further regulatory changes in relation to wind projects in China may reduce demand for our +wind turbines or lead to increased competition from foreign +competitors.
+
 
+
+
Recently +adopted merger and acquisition regulations relating to acquisitions of assets +and equity interests of Chinese companies by foreign persons may subject our +prior acquisitions to governmental review or make it difficult for us to +complete future business combinations or acquisitions.
+
 
+
On +September 8, 2006, new regulations relating to acquisitions of assets and equity +interests of Chinese companies by foreign persons, or the M&A regulations, +which were adopted by MOFCOM and several other governmental agencies, took +effect. We completed our acquisition of our Chinese subsidiaries in January +2008.  While we do not believe that the acquisition was subject to the +M&A regulations, the regulations contain a number of ambiguities and +uncertainties that will be resolved only with the passage of time and +application of the regulations.  It is possible that the future +interpretations of the M&A regulations will differ from current +interpretations and that under such future interpretations some aspects of our +acquisition transaction may be found to be subject to the regulations.  It +is not possible to know the effect of such a determination, but it could +conceivably include invalidating the transaction in its entirety. Were that to +occur, it is possible that we would lose our ownership interests in GaoKe, +perhaps without any compensation to be paid, which would substantially reduce +the value of our common shares.
+
 
+
+
In +addition, we intend to grow our operations through acquisitions and business +combinations with other companies, including companies in China, and such +acquisitions and business combinations may be subject to the M&A regulations +and related governmental approvals. To the extent that the M&A regulations +apply, we expect that transactions subject to compliance with the M&A +Regulations will be more time consuming to complete than before the M&A +regulations took effect, will be more costly for the Chinese parties (making +them less attractive), and will permit the government much more extensive +opportunities for evaluation and control over the terms of the transaction. +Therefore, it may not be possible to complete certain desirable acquisitions in +China because the terms of the transaction may not satisfy the criteria used in +the governmental approval process or, even if approved, if they are not +consummated within the time permitted by the approvals +granted.
+
+
+
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+
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+
18
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+
+
+
+
+
 
+
A +change in priority for local governments or significant reduction in government +subsidies or incentives could have a material adverse effect on our results of +operations.
+
 
+
We derive +a significant portion of our revenues from projects in cooperation with local +governments, which are dependent on government funding. In addition, the local +government approval process is often slow, unpredictable and subject to many +factors outside of our control. For example, we have applied for but not yet +received government rebates representing 45% of the Evatech acquisition price. +Curtailments, delays, changes in leadership, shifts in priorities, or general +reductions in funding could delay or reduce our revenues. Funding difficulties +experienced by local governments could also cause those institutions to be more +resistant to change and could slow investments in energy projects which could +harm our business.
+
 
+
In +addition, demand for some of our products is influenced by government incentives +aimed to promote greater use of these products, technologies and potential +energy sources. In many instances, such as in the distributed power market, +applications for alternative energy products and technologies may not be +commercially viable (or would be significantly less attractive) without these +government incentives.
+
 
+
The scope +of the government incentives depends, to a large extent, on political and policy +priorities in a given country, which could lead to a significant reduction in or +a discontinuation of the support for these products, technologies or potential +energy sources as the political or policy environment changes over time. A +significant reduction in the scope of government incentive programs would have a +materially adverse effect on the demand for some of our products and +technologies, as well as our results of operations.
+
 
+
Under previous PRC policy, issued in +April 2008, enterprises that manufactured 1.2 MW or larger wind turbines were +eligible to apply for government refunds on import tariffs and import +value-added tax for designated parts and components and materials for these +turbines. The April 2008 policy was repealed as of July 2009. Under current PRC +policy, issued in August 2009; enterprises that manufacture 1.2 MW wind turbines +or 2.0 MW or larger wind turbines or designated supporting parts for complete +units of 1.2 MW or larger wind turbines (including blades, gearboxes, +generators, control systems and converters) and sell designated quantities of +these turbines or parts during the +year +are eligible to apply for an exemption from import tariffs and import +value-added tax for parts, components and materials designated under the policy. +Enterprises that import 2.5 MW or larger wind turbines remain eligible under the +existing regulations to apply for an exemption on import tariffs and import +value-added tax with respect to these turbines. We intend to apply for this +exemption with respect to parts and components for our 2.0 MW and larger wind +turbines.
+
 
+
We +are a holding company that depends on dividend payments from our subsidiaries +for funding.
+
 
+
We are a +holding company established in the British Virgin Islands and operate all of our +business and operations through our subsidiaries in China. Therefore, our +ability to pay dividends to our shareholders and to service our indebtedness +depends upon dividends that we receive from our subsidiaries in China. If our +subsidiaries incur indebtedness or losses, such indebtedness or loss may impair +their ability to pay dividends or other distributions to us. As a result, our +ability to pay dividends and to service our indebtedness would be restricted. +Regulations in China currently permit payment of dividends only out of +accumulated profits as determined in accordance with accounting standards and +regulations in China. Each of our PRC subsidiaries, including wholly +foreign-owned enterprises and domestic companies, is required to set aside at +least 10% of its after-tax profit based on PRC accounting standards each year to +its general reserves or statutory reserve fund until the accumulative amount of +such reserves reaches 50% of its registered capital. As of December 31, 2009, +the accumulated reserves with respect to GaoKe, GaoKe Design, LICEG, Jinxiang +and Ruixiang amounted to RMB30 million, RMB0.9 million, nil, nil and nil +respectively, and the retained earnings (deficit) amounted to RMB674.0 million, +RMB11.0 million, RMB2.8 million, a deficit of RMB4.9 million and RMB51.0 million +respectively. Our statutory reserves are not distributable as cash dividends. In +addition, restrictive covenants in bank credit facilities, joint venture +agreements or other agreements that we or our subsidiaries enter into in the +future might also restrict the ability of our subsidiaries to make contributions +to us and our ability to receive distributions. We believe that the present and +anticipated retained earnings of our subsidiaries will be sufficient to enable +them to pay dividends to us in amounts that we require. However, in the future, +these restrictions on the availability and usage of our major source of funding +could impact our ability to fund our operations and to service our +indebtedness.
+
 
+
+
+
+
+
+
+
19
+
+
+
+
+
+
+
+
+
+
 
+
The +dividends we receive from our wholly-owned operating subsidiaries and our global +income may be subject to PRC tax under the new PRC tax law, which could have an +adverse effect on our results of operations.
+
 
+
Under the +Enterprise Income Tax Law enacted by the National People’s Congress of China, or +the new PRC tax law, and the Implementation Regulations of the Enterprise Income +Tax Law, both of which became effective on January 1, 2008, an enterprise +established outside of the PRC with “de facto management bodies” within the PRC +is considered a resident enterprise and is subject to the enterprise income tax +at the rate of 25% on its global income, and “de facto management bodies” is +defined as the bodies that have material and overall management and control over +the business, personnel, accounts and properties of the enterprise. If the PRC +tax authorities subsequently determine that we and our subsidiaries established +outside of China should be classified as a resident enterprise, then our global +income including the dividends we receive from our subsidiaries incorporated in +China will be subject to the enterprise income tax at the rate of 25%, which +would have a material adverse effect on our business, financial condition and +results of operations. The new PRC tax law and its implementation regulations +further provide that dividends distributed between qualified resident +enterprises, which means the investment income derived by a resident enterprise +from direct investment in other resident enterprises (other than investment +income from stock issued publicly by resident enterprises and traded on stock +exchanges where the holding period is less than 12 months) are exempt from the +enterprise income tax. As the term “resident enterprises” needs further +clarification and interpretation, we cannot assure you that if we and our +subsidiaries established outside of China are deemed as resident enterprises, +the dividends distributed by our subsidiaries incorporated in China as +foreign-invested enterprises to their direct shareholders would be regarded as +dividends distributed between qualified resident enterprises, and be exempt from +the enterprise income tax.
+
 
+
In +addition, even if we and our subsidiaries established outside of China are not +deemed to be resident enterprises, they still may be regarded as a “non-resident +enterprise,” and under the new PRC tax law and its implementation regulations, +dividends payable by a foreign-invested enterprise in China to its foreign +investor who is a non-resident enterprise will be subject to a 10% withholding +tax unless any such foreign investor’s jurisdiction of incorporation has a tax +treaty with China that provides for a different withholding arrangement. The +direct shareholders of our subsidiaries incorporated in China as +foreign-invested enterprises are located in Hong Kong. According to the Mainland +and Hong Kong Special Administrative Region Arrangement on Avoiding Double +Taxation or Evasion of Taxation on Income agreed between China and Hong Kong in +August 2006, dividends paid by a foreign-invested enterprise in China to its +direct holding company in Hong Kong will be subject to withholding tax at a rate +of no more than 5%, if the foreign investor owns directly at least 25% of the +shares of the foreign-invested enterprise.
+
 
+
The +imposition of withholding tax on dividends payable by our PRC subsidiaries to +us, or the imposition of PRC tax on our global income as a “resident enterprise” +registered outside the PRC under the new PRC tax law could have an adverse +effect on our financial condition and results of operations.
+
  
+
+
The termination and expiration or +unavailability of preferential tax treatments once available to us may have a +material adverse effect on our operating results and financial +condition.
+

+
GaoKe Energy registered as a foreign +invested enterprise, or FIE, in August 2006, entitling it to a 100% +exemption from PRC income tax for two years starting with the year ended +December 31, 2007, and a 50% exemption from PRC income tax for three years +starting with the year ended December 31, 2009. While the PRC Enterprise Income +Tax Law, or the new EIT Law, eliminated the preferential tax treatment available +to FIEs, the preferential tax treatment has been grandfathered for FIEs +registered prior to March 16, 2007, including GaoKe Energy. As such, GaoKe +Energy was not subject to income taxes in 2007 or 2008. Under the new EIT law, +GaoKe Energy should be subject to income tax at a rate of 12.5% for 2009, 2010, +and 2011 before being subject to an income tax rate of 25% in 2012. However, +GaoKe Energy was granted a full exemption from PRC income tax for 2009 by the +relevant local state tax bureau. As a result, no provision for income taxes was +made for GaoKe Energy in 2009. Although we believe this tax exemption by the +local state tax bureau is permissible, such an exemption may be subject to +discretionary interpretation and enforcement by central government PRC tax +authorities. If central government PRC tax authorities deem the exemption from +PRC income tax to be not permissible, we may be required to pay +back taxes owed which could have a material adverse effect on our financial +condition and results of operation.
+
  
+
+
Foreign +exchange regulations in the PRC may affect our ability to pay dividends in +foreign currency or conduct other foreign exchange business.
+
 
+
We +currently receive substantially all of our revenues in RMB. RMB is not presently +a freely convertible currency, and the restrictions on currency exchanges may +limit our ability to use revenues generated in RMB to fund our business +activities outside the PRC or to make dividends or other payments in U.S. +dollars. The PRC government, through the State Administration for Foreign +Exchange, or SAFE, regulates conversion of RMB into foreign currencies. +Currently, foreign invested enterprises, such as our operating subsidiaries, are +required to apply for “Foreign Exchange Registration Certificates” and to renew +those certificates annually. However, even with that certification, conversion +of currency in the “capital account” (e.g. capital items such as direct +investments or loans) still requires the approval of SAFE. There is no assurance +that SAFE approval will be obtained, and if it is not, it could impede our +business activities and restrict our ability to pay dividends should we +determine to do so in the future.
+
 
+
PRC +regulations relating to the establishment of offshore special purpose companies +by PRC residents may subject our PRC resident shareholders to personal liability +and limit our ability to inject capital into our PRC subsidiaries, limit our PRC +subsidiaries’ ability to distribute profits to us, or otherwise adversely affect +us.
+
 
+
SAFE +issued a public notice in October 2005 along with related procedural guidance in +January 2007 requiring PRC residents to register with the local SAFE branch +before establishing or controlling any company outside of China for the purpose +of capital financing with assets or equity of PRC companies, referred to in the +notice as an “offshore special purpose company.” Under this public notice, PRC +residents who are shareholders and/or beneficial owners of such offshore special +purpose companies were required to register with the local SAFE branch before +March 31, 2006. We have requested our shareholders and/or beneficial owners who +are subject to the registration requirements under the SAFE notice to register +with the local SAFE branch. Failure of these shareholders and/or beneficial +owners to register with the local SAFE branch as required by the SAFE notice or +failure of future shareholders of our Company who are PRC residents to comply +with the registration procedures set forth in the SAFE notice may subject such +shareholders and/or beneficial owners to fines and other government actions and +may also limit our ability to fund our PRC subsidiaries, limit our PRC +subsidiaries’ ability to distribute dividends, if any, to our Company or +otherwise adversely affect our business.
+
+
+
+
+
+
+
+
+
20
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+
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+
+
  +
+
+
The +PRC Labor Contract Law and its implementing rules may materially and adversely +affect our business and results of operations.
+
 
+
On June +29, 2007, the Standing Committee of the National People’s Congress of China +enacted the Labor Contract Law, which became effective on January 1, 2008. On +September 18, 2008, the State Council adopted the implementing rules for the +Labor Contract Law, which became effective upon adoption. This new labor law and +its implementing rules have reinforced the protection for employees, who, under +the existing PRC Labor Law, already have certain rights, such as the right to +have written labor contracts, the right to enter into labor contracts with no +fixed terms under specific circumstances, the right to receive overtime wages +when working overtime, and the right to terminate or alter terms in the labor +contracts. In addition, the Labor Contract Law and its implementing rules have +made some amendments to the existing PRC Labor Law and added some clauses that +could increase cost of labor to employers. For example, under the Labor Contract +Law, employers are required to base their decisions to dismiss employees on +seniority, as opposed to merit, under certain circumstances. As the Labor +Contract Law and its implementing rules are relatively new, there remains +significant uncertainty as to their interpretation and application by the PRC +government authorities. In the event that we decide to significantly reduce our +workforce, the Labor Contract Law and its implementing rules could adversely +affect our ability to effect these changes cost-effectively or in the manner we +desire, which could lead to a material negative impact on our business and +results of operations.
+
 
+
We +face risks related to health epidemics, other catastrophes or acts of terrorism, +which could disrupt our operations.
+
 
+
Our +business could be materially and adversely affected by an outbreak of the avian +flu, swine flu, severe acute respiratory syndrome, another health epidemic, or +catastrophe or an act of terrorism. In recent years, there have been reports on +the occurrences of avian flu in various parts of China, including a few +confirmed human cases and deaths. In April 2009, influenza A, or H1N1, a new +strain of flu virus commonly referred to as “swine flu,” was first discovered in +North America and quickly spread to other parts of the world, including China. +Any prolonged recurrence of avian flu, severe acute respiratory syndrome, swine +flu or other adverse public health developments in China or elsewhere in Asia +may have a material and adverse effect on our business operations. For instance, +an outbreak of avian flu, a recurrence of SARS, or any other epidemic may lead +to health or other government regulations requiring temporary closure of our +business or the businesses of our subcontractors, suppliers or customers. In +addition, terrorist attacks, a significant earthquake or other geological +disturbance in any of China’s more populated cities and financial centers could +severely disrupt the Chinese economy or cause temporary restrictions on our +business or the businesses of our subcontractors, suppliers or customers, which +would severely disrupt our business operations and materially and adversely +affect our results of operations.
+

+
Risks +relating to Our Shares
+
 
+
Our +share price is volatile and you might not be able to resell your securities at +or above the price you have paid.
+

+
The price +at which our common shares had traded has been highly volatile, with a high and +low sales price of US$21.04 and US$3.00, respectively, from January 1, 2009 +through March 30, 2010. You might not be able to sell the shares of our common +shares at or above the price you have paid. The stock market has experienced +extreme volatility that often has been unrelated to the performance of its +listed companies. Moreover, only a limited number of our shares are traded each +day, which could increase the volatility of the price of our shares. These +market fluctuations might cause our share price to fall regardless of our +performance. The market price of our common shares might fluctuate significantly +in response to many factors, some of which are beyond our control, including the +following:
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
actual + or anticipated fluctuations in our operating + results;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
changes + in securities analysts’ +expectations;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
announcements + by our competitors or us of significant new products, contracts, + acquisitions, strategic partnerships, joint ventures or capital + commitments;
+
+
+
 
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21
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+
 
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
regulatory + developments in China and our other target markets affecting us, our + customers or our competitors;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
conditions + and trends in our industry;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
general + market, economic, industry and political + conditions;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
changes + in market values of comparable companies, particularly those that focus on + the China market;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
additions + or departures of key personnel;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
stock + market price and volume fluctuations attributable to inconsistent trading + volume levels;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
future + sales of equity or debt securities, including sales which dilute existing + investors; and
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
fluctuations + in the exchange rate between the U.S. dollar and + RMB.
+
+
+

+
Shares +eligible for future sale may adversely affect the market price of our common +shares, as the future sale of a substantial amount of outstanding shares in the +public marketplace could reduce the price of our common shares.
+

+
On +January 21, 2010, we entered into a securities purchase agreement with certain +institutional investors pursuant to which we sold such investors 5,777,932 of +our common shares, together with two series of warrants to purchase an +additional 2,888,968 shares. 4,751,130 of these shares are freely tradable, and +we have undertaken to register the remainder of these shares and the shares +issuable on exercise of the warrants on a registration statement, which we have +agreed is to become effective no later than 120 days after the issuance date of +these securities. The registration of these securities for resale will be in +addition to the registration of 1,504,183 shares issuable upon exercise of +warrants that we issued in June 2009. The market price of our common shares +could decline as a result of sales of a large number of shares of our common +shares in the market or the perception that these sales could occur created by +significant market overhang. These sales, or the possibility that these sales +may occur, also might make it more difficult for us to sell equity securities in +the future at a time and at a price that we deem appropriate.
+

+
We +have a substantial, but not majority, shareholder, whose interests may not be +aligned with the interest of our other shareholders.
+
 
+
+
Our +Chairman and Chief Executive Officer, Mr. Jinxiang Lu, beneficially owns +approximately 24.8% of our outstanding common shares. Accordingly, Mr. Lu +may exercise significant influence over all matters requiring shareholder +approval, including the election of a majority of the directors and the +determination of significant corporate actions.  In addition, under +the terms of the purchase agreement dated April 14, 2007 pursuant to which we +acquired our Chinese operating companies, we are obligated to issue an aggregate +of up to 9,000,0000 additional shares to Mr. Lu if we reach certain levels of +after-tax profit for each year from 2007 through 2012.  Mr. Lu’s right +to receive these shares if we achieve these levels of after-tax profit does not +require his continued employment by our Company. We satisfied the after-tax +profit minimum for 2007, 2008 and 2009 and issued 1,000,000 shares in July 2008 +and July 2009, respectively, which are included in the percentage ownership +figure above.  Pursuant to an agreement between Mr. Lu and Mr. Lin, +our Chief Operating Officer and Director, Mr. Lu will transfer 5% of any of +these additional incentive shares issued to him to Mr. Lin.  Mr. Lin +beneficially owns approximately 4.0% of our outstanding common +shares.  If all of the remaining 6,000,000 additional shares are +issued to Mr. Lu, his percentage ownership, along with Mr. Lin’s percentage +ownership of our shares would increase significantly.  The +concentration of ownership by Mr. Lu and Mr. Lin may preclude actions being +taken even if supported by our other shareholders.  In addition, it +may discourage, delay or prevent a change in control of our Company, which could +deprive our shareholders of an opportunity to receive a premium for their shares +as part of any sale of our company.
+

+
With +respect to related party transactions, Mr. Lu, along with his spouse, hold an +aggregate 49.0% interest in GaoKe Design, an operating company which receives +subcontracting work related to our distributed power generation +projects.  GaoKe Energy holds the remaining 51.0% interest. For more +information on this related party transaction, please see Item 4.A – History and +Development of the Company and Item 7.B – “Major Shareholders and Related Party Transactions – +Related Party Transactions,” of this Annual Report on Form +20-F.
+
 
+
+
As +a foreign private issuer, we are exempt from certain SEC rules mandating that +certain information be made available to shareholders of United States public +companies.
+
 
+
We are a +foreign private issuer within the meaning of the rules promulgated under the +Securities Exchange Act of 1934, or Exchange Act. As such, we are exempt from +certain provisions applicable to United States public companies +including:
+
 
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
the + rules requiring the filing with the SEC of quarterly reports on Form 10-Q + or current reports on Form 8-K;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
the + sections of the Exchange Act regulating the solicitation of proxies, + consents or authorizations with respect to a security registered under the + Exchange Act;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
Regulation + FD precluding selective disclosures of material information; + and
+
+
+
 
+
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+
+
+
+
+
22
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+
+
+
+
+
+
+
+
 
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
the + sections of the Exchange Act requiring insiders file public prompt reports + of their stock ownership and trading activities and establishing insider + liability for profits realized from any “short swing” trading transactions + (i.e., a purchase + and sale, or a sale and purchase, of the issuer’s equity securities within + less than six months).
+
+
+

+
Because +of these exemptions, our shareholders will not be afforded the same protections +or information generally available to investors holding shares in public +companies organized in the United States.
+
 
+
You +may experience dilution due to future sales of common shares or convertible debt +or the issuances of common shares upon conversion of outstanding +warrants.
+
 
+
+
We have +reserved 2,000,000 shares of our common shares for issuance pursuant to awards +granted under the 2007 Equity Plan.  As of December 31, 2009, there +were options outstanding to acquire 1,592,939 shares under our Company’s +employee share option plan, with 407,061 shares available to be granted and +581,539 of these options were exercisable.
+
+
 
+
We +anticipate requiring additional cash resources to finance our continued growth +or other future developments. To satisfy our financing needs in the future, we +may seek to sell additional equity or debt securities. The sale of additional +equity securities, including additional warrants, or convertible debt +securities, could result in dilution to our shareholders. In addition, the +exercise of our outstanding warrants issued in June 2009 and January 2010 to +certain institutional investors could result in dilution to our existing common +shareholders. The warrants issued in June 2009 contain full-ratchet +anti-dilution rights for a period of two years from their date of issuance. +After the expiration of this two years period, the June 2009 warrants are +subject to standard weighted-average anti-dilution protection. The warrants +issued in January 2010 are subject to full ratchet anti-dilution rights until we +have received an aggregate of $65 million in proceeds from the sale of +securities (net of any proceeds that are repaid or returned by us). Once we have +received an aggregate of $65 million from the sale of securities, the January +2010 warrants are subject to adjustment on the basis of weighted average +anti-dilution. No adjustments for any such dilutive issuance will be made to the +January 2010 warrants following the third anniversary of the issuance date of +those warrants, regardless of the amount of proceeds received by us from the +sale of securities.
+

+
As a result of these anti-dilution +rights, if we issue or grant in the future any rights to purchase any of our +common shares, or other security convertible into our common shares, for an +effective per share price less than the exercise price then in effect with +respect to the June 2009 warrants, the exercise of all unexercised June 2009 +warrants will be reduced to equal such lower price for the two year period +following there issuance and, thereafter, weighted average anti-dilution rights +will apply. The exercise price of the January 2010 warrants will be reduced if +we issue shares or rights to acquire shares at less than the applicable exercise +price during the three year period from the date the January 2010 warrants were +issued, such reduction will be either to equal to such lower issuance price or +to an amount based on an weighted average price formula, pursuant to the +conditions discussed above.
+

+
The +foregoing adjustments to the exercise price of the warrants will not apply to +certain exempt issuances, including issuances pursuant to employee share option +plans.
+
  +
+
Restrictive +covenants in our outstanding warrants and under the related Securities Purchase +Agreements may limit our ability to engage in certain transactions.
+
 
+
Our +outstanding warrants issued in June 2009 would require us to make an downward +adjustment to the exercise price of the warrants in the event of any +distribution of our cash or property, including any cash dividend. Further, the +Securities Purchase Agreement pursuant to the which the warrants were issued +contains a number of covenants, including a covenant that requires us to allow +the purchasers of the warrants to participate in future offers of equity or +equity equivalents until June 2011 (two years from the date the warrants were +issued) subject to an exception for certain bona fide underwritten public +offerings and offers and sales of certain “Excluded Securities” (e.g., certain +shares issued for compensatory purposes).
+

+
Our +outstanding warrants issued in January 2010 also require us to make certain +downward adjustments to the exercise price of the warrants in the event of any +distribution of our cash or our property, including any cash dividend. Further, +the Securities Purchase Agreement pursuant to which the January 2010 warrants +were issued prohibits us from issuing any additional equity interests until we +have registered for resale all of the securities that we issued to institutional +investors in our January 2010 placement of securities.
+

+
Our +officers and directors have limited experience in public company reporting and +financial accounting, which could impair our ability to satisfy public company +filing requirements and increase our securities compliance costs.
+

+
Our +officers and directors have limited experience as officers and directors of a +publicly traded company, or in complying with the regulatory requirements +applicable to a public company. As a result, we could have difficulty satisfying +the regulatory requirements applicable to public companies, which could +adversely affect the market for our common shares. At present, we primarily rely +upon outside experts to advise us on matters relating to financial accounting +and public company reporting. While we believe that it will be possible to +satisfy our public company reporting requirements through the use of third party +experts, our general and administrative costs will remain higher to the extent +our officers alone are not able to satisfy our public company reporting +requirements.
+
 
+
+
+
+
+
+
+
23
+
+
+
+
+
+
+
+
+
+
 
+
Our +U.S. shareholders may not be able to obtain jurisdiction over our officers or +directors or access to our assets located in the PRC in the event of a lawsuit +and, as a result, may not be able to enforce their legal rights against us +and/or our officers and directors.
+
 
+
Because +most of our officers and directors reside outside of the U.S., it may be +difficult for U.S. shareholders to acquire jurisdiction over these persons in +the event of a lawsuit against us and/or our officers and directors. It also is +unclear if extradition treaties now in effect between the U.S. and the PRC would +permit effective enforcement of criminal penalties of federal securities laws +against us or our officers and directors. Furthermore, because substantially all +of our assets are located in the PRC, it would also be extremely difficult to +access those assets to satisfy an award entered against us in U.S. court. +Moreover, we have been advised that the PRC does not have treaties with the U.S. +providing for the reciprocal recognition and enforcement of judgments of courts. +As a result, it may not be possible for investors in the U.S. to enforce their +legal rights, to effect service of process upon our directors or officers or to +enforce judgments of U.S. courts predicated upon civil liabilities and criminal +penalties of our directors and officers under U.S. federal securities +laws.
+
 
+
We +have incurred and expect to continue to incur higher general and administrative +costs as a result of being a public company.
+
 
+
As a +result of our business combination transactions and listing on NASDAQ in 2008, +we have incurred and expect to continue to incur a significantly higher level of +legal, accounting and other expenses than we did before we became a public +company. As a public company, we are subject to reporting obligations under the +U.S. securities laws. In addition, SOX, as well as rules subsequently +implemented by the SEC and NASDAQ, have required changes in corporate governance +practices of public companies listed on U.S. national stock exchanges, including +foreign private issuers such as us. The U.S. securities laws and related rules +and regulations have increased our legal and financial compliance costs and made +certain activities more time-consuming and costly. We will continue to incur +considerable costs and use significant management time and other resources in an +effort to comply with our obligations as a public company including complying +with the internal control over financial reporting obligations of Section 404 of +SOX. Our reporting obligations as a public company will continue to place a +significant strain on our management, operational and financial resources and +systems for the foreseeable future.
+
 
+
We +do not anticipate paying cash dividends, so the liquidity of your investment +depends on your ability to sell your shares at an acceptable price.
+
 
+
We do not +anticipate paying cash dividends in the foreseeable future. Instead, we expect +to apply earnings toward the further expansion and development of our business. +Thus, the liquidity of your investment is dependent upon your ability to sell +shares at an acceptable price, rather than receiving an income stream from it. +Fluctuations in the market price of our shares may limit your ability to realize +any value from your investment, including recovering the initial purchase +price.
+
 
+
Certain +provisions of our memorandum and articles of association may have the effect of +preventing an acquisition or tender offer which might be viewed by our +shareholders to be in their best interests.
+
 
+
Certain +provisions of our memorandum and articles of association, including our advance +notice requirement for shareholder proposals to be brought before our annual +meeting of shareholders and restrictions on the ability of our shareholders to +call a meeting, are designed in part to discourage any tender offer or other +attempt to gain control of our company in a transaction that is not approved by +our board of directors. However, to the extent these provisions discourage a +change of control or tender offer for all or part of our authorized shares, they +may have the effect of preventing an acquisition or tender offer which might be +viewed by shareholders to be in their best interests. These provisions may also +serve to insulate incumbent management from change and to discourage not only +sudden or hostile takeover attempts, but also any attempts to acquire control +that are not approved by our board of directors.
+
 
+
We +are organized under the laws of the British Virgin Islands and, because the +rights of shareholders under British Virgin Islands law differ from those under +U.S. law, you may have fewer protections as a shareholder than you would under +U.S. law.
+
 
+
Our +corporate affairs are governed by our memorandum and articles of association, +the Business Companies Act of the British Virgin Islands and the common law of +the British Virgin Islands. The rights of shareholders to take action against +our directors, actions by minority shareholders and the fiduciary responsibility +of our directors under British Virgin Islands law are governed by the common law +of the British Virgin Islands and the Business Companies Act. The common law of +the British Virgin Islands is derived in part from comparatively limited +judicial precedent in the British Virgin Islands as well as from English common +law, which has persuasive, but not binding, authority on courts in the British +Virgin Islands. The rights of our shareholders and the fiduciary +responsibilities of our directors under British Virgin Islands law are not as +clearly established as they would be under statutes or judicial precedent in +some jurisdictions in the United States. In particular, the British Virgin +Islands has a less prescriptive body of securities laws as compared to the +United States, and provides significantly less protection to investors. BVI law +also provides greater restrictions on the abilities of shareholders to initiate +derivative actions than are provided under the laws of many U.S. +jurisdictions.
+
 
+
+
+
+
+
+
+
24
+
+
+
+
+
+
+
+
+
+
 
+
You +may not be able initiate shareholder derivative actions in U.S. courts and, in +addition, British Virgin Islands courts are less likely to enforce against us +judgments of courts in the U.S., thereby potentially depriving our shareholders +of the ability to protect their interests.
+
 
+
Shareholders +of British Virgin Islands companies may not be able to initiate shareholder +derivative actions in a federal court of the United States. The circumstances in +which any such action may be brought, and the procedures and defenses that may +be available in respect to any such action, may result in the rights of +shareholders of a British Virgin Islands company, such as ours, being more +limited than those of shareholders of a company organized in the United States. +Accordingly, shareholders may have fewer alternatives available to them if they +believe that corporate wrongdoing has occurred. The British Virgin Islands +courts are also unlikely to recognize or enforce against us judgments of courts +in the United States based on certain liability provisions of U.S. securities +law; or to impose liabilities against us, in original actions brought in the +British Virgin Islands, based on certain liability provisions of U.S. securities +laws that are penal in nature. There is no statutory recognition in the British +Virgin Islands of judgments obtained in the United States, although the courts +of the British Virgin Islands will generally recognize and enforce the non-penal +judgment of a foreign court of competent jurisdiction without retrial on the +merits. This means that even if shareholders were to sue us successfully, they +might not be able to recover anything to make up for the losses suffered as the +basis for a claim at common law in the British Virgin Islands unless certain +conditions were satisfied.
+
 
+
We +may be classified as a passive foreign investment company, which could result in +adverse U.S. federal income tax consequences to U.S. holders of our common +shares.
+
 
+
Based on +the composition of our assets and income and our current expectations, we +believe that we were not a passive foreign investment company, or PFIC, for U.S. +federal income tax purposes with respect to our 2009 taxable year and we do not +intend or anticipate becoming a PFIC for 2010 or any future taxable year. +However, the determination of our PFIC status is dependent upon the composition +of our income and assets and, in addition, we must make a separate determination +at the close of each taxable year as to whether we are a PFIC. Accordingly, we +cannot assure you that we will not be a PFIC for our current taxable year ending +December 31, 2010, or any future taxable year. A non-U.S. corporation will be +considered a PFIC for any taxable year if either (1) at least 75% of its gross +income is passive income or (2) at least 50% of the value of its assets is +attributable to assets that produce or are held for the production of passive +income. The market value of our assets will be determined based on the market +price of our common shares, which is likely to fluctuate. If we were treated as +a PFIC for any taxable year during which a U.S. person held our shares, certain +adverse U.S. federal income tax consequences could apply to such U.S. person. +See Section 10E. Additional Information, Taxation —United States —Passive Foreign +Investment Company.”
+

+
+ + + + + +
+
ITEM 4.
+ 		+
INFORMATION ON THE + COMPANY
+
+
+
 
+
+ + + + + +
+
A.
+ 		+
History and Development of the + Company
+
+
+
 
+
+
We were +established under the corporate name A-Power Energy Generation Systems, Ltd. We +were incorporated in the British Virgin Islands on May 14, 2007, under the BVI +Business Companies Act, 2004 and CT Corporation System, 111 Eighth Avenue, New +York, NY 11011 (212) 894-8539 is our agent in connection with our filings under +the Securities Act of 1933, as amended. Our principal executive offices are +located in the People’s Republic of China at No. 44 Jingxing North Street Tiexi +District, Shenyang, Liaoning, China 110021 and our telephone number is (86) +10-24-85617888.
+

+
In +January 2008, A-Power acquired all of the issued and outstanding common stock of +Head Dragon Holdings, a Hong Kong company that owns a controlling interest in +three operating subsidiaries in the PRC, collectively known as GaoKe.  In +addition, A-Power holds 100% of Head Dragon Holdings, which holds our +distributed power generation systems business through GaoKe.  A-Power also +holds 100% of Easy Flow, which owns a controlling interest in two operating +subsidiaries in the PRC through which we conduct our wind energy +business. 
+
 
+
+
+
At the +time of the Head Dragon acquisition, A-Power was a wholly-owned subsidiary of +Chardan, a blank check company with no operations that had been formed as +a vehicle for an acquisition of an operating business in China. Immediately +following the purchase of GaoKe, Chardan merged with and into A-Power for +the purpose of changing its domicile. As a result of the merger, each +outstanding share of Chardan common stock automatically converted into one +common share of A-Power, outstanding Chardan warrant automatically converted +into one A-Power warrant and each outstanding Chardan unit automatically +converted into one A-Power unit.
+
+

+
On January 22, 2008, A-Power’s +common shares began trading on the NASDAQ Capital Market, and on June 2, 2008, +A-Power’s common shares began trading on the NASDAQ Global Select +Market.
+

+
+
+
+
+
+
+
+
+
25
+
+
+
+
+
+
+
+
+
+
+
+
 
+
History +Prior to the Business Combination
+
+
 
+
Chardan +was a blank check corporation organized under the laws of the State of Delaware +on March 10, 2005, under the name “Chardan China Acquisition Corp. II.” Chardan +was formed to effect a business combination with an unidentified operating +business that had its primary operating facilities located in the PRC in any +city or province south of the Yangtze River. In August 2005, Chardan +successfully consummated an initial public offering of its equity securities +from which it derived net proceeds of approximately $30.9 million. Approximately +$29.8 million of the net proceeds of the initial public offering was placed in a +trust account and was released to A-Power upon consummation of the acquisition +of Head Dragon Holdings. The balance of the net proceeds from the initial public +offering of approximately $1.1 million was used by Chardan to pay the expenses +incurred in its pursuit of a business combination. Other than its initial public +offering and the pursuit of a business combination, Chardan did not engage in +any business.
+
 
+
+
The +Chardan Business Combination
+
 
+
On April +14, 2007, Chardan entered into a stock purchase agreement with A-Power and Mr. +Jinxiang Lu, who was the largest holder of the issued and outstanding common +shares of Head Dragon Holdings, a Hong Kong holding company formed in June 2006, +to hold equity interests in GaoKe Energy and its 51% held subsidiary GaoKe +Design (one of the leading Chinese companies that designs, constructs, and +installs distributed power generation and micro power grids) held directly by +certain stockholders of GaoKe Energy.
+
 
+
+
Pursuant +to terms of the stock purchase agreement, on January 18, 2008, A-Power acquired +all of the issued and outstanding common shares of Head Dragon Holdings and, as +a result, gained control of GaoKe Energy. Immediately after that stock purchase, +Chardan merged with and into A-Power for the purpose of redomestication out of +the United States into the British Virgin Islands for tax considerations and +greater corporate flexibility. Pursuant to the redomestication merger, each +outstanding share of Chardan common stock automatically converted into one +common share of A-Power, each outstanding Chardan warrant automatically +converted into one A-Power warrant and each outstanding Chardan unit (each unit +consisting of one share of common stock and two warrants to purchase three +shares of common stock) automatically converted into one A-Power unit. Before +the merger, the prices of Chardan’s common stock, warrants to purchase common +stock and units were quoted in the U.S. on the Over-the-Counter Bulletin Board +under the symbols CSCA, CSCAW ad CSCAU, respectively.
+
 
+
+
The +management of GaoKe Energy before the business combination was led by Mr. Lu. +Mr. Lu became our Chairman and Chief Executive Officer upon consummation of the +Chardan business combination and has continued to operate GaoKe and our other +subsidiaries since the combination.
+
 
+
Pursuant +to the terms of the stock purchase agreement, in consideration for all of his +Head Dragon Holdings shares, Mr. Lu received 13,000,000 common shares, of which +3,497,000 shares were transferred to John S. Lin and three other shareholders. +As additional consideration for the Head Dragon Holding shares, the stock +purchase agreement provides that Mr. Lu will be issued up to an aggregate of +9,000,000 common shares (1,000,0000 per year for 2007 through 2009 and 2,000,000 +for 2010 through 2012, on an all-or-none basis each year) for the six years +beginning with fiscal 2007 if, on a consolidated basis, we generate net +operating profits (excluding after-tax operating profits from any +subsequent acquisitions of securities that have a dilutive effect) of at least +the following amounts:
+
 
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Year + ending December 31,
+ 		  +
Net Operating
+
Profit (after tax)
+ 		 
+
2007
+ 		 $        14,000,000 
+
2008
+ 		 $19,000,000 
+
2009
+ 		 $29,000,000 
+
2010
+ 		 $44,000,000 
+
2011
+ 		 $63,000,000 
+
2012
+ 		 $87,000,000 
+
+
+
+
+
+
+
+

+
Mr. Lu's +right to receive these shares if we achieve the above results does not require +his continued employment by us.
+

+
We +achieved the target after-tax profit for the year ended December 31, 2007 and +December 31, 2008, and we issued 1,000,000 common shares to Mr. Lu in July 2008 +and July 2009, respectively. We also achieved the target after-tax profit for +the year ended December 31, 2009 and we expect to issue an additional 1,000,000 +common shares to Mr. Lu during the third quarter of 2010. Mr. Lu has agreed to +transfer 5% of any of these additional incentive shares issued to him by the +Company to John S. Lin, our Chief Operating Officer and Director.
+

+
Subsequent +to the business combination and redomestication merger, all of the holders of +Head Dragon Holdings outstanding preferred shares exchanged their preferred +shares on a one-to-one basis for our common shares.
+
 
+
In +February 2008, we sent out redemption notices to all of the holders of our +outstanding callable common shares purchase warrants. The warrants were +originally issued by Chardan in August 2005. As a result of the merger of +Chardan into A-Power, the warrants were exercisable into our common shares at an +exercise price of $5.00 per warrant. Approximately 11,866,303 of the 11,881,270 +warrants that were then outstanding were exercised. Holders of the few remaining +warrants that were not exercised were paid $0.01 per warrant and the warrants +were extinguished. The gross proceeds received by us from this redemption were +approximately $59.3 million, which has been used as working capital and for +other corporate purposes.
+
 
+
+
+
+
+
+
+
26
+
+
+
+
+
+
+
+
+
+
 
+
Our +Distributed Power Generation Business– Head Dragon Holdings
+
 
+
+
Our +distributed power generation systems business is held by Head Dragon Holdings, +our wholly-owned subsidiary, which owns a controlling interest in three +operating subsidiaries in China:  GaoKe Energy, a wholly-owned subsidiary +of Head Dragon Holdings; GaoKe Design, 51% of which is owned by GaoKe Energy, +36% of which is owned by Jinxiang Lu, our Chairman and Chief Executive Officer +and 13% of which is owned by Mr. Lu’s spouse; and LICEG Ltd., 90% of which is +owned by GaoKe Energy and 10% of which is owned by our joint venture partner, +LICEG, a construction and engineering company incorporated under the +Construction Commission of Liaoning provincial government. GaoKe Energy was +founded in March 2003, GaoKe Design was founded in May 2003, and we formed the +LICEG Ltd. domestic co-operative joint venture in August 2007.  Each of +these operating companies are based in Shenyang, an industrial hub-city of +China. GaoKe Energy, GaoKe Design and LICEG Ltd. are collectively referred to as +GaoKe.  GaoKe Energy is the main operating entity of GaoKe and is +responsible for entering into contracts with our distributed power generation +systems customers and undertaking projects, as well as subcontracting work to +GaoKe Design, LICEG Ltd. and to third party subcontractors. 
+
 
+
+
Acquisition +of Class A Licenses
+
 
+
+
In +October 2005, we, through GaoKe Energy, entered into an agreement to acquire +certain licenses of LICEG, a Chinese construction and engineering company. LICEG +is one of a limited number of construction and engineering companies in China +with Class A-level licenses that permit it to undertake international power and +infrastructure projects and to construct various power systems, energy and +infrastructure projects of any size in China. Since its inception in 1993, LICEG +has completed a large number of projects in China and in Africa, Eastern Europe +and the Asian Pacific region. In August 2007, pursuant to our agreement with +LICEG, we formed a domestic co-operative joint venture company, LICEG Ltd., of +which GaoKe Energy holds a 90% ownership interest and LICEG holds a 10% +ownership interest.  Pursuant to the agreement, GaoKe Energy agreed +that LICEG Ltd. would hire over 30 of LICEG’s engineers, and LICEG agreed to +transfer a number of its Class A licenses, but none of its liabilities, to LICEG +Ltd. As a +result of this agreement, from that time to 2009, we had the full right to use +these Class A licenses, which cover a broad scope of services, including +power plant construction and installation, steel construction and industrial +renovation and construction for large-scale projects in China and overseas +(subject to obtaining local approvals and permits).  GaoKe Energy +committed to pay RMB36.0 million, or approximately US$5.3 million, once LICEG +Ltd. obtains all of these licenses that LICEG agreed to transfer. In early 2010, +we have obtained ownership rights to these licenses, and will pay the RMB36.0 +million to LICEG once the final license has been transferred to LICEG Ltd. which, as +of March 30, 2010, is still in process. LICEG +also agreed to contribute RMB6.0 million, or approximately US$0.834 million, to +LICEG Ltd. and GaoKe Energy agreed to pay LICEG a fixed monthly fee of +RMB30,000, or US$4,418, in lieu of LICEG’s 10% share of retained earnings of +LICEG Ltd.  GaoKe Energy has the right to require LICEG to transfer +its 10% ownership interest to GaoKe Energy, at any time whereupon LICEG Ltd. +would become a 100% owned subsidiary of GaoKe Energy.
+
 
+
+
 Shenyang Power +Group
+

+
The +Shenyang Power Group was incorporated in May 2009 in the PRC as a construction +company specializing in electricity generation projects and manufacturer of +power equipment. Its registered capital is RMB1.0 billion of which Gaoke, LICEG +Ltd., Ruixiang and Jinxiang, all on behalf of A-Power, committed to contribute +62% of the registered capital and the remainder will be contributed by other +various non-related entities that are active in the construction +industry.
+

+
Shoulong +Energy
+

+
Shoulong +Co., Ltd., or Shoulong, was incorporated in July 2009 in Bangkok, Thailand, as a +company specializing in the construction of distributed power generation systems +in Thailand. Currently, Shoulong is overseeing our project in Prachinburi, +Thailand. A-Power directly or indirectly holds 100% of Shoulong’s +registered capital.
+
 
+
+
+
+
+
+
+
27
+
+
+
+
+
+
+
+
+
+
 
+
Our +Wind Energy Business Operations - Easy Flow
+
 
+
Our wind +energy business is held by Easy Flow, our wholly-owned subsidiary established +under the laws of Hong Kong, which owns a controlling interest in two operating +subsidiaries in China: Jinxiang, which is owned 80% by Easy Flow, 15% by Norwin, +a wind turbine company located in Denmark that is one of our licensing partners, +and 5% by Mr. Antos Glogowski, an independent consultant; and Ruixiang, which is +a wholly-owned subsidiary of Easy Flow.
+
 
+
Easy Flow +was established in June 2007 by John S. Lin, our Chief Operating Officer and +Director, for the purpose of holding our interests and financing our wind energy +business in China. Head Dragon Holdings transferred approximately $42.0 million +to Easy Flow, which Easy Flow in turn transferred to Ruixiang, to finance the +development of our 2.7 MW wind turbine production business using Fuhrländer’s +technology. Head Dragon Holdings also transferred approximately $10.0 million to +Easy Flow, which Easy Flow in turn transferred to Jinxiang, to finance the +development of our 750 kW and 225 kW wind turbine production business based on +Norwin’s technology. In June 2008, Mr. Lin transferred all of his shares in Easy +Flow to us, whereupon Easy Flow became our direct wholly-owned +subsidiary.
+
+

+
In +February 2007, GaoKe Energy entered into a license agreement with Norwin that +gave GaoKe Energy the exclusive rights to produce and sell Norwin’s 750 kW and +225 kW wind turbines in China. As part of the agreement with Norwin, Jinxiang +was established in Shenyang, China in January 2008. The license agreement has a +term of 20 years unless there is a substantial breach of the agreement. Under +this agreement, Gaoke Energy agreed to make all payments to Norwin by no later +than February 15, 2009. In January 2009, Norwin, GaoKe Energy, and Jinxiang +entered into an agreement to transfer the original license agreement from GaoKe +Energy to Jinxiang. The terms of the original agreement remain unchanged. As of +the date of this Annual Report on Form 20-F, we have a remaining balance of +$0.55 million to Norwin. However, Norwin has provided us written confirmation +dated May 31, 2009 that the agreement we have with them remains valid. We expect +to pay the remaining balance of $0.55 million to Norwin in the second half of +2010. We presently expect to begin production of Norwin’s 750 kW and 225 +kW wind turbines in China in the second quarter of 2010.
+
 
+
+
In May +2007, GaoKe Energy entered into a license agreement with Fuhrländer, a German +wind turbine manufacturer, that gave GaoKe Energy an exclusive right to sell and +a non-exclusive right to produce Fuhrländer’s 2.5 MW series wind turbines in +Liaoning and Hebei provinces of China and a non-exclusive right to produce and +sell Fuhrländer’s 2.5 MW series wind turbines in nine other PRC provinces. As +part of the agreement, Fuhrländer agreed to assist GaoKe Energy in developing a +production facility that emulates Fuhrländer’s facility in Germany, which we +have recently completed in Shenyang. Under the technology license, GaoKe Energy +has the right to any advancements or improvements that Fuhrländer makes to its +2.5 MW series wind turbine without charge. In January 2009, Fuhrländer, GaoKe +Energy, and Ruixiang entered into an agreement to transfer the original license +agreement from GaoKe Energy to Ruixiang. The terms of the original agreement +remain unchanged, except that the wind turbine series was upgraded from 2.5 MW +series of wind turbines to 2.7 MW series of wind turbines. As of the date of +this Annual Report on Form 20-F, we have sold ten 2.7 MW wind turbines for use +in 49.5 MW and 19.5 MW wind farm projects in Saiwusu, Inner Mongolia and +Donggang, Shandong Province. There +are certain disputes between the parties concerning payment and performance +under this license agreement. The +parties are in discussions to rectify this situation and are also are +currently negotiating an amendment to the license agreement to broaden the scope +of our rights to use the technology licensed thereunder. There can be no +assurance, however, that the parties will succeed in resolving the issues +between them. If we are +unable to rectify this situation, this could have a material adverse effect on +our business and results of operations.
+
+

+
In July +2009, we entered into a technology transfer agreement with Shenyang Huaren, to +use Shenyang Huaren’s proprietary technology to commercially produce and sell +1.5 MW wind turbines. As of the date of this Annual Report on Form 20-F filing, +we have not any payments under our license agreement with Shenyang Huaren as no +payments are yet due.  We have received a majority of the technology +transfer documents under the agreement and presently expect to produce the +initial 1.5 MW wind turbines in our Shenyang facility in the second half of +2010.
+
+
+

+
In +January 2010, we entered into a technology license agreement with W2E +Technologies GmbH, or W2E Technologies, to manufacture, operate, service and +sell advanced T8x 2.0 MW wind turbines. Under the license agreement, W2E +Technologies granted us an exclusive right to manufacture, operate, service and +sell its T8x 2.0 MW wind turbines in China and the United States beginning in +January 2010. In addition, we have obtained non-exclusive rights to market these +turbines in international markets outside of China and the United States. Under +the technology license, during the term of the agreement, we have the right to +any additional know-how in relation to the manufacturing, selling, erecting, +commissioning, operating, maintaining and monitoring of the T8x 2.0 MW wind +turbines without charge. As of the date of this Annual Report on Form 20-F, we +have made all scheduled payments under our license agreement with W2E +Technologies.  
+
 
+
In late +March 2008, we began construction of our wind turbine production plant, which is +located near our corporate headquarters in Shenyang, China. The plant consists +of a 320,000 square foot production facility with production lines for the +assembly of 2.7 MW, 2.5 MW, 1.5 MW, 750 kW and 225 kW series wind turbines, the +technology for which we licensed from Fuhrländer, Norwin and Shenyang Huaren +technologies, as described above. We completed construction of the facility in +June 2008, installed machinery and production lines during the second half of +2008, and had our official plant opening in January 2009.  The plant +has an annual capacity to produce a maximum of 300 units of our 2.7 MW (and/or +2.5 MW) series wind turbines, 300 units of our 1.5 MW series wind turbines and +300 units of our 750 kW and 225 kW series of wind turbines, and is expandable by +30%.  We began producing 2.7 MW wind turbines in June 2009 and +recognized revenue for the sale of these units in December 2009.
+
 
+
We expect +to begin commercial production of 2.0 MW wind turbines in the United States +under the W2E Technologies agreement discussed above in the second quarter of +2010. We intend to begin this production in a wind turbine +manufacturing facility which we plan to rent after identifying a +suitable facility and settling on commercially agreeable terms. We expect to +commence construction of our own US facility, a 320,000 square foot wind turbine +production facility with a total annual production capacity of 1.1 GW, in the +second half of 2010 or first half of 2011. We expect that the wind turbines we +plan to produce in the United States will be supplied to our planned US$1.5 +billion wind energy power plant in Texas and sold to other customers in the +North and South American markets. For more +information, see Item 3.D – “Key Information – Risk Factors – +Risks related to our business – The development of our wind energy power plant +project in Texas requires significant development work and capital and entails +political risks.”
+
+
 
+
+
+
+
+
+
+
28
+
+
+
+
+
+
+
+
+
+
 
+
On +January 25, 2010, we completed our acquisition of 100% of Evatech, based in +Kyoto, Japan, a designer and manufacturer of industrial equipment for liquid +crystal displays, plasma display panels and more recently, amorphous-silicon +(a-Si) PV cells and solar panels. After its integration with our Company, we +will adjust Evatech’s business lines to focus on equipment for the +manufacturing of PV cells and solar panels.
+

+
The term +of operation, the extension of which is subject to government approval upon +expiration, of each of GaoKe Energy, GaoKe Design, LICEG Ltd., Ruixiang and +Jinxiang, as provided in their articles of association, are set forth in the +table below:
+
 
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Company Names
+ 		  + +
Operating Period
+ 		  + +
Term of
+
Operation
+
+
GaoKe + Energy
+ 		  + +
February + 8, 2007 - February 8, 2037*
+ 		  + +
30 + years
+
+
GaoKe + Design
+ 		  + +
May + 26, 2008 - May 26, 2013**
+ 		  + +
5 + years
+
+
LICEG + Ltd.
+ 		  + +
August + 21, 2007-August 20, 2012
+ 		  + +
5 + years
+
+
Ruixiang
+ 		  + +
July + 30, 2007-July 29, 2027
+ 		  + +
20 + years
+
+
Jinxiang
+ 		  + +
January + 2, 2008-January 1, 2028
+ 		  + +
20 + years
+
+
+
+
+
+
+
 
+
+ + + + + + +
+
  +
+ 		+
*
+ 		+
GaoKe + Energy became a foreign invested company in February 2007, at which time + it renewed its incorporation, which originally occurred in March + 2003.
+
+
+

+
+ + + + + + +
+
  +
+ 		+
**
+ 		+
GaoKe + Design was established in May 2003 and renewed its incorporation + registration license in May 2008.
+
+
+
 
+
Each of +the operating business licenses of these companies can be renewed to the extent +the operating life of any of these companies extends beyond the license period +stated above.
+

+
Renewal +of the operating terms of our entities requires submitting certain application, +supporting materials and fees to the relevant PRC government entity that +supervises the entity. If we are unable to renew the operating terms, then our +continued operations would be against the relevant PRC regulations. For more +information, please see Item 3.D –  “Risk factors - Our distributed power generation +business and operating entities require certain licenses and +registrations,”, to this +Annual Report on 20-F.
+
 
+
+
Corporate +Structure Summary
+
 
+
+
Please +see below for a summary of our corporate structure:
+
 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
   +
+ 		  + +
Place of
+ 		  + +
Date of
+
+
incorporation/
+
+ 		  + +
Percentage of 
+
ownership interest 
+
attributable to the
+
Company
+ 		  + +
Principal activity
+
+
Name of company
+ 		  + +
incorporation
+ 		  + +
acquisition
+ 		  + +
Direct
+ 		  + +
Indirect
+ 		  + +
segment
+
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Head + Dragon Holdings
+ 		  + +
Hong + Kong
+ 		  + +
June + 2006
+ 		  +   + +
100
+ 		+
%
+ 		  +   + +
—
+ 		  +   + +
Investment + holding
+
+
Easy + Flow
+ 		  + +
Hong + Kong
+ 		  + +
June + 2007
+ 		  +   + +
100
+ 		+
%
+ 		  +   + +
—
+ 		  +   + +
Investment + holding
+
+
Evatech
+ 		  + +
Japan
+ 		  + +
February + 2010 (date of acquisition)
+ 		  +   +   +   +   +   + +
100
+ 		+
%
+ 		  + +
Assembly + and sale of solar panel production equipment
+
+
GaoKe + Energy
+ 		  + +
PRC
+ 		  + +
March + 2003
+ 		  +   + +
—
+ 		  +   +   + +
100
+ 		+
%
+ 		  + +
Construction + of distributed power generation systems
+
+
GaoKe + Design
+ 		  + +
PRC
+ 		  + +
May + 2003
+ 		  +   + +
—
+ 		  +   +   + +
51
+ 		+
%
+ 		  + +
Design + of distributed power generation systems
+
+
 
+
LICEG + Ltd.
+ 		  + +
PRC
+ 		  + +
August + 2007
+ 		  +   + +
—
+ 		  +   +   + +
90
+ 		+
%
+ 		  + +
Construction + of infrastructure, industrial buildings, and residential real estate + properties
+
+
Ruixiang
+ 		  + +
PRC
+ 		  + +
July + 2007
+ 		  +   + +
—
+ 		  +   +   + +
100
+ 		+
%
+ 		  + +
Manufacture + of wind energy turbines
+
+
Jinxiang
+ 		  + +
PRC
+ 		  + +
January + 2008
+ 		  +   + +
—
+ 		  +   +   + +
80
+ 		+
%
+ 		  + +
Manufacture + of wind energy turbines
+
+
Yixiang
+ 		  + +
PRC
+ 		  + +
July 2009
+ 		  +   + +
—
+ 		  +   +   + +
100
+ 		+
%
+ 		  + +
Manufacture + of wind
+
energy + turbine components
+
+
Shenyang + Power Group
+ 		  + +
PRC
+ 		  + +
May + 2009
+ 		  +   + +
—
+ 		  +   +   + +
62
+ 		+
%
+ 		  + +
Construction + of electricity generation projects and manufacture of power + equipment
+
+
Shoulong
+ 		  + +
Thailand
+ 		  + +
July + 2009
+ 		  +   + +
—
+ 		  +   +   + +
100
+ 		+
%
+ 		  + +
Construction + of distributed power generation systems
+
+
GE + Drivetrain
+ 		  + +
PRC
+ 		  + +
September + 2009
+ 		+
 
+ 		  + +
—
+ 		  +   +   + +
25
+ 		+
%
+ 		  + +
Manufacture + of wind turbine gear boxes
+
+
Shenyang + Longxiang Wind Power Techologies Limited (“Longxiang”)
+ 		  + +
PRC
+ 		  + +
October + 2009
+ 		  +   + +
—
+ 		  +   +   + +
100
+ 		+
%
+ 		  + +
Manufacture + of wind
+
energy + turbine components
+
+
Texas + A Wind
+ 		  + +
USA
+ 		  + +
December + 2009
+ 		+
 
+ 		  + +
—
+ 		  +   +   + +
30.4
+ 		%  +   + +
Project + company for Texas wind +farm
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
 
+
+
+
+
+
+
+
+
+
+
+
+
+
29
+
+
+
+
+
+
+
+
+
+
 
+
Recent +Corporate and Commercial Developments
+

+
Acquisition +of EVATECH
+
 
+
On +January 25, 2010, we completed our acquisition of 100% of Evatech based in +Kyoto, Japan, a designer and manufacturer of industrial equipment for liquid +crystal displays, plasma display panels and more recently, equipment for the +manufacture of amorphous-silicon (a-Si) PV cells and solar panels. The +acquisition was subject to the review and approval of a Japanese court as a +result of Evatech having been placed into a legal rehabilitation (insolvency) +proceeding. We paid $49.9 million in cash to purchase Evatech. We have applied +to receive 45% of this amount back in the form of rebates from +foreign-investment grants from various levels of local government (20% from the +Liaoning Provincial Government, 20% from the Shenyang Municipal Government, and +the remaining 5% from the Hunan New District Government in Shenyang. However, as +of the date of this report, we have not received any rebate +payments.
+

+
Sale +of Common Shares and Warrants in January 2010
+

+
On +January 21, 2010, we entered into a securities purchase agreement with certain +institutional investors pursuant to which we sold such investors 5,777,932 of +our common shares at a price of $14.37 per share, together with two series of +warrants to purchase an additional 2,888,968 shares. 2,099,823 of the warrants +are exercisable at $16.90 per share and the remainder are exercisable at $16.91 +per share. All of the warrants will be initially exercisable six months after +January 21, 2010 and will remain exercisable for a five-year period thereafter. +The gross proceeds of the offering (which closed on January 21, 2010) was $83 +million.
+

+
The +warrants are divided between 2,099,823 Series A warrants and 789,145 Series B +warrants. In addition to adjustments resulting from share splits, reverse splits +and similar events affecting all of the holders of our common shares, the +warrants are subject to adjustment for certain dilutive issuances of securities +by us. Until such time as we have received an aggregate of $65 million in +proceeds from the sale of securities (net of any proceeds that are repaid or +returned by us within a one year period), if we issue any securities (subject to +certain exclusions) at a price less than the then applicable exercise price, the +exercise price of the warrants will be reduced to such lower issuance price +(full ratchet anti-dilution). Once we have received an aggregate of $65 million +from the sale of securities, the adjustment to the exercise price of the +warrants for any such dilutive issuance will be made on the basis of weighted +average anti-dilution. No adjustments for any dilutive issuance will be made +following the third anniversary of the issuance date of the warrants, regardless +of the amount of proceeds we receive from the sale of securities. No additional +common shares will be issued with respect to any dilutive issuances in respect +of the Series A warrants and no adjustments will be made to the exercise price +of the Series B warrants with respect to any dilutive issuances if such issuance +or adjustment would result in the violation of applicable rules of the Nasdaq +Stock Market, unless and until approval by our shareholders for these issuance +or adjustments (“Shareholder Approval”) has first been obtained in accordance +with the rules of the Nasdaq Stock Market. We have agreed to seek Shareholder +Approval under NASDAQ rules at the Company’s next annual meeting to occur no +later than October 31, 2010 in order to permit such additional issuances of +shares or adjustments to the exercise price in relation to the warrants, as +applicable.
+
 
+
+
+
+
+
+
+
30
+
+
+
+
+
+
+
+
+
+
 
+
We also +entered into a registration rights agreement with the institutional investors +with respect to these common shares, the warrants and the shares underlying the +warrants. We have agreed to file with the SEC a registration statement on Form +F-3 covering these securities and to cause it to become effective no later than +120 days after the issuance date of the warrants and the common shares. We would +be required to pay to the institutional holders certain liquidated damages if +the registration statement does not become effective prior to this time and +thereafter if the effectiveness of the registration statement is not maintained. +In addition, we also entered into a voting agreement with Mr. Jinxiang Lu, the +Chief Executive Officer, and John S. Lin, the Chief Operating Officer pursuant +to which such shareholders have agreed to vote to approve, with respect to the +warrants, the issuance of additional common shares or adjustments to the +exercise price upon dilutive issuances that are subject to Shareholder Approval. +Mr. Lu and Mr. Lin also entered into lock-up agreements with us pursuant to +which each of them has agreed not to sell or offer to sell the common shares +held by them for up to 270 days after the closing of this +placement.
+

+
Sale +of Senior Convertible Notes and Warrants in June 2009; Conversion of Senior +Convertible Notes
+

+
On June +18, 2009, we entered into a securities purchase agreement with certain +accredited investors. Pursuant to this agreement, we sold to the buyers senior +convertible notes in the aggregate principal amount of $40,000,000 (Senior +Convertible Notes) and warrants to purchase an additional aggregate amount of +1,504,184 common shares (Warrants). We closed this private placement transaction +on June 19, 2009.
+

+
In +connection with the sale of the Senior Convertible Notes and Warrants, we +entered into note and warrant agreements with each of the investors, and certain +lock up and voting agreements.
+

+
The +warrants grant the buyers the right to acquire common shares at $10.637 per +share, subject to anti-dilution and other adjustments as described above. The +warrants may be exercised to purchase common shares at any time or times on or +after August 21, 2009, and have a term of five years.
+

+
At the +time that we issued the notes and the warrants, our memorandum and articles of +association required shareholder approval for any issuance of common shares, and +we agreed to seek shareholder approval to amend the memorandum and articles of +association to remove this requirement, so that we may issue common shares upon +conversion of the notes or exercise of the warrants, as well as approval for +other related matters. In connection with our issuance and sale of the Senior +Convertible Notes and Warrants, to permit the purchasers to convert the notes +and exercise the warrants in the event shareholder approval for issuance of the +shares was not obtained, we and Jinxiang Lu, our Chief Executive Officer and +Chairman of our Board of Directors, entered into a put agreement with each of +the buyers, pursuant to which, under certain circumstances, the buyers may +exchange their notes and warrants for certain common shares owned by Mr. Lu in +the event that the Company is unable to issue such common shares. The +obligations of Mr. Lu under the put agreements were secured by a first priority, +perfected security interest in 6,000,000 common shares of Mr. Lu. We entered +into a letter agreement pursuant to which we agreed to make Mr. Lu whole and +reimburse Mr. Lu for any losses that Mr. Lu incurs in connection with this +transaction. Our shareholders approved the required amendments to our memorandum +and articles of association on August 21, 2009. Because the shareholder approval +was obtained, as required, the put agreements have now been terminated and the +shares returned to Mr. Lu.
+

+
In +connection with this transaction, we also entered into a registration rights +agreement with the buyers. Pursuant to the terms and conditions of the +registration rights agreement, we agreed to file with the SEC a registration +statement on Form F-3 covering the resale of the common shares issuable to the +buyers upon conversion of the Senior Convertible Notes and exercise of the +Warrants. The registration statement (No. 333-161983) was initially filed on +September 18, 2009 and was declared effective on December 8, 2009.
+

+
On +December 30, 2009, we entered into a Conversion Agreement with each of the +holders of the Senior Convertible Notes. Pursuant to the Conversion Agreements, +we and each of the holders agreed, among other things, to convert the aggregate +then remaining principal amount of the Senior Convertible Notes and accrued +interest of $37,537,500 outstanding under the notes, together with certain +make-whole amounts, into an aggregate of 4,582,559 our common shares using a +conversion price per share set at $10.212, which is 96% of the original +conversion price of the Notes of $10.637. In addition, each participating holder +entered into a confirmation agreement with us confirming certain procedural +aspects of the transaction.
+

+
Entry +into Agreement for Wind Energy Power Plant and Initial +Capitalization
+

+
On +December 16, 2009, our 62%-owned subsidiary, Shenyang Power Group, entered into +a definitive agreement with affiliates of USREG Wind and Cielo Wind Power, LP +for their ownership of Texas A +Wind, a project company to develop a 600 MW wind farm in +Texas.
+
 
+
+
On February 12, 2010, Shenyang Power +Group completed the establishment of Texas A Wind and made its initial cash +contribution of US$36.6 to Texas A Wind, pursuant to the Amended and Restated +Limited Liability Company Agreement, dated December 16, 2009 between Shenyang +Power Group and USREG Wind, a Delaware limited liability company, as +amended. On February 12, 2010, USREG Wind made its capital contribution to +Texas A Wind in the form of real property interests and other project +rights.
+
+
 
+
+
+
+
+
+
+
31
+
+
+
+
+
+
+
+
+
+
 
+
In connection with making its capital +contribution, Shenyang Power Group received final approval from the Chinese +National Development and Reform Commission to proceed with the planned Texas +project.
+

+
This project is expected to cost in +total approximately $1.5 billion, a portion of which is designated for wind +turbine purchases, which are to be supplied by us. The parties will be seeking +to obtain financing from third party lenders for most of the cost of this +project.
+
 
+
Capital +Expenditures and Divestitures
+
 
+
Since +2005, our capital expenditures have consisted primarily of plant and equipment +and construction of our wind turbine production facility in Shenyang, China and +payments with respect to our licenses with Fuhrländer and Norwin for technology +for our wind energy business, and LICEG with respect to our distributed power +generation system business. The table below sets forth our capital expenditures +for the periods shown:
+
 
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + +
+
For the year ended December 31,
+ 		 
+
2007
+ 		  +
2008
+ 		   +
2009
+ 		 
+
$
+ 		4,619,000 $34,097,000  $ +
24,945,000
+ 		 
+
+
 
+
+
+
+
+
+
+
+
+
+
In +connection with a change in our business strategy to require the subcontractors +who perform the construction and installation of our distributed power +generation and micro power grid systems to purchase a majority of the equipment +and components needed to develop the systems, we made material capital +divestitures of plant and equipment beginning in 2004. In 2006, we realized +proceeds of approximately $3.6 million from the sale of this plant and +equipment. We did not make any material capital divestitures in 2007, 2008 or +2009.
+
 
+
+
Potential +Takeovers by Third Parties
+

+
There +were no indications of any public takeover offers by third parties in respect of +our common shares in 2009.
+
  
+
+
+ + + + + +
+
B.
+ 		+
Business + Overview
+
+
+
 
+
Introduction
+
 
+
+
We are an +engineering, procurement and construction, or EPC, services company in China +dedicated to the power industry. We are primarily engaged in providing onsite +distributed power generation systems and micro power grids for industrial +companies. We commenced the production of wind turbines in 2007 based on wind +turbine technology licensed from our strategic licensing partners in Europe and +China. In the first quarter of 2010, we acquired Evatech, a Japan-based designer +and producer of equipment for the manufacturing PV cells and solar +panels.
+
 
+
We are +primarily engaged in the design, construction, installation and testing of +integrated distributed power generation systems and micro power grids as +stand-alone facilities, primarily in the PRC and Southeast Asia, for various +customers in the steel, chemical, ethanol, cement and food +industries.  We typically design projects, subcontract their +construction and installation to approved third-party subcontractors and conduct +testing on completed projects before handing them over to customers. The size of +our projects range from 5 MW to 400 MW. Our distributed power generation systems +allow customers who use substantial amounts of electricity to recapture +previously wasted heat and gas from their manufacturing processes to generate +electricity.   In addition, our distributed power generation systems +utilizing biomass gasification processes allow our customers to utilize various +waste products to produce electricity or recover energy. Over the past five +years, we believe we have grown into the largest private provider of onsite +distributed power generation systems in China. We have the right to use Class A +and various other licenses, which allows us to provide a full spectrum of +services related to the design, construction and installation of distributed +power generation systems and micro power grids to our customers in China and +overseas.  In 2009, we commenced the construction of a distributed +power generation system in Thailand that uses biomass as fuel and expanded our +portfolio of green energy projects to another renewable source of energy. Since +the inception of our operations through December 31, 2009, we have completed 24 +distributed power generation systems and currently have an additional 12 +projects under construction in China. To pursue large-scale power generation +projects domestically and internationally, we formed Shenyang Power Group, an +industry venture with the Shenyang municipal government and other industrial +companies.
+
+
+
+
+
+
+
+
32
+
+
+
+
+
+
+
+
+
+
+
In 2007, +we entered into the wind energy market by obtaining licenses for Fuhrländer’s +2.5 MW turbines (later amended to upgrade to 2.7 MW turbines) and Norwin’s 750 +kW and 225 kW turbines. We subsequently obtained licenses for W2E +Technologies’ 2.0 MW turbines and Shenyang Huaren’s 1.5 MW turbines. We +completed construction of our first wind turbine production facility in Shenyang +in 2008, which is outfitted with equipment and production lines capable of +assembling 2.7 MW, 2.5 MW, 1.5 MW, 750 kW and 225 kW grade turbines. Our initial +production focus is on 2.7 MW wind turbines, which are generally larger than the +wind turbines manufactured by our competitors in China.  In June 2009, +we began assembly of 2.7 MW wind turbines. As of the date of this Annual Report +on Form 20-F, we have sold ten 2.7 MW wind turbines for use in wind farm +projects in China. In +December 2009, our subsidiary, Shenyang Power Group, entered into an agreement +to jointly establish a project company to own, design, develop, construct, +manage and operate a US$1.5 billion wind energy power plant +in Texas with a planned total nameplate capacity of 600 MW. The project company, +Texas A Wind, was established in Delaware in December +2009.  Under the terms of the agreement, we will be exclusive +manufacturer and supplier of turbines to the power plant.
+

+
We +completed the acquisition of Evatech, a company with over 20 years of experience +in photovoltaic thin-film technology, in the first quarter of 2010. Evatech +began applying its proprietary know-how and manufacturing processes to the +design and manufacture of production equipment for PV panels in 2006 and can +deliver a fully-integrated production line that provides a turn-key +manufacturing solution to solar cell suppliers. We believe that Evatech’s +manufacturing equipment for thin cells and solar production line can produce a +wide range of applications within China’s growing solar energy +market.
+
 
+
In +addition to our operations in the distributed power generation and wind energy +businesses and recent entry into the solar energy business, we conduct ongoing +research and development in renewable energy technology to uncover new +opportunities to expand our clean energy business. We have long-standing +research and development relationships with prominent research and development +institutions in China.
+
 
+
+
+
The +following is a breakdown of total revenues by category of activity and +geographic market for the last three financial years:
+
 
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   +
2007
+ 		   +
2008
+ 		   +
2009
+ 		 
  (in + thousands) 
+
Distributed + Power Generation
+ 		         
+
China
+ 		 $152,544  $246,299  $223,227 
+
Overseas
+ 		  +
nil
+ 		   10,461   37,890 
+
Sub-Total
+ 		  152,544   256,760   261,117 
  +             
+
Wind + Power
+ 		            
+
China
+ 		  +
nil
+ 		   +
nil
+ 		   32,741 
+
Overseas
+ 		  +
nil
+ 		  +
 
+ 		+
nil
+ 		   +
nil
+ 		 
+
Sub-Total
+ 		  nil   nil   32,741 
             
+
Other + (1)
+ 		  nil   8,106   17,394 
  +             
+
Total + Revenue
+ 		  152,544   264,866   311,252 
+
+
+
+
+
+
+
+
+
+
 
+
+
+
+
+
(1) Other +revenue includes construction of infrastructure, industrial buildings and +residential real estate properties through our subsidiary, LICEG +Ltd.
+
 
+
+
Distributed +Power Generation Business
+
+
 
+
We +believe that we are one of few PRC companies with the ability to provide a +complete spectrum of development services for the design, construction, +installation and testing of distributed power generation and micro power grid +systems of any size in China or abroad. Our turn-key systems are tailored to +meet the various specifications and needs of our customers.
+

+
We +conduct our distributed power generation business through GaoKe, which has the +ability to construct and install power plants of all sizes. GaoKe Energy, an +engineering services company, is GaoKe’s principal operating company that +oversees the design of projects through GaoKe Design. GaoKe Energy oversees the +construction and installation of projects through LICEG Ltd., our joint venture +company that holds certain Class A licenses, which +we obtained ownership of in early 2010 and are currently in the process of being +transferred to us. GaoKe Energy obtains the contracts for the design, +construction and installation of distributed power generation plants and micro +power networks and performs or oversees the bulk of the work associated with +those projects in its capacity as general contractor, including site +preparation, construction, equipment installation and system startup and +testing. GaoKe Energy subcontracts the design services connected with those +projects to GaoKe Design and oversees construction and installation activities +through LICEG Ltd., activities which we typically subcontract to approved +third-party subcontractors. Our distributed power generation and micro power +grid systems typically take 12 to 24 months to design, construct, install and +test.
+

+
We do not +manufacture the equipment and materials that are used in the construction of our +distributed power generation plants and micro power grids. Rather, we +incorporate standard power generating equipment into a fully integrated onsite +system for our customers that includes highly refined control systems to balance +power generation with demand. Our distributed power generation systems also +utilize waste heat or waste organic products, such as heat from an onsite +industrial boiler or food byproducts, to produce additional power or to heat +space or water, thus maximizing the return on capital and energy efficiency +associated with each project. Unlike centralized power generation, which uses +relatively few large generation plants to supply power to a large area on +China’s national power grid, distributed power generation systems are small and +supply power locally for one or a few factories or for a small town. We believe +that, on average, our projects pay for themselves in terms of reduced energy +costs to our customers within two to five years of operations, depending on the +size of the project, when compared to buying power from China’s national power +grid. In addition, our distributed power generation systems allow our industrial +customers to reduce their reliance on China’s centralized national power grid, +which is prone to black-outs or brown-outs or is completely inaccessible from +certain remote areas. Our systems generally produce lower carbon dioxide +emissions and other pollutants, making them more environmentally-friendly than +other forms of power generation contributing to China’s national power +grid.
+

+
Products +and Services
+

+
We +design, construct and test distributed power generation systems to meet the +power and heat needs of factories and users in remote areas. All of our systems +are cogeneration systems that produce both heat and power. The main components +of our distribution power generation systems include a boiler that provides +steam, a turbine to drive the generator that produces electricity, a heat +collection or recovery system that captures and cleans the residual heat exiting +the turbine to use for heating, a system to distribute the heat, an air +emissions control device to control air pollution and a control system. In +climates that make it cost effective, the residual heat can be used to operate +an absorption chiller to supply cooling or air conditioning. Our systems +maintain a careful balance, providing the required heat and power while +furnishing space and water heating or cooling which produce energy efficiencies +that are more than twice that of centralized power generation. That means less +than half of the coal or other fuel must be converted to useable energy, cutting +fuel costs and emissions in half. To ensure a continuous supply of power, our +systems typically include two sets of generators and turbines. They are sized to +complement each other in meeting peak demand for the system, but they also serve +to back up each other for routine maintenance and to avoid a blackout in the +event that one of them fails.
+
 
+
+
+
+
+
+
+
33
+
+
+
+
+
+
+
+
+
+
 
+
The +generating capacity of our systems can be tailored to meet a range of needs, +from those for the host factory to supplying a micro grid that provides power to +an entire town. We rely on a highly-skilled engineering team to customize +distributed power generation and micro power grid solutions to meet the specific +needs of each customer. Our experience in the industry allows us to standardize +a significant portion of our engineering solutions, while retaining the +flexibility to seamlessly incorporate custom specifications and +demands.
+

+
Major +Projects
+

+
As of the +date of this Annual Report on Form 20-F, we have completed 24 distributed power +generation projects, and have 12 projects that are currently-in-process or for +which we have signed a memoranda of understanding.
+
 
+
Contract and Implementation +Process
+

+
Retention and design +operations
+

+
We +receive direct customer inquiries or referrals for the majority of our projects. +Our project work process commences with a team of engineers that evaluates the +specific needs of the customer to establish the design parameters, equipment +needs and installation costs of a project to generate a pricing proposal. We +take into consideration other criteria for our pricing proposals, including +project complexity and type, past project costs and raw materials. Our sales +department works closely with our engineering staff during the pricing phase and +presents and negotiates the final pricing with the customer. A pricing proposal +is typically generated within one month of receiving a customer +inquiry.
+

+
After +acceptance of a pricing proposal, we initiate the design process. We have +enhanced the basic concept of cogeneration systems by applying design concepts +that we believe helps to carefully balance the industrial and power +generation demands of the system, with the aim of avoiding both excess capital +cost and wasteful energy consumption. Sophisticated control systems further +enhance the efficiency of our systems, and allow us to add the capability of +scavenging residual heat from the principal system functions to provide space +and water heating. Our team of highly-qualified engineers and technicians use a +series of complex formulas to determine the peak demand, which is highly +dependent upon allocating resources within the system to balance the competing +loads effectively and efficiently. We will work closely with our customers to +understand their customizations which allow for streamlined implementation and +more efficient operations. We have incorporated into our projects several +advanced, customer-requested specifications and customizations, such as the +installation of boilers and systems that utilize specific types of biomass, +the expansion of existing power generation systems and the implementation +of our systems in phases.
+

+
Equipment +procurement
+

+
Our +design team specifies the type and size of equipment required for each project. +After a design is finished, our purchasing department and engineers work with +approved PRC suppliers to purchase all of the equipment, such as turbines, +boilers and related heavy equipment, that will be used in the system and deliver +it to the project site to be integrated with the system.
+
 
+
Construction and +installation
+

+
For most +our systems, our construction and installation procedures are generally +standardized. We typically commence construction by erecting a steel frame +structure that will house the power generation system. Then, we install the +turbine, generator and other heavy or ancillary equipment. We will then build a +steam boiler control room which will serve as the nerve center to regulate the +system or grid. Finally, to ensure the proper channeling and distribution of +heat and power, we will set up a power and heat control room.
+

+
Actual +construction of the system and installation of the equipment is largely +conducted by two to four third-party subcontractors experienced in power plant +and grid construction, who are supervised by a project manager that we assign to +the project. We also deploy eight to ten engineers to the site to furnish +information on a day to day basis, and another 20 to 30 engineers in Shenyang +support the onsite team’s activities. Our onsite team of engineers oversees all +of the construction and installation activities to ensure that these tasks are +completed on time and to our rigorous standards and specifications.
+
 
+
+
Of the +projects either completed or currently in process, we maintain a select number +of highly qualified subcontractors who have worked with us for at least two +years.  In order to ensure the quality of a subcontractor’s +performance, we frequently review the qualifications of our subcontractors, +which include performance in similar projects, credit history and previous +cooperating experience. Based on these factors, we maintain a panel of preferred +subcontractors that is regularly reviewed and updated.
+
+
+
+
+
+
+
+
34
+
+
+
+
+
+
+
+
+
+
 
+
Testing and +completion
+

+
After +construction and installation is completed on a project, we typically perform a +series of tests on the newly constructed infrastructure and operating system to +evaluate system functionality and performance under simulated operating +conditions. During testing, onsite engineers provide continuous feedback to the +design team and the project leader to ensure that the system will operate as +designed when placed into operation and to improve our future projects and +construction processes. Our engineers will also train the personnel of our +customers on how to monitor the control system to identify and address potential +problems.
+

+
Automatic control +systems
+

+
Maximizing +efficiency of the system requires matching system output to overall demand for +heat and electricity. We use a proprietary monitoring and control system for our +systems. Among other things, the control system regulates the amount of steam +that enters the turbine so that the power generated matches demand. The control +system also automatically monitors the performance of all equipment in the +system, including the boiler (for steam output, temperature, air, water/coal +input), turbine, generator, grid supply, demand and distribution, as well as +space and water heating functions. The programming needed for a system to +function efficiently is customer-specific. The control system can be monitored +by the customer onsite or remotely by us via the Internet. This monitoring +function gives our engineers the ability to evaluate and try to solve problems +that occur in the system on a real-time basis from their central engineering or +design offices.
+

+
Quality +Control
+

+
We have +established a quality control department, which supervises and manages equipment +and raw materials, conducts onsite project inspections and provides after-sales +services. We strictly follow ISO 9001 standards, purchasing components only from +certified vendors and observing ISO requirements during the construction and +testing of distributed power generation systems. Our projects also conform to +the relevant PRC construction and quality control laws, as well as +GB/T19000-2000 quality standards, which have specific implementation and +technical standards for specific components of each project, such as boiler +units, thermal instrumentation and control and pipes.
+

+
Raw +Materials, Equipment and Supplies
+

+
Our +various business units work together for the purpose of ensuring that +cost-efficient and high-quality raw materials and equipment are procured for our +projects. We procure raw materials and equipment from reputable PRC suppliers. +Some of our raw materials have fixed prices and thus, our third-party +subcontractors will procure them. However, all significant purchases must be +approved by the relevant internal supervisors.
+
 
+
+
The price +of equipment used in our distributed power generation projects generally do not +fluctuate. However, raw materials that we use can fluctuate significantly in +price, particularly the price of steel. Other key raw materials, such as cement +and concrete blocks can also fluctuate.  We usually have provisions in +our agreements with our customers that in the event the prices of raw materials +or labor increase beyond a certain threshold, generally an increase of 30% or +greater, the agreements are subject to renegotiation to factor in increased +prices.  In addition, the cost of our equipment generally accounts for +15% to 30% of the total contract value and are factored into our agreements with +customers but typically do not fluctuate.
+
 
+
+
To date, +we have purchased approximately 80% of the equipment from four trusted +suppliers. The four equipment suppliers that account for the significant +majority of our equipment purchasing have been supplying to us since 2003, and +we believe that their combination of quality, service and price is superior to +the available alternatives. If needed, the necessary equipment can be obtained +from other suppliers. We do not have any long-term supply agreements and have +the flexibility to order from other suppliers when circumstances +warrant.
+

+
Customers +and Sales
+

+
Sales and +marketing
+
 
+
+
Our +management team has many long-standing relationships with companies that we +consider to be target customers in various industries including steel, +construction materials, chemical, cement, food and processing. They also +maintain relationships with municipal governments, which sponsor new development +zones that can utilize our systems, as well as with various state-owned Chinese +power companies. We have also begun to establish a team of select agents to +promote our distributed power generation business throughout China and Southeast +Asia. In addition, we have a direct sales and customer support staff of 20 +employees that pursue on potential leads and provide customer +support.
+
 
+
+
Customers
+
 
+
+
Given +that our business is project-based, we generally do not have repeat business +other than our expansion of existing projects.  Our customer base +fluctuates from year-to-year.  No single project represented more than +10% of our revenue in 2009. For more information, see Item 3.D – “Risk Factors – Risks related to our +business – Our revenue from our distributed power generation business segment +depends on gaining new customers and project contracts, and we do not have +long-term purchase commitments from our customers,” of this Annual Report +on Form 20-F.
+
+
 
+
+
+
+
+
+
+
35
+
+
+
+
+
+
+
+
+
+
 
+
Signing +contracts
+

+
Typically, +contracts with our customers will include quality assurance terms including +penalties for non-performance, warranties and after-sales service conditions. In +addition, we typically require our customers to make a 20% prepayment of the +total contract value before we begin construction of a new project, as well as +certain milestone payments as the project progresses. However, we recognize +revenue on a percentage of completion basis, see Item 3D －“Key +Information － +Risk Factors – Our use of the ‘percentage of completion’ method of +accounting could result in reduction or reversal of previously recorded revenues +and profits.”
+

+
Warranty
+

+
We +provide after-sales and general maintenance services that are customized in +accordance with the terms of project contracts. Under the standard warranty, we +will address any system-related operational problems without charge during the +first year of operation. In addition, we generally provide a warranty in the +form of a retention money deposit, which generally represents 5% of the total +value of a contract and is withheld by the customer during the warranty period +of 12 to 24 months after the completion of a distributed power generation. If +there are no significant repairs made during this period, this retention money +is released to us. We have not made any material payments for +warranties.
+
 
+
+
Backlog
+

+
Backlog +represents the dollar amount of revenue we expect to realize in the future as a +result of performing work under multi-period contracts that we have entered +into. Backlog may not be indicative of future results, and the termination or +modification of any of our larger contracts may substantially and immediately +affect our backlog.  As of March 31, 2010, our backlog for our +distributed power generation segment was approximately $367 million. For more +information, please see Item 3.D – “Risk factors – Risks related to our +business  – Projects included in our backlog may be delayed or +cancelled, which could materially adversely affect our business, financial +condition, results of operations and cash flows,” to this Annual Report +on Form 20-F.
+
 
+
Seasonality
+
 
+
We +do not experience seasonality with regard to demand for our distributed power +generation system projects. However, a majority of our distributed power +generation system projects are in Northeast China, where we typically experience +a slow down, and sometimes a complete halt, of our project developments due to +inclement weather conditions in that region from November to +March.  We recognize revenue on our distributed power generation +system projects on a percentage completion basis and thus, during the fourth +fiscal quarter and first fiscal quarter, we typically experience a slowdown in +operations and revenue recognition.  In addition, unpredicted harsh +climate conditions, or stormy weather could produce unexpected slowdowns during +the winter months beyond our typical anticipated slowdowns related to +seasonality.  
+
  
+
Wind +Power Business
+
+
 
+
We +entered the wind energy industry by acquiring wind turbine technology licenses. +In February 2007, we acquired a license from Norwin that gives us the exclusive +rights to produce and sell Norwin’s 750 kW and 225 kW wind turbines in China. As +part of the agreement with Norwin, a joint venture company, Jinxiang, was +established in Shenyang, China in January 2008 to develop and manufacture 225 kW +to 1.5 MW wind turbines. Norwin also agreed to establish with us a joint +research and development facility in Shenyang to develop new wind turbine +technology for both the China and the international markets. In May 2007, we +entered into a license agreement with Fuhrländer, which was amended in January +2009, that gives us an exclusive right to sell and a non-exclusive right to +produce Fuhrländer’s 2.7 MW series wind turbines in the provinces of Liaoning +and Hebei, and a non-exclusive right to produce and sell Fuhrländer’s 2.7 MW +series wind turbine in nine other PRC provinces. As part of the agreement, +Fuhrländer agreed to assist us in developing a production facility that emulates +Fuhrländer’s facility in Germany, which we completed in Shenyang, China. Under +the technology license, we have the right to use any advancements or +improvements that Fuhrländer makes to its 2.7 MW series wind turbine on a +royalty-free basis.
+
 
+
+
We +completed construction and installed machinery and production lines in our first +wind turbine production plant in 2008.  The facility is located in +Shenyang, China, the site of our operational headquarters and a key industrial +hub-city in China.  This 320,000 square foot plant has a total annual +production capacity of 1.1 GW, and is expandable by approximately 30%. We expect +that the annual production capacity of the plant will be initially divided +between assembly of 300 units of 2.7 MW and/or 2.5 MW grade wind turbines, 300 +units of 1.5 MW turbines and 300 units of 750 kW and/or 225 kW grade wind +turbines; however, this is subject to the changes in the availability of key +wind turbine components as well as demand from our customers.  We believe +that as we develop our wind turbine production business, we will be able to +benefit from our licensing relationships with our two European partners with +respect to training our employees, selection of suppliers and sourcing of +components, installation of wind turbines and follow-up maintenance.  We +began assembly of 2.7 MW grade wind turbines in June 2009 and, as of the date of +this Annual Report on Form 20-F, we have sold ten 2.7 MW wind turbines for use +in the 49.5 MW and 19.5 MW wind farm projects in Saiwusu, Inner Mongolia and +Donggang, Shandong Province.
+
 
+
+
+
+
+
+
+
+
36
+
+
+
+
+
+
+
+
+
+
 
+
+
In March +2009, we entered into two agreements with GE Drivetrain, a unit of GE +Transportation.  Pursuant to the first agreement, GE Drivetrain will supply +us with more than  900 2.7 MW wind turbine gearboxes beginning in 2010. +Pursuant to the second agreement, we have established a joint venture in +Shenyang, China, which is 25% owned by us and 75% owned by GE Electronic, for +the assembly and testing of wind turbine gearboxes.  The joint venture is +intended to supply gearboxes for our wind turbine business in China on an +exclusive basis and is also intended to serve as GE Drivetrain’s Southeast Asia +manufacturing center. We believe the supply agreement and joint venture for +gearboxes are strategically beneficial to us as, in our experience, gearboxes +are among the more difficult wind turbine components to source in China. The +assembly plant for this joint venture will be located in Shenyang and is +expected to commence construction in the second quarter of 2010 with production +expected to commence in the third quarter of 2010.

+
We view +our joint venture gearbox assembly business as an important first step in +enhancing our control of the supply chain and reducing costs for our key +components. In addition to establishing a joint venture for gearboxes, we intend +to identify strategic partners to establish additional joint +ventures for the production of wind turbine generators and other +key components in 2010.
+
 
+
+
In July +2009, we entered into an agreement with Shenyang Huaren, to acquire Shenyang +Huaren’s proprietary technology to commercially produce and sell 1.5 MW wind +turbines. In addition, we have agreed to fulfill Huaren’s back order of ten +units of the same turbines with an existing customer of Shenyang Huaren in +China. As of the date of this Annual Report on Form 20-F, we have made all +scheduled payments and received a majority of the technology transfer documents +under the agreement and expect to begin production of the 1.5 MW wind turbines +in our Shenyang facility in the second half of 2010.

+
In August +2009, we entered into definitive agreements to form two joint ventures with +Jiangsu Miracle. The joint ventures will mainly engage in manufacturing and +sales of key wind turbine components in China. The first joint venture, Shenyang +Tianxiang Wind Equipments Manufacturing Co., Ltd., or Shenyang Tianxiang, will +manufacture rotor blades, hubs, nacelle covers, and other key components for +wind turbines. We will contribute approximately US$1.5 million (RMB 10.2 +million) in cash for 51% of the joint venture and Jiangsu Miracle will +contribute approximately US$1.4 million (RMB 9.8 million) for 49% of the joint +venture. Shenyang Tianxiang’s plant will be located in Shenyang and all +necessary molds will be supplied by Jiangsu Miracle. The second joint venture, +Shenyang Tianrui Wind Equipments Sales Company Co., Ltd., or Shenyang Tianrui, +will focus on marketing and sales of the wind components made by Shenyang +Tianxiang. We will contribute approximately US$0.4 million (RMB 2.5 million) for +49% of the joint venture and Jiangsu Miracle will contribute approximately +US$0.4 million (RMB 2.6 million) for 51% of the joint venture. Most of the +components made by Shenyang Tianxiang will be sold to us and the remainder will +be sold through Shenyang Tianrui to various other customers. As of the date of +this Annual Report on Form 20-F, we are awaiting formal approvals from local +governmental authorities with respect to the establishment of these joint +ventures and have not made any capital contributions to the joint +ventures.
+

+
In +September 2009, we won a contract to develop a 49.5 MW wind farm in the township +of Saiwusu, Guba County, Inner Mongolia for Jihe Orient Wind Energy Co., Ltd., +or Jihe Orient. The total value of the contract is US$76.0 million. Pursuant to +the contract, we will supply eleven 2.7 MW wind turbines, as well as towers and +foundations. In addition, we will oversee construction, subcontracting and +installation for the project. The Saiwusu project commenced in October 2009 and +we expect to complete the project in June 2010. As of the date of this Annual +Report on Form 20-F, we sold five 2.7 MW wind turbines for use in this +project
+

+
+
In +October 2009, we won a contract to develop a 19.5 MW wind farm in the Donggang, +Rizhao City of Shandong Province, in Eastern China, for the Shandong subsidiary +of Datang International Power Generation Co. Ltd., or Datang Power. The total +value of the contract is US$32.0 million. Pursuant to the contract, we will +supply eight 2.7 MW wind turbines, as well as towers and foundations. In +addition, we will oversee the construction, subcontracting and installation for +the project. Construction on the project commenced in November 2009 we expect to +complete the project in November 2010. As of the date of this Annual Report on +Form 20-F, we sold five 2.7 MW wind turbines for use in this +project.
+
+

+
+
In +December 2009, Shenyang Power Group entered into an agreement with USREG Wind, +to establish a project company to own, design, develop, construct, manage and +operate a US$1.5 billion wind energy power plant across approximately 36,000 +acres in Texas with a total nameplate capacity of 600 MW, which is in the early +stages of development and seeking financing. The project company, Texas A Wind, +was established in Delaware in December 2009. In return for its initial +capital contribution of $36.6 million Shenyang Power Group received a 49% +membership interest in Texas A Wind.  USREG Wind received a 51% +membership interest in Texas A Wind in exchange for its transfer of certain land +and other rights to the project company.
+

+
Under the +agreement, USREG Wind will have management control over day-to-day operations +and will oversee the development of the power plant, while Shenyang Power will +retain voting control over certain major decisions affecting Texas A Wind such +as entry into material contracts, project financing, sale of the power plant or +dissolution of Texas A Wind. In addition, the agreement provides that our +indirect, wholly-owned subsidiary, Ruixiang, will be the exclusive manufacturer +and supplier of turbines to the power plant and that our indirect, wholly-owned +subsidiary Gaoke Energy, will be the contractor for the project.
+

+
Texas A +Wind will seek debt and equity project financing and various governmental +incentives to cover development and construction costs, expected to be +approximately US$1.5 billion. We expect that a portion of such financing will +come from private and Chinese state-owned institutions, banks and investors. In +addition, we expect a portion of such financing will be obtained from tax credit +cash grants from the United States Treasury Department and guaranteed by United +States Department of Energy loan guarantees for renewable energy projects, each +pursuant to the American Recovery and Reinvestment Act of 2009, but we can +provide you no assurance that funds will be available from the government source +in either China or the United States.
+
+
+
+
 
+
The +development of this project may be further complicated by the introduction of +new legislation in the United States. For example, several U.S. senators +have recently introduced legislation that would halt U.S. federal funding of +renewable energy projects until “Buy American” requirements are written +into law. It is uncertain as to whether this legislation will ultimately be +passed, or if passed, the final form it will take. We currently intend that +a minimum of 70% of each wind turbine to be supplied in relation to this project +would be manufactured in a new production and assembly plant in the United +States, but we cannot assure you that this plant will be built, or if built, +whether it will be sufficient to satisfy the requirements of such proposed +legislation when and if passed into law. Further, Senator Charles Schumer +has specifically urged the Obama administration to block any stimulus money +from financing this project, but such statements alone do not have the +force of law. While the prospects and progress of this proposed legislation +cannot be predicted, the political and policy priorities in the United +States remain uncertain and we cannot assure you that the introduction of this +or other legislation in the United States will not adversely impact the +development of this project or that U.S. federal funding for this project can or +will be obtained. Our inability to obtain U.S. federal funding for this +project would significantly increase our costs associated with this +project.
+
  
+
+
+
+
+
+
+
+
+
37
+
+
+
+
+
+
+
+
+
+
 
+
This +project is at an early stage of development and requires significant development +work, including but not limited to, the acquisition of additional land or land +rights, undertaking of feasibility studies and engineering design work, entering +into of utility interconnection arrangements, and securing of additional +permits. Such work must be completed before the project can obtain project +financing, receive turbines and equipment, and commence construction. This +development work is necessitated by the location of the project in a part of +Texas which does not currently have adequate electrical interconnection or +transmission capacity to the utility grids and power purchasers. Construction +will entail erection, installation and commissioning of wind turbine towers, +related civil and electrical engineering and construction work as well as +construction of electrical interconnection substations and transmission +lines.
+

+
+
In +January 2010, we entered into a technology license agreement with W2E +Technologies, to manufacture, operate, service and sell 2.0 MW wind turbines. +Under the license agreement, W2E Technologies granted us an exclusive right to +manufacture, operate, service and sell its T8X 2.0 MW wind turbines in China and +the United States beginning in January 2010. In addition, we have obtained +non-exclusive rights to market these turbines in international markets outside +of China and the United States.  As of the date of this Annual Report +on Form 20-F, we have made all scheduled payments under our license agreement +with W2E Technologies. We have received a majority of technology transfer +documents under the agreement and we presently expect to begin production of the +2.0 MW wind turbines in a rented wind turbine manufacturing facility in the +United States in the second quarter of 2010 after +identifying a suitable facility and settling on commercially agreeable +terms. The license agreement runs perpetually unless there is an event of +default by one of the parties or a voluntary termination by mutual consent of +both parties.

+
Products +and Services
+

+
+
We +commenced manufacturing wind turbines at our facility in Shenyang, China in June +2009.  While most wind turbine manufacturers in China have limited +technology and capacity and are largely constrained to producing 750 kW to 1.5 +MW level of wind turbines, we are currently able to produce 2.7 MW, 2.5 MW, +1.5 MW, 750 kW and 225 kW turbines for our customers in +China.  We are focusing our efforts on producing advanced 2.7 MW wind +turbines.  As an early entrant into the market for the larger more +advanced wind turbine units in China, we believe we +can fulfill the demand for these units utilizing our licensed technology. We +expect to begin production of gearboxes for 2.5 MW and 2.7 MW wind turbines in a +separate facility in Shenyang in the third quarter of 2010. In addition, we plan +to begin +production of our 2.0 MW wind turbines in a manufacturing facility that we plan +to rent after identifying a suitable facility and settling on commercially +agreeable terms and to develop and construct a new production and +assembly plant in the United States to supply advanced wind energy turbines, +including our W2E licensed 2.0 MW wind turbines, to renewable energy projects +throughout North and South America.
+

+
As of the +date of this Annual Report on Form 20-F, we have sold ten 2.7 MW wind turbines +for use in the 49.5 MW and 19.5 MW wind farm projects in Saiwusu, Inner Mongolia +and Donggang, Shandong Province. In addition to supplying the wind turbines for +these projects, we will also supply towers and foundations, as well as +overseeing construction, subcontracting and installation.
+

+
The +following table sets forth additional information with regard to our wind energy +products, all of which will be produced in our Shenyang +facility:

+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
+
Product
+
+ 		   + +
+
(Expected) Production
+
Commencement Date
+
+ 		  + +
+
Licensing Partner
+
+ 		  +
+
Joint Venture
+
Partner
+
+ 		 
  +   +   +    +    +  
+
Wind + Turbines
+ 		  +   +    +    +  
+
225 + kW
+ 		  + +
2nd Half + 2010
+ 		  +
Norwin
+ 		  +
-
+ 		 
+
750 + kW
+ 		  + +
 2nd + Half 2010
+ 		  +
Norwin
+ 		  +
-
+ 		 
+
1.5 + MW
+ 		  + +
2nd + Half 2010
+ 		  +
Shenyang + Huaren
+ 		  +
-
+ 		 
+
2.0 + MW
+ 		  + +
2nd + Quarter 2010
+ 		  +
W2E + Technologies
+ 		  +
-
+ 		 
+
2.7 + MW
+ 		  + +
July + 2009
+ 		  +
Fuhrländer
+ 		  +
-
+ 		 
  +   +   +    +    +  
+
Wind + Turbine Components
+ 		  +   +    +    +  
+
Gear + Boxes
+ 		  + +
3rd + Quarter 2010
+ 		  +
GE + Drivetrain
+ 		  +
GE + Electronic
+ 		 
+
Rotor + blades
+ 		  + +
 2nd + Half 2010
+ 		  +
-
+ 		  +
Jiangsu + Miracle
+ 		+
(1)
+
+
Hubs
+ 		  + +
2nd + Half 2010
+ 		  +
-
+ 		  +
Jiangsu + Miracle
+ 		+
(1) 
+
+
Nacelle + Covers
+ 		  + +
2nd + Half 2010
+ 		  +
-
+ 		  +
Jiangsu + Miracle
+ 		+
(1)
+
+
+
+
   + + +
+
+
+
+
+ + + + + +
+
(1)
+ 		+
Establishment of Jiangsu Miracle still pending + final government approval
+
+
+
  
+
In +addition to the manufacture and sale of our products, we assist our customers +with delivery, installation, testing, service and maintenance of the +turbines.
+
 
+
+
+
+
+
+
+
38
+
+
+
+
+
+
+
+
+
+
 
+
Manufacturing +and Quality Control
+

+
Our wind +turbine production plant in Shenyang, China consists of a 320,000 square foot +production facility with production lines for the assembly of 2.7 MW, 2.5 MW, +1.5 MW, 750 kW and 225 kW series wind turbines, the technology we have licensed +from Fuhrländer, Shenyang, Huaneng and Norwin. The plant has an annual capacity +to produce a maximum of 300 units of our 2.7 MW series wind turbines and 420 +units of our 750 kW and 225 kW series of wind turbines. We must produce our wind +turbines in accordance to plans and specifications that we have acquired from +our licensing partners. Accordingly, we currently purchase many of our +components directly from the same suppliers employed by our licensing partners +for our wind turbine assembly. We have also begun to implement procedures, +including the establishment of a local joint venture with GE Electronic, to +gradually source the manufacturing of key components for our wind turbines +locally.
+
+
 
+
We expect +to begin commercial production of 2.0 MW wind turbines in the United States in +the second quarter of 2010. We intend to begin this production in a +wind turbine manufacturing facility which we plan to rent after +identifying a suitable facility and settling on commercially agreeable terms. We +expect to commence construction of our own US facility, a 320,000 square foot +wind turbine production facility with a total annual production capacity of 1.1 +GW, in the second half of 2010 or first half of 2011. Our wind turbines produced +in the United States will be supplied to our US$1.5 billion wind energy power +plant in Texas and sold to other customers in the North and South American +markets. See Item +3.D – “Key Information – Risk +Factors – Risks related to our business – The development of our wind energy +power plant project in Texas requires significant development work and capital +and entails political risks,” to this Annual Report on Form 20-F for a +discussion of the risks associated with the development of this +project.
  
+
The +designs on which our wind turbines are based have been reviewed by recognized +certification bodies including but not limited to Risoe, Det Norske Veritas +and/or Germanisher Lloyd. These institutions have certified that the design +systems are in accordance with applicable standards, authority requirements and +good engineering practice. In addition, we receive quality control assistance +from and are able to draw upon the training, process and quality expertise +provided by our licensing partners from Europe.
+

+
Components +and Suppliers
+

+
We select +our suppliers based on the quality, consistency, price and delivery of the raw +materials which they supply. We purchase a wide variety of components for the +manufacture of our wind turbines including gear boxes, generators, transformers, +turbine blades, turbine frames, control systems, cables and chemicals. The +following components generally account for a significant portion of the overall +cost of our wind turbines:
+

+
Gearbox.
+
   +
+
The +gearbox is made almost entirely of steel and is the heaviest component in the +wind turbine’s nacelle, which houses most of a wind turbine’s components. The +gearbox accounts for approximately 11% to 15% of the cost of our wind turbines. +The gearbox connects the low-speed shaft driven by the rotor blade to the +high-speed shaft that drives the generator, enabling the generator to produce +electricity. The gearbox contains a highly precise gearing system. Our key +gearbox suppliers include foreign suppliers GE Drivetrain, Zollern and Winergy, +and domestic suppliers Hangzhou Gearbox Co., Ltd., Chongqing Gearbox Co., Ltd. +and Nanjing Gearbox Co., Ltd.
+

+
Generator.
+
   +
+
The +generator is connected to the gearbox and converts mechanical energy generated +by the blade system into electrical energy. Wind +turbine generators account for approximately 5% to 10% of the cost of our wind +turbines. Our key wind turbine generator suppliers include foreign suppliers +Winergy and VEM and domestic suppliers China Xiangtan Generator Co., +Ltd.
+

+
Blade +System.
+
   +
+
The blade +system is attached to the nacelle via the rotor shaft and rotates at an angular +speed dependent on the power of the wind. Blades +account for approximately 20% to 25% of the cost of our wind turbines. Our key +blade system suppliers include foreign supplier LM, and domestic suppliers China +Zhongfu Lianzhong Co., Ltd. and Zhonghang Huiteng Wind Power Equipment Co., +Ltd.
+

+
Sources +for component parts are well established and are sufficiently numerous to avoid +serious future interruptions of production. We maintain sufficient inventory to +enable us to provide a high level of service to our wind turbine customers. Our +inventory levels, payment terms and return policies are in accordance with +general practices associated with the wind energy industry in +China.
+

+
The wind +turbine components we source for our 2.7 MW wind turbines are based on advanced +technology, and so we must import these components into China from Europe. These +components are in high demand world wide and subject to scarcity and price +escalation. We typically need to pay a deposit of 30% when we order them so we +can secure these components. We view our gearbox assembly joint venture with GE +Electronic as an important first step in enhancing our control of the supply +chain and reducing costs for our key components. In addition to establishing a +joint venture for gearboxes, we intend to identify strategic partners to establish additional joint +ventures for the production of wind turbine generators and other key components +in 2010.
+

+
Although +we have yet to begin producing our smaller 750 kW and 225 kW series of wind +turbines, we believe components for these will be easier to source and cheaper +since they are mainly available in China. We also expect prices for components +related to our smaller wind turbines to decrease as the supply of these +components increases in the future.
+

+
As of the +date of this Annual Report on Form 20-F, we had not experienced any cancellation +of orders or default on the part of our suppliers. However, we may encounter +sporadic interruptions by our suppliers. In addition, we could encounter price +increases that we may not be able to pass on to our customers.
+

+
Marketing, +Sales and Customer Support
+
 
+
We expect +to target both domestic and international trade show opportunities with specific +relevance to our wind turbine products to promote our wind energy business. Key +members of our management, sales and marketing staff frequently attend trade +shows, such as the American Wind Energy Association’s Windpower Conference and +Exhibition. We believe our participation at these trade shows will allow us to +broaden our customer base, particularly with respect to our more advanced +technology wind turbine products, including our 2.7 MW turbines, which we +produce in China, and our 2.0 MW turbines, which we expect to produce +in the United States. In addition, we have established our own sales, marketing +and customer support team for our wind turbine products. As noted above, we will +also offer installation and testing services for our wind turbine +customers.
+
 
+
+
+
+
+
+
+
39
+
+
+
+
+
+
+
+
+
+
 
+
Customers
+

+
We +currently have supply contracts with two customers for the sale of our 2.7 MW +wind turbines. These customers include Jihe Orient, for whom we are supplying 11 +2.7 MW wind turbines for a US$90.5 million 49.5 MW wind farm in Inner Mongolia, +and Datang Power, for whom we are supplying eight 2.7 MW wind turbines for a +US$36.2 million 19.5 MW wind farm in Shandong Province. As of the date of this +Annual Report on Form 20-F, we have sold ten 2.7 MW wind turbines for use in the +49.5 MW and 19.5 MW wind farm projects in Saiwusu, Inner Mongolia and Donggang, +Shandong Province.
+
+

+
In +December 2009, Shenyang Power Group entered into an agreement with USREG Wind, +described in greater detail above, to establish a project company that will seek +to own, design, develop, construct, manage and operate a US$1.5 billion wind +energy power plant in Texas with a total nameplate capacity of 600 MW. The +project company, Texas A Wind, was established in Delaware in December +2009. Under this agreement, we expect to be the exclusive manufacturer and +supplier of wind turbines to the power plant, subject to Texas A Wind securing +necessary project financing to purchase and pay for the +turbines.
+
+
 
+
Solar +Energy
+
 
+
+
We +expanded our clean energy footprint into the rapidly growing solar energy +industry by acquiring Evatech, +a Japan-based company that designs and produces equipment that +manufacture PV cells and solar panels. On September 16, 2009, we entered +into a stock purchase agreement with Evatech to extend our product offerings to +this complementary business and to take advantage of favorable government +policies that are expected, among other benefits, to provide us a rebate of +approximately 45% of the total purchase price of Evatech. We completed the +acquisition on January 25, 2010 with our payment of the purchase price of $49.9 +million in cash. With the completion of the acquisition, we plan to position +ourselves as a solar equipment manufacturer as well as a supplier of PV cells +and solar panels to capture the full range of market opportunities presented by +China’s rapidly growing thin-film solar market.
+
 
+
+
Permits, +Licenses and Government Approvals
+
 
+
+
We are +required to hold certain permits and approvals for the construction, +implementation and testing of our distributed power generation projects. +In 2009, +through our joint venture company, LICEG Ltd., in which we hold 90% of the +ownership interest, we had the full right to use a Class A License held by +LICEG, a construction company established by the Liaoning provincial government, +which holds the remaining 10% interest.  In early 2010, we obtained +ownership of the Class A License. It is currently in the process of being +transferred from LICEG to LICEG Ltd. The Class +A license, issued by the Ministry of Construction, includes a construction +permit and design permit that allows us to undertake and construct various power +systems, energy and infrastructure projects of any size in China and overseas. +In addition, we also hold a Class B License, which allows us to undertake +certain construction projects of a smaller size, as well as a PRC Overseas +Project Contracting Business Qualification License, issued by MOFCOM, which +allows us to undertake overseas construction projects. For our overseas +projects, we hold the relevant local permits, licenses and approvals, and +conduct our operations in compliance with local laws and +regulations.
+
+

+
+
We are +presently evaluating what licenses, permits, registrations and approvals may be +required for (i) the manufacture and sale of wind turbines and related equipment +from our planned facilities in the United States and (ii) the operation of the +planned Texas wind farm. There are no material licenses or registrations +required under PRC laws and regulations that are specific to our wind turbine +business in China.
+
 
+
+
+
+
+
+
+
+
40
+
+
+
+
+
+
+
+
+
+
 
+
Competition
+
  
+
Renewable +energy businesses, including our distributed power generation, wind and solar +business operations, generally compete with other renewable energy sources on +the basis of cost-efficiency while continually striving to achieve cost parity +with conventional fossil fuel sources. Each one of our business segments +operates in a separate industry with the following distinct competitive dynamic +and factors.
+

+
Distributed +Power Generation
+
 
+
+
Given the +current NDRC and Ministry of Construction rules and regulations, we believe that +the industry in which we compete is highly regulated because the parties engaged +in the design, construction and testing of power generating stations must be +licensed by the relevant governmental entities.  As such, +we believe +there is limited existing competition for our target market of distributed power +generation systems and micro power grids ranging from 24 MW to 400 MW in China. +The +principal potential competition for our projects is from the many larger, +state-owned Class A and B licensees that can also provide fully integrated, +turn-key distributed power generation systems. Many of these companies have +substantially greater manpower, capital and other resources that would make them +formidable competitors in the distributed power generation business. However, +while these companies have the ability to provide such products we believe most +of these companies have focused on much larger central grid projects, such as +generating stations of 1 GW or more. While it is possible that these companies +could shift resources to smaller distributed power generation systems, we +believe that the relatively small size of the projects in which we specialize +makes the 24 MW to 400 MW project size unattractive to the large power +companies.
+
+
 
+
We +believe other private companies in China’s power industry have Class B licenses, +which limit the scope of their work in terms of range of services and size of +projects. These companies are primarily small operations that only complete a +few design projects each year. We believe that our experience and our ability to +control and deliver the entire project, allows us to compete effectively against +the holders of Class B licenses.
+
 
+
Wind +Power
+

+
Competition +among wind energy participants in China is becoming increasingly intense with +more domestic companies entering the market.  Our major domestic +competitors include Sinovel Wind Co., Ltd., Dongfang Electric Corporation +Limited, Xinjiang Goldwin Sci & Tech Co., Ltd., and Shanghai Electric Group +Company Limited.  We anticipate that our primary competitors in China will +continue to be domestic manufacturers, despite the removal in November 2009 of +the requirement that large utility companies in China purchase a minimum of 70% +of the value of turbines installed in local projects from domestic +producers.  
+

+
Chinese +domestic wind turbine manufacturers have been shifting their production focus +from kilowatt-grade turbines to megawatt grade turbines. Wind turbines currently +produced in China largely range from 200 kW to 1.5 MW, with some production at +the 2.0 MW level, which are all consumed domestically and to date have not been +exported. As a recent entrant in this market, we will initially target more +advanced technology in larger capacity turbines at the 2.7 MW grade. We believe +that currently, there are no other producers of 2.7 MW grade wind turbines in +China and that we will be able to compete effectively based on the technology we +have licensed, relationships with our technology partners and the strategic +relationships we are forming with wind turbine components companies both in +China and overseas through our licensing partners in Europe. We plan to develop +and construct a new production and assembly plant in the United States to supply +advanced wind energy turbines to renewable energy projects throughout North and +South America.
+

+
Research +and Development
+
 
+
+
We work +with our customers and suppliers to continuously improve and develop our +distributed power generation construction and installation processes by refining +our distributed power generation designs and streamlining our proprietary +components, such as our automatic control systems.  We are working +with various research institutions in the PRC that focus on wind power +technologies and have formed joint research programs to improve our distributed +power generation systems, and to develop and commercialize wind and other +renewable energy technologies.  In addition, we have agreed with +Norwin to establish a joint research and development facility in Shenyang to +develop new wind turbine technology for both the China and international +markets. We expect to sign a detailed agreement with Norwin related to the +facility in the second quarter of 2010.
+
 
+
+
+
We +believe that our industry-wide reputation for quality and our track record of +seamless product implementation, coupled with our significant relationship with +the Shenyang municipal government and leading Shenyang industrial companies, +allowed us to form the Shenyang Power Group, or SPG, in 2009. SPG is an industry +venture committed to pursuing large-scale electricity generation projects +domestically and internationally.  We hold a 62% share in this +venture, with other industrial companies holding the remaining shares. The +Shenyang municipal government has provided seed capital and subsidies to +facilitate the development of this venture. We believe that the Shenyang Power +Group will enable us to refine our design and engineering processes, streamline +our projects and enable us to develop business opportunities and secure +additional project assignments in China and overseas.
+
+
 
+
+
+
+
+
+
+
41
+
+
+
+
+
+
+
+
+
+
Intellectual +Property
+
 
+
+
Distributed Power +Generation
+

+
Our distributed power generation +business utilizes trade secrets and proprietary know-how, but does not generally +utilize protected intellectual property such as patents, licenses and +trademarks.  We do not believe that our competitive position is +dependent solely on intellectual property protections, or that any business +segment or operations as a whole are dependent.
+

+
Wind Power
+
 
+
+
Acquisition +of Advanced Wind Turbine Technology
+
 
+
+
In February 2007, GaoKe Energy entered +into a license agreement with Norwin that gave GaoKe Energy the exclusive rights +to produce and sell Norwin’s 750 kW and 225 kW wind turbines in China. As part +of the agreement with Norwin, Jinxiang was established in Shenyang, China in +January 2008. The license agreement has a term of 20 years unless there is a +substantial breach of the agreement. Under this agreement, Gaoke Energy agreed +to make all payments to Norwin by no later than February 15, 2009. In January +2009, Norwin, GaoKe Energy, and Jinxiang entered into an agreement to transfer +the original license agreement from GaoKe Energy to Jinxiang. The terms of the +original agreement remain unchanged. As of the date of this Annual Report on +Form 20-F, we have a remaining balance of $0.55 million to Norwin. However, +Norwin has provided us written confirmation dated May 31, 2009 that the +agreement we have with them remains valid. We expect to pay the remaining +balance of $0.55 million to Norwin in the second half of 2010. We expect to +begin production of Norwin’s 750kW and 225kW wind turbines in China in the +second quarter of 2010.
+

+
In May 2007, GaoKe Energy entered into +a license agreement with Fuhrländer, a German wind turbine manufacturer, that +gave GaoKe Energy an exclusive right to sell and a non-exclusive right to +produce Fuhrländer’s 2.5 MW series wind turbines in Liaoning and Hebei provinces +of China and a nonexclusive right to produce and sell Fuhrländer’s 2.5 MW series +wind turbines in nine other PRC provinces. As part of the agreement, Fuhrländer +agreed to assist GaoKe Energy in developing a production facility that emulates +Fuhrländer’s facility in Germany, which we have recently completed in Shenyang. +Under the technology license, GaoKe Energy has the right to any advancements or +improvements that Fuhrländer makes to its 2.5 MW series wind turbine without +charge.
+

+
In January 2009, Fuhrländer, GaoKe +Energy, and Ruixiang entered into an agreement to transfer the original license +agreement from GaoKe Energy to Ruixiang. The terms of the original agreement +remain unchanged, except that the wind turbine series was upgraded from 2.5 MW +series of wind turbines to 2.7 MW series of wind turbines. As of the date of +this Annual Report on Form 20-F, we have sold ten 2.7 MW wind turbines for use +in 49.5 MW and 19.5 MW wind farm projects in Saiwusu, Inner Mongolia and +Donggang, Shandong Province. There are certain disputes between the parties +concerning payment and performance under this license agreement. The parties are +in discussions to rectify this situation and are also currently negotiating an +amendment to the license agreement to broaden the scope of our rights to use the +technology licensed thereunder. There can be no assurance, however, that the +parties will succeed in resolving the issues between them. If we are unable to +rectify this situation, this could have a material adverse effect on our +business and results of operation.
+

+
In July 2009, we entered into a +technology transfer agreement with Shenyang Huaren, to use Shenyang Huaren’s +proprietary technology to commercially produce and sell 1.5 MW wind turbines. As +of the date of this Annual Report on Form 20-F filing, we have not any payments +under our license agreement with Shenyang Huaren as no payments are yet due. We +have received a majority of the technology transfer documents under the +agreement and expect to produce the initial 1.5MW wind turbines in our Shenyang +facility in the second half of 2010.
+

+
In January 2010, we entered into a +technology license agreement with W2E Technologies GmbH, or W2E Technologies to +manufacture, operate, service and sell advanced T8x 2.0 MW wind turbines. Under +the license agreement, W2E Technologies granted us an exclusive right to +manufacture, operate, service and sell its T8x 2.0 MW wind turbines in China and +the United States beginning in January 2010. In addition, we have obtained non− +exclusive rights to market these turbines in international markets outside of +China and the United States. Under the technology license, during the term of +the agreement, we have the right to any additional know-how in relation to the +manufacturing, selling, erecting, commissioning, operating, maintaining and +monitoring of the T8x 2.0 MW wind turbines without charge. As of the date of +this Annual Report on Form 20-F, we have made all scheduled payments under our +license agreement with W2E Technologies. We have received a majority of the +technology transfer documents under the agreement and expect to begin commercial +production of the 2.0MW wind turbines in the second quarter of 2010 in a rented +wind turbine manufacturing facility in the United States. The license agreement +runs perpetually unless there is an event of default by one of the parties or a +voluntary termination by mutual consent of both parties.
+

+
We expect to begin commercial +production of 2.0MW wind turbines in the United States in the second quarter of +2010. We intend to begin this production in a wind turbine manufacturing +facility which we plan to rent after identifying a suitable facility and +settling on commercially agreeable terms. We expect to commence construction of +our own US facility, a 320,000 square foot wind turbine production facility with +a total annual production capacity of 1.1 GW, in the second half of 2010 or +first half of 2011. Our wind turbines produced in the United States will be +supplied to our US$1.5 billion wind energy power plant in Texas and sold to +other customers in the North and South American markets. For more information, +see Item 3.D – “Key Information – Risk Factors – Risks related to our +business – The development of our wind energy power plant project in Texas +requires significant development work and capital and entails political +risks.”
+
 
+
+
Regulation
+

+
The PRC +government regulates the power industry in China, as well as laws related to +renewable energy. This section summarizes the principal PRC regulations relating +to our business.
+
    +
+
Renewable +Energy Law
+
    +
+
+
The +Renewable Energy Law of the PRC was issued on February 28, 2005 and effective in +2006, and amended with effect on April 1, 2010.  The Renewable Energy Law +(as amended) requires power grid operators to buy electricity that should meet +the relevant technical standards and be produced by qualified renewable energy +generators. The Renewable Energy Law (as amended) also authorizes the competent +department of energy under the State Council, in conjunction with the state +power regulatory authority and the finance department under the State Council +and in accordance with the national plan on renewable energy development and +utilization, to ascertain the proportion of total domestic electricity to be +generated by renewable energies within periods covered by the plan, to formulate +specific measures on priority dispatching and purchases of electricity generated +by renewable energies among electricity grid enterprises, and to supervise the +annual implementation thereof. The NDRC carried out an official governmental +review of the Renewable Energy Law of 2006 and promulgation of the Medium and +Long -Term Development Plan for Renewable Energy, or the Development Plan, +described below.  In addition, a variety of new environmentally-focused +laws and policies have been proposed and/or passed by the PRC +government.
+
+
 
+
The +Renewable Energy Law covers energy generated from all non-fossil sources (with +the exception of nuclear generation). It provides the framework for legislative +initiatives, designed to secure the strategic position and future development of +renewable energy. These include:
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
renewable + energy targets, including both economy-wide and technology-specific + targets;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
compulsory + grid connection for renewable energy facilities to the national + electricity grid;
+
+

+
+
+
  +
+
+
+
42
+
+
+
+
+
+
  +
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
power + pricing arrangements, including feed-in tariffs and competitive tendering + systems, to allow renewable energy to compete with traditional, fossil + fuel-powered generation; and
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
cost + sharing arrangements to divide the costs of renewable energy generation + and grid connection equitably among utilities and electricity end + users.
+
+
+

+
In China, +the central government is responsible for formulating national regulations to +guide individual provinces during the implementation process. Instructions +regarding pricing, cost-sharing, taxation and the project approvals process are +stipulated by the central government for the provincial government to follow. +However, since there are great disparities between various provinces in terms of +resource availability, industrial capacity and demand, in some cases provincial +governments have needed to formulate their own detailed provisions for their +area within the central government’s general policy framework.  Although +some national and provincial regulations have been introduced, the +implementation of the Renewable Energy Law is an ongoing process.
+
 
+
+
The +Development Plan
+
 
+
+
+
The NDRC +promulgated the Development Plan on August 31, 2007.  The Development Plan +relates to policies for the accelerated development of renewable energy during +the “Eleventh Five-Year” period in China, or 2006 to 2010, as well as thereafter +to 2020, and the various policies and regulations that have come into effect +since 2005, such as the Renewable Energy Law, Administrative Regulations on +Power Generation through Renewable Energy, Guidance Catalogue for the +Development of the Renewable Energy Industry, and the Interim Regulations for +Special Fund Management for Renewable Energy Development. For the “Eleventh +Five-Year” period, renewable energy in China is expected to enter a stage of +rapid development, bolstered by the support of the PRC central government.  +Among the goals articulated in the Development Plan are providing lower-cost +wind energy in China. Specific goals and expectations of the Development Plan, +as revised by the “Eleventh Five-Year” Development Plan for Renewable Energy +Development in 2008, include the following:
+
 
+
+
(1)           National +total installed capacity of wind energy by 2010 of 10 GW, with approximately 30 +100 MW or higher capacity wind farms and five GW-class wind power bases, +with a focus on the northern and eastern regions of China  The actual rate of newly +installed wind power capacity between 2007 and 2009 significantly exceeded the +goals and expectations set forth in the Development Plan.  As of the +end of 2009, installed wind power capacity in China reached approximately 25.1 +GW, according to the PRC’s State Electricity Regulatory Commission.
+
 
+
(2)           National +total installed capacity of wind power by 2020 of 30 GW with large-scale +regional development of wind-energy projects involving an aggregate of over 2 GW +of wind-energy in the provinces of Guangdong, Fujian, Jiangsu, Shandong, Hebei, +Inner Mongolia, Liaoning and Jilin and the establishment of six GW-class wind +power bases in Xinjiang, Gansu, Inner Mongolia, Hebei, Jilin and Jiangsu / +Shanghai. Based on news reports from Xinhua, the official press agency of +the  PRC government, it is now expected that installed wind power +capacity in China may reach in excess of 100 GW by 2020.
+
 
+
Interim +Regulations of Special Fund Management for Renewable Energy +Development
+
 
+
The +Special Fund Management for Renewable Energy Development, or the Special Fund, +was established by National Ministry of Finance to support renewable energy +development and utilization.  The fund may be used to provide finance +support and subsidies on interest payment for loans. The fund provides free +finance support mainly for companies or organizations that have weak-profits, +are non-profit or are related to the public welfare.  The fund +provides subsidiaries for loans primarily for companies or organizations which +were in the Renewable Energy Industrial Catalog (which identifies the renewable +energy technologies that will be supported by the PRC government), and which +satisfy the credit conditions of the renewable energy projects.   +Subsidies for loans are provided for periods of one to three years at rates not +exceeding 3% per year.  Among the power generation of renewable +energy, the special fund has mainly been used to support projects for wind +energy, solar energy or ocean energy. 
+

+
PRC +Regulation of the Power Plant Design and Construction Industry
+
 
+
Power +generation in China is highly regulated. Companies must obtain licenses from the +central government to engage in the design, development, construction and +installation of power generation systems and grids in China. Licenses are Class +A or Class B, which determine the services the license holder may provide. Class +A license holders can work on any size power plant in China, whereas Class B +license holders can only work on smaller scale power generation systems, which +are typically up to 25 MW. Class A licenses are available for design only, +construction only or design, construction and general contracting, and Class B +licenses are for design only, or for general contracting, or for +both.
+
 
+
We +believe that there are approximately 60 Class A construction company licensees +and 40 Class A design licensees with some companies holding both. Generally +Class A licensed companies are state-owned and focus on developing large-scale +(300 MW+) power plants to supply power to China’s central grid. We believe that +there are approximately 240 design-only Class B licensees, most of which are +either state-owned or small private companies that perform only a few projects +each year.

+
+
+
  +
+
+
+
43
+
+
+
+
+
+
  +
+
+

+
Wind +Power Pricing and Content
+
 
+
In July +2009, the NDRC issued a new policy designed to increase the profitability of PRC +wind farms by providing for fixed benchmark feed-in tariffs for new onshore wind +farms established after August 1, 2009.  The benchmark feed-in +tariffs, which are determined based on local project construction conditions and +the availability of wind resources in the area in which the wind farm is +established, range from a low of RMB0.51/kWh for high wind resource areas to +RMB0.61/kWh for low wind resource areas.
+

+
Previously, +NDRC regulations provided that a minimum of 70% of the value of the +turbines installed in wind farm projects had to be manufactured in China. +However, this localization provision was removed with the issuance of the +“Notice on the Cancellation of Requirements for the Purchase of Domestically +Produced Equipment for Wind Power Projects,” issued on November 25, +2009.
+
 
+
New +Energy Law
+
 
+
A draft +Energy Law for China has been drafted and submitted to the State Council. It is +intended to be the basic energy law that will guide and co-ordinate other laws +in China’s energy sector, thus acting as an overlay for other energy sector laws +such as the Renewable Energy Law, Energy Conservation Law, Electric Power Law +and their associated regulations and measures.  The draft Energy Law will +cover all forms of primary energy, including renewable energy, as well as +secondary energy products such as electricity and petrol.
+
 
+
The +stated purposes of the draft Energy Law include:
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
creating + a stable, economical, clean and sustainable energy supply and service + system;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
increasing + energy efficiency;
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
ensuring + energy security; and
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
promoting + the coordinated development of energy, the economy and + society.
+
+
+

+
The +“guiding principles” of the draft Energy Law include several which are intended +to reinforce the Renewable Energy law, such as:
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
sustainable + development and resource +conservation;
+
+
+

+
+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
incentivized + pricing policies for renewable energy and new energy; + and
+
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
tax + incentives to encourage the development and use of renewable and new + energy.
+
+
+

+
Under the +draft Energy Law, a national energy strategy will be established to guide the +sustainable development of China’s energy resources and safeguard its energy +security.  The strategy is intended to extend for a period of 20 to 30 +years, subject to revision and amendment every five years.  Underlying this +long-term national strategy will be five-year national energy plans and local +energy plans, all of which must be consistent with the national energy +strategy. 
+

+
Article 5 +of the draft Energy Law encourages renewable energy and low-carbon energy, in +accordance with the Renewable Energy Law and China’s National Climate Change +Program. It does not appear that the draft Energy Law is intended to make any +substantive changes to the way in which the Renewable Energy Law operates. +However, a company undertaking renewable energy projects will need to ensure +that it complies with the draft Energy Law as well as the Renewable Energy Law +and associated regulations.
+
 
+
Environmental +Regulations
+
 
+
We are subject to various environmental +laws and regulations set by the national, provincial and municipal governments +in China, including regulations on water pollution, waste discharge, hazardous +substances and noise. Our projects and manufacturing facilities are normally +required to undergo an environmental impact assessment by qualified third +parties, and a report of the assessment needs to be submitted to the relevant +environmental authorities in order to obtain their approval before commencing +construction. With respect to our distributed power generation projects and wind +power projects in China, our customers are generally responsible for undertaking +the necessary environmental impact assessment before their projects are +approved. Although we are not responsible for undertaking these assessments, +delays in their completion can affect the timing of our projects. Upon +completion of each project or facility, the relevant environmental authorities +inspect the site to ensure the applicable environmental protection requirements +have been complied with, and the approval before their projects are approved +presented together with other specified documents to the relevant construction +administration authorities for their recording. We believe that we are in +compliance in all material respects with all environmental protection laws and +regulations of the PRC.

+
+
+
  +
+
+
+
44
+
+
+
+
+
+
  +
+
+

+
Insurance
+
 
+
+
Our +business segments are insured up to the requisite minimum amount as required by +the relevant PRC laws and regulations. Pursuant to what we believe to be +industry custom, we do not carry business interruption or casualty +insurance, nor any +insurance for property, plant or equipment. We maintain primary and +excess liability insurance, as well as customary workers compensation and other +insurance in accordance with the relevant PRC laws and regulations. See Item +3.D, “Key Information - Risk +Factors - We have limited business insurance coverage in China,” to this +Annual Report in 20-F. We believe our insurance coverage is adequate for our +operations.
+
 
+
+
C.           Organization +and Structure

+
+
+
+
We are a +holding company organized under the laws of the British Virgin Islands and +conduct all of our business through our indirectly held operating subsidiaries. +We own 100% of the equity interest in Head Dragon Holdings, a Hong Kong holding +company, that, in turn, owns 100% of GaoKe Energy, a PRC company and our +principal operating subsidiary,  that, in turn, owns 51% of GaoKe +Design,  a PRC company and an operating subsidiary.   Jinxiang +Lu, our Chairman and Chief Executive Officer, owns 36% of GaoKe Design and his +wife, Haixue Yu, owns the remaining 13%. GaoKe Energy also owns 90% of a PRC +co-op joint venture company, LICEG Ltd.  LICEG owns the other 10% of this +joint venture company. For more information, see Item 4.A – “Information on the +Company – History and Development of the Company – Corporate structure summary,” +of this Annual Report on Form 20-F.
+
 
+
In +addtion, we also own 100% of Easy Flow Limited, a Hong Kong holding company, +that, in turn, owns 100% of Ruixiang, a PRC company that engages in the +production of wind turbines, and 80% of Jinxiang, a PRC company that engages in +the production of wind turbines. Of the remaining ownership interest in +Jinxiang, 15% is owned by Norwin A/S and 5% is owned by Mr. Antos Glogowski, an +independent consultant. The following diagram sets forth our current +organizational structure as of the date of this Annual Report:
+
 
+
+
+
+
+
+
+
  +
+
+
+
45
+
+
+
+
+
+
  +
+
+
+
+
 
+
+
      +
+
1. The +other shareholders of GaoKe Design are Jinxiang Lu (36%) and his +spouse, Haixue Yu (13%).
+
+
+
2. The +other shareholder of LICEG Limited is LICEG (10%).
+
3. The +other shareholders of Jinxiang are Norwin (15%) and Antos Glogowski +(5%).
+
4. +Shoulong is an offshore company incorporated in Thailand.
+
5: The +other shareholders of Shenyang Power Group Ltd. include Shenyang Darui +Investment Management Company Ltd. (20%), LICEG Ltd. (4%), Shenyang Boiler +Manufacturing Co., Ltd. (4%), Shenyang Shengshi Medium and Hi-Pressure Valve Co. +Ltd. (4%), Shenyang HuiCheng Cable Co., Ltd. (4%), Northern Heavy Industries +Group Co., Ltd. (2%), Shenyang Blower Works Group Co., Ltd. (2%) and Shenyang +Electric Machine Co., Ltd. (2%).
+
6: The +other shareholder of Texas A Wind is US REG Wind (51%). Texas A Wind is an +offshore company incorporated in the US.
+
7: The +other shareholder of GE Drivetrain Technologies (Shenyang) Co. Ltd. is GE +Electronic (China) Co. Ltd.
+
+
 
+
+
D.           Property, +Plant & Equipment
+

+
Our +principal executive offices are located in the Tiexi District in Shenyang, +China, where we own an approximately 9,300 square meter building and the rights +to use the land on which the building is located until March 2048. We also own +two other buildings, one of which is located at No. 64, Huanghai Road, Shenyang, +China and is approximately 3,423 square meters.  The other is located +at No. 35, South Six East Road, Shenyang, China and is approximately 3,486 +square meters. These buildings house our administrative offices, sales and +marketing offices, research and development facilities and design offices. +Private ownership of land is not allowed in mainland China. Rather, entities +acquire the right to use land for a designated term.
+

+
We leased +five additional office locations in China that total approximately 2,606 square +meters of office space. These facilities house administrative personnel, sales +and marketing staff, research and development staff and design staff. The +expiration of these leases range from three to five years and we feel we will be +able to renew these leases or move to other locations at rates that are similar +to the rates we are currently paying. We believe that our existing office +facilities are adequate to conduct our current and foreseeable future business +operations.
+
 
+
In 2008, +we acquired long-term land rights to approximately 29,730 square meters in +Shenyang to construct our new wind turbine production facility. Our rights to +use this land expire in 2058.  In November 2009, we completed construction +of this production facility and auxiliary facilities on this land.
+
 
+
+
In +September 2009, our joint venture with GE Electronic commenced construction of a +production and assembly plant in Shenyang to supply gearboxes for 2.5 MW and 2.7 +MW wind turbines. We expect to complete construction of this facility in the +second quarter of 2010.
+
 
+
+
+
For our +properties above, we did not have any material environmental issues that would +affect our use of the property, plant and equipment.  In addition, +there were no major encumbrances.
+
 
+
+
+
+
  +
+
+
+
46
+
+
+
+
+
+
  +
+
+
+
+

+
+
Currently, +we plan to develop and construct a new production and assembly plant in the +United States to supply advanced wind energy turbines, including our W2E +licensed 2.0 MW wind turbines, to renewable energy projects throughout North and +South America. Upon completion, we expect the facility to be 320,000 square feet +with a total annual production capacity of 1.1 GW.
+
  
+
+ + + + + +
+
ITEM + 4A.
+ 		+
UNRESOLVED + STAFF COMMENTS
+
+
+
 
+
None.
+
+
+
 
+
+ + + + + +
+
ITEM + 5.
+ 		+
OPERATING + AND FINANCIAL REVIEW AND PROSPECTS
+
+
+
 
+
The +following discussion of our financial condition and results of operations is +based upon and should be read in conjunction with our consolidated financial +statements and their related notes included in this Annual Report on Form 20-F. +This Annual Report on Form 20-F contains forward-looking statements. See “Forward-Looking +Information.” In evaluating our business, you should carefully consider +the information provided in Item 3.D, “Key Information - Risk +Factors,” of this Annual Report on Form 20-F. We caution you +that our businesses and financial performance are subject to substantial risks +and uncertainties.
+
 
+
+
Overview
+
 
+
A-Power Energy Generation Systems, +Ltd. (“A-Power” or the “Company”), formerly known as China Energy Technology +Limited, was established under the laws of the British Virgin Islands (“BVI”) on +May 14, 2007, as a subsidiary of China South Chardan Acquisition Corporation +(“Chardan”).  Its purposes were to merge with Chardan and to hold a +100% interest in Head Dragon Holdings Limited (“Head Dragon”) upon the +completion of a reverse acquisition transaction with +recapitalization.
+
 
+
We are an +engineering, procurement and construction, or EPC, services company in China +dedicated to the power industry. We are primarily engaged in providing onsite +distributed power generation systems and micro power grids for industrial +companies. We commenced the production of wind turbines in 2007 based on wind +turbine technology licensed from our strategic licensing partners in Europe and +China. In the first quarter of 2010, we acquired Evatech, a Japan-based designer +and producer of equipment for the manufacturing of PV cells and solar +panels.
+
 
+
+ +
 
+
Generating capacity requirements of the +customer and the complexity of the solution needed to meet its +needs
+
 
+
The +revenue associated with a distributed power generation project is affected by +the generating capacity requirements of the customer and the complexity of the +solution needed to meet its needs. For our distributed power generation +business, we recognize revenue on a percentage of completion basis. Because +integrated contracts started in one fiscal year are often completed in the +following fiscal year, the revenue recognized in a particular year is not, by +itself, the best indicator of whether our business is expanding. For more +information, see Item 3.D – “Risk Factors – Risks related to our +business – Our revenue from our distributed power generation business segment +depends on gaining new customers and project contracts, and we do not have +long-term purchase commitments from our customers,” of this Annual Report +on Form 20-F.
+
 
+
+
Limited amount of distributed power +generation customers at a given time
+
 
+
+
+
Currently and historically, we have +only had a limited amount of projects for a certain number of customers that are +in process at any time. Thus, our revenues have historically resulted, and are +expected to continue in the near future to result, primarily from performing +individual contracts in our power distribution generation and micro-grid system +business that, once completed, typically produce only a limited amount of +ongoing revenue for maintenance and other services. In addition, customers may +change or delay or terminate orders for products without notice for any number +of reasons, such as force majeure or seasonality factors that are unrelated to +us. As a result, in order to maintain and expand our business, we must be able +to replenish the orders in our pipeline on a continuous basis. However, it is +difficult to predict whether and when we will receive such orders or project +contracts due to the lengthy and complex bidding and selection process, which is +affected by factors that we do not control, such as market and economic +conditions, financing arrangements, commodity prices, environmental issues and +government approvals.
+

+
Further, we may not be experience +delays or failures in receiving payments and therefore our revenues and profits +may be reduced. Further, our results of operations may fluctuate from +quarter-to-quarter and year-to-year depending on whether and when we receive +such orders or project contracts, as well as the commencement and progress of +work under such contracts. It is also possible that some of our potential +customers could choose the products of our competitors instead, any number of +whom may supply products with larger generating capacity than products which we +produce. Should they do so, or if any of the foregoing risks materialize, we +could suffer a significant and material decline in our revenues and +profitability.
     
+
Revenue recognition for wind +turbines
+
    
+
+
Sales of +wind turbines involve the provision of multiple elements. For wind turbine +sales, a determination must be made whether the contract or arrangement contains +more than one unit of accounting. An arrangement is separated if: (1) the +delivered elements have value to the customer on a stand-alone basis; +(2) there is reliable evidence of the fair value of the undelivered +elements; and (3), if the arrangement includes a general right of return +relative to the delivered elements, delivery or performance of the undelivered +elements isconsidered probable and substantially in the control of the Company. +If all three criteria are fulfilled, the appropriate revenue recognition +convention is then applied to each separate unit of accounting. Generally, the +total arrangement consideration is allocated to the separate units of accounting +based on their relative fair values. Reliable fair values are sales prices for +the component when it is regularly sold on a stand-alone basis, third-party +prices for similar components or, under certain circumstances, cost plus, an +adequate business specific profit margin related to the relevant element. If the +three criteria are not met, revenue is deferred until such criteria are met or +until the period in which the last undelivered element is delivered. The amount +allocable to the delivered elements is limited to the amount that is not +contingent upon delivery of additional elements or meeting other specified +performance conditions. For multiple element contracts where there is no vendor +specific objective evidence (“VSOE”) or third-party evidence that would allow +the allocation of an arrangement fee amongst various pieces of a multi-element +contract, fees received in advance of services provided are recorded as deferred +revenues until additional operational experience or other VSOE becomes +available, or until the contract is completed.
+
   
+
We recognize wind turbine +manufacturing revenue under the guidance found in ASU 2009-13 +Multiple-Deliverable Revenue Arrangement. The manufacture of wind +turbines comprises three stages: (a) manufacture; (b) installation; and (c) +quality assurance and warranty. These three stages constitute separate units of +accounting. We recognize 90% of manufacture stage revenue when we complete +manufacture of our turbines and receive notice of customer acceptance. We +recognize installation stage revenue after we complete installation of our +turbines and receive notice of customer acceptance. We defer recognition of 10% +of wind turbine manufacture revenue, which is recognized on a straight-line +basis over a quality assurance and warranty period of 18 months following +execution of contracts associated with the sale of our wind turbines. In the +fiscal year ended December 31, 2009, we recognized total revenue from our wind +turbine operations of US$32.7 million, consisting primarily of revenue +recognized for the manufacture of ten 2.7 MW wind turbines.
+

+
+
+
+
  +
+
+
+
47
+
+
+
+
+
+
  +
+
+
+
+

+
Seasonality
+

+
We do not experience seasonality with +regard to demand for our distributed power generation system projects. However, +a majority of our distributed power generation system projects are in Northeast +China, where we typically experience a slow down, and sometimes a complete halt, +of our project developments due to inclement weather conditions in that region +from December to March.  We recognize revenue on our distributed power +generation system projects on a percentage completion basis and thus, during the +first fiscal quarter, we typically experience a slow down in operations and +revenue recognition.  In addition, unpredicted harsh climate +conditions, or stormy weather could produce unexpected slowdowns during the +winter months beyond our typical anticipated slowdowns related to +seasonality.  As we develop more projects in Southern China and in +other areas of Southeast Asia, we expect our slow downs in the winter months to +have less of an impact on our project schedules and results of operations. The +majority of our wind turbine business is not affected by seasonality, although, +the provision of transportation and installation services can be affected by +weather-related constraints.
+

+
PRC +Policies
+

+
PRC +governmental policies could materially affect our operations or +shareholders.  For information regarding those policies, see Item 3D, +“Key Information – Risk Factors – Risks Related +to Doing Business in China – Changes in the PRC’s economic, fiscal, monetary or +political policies or factors could materially affect, directly or indirectly, +the Company’s operations or shareholders” and Item 4C, “Information on the Company – Business Overview – +Regulation,” to this Annual Report on Form 20-F.
+
 
+
Description of Key Line Items
+
 
+
Revenue
+
 
+
We +currently derive revenue from the following sources:
+
 
+
+
+ + + + + + + + + + + +
  + +
·
+ 		+
Design + and general contracting services for distributed power generation + projects, where our subsidiary GaoKe, provides an end-to-end solution to + develop distributed power generation and micro power grid systems, + generally referred to as integrated contracts and construction projects, + where we undertake international power and infrastructure projects and + constructs various power systems, energy and infrastructure projects of + any size. Our + revenue in 2009 from design and general contracting services for + distributed generation projects was $261.0 + million.
+
   
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + +
 ·Wind + Turbine Production, where we manufacture wind turbines at our facility in + Shenyang, China. We are currently able to produce 2.7 MW, 2.5 MW, + 1.5 MW, 750 kW and 225 kW turbines for our customers.  In + China, we are focusing our efforts on producing advanced 2.7 MW wind + turbines. As an early entrant into the market for the larger more advanced + wind turbine units in China, we + believe we can fulfill the demand for these units by leveraging our + licensed technology. Our + revenue in 2009 from wind turbine assembly was $32.7 + million.
   
  + +
·
+ 		+
Construction + of infrastructure, industrial buildings, and residential real estate + properties through our subsidiary LICEG Ltd. Our revenue in 2009 from this + construction business was $17.4 +million.
+
+
+
+
+
+
 
+
The +Company derives its revenue primarily from contracts for the design of, and +general contracting services for, distributed power generation systems which may +require anywhere from twelve to twenty-four months to +complete. Revenue on these contracts is recognized using the percentage of +completion method of accounting, provided that sufficient progress has been made +on the contracts such that costs to complete the contracts can be reasonably +estimated.
+
 
+
The +percentage of completion is measured by relating the percentage of costs +incurred as of a particular date to the estimated total direct costs. Direct +costs include, among other things, direct labor, equipment rent, subcontracting, +direct materials and direct overhead incurred only after the receipt of a +contract. The progress of subcontractors is evaluated monthly through a +construction progress report generated by the subcontractors and verified by +representatives of the subcontractor and the Company. General and administrative +expenses are accounted for as period costs and are, therefore, not included in +the calculation of the estimates to complete construction contracts in progress. +When it is probable that total contract costs will exceed total contract +revenue, the resultant loss is recognized in full immediately, without reference +to the percentage of completion. To date, the Company has not experienced +material losses on contracts in process or completed contracts. Revisions to +contract revenue, contract costs and profit estimates, which can be significant, +are reflected in the accounting period in which the relevant facts become +known.
+
 
+ +

+
+
+
+
  +
+
+
+
48
+
+
+
+
+
+
  +
+
+
+
+
 
+
Wind +turbine revenues involve the provision of multiple elements. For wind turbine +sales, a determination must be made whether the contract or arrangement contains +more than one unit of accounting. An arrangement is separated if (1) the +delivered elements have value to the customer on a stand-alone basis, +(2) there is reliable evidence of the fair value of the undelivered +elements and (3), if the arrangement includes a general right of return relative +to the delivered element(s), delivery or performance of the undelivered elements +are considered probable and substantially in the control of the Company. If all +three criteria are fulfilled, the appropriate revenue recognition convention is +then applied to each separate unit of accounting. Generally, the total +arrangement consideration is allocated to the separate units of accounting based +on their relative fair values. Reliable fair values are sales prices for the +component when it is regularly sold on a stand-alone basis, third-party prices +for similar components or, under certain circumstances, cost plus, an adequate +business specific profit margin related to the relevant element. If the three +criteria are not met, revenue is deferred until such criteria are met or until +the period in which the last undelivered element is delivered. The amount +allocable to the delivered elements is limited to the amount that is not +contingent upon delivery of additional elements or meeting other specified +performance conditions. For multiple element contracts where there is no VSOE or +third-party evidence that would allow the allocation of an arrangement fee +amongst various pieces of a multi-element contract, fees received in advance of +services provided are recorded as deferred revenues until additional operational +experience or other VSOE becomes available, or until the contract is +completed.
+

+
We recognize wind turbine manufacturing +revenue under the guidance found in ASU 2009-13 Multiple-Deliverable Revenue +Arrangement. The manufacture of wind turbines +comprises two stages: (a) manufacture and (b) installation. +These two stages constitute separate units of accounting. We recognize 90% +of manufacture stage revenue when we complete manufacture of our turbines and +receive notice of customer acceptance. We defer recognition of 10% of wind +turbine manufacture revenue, which is recognized at the end of +the quality assurance and warranty period of 18 months following execution +of contracts associated with the sale of our wind turbines. In the fiscal year +ended December 31, 2009, we recognized total revenue from our wind turbine +operations of US$32.7  million, consisting of revenue recognized for +the manufacture of ten 2.7 MW wind turbines. We recognize installation stage +revenue consistent with the construction segment service recognition +policy.
+

+
Cost +of Sales and Business Taxes
+

+
For our +distributed generation business, cost of revenues primarily consists of +sub-contract cost, equipment cost and other costs. We design +our distributed power generation projects, and typically subcontract their +construction and installation to approved third-party subcontractors under our +oversight, and conduct testing on completed projects prior to turning them over +to our customers. We assign +some of these obligations under our contract to these subcontractors. The cost +incurred by the subcontract vendor is called the sub-contract cost. Equipment +costs consist primarily of equipment used in our construction projects such as +boilers, steamer steel, cement producers and dust catchers. Other +costs mainly include design fees, labor costs (including workers' salaries, +bonuses, travel and business development expenses), depreciation, equipment +utilization fees warranty and manufacturing overhead costs. For +our wind turbine business, cost of revenues primarily consists of +components costs of wind turbines and additional costs including transportation, +duty and taxes, material supplies and manufacturing overheads. Components +costs consist primarily of turbine gear boxes, generators, +transformers, rotor blades, mainframes, control cabinets and towers. +Additional +costs consist primarily of transportation, duties and taxes (as most +of the components for our wind turbines are sourced offshore) and warranty +costs.
+

+
Selling, +General and Administrative Expense
+
 
+
Selling +expenses for all businesses consist primarily of travel, business development, +business promotion fees and other sales and marketing expenses. General +and administrative expenses for all businesses mainly include payroll and +employee welfare benefits, travel and other expenses of administrative +departments, such as planning and financial, information systems and human +resources, and stock-based compensation costs.
+

+
+
+
+
  +
+
+
+
49
+
+
+
+
+
+
  +
+
+
+
+
 
+
We +adopted our 2007 Equity Plan in January 2008. We have +reserved 2,000,000 shares of our common shares for issuance pursuant to awards +granted under the 2007 Equity Plan and have granted a total of 1,592,939 options +under the plan as of December 31, 2009, amounting to compensation costs of $1.6 +million.  As of March 31, 2010, no additional options were granted, under +the 2007 Equity Plan. For a +description of the share options granted, including the exercise prices and +vesting periods thereof, see Item 6.E., “ Directors, Senior Management and +Employees – Share Ownership – 2007 Equity Plan .” In +accordance with the accounting standard, “Accounting for +Stock-Based  Compensation”, we are required to recognize +share-based compensation as compensation expense in our statement of operations +based on the fair value of equity awards on the day of the grant, with the +compensation expense recognized over the period in which the recipient is +required to provide service to us in exchange for the equity award . For share +options granted to our employees, we measure share-based compensation based on +the grant-date fair value of the equity instrument issued, which is recognized +as compensation expense over the requisite service period, with a corresponding +addition to equity. We determine the grant-date fair value of employee share +options using the Black-Scholes option-pricing model. The share-based +compensation is recorded to General and Administrative Expenses.
+
 
+
Other +Expenses (Income)
+
 
+
Our other +expenses (income) generally consists of interest expense, interest income and +finance costs. In 2009, our other expenses (income) also consisted of costs +related to the issuance of the convertible notes and related accounting for +warrants and subsequent share conversions and make-whole payments and +inducements.
+
 
+
Accounting +Principles Recently Adopted
+

+
In +October 2009, the FASB issued new accounting standards that revised the guidance +for “Multiple-Deliverable Revenue Arrangements”. The new standard requires +entities to allocate revenue in an arrangement using estimated selling prices of +the delivered goods and services based on a selling price hierarchy. The +amendments eliminate the residual method of revenue allocation and require +revenue to be allocated using the relative selling price method. This guidance +should be applied on a prospective basis for revenue arrangements entered into +or materially modified in fiscal years beginning on or after June 15, 2010, with +early adoption permitted. The Company has adopted this new accounting guidance +in the year ended December 31, 2009.
+

+
In July +2009, the FASB issued “FASB +Accounting Standards Codification”, as the single source of authoritative +nongovernmental U.S. GAAP. The Codification is effective for interim and annual +periods ending after September 15, 2009. All existing accounting standards are +superseded as described in SFAS 168. All other accounting literature not +included in the Codification is non-authoritative. Therefore, beginning with the +20F filing for December 31, 2009, all references made by the Company to GAAP in +the consolidated financial statements will be the new codification numbering +system.  The Codification does not change or alter existing GAAP and +therefore, does not have any impact on the Company’s consolidated financial +statements.
+

+
In +December 2007, the FASB issued new accounting guidance “Business Combinations” +which establishes principles and requirements for how an acquirer recognizes and +measures in its financial statements the identifiable assets acquired, the +liabilities assumed, any noncontrolling interest in the acquirer and the +goodwill acquired. It also establishes disclosure requirements which will +enable users to evaluate the nature and financial effects of the business +combination. The adoption on January 1, 2009 of this standard did not have a +material impact on the Company’s consolidated financial statements.
+

+
In +December 2007, the FASB issued new accounting guidance, “Noncontrolling +Interests in Consolidated Financial Statements”. This guidance establishes +accounting and reporting standards for ownership interests in subsidiaries held +by parties other than the parent, the amount of consolidated net income +attributable to the parent and to the noncontrolling interest, changes in a +parent's ownership interest and the valuation of retained noncontrolling equity +investments when a subsidiary is deconsolidated. It also establishes +reporting requirements that provide sufficient disclosures that clearly +identify and distinguish between the interests of the parent and the interests +of the noncontrolling owners. The adoption on January 1, 2009 of this standard +resulted in changes to our presentation for noncontrolling interests and did not +have a material impact on the Company’s results of operations and financial +condition.
+

+
In March +2008, the FASB issued new accounting guidance, “Disclosures about Derivative +Instruments and Hedging Activities”. It requires qualitative disclosures about +objectives and strategies for using derivatives, quantitative disclosures about +fair value amounts of and gains and losses on derivative instruments, and +disclosures about credit risk related contingent features in derivative +agreements. The adoption on January 1, 2009 of this standard did not have a +material impact on the Company’s consolidated financial position or results of +operations.
+

+
In April +2008, the FASB issued new accounting guidance, “Determination of the Useful Life +of Intangible Assets.” This guidance is intended to improve the consistency +between the useful life of a recognized intangible asset under the previous +guidance for Goodwill and Other Intangible Assets and the period of expected +cash flows used to measure the fair value of the asset when the underlying +arrangement includes renewal or extension of terms that would require +substantial costs or result in a material modification to the asset upon +renewal or extension. Companies estimating the useful life of a recognized +intangible asset must now consider their historical experience in renewing or +extending similar arrangements or, in the absence of historical experience, must +consider assumptions that market participants would use about renewal or +extension as adjusted for some entity-specific factors. The adoption on January +1, 2009 of this standard did not have a material impact on the Company’s +consolidated financial statements.
+

+
+
+
+
  +
+
+
+
50
+
+
+
+
+
+
  +
+
+
+
+
 
+
In May +2008, the FASB issued new accounting guidance, “Accounting for Convertible Debt +Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash +Settlement)”. This guidance requires the issuer of certain Convertible Debt +instruments that may be settled in cash (or other assets) on conversion to +separately account for the liability (debt) and equity (conversion option) +components of the instrument in a manner that reflects the issuer's +non-Convertible Debt borrowing rate. Such separate accounting also requires +accretion of the resulting discount on the liability component of the debt to +result in interest expense equal to an issuer’s non-Convertible Debt borrowing +rate. In addition, the guidance provides for certain changes related to the +measurement and accounting related to derecognition, modification or exchange. +The adoption on January 1, 2009 of this standard did not have a material impact +on the Company’s consolidated financial statements.
+

+
In +September 2008, the FASB issued new accounting guidance “Determining Whether +Instruments Granted in Share-Based Payment Transactions Are Participating +Securities”. It addresses whether instruments granted in share-based payment +transactions are participating securities prior to vesting and, therefore, need +to be included in the earnings allocation in computing income per +share under the two-class method. This guidance establishes that unvested +share-based payment awards that contain non-forfeitable rights to dividends or +dividend equivalents (whether paid or unpaid) are participating securities and +shall be included in the computation of earnings per share pursuant to the +two-class method. The adoption on January 1, 2009 of this standard did not have +a material impact on the Company’s consolidated financial +statements.
+

+
In April +2009, the FASB issued new accounting guidance “Recognition and Presentation of +Other-Than-Temporary Impairments”, which provides operational guidance for +determining other-than-temporary impairments (“OTTI”) for debt securities. This +standard is effective for interim and annual periods ending after June 15, +2009. The adoption of this standard did not have a material impact on the +Company’s consolidated financial statements.
+

+
In +April 2009, the FASB issued new accounting guidance, “Determining Fair +Value When Volume and Level of Activity for the Asset or Liability Have +Significantly Decreased and Identifying Transactions That Are Not Orderly”. It +provides guidance on how to determine the fair value of assets and liabilities +when the volume and level of activity for the asset/liability has significantly +decreased. It also provides guidance on identifying circumstances that indicate +a transaction is not orderly. In addition, it requires disclosure in interim and +annual periods of the inputs and valuation techniques used to measure fair value +and a discussion of changes in valuation techniques. Since the volume and +level of activity for the assets or liabilities of the Company have not +decreased and there are no transactions identified as not orderly, the adoption +of this standard did not have a material impact on the Company’s consolidated +financial statements.
+

+
In May +2009, the FASB issued new accounting standard, “Subsequent Events”. The standard +provides general guidelines to account for the disclosure of events that occur +after the balance sheet date but before financial statements are issued or +available to be issued. These guidelines are consistent with current accounting +requirements, but clarify the period, circumstances, and disclosures for +properly identifying and accounting for subsequent events. The standard is +effective for interim periods and fiscal years ending after June 15, 2009. The +adoption of this standard did not have a material impact on the Company's +consolidated financial statements.
+

+
Recent +Accounting Pronouncements
+

+
In June +2009, the FASB issued new accounting guidance that amended the consolidation +guidance for variable interest entities. The new guidance addresses the need for +reconsideration of whether an entity is a variable interest entity, requires +additional qualitative considerations about the determination of the primary +beneficiary of variable interest entities and prescribes disclosures about +variable interest entities. This guidance is effective for the Company beginning +January 1, 2010. The Company is currently evaluation the potential impact of +adopting this statement on its financial position and results or +operations.
+

+ +

+
+
+
+
  +
+
+
+
51
+
+
+
+
+
+
  +
+
+
+
+
 
+
+ + + + + +
+
A.
+ 		+
Operating + Results
+
+
+
 
+
Comparison +of Years Ended December 31, 2009 and 2008.
+
 
+
Revenues
+
 
+
For the +year ended December 31, 2009, total revenues amounted to $311.3 million, an +increase of $46.4 million or 17.5%, from $264.9 million for the year ended +December 31, 2008. For the year ended December 31, 2009, total revenues consists +of $261.1 million from distributed power generation, $32.8 million from wind +turbine business and $17.4 million from LICEG Ltd. This compares with $256.8 +million from distributed power generation, nil from wind turbine business and +$8.1 million from LICEG Ltd., for the year ended December 31, 2008. The increase +in revenues from 2008 to 2009 was primarily due to revenue from our wind turbine +business earned in 2009, in the amount of $32.8 million as no wind turbine +revenue was earned in 2008. In December, 2009, the company sold a total of ten +sets of wind turbines to Inner Mongolia Wulate Houqi Oriental Wind Power Company +Ltd. (“Inner Mongolia”) and Rizhao Hengyuan Wind Power Company Ltd. +(“Rizhao”).
+

+
Revenue +earned from our distributed power generation in 2009 is consistent with the +revenue from such business in 2008, with a slight increase of $4.3 million, or +1.7%.  This slight increase was mainly due to the fact that six +projects were completed in 2009 while only four projects were completed in +2008. The +decrease in the growth of our revenue in the distributed power generation +business for the year ended December 31, 2009 (when revenues in this business +increased by $4.3 million over 2008) and the year ended December 31, 2008 (when +revenues in this business increased by $104.2 million over 2007) is attributable +to the general economic slowdown in 2009 which resulted in fewer new projects +being started in 2009. The lower number of projects commenced in 2009, in +particular, impacted the growth of our revenues in the distributed power +generation business.
+
 
+
In the +year ended December 31, 2009 LICEG Ltd. completed ten construction projects +compared with nine in 2008. As of December 31, 2009, eleven projects were +in process compared with nine projects in process in 2008. In addition, the +average contract price of projects LICEG Ltd. worked on in 2009 was $1.6 +million comparing to $0.8 million in 2008, which resulted directly in +the significant increase in revenue of LICEG Ltd. during the year ended December +31, 2009 compared to 2008.
+

+
 
+
Cost +of Sales and Business Taxes
+

+
The total +cost of sales and business taxes for the year ended December 31, 2009 was $260.2 +million, an increase of $32.2 million, or 14.1%, over the same period in the +prior year. For the year ended December 31, 2009, total cost of sales and +business taxes consisted of $219.1 million from distributed power generation, +$24.1 million from wind turbine business and $17.0 million from LICEG Ltd. This +compares with $221.1 million from distributed power generation, nil from wind +turbine business and $6.9 million from LICEG Ltd., for the year ended December +31, 2008. This increase in cost of sales and business taxes was due to the +increased business activity reflected in our increased revenues. This increase +of 14.1% in cost of revenues is generally consistent with the 17.5% increase in +revenues. The cost of the ten sets of wind turbines sold to Inner Mongolia and +Rizhao was $24 million.
+

+
Gross margin
+

+
As a +percentage of total revenues, the overall gross margin was 16.4% for the year +ended December 31, 2009 compared to 13.9% for the year ended December 31, 2008. +The improvement in gross margin of 2.5% is attributable to the 26.4% gross +margin from our wind turbine business, partially offset by a 15.5% gross margin +from our distributed power generation construction business. Compared with the +year ended December 31, 2008, gross margin from distributed power generation +business increased 1.6%, mainly attributed to the higher efficiency derived from +experience that we gained from constructing larger contracts. The gross margin +of LICEG Ltd. was 2.3% for the year ended December 31, 2009, compared with 14.8% +for 2008. This +decrease in gross margins between 2009 and 2008 is attributable to price +reductions made by LICEG Ltd. for its construction services during 2009 in +response to deteriorating economic conditions.
+
 
+
Selling, +general and administrative expenses
+
 
+
Selling, +general and administrative expenses mainly include payroll and employee welfare +benefits, travel and other expenses of administrative departments, such as +planning and financial, information systems and human resources, and stock-based +compensation costs.
+
 
+
Selling, +general and administrative expenses amounted to approximately $12.8 million for +year ended December 31, 2009, an increase of approximately $4.1 million, or +47.6%, compared to approximately $8.7 million in the year ended December 31, +2008. For the year ended December 31, 2009, total selling, general and +administrative expenses consisted of $4.5 million from distributed power +generation, $1.3 million from wind turbine business and $0.6 million from LICEG +Ltd., and $6.4 million expenses related to corporate operating expenses. This +compares with $3.8 million from distributed power generation, $0.5 million from +wind turbine business, $0.5 million from LICEG Ltd. and $3.9 million related to +corporate operating expenses for the year ended December 31, 2008. As a +percentage of revenues these expenses increased from 3% for the year ended +December 31, 2008 to 4.1% for the year ended December 31, 2009. The increases +are mainly attributable to stock-based compensation expense in the amount of +$1.6 million in 2009 compared to $0.8 million in 2008; depreciation and +amortization in the amount of $1.6 million in 2009 compared to $0.3 million in +2008; professional fees and related expenses associated with our Company being +listed on the NASDAQ in the amount of $2.3 million in 2009 compared to $1.6 +million in 2008.
+

+
+
+
+
  +
+
+
+
52
+
+
+
+
+
+
  +
+
+
+
+
 
+
Income +from operations
+
 
+
Income +from operations amounted to $38.2 million for the year ended December 31, 2009, +an increase of approximately $9.2 million, or 31.8%, from $29.0 million for the +year ended December 31, 2008 . This was the net result of increases of $46.4 +million in total revenues, $32.2 million in cost of revenues and of $4.1 million +in general and administrative expenses. As a percentage of total revenue, the +operating income for the year ended December 31, 2009 was 12.3% compared to +10.6% for the year ended December 31, 2008.
+
 
+
Other +expenses (Income)
+

+
Finance +costs and interest costs
+
 
+
Finance +costs and interest costs (not including interest costs attributable to the +Convertible Debt) increased by approximately $0.5 million to $0.6 million for +the year ended December 31, 2009 from $0.2 million for the year ended December +31, 2008.
+
 
+
Other +income
+
 
+
Other +income consisted of miscellaneous income from non-operating activities. For the +year ended December 31, 2009, other income decreased by approximately $0.5 +million to approximately $0.4 million, compared to other income of approximately +$1.0 million for the year ended December 31, 2008. The other income for the year +ended December 31, 2009 mainly came from gain on fixed assets disposal, +partially offset by loss on investment on GE Drivetrain.
+
 
+
Expenses +relating to Accounting for the +Convertible Debt
+
+
+
 
+
On June +19, 2009, the Company entered into a securities purchase agreement with certain +accredited investors (the “Buyers”).  Under the agreement, the Company +agreed to issue Senior Convertible Notes due on June 19, 2014 (the “Convertible +Debt”) and warrants (the “Warrants”) to purchase common shares for an aggregate +purchase price of $40.0 million. The transaction closed on June 22, +2009.
+
 
+
The +aggregated expenses relating to the Convertible Debt for the year ended December +31, 2009, totaling $53.0 million, is comprised of  $2.3 million of +accretion expenses on the Convertible Debt, $11.6 million relating to the change +in fair value of warrants from the date of issue to December 31, 2009, $25.6 +million relating to the change in fair value of the embedded derivative +instrument, $9.9 million of make-whole amount paid on conversion and $3.4 +million representing the fair value of inducements issued to Buyers to +convert.
+
 
+
The +Convertible Debt bore interest at an initial rate of 3% per annum, which was +scheduled to increase each year up to a maximum of 12% per annum, payable +quarterly, at the Company’s option, in cash or common shares. The initial +conversion price of the Convertible Debt was $10.637 per common share, subject +to full ratchet anti-dilution protection until June 19, 2011 and thereafter +subject to weighted average anti-dilution protection. In addition, 1,504,184 +five-year Warrants were granted with an initial strike price of $10.637 per +common share, subject to full ratchet anti-dilution protection until June 19, +2011 and thereafter subject to weighted average anti-dilution +protection.
+
 
+
Both the +Warrants and embedded derivative associated with the convertible debt meet the +definition of a derivative instrument according to the standard, “Accounting for +Derivative Instruments and Hedging Activities” and are recorded as a derivative +instrument liabilities and periodically marked-to-market.  The fair +value of the Warrants and embedded derivative on inception were determined to be +$6.2 million and $19.8 million, respectively, using the Cox-Rubinstein-Ross +Binomial Lattice Model (“Binomial Model”) with the following assumptions: +expected life 5 years, expected volatility – 59%, risk free interest rate – +2.8890% and dividend rate – 0%.
+
 
+
After +allocating the gross proceeds to the fair value of the Warrants and the embedded +derivative instrument, the remaining proceeds were allocated as the initial +carrying value of the Convertible Debt.  The amount is accreted to its +face amount at maturity using the effective interest method. The effective +interest rate was determined to be 29.68%.
+
 
+
In early +December 2009, convertible notes of totaling $2.5 million were converted into +235,030 common shares at the conversion price of $10.637. A make whole payment +in an aggregate amount of $0.6 million was paid in common shares in +lieu of cash at the end of December 2009.
+
 
+
On +December 30 and 31, 2009, the Company entered into Conversion Agreements with +the remaining holders of the Convertible Debt which converted the outstanding +principal amount of $37.5 million and accrued interest of $0.5 million under the +Convertible Debt agreement, together with a make-whole payment in the amount of +$9.3 million, into an aggregate of 4,582,561 common shares of the Company using +a conversion price per share set at $10.212, which is 96% of the original +conversion price of the Convertible Debt of $10.637.  The common +shares issuable upon conversion are freely tradable by the Buyers and the shares +issuable upon exercise of the warrants have been registered for resale under the +Securities Act of 1933, as amended.
+
+
+
 
+
+
+
+
  +
+
+
+
53
+
+
+
+
+
+
  +
+
+
+
+
 
+
Income +Tax Provision
+
 
+
The +income tax provision for the year ended December 31, 2009 was $1.8 million, +compared to an income tax provision of $0.07 million for the year ended December +31, 2008. The increase was primarily attributed to income tax incurred from our +wind turbine business. In 2009 our wind turbine business was subject to a 25% +income tax provision. An aggregate of $3.7 million in income tax was declared to +the local tax bureau, $1.6 million of which was considered as deferred tax +assets. In 2008, no such provision was required as the wind turbine business had +no sales.
+

+
GaoKe +Energy, our major operating subsidiary, became a Foreign Invested Enterprise +under PRC regulations in August 2006, qualifying it for a full income tax +exemption from PRC income tax for two years starting with the year ending +December 31, 2007 and a 50% exemption from PRC income tax for three years +starting with the year ending December 31, 2009. However, no tax provision has +been provided for Gaoke Energy for 2009 because Gaoke Energy was able to obtain +a full income tax exemption for 2009 from local tax authorities. The 2009 tax +provision is provided for Gaoke Design, Ruixiang and LICEG Ltd.
+

+
Noncontrolling +interest
+
 
+
Noncontrolling interest includes the +share of profit or loss allocated to other parties’ interests in GaoKe Design, +Jinxiang and Shenyang Power Group. Noncontrolling ownership interests in +GaoKe Design, Jinxiang and Shenyang Power Group were 49%, 20% and 38%, +respectively, for the year ended December 31, 2009, compared with 49%, 20% and +nil, respectively, for the year ended December 31, 2008.
+

+
Noncontrolling interest decreased by +approximately $0.2 million to $0.2 million for the year ended December 31, 2009 +from $0.4 million for the year ended December 31, 2008. This decrease was +attributable to a decrease in noncontrolling interest of 20% in +Jinxiang and 38% in Shenyang Power Group.
+
  
+
Net +(Loss) income
+
 
+
For the +year ended December 31, 2009, our net loss amounted to approximately $16.7 +million, a decrease of $45.2 million, or 158.5%, compared to net income of $28.5 +million for the year ended December 31, 2008. The decrease in net income from +the prior year was due to an increase in other expenses (income) in the amount +of $53.8 million and increased general and administrative expenses in the amount +of $4.1 million. This decrease was offset by a $14.2 million increase in +gross margin from operations including $53.0 million of expense relating to the +Convertible Debt.
+
 
+
Foreign +currency translation adjustment and comprehensive income
+
 
+
For the +year ended December 31, 2009, we recorded a loss on foreign currency translation +of approximately $0.1 million, compared to a gain of $4.6 million for the year +ended December 31, 2008, attributable primarily to appreciation of the RMB +against the U.S. dollar. As a result, our comprehensive loss for the year ended +December 31, 2009 was $16.8 million, compared to comprehensive income of $33.1 +million for the year ended December 31, 2008.
+

+
Comparison +of Years Ended December 31, 2008 and 2007.
+
 
+
Revenues
+
 
+
For the +year ended December 31, 2008, total revenues amounted to $264.9 million, an +increase of $112.4 million or 73.7%, from $152.5 million for the year ended +December 31, 2007. For the year ended December 31, 2008, total revenues consists +of $256.8 million from distributed power generation and $8.1 million from LICEG +Ltd. This compares with $152.5 million from distributed power generation and nil +from LICEG Ltd. for the year ended December 31, 2007. The increase from 2007 to +2008 was primarily due to continued growth in our core distributed power +generation business and the relatively larger size of projects under +construction in 2008 compared to 2007.  In 2008, there +were fifteen contracts in progress, compared to ten contracts in 2007. The +average size of the projects under construction in 2008 was approximately $45.5 +million, an increase of $3.2 million or 7.6%, from $42.3 million in +2007.  
+
 
+
Cost +of sales and business taxes
+

+
The total +cost of revenues for year ended December 31, 2008 was $228.0 million, an +increase of $96.0 million, or 72.7%, over in the same period in 2007. +For the year ended December 31, 2008, total cost of sales and business taxes +consists of $221.1 million from distributed power generation and $6.9 million +from LICEG Ltd. This compares with $132.0 million from distributed power +generation and nil from LICEG Ltd. for the year ended December 31, 2007. The +increase in cost of revenues and business taxes was due to the increased +business activity reflected in our increased revenues. This increase of 72.7% in +cost of revenues and business taxes is generally consistent with the 73.7% +increase in revenues described above. The 1% difference is attributable to +the higher average size of the integrated contracts performed in 2008, which +generally have a 0.5% to 1.0% higher margin than smaller contracts due to +economies of scale.
+

+
+
+
+
  +
+
+
+
54
+
+
+
+
+
+
  +
+
+
+
+
 
+
Gross +margin
+

+ +
 
+
Selling, +general and administrative expenses
+
 
+
Selling, +general and administrative expenses mainly include payroll and employee welfare +benefits, traveling and other expenses of administrative departments, such as +planning and financial, information systems and human resources.
+
 
+
Selling, +general and administrative expenses amounted to approximately $8.7 million for +year ended December 31, 2008, an increase of approximately $5.2 million, or +149.9%, compared to approximately $3.5 million in the year ended December 31, +2007. For the year ended December 31, 2008, total selling, general and +administrative expenses consisted of $3.8 million from distributed power +generation, $0.5 million from LICEG Ltd., $0.5 million from wind turbine +business, and $3.9 related to corporate operating expenses. This compares with +$0.8 million from distributed power generation, nil from LICEG Ltd., and $2.7 +million related to corporate operating expenses for the year ended December 31, +2007. As a percentage of revenues these expenses increased from 2.3% for the +year ended December 31, 2007 to 3.3% for the year ended December 31, 2008, due +to the addition of consulting fees and related expenses associated with our +Company becoming a public company listed on the NASDAQ on January 22, 2008 and +related ongoing compliance costs.
+
 
+
Income +from operations
+
 
+
Income +from operations increased by approximately $11.1 million, or 70.0%, from $17.1 +million for the year ended December 31, 2007 to $28.2 million for the year ended +December 31, 2008. This was the net result of increases of $112.3 million in +total revenues, $96.0 million in cost of revenues and of $5.2 million in general +and administrative expenses. As a percentage of total revenue, the operating +income for the year ended December 31, 2008 was 10.6% compared to 11.2% for the +year ended December 31, 2007. The decrease in operating income as a percentage +of total revenues was due mainly to an increase in general and administrative +expenses resulting from the higher expenses associated with becoming a public +company in 2008 and related ongoing compliance costs.
+
 
+
Finance +costs and interest costs
+
 
+
Finance +costs and interest costs decreased by approximately $1.7 million to $0.2 million +for the year ended December 31, 2008 from $1.9 million for the year ended +December 31, 2007. In 2007, $0.72 million in expenses related to raising the +$15.6 million in debt and equity financing from 17 private investors in May 2007 +and accrued interest of $0.90 million on the $15.0 million notes to the 17 +investors. These notes were paid in full following consummation of the business +combination between A-Power and Head Dragon Holdings on January 18, 2008 +without incurring further finance cost.
+
 
+
Other +income
+
 
+
Other +income consisted of miscellaneous income from non-operating activities. For the +year ended December 31, 2008, other income increased by $0.72 million to $0.97 +million, compared to other income of $0.25 million for the year ended December +31, 2007. The other income for the year ended December 31, 2008 was generated +from the interest on cash held by our commercial bank.
+
 
+
Income +tax provision
+
 
+
The +income tax provision for the year ended December 31, 2008 was $0.1 million, +compared to an income tax provision of $0.2 million for the year ended December +31, 2007. GaoKe Energy, which contributed 99.8% of our 2007 revenue, became a +Foreign Invested Enterprise under PRC regulations in August 2006, qualifying it +for a full income tax exemption from PRC income tax for two years starting with +the year ending December 31, 2007 and a 50% exemption from PRC income tax for +three years starting with the year ending December 31, 2010.
+
 
+
Noncontrolling +interest
+
 
+
Noncontrolling +interest includes the share of profit or loss allocated to other parties’ +interests in GaoKe Design and Jinxiang. The noncontrolling ownership interest of +GaoKe Design was 49% for the year ended both December 31, 2008 and December 31, +2007, resulting in noncontrolling interest of approximately $0.4 +million for the year ended December 31, 2008, compared with $0.04 million for +the year ended December 31, 2007. This increase was mainly attributable to a +noncontrolling interest increase of 20% in Jinxiang and an increase in the net +income in GaoKe Design in 2008.
+

+
+
+
+
  +
+
+
+
55
+
+
+
+
+
+
  +
+
+
+
+ +
Net +income
+
 
+
For the +year ended December 31, 2008, our net income amounted to approximately $28.5 +million, an increase by $13.3 million, or 87.4%, compared to $15.2 million for +the year ended December 31, 2007. This increase was attributable primarily to +the significant growth in revenue and operating income, as well as an increase +in the number and the average size of integrated contracts being performed, +which tend to carry higher margins.
+
 
+
Foreign +currency translation adjustment and comprehensive income
+
 
+
For the +year ended December 31, 2008, we recorded a gain on foreign currency translation +of approximately $4.6 million, compared to $1.5 million for the year ended +December 31, 2007, attributable primarily to appreciation of the RMB against the +U.S. dollar. Our comprehensive income for the year ended December 31, 2008 was +$33.1 million, compared to $16.8 million for the year ended December 31, +2007.
+
 
+
+ + + + + +
+
B.
+ 		+
Liquidity + and Capital Resources
+
+
+
 
+ +
 
+
            As +of December 31, 2009, the Company had current assets of $258 million out of +total assets of $355 million, including cash and cash equivalents of +$166.5 million (not including restricted cash of $13.4 million), accounts +receivable of $12.5 million, prepayments, deposits and other receivables of +$52.5 million, inventory of $10.3 million, and costs and estimated earnings +in excess of billing on uncompleted contracts of $3 million. Our total +liabilities amounted to $102.7 million and total equity amounted to $252.6 +million. Our current ratio, which is defined as current assets divided by +current liabilities, is approximately 2.51 as of December 31, +2009.
+
 
+
Following +A-Power’s acquisition of Head Dragon Holdings on January 18, 2008, a cash amount +of approximately $31.7 million of the net proceeds from Chardan’s initial public +offering in August 2005 was released to us.
+
 
+
In +February 2008, A-Power sent out redemption notices to all of the holders of +its issued and its outstanding callable common shares purchase warrants. +Majority of the warrants were originally issued by Chardan in August 2005. As a +result of the merger of Chardan into A-Power, the warrants were exercisable into +shares of A-Power common shares. Approximately 11,866,303 of the 11,881,270 +warrants that were then issued and outstanding were exercised at a price of +$5.00 per warrant. The gross proceeds received by A-Power from this +redemption were approximately $59.3 million.
+
   
+
On June 18, 2009, we entered +into a securities purchase agreement with certain accredited investors (the +“Buyers”).  Under the agreement, we agreed to issue Senior +Convertible Notes due on June 19, 2014 (the “Convertible Debt”) and warrants to +purchase common shares for an aggregate purchase price of $40 million. The +transaction closed on June 22, 2009. In early December 2009, Convertible +Debt totalling $2.5 million was converted into 235,030 common shares +at the conversion price of $10.637. A make whole payment in the amount of $0.6 +million were paid in common shares in lieu of cash at the end of December 2009. +On December 30 and 31, 2009, we entered into conversion agreements with the +holders of the remaining Convertible Debt which converted the outstanding +principal amount of $37.5 million and accrued interest of $0.5 million under the +Convertible Debt, together with a make-whole payment in the amount of $9.2 +million, into an aggregate of 4,582,559 of our common shares using a conversion +price per share set of $10.212, which is 96% of the original conversion +price of the Convertible Debt of $10.637.  The common shares issuable +upon conversion of the Convertible Debt and upon exercise of the Warrants have +been registered for resale under the Securities Act.
+
+    +
+
+
+
On July +28, 2009, the Company entered into a short-term loan agreement totaling $7,324 +(RMB 50,000,000) with Shanghai Pudong Development Bank to finance its short term +capital requirements. The loan bears interest at 5.841% per annum and due for +repayment on July 27, 2010.
+
 
+
In +September and October, 2009, the Company entered into three separate foreign +currency forward contracts totaling $12.5 million (Euro 8.5 million) to hedge +certain of its foreign currency cash flow exposures in the inventory purchase +transactions with Fuhrlander, a German supplier in wind business segment. The +contracts fixed the exchange rate between Euro and RMB at exchange rates between +10.11 to 10.231. The contracts mature on April 20, 2010, April 23, 2010, and +September 24, 2010. In connection with these contracts, the Company recorded a +loss on foreign currency forward contracts of $516,000 at December 31, 2009. No +such forward exchange contracts existed in +2008.
    
+
+
  On +September 16, 2009, the Company signed an agreement to acquire 100% of Evatech +of Kyoto, Japan, a 22-year-old designer and manufacturer of industrial equipment +for liquid crystal displays (LCDs), plasma display panels (PDPs) and +amorphous-silicon (a-Si) photovoltaic (PV) panels. The total purchase +consideration was $49.9 million, to be paid in cash, on closing. On January +25, 2010, the acquisition closed and the Company paid $49.9 +million.
+
 
+
On +December 16, 2009, Shenyang Power Group entered into an Joint Venture Agreement +(the "LLC Agreement") with USREG Wind, a Delaware limited liability +company.  USREG Wind is indirectly jointly owned and controlled by US +Renewable Energy Group, an investment and consulting firm, and Cielo, a U.S. +wind energy project developer.  Under the LLC Agreement, Shenyang +Power Group and USREG Wind have agreed to establish, co-own and co-manage a +Delaware limited liability company (the “Project Company”) that will own, +design, develop, construct, manage and operate a wind energy power plant to be +located in Texas with a total planned nameplate capacity of 600 MW (the +"Project"). Shenyang Power Group owns a 49% interest in the Project +Company following a capital contribution of $36.6 million cash, and USREG Wind +owns a 51% interest in the Project Company following its transfer of certain +rights in land and other Project rights to the Project Company. We paid the +full capital contribution in the amount of $36.6 million on February 12, +2010. Under the LLC Agreement, our indirect wholly-owned subsidiary, Ruixiang, +is designated exclusive manufacturer and supplier of turbines to the power plant +and our indirect wholly-owned subsidiary Liaoning GaoKe Energy is designated the +contractor for the project.  This project is expected to cost +approximately $1.5 billion, a portion of which is designated for wind turbine +purchases. The parties will be seeking to obtain financing from third-party +lenders for most of the cost of this project.  The development, +financing, construction and operation of the project entails numerous risks, and +we cannot assure you that the project will secure the financing necessary to +purchase and pay for the turbines to be provided by Ruixiang or the construction +services to be provided by GaoKe energy or that all final land or land rights, +permitting and transmission rights and capacity will be obtained.  All +such financing and rights must be obtained for the project to commence +commercial operations, generate revenue and achieve economic +success.
+
 
+
+
+
+
  +
+
+
+
56
+
+
+
+
+
+
  +
+
+
+
+
 
+
On +January 21, 2010, the +Company entered into a securities purchase agreement with certain +institutional investors pursuant to which we sold such investors 5,777,932 of +our common shares at a price of $14.37 per share, together with two series of +warrants to purchase an additional 2,888,968 shares.  2,099,823 of the +warrants are exercisable at $16.90 per share and the remainder are exercisable +at $16.91 per share.  All of the warrants will be initially +exercisable six months after January 21, 2010 and will remain exercisable for a +five-year period thereafter. The gross proceeds of the offering (which closed on +January 21, 2010) were $83 million.
+
  
+
+
+
We believe that cash expected to be +generated by operations, as well as cash on hand of $166 million, the net +proceeds of the Company’s $83 million equity financing in January 2010, and +anticipated rebates from the PRC and Chinese local governments in the amount of +$22 million (which we have applied for) related to our acquisition of +Evatech, will be sufficient to meet our short term operational and capital +expenditure requirements, and meet our working capital needs for at least the +next 12 months, based on our current expectations.
+

+
As described in Section 5.F. Tabular +Disclosure of Contractual Obligations, these short-term operational and capital +expenditures include $235.2 million committed for 2010 to sub-contractors, +suppliers, joint venture partners, our technology partners and +others.  In the first three months of 2010 we spent $49.9 million in +cash on the acquisition of Evatech and contributed $36.6 million to Texas A +Wind, the project company for our Texas wind farm project, in return for +our interest in that entity.
+
 
+
We also +anticipate additional capital expenditures of approximately $100 million +starting in 2010, principally to support the planned construction of our US wind +turbine manufacturing facility, which will produce wind turbine for our US$1.5 +billion wind energy power plant in Texas as well as other customers in North and +South America. Our wind turbine facility in the United States will likely be +financed by available cash from operations, bank debt, and/or issuance of equity +and/or debt instruments or some combination of some or all of the +foregoing.  See Item 3D, "Key +Information – Risk Factors - Risks Related to Our Business – The development of +our wind energy power plant in Texas requires significant development work and +capital and entails political risks” for a discussion of the issues and +risks involved in expanding our wind business in the United States and “Risks Related to Our Business – Our distributed power +generation and wind turbine business will require significant amounts of working +capital.  If we or our customers  cannot satisfy these +working capital requirements, the growth and development of our business could +suffer materially” for a discussion of the risks involved in our failing +to obtain sufficient working capital for the expansion of our businesses. +We expect +other capital expenditures for our US$1.5 billion power plant to be financed in +part by the PRC government and in part by the government of the United States of +America, although no assurance can be given as to the availability of funding +from either of these sources.
+
 
+
Any equity and/or debt, if offered +and issued, will likely be for an amount substantially greater than current +working capital and capital needs. We presently anticipate that any such excess +would be used for future working capital needs and potential capital +projects.
+

+
We cannot, however, predict the +amount or timing of our need for additional funds under various circumstances, +such as: significant business development transactions; new product development +projects; changes to our capital structure; acquisition opportunities. or other +factors that may require us to raise additional funds through borrowings, or the +issuance of debt, equity or equity-linked securities. In addition, certain +contingent events, such as future commitments and joint venture agreements, if +realized, could have a material adverse impact on our liquidity and capital +resources. The continuing uncertainty in the credit and capital markets may +limit our access to additional funding or affect the pricing +thereof.
+

+
We presently conduct our operations +through subsidiaries in China, and cash generated by our subsidiaries is a major +source of funding for our operations. See Item 3D, "Key Information – Risk Factors - +Risks Related to Doing Business in China - We are a holding company that depends +on dividend payments from our subsidiaries for funding" for a discussion +of how our holding company structure and Chinese regulations may affect our +ability to access those funds
+
+
   
+
+
Comparison +of Years Ended December 31, 2009 and 2008
+

+
Net cash +provided by operating activities totalled $64.4 million for the year ended +December 31, 2009, an increase of $86.7 million compared to net cash used in +operating activities of $22.3 million for the year ended December 31, 2008. The +increase resulted primarily from non-cash items of $56 million related to the +accounting for the Convertible Debt issuance and conversion discussed earlier. +The non-cash items consist of: (i) $11.5 million from the change in fair value +of the Warrants; (ii) $25.6 million from the change in fair value of embedded +derivatives; (iii) $2.3 million from accretion expenses on Convertible Debt; +(iv) $ 9.9 million from make-whole amount paid on conversion of the Convertible +Debt; and (v) $3.4 million being the fair value of inducement issued to the +Buyers on conversion of the Convertible Debt. There were no such non-cash items +in the year ended December 31, 2008. In addition, the non-cash item of +stock-based compensation, amortization and future income tax recovery in +the amounts of $1.6 million, $1.6 million and ($1.9 million), respectively, was +$0.4 million higher than the comparable amounts in 2008.
+

+
The +following details the changes in the operating assets and +liabilities:
+

+
+ + + + + + +
  + +
Ÿ
+ 		+
$7.4 + million increase in accounts +receivable;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$0.9 + million increase in costs and estimated earnings in excess of billings on + uncompleted contracts;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$28.6 + million decrease in prepayments, deposits and other receivables; +
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$1.6 + million increase in inventory;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$5.7 + million increase in accounts payable and accrued + liabilities;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$3.3 + million decrease in customer +deposits;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$0.9 + million increase in billings in excess of costs and estimated earnings + on;
+
+
+
 
+
+ + + + + + + + + + + + + + + + +
  + +
Ÿ
+ 		+
$3.0 + million increase in income and business taxes payable; + and
+
  +   +   +
  + +
Ÿ
+ 		+
$1.4 + million increase in unearned +revenue.
+
+
+
 
+
The +increase in accounts receivable was due to a delayed payment from a distributed +power project customer. The increase in costs and estimated earnings in excess +of billings on uncompleted contracts was due to an increase in revenue +recognized as a percentage of completion in excess of billings of several +projects of LICEG Ltd. The +decrease in prepayments, deposits and other receivables was mainly due to the +decrease of $12.0 million in prepayments to our wind turbine suppliers in +2009, and the decrease in deposits paid to our distributed power +generation vendors as a cash conservation measure. The increase in +inventory was due to increased purchases of wind turbine components in +anticipation of market demand for wind turbines, for which assembly had not yet +commenced as of December 31, 2008. The increase in accounts payable and accrued +liabilities was due to a delay of payment to vendors in line with our cash +conservation measures. The increase in customer deposits was due to larger +contract deposits that were received during 2009 for a higher number and average +size of contracts being performed compared to a lesser amount of contract +deposits received during 2008. The increase in billings in excess of costs and +estimated earnings was due to actual work progress of several projects such as +Suihua new energy being less than amounts charged by vendors on settlement +progress of projects. The increase in tax payable was due to the tax payable +from the wind turbine business at a rate of 25% for 2009. The increase in +unearned revenue was attributable to billings in excess of revenue recognized in +the wind turbine business.
+

+
Net cash +used in investing activities was $39.5 million for the year ended December 31, +2009, compared to $14.8 million for the year ended December 31, 2008. This +increase of $24.7 million was mainly attributable to $8.2 million increase in +restricted bank balances as a guarantee of short term loan and $2.5 million +increase in long term investment as a result of our capital injection in GE +Drivetrain. In addition, purchases of property, plant and equipment in 2009 was +$23.6 million compared to $6.1 million in 2008; payments on deposit of +intangible assets in 2008 were $6.5 million compared to almost nil in 2009; +purchase of intangible assets in 2009 was $1.3 million compared to $3.8 million +in 2008; construction in progress in 2008 was $17.7 million compared to nil in +2009; loans to third parties was $1.4 million in 2009 compared to $8.9 million +in 2008; liabilities assumed from A-Power in 2008 were $1.0 million +compared to nil in 2009. The increase in net cash used in investing activities +was largely offset by 31.7 million cash received from Chardan upon +recapitalization in 2008. (no such cash was received in 2009)
+

+
+
+
+
  +
+
+
+
57
+
+
+
+
+
+
  +
+
+
+
+
 
+
Net cash +provided by financing activities amounted to $96.9 million for the year ended +December 31, 2009, compared to $43.5 million for the year ended December 31, +2008. The increase of $53.4 million was attributable to $37.1 million in net +proceeds from our issuance of convertible notes; $35.5 million of proceeds from +issuance of common shares; proceeds from short term bank loans in the amount of +$20.4 million during 2009; and $4.0 million received from a shareholder. For the +year ended December 31, 2008, we received $59.3 million on the issuance of share +capital, offset by repayments of bank loans in the amount of $1.0 million and +notes payable of $15.0 million.
+

+
Comparison +of Years Ended December 31, 2008 and 2007
+
 
+
Net cash +used in operating activities totaled $22.3 million for the year ended December +31, 2008, a decrease in positive cash flow by $43.4 million compared to $21.1 +million in the prior year. This decrease resulted primarily from an increase in +net income of $28.5 million, increase in non-cash expenses of $1.3 million and +the following changes in the operating assets and liabilities:
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$13.3 + million decrease in accounts +receivable;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$2.1 + million increase in costs and estimated earnings in excess of billings on + uncompleted contracts;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$66 + million increase in prepayments, deposits and other + receivables;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$8.6 + million increase in inventory;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$3.6 + million decrease in accounts payable and accrued + liabilities;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$10.5 + million increase in customer +deposits;
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$3.9 + million increase in billings in excess of costs and estimated earnings on; + and
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
$0.3 + million increase in income and business taxes + payable.
+
+
+
 
+
The +decrease in accounts receivable was due to our enhanced ability of receivable +collections. The increase in costs and estimated earnings in excess of billings +on uncompleted contracts was due to all revenue recognized on uncompleted +contracts having been billed as of December 31, 2007, which was not the +same case as of December 31, 2008. The increase in prepayments, deposits +and other receivables was due to an increase on substantial advances to our +major project suppliers, with more construction contracts signed in 2008. The +increase in inventory was due to purchase of parts for wind equipment, though +assembling had not yet commenced by December 31, 2008. The decrease in accounts +payable and accrued liabilities was due to the timing of payments to vendors. +The increase in customer deposits was due to larger contract deposits that were +received during 2008 for a higher number and average size of contracts being +performed compared to a lesser amount of contract deposits received during 2007. +The increase in billings in excess of costs and estimated earnings on was +because all billed revenue had been recognized as revenue as of December +31, 2007, which is not the same case as of December 31, 2008. The increase +in tax payable was due to the increase in revenue and net income in +2008.
+
 
+
Net cash +used in investing activities was $14.8 million for the year ended December 31, +2008, compared to net cash used in investing activities of $4.6 million for the +year ended December 31, 2007. The cash used in investing activities for the year +ended December 31, 2008 consisted of $6.1 million for purchase of property, +plant and equipment, $6.6 million for deposits on licenses for wind turbine +technology, $17.7 million for construction in progress on our wind turbine +production facility, $1.0 million for liabilities assumed from A-Power, $8.9 +million loan to third parties, $31.7 million cash received from Chardan, $2.6 +million in restricted cash and $3.8 million for purchase of land use rights . +The cash from investing activities during the year ended December 31, 2007 +consisted of $0.5 million for purchase of property, plant and equipment +and $4.1 million for deposits on licenses for wind turbine +technology.
+
 
+
Net cash +flows provided by financing activities amounted to $43.4 million for the year +ended December 31, 2008 and net cash provided by financing activities amounted +to $10.0 million for the year ended December 31, 2007. For the year ended +December 31, 2008 cash flow from financing activities consisted of proceeds from +share capital of $59.33 million, repayment of note payable of $15.0 million, +repayment of a bridge loan to the former shareholders of Head Dragon of $0.12 +million and repayment of bank loan of $1.01 million. For the year ended December +31, 2007 cash flow from financing activities consisted of proceeds from share +capital of $2.9 million, proceeds from notes payable of $14.3 million, repayment +of related party note payable of $7.3 million, repayment of a related party loan +of $0.01 million and proceeds from payment made by shareholder of $0.2 +million.
+

+
+
+
+
  +
+
+
+
58
+
+
+
+
+
+
  +
+
+
+
+
 
+
Working +Capital
+
 
+
Our +working capital increased by approximately $58.7 million to $155.5 million as of +December 31, 2009, compared to $96.8 million as of December 31, +2008.
+

+
Total +current assets at December 31, 2009 amounted to $258.2 million, an increase of +approximately $111.9 million compared to $146.3 million at December 31, 2008. +The increase was primarily attributable to an increase in the amount of cash, +including cash received upon issuance of $40.0 million aggregate principal +amount of Convertible Debt in June 2009 and wind turbine business revenue which +was invoiced and received in the amount of $34.2 million, as well as our cash +conservation efforts described above.
+

+
Total +current liabilities at December 31, 2009 amounted to $102.7 million, an increase +of approximately $53.1 million compared to $49.6 million at December 31, 2008. +This increase is primarily attributable to growth in our business resulting in +an overall increase in accounts payable and accrued liabilities of $7.4 million +relating to amounts owing to our contractors; $1.4 million increase in unearned +revenue as a result of billings in excess of recognized revenue on wind turbine +business (there was no unearned revenue in 2008); $3.3 million increase in +income and business taxes payable attributable to income tax imposed on the wind +turbine business; $17.8 million increase in warrants liabilities issued in +conjunction with $40 million Convertible Debt; and $20.3 million in bank +loans, an aggregate of $7.3 million of which was required for daily business +operations and an aggregate of $13.0 million of which was required for hedging +foreign exchange. No such loans were outstanding in 2008.
+

+
Our +current ratio decreased to 2.51 at December 31, 2009 from 2.95 at +December 31, 2008. This decrease in our current ratio was primarily due to +the $17.8 million warrant liability offset by growth of 2009 current assets at a +faster rate than the growth of current liability, attributable to an increase in +cash.
+

+
Critical +accounting policies
+

+
We +prepare our financial statements in conformity with U.S.GAAP, which requires us +to make estimates and assumptions that affect the reported amounts of assets and +liabilities, disclosure of contingent assets and liabilities on the date of the +financial statements and the reported amounts of revenues and expenses during +the financial reporting period. We continually evaluate these estimates and +assumptions based on the most recently available information, our own historical +experience and on various other assumptions that we believe to be reasonable +under the circumstances. Since the use of estimates is an integral component of +the financial reporting process, actual results could differ from those +estimates. Some of our accounting policies require higher degrees of judgment +than others in their application. We consider the policies discussed below to be +critical to an understanding of our financial statements as their applications +places the most significant demands on our management’s judgment.
+

+
Revenue recognition. Revenues +were generated from the design and construction of new energy or renewable +energy power stations, micro-power networks, infrastructure, industrial +buildings, and residential real estate properties.  The contracts for +the design and construction of customized energy systems and networks are +legally enforceable binding agreements between the Company and its customers. + Performance of these contracts often will extend over long periods, and +the Company’s right to receive payments depends on its performance in accordance +with these contractual agreements.  The duration of contracts varies from +several months to 18 months or more.  The operating cycle of the +Company is determined by a composite of many individual contracts in various +stages of completion and is measured by the duration of the average time +intervening between the acquisition of materials or service entering the +construction process and the substantial completion of contracts. + 
+

+
Revenue for the construction segment is +recognized using the percentage of completion method of accounting, in +accordance with the accounting standard, “Accounting for Construction Contracts +and Certain Production-Type Contracts”.  Revenue recognition is based +on an estimate of the income earned to date based on percentage of completion, +less income recognized in earlier periods.  Estimates of the degree of +completion of a contract are based on the actual direct costs incurred to date +compared with the expected total direct contract costs.  Direct costs +include, but are not limited to, direct labor, equipment rent, subcontracting, +direct materials, and direct overhead incurred after the receipt of a +contract.  General and administrative expenses are accounted for as +period costs and are, therefore, not included in the percentage of completion +calculation.  The progress of subcontractors is evaluated on a monthly +basis in a construction progress report generated by a Company project manager +and verified by representatives of the subcontractor and of the +Company.
+

+
Revisions in contract revenue, contract +costs, and profit estimates are made in the period in which the circumstances +requiring the revision are identified.  Provisions for anticipated loss on +uncompleted contracts, if any, are made immediately upon identification of the +anticipated loss.  To date, the Company has not experienced any material +losses on either contracts in process or on completed contracts.
+

+
Claims to +additional contract revenue are recognized only to the extent that related costs +have been incurred, that evidence of a sound legal basis for the claim exists, +and that it is probable that such claims will result in additional contract +revenues.  Total claim amounts reported by the Company are approximate +and are subject to revision as final documentation, resolution of issues, +settlements progress and/or payments are received.  Revenue in excess +of billings on uncompleted contracts is considered unbilled revenue and reported +as a current asset on the consolidated balance sheets.  Billings in +excess of revenues on uncompleted contracts is considered unearned revenue and +reported as a current liability on the consolidated balance sheets.
+

+
+
+
+
  +
+
+
+
59
+
+
+
+
+
+
  +
+
+
+
+
 
+
Wind +turbine revenues involve the provision of multiple elements. For wind turbine +sales, the Company determines whether the contract or arrangement contains more +than one unit of accounting. An arrangement is separated if: (i) the +delivered element(s) has (have) value to the customer on a stand-alone basis; +(ii) there is reliable evidence of the fair value of the undelivered +element(s); and (iii), if the arrangement includes a general right of return +relative to the delivered element(s), delivery or performance of the undelivered +element(s) is (are) considered probable and substantially in the control of the +Company. If all three criteria are fulfilled, the appropriate revenue +recognition convention is then applied to each separate unit of accounting. +Generally, the total arrangement consideration is allocated to the separate +units of accounting based on their relative fair values. Reliable fair values +are sales prices for the component when it is regularly sold on a stand-alone +basis, third-party prices for similar components or, under certain +circumstances, cost plus, an adequate business specific profit margin related to +the relevant element. If the three criteria are not met, revenue is deferred +until such criteria are met or until the period in which the last undelivered +element is delivered. The amount allocable to the delivered elements is limited +to the amount that is not contingent upon delivery of additional elements or +meeting other specified performance conditions. For multiple element contracts +where there is no VSOE or third-party evidence that would allow the allocation +of an arrangement fee amongst various pieces of a multi-element contract, fees +received in advance of services provided are recorded as deferred revenues until +additional operational experience or other VSOE becomes available, or until the +contract is completed.
+

+
Warranty costs. For our +distributed generation business, customers typically withhold payment of 5% of +each invoice amount from the Company as security for performance of any +additional work that may be required during the warranty period following +contract completion.  This withheld amount is recorded on the balance +sheet as an asset in accounts receivable.  The warranty period +typically consists of one year beginning on the date of the customer’s initial +acceptance of the completed project.  After the completion of the +warranty period, the customer pays the retained amount to the Company, less any +amount used for additional contract costs.  Historically, no +additional costs have been necessary during the warranty period, and all amounts +withheld by customers have been paid in full at the expiration of the warranty +period.   Therefore, the Company records the entire withheld +amount as accounts receivable during the period without any allowance for bad +debts.
+

+
For our +wind turbine manufacturing business, maintenance of the component will be mainly +responsible for component vendor. As the manufacturer of wind turbine, the +warranty cost mainly includes the post customer telephone support, the labor +cost and travelling and entertainment expense for post customer +technician.
+

+
Inventory. Inventory is +comprised of raw materials and low value consumables, work-in-progress, and +finished goods.   Inventories are stated at the lower of cost or +market based on weighted average method.  Work-in-progress represents +the costs of inventory for manufacturing projects which have been initiated in +accordance with specific contracts with customers but have not been completed. + The Company makes provisions for estimated excess and obsolete inventory +based on its periodic reviews of inventory quantities on hand and forecasts of +product demand and production requirements from its customers.  The Company +writes down inventories for not saleable, excess, or obsolete raw materials, +work-in-process, and finished goods by reducing cost of sales for the amount of +the write-down.  As of December 31, 2009, all inventory was classified +as raw materials and goods in transit and was recorded at cost with no +write-downs to date.  Shipping and handling costs are included in the +inventory balance and are allocated to the related inventory. As of December 31, +2009, all inventory came from the wind turbine business.
+

+
Deferred tax. The Company +uses the liability method of accounting for income taxes, in accordance with the +accounting standard “Accounting for Income Taxes”.  Under this method, +deferred income tax assets and liabilities are recognized for the future income +tax consequences attributable to differences between the financial statement +carrying amounts of existing assets and liabilities and their respective tax +bases.  Income tax assets and liabilities are measured using enacted +tax rates expected to apply to income in the years in which those temporary +differences are expected to be recovered or settled.  The effect of a +change in tax rates on income tax assets and liabilities is reflected in +operations for the period in which the change occurs.  Valuation +allowances are established when necessary to reduce deferred tax assets to the +amount expected to be realized.
+

+
The +Company adopted the provision of the interpretation, “Accounting for Uncertainty +in Income Taxes”, on January 1, 2007.  As of December 31, 2009, the Company +did not have any accrued interest or penalties associated with any unrecognized +tax benefits, and no related interest expense was recognized during the +year.  The Company does not believe there will be any material changes +in its unrecognized tax positions over the next 12 months.  The +Company’s effective tax rate differs from the national statutory rate primarily +due to non-deductible expenses, temporary differences, and preferential tax +treatment for GaoKe Energy.
+

+
Stock-based compensation. The +Company accounts for share-based compensation for employees and directors using +the modified prospective method of accounting, in accordance with the accounting +standard, “Accounting +for Stock-Based Compensation.”  In accordance with the accounting +standard, share-based payment transactions with employees, such as share +options, are measured based on the grant-date fair value of the equity +instrument issued and recognized as compensation expense over the requisite +service period, with a corresponding addition to equity.  The Company +determines the grant-date fair value of employee share options using the +Black-Scholes option-pricing model.
+

+
Impairment of long-lived assets. +The Company assesses the impairment of long-lived assets held for use +whenever events or changes in circumstances indicate that the carrying value may +not be fully recoverable, in accordance with the accounting standard, +“Accounting for the Impairment or Disposal of Long-Lived +Assets”.  When the carrying value is not recoverable from undiscounted +future cash flows, an impairment loss is recorded in the amount of the +difference between carrying value over fair value. The Company has assessed that +no significant impairment of its long-lived assets held for use exists as of +December 31, 2009 and 2008.
+

+
+
+
+
  +
+
+
+
60
+
+
+
+
+
+
  +
+
+
+
+
 
+
Fair value of financial +instruments. Effective January 1, 2008, the Company adopted the standard, +"Fair Value Measurements," which provides a framework for measuring fair value +under GAAP. As defined in the standard, fair value is the price that would be +received to sell an asset or paid to transfer a liability in an orderly +transaction between market participants at the measurement date (exit price). +The Company utilizes market data or assumptions that the Company believes market +participants would use in pricing the asset or liability, including assumptions +about risk and the risks inherent in the inputs to the valuation technique. +These inputs can be readily observable, market corroborated or generally +unobservable.
+

+
The +Company primarily applies the market approach for recurring fair value +measurements and endeavors to utilize the best available information. +Accordingly, the Company utilizes valuation techniques that maximize the use of +observable inputs and minimize the use of unobservable inputs. The Company is +able to classify fair value balances based on the observability of those +inputs.
+

+
The +standard establishes a fair value hierarchy that prioritizes the inputs used to +measure fair value. The hierarchy gives the highest priority to unadjusted +quoted prices in active markets for identical assets or liabilities (Level 1 +measurement) and the lowest priority to unobservable inputs (Level 3 +measurement). The three levels of the fair value hierarchy defined by the +standard are as follows:
+

+
Level 1 - +Quoted prices are available in active markets for identical assets +or liabilities as of the reporting date. Active markets are those +in which transactions for the asset or liability occur in +sufficient frequency and volume to provide pricing information on an +ongoing basis. Level 1 primarily consists of financial instruments such +as exchange-traded derivatives, listed equities and U.S. +government treasury securities.
+

+
Level 2 - +Pricing inputs are other than quoted prices in active markets included in +Level 1, which are either directly or indirectly observable as of the +reporting date. Level 2 includes those financial instruments that are +valued using models or other valuation methodologies. These models are +primarily industry-standard models that consider various assumptions, +including quoted forward prices for commodities, time value, volatility +factors, and current market and contractual prices for the underlying +instruments, as well as other relevant economic measures. Substantially all +of these assumptions are observable in the marketplace throughout the full +term of the instrument, can be derived from observable data or are +supported by observable levels at which transactions are executed in the +marketplace. Instruments in this category include non-exchange-traded +derivatives such as over the counter forwards, options and repurchase +agreements.
+

+
Level 3 - +Pricing inputs include significant inputs that are generally +less observable from objective sources. These inputs may be used +with internally developed methodologies that result in management's +best estimate of fair value from the perspective of a market +participant. Level 3 instruments include those that may be more structured +or otherwise tailored to customers' needs. At each balance sheet +date, the Company performs an analysis of all instruments subject to the +standard and includes in Level 3 all of those whose fair value is based on +significant unobservable inputs.
+
 
+
+ + + + + +
+
C.
+ 		+
Research + and Development, Patents and Licenses, +Etc.
+
+
+
 
+
Research +and Development
+
 
+
As a +high-technology engineering services company, GaoKe’s business and long-term +development rely heavily on its research and development capabilities to improve +its existing distributed power generation and micro power grid systems and to +develop and commercialize new “green” energy technologies. In 2007, 2008, 2009, +the Company, through its GaoKe subsidiary, expensed $315,552, $143,930 and +$380,634 respectively, on research and development. For additional information, +please see “Item B－ +Business Overview － Research and Development,” +to this Annual Report on Form 20-F.
+

+
            For +more information on our licensing arrangements with our wind turbine suppliers, +see Item 4.A－ +“Information on the Company – +History and Development of the Company – Our Wind Energy Business Operations - +Easy Flow,” to this Annual Report on Form 20-F.
+ +
+ + + + + +
+
D.
+ 		+
Trend + Information
+
+
+
 
+
Since +2003 we have been providing construction and engineering services related to +distributed power generation and micro grid power systems to the PRC market. +Because most of our customers are located in Northern China where the winter +season with extremely cold temperatures usually lasts from two to four months, +our revenue has seasonal variations, with revenue in the first and fourth +quarter relatively lower than the second and third quarter. However, as we +accelerate our entry into the distributed power generation market in Southeast +Asia and other areas and expand our wind turbine production business (where +assembly of components is mostly finished indoors), we expect to see a reduction +in the seasonal variations of our revenues.
+

+
+
+
+
  +
+
+
+
61
+
+
+
+
+
+
  +
+
+
+
+
 
+
As part +of our overall wind energy business strategy, we acquired technical know-how +from both Fuhrländer for its 2.7 MW wind turbine and Norwin for its 750 kW and +225 kW wind turbines. We commenced production of 2.7 MW wind turbine in June +2009 in our newly constructed wind turbine production facility in Shenyang, +China.  With the PRC government’s recent increased focus on and +incentives for wind power generation, we expect that there will be more +participants in the wind energy business.  As wind turbine producers +in China increase their production capacity, we expect downward pressure +domestically on the prices of wind turbines, especially given that many of the +customers developing wind farms are large state-owned power companies with +strong bargaining positions.  Many of our competitors in China produce +wind turbines at the 750 kW to 1.5 MW range. While we will need to develop a +strategy to address increased competition in the PRC wind turbine market, we +expect that our 2.7 MW wind turbines will remain competitive in the short-and +medium-term since we are early entrants in this higher capacity wind turbine +class in China. Due to the relative scarcity of manufacturers of 2.7 MW wind +turbines in China, we believe there will be less downward pressure on the prices +of these larger turbines in the PRC market.
+
 
+ +
We plan +to build our presence in the international market in a cost-effective +manner which we expect will begin with the commercial production +of 2.0MW wind turbines in the United States, which we expect will occur in +the second half of 2010. We expect to begin this production +in a wind turbine manufacturing facility which we plan to rent +after identifying a suitable facility and settling on commercially agreeable +terms. We expect to commence construction of our own US facility, a 320,000 +square foot wind turbine production facility with a total annual production +capacity of 1.1 GW, in the second half of 2010 or first half of 2011. Our wind +turbines produced in the United States will be supplied to our US$1.5 billion +wind energy power plant in Texas and sold to other customers in the North and +South American markets. See Item +3.D – “Key Information – Risk +Factors – Risks related to our business – The development of our wind energy +power plant project in Texas requires significant development work and capital +and entails political risks” for more information regarding the risks +involved in the development of this project.  + +
 
+
+
+ + + + + +
+
E.
+ 		+
Off-Balance + Sheet Arrangements
+
+
+
 
+
We have +not entered into any financial guarantees or other commitments to guarantee the +payment obligations of any third parties as of December 31, 2009. We do not have +any other off-balance sheet arrangements except for the contractual obligations +and commitments described below as of December 31, 2009. We believe that there +are no off-balance sheet arrangements that have, or are reasonably likely to +have, a material effect on our financial condition, changes in financial +condition, revenues or expenses, results of operations, liquidity, capital +expenditures or capital resources.
+

+
+
+
+
  +
+
+
+
62
+
+
+
+
+
+
  +
+
+
+
+
 
+
+ + + + + +
+
F.
+ 		+
Tabular + Disclosure of Contractual +Obligations
+
+
+
 
+
The +following sets forth our contractual obligations as of December 31, 2009 +(in U.S. dollars):
+
 
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +      +
Payments due by period
+ 		 
  +   +
Total
+ 		   +
Less than 1 year
+ 		   +
1-3 years
+ 		   +
3-5 years
+ 		   +
More than 5 years
+ 		 
+
Long-Term + Notes Payable
+ 		 $   $   $   $   $  
+
Interest + Payable
+ 		 $   $   $   $   $  
+
Guarantee + (1)
+ 		 $7,300,000  $7,300,000  $   $   $  
+
Operating + Lease Commitment (2)
+ 		 $205,000  $148,000  $57,000  $   $  
+
Purchase + Commitment (3)(4)(5)(6)(7)(8)
+ 		 $46,238,000  $46,238,000  $   $   $  
+
Sub-Contracts + (3)
+ 		 $165,700,000  $165,700,000  $   $   $  
+
Technology + License Fees (9)(4)(10)(11)
+ 		 $12,836,000  $8,636,000  $4,200,000  $   $  
+
Other + Commitment (12)(6)
+ 		 $7,133,000  $7,133,000  $   $   $  
+
Total 
+ 		 $239,412,000  $235,155,000  $4,257,000  $   $  
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

+
+ + + + + + +
+ +
1.
+ 		+
On + July 28, 2009, we entered into a short-term loan agreement totaling $7.3 + million (RMB50.0 million) with Shanghai Pudong Development Bank. Pursuant + to the loan agreement, the loan bears interest at 5.841% per annum and + must be repaid on July 27, 2010. GaoKe Energy provided a guarantee for the + loan.
+
+
+
 
+
+
+
+ + + + + + +
+ +
2.
+ 		+
In + June 2008, we entered into an operating lease agreement for its Beijing + offices, which runs through June 2011. The total commitment remaining as + of December 31, 2009 was approximately $185,000 (RMB 1.3 million). In May + 2009, we entered into an operating lease agreement for its operating + office based in a Shenyang mall, which runs through April 30, 2010. The + total commitment remaining as of December 31, 2009 was approximately + $11,000 (RMB 77,000). In January 2010, we renewed an operating lease + agreement for GaoKe Energy’s Beijing office, which runs through April 30, + 2010. The total commitment remaining as of December 31, 2009 was + approximately $9,000 (RMB 60,000).
+
+
+
 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + +
+ +
3.
+ 		+
We + are committed to purchasing subcontracting services and project supplies + related to the fulfillment of our distributed power generation + contracts.  The total commitment to subcontractors and suppliers + remaining as of December 31, 2009 was approximately $206 million (RMB1.4 + billion) and $19.2 million (RMB131 million), respectively.  Included + in prepayments, deposits and other receivables are payments of $40.3 + million (RMB275.4 million) to be applied against these + commitments. 
+
+
+
 
+
+ + + + + + +
+ +
4.
+ 		+
In + May 2007, we entered into an agreement with Fuhrländer AG to acquire its + license to manufacture and sell wind turbines for a total payment of $6.4 + million (Euro 4.5 million). As of December 31, 2009, this amount had been + paid by us and classified as an intangible asset. We also committed to pay + $5.1 million (Euro 3.5 million) in training fees as part of this agreement + before it receives the license. As of December 31, 2009, $2.2 million + (Euro 1.5 million) had been paid by us and classified as an intangible + asset. The remaining balance of $2.9 million (Euro 2.0 million) has not + been paid by us as of December 31, 2009 because Fuhrländer, as of December + 31, 2009, had not yet provide all technology documents required under the + agreement. In a separate parts purchase agreement with Fuhrländer, we also + committed to the purchase $17.9 million (Euro 12.7 million) in parts + inventory. As of December 31, 2009, $6.5 million (Euro 4.6 million) in + parts inventories had been purchased by us against this + commitment.
+
+
+
 
+
+ + + + + + +
+ +
5.
+ 		+
On + March 3, 2009, we entered into an agreement with GE Commercial Shanghai + Co., Ltd. (“GE Shanghai”) to purchase gearboxes. GE Shanghai committed to + supply 100 sets, 300 sets and 500 sets of gearbox in 2010, 2011 and 2012, + respectively. To secure these rights, we committed to pay GE Shanghai + $10.9 million. Pursuant to the payment schedule in this agreement, $1.9 + million was scheduled to be paid before November 30, 2009, $7.6 million + was scheduled to be paid before March 1, 2010 and the remaining $1.4 + million was scheduled to be paid before July 1, 2010. As of December 31, + 2009, we had not made all payments according to this + schedule.
+
+
+
 
+
+ + + + + + +
+ +
6.
+ 		+
On + August 18, 2009, we entered into definitive agreements to form two joint + ventures with Jiangsu Miracle. The first joint venture, Shenyang Tianxiang + Wind Equipments Manufacturing Co., Ltd. (“Shenyang Tianxiang”), will + manufacture rotor blades, hubs, nacelle covers, and other key components + for wind turbines. A-Power is committed to contribute approximately $1.5 + million (RMB10.2 million) in cash for 51% of its registered capital. The + second joint venture, Shenyang Tianrui Wind Equipments Sales Company Co., + Ltd. (“Shenyang Tianrui”) will engage in marketing and sales of the wind + turbine components made by Shenyang Tianxiang. A-Power is committed to + contribute $359,000 (RMB2.5 million) in cash for 49% of its registered + capital. In a separate purchase agreement with Jiangsu Miracle effective + in January 2010, we also committed to pay $4.2 million (RMB 29.9 million) + to make a 20% advance payment for purchased components, with 70% to be + paid on receipt of quality inspection certification and package statement + and the remaining 10% to be paid upon delivery of + components.
+
+
+

+
+ + + + + + +
+ +
7.
+ 		+
In + October 2008, we entered into an agreement with Shandong Shuanyi Group + Company Ltd. to purchase 15 sets of 750 KW cabin cover and deflector + shield wind turbine components for $260,000 (RMB1.8 million). We committed + to pay an advance of $78,000 (RMB530,000) upon the effective date of the + contract, an additional $176,000 (RMB1.2 million) upon receipt of the + components, and the remaining $10,000 (RMB70,000) upon completion of the + quality warranty period. As of December 31, 2009, the advance of $78,000 + (RMB530,000) had been paid by us and the remaining $186,000 + (RMB1.2million) has not been paid as only five sets of components had been + received.
+
+
+

+
+ + + + + + +
+ +
8.
+ 		+
In + October 2008, we entered into an agreement with Qinhuangdao Yaohua Glass + steel Company Ltd. to purchase 17 sets of 750 KW cabin cover and deflector + shield wind turbine components for $357,000 (RMB2.4 million). We committed + to pay an advance of $107,000 (RMB730,000) upon the effective date of the + contract, an additional $234,000 (RMB1.6 million) upon receipt of the + components, and the remaining $13,000 (RMB90,000) upon the completion of + the quality warranty period. As of December 31, 2009, an advance of + $20,000 (RMB139,800) was paid by us and the remaining $337,000 + (RMB2.3million) has not been paid since no components have been + received.
+
+
+

+
+ + + + + + +
+ +
9.
+ 		+
In + February 2007, we entered into an agreement with Norwin to acquire its + license and trademark to manufacture wind turbines for a total payment of + $3.5 million. As of December 31, 2008, $1.75 million had been paid by us + and classified as a deposit on intangible assets. We committed to pay the + remaining $1.75 million by February 15, 2009. On January 28, 2010, $1.2 + million had been paid by us, leaving a remaining balance of $550,000 + outstanding.
+
+
+
 
+
+ + + + + + +
+ +
10.
+ 		+
+
In + July 2009, we entered into a technology transfer agreement with Shenyang + Huaren, to use Shenyang Huaren’s proprietary technology to commercially + produce and sell 1.5 MW wind turbines. To secure these rights, we agreed + to pay Shenyang Huaren RMB4.0 million, including an initial transfer fee + of RMB2.0 million within 15 days of executing the agreement, RMB1.0 + million within one month of receiving technology transfer documents from + Shenyang Huaren, RMB0.5 million within 15 days of producing the initial + prototype and RMB0.5 million within 15 days of connection of a wind + turbine to the grid. As of December 31, 2009, we haven’t made any payments + yet.
+
+
+
+

+
+ + + + + + +
+ +
11.
+ 		+
+
In + January 2010, we entered into a technology license agreement (the “W2E + Agreement”) with W2E Technologies to manufacture, operate, service and + sell advanced T8x 2.0 MW wind turbines. Under the license agreement, W2E + Technologies granted us an exclusive right to manufacture, operate, + service and sell its T8x 2.0 MW wind turbines in China and the United + States beginning in January 2010. In addition, we have obtained + non-exclusive rights to market these turbines in international markets + outside of China and the United States. Under the technology license, + during the term of the agreement, we have the right to any additional + know-how in relation to the manufacturing, selling, erecting, + commissioning, operating, maintaining and monitoring of the T8x 2.0 MW + wind turbines without charge. To secure these rights, we agreed to pay W2E + Technologies a transfer fee of approximately $1,400 (EUR 1.0 million), an + additional approximately $2,000 (EURO 1.5 million) upon achievement of + certain technology transfer and turbine assembly milestones and further + minimum royalty payments of approximately $4,200 (EURO 3.0 million) over a + period of seven years following the first commission of wind turbines. The + company paid W2E Technologies approximately $1,400 (EUR 1.0 million) in + February, 2010
+
+
+
+
+
 
+
+ + + + + + +
+ +
12.
+ 		+
In + October 2005, we entered into an agreement with LICEG to set up a + joint-venture company, LICEG Ltd., which was incorporated in August 2007. + Pursuant to this agreement, we are required to pay LICEG $5.3 million (RMB + 36.0 million) when LICEG fulfills its obligations under the agreement to + obtain designated licenses and settle with its existing employees. LICEG + expects to fulfill its obligations in fiscal year + 2010.
+
+
+
 
+
+ + + + + +
+ + +
Safe + Harbor
+
+
+
 
+
See “FORWARD-LOOKING INFORMATION” at +the beginning of this Annual Report on Form 20-F.
+
+
 
+
+
+
+
+
+
+
63
+
+
+
+
+
+
+
+
+
+
+

+
+ + + + + +
+
ITEM + 6.
+ 		+
DIRECTORS, + SENIOR MANAGEMENT AND EMPLOYEES
+
+
+
 
+
+ + + + + +
+
A.
+ 		+
+
Directors + and Senior Management
+
+
+
+
 
+
The names +of our current directors and senior management and their ages and principal +positions with A-Power as of March 31, 2010 are as follows:
+
 
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Directors + and Executive Officers
+ 		  + +
Age
+ 		  + +
Position/Title
+
+
Jinxiang + Lu
+ 		  + +
57
+ 		  + +
Chairman + of the Board and Chief Executive Officer
+
+
Robert + B. Leckie*
+ 		  + +
62
+ 		  + +
Independent + Director
+
+
Dilip + Limaye
+ 		  + +
66
+ 		  + +
Independent + Director
+
+
Remo + Richli
+ 		  + +
47
+ 		  + +
Independent + Director
+
+
Zhenyu + Fan
+ 		  + +
48
+ 		  + +
Independent + Director
+
+
John + S. Lin **
+ 		  + +
48
+ 		  + +
Director + and Chief Operating Officer
+
+
Jianmin + Wu
+ 		  + +
46
+ 		  + +
Independent + Director
+
+
Kin + Kwong (Peter) Mak***
+ 		+
  
+ 		+
48
+ 		+
  
+ 		+
Chief + Financial Officer
+
+
Engang + Wang
+ 		  + +
42
+ 		  + +
Chief + Technology Officer
+
+
Bin + Jiang
+ 		  + +
35
+ 		  + +
Chief + Accounting Officer
+
+
+
 
+
+
+
+
+
* Robert +B. Leckie was appointed to the board of directors in March 2008 to fill the +vacancy created by the departure of Richard D. Propper from our board of +directors, who resigned in March 2008. Dr. Propper’s resignation was not the +result of any disagreement with us.
+
 
+
** John +S. Lin served as our Chief Strategy Officer during 2008 until he resigned from +such position upon his appointment as our Chief Operating Officer in May +2009.  Mr. Lin also served as our Interim Chief Financial Officer from +October 2008 to May 2009.  On May 26, 2009, we appointed Kin Kwong +(Peter) Mak as our Chief Financial Officer. However, during a transition period, +anticipated to last through August 30, 2009, Mr. Lin continues to perform the +functions of our principal financial officer, including evaluating our internal +controls over financial reporting and working with our independent auditors and +audit committee with respect to audit services and the design and operation of +our internal controls over financial reporting.
+
 
+
*** Kin +Kwong (Peter) Mak was appointed as our Chief Financial Officer in May 2009. From +October 2008 through May 2008, Mr. Lin served as our Interim Chief Financial +Officer and resigned from such position in May 2009 upon the appointment of Mr. +Mak. During a transition period through the first three months after Mr. Mak’s +appointment, Mr. Lin will continue to perform the functions of the Company’s +principal financial officer. Our previous Chief Financial Officer, Edward Meng, +was terminated by the Company in October 2008. NASDAQ Stock Market forwarded a +notification letter written to NASDAQ from Mr. Meng’s former employer. The +letter stated that Mr. Meng had breached that company’s code of conduct by being +employed by that company on a full-time basis while at the same time being +employed by A-Power as its Chief Financial Officer.  After +deliberations and consultations with NASDAQ, the Board of Directors of A-Power +determined that terminating Mr. Meng’s employment with A-Power was the +appropriate action.
+
 
+
All of +these persons except for Robert B. Leckie, Dilip Limaye and John S. Lin (who are +residents of the United States) and Remo Richli (who is a resident of +Switzerland) are residents of the PRC. There are no family relationships among +any of the directors or executive officers of our company.
+
 
+
Other +than our Chairman and Chief Executive Officer, our Chief Financial Officer, our +Chief Operating Officer, there are no executive officers.
+
 
+
Jinxiang +Lu has served as our Chairman of the Board and Chief Executive Officer +since January 2008. Mr. Lu has been involved with developing power generation +systems and power grids in China for over 30 years. In the 1980s and 1990s, +while in charge of various major power plant projects in Huanren, Benxi, Tiefa +and Chao, he recognized the inherent limitations and drawbacks of a central +power system and began developing proprietary distributed power generation and +micro power grid designs, processes and functionality. His distributed power +generation and micro grid system has been refined over the past 20 years by Mr. +Lu and his team of engineers and now can efficiently and automatically produce +both electricity and heat in a single facility. Based on this technology, Mr. Lu +founded GaoKe Energy and GaoKe Design in 2003 and served as the president and +chief executive officer of these companies. Mr. Lu holds a Masters degree from +Harbin Science and Technology University where he studied power plants and grid +network design.

+
+
+
  +
+
+
+
64
+
+
+
+
+
+
  +
+
+

+
+
John S. +Lin has been a member of our board of directors since January 2008 and +serves as our Secretary of the Board and has served as our Chief Strategy +Officer since April 2008 and was appointed as our Interim Chief Financial +Officer in October 2008 upon the termination of Edward Meng’s employment as +Chief Financial Officer. In May 2009, Mr. Lin was appointed as our Chief +Operating Officer whereupon he resigned from his position as Chief Strategy +Officer and Interim Chief Financial Officer. As our Chief Operating +Officer, Mr. Lin’s responsibilities include our development and oversight of our +overall global business strategy, mergers and acquisitions strategy and business +channel development. Mr. Lin also currently serves as a director and as the +president and chief executive officer of CBC International Capital Corp. +and CBC Investment Consulting (Shanghai) Co., Ltd., a position he has held since +1999. CBC advises Chinese companies in a variety of financial matters, including +capital formation. He is experienced in raising capital in China and the U.S., +structuring transactions and reorganizations of Chinese companies and public +offerings of Chinese companies in exchanges worldwide and has represented +emerging growth technology firms, venture capital firms and investment banks . +Mr. Lin has also served as a director and general manager of Chiway Investment +(Anhui) Co., Ltd., which has been commissioned to manage $50 million for Hefei +City, China, to attract high technology businesses to the area, since 2000, +and as a director of Fair City Technology Co. Ltd., a privately held company, +since October 2005. Mr. Lin is also a director of Wisgold Technology Ltd. and +Eastland Investment Ltd., both of which are privately held companies. Mr. Lin is +bilingual in English and Chinese and received a degree from Shanghai Traditional +Medicine University, a Doctorate of Business Administration from Warnborough +University, and an Executive MBA from California State University Los Angeles +and Beijing University. Mr. Lin is currently an Executive MBA candidate of +Stanford Graduate School of Business.
+
 
+
+
Peter Mak +was named as our Chief Financial Officer effective May 26, 2009, although +Mr. John S. Lin continued to perform the functions of Chief Financial Officer +through August 30, 2009. He was the Chief Financial Officer of New Dragon Asia +Corp., a NYSE-Amex listed company from August 2004 to February 2009. Mr. Mak was +the managing director of Venfund Investment Management Limited, a Shenzhen-based +mid-market mergers and acquisition investment banking firm from late 2001 to +July 2004. Prior to that, Mr. Mak spent 17 years at Arthur Andersen Worldwide +where he was a firm partner and served as the managing partner of Arthur +Andersen Southern China in his last position with the firm. Mr. Mak also serves +as an independent director and audit committee chairman of Trina Solar Limited, +a New York Stock Exchange listed company, China Security and Surveillance +Technology, Inc., a New York Stock Exchange and NASDAQ Dubai listed company, +China GrenTech Corp. Ltd, a NASDAQ listed company and  Dragon +Pharmaceutical Inc., an OTCBB company; Huabao International Holdings Ltd., China +Dongxiang (Group) Co., Ltd., Pou Sheng International (Holdings) Limited, Real +Gold Mining Limited and 361 Degrees International Limited, companies listed on +the Hong Kong Stock Exchange; and Bright World Precision Machinery Ltd., a +company listed in Singapore. Mr. Mak is a graduate of the Hong Kong Polytechnic +University and a fellow member of the Association of Chartered Certified +Accountants, UK, and the Hong Kong Institute of Certified Public Accountants, +and a member of the Institute of Chartered Accountants, in England and +Wales
+
 
+
+
+
Robert B. +Leckie has been a member of our board of directors since March 2008. Mr. +Leckie has been responsible for the legal departments of multiple multinational +companies and has a wealth of experience with acquisitions, divestitures, joint +ventures and financings, both public and private. Mr. Leckie also has +substantial management experience. From 1995 through 1998 he served as the chief +executive - Industrial Division for Novar plc., a public UK diversified +industrial manufacturing and electrical controls company. From 1998 until Novar +was acquired by Honeywell in 2005, Mr. Leckie was Novar’s General Counsel with +responsibility for the Americas. Since May 2006, Mr. Leckie has operated a +private legal practice in San Antonio, Texas. Mr. Leckie received a bachelors +and masters degree in electrical engineering and a law degree from McGill +University in Canada. He is licensed to practice law in Texas, New York and +Ontario, Canada.
+
 
+
Dilip +Limaye has been a member of our board of directors since January 2008. +Mr. Limaye is an internationally recognized expert in the field of cogeneration, +distributed power generation and renewable energy technologies. He is currently +a senior advisor with the World Bank and the International Institute for Energy +Conservation and serves as a consultant to the Japan Research Institute and +USAID. For these institutions, Mr. Limaye is currently developing and +implementing energy conservation strategies and solutions (primarily through +cogeneration/distributed generation and other “green” technologies) for Vietnam, +India, the Philippines, Japan, and Central and Eastern Europe. This includes +developing micro networks based on green energy technologies for the island of +Negros, Philippines and for the city of Yokohama, Japan. Mr. Limaye has held +over 30 seminars in the United States and developing countries on cogeneration +and distributed generation and has published two books on these topics. Mr. +Limaye was the principal consultant and technical advisor for the U.S. Electric +Power Research Institute’s major 10-year project to assess cogeneration and +distributed generation and to develop sustainable models of collaborative +efforts among U.S. utilities, customers, equipment suppliers, and energy service +providers to implement cogeneration projects. He was also a founding member of +the International Cogeneration Society and assisted in the development of the +Certified Cogeneration Professional (CCP) program for the Cogeneration Institute +of the Association of Energy Engineers. In addition, Mr. Limaye was the founder +and president of the International Energy Services Company, the first +multi-national energy services company (ESCO), and is currently the president of +SRC Global, Inc., a position he has held since 1999.
+
 
+
+
Remo +Richli has been a member of our board of directors since January 2008. +Mr. Richli has been a Partner of Bridgelink AG, a private international mergers +and acquisition firm headquartered in Switzerland, since 2005. His +responsibilities include the acquisition and divestiture of companies as well as +raising funds, including private equity deals and venture capital funds. +Previously, he worked in the United States as a financial expert at RP +Associates in San Diego, a venture capital firm focusing on corporate finance +and financial structures. His work included evaluations of investment +opportunities, financial modeling of investments, and fundraising, as well as +building teams on operational and strategic levels. During his time with RP +Associates, Mr. Richli also served as chief financial officer of one of its +portfolio companies. From 1993 to 1999, Mr. Richli owned a consulting firm +engaged in corporate finance consultancy and acted as the chief executive +officer of client companies on a consulting basis. From 1991 to 1993, Mr. Richli +was a director at the Department of Finance at the city government level in +Switzerland. Mr. Richli also serves as a member of the board of directors of +Origin Agritech Limited, a technology-focused crop seed company serving Mainland +China that is traded on the NASDAQ Global Select Market. He studied in +Switzerland and in the United States. Remo Richli holds a BA and a MSc in +Business and Economics, an MBA in Finance as well as an Executive Master in +Management.
+
 
+
Zhenyu Fan +has been a member of our board of directors since January 2008. Mr. Fan is an +expert in power plant design and development. He possesses long-standing +relationships with many of the large utilities, energy companies and governments +in countries throughout Southeast Asia. With these strategic relationships, Mr. +Fan has been instrumental in obtaining and managing projects for Chinese power +companies in India, Indonesia and Vietnam to develop power plants ranging in +size from a few megawatts to over 1 GW. Since 2002, Mr. Fan has worked as a +manager at China National Machinery & Equipment Import & Export +Corp.

+
+
+
  +
+
+
+
65
+
+
+
+
+
+
  +
+
+

+
Jianmin Wu +has been a member of our board of directors since January 2008. Mr. Wu is +experienced in investment banking and finance and serves as the chief +representative of Huatai Securities Co., Ltd. for its investment banking +activities in China, a position he has held since 2001. He also currently serves +as an independent board member of Fushun Special Steel Co., Ltd., a Chinese +manufacturer of special steel products that is listed on the Shanghai Stock +Exchange. From 2005 to June 2006, he was the vice president of finance for Migao +Corporation (Toronto Exchange: MGO), and played a major role in their initial +public offering process. Mr. Wu also previously worked as the investment banking +manager at Shenyin Wanguo Securities Ltd. from 1996 to 2001. Mr. Wu has a degree +in Applied Computer Science from Shanghai Machinery University and a masters +degree in electrical engineering from Dalian University of +Technology.
+
 
+
+
Bin Jiang +has served as our Chief Accounting Officer since October 2008. Before joining +Gaoke in 2005, she worked for nearly eight years as an accountant and auditor in +Liaoning Guangming. During her time at Liaoning Guangming, she accumulated audit +and accounting experience, as well as finance and management experience. She +graduated with a bachelor degree from Beijing Technology and Business +University in 1997.
+

+
Engang +Wang has served as our Chief Technology Officer since October 2008. Mr. +Wang has a strong research and technology background in the design and practice +of power plants. Prior to serving as our Chief Technology Officer, he served as +the General Engineer for the following plants: Benxi No.2 Power Plant, Hengren +Power Plant and Tieling Power Plant. Mr. Wang holds a bachelor’s degree from +Fuxin Coal University. He is currently in charge of the designs for each project +of GaoKe, which +incorporates the latest research and development from our research +collaborations and institutions. + +
 
+
+
+
+
+ + + + + +
+
B.
+ 		+
Compensation
+
+
+
+
 
+
Executive +Compensation
+
 
+
A-Power +Directors and Executive Officers
+
 
+
+
The +following table sets forth directors and executive officers employed by A-Power +during the year ended December 31, 2009. The amounts of cash compensation paid +by A-Power to our executive officers and directors for services in all +capacities to A-Power for the year ended December 31, 2009 are set forth below. +A-Power granted 790,000 share options to our directors and executive officers. +No other awards were granted under our 2007 Equity Plan or other non-cash +compensation plans during 2009.
+
+
 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Name + and Title of Position with A-Power
+ 		  +
Salary + /
+
Directors’
+
Fees(1)
+ 		  +
Bonus
+ 		 
+
Jinxiang + Lu
+
President + and Chief Executive Officer
+ 		 $300,000(2)    +
+
100,000 + (2)
+
+ 		 
+
John + S. Lin
+
Director + and Chief Operating Officer
+ 		 $240,000(3)(4)    +
+
50,000
+
+ 		 
+
Kin + Kwong (Peter) Mak
+
Chief + Financial Officer
+ 		 $ +
120,000
+ 		(5)    +
23,970
+ 		 
+
Robert + B. Leckie
+
Independent + Director
+ 		 $36,000(4)    +
None
+ 		 
+
Dilip + R. Limaye
+
Independent + Director, Chair of Compensation Committee
+ 		 $48,000(4)    +
None
+ 		 
+
Remo + Richli
+
Independent + Director, Chair of Audit Committee
+ 		 $60,000(4)   +
None
+ 		 
+
Zhenyu + Fan
+
Independent + Director
+ 		 $36,000(4)    +
None
+ 		 
+
Jianmin + Wu
+
Independent + Director
+ 		 $36,000(4)    +
None
+ 		 
+
Engang + Wang
+
Chief + Technology Officer
+ 		 $120,000    +
None
+ 		 
+
Bin + Jiang
+
Chief + Accounting Officer
+ 		 $96,000    +
None
+ 		 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
  
+
+
+
  +
+
+
+
66
+
+
+
+
+
+
  +
+
+
+
+
  
+
(1) +Salaries and directors’ fees were paid in U.S. dollars.
+
 
+
+
(2) +$75,000 of this amount was paid in January 2010. Based on his business +performance, we decided to grant Mr. Lu a year end bonus of $100,000 for 2009, +which was paid in January, 2010.
+
 
+
(3) Mr. +Lin served as our Chief Strategy Officer  beginning on April 1, 2008 and +resigned from such position when he was appointed as our Chief Operating Officer +in May 2009. Mr. Lin served as our Interim Chief Financial Officer from October +2008 through May 2009 and was paid an additional $15,000 per month for his +services to the Company in such interim position. $45,000 of Mr. Lin’s salary +was paid in January 2010. Based on his business performance, we decided to grant +Mr. Lin a year end bonus of $50,000 for 2009, which was paid in January +2010.
+
 
+
(4) 75% +of the amounts shown in the salary /directors’ fees column was paid in 2009. The +remaining 25% was paid in January 2010.
+
  
+
(5) Kin +Kwong (Peter) Mak was appointed our Chief Financial Officer in May 2009 and had +a salary of $120,000 per annum in 2009. $33,333 of Mr. Mak’s salary was paid in +January 2010. Based on his business performance, we decided to grant Mr. Mak a +year end bonus of $23,970 for 2009, which was paid in January, +2010.
+
+
 
+
Chardan +and A-Power Executive Officers
+
 
+
Each +executive officer agreed not to take any compensation prior to the consummation +of a business combination.
+
 
+
Director +Compensation
+
 
+
In +addition to the directors’ fees listed above, Chardan and A-Power have +reimbursed their directors for expenses incurred in attending board meetings. +Upon a director’s election to the board, we have granted an option to purchase +our common shares under our 2007 Equity Plan, with an exercise price equal to +the closing market price of our common shares on the date of grant (or, if the +NASDAQ Stock Market was closed on the date of grant, the closing market price on +the following day), vesting in 36 equal monthly installments over the 36-month +period following the date of grant and exercisable for five (5) years (See Item +6.E., “Directors, Senior +Management and Employees – Share Ownership”).
+
 
+
+ + + + + +
+
C.
+ 		+
Board + Practices
+
+
+
 
+
Board +Composition and Terms of Directors and Officers
+
 
+
Our board +of directors currently consists of seven directors and we have determined that +five of our directors, Robert B. Leckie, Dilip Limaye, Remo Richli, Zhenyu Fan +and Jianmin Wu, are independent directors as defined in the NASDAQ Stock Market +LLC listing standards. Before our business combination with Head Dragon Holdings +in January 2008, we did not have any independent directors.
+

+
On August +25, 2009, the company held an annual general meeting in Shenyang, China and +approved an amendment to our Memorandum and Articles of Association to delete +the requirement for a classified board of directors.
+
 
+
Pursuant +to our memorandum and articles of association, the business of our company is +managed by our board of directors. Commencing with the first annual meeting of +the shareholders, directors are elected for a term of office to expire at the +third succeeding annual meeting of the shareholders after their +election.  Jinxiang Lu, Zhenyu Fan, Jianmin Wu, John Lin, Dilip +Limaye, Remo Richli and Robert Leckie were all appointed by the board on January +21, 2008. Each director will hold office until the expiration of his or her term +of office and until his or her successor have been elected and qualified, or +until his or her earlier death, resignation or removal by the shareholders or a +resolution passed by the majority of the remaining directors.
+
 
+
In the +interim between annual meetings of shareholders, or special meetings of +shareholders called for the election of directors, newly created directorships +and any vacancy on the board of directors may be filled by the vote of a +majority of the remaining directors then in office, although less than a quorum, +or by the sole remaining director. A director elected to fill a vacancy +resulting from death, resignation or removal of a director will serve for the +remainder of the full term of the director whose death, resignation or removal +will have caused such vacancy and until his successor will have been elected and +qualified.
+
 
+
Our +officers are appointed by resolution of our directors and hold office until +removed from office by our directors, whether or not a successor is +appointed.

+
+
+
  +
+
+
+
67
+
+
+
+
+
+
  +
+
+

+
Service +Agreements
+
 
+
We do not +have service or employment agreements with any of our directors or officers or +any other agreements that provide for benefits upon termination of service as a +director or employee of ours.
+
 
+
Committees +of the Board of Directors
+
 
+
+
We +currently have two committees under our board of directors: an audit committee +and a compensation committee. Our board of directors has adopted a nominating +and corporate governance committee charter but has not yet appointed any members +to this committee.
  
+
Audit +Committee
+
 
+
+
Our audit +committee currently consists of Remo Richli, Jianmin Wu, and Zhenyu Fan. Mr. +Richli serves as chairman of the audit committee. All of the audit committee +members are independent directors, as defined in the NASDAQ Stock Market listing +standards and Rule 10A-3 of Exchange Act, as amended. Each member of our audit +committee can read and understand fundamental financial statements, including a +balance sheet, income statement, and cash flow statement. Our board of directors +has determined that Mr. Richli qualifies as an “audit committee financial +expert” as that term is defined in the rules and regulations established by the +SEC. This designation is a disclosure requirement of the SEC related to Mr. +Richli’s experience and understanding with respect to certain accounting and +auditing matters. The designation does not impose on Mr. Richli any duties, +obligations or liability that are greater than those generally imposed on him as +a member of our audit committee and our board of directors, and his designation +as an audit committee financial expert pursuant to this SEC requirement does not +affect the duties, obligations or liability of any other member of our audit +committee or board of directors.
+
+
 
+
The +primary purpose of the audit committee is to oversee our accounting and +financial reporting processes and the audits of the financial statements of our +company. Pursuant to the audit committee charter adopted by our board of +directors, the audit committee is responsible for, among other +things:
+
 
+
·         appointing, +retaining and overseeing the work of our independent auditor, including +resolving disagreements between the management and our independent auditor +relating to financial reporting;
+
 
+
·         pre-approving +all audit and non-auditing services permitted to be performed by our independent +auditor, provided that the committee may establish pre-approval policies and +procedures;
+
 
+
·         reviewing +annually the independence and quality control procedures of our independent +auditor;
+
 
+
·         reviewing +regularly with our independent auditor any significant difficulties encountered +during the course of the audit, any restrictions on the scope of work or access +to required information, any significant disagreement with management in +connection with the preparation of the financial statements and any significant +judgments made in connection with the preparation of the financial statements +and their view as the appropriateness of such judgments;
+
 
+
·         reviewing +with our independent auditor the critical accounting policies and practices used +by the company;
+
 
+
·         discussing +with management and our independent auditor the annual audited financial +statements and any certification, report, opinion or review rendered by our +independent auditor;
+
 
+
·         discussing +with management and our independent auditor the annual audited financial +statements and any certification, report, opinion or review rendered by the +independent auditors;
+
 
+
·         discussing +with management and our independent auditor its assessment of the effectiveness +and adequacy of the company’s internal control structure and procedures for +financial reporting and consider with management and the independent auditors +whether any changes to such internal controls are appropriate;
+
 
+
·         discussing +with management and our independent auditor material off-balance sheet +transactions or structures;
+
 
+
·         meeting +separately with our independent auditor to discuss critical accounting policies, +management letters, recommendations on internal controls, the auditor’s +engagement letter and independence letter and other material written +communications between the independent auditors and the management;
+
 
+
·         reviewing +and approving, if appropriate, all proposed related party +transactions;

+
+
+
  +
+
+
+
68
+
+
+
+
+
+
  +
+
+

+
·         establishing +procedures for the receipt, retention and treatment of complaints and/or +concerns received by the company regarding accounting, internal accounting +controls or auditing matters and adopt, as necessary, appropriate remedial +measures or actions with respect to such complaints or concerns; +and
+

+
·         annually +reviewing and reassessing the adequacy of our audit committee +charter.
+
 
+
Compensation +Committee
+
 
+
Our +compensation committee currently consists of Mr. Limaye and Mr. Fan. Mr. +Limaye serves as chairman of the compensation committee. All members of the +compensation committee are independent directors, as defined in the NASDAQ Stock +Market listing standards. Pursuant to the compensation committee charter adopted +by our board of directors, the primary functions of the compensation committee +include:
+
    +
+
·         overseeing +the development and implementation of our compensation programs and +policies;
+

+
·         reviewing +periodically and modifying, to the extent it deems necessary or advisable, our +compensation programs;
+
 
+
·         reviewing +candidates for senior officer positions and their executive development +plans;
+
 
+
·         reviewing, +analyzing and approving executive officer compensation, including granting share +options and other awards under our incentive compensation plans and approving +corporate and individual performance goals and objectives relevant to executive +officer compensation and the long-term equity incentive awards;
+
 
+
·         reviewing +and approving compensation guidelines for all other officers of the +company;
+
 
+
·         developing +compensation guidelines and reviewing and approving the compensation program of +the directors of the company who are not members of the compensation +committee;
+
 
+
·         administering +our executive officer compensation and benefit plans, subject to delegation of +routine duties to appropriate individuals of the company; and
+
 
+
·         preparing +any reports on executive compensation required by applicable rules and +regulations.
+
 
+
Nominating +and Corporate Governance Committee.
+
 
+
We do not +currently have a nominating and corporate governance committee. Our board of +directors has adopted a charter for a nominating and corporate governance +committee, but has not yet appointed any members of the committee. Pursuant to +the nominating and corporate governance committee charter adopted by our board +of directors, the primary responsibilities of this committee will +include:
+
 
+
·         identifying +individuals qualified to become members of our board of directors;
+
 
+
·         selecting, +or recommending to the board, director nominees for each election of +directors;
+
 
+
·         developing +and recommending to the board criteria for selecting qualified director +candidates;
+
 
+
·         recommending +corporate governance principles, a code of conduct and compliance mechanisms for +the company; and
+
 
+
·         providing +oversight in the evaluation of the board and its committees.
+
 
+
In +connection with Dr. Propper’s resignation from our board of directors in +March 2008, Mr. Leckie was nominated to fill the vacancy on the board left by +Dr. Propper. Mr. Leckie’s appointment was unanimously approved by all of +our directors including all of our independent directors.
+
 
+
Duties +of Directors
+
 
+
Under the +laws of the British Virgin Islands, our directors, officers and other agents are +obligated to act honestly and in good faith and exercise care, diligence and +skill of a reasonably prudent person acting in comparable circumstances. In +fulfilling their duty of care to us, our directors must ensure compliance with +our memorandum and articles of association. We have the right to take legal +action if a duty owed by our directors is breached.

+
+
+
  +
+
+
+
69
+
+
+
+
+
+
  +
+
+
+
+
 
+
D. +Employees
+
 
+
As of +December 31, 2007, 2008 and 2009, we had approximately 250, 330 and 457 +employees, respectively. A-Power, Head Dragon Holdings and Easy Flow are holding +companies and had no employees during these dates. Substantially all of our +employees are located in China and employed by our operating subsidiaries +established there.
+

+
Staff headcounts of individual +entities of A-Power and its subsidiaries as of December 31, 2009 are set forth +below:
+

+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
+
Company
+
+ 		  +
+
Headcount
+
+ 		 
  +    
+
A-Power
+ 		  6 
+
Gaoke + Energy
+ 		  157 
+
Shenyang + Power Group
+ 		  11 
+
Jinxiang
+ 		  72 
+
Ruixiang
+ 		  90 
+
Yixiang
+ 		  9 
+
LICEG + Ltd.
+ 		  30 
+
GaoKe + Design
+ 		  82 
+
Total
+ 		  457 
+
+
+
+
+
 
+
Our +employees are not covered by any collective bargaining agreement. We consider +our relations with our employees to be good.
+

+
We have +established an employee welfare plan in accordance with the relevant PRC laws +and regulations. Our total expenses for this plan was US$0.2 million, US$0.5 +million and US$0.6 million for the years ended December 31, 2007, 2008 and 2009, +respectively.
+

+
As we +continue to expand our business, we believe it is critical to hire and retain +top talent, especially in the area of engineering. We believe we have the +ability to attract and retain high quality engineering talent in China based on +our competitive salaries, annual performance-based bonus system, and equity +incentive program for senior employees and executives. In addition, we have a +training program for entry-level engineers that allows them to work closely with +an experienced mentor to gain valuable hands-on experience and provide other +professional development opportunities, including seminars where experienced +engineers give lectures on specific engineering topics and new methods that can +be applied to various projects.
+
 
+
We have +established an employee welfare plan in accordance with the relevant PRC laws +and regulations.  Our total expenses for this plan was US$0.2 million, +US$0.5 million and US$0.6 million for the years ended December 31, 2007, 2008 +and 2009, respectively.
+
 
+
As we continue to expand our business, +we believe it is critical to hire and retain top talent, especially in the area +of engineering. We believe we have the ability to attract and retain high +quality engineering talent in China based on our competitive salaries, annual +performance-based bonus system, and equity incentive program for senior +employees and executives.  In addition, we have a training program for +entry-level engineers that allows them to work closely with an experienced +mentor to gain valuable hands-on experience and provide other professional +development opportunities, including seminars where experienced engineers give +lectures on specific engineering topics and new methods that can be applied to +various projects.
+

+
+
+
E. +Share Ownership
+
 
+
As of +March 20, 2010, 45,363,638 of our common shares were outstanding. Our common +shareholders are entitled to vote together as a single class on all matters +submitted to shareholders for approval. No holder of common shares has different +voting rights from other any other holders of common shares. We are not aware of +any arrangement that may, at a subsequent date, result in a change of control of +our company. As of March 20, 2010 approximately 33,745,638 common shares, or +70.7%, of our outstanding common shares was held by seven record holders in +the United States, including 31,061,964 shares held by Cede & Co as nominee +for the Depository Trust Company.
+
+
+
 
+
The +following table sets forth information with respect to the beneficial ownership +of our common shares as of March 20, 2010 by:
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
each + of our directors and executive officers; +and
+
+
+
 
+
+ + + + + + +
  + +
Ÿ
+ 		+
each + person known to us to beneficially own more than 5.0% of our outstanding + common shares.
+
+
+
 
+
Except as +otherwise noted, the business address of each person listed in the table is c/o +A-Power Energy Generation Systems, Ltd., No. 44 Jingxing North Street, Tiexi +District, Shenyang, Liaoning, China.
+
 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   + +
Shares
+
Beneficially Owned (1)
+ 		  +
  +   + +
Number
+ 		  + +
%
+ 		  +
+
Directors + and Executive Officers:
+ 		  +    +   +   +
+
Jinxiang + Lu (2)
+ 		  +   + +
11,278,000
+ 		  + +
 24.8 +
+ 		+
%
+
+
Robert + B. Leckie
+ 		  +   + +
 *
+ 		  +   +   +
+
Dilip + Limaye
+ 		  +   + +
 *
+ 		  +   +   +
+
Remo + Richli
+ 		  +   + +
 *
+ 		  +   +   +
+
Zhenyu + Fan
+ 		  +   + +
 *
+ 		  +   +   +
+
John + S. Lin (3)
+ 		  +   + +
1,813,333
+ 		  + +
4.0 +
+ 		+
%
+
+
Jianmin + Wu
+ 		  +   + +
 *
+ 		  +   +   +
+
Kin + Kwong (Peter) Mak
+ 		  +   + +
 *
+ 		  +   +   +
+
Engang + Wang
+ 		  +   + +
 *
+ 		  +   +   +
+
Bin + Jiang
+ 		  +   + +
 *
+ 		  +   +   +
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

+
* +Indicates beneficial ownership is less than 1%.

+
+
+
  +
+
+
+
70
+
+
+
+
+
+
  +
+
+
+
 
+
(1) +  Beneficial ownership is determined in accordance with Rule 13d-3 under +the Securities Exchange Act of 1934, as amended, and includes voting or +investment power with respect to the securities. The number and percentage +beneficial ownership of each listed person is based on the number of our common +shares outstanding as of March 20, 2010, as well as the number of shares +underlying options exercisable by such person within 60 days of March 20, 2010. +Shares underlying options are not deemed outstanding for purposes of computing +the percentage ownership of any other person.
+
 
+
+
(2) +  In connection with our acquisition of Head Dragon Holdings, the related +stock purchase agreement, dated as of April 14, 2007, provides that Mr. Lu will +be issued up to an aggregate of 9,000,000 additional of our common shares +(1,000,000 per year for 2007 through 2009 and 2,000,000 for 2010 through 2012, +on an all-or-none basis each year) for the six years beginning with fiscal 2007 +if, on a consolidated basis, we generate certain net operating profits. See Item +4.A. “Information on the +Company – History and Development of the Company - The Business +Combination.” Pursuant to an agreement between Mr. Lu and John S. Lin, +our Chief Operating Officer and Director, Mr. Lu will transfer 5% of any of +these additional incentive shares issued to him by the Company to Mr. Lin. Based +on our net operating profits for 2008 and 2007, respectively, we issued +1,000,000 shares to Mr. Lu in July 2009 and 2008, respectively. We have included +1,900,000 of those shares in the number and percentage of shares beneficially +owned by Mr. Lu, and the remaining 100,000 of those shares in the number and +percentage of shares beneficially owned by Mr. Lin.  Based on our net +operating profits for 2009, we expect to issue an additional 1,000,000 shares to +Mr. Lu in 2009, however, such amount of additional shares has not been included +in the number and percentage of shares beneficially owned by Mr. Lu or Mr. Lin. +The number and percentage of shares beneficially owned by Mr. Lu also includes +193,056 shares subject to an option that are currently exercisable or +exercisable within 60 days of March 20, 2010 out of a total of 10,521,056 +shares.
+
 
+
(3) +  Mr. Lin’s shares consist of 455,000 shares held of record by United Ally +Limited, 585,000 shares held of record by Smooch Sky Investments Limited, +585,000 shares held of record by Eastland Investments Limited, 50,000 shares to +be transferred to Mr. Lin from Mr. Lu, totally 1,725,000 shares. Mr. Lin is +the sole director and shareholder of United Ally Limited, Smooch Sky Investments +Limited and Eastland Investments Limited. Mr. Lu has agreed to transfer to Mr. +Lin 5% of the up to 9,000,000 additional incentive shares issuable to him by us. +Based on our net operating profits for 2008 and 2007, respectively, we issued +1,000,000 shares to Mr. Lu in July 2009 and July 2008.  We have +included 50,000 of such shares (5% of 1,000,000 incentive shares) in the number +and percentage of shares beneficially owned by Mr. Lin.  Based on our +net operating profits for 2008, we expect to issue an additional 1,000,000 +shares to Mr. Lu in the third quarter of 2009, however, the 50,000 shares +issuable to Mr. Lin under the arrangement between Mr. Lu and Mr. Lin has not +been included in the number and percentage of shares beneficially owned by Mr. +Lin. The +number and percentage of shares beneficially owned by Mr. Lin also includes +88,333 shares subject to an option that are currently exercisable or exercisable +within 60 days of March 20, 2010.
+
 
+
+
2007 +Equity Plan
+
 
+
+
We have +one plan under which our employees may acquire capital in the company, namely +our 2007 Equity Plan. On January 18, 2008, the stockholders of Chardan +approved the Chardan 2007 Equity Plan and, in connection with the +redomestication merger of Chardan with and into A-Power, A-Power assumed the +2007 Equity Plan. The purpose of the share option plan is to enable us to offer +our employees, officers, directors and consultants whose past, present and/or +potential contributions to our company have been, are or will be important to +our success, an opportunity to acquire a proprietary interest in our company. We +have reserved 2,000,000 of our common shares for issuance pursuant to awards +granted under the 2007 Equity Plan and, as of March 15, 2010, options +exercisable for up to 1,592,939 shares have been issued under the 2007 Equity +Plan.
+
 
+
The +following table summarizes, as of March 15, 2010, the options granted under our +2007 Equity Plan to our directors, executive officers and other +employees:
+
 
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Name
+ 		  + +
Common Shares
+
Underlying
+
Options
+ 		  +   + +
Exercise Price 
+
Per Share
+
(US$)(1)
+ 		  +
Grant Date
+ 		  + +
Expiration Date
+ 		  + +
Vesting Schedule
+
+
Jinxiang Lu
+ 		  +   + +
250,000
+ 		  +   + +
$
+ 		+
7.18
+ 		+
(1)
+ 		  +
April + 17, 2009
+ 		  + +
April + 17, 2014
+ 		  +   +   + +
(4)
+
  +   +   + +
300,000
+ 		  +   + +
$
+ 		+
14.00
+ 		+
(2)
+ 		  +
January + 21, 2008
+ 		  + +
January + 21, 2013
+ 		  +   +   + +
(4)
+
+
Richard + D. Propper(3)
+ 		  +   + +
30,000
+ 		(3)  + +
$
+ 		+
14.00
+ 		+
(2)
+ 		  +
January 21, 2008
+ 		  + +
January 21, 2013
+ 		  +   +   + +
(4)
+
+
Robert + B. Leckie
+ 		  +   + +
10,000
+ 		  +   + +
$
+ 		+
7.18
+ 		+
(1)
+ 		  +
April + 17, 2009
+ 		  + +
April + 17, 2014
+ 		  +   +   + +
(4)
+
  +   +   + +
30,000
+ 		  +   + +
$
+ 		+
13.15
+ 		+
(10)
+ 		  +
March + 14, 2008
+ 		  + +
March + 14, 2013
+ 		  +   +   + +
(4)
+
+
Dilip + Limaye
+ 		  +   + +
40,000
+ 		  +   + +
$
+ 		+
7.18
+ 		+
(1)
+ 		  +
April + 17, 2009
+ 		  + +
April + 17, 2014
+ 		  +   +   + +
(4)
+
  +   +   + +
40,000
+ 		  +   + +
$
+ 		+
14.00
+ 		+
(2)
+ 		  +
January 21, 2008
+ 		  + +
January 21, 2013
+ 		  +   +   + +
(4)
+
+
Remo + Richli
+ 		  +   + +
50,000
+ 		  +   + +
$
+ 		+
7.18
+ 		+
(1)
+ 		  +
April + 17, 2009
+ 		  + +
April + 17, 2014
+ 		  +   +   + +
(4)
+
  +   +   + +
50,000
+ 		  +   + +
$
+ 		+
14.00
+ 		+
(2)
+ 		  +
January + 21, 2008
+ 		  + +
January + 21, 2013
+ 		  +   +   + +
(4)
+
+
Zhenyu + Fan
+ 		  +   + +
30,000
+ 		  +   + +
$
+ 		+
7.18
+ 		+
(1)
+ 		  +
April + 17, 2009
+ 		  + +
April + 17, 2014
+ 		  +   +   + +
(4)
+
  +   +   + +
30,000
+ 		  +   + +
$
+ 		+
14.00
+ 		+
(2)
+ 		  +
January + 21, 2008
+ 		  + +
January + 21, 2013
+ 		  +   +   + +
(4)
+
+
Jianmin + Wu
+ 		  +   + +
30,000
+ 		  +   + +
$
+ 		+
7.18
+ 		+
(1)
+ 		  +
April + 17, 2009
+ 		  + +
April + 17, 2014
+ 		  +   +   + +
(4)
+
  +   +   + +
30,000
+ 		  +   + +
$
+ 		+
14.00
+ 		+
(2)
+ 		  +
January + 21, 2008
+ 		  + +
January + 21, 2013
+ 		  +   +   + +
(4)
+
+
John + S. Lin
+ 		  +   + +
180,000
+ 		  +   + +
$
+ 		+
7.18
+ 		+
(1)
+ 		  +
April + 17, 2009
+ 		  + +
April + 17, 2014
+ 		  +   +   + +
(4)
+
  +   +   + +
30,000
+ 		  +   + +
$
+ 		+
14.00
+ 		+
(2)
+ 		  +
January + 21, 2008
+ 		  + +
January + 21, 2013
+ 		  +   +   + +
(4)
+
+
Edward + Meng (6)
+ 		  +   + +
150,000
+ 		  +   + +
$
+ 		+
14.00
+ 		+
(2)
+ 		  +
January + 21, 2008
+ 		  + +
January + 21, 2013
+ 		  +   +   + +
(5)
+
+
Kin + Kwong (Peter) Mak
+ 		  +   + +
200,000
+ 		  +   + +
$
+ 		+
12.87
+ 		+
(7)
+ 		  +
June + 12, 2009
+ 		  + +
June + 12, 2014
+ 		  +   +   + +
(9)
+
+
Other + Employees
+ 		  +   + +
242,106
+ 		+
(11)
+ 		  + +
$
+ 		+
7.18
+ 		+
(1)
+ 		  +
April + 17, 2009
+ 		  + +
April + 17, 2014
+ 		  +   +   + +
(4)
+
  +   +   + +
50,000
+ 		  +   + +
$
+ 		+
14.00
+ 		+
(2)
+ 		  +
January + 21, 2008
+ 		  + +
January + 21, 2013
+ 		  +   +   + +
(5)
+
+
Total + Outstanding:
+ 		  +   + +
1,592,939
+ 		+
(8)
+ 		  +   +   +   +    +   +   +   +   +   +   +
+
+
+
 
+
+
+
+
  +
+
+
+
71
+
+
+
+
+
+
  +
+
+
+

+
+ + + + + + +
  + +
(1)
+ 		+
On + April 7, 2009, our compensation committee awarded options with a grant + date of April 17, 2009 and an exercise price equal to the closing price of + our common shares on that day. The closing price of our common shares on + April 17, 2009 as reported by NASDAQ was +$7.18.
+
+
+
 
+
+ + + + + + +
  + +
(2)
+ 		+
The + NASDAQ Stock Market was closed on Monday, January 21, 2008 for the Martin + Luther King holiday. On January 21, 2008, our board of directors + determined that the exercise price of options granted on January 21, 2008 + shall equal the closing price of our common shares on following day. The + closing price of our common shares on January 22, 2008 as reported by + NASDAQ was $14.00.
+
+
+
 
+
+ + + + + + +
  + +
(3)
+ 		+
Dr. + Propper was granted options in connection with his service as a member of + our board of directors. He resigned from our board of directors in March + 2008 and his options vested and are exercisable only to the extent of 1/36 + of the underlying shares. The unvested balance of the options (29,167) has + been cancelled and returned to the 2007 Equity + Plan.
+
+
+
 
+
+ + + + + + +
  + +
(4)
+ 		+
Option + vests in 36 equal monthly installments over the 36-month period following + the date of grant.
+
+
+
 
+
+ + + + + + +
  + +
(5)
+ 		+
Option + vests as to 25% of the underlying shares on January 21, 2009 and the + remaining shares vest in 36 equal monthly installments over the 36-month + period following January 21, 2009.
+
+
+
 
+
+ + + + + + +
  + +
(6)
+ 		+
Share + options were granted to the then Chief Financial Officer of the Company, + Mr. Meng, to purchase a total of 150,000 common shares at an exercise + price of $14.00, the fair market value at the date of grant. These options + were to vest over four years and were exercisable for ten + years.  However, the Chief Financial Officer’s service with the + Company was terminated in October 2008 before any options had + vested.  All of these options were subsequently cancelled and + returned to the 2007 Equity Plan.
+
+
+
 
+
+ + + + + + +
  + +
(7)
+ 		+
On + June 5, 2009, our compensation committee awarded options to our newly + appointed Chief Financial Officer with a grant date of June 12, 2009 and + an exercise price equal to the closing price of our common shares on that + day. The closing price of our common shares on June 12, 2009 as reported + by NASDAQ was $12.87.
+
+
+
 
+
+ + + + + + +
  + +
(8)
+ 		+
+
The + member of total outstanding options has been calculated after accounting + for cancelled options that have been returned to the 2007 Equity + Plan.
+
+
+
+
 
+
+ + + + + + +
  + +
(9)
+ 		+
Option + vests as to (i) 1/6 of the underlying shares in 12 equal monthly + installments over the 12-month period following the date of grant, (ii) + 1/3 of the underlying shares in 12 equal monthly installments over the + second 12-month period following the date of grant and (iii) ½ of the + underlying shares on 12 equal monthly installments over the third 12-month + period following the date of grant.
+
+
+

+
+ + + + + + + + + + + + + + + + +
  + +
(10)
+ 		+
On + March 14, 2008, our compensation committee awarded options with a grant + date of March 14, 2008 and an exercise price equal to the closing price of + our common shares on that day. The closing price of our common shares on + March 14, 2008 as reported by NASDAQ was $13.15.
+
  +   +   +
  + +
(11)
+ 		+
+
On + April 17, 2009, our compensation committee awarded options to purchase + 247,900 shares to the company’s other employees. As of December 31, 2009, + options to purchase 5,794 of these shares were cancelled due to the + resignation of a number of these + employees.
+
+
+
+
 
+
+
+
  +
+
+
+
72
+
+
+
+
+
+
  +
+
+

+
The +following paragraphs summarize the principal terms of our 2007 Equity +Plan:
+
 
+
Administration. The plan is +administered by the compensation committee of our board of directors. Subject to +the provisions of the plan, the compensation committee determines, among other +things, the persons to whom from time to time awards may be granted, the +specific type of award to be granted, the number of shares subject to each +award, share prices, any restrictions or limitations on the awards, and any +vesting, exchange, deferral, surrender, cancellation, acceleration, termination, +exercise or forfeiture provisions related to the awards. The interpretation and +construction by the compensation committee of any provisions of, and the +determination by the compensation committee of any questions arising under, the +plan or any rule or regulation established by the compensation committee +pursuant to the plan is final and binding on all persons interested in the +plan.
+
 
+
Shares subject to the plan. +The plan authorizes a total of 2,000,000 common shares to be granted as awards +under the plan. In order to prevent the dilution or enlargement of the rights of +holders under the plan, our compensation committee may determine whether or not +to adjust the terms of the awards or the number of shares reserved for issuance +under the plan in the event of any share split, reverse share split, share +dividend payable on our common shares, combination or exchange of shares, or +other extraordinary event occurring after the grant of an award. Our common +shares that are awarded under the plan may be either treasury shares or +authorized but unissued shares. Treasury shares are those purchased or acquired +by us from a shareholder or in the public market. If any award granted under the +plan is forfeited or terminated, the common shares reserved for issuance +pursuant to the award will be made available for future award grants under the +plan.
+
 
+
Eligibility. Subject to the +provisions of the plan, awards may be granted to key employees, officers, +directors and consultants who are deemed to have rendered or are able to render +significant services to us or our subsidiaries and who are deemed to have +contributed or to have the potential to contribute to our success. Incentive +share options may only be awarded to individuals who are our employees at the +time of grant. Notwithstanding the foregoing, an award may be granted to an +individual in connection with his or her hiring or retention, or at any time on +or after the date he or she reaches an agreement with us, either oral or in +writing, with respect to his or her hiring, even though it may be prior to the +date he or she first performs services for us or our subsidiaries. However, no +portion of any award of this nature can vest prior to the date that the +individual first performs the services he or she was hired or retained to +perform.
+
 
+
Types of awards. The +compensation committee may award to participants any of the following types of +awards, either alone or in tandem with each other: share options (incentive and +non-qualified), share appreciation rights, restricted shares, restricted share +units, performance units and shares, deferred compensation awards, and other +share-based awards. The various types of awards will enable us to respond to +changes in compensation practices, tax laws, accounting regulations and the size +and diversity of our business. To date, we have granted only share option awards +under the plan.
+
 
+
Terms of option awards. Under +the plan, our compensation committee may award to participants share options +that are intended to qualify as “incentive share options” within the meaning of +Section 422 of the Internal Revenue Code of the United States or are not +intended to be so qualified. Incentive share options may only be awarded to our +employees (including those of our subsidiaries). To the extent that any share +option intended to qualify as an incentive share option does not so qualify it +will constitute a non-incentive share option. The compensation committee will +fix the term of each share option. However, an incentive share option may be +granted only within the ten-year period commencing from the effective date of +the plan and may only be exercised within ten years from the date of grant, or +five years from the date of grant in the case of a participant who at the time +the share option is granted owns more than 10% of the total combined voting +power of all of our classes of voting securities. The exercise price of share +options granted under the plan will be determined by the compensation committee +at the time of the grant, but in no event will the price be less than the fair +market value of the underlying common shares on the last trading day prior to +the date the share option is granted. However, the exercise price of an +incentive share option granted to a 10% shareholder will not be less than 110% +of the fair market value of the shares on the last trading day prior to the date +the share option is granted. The number of shares covered by incentive share +options which may first become exercisable by a participant in any calendar year +cannot have an aggregate fair market value in excess of $100,000, measured at +the date of grant. The compensation committee will determine the terms and +conditions of share options and when they will become exercisable. Any +requirement that options be exercised in installments may be waived in whole or +in part by the compensation committee. 
+
 
+
Vesting schedule of options. +The vesting schedules of awards are subject to the discretion of our +compensation committee.
+
 
+
Payment of exercise price. +Payment of the exercise price for share options may be made in cash, in our +common shares owned by the participant, in a combination of the two, or +otherwise, as reflected in the applicable award agreement. Additionally, the +compensation committee may permit a participant to elect to pay the exercise +price by irrevocably authorizing a third party to sell common shares, or a +sufficient portion of the shares, acquired upon exercise of the share option and +pay to us a sufficient portion of the sale proceeds to pay the entire exercise +price and any tax withholding resulting from the exercise. The committee may +also approve the use of any other legal consideration to exercise a share +option. A participant has no rights as a shareholder with respect to common +shares underlying a share option granted under the plan until shares are +actually issued upon exercise of the share option.

+
+
+
  +
+
+
+
73
+
+
+
+
+
+
  +
+
+

+
Award agreements. Share +options, share appreciation rights, restricted shares, deferred shares, share +reload options and other share-based awards granted under the plan will be +evidenced by agreements consistent with the plan in a form as prescribed by the +compensation committee. Neither the plan nor agreements evidencing awards under +the plan confer any right to continued employment upon any holder of a share +option, share appreciation right, restricted shares, deferred shares, share +reload option or other share-based award. Further, except as expressly provided +in the plan, expressly provided in the grant of an award, or discussed above +with respect to the transferability of share options in certain limited +exceptions, all agreements will provide that the right to exercise share +options, receive restricted shares after the expiration of the restriction +period or deferred shares after the expiration of the deferral period, receive +payment under other share-based awards, or exercise a share appreciation right +cannot be transferred except by will or the laws of descent and +distribution.
+
 
+
Transfer restrictions. Share +options may not be assigned or transferred by a participant except by will or by +the laws of descent and distribution, and during the lifetime of a participant, +the share options may only be exercisable by the person to whom it was granted, +or, to the extent of legal incapacity or incompetency, the participant’s +guardian or legal representative. Notwithstanding the foregoing, with the +approval of the compensation committee, a participant may transfer a +nonstatutory share option by gift, for no consideration, or pursuant to a +domestic relations order, in either case, to or for the benefit of the +participant’s immediate family; or to an entity in which the participant or +members of the participant’s immediate family own more than 50% of the voting +interest, in exchange for an interest in that entity. Additionally, the transfer +will be subject to any additional limits that the compensation committee may +establish and the execution of any documents that the compensation committee may +require. If a transfer of this nature is made, the transferee shall remain +subject to all the terms and conditions applicable to the share option prior to +the transfer.
+
 
+
Term and amendments. The plan +will terminate when there are no awards outstanding and when no further awards +may be granted. Our board of directors has the right to amend, suspend or +discontinue any provision of the plan, provided that the action may not +adversely affect awards previously granted between a participant and us without +the participant’s consent.
+
 
+
+ + + + + +
+
ITEM + 7.
+ 		+
MAJOR + SHAREHOLDERS AND RELATED PARTY +TRANSACTIONS
+
+
+
 
+
+ + + + + +
+
A.
+ 		+
Major + Shareholders
+
+
+
 
+
Please +refer to Item 6.E, “ Directors, Senior Management and +Employees — Share Ownership.”
+
 
+
In +connection with the business combination effected in January 2008, Chardan’s +public shareholders were significantly diluted. In the redomestication merger +between Chardon and A-Power, Chardan security holders received an equal number +of common shares in A-Power in exchange for their Chardan common stock. However, +immediately after A-Power’s acquisition of Head Dragon Holdings, persons who +held shares of Chardan’s common stock before the redomestication merger and the +acquisition of Head Dragon Holdings owned less than 34% of A-Power and former +owners of Head Dragon Holdings owned approximately 65% of A-Power. If A-Power +(formerly China Energy Technology Limited) issues all the potential earn out +shares to Mr. Lu described under Item 4.A, “Information on the Company - +History and Development of the Company - The Business Combination,” Mr. +Lu could own a significantly greater percentage of A-Power. 
+
 
+
+ + + + + +
+
B.
+ 		+
Related + Party Transactions
+
+
+
 
+
+
Loans to Head Dragon Heating Pump +Co. and Liaoning High-Tech Furnace Insulation and Anti-Corrosion Engineering, +Ltd
+
 
+
We provide loans in the aggregate +amount of $105,000 to Head Dragon Heating Pump Co. and Liaoning High-Tech +Furnace Insulation and Anti-Corrosion Engineering, Ltd., to support working +capital needs. These two companies are controlled by Mr. +Lu.  These loans are unsecured, non-interest bearing and have no fixed +terms of repayment.
+
 
+
+
Head +Dragon Holdings Loans from Chief Executive Officer
+
  +  
+
+
As of December 31, 2008, Mr. Lu was +obligated to pay the company $1,192,000. On March 26, 2009, Head Dragon entered +into a loan agreement with Mr. Lu, for a loan $3,000,000 for general business +purposes. On May 6, 2009, Head Dragon entered into another loan agreement with +Mr. Lu for a loan of $1,000,000 for general business purposes. Both +loans are for a one-year term and is unsecured +and non-interest bearing.  As agreed to by Mr. Lu, Head Dragon +and us, the Head Dragon loans offset the outstanding loans that Mr. Lu owed to +us and thus, as of December 31, 2009, we were obligated to pay Mr. Lu a +total of $2,808,000 in outstanding loans.  On February 9, 2010, we +repaid the outstanding $2,808,000 to Mr. Lu.
+
+
          + +
+
Subcontracting +of Services to GaoKe Design
+
 
+
Mr. Lu, +along with his spouse, holds an aggregate 49.0% interest in GaoKe Design, an +operating company which receives subcontracts from GaoKe for design work related +to our distributed power generation projects. GaoKe Energy holds the remaining +51.0% interest. The total +revenue of GaoKe Design for 2009 was $1,774,000, and an aggregate +of $386,000 of net income of GaoKe Design may be attributed to the +Company's Chairman and his spouse. For more information on this related +party transaction, please see Item 4.A – “History and Development of the +Company” +to this Annual Report on Form +20-F.
+
 
+
+
+
Stock +Purchase Agreement among Chardan, A-Power and Jinxiang Lu
+
 
+
On April +14, 2007, Chardan entered into a stock purchase agreement with A-Power and +Jinxiang Lu, our Chairman and Chief Executive Officer, who was the sole holder +of all of the issued and outstanding common shares of Head Dragon Holdings. +Pursuant to the terms of the stock purchase agreement, on January 18, 2008, +A-Power acquired all of the issued and outstanding common shares of Head Dragon +Holdings, gaining control of GaoKe. For information regarding the consideration +paid and payable to Mr. Lu pursuant to this stock purchase agreement, see Item +4.A, “Information on the +Company - History and Development of the Company - The Business +Combination,” to this Annual Report on Form 20-F.
+
 
+
GaoKe Energy Loan from Shenyang +Xiangfeng New Energy Engineering Ltd.
+

+
Xiangfeng +New Energy Engineering Ltd., or Xiangfeng, made an unsecured, non-interest +bearing loan to GaoKe Energy in 2007, which was used to fund GaoKe Energy’s +general working capital needs.  The loan had no fixed terms of +repayment and as of December 31, 2007, the outstanding balance was approximately +$1,104,000.  A balance of approximately $1,316,000 was outstanding +as of December 31, 2009.  The increase of the outstanding balance +reflected the foreign exchange rate change. Mr. John S. Lin, our Chief Operating +Officer and Director, is the sole shareholder of Xiangfeng. 
+
 
+
+
+
  +
+
+
+
74
+
+
+
+
+
+
  +
+
+

+
Consulting Services by Chardan +Capital, LLC
+
 
+
In March +2008, we entered into a consulting agreement with Chardan Capital, LLC to +provide a variety of services including advice and assistance in meeting U.S. +public reporting requirements and accounting standards, SOX compliance, +corporate structuring and development, shareholder relations, corporate finance +and operational capitalization, transfer agent matters and such other similar +services as requested and agreed to by Chardan Capital, LLC in exchange for a +fee of $20,000 per month. Richard D. Propper, a director of ours until his +resignation in March 2008, is a managing member of Chardan Capital, +LLC.
+
 
+
Advisory +Services by CBCIC Group
+
 
+
In +October 2008, we signed a service agreement with CBCIC International Group that +it would provide human resource outsourcing to us from October 2008 at a rate of +RMB 30,000 per month. Mr. John S. Lin, our Chief Operating Officer and a +Director, serves as a director and Chief Executive Officer of CBCIC +International Capital Company Limited.
+
 
+
A-Power +Pledged Collateral on behalf of Chardan Capital
+
 
+
We +pledged $3 million from our money market account as the third collateral on a +loan, in which Chardan capital was the first guarantor , and Richard Proper was +the second guarantor. As of December 31, 2008, $1 million was released as +collateral and $2 million remained pledged and therefore, treated as restricted +cash. In January 2009, a further $1 million was paid and released as +collateral.
+
 
+
Consulting +Services by Fair City Technology Ltd.
+
 
+
Fair City +Technology Ltd. provided us with financial consulting services in 2007 with +respect to a bridge loan to the Company, for which we were billed $300,000 in +2007. Disbursements of $200,000 and $100,000 were made to Fair City in 2008 and +2007 respectively. Mr. John S. Lin, our Chief Operating Officer and Director, is +the sole director and shareholder of Fair City Technology Ltd.
+
 
+
Certain +Arrangements with Mr. Jinxiang Lu Related to Our Senior Convertible +Notes
+
 
+
At the +time that we issued the notes and the warrants, our memorandum and articles of +association required shareholder approval for any issuance of common +shares.  In connection with our issuance and sale of the senior +convertible notes and warrants, we and Mr. Jinxiang Lu, our Chairman and Chief +Executive Officer, entered into a put agreement with each of the buyers of the +notes, pursuant to which, under certain circumstances, the buyers may exchange +their notes and warrants for certain common shares owned by Mr. Lu in the event +we are unable to issue such common shares.  Mr. Lu pledged 6,000,000 +of his shares upon closing of the sale of the notes in connection with this put +agreement.  We entered into a letter agreement pursuant to which we +agreed to make Mr. Lu whole and reimburse Mr. Lu for any losses that Mr. Lu +incurs if he is required to exchange his common shares.   We +received shareholder approval to amendments to our memorandum and articles of +association that will enable us to issue common shares upon conversion of senior +convertible notes and exercise of the warrants.  Because the shareholder +approval was obtained, as required, the put agreements have now +been terminated and the shares returned to Mr. Lu.
+
 
+
+ + + + + +
+
C.
+ 		+
Interests + of Experts and Counsel
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
ITEM + 8.
+ 		+
FINANCIAL + INFORMATION
+
+
+
 
+
+ + + + + +
+
A.
+ 		+
Consolidated + Statements and Other Financial +Information
+
+
+
 
+
We have +appended our consolidated financial statements filed as part of this Annual +Report on Form 20-F.
+
 
+
Legal +Proceedings
+
 
+
We are +not currently a party to any pending legal proceedings which are expected to +have a significant effect on our business, financial position, results of +operations or liquidity, nor are we aware of any proceedings that are pending or +threatened which may have a significant effect on our business, financial +position and results of operations or liquidity. However, from time to time, we +may be subject to various claims and legal actions arising in the ordinary +course of business. 

+
+
+
  +
+
+
+
75
+
+
+
+
+
+
  +
+
+
+
 
+
Dividend +Policy
+
 
+
+
Except as +disclosed previously, we have never declared or paid any cash dividends on our +common shares, nor do we have any present plan to pay any cash dividends on our +common shares in the foreseeable future. See Item 3.A. “ A. Selected Financial Data - +Selected Statement of +Operations Data . “ We currently intend to retain most of our available +funds and any future earnings to develop and expand our business. Any payment of +dividends in the future will be at the discretion of our board of +directors.
+
 
+
+
+ + + + + +
+
B.
+ 		+
Significant + Changes
+
+
+
 
+
See Item +4.A “ Information on the +Company - History and Development of the Company – Our Wind Energy Business +Operations “ and “ Recent-Developments +..”
+
 
+
+ + + + + +
+
ITEM + 9.
+ 		+
THE + OFFER AND LISTING
+
+
+
 
+
+ + + + + +
+
A.
+ 		+
Offering + and Listing Details
+
+
+
 
+
Our +common shares, units and warrants began trading on the NASDAQ Capital Market on +January 22, 2008 under the symbols “APWR,” “APWRU” and “APWRW,” +respectively. In connection with our calling the warrants for redemption, the +units and warrants were removed from listing by the NASDAQ Stock Market LLC +effective March 18, 2008, with respect to the units, and March 31, 2008, with +respect to the warrants. On June 2, 2008, our common shares began trading on the +NASDAQ Global Select Market under the same symbol, “APWR.”
+
 
+
The +following table provides the high and low market prices of our common +shares, units and warrants, as reported on the NASDAQ Capital Market or the +NASDAQ Global Select Market, as applicable, on an annual quarterly and monthly +basis from January 22, 2008 through March 15, 2010.
+
 
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   + +
A-Power Common Shares
+ 		  +   + +
A-Power Units
+ 		  +   + +
A-Power Warrants
+ 		  +
+
Period
+ 		+
  +
+ 		+
High
+ 		  +   + +
Low
+ 		  +   + +
High
+ 		  +   + +
Low
+ 		  +   + +
High
+ 		  +   + +
Low
+ 		  +
+
Annual + High and Low
+ 		  +    +   +    +   +    +   +    +   +    +   +    +
+
2008 + (from January 22, 2008; through March 18 with respect to the units; + through March 31 with respect to the warrants)
+ 		  + +
$
+ 		+
31.89
+ 		  +   + +
$
+ 		+
3.25
+ 		  +   + +
 $
+ 		+
47.00
+ 		  +   + +
$
+ 		+
25.96
+ 		  +   + +
$
+ 		+
14.25
+ 		  +   + +
$
+ 		+
6.83
+ 		  +
+
2009
+ 		  + +
$
+ 		+
21.04
+ 		  +   + +
$
+ 		+
3.00
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
Quarterly + High and Low
+ 		  +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +
+
First + Quarter 2008 (from January 22, 2009; through March 18 with respect to the + units; through March 31 with respect to the warrants)
+ 		  + +
$
+ 		+
19.50
+ 		  +   + +
$
+ 		+
11.96
+ 		  +   + +
$
+ 		+
47.00
+ 		  +   + +
$
+ 		+
25.96
+ 		  +   + +
$
+ 		+
14.25
+ 		  +   + +
$
+ 		+
6.83
+ 		  +
+
Second + Quarter 2008
+ 		  + +
$
+ 		+
31.89
+ 		  +   + +
$
+ 		+
14.11
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
Third + Quarter 2008
+ 		  + +
$
+ 		+
31.8
+ 		  +   + +
$
+ 		+
8.03
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
Fourth + Quarter 2008
+ 		  + +
$
+ 		+
9.15
+ 		  +   + +
$
+ 		+
3.25
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
First + Quarter 2009
+ 		  + +
$
+ 		+
6.38
+ 		  +   + +
$
+ 		+
3.00
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
Second + Quarter 2009
+ 		  + +
$
+ 		+
14.68
+ 		  +   + +
$
+ 		+
3.92
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
Third + Quarter 2009
+ 		  + +
$ 
+ 		+
11.93
+ 		  +   + +
$
+ 		+
6.56
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
Fourth + Quarter 2009
+ 		  + +
$
+ 		+
21.04
+ 		  +   + +
$
+ 		+
9.51
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
First + Quarter 2010 (through March 30, 2010)
+ 		  + +
$
+ 		+
20.32
+ 		  +   + +
$
+ 		+
11.02
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
Monthly + High and Low
+ 		  +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +   +
+
September + 2009
+ 		  + +
$
+ 		+
11.93
+ 		  +   + +
$
+ 		+
7.76
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
October + 2009
+ 		  + +
$
+ 		+
12.39
+ 		  +   + +
$
+ 		+
9.51
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
November + 2009
+ 		  + +
$
+ 		+
18.70
+ 		  +   + +
$
+ 		+
10.50
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
December + 2009
+ 		  + +
$
+ 		+
21.04
+ 		  +   + +
$
+ 		+
14.37
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
January + 2010
+ 		  + +
$
+ 		+
20.32
+ 		  +   + +
$
+ 		+
11.78
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
February + 2010
+ 		  + +
$
+ 		+
14.09
+ 		  +   + +
$
+ 		+
11.02
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
March + 2010 (through March 30, 2010)
+ 		  + +
$
+ 		+
13.95
+ 		  +   + +
$
+ 		+
11.37
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +   +   + +
n/a
+ 		  +
+
+
+
+
+
+
+
+
+
+

+
+
+
  +
+
+
+
76
+
+
+
+
+
+
  +
+
+
+

+
+ + + + + +
+
B.
+ 		+
Plan + of Distribution
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
C.
+ 		+
Markets
+
+
+
 
+
Our +common shares currently trade on the NASDAQ Global Select Market under the +symbol “APWR.”
+
 
+
+ + + + + +
+
D.
+ 		+
Selling + Shareholders
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
E.
+ 		+
Dilution
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
F.
+ 		+
Expenses + of the Issue
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
ITEM + 10.
+ 		+
ADDITIONAL + INFORMATION
+
+
+
 
+
+ + + + + +
+
A.
+ 		+
Share + Capital
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
B.
+ 		+
Memorandum + and Articles of Association
+
+
+
 
+
Charter
+
 
+
Our +charter documents consist of our amended and restated memorandum of association +and our amended and restated articles of association, or the memorandum and +articles of association.  We may amend our memorandum and articles of +association generally by a resolution of our shareholders.  We held an +annual shareholder meeting on August 21, 2009.  During that meeting, +certain amendments to the memorandum and articles of association were approved +by our shareholders.  
+
 
+
The +following description of certain provisions of our memorandum and articles of +association does not purpose to be complete and is qualified in its entirety by +our memorandum and articles of association included as Exhibits 3.1 and 3.2 to +this Annual Report on Form 20 - F.
+
 
+
Corporate +Powers
+
 
+
A-Power +was incorporated under the BVI Business Companies Act, 2004 on May 14, +2007.  Pursuant to Section 5 of our memorandum of association, the +objects for which we were established are unrestricted and we have full power +and authority to carry out any objects not prohibited by the BVI Business +Companies Act, 2004,  as the same may be revised from time to time, or +any other law of the British Virgin Islands, except that we have no power to +carry on banking or trust business, business as an insurance or reinsurance +company, insurance agent or insurance broker, the business of company +management, the business of providing the registered office or the registered +agent for companies incorporated in the British Virgin Islands, or business as a +mutual fund, mutual fund management or mutual fund administrator, unless we +obtain certain licenses under the laws of the British Virgin +Islands.
+
 
+
Board +Composition
+
 
+
Pursuant +to our memorandum and articles of association, the business of our company is +managed by our board of directors.   Commencing with the first +annual meeting of the shareholders, directors are elected for a term of office +to expire at the third succeeding annual meeting of the shareholders after their +election.  Each director will hold office until the expiration of his +or her term of office and until his or her successor have been elected and +qualified, or until his or her earlier death, resignation or removal by the +shareholders or a resolution passed by the majority of the remaining +directors. 
+
 
+
In the +interim between annual meetings of shareholders, or special meetings of +shareholders called for the election of directors, newly created directorships +and any vacancy on the board of directors may be filled by the vote of a +majority of the remaining directors then in office, although less than a quorum, +or by the sole remaining director. A director elected to fill a vacancy +resulting from death, resignation or removal of a director will serve for the +remainder of the full term of the director whose death, resignation or removal +will have caused such vacancy and until his successor will have been elected and +qualified.

+
+
+
  +
+
+
+
77
+
+
+
+
+
+
  +
+
+

+
There is +no cumulative voting by shareholders for the election of +directors.  We do not have any age-based retirement requirement and we +do not require our directors to own any number of shares to qualify as a +director.
+
 
+
Board +Meetings
+
 
+
Board +meetings may be held at the discretion of the directors upon not less than 3 +days notice. Decisions made by the directors at meetings shall be made by a +majority of the directors.  There must be at least a majority of the +directors (with a minimum of two) at each meeting unless there is only one +director.
+
 
+
Directors +Interested in a Transaction
+
 
+
A +director must, immediately after becoming aware of the fact that he is +interested in a transaction entered into or to be entered into by us, disclose +such interest to the board of directors, but may vote on a matter related to the +transaction, attend a meeting of directors at which a matter relating to the +transaction arises and be included among the directors present at the meeting +for the purposes of a quorum and sign a document on behalf of the company, or do +any other thin in his capacity as a director, that relates to the +transaction.  A director is not required to disclose his interest in a +transaction or a proposed transaction to our board of directors if the +transaction or proposed transaction is between the director and us, or the +transaction or proposed transaction is or is to be entered into the ordinary +course of our business and on usual terms and conditions.
+
 
+
The +directors may exercise all powers of our company to borrow money, mortgage or +charge our undertakings and property, issue debentures, debenture shares and +other securities whenever money is borrowed or as security for any debt, +liability or obligation of the company or of any third party.
+
 
+
Our +directors may, by resolution, fix the compensation of directors in respect of +services rendered or to be rendered in any capacity to us.
+
 
+
A +director may attend and speak at any meeting of the shareholders and at any +separate meeting of the holders of any class of our shares.
+
 
+
Rights +of Shares
+
 
+
We are +currently authorized to issue 150,000,000 common shares of US$0.0001 par value +each.  The common shares have one vote each and have the same rights +with regard to dividends paid by the company and distributions of the surplus +assets of the company.  We are also authorized to issue 1,000,000 +preferred shares of US$0.0001 par value each.
+
 
+
The +directors may, subject to the BVI Business Companies Act, 2004, by amending the +memorandum of association and/or the articles of association, determine the +rights related to any preferred shares that we may issue.  The +directors may redeem any of our outstanding shares at a premium.
+
 
+
Issuance +of Shares; Variation of Rights of Shares
+
 
+
Our +articles of association provide that directors may offer, allot, grant options +over or otherwise dispose of our unissued shares to such persons at such times +and for such consideration and upon such terms and conditions as the directors +may determine.
+
 
+
Without +prejudice to any special rights previously conferred on the holders of any +existing shares or class of shares, we may issue shares, with such preferred, +deferred or other special rights or such restrictions, whether in regard to +dividend, voting or otherwise, as the directors from time to time may +determine.
+
  
+
If we +issue shares of more than one class, the rights attached to any class (unless +otherwise provided by the terms of issue of the shares of that class) may be +varied with the consent in writing of the holders of not less than three-fourths +of the issued shares of that class and the holders of not less than +three-fourths of the issued shares of any other class of shares which may be +affected by such variation.  The rights conferred upon the holders of +the shares of any class issued with preferred or other rights will not, unless +otherwise expressly provided by the terms of issue of the shares of that class, +be deemed to be varied by the creation or issue of further shares ranking pari +passu therewith.
+
 
+
Shareholders Meetings
+
 
+
Under our +memorandum and articles of association, we are required to hold an annual +meeting of shareholders each year at such date and time determined by our +directors.  Special meetings of shareholders may be called pursuant to +board resolution or the written request of shareholders holding more than 30% of +the votes of our outstanding voting shares.  Written notice of +meetings of shareholders must be given to each shareholder entitled to vote at a +meeting not fewer than 10 nor more than 60 days prior to the date of the +meeting.  The written notice will state the place, time and business +to be conducted at the meeting.  The shareholders listed in our share +register on the date prior to the date the notice is given shall be entitled to +vote at the meeting, unless the notice provides a different date for determining +the shareholders who are entitled to vote and that date is not fewer than 10 nor +more than 60 days prior to the date of the meeting and not more than 10 days +after notice is given.

+
+
+
  +
+
+
+
78
+
+
+
+
+
+
  +
+
+

+
Business +to be transacted at a shareholder meeting must be either described in the notice +of the meeting sent by the board of directors, brought by or at the direction of +the board of directors at the meeting or brought by +shareholders.  Shareholders may bring business at a meeting by sending +notice to our primary office not fewer than 60 nor more than 90 days prior to +the date of the meeting.  If we provide less than 70 days notice of +our shareholder meeting, shareholders may provide notice of business they wish +to bring within 10 days after the public disclosure or notice.
+
 
+
A meeting +of shareholders held without proper notice will be valid if shareholders holding +90% majority of the total number of shares entitled to vote on all matters to be +considered at the meeting, or 90% of the votes of each class or series of shares +where shareholders are entitled to vote thereon as a class or series, together +with an absolute majority of the remaining votes, have waived notice of the +meeting and, for this purpose, presence of a shareholder at the meeting is +deemed to constitute a waiver.  The inadvertent failure of the +directors to give notice of a meeting to a shareholder, or the fact that a +shareholder has not received notice, will not invalidate a meeting.
+
 
+
Shareholders +may vote in person or by proxy.  No business may be transacted at any +meeting unless a quorum of shareholders is present.  A quorum consists +of the presence in person or by proxy of holders entitled to exercise at least +50% of the voting rights of the shares of each class or series of shares +entitled to vote as a class or series thereon and the same proportion of the +votes of the remaining shares entitled to vote thereon.
+
 
+
Changes in the Maximum Number of Shares the +Company is Authorized to Issue
+
 
+
Subject +to the provisions of the BVI Business Companies Act, 2004, we may, by a +resolution of shareholders, amend our memorandum and articles of association to +increase or decrease the number of shares authorized to be +issued.  Our directors may, by resolution, authorize a distribution by +us at a time, of an amount, and to any shareholders they think fit if they are +satisfied, on reasonable grounds, that we will, immediately after the +distribution, satisfy the solvency test as set forth in the BVI Business +Companies Act, 2004, which requires that the value of a company’s assets exceeds +its liabilities, and the company is able to pay its debts as they fall +due.
+
 
+
Indemnification
+
 
+
Subject +to the provisions of the BVI Business Companies Act, 2004, we may indemnify any +person who (a) is or was a party or is threatened to be made a party to any +threatened, pending or completed proceedings, whether civil, criminal, +administrative or investigative, by reason of the fact that the person is or was +a director of our company; or (b) is or was, at our request, serving as a +director of, or in any other capacity is or was acting for, another company or a +partnership, joint venture, trust or other enterprise, against all expenses, +including legal fees, and against all judgments, fines and amounts paid in +settlement and reasonably incurred in connection with legal, administrative or +investigative proceedings.
+
 
+
+ + + + + +
+
C.
+ 		+
Material + Contracts
+
+
+
 
+
We have +not entered into any material contracts other than in the ordinary course of +business for the two years immediately preceding the date of the Annual Report +and other than those described in Item 4, “Information on the Company,” +Item 7.B., “Major Shareholders +and Related Party Transactions - Related Party Transactions,” or +elsewhere in this Annual Report on Form 20-F.

+
+
+
  +
+
+
+
79
+
+
+
+
+
+
  +
+
+
+

+
+ + + + + +
+
D.
+ 		+
Exchange + Controls
+
+
+
 
+
British +Virgin Islands
+
 
+
There are +no exchange control regulations imposed on us or our shareholders under British +Virgin Islands law.
+
 
+
The +PRC
+
 
+
Registered +Restrictions on Foreign Currency Exchange
+
 
+
Pursuant +to existing foreign currency exchange regulations in the PRC, including the +Foreign Exchange Administration Resolutions promulgated on January 29, 1996 and +amended with effect on August 5 ,2008 and various regulations issued by SAFE, +RMB is a freely convertible currency and no limitation to the international +receipt and payment and transfer to the extent of current account items on the +basis of the true and legal transacts. Payments for transactions that take place +within the PRC must be made in RMB, unless otherwise provided by the State. PRC +companies can repatriate foreign currency payments received from abroad or keep +the payment offshore in accordance with the conditions, however, in certain +circumstances, the formal prior approval from SAFE or its local branch is +needed. Foreign Invested Enterprises may retain foreign exchange in accounts +with designated foreign exchange banks subject to a cap set by SAFE or its local +branch. But we have no idea if the aforementioned regulations are changed some +day and unless otherwise approved, domestic enterprises will have to convert all +of their foreign currency receipts into RMB.
+
 
+
In +addition, pursuant to the SAFE’s Circular No. 75, Notice on Relevant Issues +Concerning Foreign Exchange Administration for PRC Residents to Engage in +Financing and Inbound Investment via Overseas Special Purpose Vehicles, issued +on October 21, 2005, (1) a PRC resident, including a PRC resident natural person +or a PRC company, shall register with the local branch of SAFE before it +establishes or controls an overseas special purpose vehicle for the purpose of +overseas equity financing (including convertible debt financing); (2) when a PRC +resident contributes the assets of or its equity interests in a domestic +enterprise into a special purpose vehicle, or engages in overseas financing +after contributing assets or equity interests into a special purpose vehicle, +such PRC resident shall register his or her interest in the special purpose +vehicle and the change thereof with the local branch of SAFE; and (3) when the +special purpose vehicle undergoes a material event outside of China, such as +change in share capital or merger and acquisition, the PRC resident shall, +within 30 days from the occurrence of such event, register such change with the +local branch of SAFE. Following the completion of the aforesaid registration, +payment of dividends, profits and other payments to overseas special purpose +vehicles are permitted under PRC laws and regulations, PRC residents who are +shareholders of special purpose vehicles established before November 1, 2005 +were required to register with the local SAFE branch before March 31, 2006. +Under Circular No. 75, failure to comply with the registration procedures set +forth above may result in penalties, including restrictions on a PRC +subsidiary’s foreign exchange activities and its ability to distribute dividends +to the special purpose vehicle.
+
 
+
On +December 25, 2006, the PBOC promulgated the “Measures for the Administration of +Individual Foreign Exchange”, and on January 5, 2007, SAFE further promulgated +the implementation rules on those measures. Both became effective on February 1, +2007. According to the implementation rules, if individuals in the PRC +participate in any employee share ownership plan or share option plan of an +overseas listed company, those individuals must apply as a group through the +company or a domestic agency to SAFE or the appropriate local branch for +approval for any foreign exchange-related transactions concerning that +plan.
+
 
+
Restrictions +on Dividend Distribution
+
 
+
The +principal regulations governing dividend distributions by foreign owned +enterprises include:
+
 
+
+ + + + + + +
  + +
·
+ 		+
The + Wholly Foreign Owned Enterprise Law, promulgated by the National People’s + Congress on April 12, 1986 and amended on October 31, + 2000;
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
The + Wholly Foreign Owned Enterprise Law Implementing Rules, promulgated by the + National People’s Congress on December 12, 1990 and amended on April 12, + 2001;
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
The new + PRC Tax Law, promulgated by the National People’s Congress on March + 16, 2007; and
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
The + Implementation Rules on the new PRC Tax Law, promulgated by the + State Council on December 6, 2007.
+
+
+
 
+
Under +these regulations, wholly or partially foreign owned enterprises in the PRC may +pay dividends only out of their accumulated profits, if any, determined in +accordance with PRC accounting standards and regulations. The distribution of +dividends by a wholly foreign-owned enterprise out of China is subject to +examination by banks designated by SAFE. In addition, based on PRC accounting +standards, these wholly foreign-owned companies are required to set aside at +least 10% of their after-tax profits each year, if any, to fund certain +statutory reserve funds. A company is not required to set aside its profits to +fund the reserve until its cumulative total reserve fund is equal to at least +50% of the company’s registered capital. 

+
+
+
  +
+
+
+
80
+
+
+
+
+
+
  +
+
+
+

+
+ + + + + +
+
E.
+ 		+
Taxation
+
+
+
 
+
The +following summary of the material British Virgin Islands, PRC and United States +federal income tax consequences of an investment in our common shares is based +upon laws and relevant interpretations thereof in effect as of the date of the +Annual Report , all of which are subject to change, and does not constitute +legal or tax advice. This summary does not deal with all possible tax +consequences relating to an investment in our common shares, such as the tax +consequences under state, local and other tax laws.
+
 
+
British +Virgin Islands
+
 
+
All +dividends, interests, rents, royalties, compensations and other amounts paid by +us to persons who are not resident in the British Virgin Islands are exempt from +all forms of taxation in the British Virgin Islands and any capital gains +realized with respect to any of our shares, debt obligations, or other +securities by persons who are not persons resident in the British Virgin Islands +are exempt from all forms of taxation in the British Virgin Islands. No estate, +inheritance, succession or gift tax, rate, duty, levy or other charge is payable +under BVI law by persons who are not persons resident in the British Virgin +Islands with respect to any of our shares, debt obligation or other securities. +There are currently no withholding taxes or exchange control regulations in the +British Virgin Islands applicable to us or our shareholders. Currently, there is +no income tax treaty, convention or reciprocal tax treaty regarding withholdings +currently in effect between the United States and the British Virgin +Islands.
+
 
+
PRC
+
 
+
Under the +new PRC tax law and its Implementation Rules, dividends, interests, +rent, royalties and gains on transfers of property payable by a foreign-invested +enterprise in the PRC to its foreign investor who is a non-resident enterprise +will be subject to a 10% withholding tax, unless such non-resident enterprise’s +jurisdiction of incorporation has a tax treaty with the PRC that provides for a +reduced rate of withholding tax.
+
 
+
Under the +New EIT Law, an enterprise established outside the PRC with its “de facto +management body” within the PRC is considered a resident enterprise and will be +subject to the enterprise income tax at the rate of 25% on its worldwide income. +A “de facto management body” is defined as an organizational body that +effectively exercises overall management and control over production and +business operations, personnel, finance and accounting, and properties of the +enterprise. It remains unclear how the PRC tax authorities will interpret this +definition. Notwithstanding the foregoing provision, the New EIT Law also +provides that, if a resident enterprise directly invests in another resident +enterprise, the dividends received by the investing resident enterprise from the +invested enterprise are exempted from income tax, subject to certain conditions. +However, it remains unclear how the PRC tax authorities will interpret the PRC +tax resident treatment of an offshore company, like us, having indirect +ownership interests in PRC enterprises through intermediary holding +vehicles.
+
 
+
Moreover, +under the New EIT Law, foreign shareholders may be subject to a 10% withholding +tax upon dividends payable by us and gains realized on the sale or other +disposition of shares, if such income is sourced from within the PRC and we are +classified as a PRC resident enterprise.
+
 
+
United +States
+
 
+
The +following discussion describes the material U.S. federal income tax consequences +to U.S. Holders (as defined below) under present law of an investment in our +common shares. This discussion applies only to U.S. Holders that hold our common +shares as capital assets. This discussion is based on the Internal Revenue Code +of 1986, as amended, or the Code, Treasury regulations promulgated thereunder, +and administrative and judicial interpretations thereof, all as in effect on the +date hereof and all of which are subject to change, possibly with retroactive +effect, or to different interpretation.
+
 
+
The +following discussion does not deal with the tax consequences to any particular +investor or to persons in special tax situations such as:
+
   
+
+ + + + + + +
 ·banks;
+
+
 
+
+ + + + + + +
 ·financial + institutions;
+
+
 
+
+ + + + + + +
 ·insurance + companies;
+
+
 
+
+ + + + + + +
 ·regulated + investment companies;
+
+
 
+
+ + + + + + +
 ·real + estate investment trusts;
+
+
+
+
+
+
  +
+
+
+
81
+
+
+
+
+
+
  +
+
+
+
     +
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
 ·broker + dealers;
   
 ·traders + that elect to mark-to-market;
   
 ·tax-exempt + entities;
   
 ·U.S. + expatriates;
   
 ·persons + liable for alternative minimum tax;
   
  + +
·
+ 		+
persons + holding our common shares as part of a straddle, hedging, conversion or + integrated +transaction;
+
+
+
+
+
+
+
+
+
+
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
holders + that actually or constructively own 10% or more of our voting + shares;
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
persons + that have a “functional currency” other than the U.S. + dollar;
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
persons + holding our common shares through partnerships or other pass-through + entities; or
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
persons + who acquired our common shares pursuant to the exercise of any employee + share option or otherwise as +compensation.
+
+
+
 
+
INVESTORS +ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. +FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, +NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND +DISPOSITION OF OUR COMMON SHARES.
+
 
+
The +discussion below of the U.S. federal income tax consequences to “U.S. Holders” +will apply to you if you are a beneficial owner of our common shares and you +are, for U.S. federal income tax purposes:
+
 
+
+ + + + + + +
  + +
·
+ 		+
an + individual who is a citizen or resident of the United + States;
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
a + corporation (or other entity taxable as a corporation for U.S. federal + income tax purposes) organized under the laws of the United States, any + State thereof or the District of +Columbia;
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
an + estate, the income of which is subject to U.S. federal income taxation + regardless of its source; or
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
a + trust that (1) is subject to the primary supervision of a court within the + United States and the control of one or more U.S. persons for all + substantial decisions or (2) has a valid election in effect under + applicable U.S. Treasury regulations to be treated as a U.S. + person.
+
+
+
 
+
If a +partnership holds shares of our common shares, the consequences to a partner +will generally depend upon the status of the partner and upon the activities of +the partnership. A partner of a partnership holding our common shares should +consult its own tax adviser regarding the U.S. tax consequences of its +investment in our common shares through the partnership. This discussion does +not address any U.S. state or local or non-U.S. tax considerations or any U.S. +federal estate, gift or alternative minimum tax considerations.
+
 
+
Dividends
+
 
+
Subject +to the discussion below under “—Passive Foreign Investment +Company,” the gross amount of our distributions to you with respect to +our common shares generally will be included in your gross income as dividend +income on the date of receipt by you, but only to the extent that the +distribution is paid out of our current or accumulated earnings and profits (as +determined under U.S. federal income tax principles). To the extent the amount +of such distribution exceeds our current and accumulated earnings and profits as +so computed, it will be treated first as a non-taxable return of capital to the +extent of your adjusted tax basis in our common shares and, to the extent the +amount of such distribution exceeds such adjusted tax basis, will be treated as +gain from the sale of such common shares. We, however, may not calculate +earnings and profits in accordance with U.S. tax principles. In this case, all +distributions by us to U.S. Holders will generally be treated as dividends. The +dividends will not be eligible for the dividends-received deduction allowed to +corporations in respect of dividends received from other U.S. +corporations.

+
+
+
  +
+
+
+
82
+
+
+
+
+
+
  +
+
+

+
Certain +dividends received by non-corporate U.S. Holders, including individuals, in +taxable years beginning before January 1, 2011, generally will be subject +to a maximum income tax rate of 15%. This reduced income tax rate is applicable +to dividends paid by “qualified foreign corporations” and only with respect to +common shares held for a minimum holding period of at least 61 days during a +specified 121-day period, and if certain other conditions are met. We are +considered a qualified foreign corporation with respect to our common shares +because our shares are listed on the NASDAQ. Accordingly, subject to the +discussions below under “—Passive Foreign Investment +Company,” dividends paid by us with respect to our common shares +generally should be eligible for the reduced income tax rate. A qualified +foreign corporation also includes a foreign corporation that is eligible for the +benefits of certain income tax treaties with the United States. In the event +that we are deemed to be a PRC resident enterprise under the New EIT Law (see +discussion under “The PRC – +Restrictions on Dividend Distribution” ), we may be eligible for the +benefits of the income tax treaty between the United States and the PRC. If we +are eligible for such benefits, dividends we pay on the common shares would be +eligible for the reduced rate even if our shares were not traded on a U.S. stock +exchange.
+
 
+
The U.S. +Treasury Department has announced its intention to promulgate rules pursuant to +which holders of our common shares and intermediaries through whom such common +shares is held will be permitted to rely on certifications from issuers to +establish that dividends are treated as qualified dividends eligible for the +reduced rate, described above. Because such rules have not yet been issued, it +is not clear whether we will be in a position to comply with them. Investors +should consult their tax advisors regarding the availability of the lower rate +for dividends paid with respect to our common shares.
+
 
+
Dividends +will constitute foreign source income for foreign tax credit limitation +purposes. The limitation on foreign taxes eligible for credit is calculated +separately with respect to specific classes of income. For this purpose, +dividends distributed by us with respect to our common shares will generally +constitute “passive category income” but could, in the case of certain U.S. +Holders, constitute “general category income.”  Furthermore, in +certain circumstances, if you have held our common shares for less than a +specified minimum period during which you are not protected from risk of loss, +or are obligated to make payments related to the dividends, you will not be +allowed a foreign tax credit for any PRC withholding taxes imposed on dividends +paid on our common shares.
+
 
+
In the +event that we are deemed to be a PRC resident enterprise under the New EIT Law +(see discussion under “The PRC +– Restrictions on Dividend Distributions” ), you may be subject to PRC +withholding taxes on dividends paid to you with respect to our common shares. +Subject to generally applicable limitations, PRC withholding taxes on dividends, +if any, may be treated as foreign taxes eligible for credit against your U.S. +federal income tax liability. Investors should consult their tax advisors +regarding the availability of the foreign tax credit under their particular +circumstances.
+
 
+
If we +make a distribution in a currency other than U.S. dollars, you will be +considered to receive the U.S. dollar value of the distribution determined at +the spot U.S. dollar rate for the foreign currency on the date such distribution +is received by you regardless of whether you convert the distribution into U.S. +dollars.  Any gain or loss resulting from currency exchange +fluctuations during the period from the date the dividend payment is includible +in your income to the date you convert the distribution in U.S. dollars will be +treated as ordinary income or loss from U.S. sources.
+
 
+
A +distribution of additional common shares to U.S. Holders with respect to our +common shares that is made as part of a pro rata distribution to all +shareholders generally will not be subject to U.S. federal income +tax.
+
 
+
Taxation +of Disposition of Our Common Shares
+
 
+
Subject +to the discussion below under “—Passive Foreign Investment +Company,” you will recognize taxable gain or loss on any sale, exchange +or other taxable disposition of a share of our common shares equal to the +difference between the amount realized (in U.S. dollars) for the share and your +tax basis (in U.S. dollars) in the share. Your tax basis in a share of our +common shares generally will equal to the cost of such share. The gain or loss +generally will be capital gain or loss. If you are a non-corporate U.S. Holder, +including an individual U.S. Holder, who has held the share for more than one +year, you will be eligible for reduced tax rates. The deductibility of capital +losses is subject to limitations. Any such gain or loss that you recognize will +generally be treated as U.S. source income or loss for foreign tax credit +limitation purposes.
+
 
+
In the +event that we are deemed to be a PRC “resident enterprise” under PRC tax law, +you may be eligible for the benefits of the income tax treaty between the United +States and the PRC. Under that treaty, if any PRC tax was to be imposed on any +gain from the disposition of our common shares, the gain may be treated as +PRC-source income. U.S. Holders are urged to consult their tax advisors +regarding the tax consequences if a foreign withholding tax is imposed on a +disposition of our common shares, including the availability of the foreign tax +credit under their particular circumstances.
+
 
+
Passive +Foreign Investment Company
+
 
+
A +non-U.S. corporation is considered to be a PFIC for any taxable year if, +applying certain look-through rules, either:
+
 
+
+ + + + + + +
  + +
·
+ 		+
at + least 75% of its gross income is passive income, + or
+
+
+
 
+
+ + + + + + +
  + +
·
+ 		+
at + least 50% of the value of its assets (based on an average of the quarterly + values of the assets during a taxable year) is attributable to assets that + produce or are held for the production of passive + income.
+
+
+
 
+
+
+
  +
+
+
+
83
+
+
+
+
+
+
  +
+
+

+
For this +purpose, we will be treated as owning our proportionate share of the assets and +earning our proportionate share of the income of any other corporation in which +we own, directly or indirectly, at least 25% (by value) of the +shares.
+
 
+
Based on +the composition of our assets and income and the current expectations, we +believe that we should not be treated as a PFIC for U.S. federal income tax +purposes with respect to our 2009 taxable year and we do not intend or +anticipate becoming a PFIC for 2010 or any future taxable year. The +determination of PFIC status is a factual determination that must be made +annually at the close of each taxable year.  Changes in the nature of +our income or assets, or a decrease in the trading price of the our common +shares may cause us to be considered a PFIC in the current or any subsequent +year. As noted above, there can be no certainty in this regard with regard to +2010 until the close of this taxable year.
+
 
+
If we are +a PFIC for any year during which you hold our common shares, we generally will +continue to be treated as a PFIC for all succeeding years during which you own +our common shares.
+
 
+
If we are +a PFIC in any year during which you own our common shares, you may experience +certain adverse tax consequences.  You could be liable for additional +taxes and interest charges upon (i) distributions received by you with respect +to our common shares during the year, but only to the extent that the aggregate +of the distributions for the taxable year exceeds 125% of the average amount of +distributions received by you in the preceding three years, or (ii) upon a sale +or other disposition of a common share at a gain, whether or not we continue to +be a PFIC (each an “excess distribution”). The tax will be determined by +allocating the excess distribution ratably to each day you held our common +shares. The amount allocated to the current taxable year and any taxable year +with respect to which we were not a PFIC will be taxed as ordinary income +(rather than capital gain) earned in the current taxable year. The amount +allocated to other taxable years will be taxed at the highest marginal rates +applicable to ordinary income for such taxable years and, in addition, an +interest charge will be imposed on the amount of such taxes.
+
 
+
If we +were to become a PFIC, these adverse tax consequences may be avoided if a U.S. +Holder is eligible to and does elect to annually mark-to-market our common +shares. If you make a mark-to-market election with respect to your shares of our +common shares, you will generally include as ordinary income the excess, if any, +of the fair market value of your shares at the end of each taxable year over +their adjusted basis, and will be permitted an ordinary loss in respect of the +excess, if any, of the adjusted basis of your shares over their fair market +value at the end of the taxable year (but only to the extent of the net amount +of previously included income as a result of the mark-to-market election). Any +gain recognized on the sale or other disposition of your shares of our common +shares will be treated as ordinary income. The mark-to-market election is +available only for “marketable stock,” which is stock that is traded in other +than de minimis quantities on at least 15 days during each calendar quarter on a +qualified exchange or other market, as defined in the applicable Treasury +regulations.  Our common shares are listed on NASDAQ, and we expect, +although no assurance can be given, that such shares will be regularly traded on +that exchange.
+
 
+
Your +adjusted tax basis in your common shares will be increased by the amount of any +income inclusion and decreased by the amount of any deductions under the +mark-to-market rules. If you make a mark-to-market election, it will be +effective for the taxable year for which the election is made and all subsequent +taxable years unless our common shares are no longer regularly traded on a +qualified exchange or the Internal Revenue Service consents to the revocation of +the election. U.S. Holders are urged to consult their tax advisors about the +availability of the mark-to-market election, and whether making the election +would be advisable in their particular circumstances.
+
 
+
In +general, if a non-U.S. corporation is a PFIC, a holder of shares in that +corporation may avoid taxation under the rules described above by making a +“qualified electing fund” election to include its share of the corporation’s +income on a current basis, or a “deemed sale” election once the corporation no +longer qualifies as a PFIC. However, you may make a qualified electing fund +election with respect to your common shares only if we agree to furnish you +annually with certain tax information, and we do not presently intend to prepare +or provide such information.
+
 
+
If you +hold shares of our common shares in any year in which we are a PFIC, you will be +required to file Internal Revenue Service Form 8621 regarding distributions +received on the shares and any gain realized on the disposition of the +shares.  The reduced tax rate for dividend income, as discussed above +under “Dividends,” is not applicable to a dividend paid by us if we are a PFIC +for either the year the dividend is paid or the preceding year.
+
 
+
YOU +ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING
+
THE +APPLICATION OF THE PFIC RULES TO YOUR INVESTMENT IN OUR COMMON +SHARES.
+
 
+
Information +Reporting and Backup Withholding
+
 
+
Dividend +payments with respect to our common shares and proceeds from the sale, exchange +or redemption of our common shares may be subject to information reporting to +the Internal Revenue Service and possible U.S. backup withholding at a current +rate of 28%. Backup withholding will not apply, however, to a U.S. Holder who +furnishes a correct taxpayer identification number and makes any other required +certification or who is otherwise exempt from backup withholding. U.S. Holders +who are required to establish their exempt status generally must provide such +certification on Internal Revenue Service Form W-9. U.S. Holders should consult +their tax advisors regarding the application of the U.S. information reporting +and backup withholding rules. 

+
+
+
  +
+
+
+
84
+
+
+
+
+
+
  +
+
+

+
Backup +withholding is not an additional tax. Amounts withheld as backup withholding may +be credited against your U.S. federal income tax liability, and you may obtain a +refund of any excess amounts withheld under the backup withholding rules by +filing the appropriate claim for refund with the Internal Revenue Service and +furnishing any required information.
+
 
+
+ + + + + +
+
F.
+ 		+
Dividends + and Paying Agents
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
G.
+ 		+
Statement + by Experts
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
H.
+ 		+
Documents + on Display
+
+
+
 
+
We are +subject to the periodic reporting and other informational requirements of the +Exchange Act. Under the Exchange Act, we are required to file reports and other +information with the U.S. SEC. Specifically, we are required to file an annual +report under Form 20-F no later than six months after the close of each of our +fiscal years, which is December 31. Copies of reports and other +information, when so filed, may be inspected without charge and may be obtained +at prescribed rates at the SEC’s public reference room located at 100 F Street, +NE, Washington, D.C. 20549. The public may obtain information regarding the +Washington, D.C. Public Reference Room by calling the Commission at +1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains +reports, proxy and information statements, and other information regarding +registrants that make electronic filings with the SEC using its EDGAR +filing system. As a foreign private issuer, we are exempt from the rules under +the Exchange Act prescribing the furnishing and content of quarterly reports and +proxy statements, and officers, directors and principal shareholders of ours are +exempt from the reporting and short- swing profit recovery provisions contained +in Section 16 of the Exchange Act.
+
 
+
+ + + + + +
+
I.
+ 		+
Subsidiary + Information
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
ITEM + 11.
+ 		+
QUANTITATIVE + AND QUALITATIVE DISCLOSURES ABOUT MARKET +RISK
+
+
+
 
+
Interest +Rate Risk
+
 
+
Our +exposure to market rate risk for changes in interest rates relates primarily to +the interest income generated by excess cash invested in short term money market +accounts and certificates of deposit. We have not used derivative financial +instruments to manage our interest rate exposure. Interest-earning instruments +carry a degree of interest rate risk. We have not been exposed nor do we +anticipate being exposed to material risks due to changes in interest rates. +However, our future interest income may fall short of expectations due to +changes in interest rates.
+
 
+
Foreign +Currency Risk
+
 
+
Substantially +all our revenues and expenses are denominated in RMB and a substantial portion +of our cash is kept in RMB, but a portion of our cash is also kept in U.S. +dollars and we use U.S. dollars as our reporting currency. The value of our +shares will be affected by the foreign exchange rate between U.S. dollars and +RMB. Unfavorable changes in the exchange rate between RMB and U.S. dollars may +result in a material effect on the cumulative translation adjustment recorded as +a charge in shareholder’s equity. Further, to the extent that we need to convert +U.S. dollars into RMB for our operational needs and the RMB appreciates against +the U.S. dollar at that time, our financial position and the price of our shares +may be adversely affected. Conversely, if we decide to convert our RMB into U.S. +dollars for the purpose of declaring dividends on our shares or otherwise and +the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our +earnings in China would be reduced.
+
 
+
The value +of the RMB against the U.S. dollar and other currencies may fluctuate and is +affected by, among other things, changes in China’s political and economic +conditions. For information regarding the exchange rate between the U.S. dollar +and the RMB, see Item 3.A, “Key Information – Selected +Financial Data – Exchange Rate Information.” The conversion of RMB into +foreign currencies, including U.S. dollars, has been based on rates set by the +PBOC. On July 21, 2005, the PRC government changed its decade-old policy of +pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB +is permitted to fluctuate within a narrow and managed band against a basket of +certain foreign currencies. This change in policy has resulted in an +appreciation of the RMB against the U.S. dollar of approximately 6.9% in 2007 +and 6.8% in 2008. There was no material appreciation of the RMB against the +US dollar in 2009. There remains significant international pressure on the PRC +government to adopt an even more flexible currency policy, which could result in +a further and more significant appreciation of the RMB against the U.S. +dollar.

+
+
+
  +
+
+
+
85
+
+
+
+
+
+
  +
+
+

+
In addition, the RMB is not a freely convertible currency. Our +subsidiaries are allowed to pay outstanding current account obligations in +foreign currency but must present the proper documentation to a designated +foreign exchange bank. There is no certainty that all future local currency can +be repatriated.
+
 
+
+
Further, we began to use +forward currency +contracts to avoid foreign currency +risk in 2009. We believe forward currency contracts are useful for managing +exposures beyond spot contracts, as they +allow a purchaser to secure the then +current exchange rate for settlement at a future date. We believe that the purchase of forward currency +contracts may protect +our profit margins and increase our competitive +standing internationally because our +anticipated foreign payables or receivables +can be contracted at present market levels to protect against currency fluctuations. +Each forward currency contract includes +two components. The first is the spot, or current value of +the currencies involved. The second involves the interest rate differentials +between the two currencies. The interest rate component allows markets to adjust +for the time value of money. If the spot is +for settlement in two days, the forwards will allow pricing to reflect which +currency is more attractive to hold beyond spot. Depending upon +whether a purchaser is buying or selling a currency with a higher rate of +interest, a +forward contract can +be either more or less +attractive.
+
+
 
+
In 2009, we entered into three +separate foreign forward currency purchase instruments with Huaxia Bank, as to +which we recorded an aggregate loss of $516,000 as of December 31, 2009, the +details of which are as follows:
+
 
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   +
December + 31,
+ 		   +
December + 31,
+ 		 
  +   +
2009
+ 		   +
2008
+ 		 
  +   +
(000s + of $US)
+ 		 
+
Forward + contract #1 (i)
+ 		   +
229   
+ 		   -    
+
Forward + contract #2 (ii)
+ 		  219      -    
+
Forward + contract #3 (iii)
+ 		  68      -    
  +         
+
Total
+ 		  516      -    
+
+
+
+
+
+
+
 
+
+ + + + + +
+
(i)  +  
+ 		+
On + September 24, 2009, Ruixiang entered a foreign currency forward contract + with a notional amount of $6,009 (Euro 4,187,000) with Huaxia Bank. See + Note 13 to our audited financial statements for the year ended December + 31, 2009. The contract fixed the exchange rate between Euro and RMB at + 10.11 with maturity date on September 24, +2010.
+
+
+
 
+
+ + + + + +
+
(ii)  +  
+ 		+
On + October 22, 2009, Ruixiang entered a foreign currency forward contract + with a notional amount of $4,824 (Euro 3,361,000) with Huaxia Bank. See + Note 13 to our audited financial statements for the year ended December + 31, 2009. The contract fixed the exchange rate between Euro and RMB at + 10.231 with maturity date on April 20, +2010.
+
+
+
 
+
+
+ + + + + +
+
(iii)  +  
+ 		+
+
On + October 27, 2009, Ruixiang entered a foreign currency forward contract + with a notional amount of $1,695 (Euro 1,181,000) with Huaxia Bank. See + Note13 to our audited financial statements for the year ended December 31, + 2009. The contract fixed the exchange rate between Euro and RMB at 10.18 + with maturity date on April 23, +2010.
+
+
+
+
 
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   + +
Execution + Date
+ 		  + +
Interest + per annum
+ 		  + +
Repayment + Date
+ 		  + +
Loan + Amount
+
+
Contract + #1
+ 		  + +
September + 24, 2009
+ 		  + +
2.196%
+ 		  + +
September + 24, 2010
+ 		  + +
Euro + 4.2 million
+
+
Contract + #2
+ 		  + +
October + 22, 2009
+ 		  + +
2.771%
+ 		  + +
April + 23, 2010
+ 		  + +
Euro + 3.4 million
+
+
Contract + #3
+ 		  + +
October + 27, 2009
+ 		  + +
2.771%
+ 		  + +
April + 23, 2010
+ 		  + +
Euro + 1.1 +million
+
+
+
+
+
+
+
+
+
+
+
+
 
+
+
+
+ + + + + +
+
ITEM + 12.
+ 		+
DESCRIPTION + OF SECURITIES OTHER THAN EQUITY +SECURITIES
+
+
+
 
+
Not +applicable.
+
 
+
PART +II
+
 
+
+ + + + + +
+
ITEM + 13.
+ 		+
DEFAULTS, + DIVIDEND ARREARAGES AND +DELINQUENCIES
+
+
+
 
+
None.
+
 
+
+ + + + + +
+
ITEM + 14.
+ 		+
MATERIAL + MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF + PROCEEDS
+
+
+
 
+
On +January 18, 2008, Chardan’s stockholders voted to approve the following material +modifications to Chardan’s and A-Power’s charters:
+
 
+
· +      an amendment to the geographic limitation in +Chardan’s certificate of incorporation to permit Chardan to enter into a +business combination with an operating business that has its principal operating +facilities located anywhere in the PRC; and
+
 
+
· +      an increase in the authorized capital of +A-Power from 43 million shares to 50 million shares to permit A-Power to meet +its obligations to issue shares pursuant to the redomestication merger with +Chardan and the stock purchase agreement with Mr. Lu, the then sole shareholder +of Head Dragon Holdings common stock, while providing A-Power some flexibility +with regard to future issuances in connection with any future financing +transactions, business acquisitions and the like, although there were no pending +transactions that required such an increase.
+
 
+
On +January 18, 2008, Chardan’s stockholders also approved the merger of Chardan +with and into A-Power for the purpose of redomestication of Chardan to the +British Virgin Islands. Holders of Chardan units received one A-Power unit for +every Chardan unit. Holders of Chardan common stock received one share in +A-Power for every share of Chardan common stock. Holders of Chardan warrants +received one A-Power warrant for every Chardan warrant. The holder of the unit +purchased option issued by Chardan to the representative of the underwriters in +its initial public offering in August 2005 received an equivalent option from +A-Power. As a result of A-Power’s issuance of shares to Mr. Lu as consideration +for all the issued and outstanding common shares of Head Dragon Holdings, the +former Chardan stockholders’ interests were diluted so that they only owned +approximately 35% of A-Power.
+
 
+
On August +21, 2009, A-Power’s shareholders voted to approve the following material +modifications to A-Power’s memorandum and articles of association:
+

+
+ + + + + + +
  + +
·
+ 		+
a + deletion of the requirement of shareholder approval for issuances of + shares by A-Power;
+
+
+

+
+ + + + + + +
  + +
·
+ 		+
an + increase in the authorized capital of A-Power by 100,000,000 common + shares;
+
+
+

+
+ + + + + + +
  + +
·
+ 		+
certain + amendments to clarify shareholder meeting procedures; + and
+
+
+

+
+ + + + + + +
  + +
·
+ 		+ +
+
+
 
+
+
+
  +
+
+
+
86
+
+
+
+
+
+
  +
+
+
+

+
+ + + + + +
+
ITEM + 15.
+ 		+
CONTROLS + AND PROCEDURES
+
+
+
 
+
Disclosure +Controls and Procedures
+
+

+
We +performed an evaluation under the supervision and with the participation of our +management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and +procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) +as of the end of the period covered by this report.  Disclosure +controls and procedures are those practices and procedures that are designed to +ensure that information required to be disclosed in the reports that we file and +submit under the Exchange Act (i) is recorded, processed, summarized and +reported as and when required and (ii) is accumulated and communicated to +our management, including our Chief Executive Officer and Chief Financial +Officer, as appropriate, to allow timely decisions regarding required +disclosure. Based on this evaluation, our Chief Executive Officer and Chief +Financial Officer, concluded that our disclosure controls and procedures as of +the end of the period covered by this report were not effective to provide +reasonable assurance, primarily due to the material weaknesses in our internal +controls, as discussed below.
+

+
Management’s +Report on Internal Control Over Financial Reporting
+

+
Our +management is responsible for establishing and maintaining adequate internal +control over financial reporting as defined in rules 13a-15(f) and 15d-15(f) +under the Exchange Act. Our internal control system was designed to provide +reasonable assurance regarding the reliability of financial reporting and the +preparation and fair presentation of our published consolidated financial +statements in accordance with accounting principles generally accepted in the +United States.
+

+
Because +of its inherent limitations, internal control over financial reporting may not +prevent or detect misstatements. Also, projections of any evaluation of +effectiveness to future periods are subject to risk that controls may become +inadequate because of changes in conditions, on that the degree of compliance +with policies and procedures may deteriorate.
+

+
Our +management performed an assessment of the effectiveness of our internal control +over financial reporting as of December 31, 2009, utilizing the criteria +described in the “Internal Control – Integrated Framework” issued by the +Committee of Sponsoring Organizations of the Treadway Commission (COSO). The +objective of this assessment was to determine whether our internal control over +financial reporting was effective as of December 31, 2009.  During +management’s assessment of the effectiveness of internal control over financial +reporting as of December 31, 2009, management identified the following material +weaknesses described below.  A material weakness is a deficiency, or +combination of deficiencies, in internal control over financial reporting such +that there is a reasonable possibility that a material misstatement of our +annual or interim consolidated financial statements will not be prevented or +detected on a timely basis.  Based on the assessment, and because of +the material weaknesses described below, management concluded that our internal +control over financial reporting was not effective as of December 31, +2009.
+

+
Entity-Level +Controls
+

+
Management +tried to improve entity-level control using the COSO internal control framework +but concluded that such control activities were not appropriately designed and +operating effectively as of December 31, 2009.  Specifically, +management concluded that we did not have adequate controls with respect to: +(i) insufficient communication of appropriate business practices and +standards, (ii) lack of effective procedures to ensure that risks related to +financial reporting are assessed in a timely manner (iii) in certain instances, +lack of written policies and procedures, and (iv) insufficient monitoring of +internal controls. Due to the deficiencies noted above management determined +that these deficiencies constitute a material weakness in the control +environment, risk assessment, control activities, monitoring, information and +communication.
+

+
Financial +Closing and Reporting Process
+

+
We did +not maintain effective controls over the financial reporting process and +underlying accounting processes due to the lack of certain written policies and +procedures.
+

+
Notwithstanding +the material weaknesses described above, management believes that there are no +material inaccuracies or omissions of material fact and, to the best of its +knowledge, believes that the consolidated financial statements included in this +annual report present fairly, in all material respects, our financial position, +results of operations, and cash flows for the periods presented in conformity +with accounting principles generally accepted in the United States.
+

+
The +effectiveness of our internal control over financial reporting has been audited +by MSCM LLP, an independent registered public accounting firm that audited the +consolidated financial statements included in this Annual Report on Form 20-F, +as stated in their report which is included herein.
+

+
Remediation +and Changes in Internal Controls
+

+
Our +management, including our Chief Executive Officer and Chief Financial Officer, +are committed to improve internal control over financial reporting. We are +investing more in developing and implementing remediation plans to address our +material weaknesses. We have taken the following actions to improve our internal +control over financial reporting:
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
In + January, 2010, we hired a Vice President to help us improve our internal + control. He is leading our internal control project team and helping + headquarters, subsidiaries and business departments improve internal + control.
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
We + are assessing and refining our key policies and processes within + headquarters and subsidiaries, including financial reporting policies and + processes. We will have all written policies and processes ready before + end of June 2010.
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
Management + is making more of an effort to assess risk in a timely manner, and we are + having increased and timely communication between headquarters, + subsidiaries and departments associated with business practices, standards + and risks. Key risks will be communicated directly to the Audit + Committee.
+
+
+

+
+ + + + + + +
+
  +
+ 		+
·
+ 		+
Our + internal audit department, which is already set up, will take the + responsibility to monitor the effectiveness of internal control over + financial reporting and operations. Management will also monitor closely + if our internal control system is +effective.
+
+
+

+
Our +management will continue to improve and monitor the effectiveness of our +disclosure controls and procedures and our internal control over financial +reporting, and is committed to taking further action and implementing additional +improvements as necessary.  However, our management cannot guarantee +that the measures taken or any future measures will remediate the material +weaknesses identified or that any additional material weaknesses or significant +deficiencies will not arise in the future due to a failure to implement and +maintain adequate internal control over financial reporting.
+

+
Other +than the remediation and changes described in “Management's Report on Internal +Control Over Financial Reporting” above, there were no changes in our internal +control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) +under the Exchange Act) that occurred during the year ended December 31, 2009, +that have materially affected, or are reasonably likely to materially affect, +our internal control over financial reporting.
+
 
+
+
+
+
  +
+
+
+
87
+
+
+
+
+
+
  +
+
+
+

+
Changes +in Internal Control over Financial Reporting
+
 
+
There +were no changes in our internal control over financial reporting during the year +ended December 31, 2009 that have materially affected, or are reasonably likely +to materially affect, our internal control over financial +reporting.
+
 
+
Our +independent registered public accounting firm, who audited the financial +statements included in this annual report on Form 20-F, has issued an +attestation report on management’s assessment of the effectiveness of our +internal control over financial reporting as of December 31, 2009, which is set +forth below.
+
 
+
Report +of Independent Registered Public Accounting Firm
+
 
+
To the +Board of Directors and Stockholders of A-Power Generation Systems, +Ltd.
+
 
+
We have +audited A-Power Generation Systems, Ltd.’s internal controls over financial +reporting as of December 31, 2009, based on criteria established in Internal +Control – Integrated Framework issued by the Committee of Sponsoring +Organizations of the Treadway Commission (COSO).  A-Power Generation +Systems, Ltd.’s management is responsible for maintaining effective internal +control over financial reporting and for its assessment of the effectiveness of +internal control over financial reporting, included in the accompanying +Management’s Annual Report on Internal Control over Financial +Reporting.  Our responsibility is to express an opinion on the +company’s internal control over financial reporting based on our +audit.
+
 
+
+
+
+
  +
+
+
+
88
+
+
+
+
+
+
  +
+
+
+
+

+
We +conducted our audit in accordance with the standards of the Public Company +Accounting Oversight Board (United States).  Those standards required +that we plan and perform the audit to obtain reasonable assurance about whether +effective internal control over financial reporting was maintained in all +material respects.  Our audit of internal control over financial +reporting included obtaining an understanding of internal control over financial +reporting, assessing the risk that a material weakness exists and testing and +evaluating the design and operating effectiveness of internal control based on +the assessed risk.  Our audit also included performing such other +procedures as we considered necessary in the circumstances.  We +believe that our audit provides a reasonable basis for our opinion.
+
 
+
A +company’s internal control over financial reporting is a process designed to +provide reasonable assurance regarding the reliability of financial reporting +and the preparation of financial statements for external purposes in accordance +with generally accepted accounting principles.  A company’s internal +control over financial reporting includes those policies and procedures that (1) +pertain to the maintenance of records that, in reasonable detail, accurately and +fairly reflect the transactions and dispositions of the assets of the company; +(2) provide reasonable assurance that transactions are recorded as necessary to +permit the preparation of financial statements in accordance with generally +accepted accounting principles, and that receipts and expenditures of the +company are being made only in accordance with authorizations of management and +directors of the company; and (3) provide reasonable assurance regarding +prevention or timely detection of unauthorized acquisition, use, or disposition +of the company’s assets that could have a material effect on the financial +statements.
+
 
+
Because +of its inherent limitations, internal control over financial reporting may not +prevent or detect misstatements.  also projects of any evaluation of +effectiveness to future periods are subject to the risk that controls may become +inadequate because of changes in conditions, or that the degree of compliance +with the policies or procedures may deteriorate.
+
 
+
A +material weakness is a control deficiency, or combination of deficiencies, in +internal control over the financial reporting, such that there is a reasonable +possibility that a material misstatement of the Company’s annual or interim +financial statements will not be prevented or detected on a timely +basis.
+
 
+
As +described in Management’s Annual Report on Internal Control over Financial +Reporting, management has concluded that the Company did not maintain effective +control over financial reporting as of December 31, 2009 due to pervasive +control deficiencies and material weaknesses.  The existence of +pervasive control deficiencies and material weaknesses impair the effectiveness +of other controls by rendering their design ineffective or by keeping them from +operating effectively.  As stated in management’s report, the +pervasive deficiencies identified include both entity level and financial +closing and reporting processes and consisted of inadequate controls with +respect to (1) communication of appropriate business practices and standards, +(2) assessment of business risk and risks related to financial reporting, (3) +written policies and procedures, (4) monitoring of internal controls and, (5) +the financial reporting process and the underlying accounting +processes.  These material weaknesses were considered in determining +the nature, timing and extent of audit tests applied in our audit of the 2009 +financial statements, and this report does not affect our report dated March 31, +2010 on those financial statements.
+
 
+
In our +opinion, because of the effect of the material weaknesses described above on the +achievement of the objectives of the control criteria, A-Power Energy Generation +Systems, Ltd. has not maintained effective internal control over financial +reporting as of December 31, 2009, based on criteria established in Internal +Control—Integrated Framework issued by the Committee of Sponsoring Organizations +of the Treadway Commission (COSO).
+

+
We have +also audited, in accordance with the standards of the Public Company Accounting +Oversight Board (United States), the consolidated balance sheets and the related +consolidated statements of income and comprehensive  income, +stockholders’ equity, and cash flows of A-Power Energy Generation Systems, Ltd., +and our report dated March 31, 2010 expressed an unqualified +opinion.
+

+
/s/ MSCM +LLP
+
MSCM +LLP
+
Toronto, +Canada
+
March 31, +2009
+
 
+
+
+ + + + + +
+
ITEM 16A.
+ 		+
AUDIT + COMMITTEE FINANCIAL EXPERT
+
+
+
 
+
See +Item 6.C, “Directors, +Senior Management and Employees — Board Practices – Committees of the Board of +Directors – Audit Committee.”
+
 
+
+ + + + + +
+
ITEM 16B.
+ 		+
CODE + OF ETHICS
+
+
+
 
+
Effective +as of the consummation of our business combination with Head Dragon Holdings, +our board of directors adopted a Code of Conduct and Policy Regarding Reporting +of Possible Violations, which is applicable to all of our directors, officers, +full and part time employees and contract workers. A Code of Ethics for Senior +Officers, which is applicable to our chief executive officer, chief financial +officer and controller, and Chief Accounting Officer forms a part of our Code of +Conduct. Our Code of Conduct was filed with the SEC as an exhibit to our Annual +Report for the year ended December 31, 2007. 

+
+
+
  +
+
+
+
89
+
+
+
+
+
+
  +
+
+
+

+
+ + + + + +
+
ITEM 16C.
+ 		+
PRINCIPAL + ACCOUNTANT FEES AND SERVICES
+
+
+
 
+
During +2009, our registered independent public accountant was MSCM LLP, or +MSCM.  The following table sets forth the aggregate fess by category +as specified below paid by us to MSCM  in connection with certain +professional services rendered by such firms for the annual periods +indicated.
+

+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  + +
MSCM
+ 		  + +
MSCM
+ 		  +
  + +
2009
+ 		  + +
2008
+ 		  +
+
Audit + Fees (1)
+ 		 CDN$ +
 581,275
+ 		  + CDN$ +
302,390
+ 		  +
+
Audit-Related + Fees
+ 		  +
—
+ 		  +   + +
—
+ 		  +
+
Tax + Fees
+ 		  +
—
+ 		  +   +
9,500
+ 		  +
+
All + Other Fees
+ 		  +
—
+ 		  +   + +
 —
+ 		  +
+
+
+
+
+
+
+
+
+
+
 
+
+ + + + + +
+
(1)
+ 		+
“Audit + fees” means the aggregate fees billed for professional services rendered + for the audit of annual financial statements, the interim review of + quarterly financial statements and services that are normally provided by + a principal external auditor in connection with statutory and regulatory + filings or engagements).
+
+
+

+
The audit +committee pre-approves each individual professional service requested from MSCM, +including tax services and related fees.
+
 
+
+ + + + + +
+
ITEM 16D.
+ 		+
EXEMPTIONS + FROM THE LISTING STANDARDS FOR AUDIT +COMMITTEES
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
ITEM 16E.
+ 		+
PURCHASES + OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED + PURCHASERS
+
+
+
 
+
We do not +have an equity securities repurchase program and did not repurchase any of our +equity securities during the year ended December 31, 2009.
+
 
+
+ + + + + +
+
ITEM 16F.
+ 		+
CHANGE + IN REGISTRANT’S CERTIFYING +ACCOUNTANT
+
+
+
 
+
Not +applicable.
+
 
+
+ + + + + +
+
ITEM 16G.
+ 		+
CORPORATE + GOVERNANCE
+
+
+
 
+
Nasdaq +Marketplace Rule 5615(a)(3) permits foreign private issuers like us to +follow “home country practice” with respect to certain corporate governance +matters. We are committed to a high standard of corporate governance and we +endeavor to comply with Nasdaq corporate governance rules.
+
 
+
However, +Nasdaq Marketplace Rule 5605(e) and IM-5605-7 requires among other things, that +director nominees must be either selected, or recommended for the board’s +selection by independent directors constituting a majority of the board’s +independent directors in a vote in which only the independent directors +participate or by a nomination committee comprised solely of independent +directors. We did not have a nominating and corporate governance committee in +2008. Our board of directors has adopted a charter for a nominating and +corporate governance committee, but has not yet appointed any members of the +committee.
+
 
+
Nasdaq Marketplace Rule 5250(d)(1) +requires each issuer to distribute to shareholders copies of an annual report +containing audited financial statements of the company and its subsidiaries. It +further requires that the report be distributed to shareholders a reasonable +period of time prior to the company’s annual meeting of shareholders and that it +be filed with Nasdaq at the time it is distributed to shareholders. Nasdaq +Marketplace Rule 5620(a) and IM-5620 requires each issuer with a new listing +that was not previously subject to a requirement to hold an annual meeting, to +hold its first meeting within one-year after its first fiscal +year-end.  Our common shares began trading on the Nasdaq Capital +Market on January 22, 2008, and on the Nasdaq Global Select Market on June 2, +2008. We held an annual general meeting of shareholders on August 21, 2009, +where our shareholders approved an amendment and restatement of our Memorandum +and Articles of Association.  We follow home country practice with +respect to distribution to shareholders of copies of an annual report and +holding of annual shareholder meetings.  We may hold annual meetings +in future years if there are significant issues that require shareholder +approval or if our memorandum and articles require us to do so, however, our +home country practice under the laws of the British Virgin Islands does not +require us to distribute to shareholders copies of our annual report, nor does +it require us to hold annual shareholder meetings.  For information +regarding our memorandum and articles of association, which reflects British +Virgin Islands law, see Item 10.B – “Additional +Information – Memorandum and Articles of Association,” to this Annual Report on Form 20-F. In +accordance with Nasdaq Marketplace Rule 5250(d)(1), we will post this Annual +Report on Form 20-F on our company website at: +http://investor.apowerenergy.com/annuals.cfm.  In addition, we will +provide a hardcopy of our Annual Report on Form 20-F free of charge to +shareholders upon request. 

+
+
+
  +
+
+
+
90
+
+
+
+
+
+
  +
+
+

+
PART III
+
 
+
ITEM +17.           FINANCIAL +STATEMENTS
+
 
+
We have +elected to provide financial statements pursuant to Item 18.
+
 
+
ITEM +18.           FINANCIAL +STATEMENTS
+
 
+
Our +consolidated financial statements are included at the end of this Annual Report +on Form 20-F .
+
 
+
ITEM +19.           EXHIBITS +
+
 
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Exhibit
+
No.
+ 		  + +
Description of Document
+
  +   +   +
+
1.1
+ 		  + +
Amended + and Restated Memorandum of Association of A-Power Energy Generation + Systems, Ltd. (incorporated by reference to Exhibit 1.1 of Amendment No. 1 + to the annual report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on December 2, 2009)
+
  +   +   +
+
1.2
+ 		  + +
Amended + and Restated Articles of Association of A-Power Energy Generation Systems, + Ltd. (incorporated by reference to Exhibit 1.2 of Amendment No. 1 to the + annual report on Form 20-F (file no. 001-33820) filed with the Securities + and Exchange Commission on December 2, 2009)
+
  +   +   +
+
2.1
+ 		  + +
Form + of Unit Purchase Option granted to EarlyBird Capital, Inc., as + representative of the underwriters (incorporated by reference to Exhibit + 4.4 of the registration statement on Form S-1 of Chardan South China + Acquisition Corporation (file no. 333-125018) filed with the Securities + and Exchange Commission on May 17, 2005)
+
  +   +   +
+
2.2
+ 		  + +
Amendment + to Unit Purchase Option granted to EarlyBird Capital, Inc., as + representative of the underwriters, dated April 16, 2007 (incorporated by + reference to Exhibit 4.7 of the annual report on Form 10-KSB of Chardan + South China Acquisition Corporation (file no. 000-51432-07771156) filed + with the Securities and Exchange Commission on April 17, + 2007)
+
  +   +   +
+
2.3
+ 		  + +
Form + of Warrant Agreement between Continental Stock Transfer & Trust + Company and A-Power Energy Generation Systems, Ltd. (as successor to + Chardan South China Acquisition Corporation) (incorporated by reference to + Exhibit 4.5 of Amendment No. 3 to the registration statement on Form S-1 + of Chardan South China Acquisition Corporation (file no. 333-125018) filed + with the Securities and Exchange Commission on July 28, + 2005)
+
  +   +   +
+
2.4
+ 		  + +
Warrant + Clarification Agreement with Continental Stock Transfer & Trust + Company, dated April 16, 2007 (incorporated by reference to Exhibit 4.6 of + the annual report on Form 10-KSB of Chardan South China Acquisition + Corporation (file no. 000-51432-07771156) filed with the Securities and + Exchange Commission on April 17, 2007)
+
  +   +   +
+
2.5
+ 		  + +
Registration + Rights Agreement among A-Power Energy Generation Systems, Ltd. (as + successor to Chardan China Acquisition Corp. III) and Li Zhang, Kerry + Propper, Jiangnan Huang, Chardan Capital Partners and SUJG, Inc. + (incorporated by reference to Exhibit 10.11 of the registration statement + on Form S-1 of Chardan South China Acquisition Corporation (file no. + 333-125018) filed with the Securities and Exchange Commission on May 17, + 2005)
+
  +   +   +
+
4.1
+ 		  + +
Stock + Purchase Agreement, dated April 14, 2007, between A-Power Energy + Generation Systems, Ltd. (as successor to Chardan South China Acquisition + Corporation and China Energy Technology Limited) and Jinxiang Lu + (incorporated by reference to Annex A of the proxy statement/prospectus + contained in the registration statement on Form S-4 (file no. 333-142894) + originally filed with the Securities and Exchange Commission on May 11, + 2007)
+
  +   +   +
+
4.2
+ 		  + +
Form + of Agreement and Plan of Merger between Chardan South China Acquisition + Corporation and China Energy Technology Limited (incorporated by reference + to Exhibit 2.2 of our registration statement on Form S-4 (file no. + 333-142894) filed with the Securities and Exchange Commission on May 11, + 2007)
+
+
+
+
+

+
+
+
  +
+
+
+
91
+
+
+
+
+
+
  +
+
+
+

+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
4.3
+ 		  + +
Investment + Management Trust Agreement between A-Power Energy Generation Systems, Ltd. + (as successor to Chardan China Acquisition Corp. III) and Continental + Stock Transfer & Trust Company (incorporated by reference to Exhibit + 10.7 of the registration statement on Form S-1 of Chardan South China + Acquisition Corporation (file no. 333-125018) filed with the Securities + and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.4
+ 		  + +
Form + of Stock Escrow Agreement among A-Power Energy Generation Systems, Ltd. + (as successor to Chardan China Acquisition Corp. III), Continental Stock + Transfer & Trust Company, and Li Zhang, Kerry Propper, Jiangnan Huang, + Chardan Capital Partners and SUJG, Inc. (incorporated by reference to + Exhibit 10.8 of the registration statement on Form S-1 of Chardan South + China Acquisition Corporation (file no. 333-125018) filed with the + Securities and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.5
+ 		  + +
Letter + Agreement between Chardan China Acquisition Corp. III and Chardan Capital, + LLC regarding administrative support for period between initial public + offering and effective date of business combination or liquidation of + Chardan China Acquisition Corp. III (incorporated by reference to Exhibit + 10.9 of the registration statement on Form S-1 of Chardan South China + Acquisition Corporation (file no. 333-125018) filed with the Securities + and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.6
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), EarlyBird + Capital, Inc. and Dr. Richard D. Propper (incorporated by reference to + Exhibit 10.1 of the registration statement on Form S-1 of Chardan South + China Acquisition Corporation (file no. 333-125018) filed with the + Securities and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.7
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), EarlyBird + Capital, Inc. and Li Zhang (incorporated by reference to Exhibit 10.2 of + the registration statement on Form S-1 of Chardan South China Acquisition + Corporation (file no. 333-125018) filed with the Securities and Exchange + Commission on May 17, 2005)
+
  +   +   +
+
4.8
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), + EarlyBirdCapital, Inc. and Kerry Propper (incorporated by reference to + Exhibit 10.3 of the registration statement on Form S-1 of Chardan South + China Acquisition Corporation (file no. 333-125018) filed with the + Securities and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.9
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), + EarlyBirdCapital, Inc. and Jiangnan Huang (incorporated by reference to + Exhibit 10.4 of the registration statement on Form S-1 of Chardan South + China Acquisition Corporation (file no. 333-125018) filed with the + Securities and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.10
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), + EarlyBirdCapital, Inc. and Chardan Capital Partners (incorporated by + reference to Exhibit 10.5 of the registration statement on Form S-1 of + Chardan South China Acquisition Corporation (file no. 333-125018) filed + with the Securities and Exchange Commission on May 17, + 2005)
+
  +   +   +
+
4.11
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), + EarlyBirdCapital, Inc. and SUJG, INC. (incorporated by reference to + Exhibit 10.6 of the registration statement on Form S-1 of Chardan South + China Acquisition Corporation (file no. 333-125018) filed with the + Securities and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.12
+ 		  + +
Cooperation + Agreement, dated September 16, 2005, between Liaoning GaoKe Energy Group + Company Limited and Tsinghua University (incorporated by reference to + Exhibit 10.14 of Amendment No. 2 of our registration statement on Form S-4 + (file no. 333-142894) filed with the Securities and Exchange Commission on + October 11, 2007)
+
  +   +   +
+
4.13
+ 		  + +
Cooperation + Agreement, dated June 25, 2005, between Liaoning GaoKe Energy Group + Company Limited and China Academic Sciences Guangzhou Energy Institute + (incorporated by reference to Exhibit 10.15 of Amendment No. 2 of our + registration statement on Form S-4 (file no. 333-142894) filed with the + Securities and Exchange Commission on October 11, 2007)
+
  +   +   +
+
4.14
+ 		  + +
A-Power + Energy Generation Systems, Ltd. 2007 Equity Plan (incorporated by + reference to Annex D of the proxy statement/prospectus contained in our + registration statement on Form S-4 (file no. 333-142894) originally filed + with the Securities and Exchange Commission on May 11, + 2007)
+
  +   +   +
+
4.15
+ 		  + +
Form + of 2007 Equity Plan Notice of Grant of Stock Option and Stock Option + Agreement (for participants resident in the PRC) (incorporated by + reference to Exhibit 4.15 of our Annual Report on Form 20-F (file no. + 001-33820) filed with the Securities and Exchange Commission on July 11, + 2008)
+
+
+

+
+
+
  +
+
+
+
92
+
+
+
+
+
+
  +
+
+
+

+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+ +   + +
Form + of 2007 Equity Plan Notice of Grant of Stock Option and Stock Option + Agreement (for U.S. participants) (incorporated by reference to Exhibit + 4.16 of our Annual Report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on July 11, 2008)
+
  +   +   +
+
4.17
+ 		  + +
Form + of 2007 Equity Plan Notice of Grant of Stock Option and Stock Option + Agreement (for international participants resident outside the PRC) + (incorporated by reference to Exhibit 4.17 of our Annual Report on Form + 20-F (file no. 001-33820) filed with the Securities and Exchange + Commission on July 11, 2008)
+
  +   +   +
+
4.18
+ 		  + +
Securities + Purchase Agreement, dated June 18, 2009, between A-Power Energy Generation + Systems, Ltd. and the investors named therein (incorporated by reference + to Exhibit 4.18 of Amendment No. 1 to the annual report on Form 20-F (file + no. 001-33820) filed with the Securities and Exchange Commission on + December 2, 2009)
+
  +   +   +
+
4.19
+ 		  + +
Form + of Senior Convertible Note, dated June 19, 2009, issued by A-Power Energy + Generation Systems, Ltd. (incorporated by reference to Exhibit 4.19 of + Amendment No. 1 to the annual report on Form 20-F (file no. 001-33820) + filed with the Securities and Exchange Commission on December 2, + 2009)
+
  +   +   +
+
4.20
+ 		  + +
Form + of Warrant, dated June 19, 2009, issued by A-Power Energy Generation + Systems, Ltd. (incorporated by reference to Exhibit 4.20 of Amendment No. + 1 to the annual report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on December 2, 2009)
+
  +   +   +
+
4.21
+ 		  + +
Form + of Put Agreement, dated June 19, 2009, between A-Power Energy Generation + Systems, Ltd. and the investors named therein (incorporated by reference + to Exhibit 4.21 of Amendment No. 1 to the annual report on Form 20-F (file + no. 001-33820) filed with the Securities and Exchange Commission on + December 2, 2009)
+
  +   +   +
+
4.22
+ 		  + +
Pledge + Agreement, dated June 19, 2009, by and among Jinxiang Lu, A-Power Energy + Generation Systems, Ltd. and Hudson Bay Fund LP (incorporated by reference + to Exhibit 4.22 of Amendment No. 1 to the annual report on Form 20-F (file + no. 001-33820) filed with the Securities and Exchange Commission on + December 2, 2009)
+
  +   +   +
+
4.23
+ 		  + +
Letter + Agreement, dated June 19, 2009, between A-Power Energy Generation Systems, + Ltd. and Jinxiang Lu (incorporated by reference to Exhibit 4.23 of + Amendment No. 1 to the annual report on Form 20-F (file no. 001-33820) + filed with the Securities and Exchange Commission on December 2, + 2009)
+
  +   +   +
+
4.24
+ 		  + +
Registration + Rights Agreement, dated June 18, 2009, by and among A-Power Energy + Generation Systems, Ltd. and the investors named therein (incorporated by + reference to Exhibit 4.24 of Amendment No. 1 to the annual report on Form + 20-F (file no. 001-33820) filed with the Securities and Exchange + Commission on December 2, 2009)
+
  +   +   +
+
4.25
+ 		  + +
Voting + Agreement, dated June 19, 2009, by and among A-Power Energy Generation + Systems, Ltd., Jinxiang Lu and John S. Lin (incorporated by reference to + Exhibit 4.25 of Amendment No. 1 to the annual report on Form 20-F (file + no. 001-33820) filed with the Securities and Exchange Commission on + December 2, 2009)
+
  +   +   +
+
4.26
+ 		  + +
Lock-up + Agreement, dated June 19, 2009, between A-Power Energy Generation Systems, + Ltd. and each of Jinxiang Lu and John S. Lin (incorporated by reference to + Exhibit 4.26 of Amendment No. 1 to the annual report on Form 20-F (file + no. 001-33820) filed with the Securities and Exchange Commission on + December 2, 2009)
+
  +   +   +
+
4.27
+ 		  + +
License + Agreement, dated May 23, 2007, between Liaoning GaoKe Energy Group Company + Limited and Führlander AG (incorporated by reference to Exhibit 4.27 to + our Annual Report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on June 30, 2009)
+
  +   +   +
+
4.28
+ 		  + +
Know-how + License Use Agreement, dated January 12, 2009, by and among Liaoning GaoKe + Energy Group Company Limited, Shenyang Lucky Wind Power Equipments Co., + Ltd and Führlander AG (incorporated by reference to Exhibit 4.28 to our + Annual Report on Form 20-F (file no. 001-33820) filed with the Securities + and Exchange Commission on June 30, 2009)
+
  +   +   +
+
4.29
+ 		  + +
License + Agreement, dated February 16, 2007, between Liaoning GaoKe Energy Group + Company Limited and Norwin A/S (incorporated by reference to Exhibit 4.29 + to our Annual Report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on June 30, 2009)
+
  +   +   +
+
4.30
+ 		  + +
Technology + License Use Agreement, dated January 12, 2009, by and among Liaoning GaoKe + Energy Group Company Limited, Shenyang Gold Lucky Electric Power + Equipments Co., Ltd and Norwin A/S (incorporated by reference to Exhibit + 4.30 to our Annual Report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on June 30, + 2009)
+
+
+

+
+
+
  +
+
+
+
93
+
+
+
+
+
+
  +
+
+
+

+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
4.31
+ 		  + +
Form + of Conversion Agreement between A-Power Energy Generation Systems, Ltd. + and the investors named therein (incorporated by reference to Exhibit 99.2 + of our Form 6-K (file no. 001-33820) filed with the Securities and + Exchange Commission on December 21, 2009)
+
  +   +   +
+
4.32
+ 		  + +
Form + of Confirmation Letter between A-Power Energy Generation Systems, Ltd. and + the investors named therein (incorporated by reference to Exhibit 99.3 of + our Form 6-K (file no. 001-33820) filed with the Securities and Exchange + Commission on December 21, 2009)
+
  +   +   +
+
4.33
+ 		  + +
Form + of Securities Purchase Agreement, dated January 21, 2010, between A-Power + Energy Generation Systems, Ltd. and the investors named therein + (incorporated by reference to Exhibit 99.1 of our Form 6-K (file no. + 001-33820) filed with the Securities and Exchange Commission on January + 21, 2010)
+
  +   +   +
+
4.34
+ 		  + +
Form + of [A/B] Warrant, dated January 21, 2010, issued by A-Power Energy + Generation Systems, Ltd. (incorporated by reference to Exhibit 99.2 of our + Form 6-K (file no. 001-33820) filed with the Securities and Exchange + Commission on January  21, 2010)
+
  +   +   +
+
4.35
+ 		  + +
Form + of Registration Rights Agreement, dated January 21, 2010,by and among + A-Power Energy Generation Systems, Ltd. and the investors named therein + (incorporated by reference to Exhibit 99.3 of our Form 6-K (file no. + 001-33820) filed with the Securities and Exchange Commission on January + 21, 2010)
+
  +   +   +
+
4.36
+ 		  + +
Form + of Voting Agreement , dated January 21, 2010, by and among A-Power Energy + Generation Systems, Ltd., Jinxiang Lu and John S. Lin (incorporated by + reference to Exhibit 99.4 of our Form 6-K (file no. 001-33820) filed with + the Securities and Exchange Commission on January 21, + 2010)
+
  +   +   +
+
4.37
+ 		  + +
Form + of Lock-up Agreement, dated January 21, 2010, between A-Power Energy + Generation Systems, Ltd. and each of Jinxiang Lu and John S. Lin + (incorporated by reference to Exhibit 99.5 of our Form 6-K (file no. + 001-33820) filed with the Securities and Exchange Commission on January + 21, 2010)
+
  +   +   +
+
4.38**
+ 		  + +
Agreement + for Product Design & Development and Licensing of Wind Turbine + Technology, dated December 30, 2009, by and between A-Power Energy + Generation Systems, Ltd. and W2E Technologies GmbH
+
  +   +   +
+
 4.39*
+ 		  + +
Memorandum + of Understanding on Framework of Cooperation, dated January 28, 2008, + between A-Power Energy Generation Systems, Ltd. and Furhlander + AG
+
  +   +   +
+
 4.40*
+ 		  + +
Amended + and Restated Limited Liability Company Agreement, dated December 16, 2009, + between United States Renewable Energy Group Wind Partners I, LLC and + Shenyang Power Group Company
+
  +   +   +
+
 4.41*
+ 		  + +
Amendment + No. 1 to Amended and Restated Limited Liability Company Agreement, dated + February 12, 2010, between United States Renewable Energy Group Wind + Partners I, LLC and Shenyang Power Group
+
   
+
 4.42
+ 		 Stock + Purchase Agreement, dated September 19, 2009, between Liaoning GaoKe + Energy Group Company Limited and EVATECH Co. Ltd (incorporated by + reference to Exhibit 99.1 of our Form 6-K (file no. 001-33820) filed with + the Securities and Exchange Commission on December 2, 2009)
  +   +   +
+
8.1*
+ 		  + +
List + of Subsidiaries
+
  +   +   +
+
11.1
+ 		  + +
Code + of Conduct and Policy Regarding Reporting Possible Violations + (incorporated by reference to Annex G of the proxy statement/prospectus + contained in our registration statement on Form S-4 (file no. 333-142894) + originally filed with the Securities and Exchange Commission on May 11, + 2007)
+
  +   +   +
+
12.1*
+ 		  + +
Principal + Executive Officer Certification Pursuant to Section 302 of the + Sarbanes-Oxley Act of 2002
+
  +   +   +
+
12.2*
+ 		  + +
Principal + Financial Officer Certification Pursuant to Section 302 of the + Sarbanes-Oxley Act of 2002
+
  +   +   +
+
13.1*±
+ 		  + +
Principal + Executive Officer Certification Pursuant to Section 906 of the + Sarbanes-Oxley Act of 2002
+
  +   +   +
+
13.2*±
+ 		  + +
Principal + Financial Officer Certification Pursuant to Section 906 of the + Sarbanes-Oxley Act of 2002
+
  +   +   +
+
23.1*
+ 		  + +
Consent + of MSCM LLP
+
+
+
+
+
+
 
+
* Filed +with this Annual Report on Form 20-F.
+

+
** A +portion of the Exhibit was omitted and has been filed separately with the +Secretary of the Commission pursuant to an SEC order granting confidential +treatment thereof. Filed with this Annual Report on Form 20-F.
+
 
+
+
± This +certification is furnished pursuant to Rule 13a-14(b) and Section 1350 of +Chapter 63 of Title 18 of the United States Code and will not be deemed filed +for purposes of Section 18 of the Exchange Act, or otherwise subject to +liability of that section. This certification will not be deemed to be +incorporated by reference into any filing under the Securities Act or the +Exchange Act.

+
+
+
  +
+
+
+
94
+
+
+
+
+
+
  +
+
+

+
SIGNATURES
+
 
+
The +registrant hereby certifies that it meets all of the requirements for filing on +Form 20-F and that it has duly caused and authorized the undersigned to sign +this Annual Report on Form 20-F on its behalf.
+
 
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + +
  + +
A-POWER ENERGY GENERATION SYSTEMS, LTD.
+
  +   +   +
  + +
By:
+ 		+
/s/ + Jinxiang Lu
+
  +   + +
Jinxiang + Lu
+
  +   + +
Chairman + of the Board and Chief  Executive +Officer
+
+
+
+
+
Date: +March 31, 2010

+
+
+
  +
+
+
+
95
+
+
+
+
+
+
  +
+
+
+
  
+
+
A-POWER +ENERGY GENERATION SYSTEMS, LTD. AND SUBSIDIARIES
+

+
INDEX +TO CONSOLIDATED FINANCIAL STATEMENTS
+
 
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   +
Page
+ 		 
+
Report + of independent registered public accounting firm
+ 		  +
F-2
+ 		 
+
Consolidated + Financial Statements
+ 		   
+
Consolidated + Balance Sheets
+ 		  +
F-3
+ 		 
+
Consolidated + Statements of Income
+ 		  +
F-4
+ 		 
+
Consolidated + Statements of Comprehensive Income
+ 		  +
F-5
+ 		 
+
Consolidated + Statements of Stockholders’ Equity
+ 		  +
F-6
+ 		 
+
Consolidated + Statements of Cash Flows
+ 		  +
F-7
+ 		 
+
Notes + to Consolidated Financial Statements
+ 		  +
F-9
+ 		 
+
+
+
+
+
+
+
+
+
+
 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

+
REPORT +OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+
 
+
To the +Board of Directors and
+
Stockholders +of A-Power Energy Generation Systems, Ltd.
+
 
+
We have +audited the accompanying consolidated balance sheets of A-Power Energy +Generation Systems, Ltd. and subsidiaries (the “Company”) as of December 31, +2009 and 2008, and the related consolidated statements of income, comprehensive +income, stockholders’ equity and cash flows for each of the years in the +three-year period ended December 31, 2009.  The Company’s management +is responsible for these financial statements.  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.  An audit +includes examining, on a test basis, evidence supporting the amounts and +disclosures in the financial statements. An audit also includes assessing the +accounting principles used and significant estimates made by management, as well +as evaluating the overall financial statement presentation.  We +believe that our audits provide a reasonable basis for our opinion.
+
 
+
In our +opinion, the consolidated financial statements referred to above present fairly, +in all material respects, the financial position of the Company as of December +31, 2009 and 2008, and the results of its operations and its cash flows for each +of the years in the three-year period ended December 31, 2009 in conformity with +accounting principles generally accepted in the United States of +America.
+
 
+
We also +have audited, in accordance with the standards of the Public Company Accounting +Oversight Board (United States).  The Company’s internal control over +financial reporting as of December 31, 2009, based on criteria established in +Internal Control—Integrated +Framework issued by the Committee of Sponsoring Organizations of the +Treadway Commission (COSO), and our report dated March 31, 2010 expressed an +adverse opinion.
+
 
+
/s/ MSCM +LLP
+
MSCM +LLP
+
Toronto, +Canada
+
March 31, +2010
+
 
+
+
+
+
+
+
+
F-2
+
+
+
+
+
+
+
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+

+
Consolidated +Balance Sheets
+
(In +Thousands of United States Dollars)
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
        +  
+ 		  +
December + 31,
+ 		 
  +   +
2009
+ 		   +
2008
+ 		 
+
Assets +  
+ 		      
+
Current assets +  
+ 		      
+
Cash + and cash equivalents 
+ 		 $166,476  $44,518 
+
Restricted + cash (note + 4)
+ 		  13,399   2,608 
+
Accounts + receivable, net of allowance for doubtful accounts of $Nil (2008 - $Nil) + (note 5) +  
+ 		  12,463   7,238 
+
Prepayments, + deposits, other receivables (note 6) +  
+ 		  52,452   79,845 
+
Costs + and estimated earnings in excess of billings on uncompleted + projects 
+ 		  2,967   2,094 
+
Inventory + (note + 7)
+ 		  10,327   8,723 
+
Due + from related parties (note 22) +  
+ 		  105   1,297 
+
Total + current assets
+ 		  258,189   146,323 
  +         
+
Accounts + receivable, net of allowance for doubtful accounts of $Nil (2008 - $Nil) + (note 5) +  
+ 		  5,738   3,646 
+
Construction + in progress  (note + 9)
+ 		  —   18,006 
+
Property, + plant and equipment, net accumulated depreciation of $1,912 (2008 - $959) + (note 8) +  
+ 		  58,617   14,312 
+
Intangible + assets ,net accumulated depreciation of $169 (2008-Nil) (note + 10)
+ 		  22,412   12,564 
+
Deposits + on intangible assets (note 11) +  
+ 		  5,657   10,322 
+
Deferred + income tax asset (note + 20)
+ 		  2,321   364 
+
Long + term investment (note + 12)
+ 		  2,423   — 
+
Total assets +  
+ 		 $355,357  $205,537 
+
Liabilities and Stockholders’ + Equity  
+ 		        
+
Bank + loans (note 13) +  
+ 		 $19,852  $— 
+
Accounts + payable 
+ 		  15,415   12,909 
+
Other + payables and accrued liabilities  (note + 14)
+ 		  24,619   17,227 
+
Customer + deposits 
+ 		  9,994   13,350 
+
Billings + in excess of costs and estimated earnings on uncompleted + projects
+ 		  4,887   4,022 
+
Unearned + revenue
+ 		  1,419   — 
+
Due + to related parties (note + 22)  
+ 		  4,158   1,320 
+
Income + and business taxes payable  (note + 20)
+ 		  4,078   742 
+
Deferred + Income tax liability (note + 20)
+ 		  31   — 
+
Fair + value of forward contracts (note + 25)
+ 		  516   — 
+
Warrants + liability (note + 15)
+ 		  17,750   — 
+
Total + liabilities   
+ 		  102,719   49,570 
  +         
+
Commitments and + contingencies (note 24) +  
+ 		        
+
Stockholders' equity +  
+ 		        
+
Common + shares, 150,000,000 authorized with par value of $0.0001 per share, + 39,585,706
+
shares issued (2008 – 50,000,000 + authorized, 33,706,938 shares issued) + (note + 17) +  
+ 		  4   3 
+
Additional + paid-in capital 
+ 		  203,491   111,242 
+
Accumulated + other comprehensive income 
+ 		  6,459   6,578 
+
Statutory + reserves (note + 18)  
+ 		  4,155   4,155 
+
Retained + earnings 
+ 		  (1,651)  33,331 
+
Total + A-Power Energy Generation Systems Ltd. stockholders’ +equity
+ 		 $212,458  $155,309 
+
Noncontrolling + interest   (note + 16)
+ 		  40,180   658 
+
Total + stockholders’ equity   
+ 		  252,638   155,967 
+
Total liabilities and + stockholders’ equity  
+ 		 $355,357  $205,537 
+
+
+
+
+
+
+
+

+
  +The accompanying notes are an +integral part of these consolidated financial statements.
+
 
+
+
+
+
+
+
+
F-3
+
+
+
+
+
+
+
+
+
+
  
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Consolidated +Statements of Income
+
(In +Thousands of United States Dollars, Except per Share Amounts)
+
+
+
+
 
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   +    +
+
  +  
+ 		  + +
Years ended December 31,
+ 		  +
+
       +  
+ 		  + +
2009
+ 		  +   + +
2008
+ 		  +   + +
2007
+ 		  +
+
  +  
+ 		  +    +   +    +   +    +
+
Revenues +  
+ 		  + +
$
+ 		+
311,252
+ 		  +   + +
$
+ 		+
264,866
+ 		  +   + +
$
+ 		+
152,544
+ 		  +
+
Cost of sales and business + taxes  
+ 		  +   + +
260,167
+ 		  +   +   + +
227,990
+ 		  +   +   + +
131,987
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Gross profit +  
+ 		  +   + +
51,085
+ 		  +   +   + +
36,876
+ 		  +   +   + +
20,557
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Expenses +  
+ 		  +   +   +   +   +   +   +   +   +   +   +   +
+
Selling, + general and administrative expenses
+ 		  +   + +
12,845
+ 		  +   +   + +
8,700
+ 		  +   +   + +
3,482
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Income + from operations  
+ 		  +   + +
38,240
+ 		  +   +   + +
28,176
+ 		  +   +   + +
17,075
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Other expenses (incomes) +  
+ 		  +   +   +   +   +   +   +   +   +   +   +   +
+
Interest + costs
+ 		  +   + +
369
+ 		  +   +   + +
153
+ 		  +   +   + +
969
+ 		  +
+
Finance + costs
+ 		  +   + +
272
+ 		  +   +   + +
-
+ 		  +   +   + +
913
+ 		  +
+
Other + income 
+ 		  +   + +
(437)
+ 		  +   +   + +
(966
+ 		+
)
+ 		  +   + +
(250
+ 		+
) 
+
+
Accretion + expense on convertible notes
+ 		  +   + +
2,280
+ 		  +   +   + +
—
+ 		  +   +   + +
—
+ 		  +
+
Change + in fair value of warrants
+ 		  +   + +
11,596
+ 		  +   +   + +
—
+ 		  +   +   + +
—
+ 		  +
+
Change + in fair value of embedded derivative-convertible notes
+ 		  +   + +
25,611
+ 		  +   +   + +
—
+ 		  +   +   + +
—
+ 		  +
+
Make-whole + amount paid on conversion
+ 		  +   + +
9,886
+ 		  +   +   + +
—
+ 		  +   +   + +
—
+ 		  +
+
Fair + value of inducement issued to convertible notes holders on + conversion
+ 		  +   + +
     3,394
+ 		  +   +   + +
        —
+ 		  +   +   + +
         —
+ 		  +
             
+
Total + other expenses (incomes)
+ 		  +   + +
     52,971
+ 		  +   +   + +
(813)
+ 		  +   +   + +
         1,632
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Income before provision for + income taxes
+ 		  +   + +
(14,731)
+ 		  +   +   + +
28,989
+ 		  +   +   + +
15,443
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Provision + for income taxes (note + 20)  
+ 		  +   + +
1,792
+ 		  +   +   + +
71
+ 		  +   +   + +
190
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Net + (loss) Income
+ 		  +   + +
(16,523)
+ 		  +   +   + +
28,918
+ 		  +   +   + +
15,253
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Deduct: + Net income attributed to noncontrolling interest  (note + 16)
+ 		  +   + +
(169)
+ 		  +   +   + +
(402
+ 		+
) 
+ 		  +   + +
(39)
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Net + (loss) income attributable to A-Power Energy Generation Systems, + Ltd.
+ 		  +   + +
(16,692)
+ 		  +   +   + +
28,516
+ 		  +   +   + +
15,214
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
(Loss) earnings per + share (note + 21) : 
+ 		  +   +   +   +   +   +   +   +   +   +   +   +
+
Basic 
+ 		  + +
$
+ 		+
(0.49
+ 		+
 )
+ 		  + +
$
+ 		+
0.96
+ 		  +   + +
$
+ 		+
1.17
+ 		  +
+
Diluted 
+ 		  + +
$
+ 		+
(0.49
+ 		+
 )
+ 		  + +
$
+ 		+
0.94
+ 		  +   + +
$
+ 		+
1.17
+ 		  +
+
  +  
+ 		  +   +   +   +   +   +   +   +   +   +   +   +
+
Weighted average number of + shares outstanding:  
+ 		  +   +   +   +   +   +   +   +   +   +   +   +
+
Basic 
+ 		  +   + +
34,199,100
+ 		  +   +   + +
29,824,158
+ 		  +   +   + +
13,000,000
+ 		  +
+
Diluted 
+ 		  +   + +
34,199,100
+ 		  +   +   + +
30,432,434
+ 		  +   +   + +
13,000,000
+ 		  +
+
+
+
+
+
+
+
+
+
+
+

+
The +accompanying notes are an integral part of these consolidated financial +statements
+
 
+
+
+
+
+
+
+
F-4
+
+
+
+
+
+
+
+
+
+

+
A-Power +Energy Generation Systems, Ltd. and subsidiaries
+
Consolidated +Statements of Comprehensive Income
+
(In +Thousands of United States Dollars, Except per Share Amounts) + +
+
 
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
  +  
+ 		  +
Years ended December 31,
+ 		 
+
       +  
+ 		  +
2009
+ 		   +
2008
+ 		   +
2007
+ 		 
             
+
Net + (loss) Income
+ 		 $(16,523) $28,918  $15,253 
  +             
+
Other comprehensive + income  
+ 		            
             
+
(Loss) + gain in foreign exchange translation
+ 		  (119)  4,562   1,542 
  +             
+
Comprehensive + (loss) income
+ 		 $(16,642) $33,480  $16,795 
  +             
+
Add: + Comprehensive income attributable to noncontrolling + interest
+ 		  (169)  (402)  (39)
  +             
+
Comprehensive + (loss) income attributable to A-Power Energy Generation Systems, + Ltd.
+ 		 $(16,811) $33,078  $16,756 
+
+
+
+
+
+
+
+
+
+
+
+
+

+
The +accompanying notes are an integral part of these consolidated financial +statements
+
 
+
+
+
+
+
+
+
F-5
+
+
+
+
+
+
+
+
+
+

+
A-Power Energy Generation Systems, Ltd. and +Subsidiaries
+
Consolidated +Statements of Stockholders’ Equity
+
(In +Thousands of United States Dollars)
+

+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
    +
Common
+
Shares
+ 		   +
Share
+
Value
+ 		   +
Additional
+
paid-in
+
Capital
+ 		   +
Acc. Other
+
Comp.  Income
+
(loss)
+ 		   +
Statutory
+
Reserves
+ 		   +
Retained
+
Earnings
+
(loss)
+ 		   +
Noncontrolling
+
Interest
+ 		   +
Total
+ 		 
+
Balance, + December
+
31, + 2007 
+ 		  13,000,000  $1   3,391  $2,016  $3,307  $22,563  $256  $31,534 
+
Recapitalization + in connection with Share Exchange Transaction
+ 		  7,000,000   1   —   —   —   —   —   1 
+
Conversion + of preferred stock to common stock in connection with Share Exchange + Transaction
+ 		  650,000   —   —   —   —   —   —   — 
+
Paid + in capital of acquiree recorded in connection with Share Exchange + Transaction
+ 		  —   —   30,968   —   —   —   —   30,968 
+
Capital + stock issued as an exercise of option
+ 		  190,635   —   —   —   —   —   —   — 
+
Warrants + redeemed
+ 		  11,866,303   1   59,328   —   —   —   —   59,329 
+
Merger + related shares issued re 2007 performance
+ 		  1,000,000   —   12,600   —   —   (12,600)  —   — 
+
Incentive + shares related to 2008 performance
+ 		  —   —   4,300   —   —   (4,300)  —   — 
+
Stock + based compensation
+ 		  —   —   836   —   —   —   —   836 
+
Elimination + of acquiree opening deficit
+ 		  —   —   (181)  —   —   —   —   (181)
+
Foreign + currency translation adjustment
+ 		  —   —   —   4,562   —   —   —   4,562 
+
Adjustment + to statutory reserves  
+ 		  —   —   —   —   848   (848)  —   — 
+
Noncontrolling + Interest
+ 		  —   —   —   —   —   —   402   402 
+
Net + income
+ 		  —   —   —   —   —   28,516   —   — + 28,516 
+
Balance, + December 31, 2008
+ 		  33,706,938   3   111,242   6,578   4,155   33,331   658   155,967 
+
Incentive + shares
+
issued + re 2008 performance
+ 		  1,000,000   —   —   —   —   —   —   — 
+
Conversion + of $40 million convertible notes
+ 		  4,878,768   1   72,357   —   —   —   —   72,358 
+
Inventive + shares related to 2009 performance
+ 		  —   —   18,290   —   —   (18,290)  —   — 
+
Stock-based + Compensation
+ 		  —   —   1,602   —   —   —   —   1,602 
+
Net + income
+ 		  —   —   —   —   —   (16,692)  169   (16,523)
+
Noncontrolling + shareholder capital injection
+ 		  —   —   —   —   —   —   39,353   39,353 
+
Foreign + currency translation adjustment
+ 		  —   —   —   (119)  —   —   —   (119)
+
Balance, + December 31, 2009
+ 		  39,585,706  $4  $203,491  $6,459  $4,155  $(1,651) $40,180  $252,638 
+
+
+
+
+
+
 
+
The +accompanying notes are an integral part of these consolidated financial +statements.
+
 
+
+
+
+
+
+
+
F-6
+
+
+
+
+
+
+
+
+
+
 
+
A-Power Energy Generation Systems, Ltd. and +Subsidiaries
+
Consolidated +Statements of Cash Flows
+
(In +Thousands of United States Dollars)
+

+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
  +  
+ 		  +
Years ended December 31,
+ 		 
+
    +  
+ 		  +
2009
+ 		   +
2008
+ 		   +
2007
+ 		 
+
 
+ 		         
+
Cash + flows from operating activities:
+ 		            
+
Net + income  
+ 		 $(16,523) $28,918  $15,253 
  +             
+
Adjustments + to reconcile net income to cash provided by (used + in) operating activities:  
+ 		            
+
Stock-based + compensation
+ 		  1,602   836   — 
+
Amortization
+ 		  1,628   385   187 
+
Accretion + on promissory note 
+ 		  —   —   192 
+
Issuance + cost 
+ 		  —   —   721 
+
Future + income tax recovery 
+ 		  (1,924)   (358)  — 
+
Payment + to a supplier by a non-monetary item 
+ 		  —   —   16 
+
Gains + from disposition of property, plant and equipment
+ 		  (42)  —   (5 + )
+
Loss + recognized from GE Joint Venture
+ 		  85   —   — 
+
Change + in fair value of warrants
+ 		  11,596   —   — 
+
Change + in fair value of embedded derivatives
+ 		  25,611   —   — 
+
Accretion + expense on convertible notes
+ 		  2,280   —   — 
+
Make-whole + amount paid on conversion
+ 		  9,886   —   — 
+
Fair + value of inducement issued to convertible note holders on + conversion
+ 		  3,394   —   — 
  +             
+
Changes + in operating assets and liabilities: 
+ 		            
+
Accounts + receivable 
+ 		  (7,387 + )  13,345   (16,295)
+
Costs + and estimated earnings in excess of billings on uncompleted + contracts 
+ 		  (873)  (2,056)  834 
+
Prepayments, + deposits and other receivables  
+ 		  28,612   (66,010 + )  18,623 
+
Inventory +  
+ 		  (1,608)  (8,565 + )  — 
+
Accounts + payable and accrued liabilities 
+ 		  5,740   (3,588 + )  11,815 
+
Customer + deposits 
+ 		  (3,347)    10,505   (7,110 + )
+
Billings + in excess of costs and estimated earnings on uncompleted + contracts
+ 		  867   3,949   — 
+
Due + to (from) related parties
+ 		  26   —   — 
+
Unearned + revenue
+ 		  1,418   —   — 
+
Income + and business taxes payable 
+ 		  3,334   320   (3,119)
+
Net + cash provided by (used in) operating activities +  
+ 		  64,375   (22,319 )  21,112 
  +             
+
Cash + flows from investing activities: +  
+ 		            
+
Increase + in restricted bank balances
+ 		  (10,782)  (2,608 + )  — 
+
Proceeds + from sale of property, plant and equipment 
+ 		  92 + )  —   — 
+
Purchase + of property, plant and equipment 
+ 		  (23,634)  (6,091)  (495)
+
Payments + of deposits on intangible assets
+ 		  (9)  (6,575)  (4,124 + )
+
Purchase + of intangible assets
+ 		  (1,302)  (3,750 + )  — 
+
Construction + in progress 
+ 		  —   (17,681 + )  — 
+
Loans + to third parties 
+ 		  (1,400)  (8,873 + )  — 
+
Cash + received from Chardan upon recapitalization
+ 		  —   31,748   — 
+
Liabilities + assumed from A-Power
+ 		  —   (1,008 + )  — 
+
Long + term investment
+ 		  (2,507)  —   — 
+
Net + cash (used in) investing activities +  
+ 		  (39,542)  (14,838)  (4,619)
+
+
+
+
+
+
+
+
+
+
+
 
+
+
+
+
+
+
+
F-7
+
+
+
+
+
+
+
+
+
+

+
A-Power +Energy Generation Systems Ltd. and Subsidiaries
+
Consolidated +Statements of Cash Flows (continued)
+
(In +Thousands of United States Dollars)
+
 
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
   
+ 		  + +
Years ended December 31,
+ 		  +
+
     
+ 		  + +
2009
+ 		  +   + +
2008
+ 		  +   + +
2007
+ 		  +
+
Cash flows from financing + activities:  
+ 		  +    +   +    +   +    +
+
Proceeds + from bank loans 
+ 		  +   + +
20,354
+ 		  +   +   + +
—
+ 		  +   +   + +
—
+ 		  +
+
Proceeds + from share capital, net of cost 
+ 		  +   + +
35,453
+ 		  +   +   + +
59,330
+ 		  +   +   + +
2,871
+ 		  +
+
Proceeds + from notes payable, net of cost 
+ 		  +   + +
—
+ 		  +   +   + +
—
+ 		  +   +   + +
14,279
+ 		  +
+
Repayment + of bank loans
+ 		  +   + +
—
+ 		  +   +   + +
(1,008
+ 		+
)
+ 		  +   + +
—
+ 		  +
+
Repayment + of notes payable
+ 		  +   + +
—
+ 		  +   +   + +
(15,000
+ 		+
)
+ 		  +   + +
—
+ 		  +
+
Repayments + of related party notes 
+ 		  +   + +
—
+ 		  +   +   + +
—
+ 		  +   +   + +
(7,301
+ 		+
)
+
+
Due + to related parties 
+ 		  +   + +
—
+ 		  +   +   + +
128
+ 		  +   +   + +
(12
+ 		+
)
+
+
Due + to shareholder 
+ 		  +   + +
4,000
+ 		  +   +   + +
—
+ 		  +   +   + +
194
+ 		  +
+
Proceeds + from issuance of convertible notes
+ 		  +   + +
37,097
+ 		  +   +   + +
—
+ 		  +   +   + +
—
+ 		  +
+
Net cash provided by financing + activities  
+ 		  +   + +
96,904
+ 		  +   +   + +
43,450
+ 		  +   +   + +
10,031
+ 		+
 
+
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Effect + of exchange rate change  
+ 		  +   + +
221
+ 		  +   +   + +
2,393
+ 		  +   +   + +
791
+ 		  +
+
Net increase in cash and cash + equivalents  
+ 		  +   + +
121,958
+ 		  +   +   + +
8,686
+ 		  +   +   + +
27,315
+ 		  +
  +   +   +   +   +   +   +   +   +   +   +   +   +
+
Cash + and cash equivalents, beginning of year
+ 		  +   + +
44,518
+ 		  +   +   + +
35,832
+ 		  +   +   + +
8,517
+ 		  +
+
Cash + and cash equivalents, end of year
+ 		  + +
$
+ 		+
166,476
+ 		  +   + +
$
+ 		+
44,518
+ 		  +   + +
$
+ 		+
35,832
+ 		  +
+
  +  
+ 		  +   +   +   +   +   +   +   +   +   +   +   +
+
Supplemental disclosures of + cash flow information:  
+ 		  +   +   +   +   +   +   +   +   +   +   +   +
+
Interest + paid
+ 		  + +
$
+ 		+
173
+ 		  +   + +
$
+ 		+
1,035
+ 		  +   + +
$
+ 		+
65
+ 		  +
+
Taxes + paid  
+ 		  + +
$
+ 		+
632
+ 		  +   + +
$
+ 		+
—
+ 		  +   + +
$
+ 		+
60
+ 		  +
+
+
+
+

+
The +accompanying notes are an integral part of these consolidated financial +statements.
+
 
+
+
+
+
+
+
+
F-8
+
+
+
+
+
+
+
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+
+ + + + + +
+
1. 
+ 		+
Nature + of Operations and Basis of Presentation (Summary of + Organization)
+
+
+
+
+

+
A-Power +Energy Generation Systems, Ltd. (“A-Power” or the “Company”), formerly known as +China Energy Technology Limited, was established under the laws of the British +Virgin Islands (“BVI”) on May 14, 2007, as a subsidiary of Chardan South China +Acquisition Corporation (“Chardan”).  Its purposes were to merge with +Chardan and to hold a 100% interest in Head Dragon Holdings Limited (“Head +Dragon”) upon the completion of a reverse acquisition transaction with +recapitalization (the “1/18/08 Transaction”), as described in Note 3 to the +consolidated financial statements.  As of December 31, 2009, details of the +Company’s subsidiaries are as follows:
+

+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Name of company
+ 		  +
Place of
+
incorporation
+ 		  +
Date of 
+
incorporation
+ 		  + +
Percentage of 
+
ownership interest 
+
attributable to the
+
Company
+ 		  + +
Principal activity
+
segment
+
  +    +    +   + +
Directly
+ 		  +   + +
Indirectly
+ 		  +   +
  +    +    +   +    +   +    +   +
+
Head + Dragon Holdings Limited
+
(“Head + Dragon”)
+ 		  +
Hong + Kong
+ 		  +
June + 2006
+ 		  +   + +
100
+ 		+
%
+ 		  +   + +
—
+ 		  + +
Investment + holding
+
  +    +    +   +   +   +   +   +   +   +   +   +
+
Easy + Flow Limited (“Easy Flow”)
+ 		  +
Hong + Kong
+ 		  +
June + 2007
+ 		  +   + +
100
+ 		+
%
+ 		  +   + +
—
+ 		  + +
Investment + holding
+
  +    +    +   +   +   +   +   +   +   +   +   +
+
Liaoning + GaoKe Energy Group Company Limited  (“GaoKe + Energy”)
+ 		  +
People’s + Republic of China (“PRC”)
+ 		  +
March + 2003
+ 		  +   + +
—
+ 		  +   +   + +
100
+ 		+
%  
+ 		+
Construction + of distributed power generation systems
+
  +    +    +   +   +   +   +   +   +   +   +   +
+
Liaoning + GaoKe (High-Tech) Energy Saving and Thermoelectricity Design Research + Institute (“GaoKe Design”)
+ 		  +
PRC
+ 		  +
May + 2003
+ 		  +   + +
—
+ 		  +   +   + +
51
+ 		+
%
+ 		+
Design + of distributed power generation systems
+
  +    +    +   +   +   +   +   +   +   +   +   +
+
Liaoning + International Construction and Engineering Group Limited
+
(“LICEG + Ltd.”)
+ 		  +
PRC
+ 		  +
August + 2007
+ 		  +   + +
—
+ 		  +   +   + +
90
+ 		+
%
+ 		+
Construction + of infrastructure, industrial buildings, and residential real estate + properties
+
  +    +    +   +   +   +   +   +   +   +   +   +
+
Shenyang + (Ruixiang) Lucky Wind Power Equipments Co., Ltd. + (“Ruixiang”)
+ 		  +
PRC
+ 		  +
July + 2007
+ 		  +   + +
—
+ 		  +   +   + +
100
+ 		+
%
+ 		+
Manufacture + of wind energy turbines
+
  +    +    +   +   +   +   +   +   +   +   +   +
+
Shenyang + (Jinxiang) Gold Luck Electric Power Equipment Co., Ltd. + (“Jinxiang”)
+ 		  +
PRC
+ 		  +
January + 2008
+ 		  +   + +
—
+ 		  +   +   + +
80
+ 		+
%
+ 		+
Manufacture + of wind energy turbines
+
  +    +    +   +   +   +   +   +   +   +   +   +
+
Shenyang + Yixiang Wind
+
Power + Equipment Limited
+
(“Yixiang”)
+ 		  +
PRC
+ 		  +
July + 2009
+ 		  +   + +
—
+ 		  +   +   + +
100
+ 		%  + +
Manufacture + of wind
+
energy + turbine components
+
  +    +    +   +   +   +   +   +   +   +   +   +
+
Shenyang + Power Group Ltd.
+
(“Power”)
+ 		  +
PRC
+ 		  +
May + 2009
+ 		  +   + +
—
+ 		  +   +   + +
62
+ 		%  + +
Construction + of electricity generation projects and manufacture of power + equipment
+
  +    +    +   +   +   +   +   +   +   +   +   +
+
Shoulong + Energy Co., Ltd.
+
(“Shoulong”)
+ 		  +
Thailand
+ 		  +
July + 2009
+ 		  +   + +
—
+ 		  +   +   + +
100
+ 		% + +
Construction + of distributed power generation systems
+
 
+
+
Shenyang + Longxiang Wind Power Techologies Limited ("Longxiang")
+ 		  +
PRC
+ 		  +
October + 2009
+ 		  +   + +
—
+ 		  +   +   + +
100
+ 		%  + +
Research + and development, consultant service for wind turbine + business
+
+
+
+
+
+
+
+
+
+
+
+
+
+
 
+
+
+
+
+
+
+
F-9
+
+
+
+
+
+
+
+
+
+
 
+
Head +Dragon was incorporated in June 2006 in Hong Kong to act as a holding company +for its 100% subsidiary, GaoKe Energy.  Prior to the reverse +acquisition of A-Power, Head Dragon was wholly-owned by Mr. Jinxiang Lu, the +current Chief Executive Officer of the Company.
+

+
Easy Flow +was incorporated in June 2007 in Hong Kong to act as a holding company for its +100% subsidiary, Ruixiang, and its 80% subsidiary, Jinxiang.  Easy +Flow and its subsidiaries were owned by the current Chief Operation Officer of +the Company on behalf of A-Power.  The ownership was transferred to +A-Power in June 2008 at a nominal cost.
+

+
Since the +current Chief Operation Officer of A-Power owned Easy Flow on behalf of the +Company before the ownership transfer in June 2008, Easy Flow and its +subsidiaries were consolidated within A-Power’s financial statements throughout +the years ended December 31, 2009, 2008 and 2007.
+

+
GaoKe +Energy was incorporated in the PRC in March 2003 as a construction company +specializing in new energy or renewable energy power-stations and micro-power +networks within the PRC.  GaoKe Energy became a 100% subsidiary of +Head Dragon in June 2006.  Thereafter, GaoKe Energy has been a Foreign +Investment Enterprise starting from January 1, 2007.  GaoKe Energy is +a 51% owner of its subsidiary GaoKe Design, and a 90% owner of its subsidiary, +LICEG Ltd.  Prior to the sale to Head Dragon, GaoKe Energy was +wholly-owned by Mr. Jinxiang Lu.
+
 
+
GaoKe +Design was incorporated in the PRC in May 2003 as a design company specializing +in new energy or renewable energy power-stations and micro-power +networks.  GaoKe Design was incorporated as a 51% subsidiary of GaoKe +Energy with minority ownership of 36% held by Mr. Jinxiang Lu, and 13% held by +Ms. Haixue Yu, the wife of Mr. Jinxiang Lu.
+
 
+
LICEG, +Ltd. was incorporated in August 2007 in the PRC as a construction +company. LICEG, Ltd. was incorporated as a joint venture with 90% majority +ownership held by GaoKe Energy and 10% minority ownership held by Liaoning +International Construction and Engineering Group (“LICEG”), a PRC state-owned +construction and engineering company, which holds a Class A construction +license.  LICEG Ltd. intends to obtain the Class A construction +license from LICEG, enabling it to specialize in power and infrastructure +projects of any size both domestically in the PRC and +internationally.
+
 
+
Ruixiang +was incorporated in July 2007 in the PRC as a manufacturing company specializing +in the production of 2.7 MW wind turbines based on the technology of Fuhrlander +AG, a German technology company.  Ruixiang was incorporated as a 100% +subsidiary of Easy Flow and became an indirect 100% subsidiary of A-Power when +Easy Flow was transferred to A-Power in June 2008.
+
 
+
Jinxiang +was incorporated in January 2008 in the PRC as a manufacturing company +specializing in the production of 750 kW and 225 kW wind turbines based on the +technology of Norwin A/S, a Danish technology company.  Jinxiang was +incorporated as an 80% subsidiary of Easy Flow with minority ownership of 15% +held by Norwin A/S and 5% held by Mr. Antos Glogowski, an independent +consultant.  Jinxiang became an indirect 80% subsidiary of A-Power +when Easy Flow was transferred to A-Power in June 2008.
+
 
+
Yixiang +was incorporated in June 2009 in the PRC as a manufacturing company specializing +in the production of wind turbine components to establish a joint venture with +GE Drivetrain Technologies, a unit of GE Transportation, namely, GE Drivetrain +Technologies (Shenyang) Co., Ltd.. As of December 31, 2009, the Company had +contributed 50% of its share of equity amounting to $2,508 (RMB17,125,000 )of +$5,016(RMB34, 250,000).
+

+
Power was +incorporated in May 2009 in the PRC as a construction company specialized in +electricity generation projects and manufacturer of power equipment. Its +registered capital is $147,000 (RMB1,000 million) of which Gaoke Energy, LICEG +Ltd., Ruixiang and Jinxiang, all on behalf of A-Power, committed to contribute +62% of the registered capital and the remainder from other various non-related +entities. As of December 31, 2009, 62% of the registered capital was paid by +A-Power Group, and 24.2% of the registered capital was paid by other non-related +entities.
+
 
+
+
+
+
+
+
+
F-10
+
+
+
+
+
+
+
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
Shoulong +was incorporated in July 2009 in Bangkok, Thailand, specializing in the +construction of distributed power generation systems. 48.997% of its ownership +is held by Gaoke Energy and 51% of its ownership is held by Sombat +Chotviriyakul, a non-related party. The remaining 0.003% of its ownership is +held by Lu Jia, Sun Guangmin and Wang Guijuan, equally, on behalf of Gaoke +Energy. In July 2009, Gaoke Energy advanced a non-interest bearing loan of $150 +to Sombat Chotviriyakul for his share of capital to Shoulong. Sombat +Chotviriyakul is not entitled to the profit or loss of Shoulong, but holds the +equity on behalf of Gaoke. Sun Guangmin, Lu Jia and Wang Guijuan, who are the +staff of A-Power, together with Sombat Chotviriyakul, are directors of Shoulong. +Pursuant to the Articles of Association of Shoulong, the majority of directors +present forms a quorum for the transaction of business. Therefore, the Company +is considered to be the ultimate holding Company of Shoulong, and therefore, +consolidates Shoulong’s financial results.
+
 
+
Longxiang +was incorporated in October 2009 in the PRC as a manufacturing company +specializing in research and development, consultant service for wind turbine +business.
+

+
Except +for Shoulong, as of December 31, 2009, all the operating subsidiaries as +described above are engaged in businesses in the PRC.
+

+
+
+ + + + + +
+
2.
+ 		+
Summary + of Significant Accounting +Policies
+
+
+
+

+
Principle +of consolidation
+

+
The +consolidated financial statements include the accounts of the Company and its +subsidiaries. All significant intercompany transactions and balances are +eliminated during the consolidation process.  These consolidated financial +statements have been prepared in accordance with the accounting principles +generally accepted in the United States of America (“U.S. GAAP”).
+

+
Foreign +currency translation
+

+
The +functional currency of the Company’s operating unit subsidiaries in the PRC is +the Chinese Yuan Renminbi (“RMB”), the functional currency of Shoulong is Thai +Bhat, and the functional currency of the Company and its holding company +subsidiaries is the U.S. Dollar.  The accompanying consolidated +financial statements have been translated as necessary and presented in U. S. +Dollars according to the accounting standard, “Foreign Currency +Translation.”  In accordance with Foreign Currency Translation, all +assets and liabilities were translated at the current exchange rate at the +balance sheet dates, stockholders' equity was translated at the historical +rates, and the consolidated statements of income and comprehensive income and +consolidated statements of cash flows were translated at the average exchange +rates for the periods.  As of December 31, 2009, the assets and +liabilities of the Company maintained in RMB were translated to U.S. Dollars at +US $1.00 = RMB 6.8259 (US $1.00 = RMB 6.8225 and 7.2946 respectively at December +31, 2008 and 2007), and the consolidated statements of income and comprehensive +income of the Company maintained in RMB was translated to U.S. Dollars at US +$1.00 = RMB6.8307(US $1.00 = RMB6.9477 and 7.6072 respectively in 2008 and +2007).  Adjustments resulting from the translation of financial +statements from RMB into U.S. dollars are recorded in the consolidated +statements of stockholders’ equity and the consolidated statements of income and +comprehensive income as a foreign currency translation adjustment and in the +consolidated balance sheets in stockholders’ equity as part of accumulated other +comprehensive income, in accordance with the accounting standard, “Reporting +Comprehensive Income”.  The foreign currency translation adjustment of +($119), $4,562 and $1,542 have been reported as such in the consolidated +statements of stockholders’ equity and the consolidated statements of income and +comprehensive income for the years ended December 31, 2009, 2008 and 2007 +respectively and as part of accumulated other comprehensive income in the +consolidated balance sheets.
+

+
The value +of the RMB against the U.S. Dollar and other currencies may fluctuate and is +affected by, among other things, changes in PRC's political and economic +conditions. Any significant revaluation of RMB may materially affect the +Company’s financial condition reported in U.S. Dollars.
+

+
Chinese +government regulations allow convertibility of RMB to U.S. Dollars for current +account transactions, but, as significant restrictions are present, such +translations should not be construed as representations that RMB could be +converted into U.S. Dollars at the translation rate or at any other +rate.
+
 
+
+
+
+
+
+
+
F-11
+
+
+
+
+
+
+
+
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
Use +of estimates
+

+
The +preparation of financial statements in conformity with U.S. GAAP requires +management to make estimates and assumptions that affect the reported amounts of +assets and liabilities and disclosure of contingent assets and liabilities at +the date of the financial statements and the reported amounts of income and +expenses during the reporting period.  Actual results could differ +from those estimates.
+

+
 Revenue +recognition
+

+
Revenues +are generated from the design and construction of new energy or renewable energy +power stations, micro-power networks, infrastructure, industrial buildings, and +residential real estate properties.  The contracts for the design and +construction of customized energy systems +and networks are legally enforceable binding agreements between the Company and +its customers.  Performance of these contracts often will extend over long +periods, and the Company’s right to receive payments depends on its performance +in accordance with these contractual agreements.  The duration of contracts +varies from several months to eighteen months or more.  The operating +cycle of the Company is determined by a composite of many individual contracts +in various stages of completion and is measured by the duration of the average +time intervening between the acquisition of materials or service entering the +construction process and the substantial completion of contracts. + 
+

+
Revenue +for the construction segment is recognized using the percentage of completion +method of accounting, in accordance with the accounting standard, “Accounting +for Construction Contracts and Certain Production-Type +Contracts”.  Revenue recognition is based on an estimate of the income +earned to date based on percentage of completion, less income recognized in +earlier periods.  Estimates of the degree of completion of a contract +are based on the actual direct costs incurred to date compared with the expected +total direct contract costs.  Direct costs include, but are not limited to, +direct labor, equipment rent, subcontracting, direct materials, and direct +overhead incurred after the receipt of a contract.  General and +administrative expenses are accounted for as period costs and are, therefore, +not included in the percentage of completion calculation.  The +progress of subcontractors is evaluated on a monthly basis in a construction +progress report generated by a Company project manager and verified by +representatives of the subcontractor and of the Company.
+

+
Revisions +in contract revenue, contract costs, and profit estimates are made in the period +in which the circumstances requiring the revision are identified. + Provisions for anticipated loss on uncompleted contracts, if any, are made +immediately upon identification of the anticipated loss.  To date, the +Company has not experienced any material losses on either contracts in process +or on completed contracts.
+

+
Claims to +additional contract revenue are recognized only to the extent that related costs +have been incurred, that evidence of a sound legal basis for the claim exists, +and that it is probable that such claims will result in additional contract +revenues.  Total claim amounts reported by the Company are approximate +and are subject to revision as final documentation, resolution of issues, +settlements progress and/or payments are received.  Revenue in excess +of billings on uncompleted contracts is considered unbilled revenue and reported +as a current asset on the consolidated balance sheets.  Billings in +excess of revenues on uncompleted contracts is considered unearned revenue and +reported as a current liability on the consolidated balance sheets.
+

+
Wind +turbine revenues involve the provision of multiple elements. For wind turbine +sales, the Company determines whether the contract or arrangement contains more +than one unit of accounting. An arrangement is separated if (1) the +delivered element(s) has (have) value to the customer on a stand-alone basis, +(2) there is reliable evidence of the fair value of the undelivered +element(s) and (3), if the arrangement includes a general right of return +relative to the delivered element(s), delivery or performance of the undelivered +element(s) is (are) considered probable and substantially in the control of the +Company. If all three criteria are fulfilled, the appropriate revenue +recognition convention is then applied to each separate unit of accounting. +Generally, the total arrangement consideration is allocated to the separate +units of accounting based on their relative fair values. Reliable fair values +are sales prices for the component when it is regularly sold on a stand-alone +basis, third-party prices for similar components or, under certain +circumstances, cost plus, an adequate business specific profit margin related to +the relevant element. If the three criteria are not met, revenue is deferred +until such criteria are met or until the period in which the last undelivered +element is delivered. The amount allocable to the delivered elements is limited +to the amount that is not contingent upon delivery of additional elements or +meeting other specified performance conditions. For multiple element contracts +where there is no vendor specific objective evidence (VSOE) or third-party +evidence that would allow the allocation of an arrangement fee amongst various +pieces of a multi-element contract, fees received in advance of services +provided are recorded as deferred revenues until additional operational +experience or other VSOE becomes available, or until the contract is +completed.
+
 
+
+
The +Company recognizes wind turbine manufacturing revenue under the guidance found +in ASU 2009-13 Multiple-Deliverable Revenue Arrangement. The manufacture of wind +turbines comprises two stages: (a) manufacture; and (b) installation. These two +stages constitute separate units of accounting. We recognize 90% of manufacture +stage revenue when we complete manufacture of our turbines and receive notice of +customer acceptance. We defer recognition of 10% wind turbine manufacture +revenue, which is recognized at the end of the quality assurance and warranty +period of 18 months following execution of contracts associated with the sale of +our wind turbines. In the fiscal year ended December 31, 2009, we recognized +total revenue from our wind turbine operations of $32,700, consisting of revenue +recognized for the manufacture of ten 2.7MW wind turbines. We recognize +installation stage revenue consistent with the Distributed Power Generation +segment revenue recognition policy.
+
+
 
+
+
+
+
+
+
+
F-12
+
+
+
+
+
+
+
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
The +company generated revenue of $311,252 in 2009, of which approximately 83.9% was +generated from the construction segment, and approximately 10.5% generated form +wind business segment. The remaining 5.6% was generated from other +segments.
+

+
Concentration +of risks
+

+
The +Company maintains cash balances, at times, with U.S financial institutions in +excess of amounts insured by the Federal Deposit Insurance +Corporation.  Management monitors the soundness of these institutions +and considers the Company’s risk negligible.
+

+
Additionally, +the Company maintains cash balances with state-owned banks within the PRC, as +substantially all of the Company’s revenue and expenses are denominated in +RMB.  No deposits are covered by insurance.  The Company has +not experienced any losses in such accounts.  Management also monitors +currency fluctuations and associated risks.
+

+
Cash +and cash equivalents
+

+
Cash and +cash equivalents are comprised of cash on hand and  short-term, highly +liquid investments with original maturities of three months or less that are +readily convertible to known amounts of cash and which are subject to an +insignificant risk of change in value.  As of December 31, 2009 and +2008, the Company did not have any cash equivalents.
+

+
Accounts +receivable
+

+
Trade +accounts receivable arise when the Company has invoiced a customer for work +performed on a contract, but payment for the work has not yet been received and +are recorded as current accounts receivable.  
+

+
For the +Distributed generation business, Customers typically withhold 5% of each invoice +amount as security for performance of any additional work that is required +during the warranty period, which is normally the year following the customer’s +initial acceptance of the completed project.  These retentions +withheld by customers with a remaining warranty period of one year or less are +recorded as current accounts receivable, and retentions withheld by customers +with a remaining warranty period greater than one year are recorded as +non-current accounts receivable.
+

+
The +Company recognizes an allowance for doubtful accounts to ensure accounts +receivable are not overstated due to potential uncollectibility.  An +allowance is made when objective evidence exists that the Company may not be +able to collect all amounts due according to the original terms of receivables, +and bad debts are written off when uncollectibility is +confirmed.  Based on its experience, the warranty claims are in turn +satisfied by the Company’s subcontractors with no material expenditures required +by the Company, and no significant events have occurred to indicate potential +uncollectibility from customers.  Therefore, an allowance for doubtful +accounts of $Nil and $Nil was recorded as of December 31, 2009 and 2008, +respectively.  Bad debt expensed for the years ended December 31, +2009, 2008 and 2007 amounted to $Nil.
+

+
Prepayments +and other receivables
+

+
The +Company typically makes down payments of 10% to 15% of total contract price due +to a vendor upon or immediately following the execution of a +contract.  This down payment is recorded as an asset as deposits or +prepayments.  The remaining balance of the contract price is paid over +the term of the contract as work is completed by the vendor.
+
 
+
+
+
+
+
+
+
F-13
+
+
+
+
+
+
+
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
Inventory
+

+
Inventory +is comprised of raw materials and low value consumables, work-in-progress, and +finished goods.   Inventories are stated at the lower of cost or +market based on weighted average method.  Work-in-progress represents +the costs of inventory for manufacturing projects which have been initiated in +accordance with specific contracts with customers but have not been completed. + The Company makes provisions for estimated excess and obsolete inventory +based on its periodic reviews of inventory quantities on hand and forecasts of +product demand and production requirements from its customers.  The Company +writes down inventories for not saleable, excess, or obsolete raw materials, +work-in-process, and finished goods by increasing cost of sales for the amount +of the write-down.  As of December 31, 2009, all inventory balance was +classified as raw materials and goods in transit and was recorded at cost with +no write-downs to date.  Shipping and handling costs are included in +the inventory balance and are allocated to the related inventory. As of December +31, 2009, all inventory balances related to the wind turbine +business.
+

+
Land +use rights
+

+
Private +ownership of land is not permitted in the PRC.  Entities purchase the +right to use land for a designated term from the Chinese +government.
+

+
Land use +rights were purchased from the Chinese government and are recorded at historical +cost as intangible assets.  The term of the rights is determined by +the Chinese government when the land use rights are granted.  The +rights are subject to amortization over the term of the rights (35 to 50 years) +using the straight-line method of amortization.
+

+
Property, +plant and equipment
+

+
Property, +plant and equipment are recorded at cost and are stated net of +depreciation.  Depreciation expense is determined using the +straight-line method over the estimated useful lives of the assets, with a +residual value of 0% to 10%.  Leasehold improvements are amortized +over the lesser of their economic useful lives or the term of the related +leases.  The estimated asset useful lives are as follows:
+

+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Buildings
+ 		  + +
35
+ 		  + +
Years
+
+
Machinery + and equipment
+ 		  + +
5 - + 14
+ 		  + +
Years
+
+
Vehicles
+ 		  + +
4 - + 6
+ 		  + +
Years
+
+
Office + equipment
+ 		  + +
5 - + 8
+ 		  + +
Years
+
+
Computer + software
+ 		  + +
3
+ 		  + +
Years
+
+
Leasehold + improvements
+ 		  + +
lease + term
+ 		  +   +
+
+
+

+
Expenditures +for repairs and maintenance are expensed as incurred.  Gains and +losses on depreciable assets retired or sold are recognized in the statements of +income and comprehensive income in the year of disposal.
+

+
Impairment +of long-lived assets
+

+
The +Company assesses the impairment of long-lived assets held for use whenever +events or changes in circumstances indicate that the carrying value may not be +fully recoverable, in accordance with the accounting standard, “Accounting for +the Impairment or Disposal of Long-Lived Assets”.  When the carrying +value is not recoverable from undiscounted future cash flows, an impairment loss +is recorded in the amount of the difference between carrying value over fair +value.
+

+
The +Company has assessed that no significant impairment of its long-lived assets +held for use exists as of December 31, 2009 and 2008.
+
 
+
+
+
+
+
+
+
F-14
+
+
+
+
+
+
+
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
Deposits +on intangible assets
+

+
 The +Company entered into an agreement with Norwin A/S to transfer the technology +know-how from Norwin A/S to the Company’s manufacturing subsidiary, Jinxiang. As +consideration for the technology, the Company was required to +make payments totaling $3,500 to Norwin A/S and additionally provide Norwin +A/S with a 15% ownership of Jinxiang values at $3,900. Upon transfer of the +technology know-how, the technology would be valued and recorded as an +intangible asset, subject to amortization. As the technology and training from +Norwin A/S was not considered to have been completed as of December 31, 2009, +the payments made to the technology vendor for the intangible assets are +classified as deposits on intangible assets.
+

+
Fair +value of financial instruments
+

+
Effective +January 1, 2008, the Company adopted the standard, "Fair Value Measurements," +which provides a framework for measuring fair value under GAAP. As defined in +the standard, fair value is the price that would be received to sell an asset or +paid to transfer a liability in an orderly transaction between market +participants at the measurement date (exit price). The Company utilizes market +data or assumptions that the Company believes market participants would use in +pricing the asset or liability, including assumptions about risk and the +risks inherent in the inputs to the valuation technique. These inputs can be +readily observable, market corroborated or generally unobservable.
+

+
The +Company primarily applies the market approach for recurring fair value +measurements and endeavors to utilize the best available information. +Accordingly, the Company utilizes valuation techniques that maximize the use of +observable inputs and minimize the use of unobservable inputs. The Company is +able to classify fair value balances based on the observability of those +inputs.
+
The +standard establishes a fair value hierarchy that prioritizes the inputs used to +measure fair value. The hierarchy gives the highest priority to unadjusted +quoted prices in active markets for identical assets or liabilities (Level 1 +measurement) and the lowest priority to unobservable inputs (Level 3 +measurement). The three levels of the fair value hierarchy defined by the +standard are as follows:
+
 
+
+
+ + + + + +
+
Level + 1 
+ 		+
Quoted + prices are available in active markets for identical assets + or liabilities as of the reporting date. Active markets are those + in which transactions for the asset or liability occur in + sufficient frequency and volume to provide pricing information on an + ongoing basis. Level 1 primarily consists of financial instruments + such as exchange-traded derivatives, listed equities and U.S. + government treasury +securities.
+
+
+

+
+ + + + + +
+
Level + 2 
+ 		+
Pricing + inputs are other than quoted prices in active markets included in + Level 1, which are either directly or indirectly observable as of the + reporting date. Level 2 includes those financial instruments that are + valued using models or other valuation methodologies. These + models are primarily industry-standard models that consider + various assumptions, including quoted forward prices for commodities, + time value, volatility factors, and current market and contractual + prices for the underlying instruments, as well as other relevant + economic measures. Substantially all of these assumptions are + observable in the marketplace throughout the full term of the + instrument, can be derived from observable data or are supported by + observable levels at which transactions are executed in the + marketplace. Instruments in this category include non-exchange-traded + derivatives such as over the counter forwards, options and repurchase + agreements.
+
+
+

+
+ + + + + +
+
Level + 3 
+ 		+
Pricing + inputs include significant inputs that are generally less observable + from objective sources. These inputs may be used with internally + developed methodologies that result in management's best estimate of + fair value from the perspective of a market participant. Level 3 + instruments include those that may be more structured or otherwise + tailored to customers' needs. At each balance sheet date, the + Company performs an analysis of all instruments subject to the standard + and includes in Level 3 all of those whose fair value is based on + significant unobservable +inputs.
+
+
+
+
 
+
Liabilities +measured at fair value on a recurring basis include the following as of December +31, 2009:
+
 
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
+
Fair Value Measurements + Using 
+
+ 		  +
Level + 1
+ 		   +
Level + 2
+ 		   +
Level3
+ 		   +
At Fair Value
+ 		 
+
Warrants + liability
+ 		  -   17,750   -   17,750 
+
Fair + value of forward contracts
+ 		  -   516   -   516 
+
Total
+ 		 $   $18,266  $-  $18,266 
+
+
+
+
+
+
+
+
 
+
No item +should be valued by above measurements as of December 31, 2008.
+
 
+
+
+
+
+
+
+
F-15
+
+
+
+
+
+
+
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts
+

+
Accounts +payable
+

+
Accounts +payable consist of expenses incurred but not yet paid for by the +Company.  The Company typically withholds 10% of payments due to +subcontractors until the warranty period on related projects has +expired.  These retentions are to ensure that any necessary work to be +performed during the warranty period is completed by the subcontractors so that +the Company’s customer is satisfied and pays its retention withheld in +full.
+

+
Warranty +costs
+

+
For +the Distributed generation business, customers typically withhold payment +of 5% of each invoice amount from the Company as security for performance of any +additional work that may be required during the warranty period following +contract completion.  This withheld amount is recorded on the balance +sheet as an asset in accounts receivable.  The warranty period +typically consists of one year beginning on the date of the customer’s initial +acceptance of the completed project.  After the completion of the +warranty period, the customer pays the retained amount to the Company, less any +amount used for additional contract costs.  Historically, no +additional costs have been necessary during the warranty period, and all amounts +withheld by customers have been paid in full at the expiration of the warranty +period.   Therefore, the Company records the entire withheld +amount as accounts receivable during the period without any allowance for bad +debts.
+

+
For the +Wind turbine manufacturing business, maintenance of the components will be +mainly the responsibility of the component vendors. As the manufacturer of the +wind turbines, the warranty cost mainly includes the post-sale telephone +support, labor cost and travel and entertainment expenses for customer support +technicians. $380 was accrued for the warranty costs and recorded in cost of +sales for the year ended December 31, 2009.
+

+
Customer +deposits
+

+
For +distributed generation business, customers typically make down payments of 10% +to 15% of a total contract price upon or immediately following the execution of +a contract.  For wind turbine business, the down payment of +approximately 30% of a total contract price is paid upon or immediately +following the execution of a contract for wind turbine manufacturing business. +This down payment is recorded as a liability in customer +deposits.  The remaining balance of the contract price is paid over +the term of the contract as work is completed by the Company.
+

+
As work +is performed on a contract, the balance of customer deposits is periodically +decreased based on recognized revenue until the balance reaches zero, at which +point recognized revenue is then posted directly to current accounts +receivable.
+

+
Income +taxes
+

+
Current +income taxes are filed in accordance with the laws of the relevant tax +authorities in the appropriate jurisdictions of the Company.
+
 
+
In August +2006, GaoKe Energy registered as a Foreign Investment Enterprise (“FIE”), +entitling it to a 100% exemption from PRC income tax for two years starting with +the year ended December 31, 2007, and a 50% exemption from PRC income tax for +three years starting with the year ending December 31, 2009.  On March +16, 2007, the National People's Congress of China passed “The Law of the +People's Republic of China on Enterprise Income Tax,” which became effective on +January 1, 2008.  This law eliminated the preferential tax treatment +available to FIEs; however, the preferential tax treatment has been +grandfathered for FIEs registered prior to the law taking effect, including +GaoKe Energy. All operating subsidiaries, except for GaoKe Energy, are subject +to the full income tax rate of 25%.
+
 
+
+
+
+
+
+
+
F-16
+
+
+
+
+
+
+
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
Deferred +tax
+

+
The +Company uses the liability method of accounting for income taxes, in accordance +with the accounting standard “Accounting for Income Taxes”.  Under +this method, deferred income tax assets and liabilities are recognized for the +future income tax consequences attributable to differences between the financial +statement carrying amounts of existing assets and liabilities and their +respective tax bases.  Income tax assets and liabilities are measured +using enacted tax rates expected to apply to income in the years in which those +temporary differences are expected to be recovered or settled.  The +effect of a change in tax rates on income tax assets and liabilities is +reflected in operations for the period in which the change +occurs.  Valuation allowances are established when necessary to reduce +deferred tax assets to the amount expected to be realized.
+

+
The +Company adopted the provision of the interpretation, “Accounting for Uncertainty +in Income Taxes”, on January 1, 2007.  As of December 31, 2009, the Company +did not have any accrued interest or penalties associated with any unrecognized +tax benefits, and no related interest expense was recognized during the +year.  The Company does not believe there will be any material changes +in its unrecognized tax positions over the next 12 months.  The +Company’s effective tax rate differs from the national statutory rate primarily +due to non-deductible expenses, temporary differences, and preferential tax +treatment for GaoKe Energy.
+
 
+
Basic +and diluted earnings per share
+

+
The +Company computes earnings per share in accordance with the accounting standard, +“Earnings Per Share”.  The standard requires presentation of both +basic and diluted earnings per share (EPS) on the face of the income +statement.  Basic EPS is computed by dividing net income available to +common stockholders (numerator) by the weighted average number of shares +outstanding (denominator) during the period.  Diluted EPS reflects the +impact of all potentially dilutive securities, such as stock warrants, +convertible debts and options. The effect of the unearned earn-out shares +associated with the 1/18/08 Transaction (see Note 3) has not been considered in +diluted EPS since the shares are contingently issuable.  The weighted +average numbers of shares outstanding during 2007 has been restated to reflect +the recapitalization on January 18, 2008.
+

+
Noncontrolling +interests
+

+
The +noncontrolling interests of the Company include other parties’ interests in the +following corporate subsidiaries: GaoKe Design, LICEG Ltd., Power and +Jinxiang.  The minority ownership interests in these corporate +subsidiaries were 49%, 10%, 38% and 20%, respectively, as of December 31, 2009, +as follows:
+
 
+
+
+ + + + + + +
+ +
·
+ 		+
The + 49% noncontrolling interest in GaoKe Design is 36% held by Mr. Jinxiang + Lu, the Company’s Chairman and CEO, and 13% held by his wife, Ms. Haixue + Yu.
+
+
+

+
+ + + + + + +
+ +
·
+ 		+
The + 10% noncontrolling interest in LICEG Ltd. is held by + LICEG.
+
+
+

+
+ + + + + + +
+ +
·
+ 		+
The + 20% noncontrolling interest in Jinxiang is 15% held by Norwin A/S and 5% + held by Mr. Antos Glogowski.
+
+
+

+
+ + + + + + +
+ +
·
+ 		+
The + 38% noncontrolling interest in Power is 20% held by Shenyang Darui + investment Management Company Ltd., 2% held by Northern Heavy Industries + Group Co., Ltd., 2% held by Shenyang Blower Works Group Co., Ltd., 2% held + by Shenyang Electric Machine Co., Ltd, 4% held by Shenyang HuiCheng Cable + Co., Ltd., 4% held by Shenyang Shengshi Medium and Hi-Pressure Valve Co. + Ltd., and 4% held by Shenyang Boiler Manufacturing Co., + Ltd.
+
+
+
+
 
+
The +noncontrolling owners’ allocated shares of historical and current profits or +losses in these investee companies are included in the accompanying consolidated +balance sheets and statements of income and comprehensive income, according to +their ownership percentage with the exception of LICEG Ltd., whose +noncontrolling owner does not share in its gains or losses per the joint venture +agreement.
+
 
+
+
+
+
+
+
+
F-17
+
+
+
+
+
+
+
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
Stock-based +compensation
+
 
+
The +Company accounts for stock-based compensation for employees and directors using +the modified prospective method of accounting, in accordance with the accounting +standard, “Accounting +for Stock-Based Compensation.”  In accordance with the accounting +standard, stock-based payment transactions with employees, such as share +options, are measured based on the grant-date fair value of the equity +instrument issued and recognized as compensation expense over the requisite +service period, with a corresponding addition to equity.  The Company +determines the grant-date fair value of employee share options using the +Black-Scholes option-pricing model.
+

+
Comprehensive +income
+

+
The +Company has reported comprehensive income in the statements +of comprehensive income, in accordance with the accounting standard, +“Reporting Comprehensive Income.”  Comprehensive income is comprised of net +income and all changes to stockholders’ equity, including foreign currency +translation adjustments, except, those due to investments by owners and +distributions to owners.
+

+
Statement +of cash flows
+

+
The +Company reports its consolidated statements of cash flows in accordance with the +accounting standard, “Statement of Cash Flows”. As a substantial portion of cash +flows from the Company’s operation are based in RMB, an average exchange rate +for the periods (6.8307, 6.9477 and 7.6072 for years ended December 31, 2009, +2008 and 2007, respectively) was used for translation from RMB to U.S. +Dollars.
+

+
Accounting +principles recently adopted
+

+
In +October 2009, the FASB issued new accounting standards that revised the guidance +for “Multiple-Deliverable Revenue Arrangements”. The new standard requires +entities to allocate revenue in an arrangement using estimated selling prices of +the delivered goods and services based on a selling price hierarchy. The +amendments eliminate the residual method of revenue allocation and require +revenue to be allocated using the relative selling price method. This guidance +should be applied on a prospective basis for revenue arrangements entered into +or materially modified in fiscal years beginning on or after June 15, 2010, with +early adoption permitted. The Company has adopted this new accounting guidance +in the year ended December 31, 2009.
+

+
In July +2009, the FASB issued “FASB +Accounting Standards Codification”, as the single source of authoritative +nongovernmental U.S. generally accepted accounting principles (GAAP). +Codification is effective for interim and annual periods ending after September +15, 2009. All existing accounting standards are superseded as described in SFAS +168. All other accounting literature not included in Codification is +non-authoritative. Therefore, beginning with the 20F filing for December 31, +2009, all references made by the Company to GAAP in the consolidated financial +statements will be the new codification numbering +system.  Codification does not change or alter existing GAAP and +therefore, does not have any impact on the Company’s consolidated financial +statements.
+

+
In +December 2007, the FASB issued new accounting guidance “Business Combinations” +which establishes principles and requirements for how an acquirer recognizes and +measures in its financial statements the identifiable assets acquired, the +liabilities assumed, any noncontrolling interest in the acquirer and the +goodwill acquired. It also establishes disclosure requirements which will enable +users to evaluate the nature and financial effects of the business combination. +The adoption on January 1, 2009 of this standard did not have a material impact +on the Company’s consolidated financial statements.
+

+
In +December 2007, the FASB issued new accounting guidance, “Noncontrolling +Interests in Consolidated Financial Statements”. This guidance establishes +accounting and reporting standards for ownership interests in subsidiaries held +by parties other than the parent, the amount of consolidated net income +attributable to the parent and to the noncontrolling interest, changes in a +parent's ownership interest and the valuation of retained noncontrolling equity +investments when a subsidiary is deconsolidated. It also establishes +reporting requirements that provide sufficient disclosures that clearly identify +and distinguish between the interests of the parent and the interests of the +noncontrolling owners. The adoption on January 1, 2009 of this standard resulted +in changes to our presentation for noncontrolling interests and did not have a +material impact on the Company’s results of operations and financial +condition.
+
 
+
+
+
+
+
+
+
F-18
+
+
+
+
+
+
+
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
In March +2008, the FASB issued new accounting guidance, “Disclosures about Derivative +Instruments and Hedging Activities”. It requires qualitative disclosures about +objectives and strategies for using derivatives, quantitative disclosures about +fair value amounts of and gains and losses on derivative instruments, and +disclosures about credit risk related contingent features in derivative +agreements. The adoption on January 1, 2009 of this standard did not have a +material impact on the Company’s consolidated financial position or results of +operations.
+

+
In April +2008, the FASB issued new accounting guidance, “Determination of the Useful Life +of Intangible Assets.” This guidance is intended to improve the consistency +between the useful life of a recognized intangible asset under the previous +guidance for Goodwill and Other Intangible Assets and the period of expected +cash flows used to measure the fair value of the asset when the underlying +arrangement includes renewal or extension of terms that would require +substantial costs or result in a material modification to the asset upon +renewal or extension. Companies estimating the useful life of a recognized +intangible asset must now consider their historical experience in renewing or +extending similar arrangements or, in the absence of historical experience, must +consider assumptions that market participants would use about renewal or +extension as adjusted for some entity-specific factors. The adoption on January +1, 2009 of this standard did not have a material impact on the Company’s +consolidated financial statements.
+

+
In May +2008, the FASB issued new accounting guidance, “Accounting for Convertible Debt +Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash +Settlement)”. This guidance requires the issuer of certain convertible debt +instruments that may be settled in cash (or other assets) on conversion to +separately account for the liability (debt) and equity (conversion option) +components of the instrument in a manner that reflects the issuer's +non-convertible debt borrowing rate. Such separate accounting also requires +accretion of the resulting discount on the liability component of the debt to +result in interest expense equal to an issuer`s non-convertible debt borrowing +rate. In addition, the guidance provides for certain changes related to the +measurement and accounting related to derecognition, modification or exchange. +The adoption on January 1, 2009 of this standard did not have a material impact +on the Company’s consolidated financial statements.
+

+
In +September 2008, the FASB issued new accounting guidance “Determining Whether +Instruments Granted in Share-Based Payment Transactions Are Participating +Securities”. It addresses whether instruments granted in share-based payment +transactions are participating securities prior to vesting and, therefore, need +to be included in the earnings allocation in computing income per share under +the two-class method. This guidance establishes that unvested share-based +payment awards that contain non-forfeitable rights to dividends or dividend +equivalents (whether paid or unpaid) are participating securities and shall be +included in the computation of earnings per share pursuant to the two-class +method. The adoption on January 1, 2009 of this standard did not have a material +impact on the Company’s consolidated financial statements.
+

+
In April +2009, the FASB issued new accounting guidance “Recognition and Presentation of +Other-Than-Temporary Impairments”, which provides operational guidance for +determining other-than-temporary impairments (“OTTI”) for debt securities. This +standard is effective for interim and annual periods ending after June 15, +2009. The adoption of this standard did not have a material impact on the +Company’s consolidated financial statements.
+

+
In +April 2009, the FASB issued new accounting guidance, “Determining Fair +Value When Volume and Level of Activity for the Asset or Liability Have +Significantly Decreased and Identifying Transactions That Are Not Orderly”. It +provides guidance on how to determine the fair value of assets and liabilities +when the volume and level of activity for the asset/liability has significantly +decreased. It also provides guidance on identifying circumstances that indicate +a transaction is not orderly. In addition, it requires disclosure in interim and +annual periods of the inputs and valuation techniques used to measure fair value +and a discussion of changes in valuation techniques. Since the volume and level +of activity for the assets or liabilities of the Company have not decreased and +there are no transactions identified as not orderly, the adoption of this +standard did not have a material impact on the Company’s consolidated financial +statements.
+

+
In May +2009, the FASB issued new accounting standard, “Subsequent Events”. The standard +provides general guidelines to account for the disclosure of events that occur +after the balance sheet date but before financial statements are issued or +available to be issued. These guidelines are consistent with current accounting +requirements, but clarify the period, circumstances, and disclosures for +properly identifying and accounting for subsequent events. The standard is +effective for interim periods and fiscal years ending after June 15, 2009. The +adoption of this standard did not have a material impact on the Company's +consolidated financial statements.
+
 
+
+
+
+
+
+
+
F-19
+
+
+
+
+
+
+
+
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
New +Accounting Pronouncements
+

+
In June +2009, the FASB issued new accounting guidance that amended the consolidation +guidance for variable interest entities. The new guidance addresses the need for +reconsideration of whether an entity is a variable interest entity, requires +additional qualitative considerations about the determination of the primary +beneficiary of variable interest entities and prescribes disclosures about +variable interest entities. This guidance is effective for the Company beginning +January 1, 2010. The Company is currently evaluation the potential impact of +adopting this statement on its financial position and results of +operations.
+

+
In August +2009, Accounting Standards updated the guidance for Measuring Liabilities at +Fair Value. It becomes effective for the Company on January 1, 2010. This +amendment provides additional guidance on how companies should measure +liabilities at fair value. While reaffirming the existing definition of fair +value, this guidance introduces the concept of entry value into the +determination of fair value. Entry value is the amount an entity would receive +to enter into an identical liability. Under the new guidance, the fair value of +a liability is not adjusted to reflect the impact of contractual restrictions +that prevent its transfer. It is expected that the adoption of this new guidance +will have no material effect on the Company’s financial statements.
+
 
+
+
+
+
+
+
+
F-20
+
+
+
+
+
+
+
+
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
3.
+ 		+
Acquisition
+
+
+
+

+
Chardan +was incorporated in Delaware on March 10, 2005, as a blank check company with +the objective to acquire an operating business with its primary operating +facilities in any city or province south of the Yangtze River, within the +PRC.  Effective July 14, 2005, Chardan’s Board of Directors and +Initial Stockholders authorized an amendment to Chardan’s Certificate of +Incorporation to change its name from Chardan China Acquisition Corp. III to +Chardan South China Acquisition Corporation.  Chardan’s IPO (OTCBB) +went effective in August 2005.
+

+
On April +14, 2007, Chardan entered into a stock purchase agreement to acquire all of the +issued and outstanding ordinary shares of Head Dragon.  On May 14, +2007, Chardan created a wholly-owned subsidiary, China Energy Technology +Limited, incorporated in the BVI, to ultimately execute the +agreement.
+

+
On +January 17, 2008, following notification from the Securities and Exchange +Commission that Chardan’s S-4 prospectus/proxy materials had been declared +effective, Chardan held a special meeting of its stockholders, during which the +re-domestication merger of Chardan into its BVI-based wholly-owned subsidiary +and the acquisition of Head Dragon were both approved.
+

+
Re-domestication +Merger
+

+
On +January 18, 2008, Chardan merged with and into its wholly-owned subsidiary, +A-Power (formerly known as China Energy Technology, Ltd.), for the purposes of +re-domestication into the BVI.
+

+
 Conducted in anticipation +of the acquisition of Head Dragon and to secure future tax benefits, the +re-domestication merger was achieved by a one-for-one exchange of all the +outstanding common stock of Chardan for common shares of A-Power and the +assumption of all the rights and obligations of Chardan by A-Power, including +the assumption of all outstanding warrants of Chardan on the same terms as they +were originally issued.
+

+
Acquisition +of Head Dragon
+

+
On +January 18, 2008,  A-Power acquired  a  100% +equity interest in  Head Dragon  by issuing +13,000,000 common shares  of A-Power’s common stock to Mr. +Jinxiang Lu, the sole shareholder of Head Dragon, in exchange for all of the +issued and outstanding common shares of Head Dragon (the “1/18/08 +Transaction”).
+

+
The +completion of the 1/18/08 Transaction enabled the sole shareholder of Head +Dragon, a private operating company, to obtain a majority voting interest in +A-Power, a non-operating public company with a significant amount of +cash.  U.S. GAAP requires that the company whose stockholders retain +the majority interest in a combined business be treated as the acquirer for +accounting and reporting purposes.   Therefore, Head Dragon was +deemed to be the acquirer for accounting and financial reporting purposes, +although the legal status of A-Power as the acquiring company did not +change.  The 1/18/08 Transaction utilizes the capital structure of +A-Power, and the asset and liability values of Head Dragon are recorded at +historical cost.
+

+
Under the +reverse acquisition accounting, the historical consolidated financial statements +of the Company for the years ending prior to January 18, 2008, presented for +comparative purposes, are those of Head Dragon and its subsidiaries. The +financial statements of A-Power reflect the aforementioned stock purchase +transaction in the stockholders’ equity statement through a line of +reorganization and recapitalization to present the net assets of A-Power as of +January 18, 2008, as follows:
+

+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
January + 18, 2008
+ 		  +    +
+
Net + assets acquired
+ 		  +    +
+
Cash
+ 		  + +
$
+ 		+
31,748
+ 		  +
+
Accounts + payable and accrued liabilities
+ 		  +   + +
(780
+ 		+
)
+
  +   + +
$
+ 		+
30,968
+ 		  +
+
+
+
+
+
+
+
+

+
+
+
+
+
+
+
F-21
+
+
+
+
+
+
+
+
+
+
 
+
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
Earn-Out +Shares
+

+
As an +additional purchase price of the 1/18/08 Transaction, the sole stockholder of +Head Dragon will be issued, on an all or none basis per year, an aggregate of +9,000,000 common shares of A-Power, as set forth below, if, on a consolidated +basis, the Company has net operating profits (Gross margin minus selling, +general and administrative expenses of the Company according to U.S. GAAP as +defined in the purchase agreement signed by the then sole stockholder of Head +Dragon and the Company) of the following amounts for the indicated fiscal years +ending December 31:
+
 
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Fiscal + Year
+ 		  + +
Net + Operating Profit
+ 		  +   + +
Number of + Shares
+ 		  +
+
2007
+ 		  + +
$
+ 		+
14,000
+ 		  +   +   + +
1,000,000
+ 		  +
+
2008
+ 		  + +
$
+ 		+
19,000
+ 		  +   +   + +
1,000,000
+ 		  +
+
2009
+ 		  + +
$
+ 		+
29,000
+ 		  +   +   + +
1,000,000
+ 		  +
+
2010
+ 		  + +
$
+ 		+
44,000
+ 		  +   +   + +
2,000,000
+ 		  +
+
2011
+ 		  + +
$
+ 		+
63,000
+ 		  +   +   + +
2,000,000
+ 		  +
+
2012
+ 		  + +
$
+ 		+
87,000
+ 		  +   +   + +
2,000,000
+ 		  +
+
+
+
+
+
+
+

+
The net +operating profit target for fiscal 2008 and 2007 were met.  The +related earn-out shares were authorized for issuance to Mr. Jinxiang Lu by the +Audit Committee on June18, 2009 and July 2, 2008, respectively, and were issued +on July 14, 2009 and July 31, 2008.   The shares have been +included in the basic weighted average number of shares outstanding from the +issuance date and have been included in the diluted weighted average number of +shares outstanding from the measurement date.
+

+
The net +operating profit target for fiscal 2009 was also met.  As of December +31, 2009, issuance of the related earn-out shares to Mr. Jinxiang Lu for 2009 is +pending authorization by the board of directors. The shares were not included in +basic but were included in diluted weighted average number of shares outstanding +for one day during the year ended December 31, 2009.
 
+
+
+
  +
+
+
+
F-22
+
+
+
+
+
+
  +
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
4.
+ 		+
Restricted + cash
+
+
+
+

+
The +Company’s restricted cash consisted of the following:
+

+
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
  +  
+ 		+
December 31,
+ 		  +
December 31,
+ 		 
+
  +  
+ 		+
2009
+ 		  +
2008
+ 		 
+
Guarantee + provided to Chardan Capital (i)
+ 		 $—  $2,000 
+
Performance + deposit (ii)
+ 		  —   608 
+
Collateral for + Euro Loan#1 (iii)
+ 		  6,228   — 
+
Collateral for + Euro Loan#2 (iv)
+ 		  5,057   — 
+
Collateral for + Euro Loan#3 (v)
+ 		  1,817   — 
+
Duty + tax payment (vi)
+ 		  297   — 
+
  +  
+ 		 $13,399  $2,608 
+
+
+
+
+
+
+
+
+
+
+
+
+
+

+
(i) On +April 11, 2008, the Company offered $3,000 cash as collateral for a loan of +$3,000 granted to Chardan Capital, LLC (“Chardan Capital”) by California Bank +& Trust, maturing on August 1, 2008. The maturity date of the loan was +extended three times, to November 2008, March 2009, and June 2009. Chardan made +three loan payments of $1,000 each in December 2008, January 2009 and August, +2009. As of December 31, 2009, the bank had released the collateral. See Note +22.
+

+
(ii) As +of December 31, 2008, GaoKe Energy maintained a restricted cash balance of $608 +(RMB4,150,000 ) as a contract performance deposit required by a customer for a +project in Vietnam, its first international contract. As of December 31, 2009, +the bank had released the deposit.
+

+
(iii) On +September 24, 2009, Ruixiang placed a one-year fixed deposit of $6,228 +(RMB42,510,000) as collateral for a one-year loan of $6,009 (EUR4,187,000) from +Huaxia bank. See Note 13.
+

+
(iv) On +October 22, 2009, Ruixiang placed a one-year fixed deposit of +$5,057(RMB34,520,000) as collateral for a one-year loan of $4,824 (EUR3,361,000) +from Huaxia bank. See Note 13.
+

+
(v) On +October 27, 2009, Ruixiang placed a one-year fixed deposit of $1,817 +(RMB12,400,000) as collateral for a one-year loan of $1,695 (EUR1,181,000) from +Huaxia bank. See Note 13.
+

+
(vi) +Ruixiang wired $297(RMB2,028,000) to a designate bank account for duty tax +payment in December, 2009. Therefore, as of December 31, 2009, balance is +recorded as restricted cash. The bank account belongs to Ruixiang.
+

+
+
+ + + + + +
+
5.
+ 		+
Accounts + receivable
+
+
+
+

+
Current +trade accounts receivable at December 31, 2009 and 2008, respectively, totaled +$12,463 and $7,238 respectively, net of an allowance for doubtful accounts of +$Nil and $Nil, respectively, including contract warranty of $4,761 and $6,695, +respectively.  Non-current accounts receivable after discount totaled +$5,738 and $3,646 at December 31, 2009 and 2008, respectively, including +contract warranty of $1,738 and $3,575.  Non-current trade accounts +receivable was discounted to present fair value at a rate of 5.4% for 2009 (2008 +- - 5.4%).  The non-current balances retained by customers are +expected to be collected within two years after December 31, +2009.

+
+
+
  +
+
+
+
F-23
+
+
+
+
+
+
  +
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
6.
+ 		+
Prepayments, deposits, and other + receivables
+
+
+
+

+
The +Company’s prepayments, deposits, and other receivables consisted of the +following:
+

+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
  +  
+ 		  + +
December 31,
+ 		  +   + +
December 31,
+ 		  +
+
  +  
+ 		  + +
2009
+ 		  +   + +
2008
+ 		  +
+
Prepayment + for raw materials and contractors  
+ 		  + +
$ 40,540
+ 		  +   + +
$
+ 		+
69,201
+ 		  +
+
Advances + to projects and employees  
+ 		  +   + +
776
+ 		  +   +   + +
927
+ 		  +
+
Advances + to third parties  
+ 		  +   + +
10,234
+ 		  +   +   + +
9,178
+ 		  +
+
Other + deposits and prepayments  
+ 		  +   + +
902
+ 		  +   +   + +
539
+ 		  +
+
  +  
+ 		  + +
$
+ 		+
52,452
+ 		  +   + +
$
+ 		+
79,845
+ 		  +
+
+
+
+
+
+
+

+
The +Company receives substantial prepayment deposits from its customers and, +similarly, pays substantial advances to its major project suppliers, in +accordance with common business practices in the PRC.  Additionally, +as a significant number of transactions are conducted in cash, substantial cash +sums are provided to employees on job sites, warehouses and elsewhere to +transact business in the local custom, which are recorded as +advances.
+

+
The +Company entered into a loan agreement with Heilongjiang Hailun Biomass Power +Generation Ltd., a customer of the Company, to provide an interest-free loan of +$8,800.  The funds were advanced on May 14, 2008 and the due date for +repayment was extended from May 14, 2009 to May 14, 2010. The balance was +discounted to present fair value at a rate of 5.4% for 2009. For the year ended +December 31, 2009, $195 was discounted to present the loan to a fair +value.
+

+
+
+ + + + + +
+
7.
+ 		+
Inventory
+
+
+
+

+
The +Company’s inventory consists of the following:
+

+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   + +
December 31,
+ 		  +   + +
December 31,
+ 		  +
  +   + +
2009
+ 		  +   + +
2008
+ 		  +
+
Inventory + in  transit
+ 		  + +
$ 1,437
+ 		  +   + +
$
+ 		+
-
+ 		  +
+
Raw + Material
+ 		  +   + +
8,890
+ 		  +   +   + +
8,723
+ 		  +
+
  +  
+ 		  + +
$
+ 		+
10,327
+ 		  +   + +
$
+ 		+
8,723
+ 		  +
+
+
+
+
+
+
+

+
As of +December 31, 2009 and 2008, all inventory balances were for the Wind Business +segment.

+
+
+
  +
+
+
+
F-24
+
+
+
+
+
+
  +
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
8.
+ 		+
Property, plant and + equipment
+
+
+
+
 
+
The +Company’s property, plant and equipment consists of the following:
+

+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
  +  
+ 		  + +
December 31,
+ 		  +   + +
December 31,
+ 		  +
+
  +  
+ 		  + +
2009
+ 		  +   + +
2008
+ 		  +
+
Building
+ 		  + +
$54,870
+ 		  +   + +
$
+ 		+
12,519
+ 		  +
+
Machinery + and equipment  
+ 		  +   + +
2,527
+ 		  +   +   + +
479
+ 		  +
+
Vehicles +  
+ 		  +   + +
2,320
+ 		  +   +   + +
1,707
+ 		  +
+
Office + equipment  
+ 		  +   + +
559
+ 		  +   +   + +
428
+ 		  +
+
Computer + software  
+ 		   +
64
+ 		    +
64
+ 		 
+
Leasehold + improvements
+ 		  +   + +
189
+ 		  +   +   + +
74
+ 		  +
  +   +   + +
60,529
+ 		  +   +   + +
15,271
+ 		  +
+
Less: + Accumulated depreciation and amortization
+ 		  +   + +
1,912
+ 		  +   +   + +
959
+ 		  +
+
  +  
+ 		  + +
$
+ 		+
58,617
+ 		  +   + +
$
+ 		+
14,312
+ 		  +
+
+
+
+
+
+
+
+
+
+
+

+
Depreciation +and amortization expense for the years ended December 31, 2009, 2008 and 2007 +totaled $1,019, $385 and $187, respectively. Of those amounts, $25, $13 and $11 +were included in the cost of sales and $994, $372 and $176 were included in +general and administrative expenses, respectively.
+

+
+
+ + + + + +
+
9.
+ 		+
Construction in + progress
+
+
+
+

+
As of +December 31, 2009 and 2008, construction in progress totaled $Nil and $18,006, +respectively. Construction in progress related to facilities for the Company’s +Wind Business segment.
+
 
+
Construction +in progress is measured at cost and, upon completion of the facilities, all +direct costs relating to the construction of the facility has been capitalized +as property, plant and equipment.
+

+
+
+ + + + + +
+
10.
+ 		+
Intangible + assets
+
+
+
+

+
Intangible +assets at the Company consisted of land use rights, wind turbine licenses and +other patents totaling $22,412 and $12,564 as of December 31, 2009 and 2008, +respectively.
+

+
(a) These +land use rights were purchased and granted by the Chinese government in 2008 for +use by the Company’s construction and manufacturing segments.
+

+
(b) The +Company entered into an agreement with Fuhrlander A/G to transfer the technology +know-how from Fuhrlander A/G to the Company’s manufacturing subsidiary, +Ruixiang. As consideration for the technology, the Company would submit payments +of Euro 10 million to Fuhrlander A/G for technology and training fees. Upon +transfer of the technology know-how, the technology and training fees would be +valued and recorded as an intangible asset, subject to amortization and +capitalization. The license term is in perpetuity unless there is a breach of +the contract terms, payments are not made as required, or there is a voluntary +termination by mutual consent. The license acquisition fees will be tested +annually for impairment. If the carrying value is not recoverable from future +cash flows and the carrying value exceeds the assets’ fair value, an impairment +loss will be recorded for the excess of carrying value over fair value. The +transfer of the technology know-how from Fuhrlander A/G to the Company’s +manufacturing subsidiary, Ruixiang, was completed at the end of December 2009. +Therefore, the total payments of $8,572 to Fuhrlander, which were previously +recorded as a deposit on intangible assets, were reclassified as an intangible +asset as of December 31, 2009.
+

+
Amortization +expense for the years ended December 31, 2009, 2008 and 2007 amounted to $169, +$Nil and $ Nil, respectively.
+

+
We expect +to recognize annual amortization expense of $1,148 in each of 2010, 2011, 2012, +2013, and 2014.

+
+
+
  +
+
+
+
F-25
+
+
+
+
+
+
  +
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
11.
+ 		+
Deposits on intangible + assets
+
+
+
+

+
(a) The +Company entered into an agreement with Norwin A/S to transfer the technology +know-how from Norwin A/S to the Company’s manufacturing subsidiary, Jinxiang. As +consideration for the technology, the Company would submit payments totaling +$3,500 to Norwin A/S and additionally provide Norwin A/S with a 15% ownership of +Jinxiang valued at $3,900. Upon transfer of the technology know-how, the +technology would be valued and recorded as an intangible asset, subject to +amortization. The license has a term of twenty years from the date of transfer. +The total license payments will be amortized on a straight line basis over the +license term at the rate of $175 per year.
+

+
In April +2009, PRC foreign investment authority approved the wind turbine technology +contributed by Norwin A/S as 15% of the total registered capital, which is +$3,900. As of December 31, 2009, Company management had determined that the +technology had not been effectively transferred. As such, the $1,757 +cumulatively paid by the Company to Norwin A/S and the capital contribution of +$3,900 made by Norwin A/S are recorded as a deposit on intangible asset. On +January 28, 2010, the company paid an additional $1,200 to Norwin A/S. See Note +24.
+

+
As of +December 31, 2009 and 2008, deposits on intangible assets totaled $5,657 and +$10,322, respectively.
+

+
+
+ + + + + +
+
12.
+ 		+
Long term + investment
+
+
+
+
 
+
Pursuant +to the Joint Venture Agreement between Ruixiang and GE Drivetrian, Yixiang, the +wholly-owned subsidiary of Ruixiang, injected its first installment of capital +of $2,508 (RMB17, 125,000) to GE Drivetrain Technologies (Shenyang) Co., Ltd. +(“GETS”) in September 2009.
+

+
Pursuant +to Articles of Association of GETS, the total registered capital is +approximately $20,070 (RMB137,000,000) and Yixiang owns 25%. Yixiang is +obligated to inject the second installment of capital totaled $2,508 +(RMB17,125,000) to GETS by June 30, 2010. Yixiang exercises significant +influence on GETS and its investment is recorded using equity method. Long term +investment in GETS decreased by $85 (25% proportionate recognition of GETS 2009 +loss of $340).
+

+
As of +December 31, 2009 and December 31, 2008, long term investment totaled $2,423 and +$nil, respectively.
 
+
+
+
  +
+
+
+
F-26
+
+
+
+
+
+
  +
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
13.
+ 		+
Bank + loans
+
+
+
+

+
The +Company’s bank loans consisted of the following:
+

+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  + +
December 31,
+ 		  +
December 31,
+ 		 
  + +
2009
+ 		  +
2008
+ 		 
  +   +
Amount
+ 		   +
Amount
+ 		 
  +   +
　
+ 		   +
　
+ 		 
+
Shanghai + Pudong Development Bank (i)
+ 		 $7,324  $— 
+
Huaxia + Bank Euro Loan #1 (ii)
+ 		  6,009   — 
+
Huaxia + Bank Euro Loan #2 (iii)
+ 		  4,824   — 
+
Huaxia + Bank Euro Loan #3 (iv)
+ 		  1,695   — 
+
  +  
+ 		 $19,852  $0 
+
+
+
+
+
+
+
+
+

+
(i) On +July 28, 2009, Ruixiang entered into a short-term loan agreement totaling $7,324 +(RMB50,000,000) with Shanghai Pudong Development Bank. Pursuant to the loan +agreement, the loan bears interest at 5.841% per annum and due for repayment on +July 27, 2010.
+

+
(ii) On +September 24, 2009, Ruixiang entered into a short-term loan agreement and a +collateral agreement with Huaxia Bank. Pursuant to the loan agreement, the loan +amount approximates $6,009 (EUR 4,187,000), bearing interest at 2.196% per annum +and is due for repayment on September 24, 2010. Pusuant to the collateral +agreement, a fixed deposit amount of $6,228 (RMB42,510,000) was pledged as +security. Interest income from the fixed deposit will be used to net-off the +interest expenses generated from the loan. See Note 4.
+

+
(iii) On +October 22, 2009, Ruixiang entered into a short-term loan agreement and a +collateral agreement with Huaxia Bank. Pursuant to the loan agreement, the loan +amount approximates $4,824 (EUR 3,361,000), bearing interest at 2.771% per annum +and is due for repayment on April 23, 2010. Pusuant to the collateral agreement, +a fixed deposit amount of $5,057 (RMB34,520,000) was pledged as security. +Interest income from the fixed deposit will be used to net-off the interest +expenses generated from the loan. See Note 4.
+

+
(iv) On +October 27, 2009, Ruixiang entered into a short-term loan agreement and a +collateral agreement with Huaxia Bank. Pursuant to the loan agreement, the loan +amount approximates $1,695 (EUR 1,181,000), bearing interest at 2.771% per annum +and is due for repayment on April 23, 2010. Pursuant to the collateral +agreement, a fixed deposit amount of $1,817 (RMB12,400,000) was pledged as +security. Interest income from the fixed deposit will be used to net-off the +interest expenses generated from the loan. See Note 4.
+

+
As of +December 31, 2009 and 2008, short term loans totaled $19,852 and $Nil, +respectively.
+

+
+
+ + + + + +
+
14.
+ 		+
Other payables and accrued + liabilities
+
+
+
+
The +Company’s other payables and accrued liabilities consisted of the +following:
+

+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
  +  
+ 		  + +
December 31,
+ 		  +   + +
December 31,
+ 		  +
+
  +  
+ 		  + +
2009
+ 		  +   + +
2008
+ 		  +
+
Other + payables  
+ 		  + +
$
+ 		+
9,357
+ 		  +   + +
$
+ 		+
1,837
+ 		  +
+
Unpaid + costs of buildings and land use rights
+ 		  +   + +
14,601
+ 		  +   +   + +
15,366
+ 		  +
+
Staff + benefit accruals  
+ 		  +   + +
661
+ 		  +   +   + +
24
+ 		  +
+
Total
+ 		  + +
$
+ 		+
24,619
+ 		  +   + +
$
+ 		+
17,227
+ 		  +
+
+
+
+
+
+

+
+
+
  +
+
+
+
F-27
+
+
+
+
+
+
  +
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
15.
+ 		+
Senior convertible + notes
+
+
+
+

+
On June +19, 2009, the Company entered into a securities purchase agreement with certain +accredited investors (the “Buyers”).  Under the agreement, the Company +agreed to issue Senior Convertible Notes due on June 19, 2014 (the “Convertible +Debt”) and warrants (the “Warrants”) to purchase common shares for an aggregate +purchase price of $40,000. The transaction closed on June 22, 2009.
+
 
+
The +Convertible Debt bears interest at 3% per annum, which will be increased each +year up to a maximum of 12% per annum, payable quarterly, at the Company’s +option, in cash or common shares. Under an +early conversion, the Company is liable to the holders of the convertible notes +in the amount of any interest for the period from the conversion date through +the maturity date, discounted to the present value (“Make-Whole +payments”.) The initial conversion price of the Convertible Debt is +$10.637 per common share, subject to full ratchet anti-dilution protection until +June 19, 2011 and thereafter subject to weighted average anti-dilution +protection. In addition, 1,504,184 +five-year Warrants were granted with an initial strike price of $10.637 per +common share, subject to full ratchet anti-dilution protection until June 19, +2011 and thereafter subject to weighted average anti-dilution +protection.
+
 
+
Both the +Warrants and embedded derivative associated with the Convertible Debt meet the +definition of a derivative instrument according to the standard, “Accounting for +Derivative Instruments and Hedging Activities” and are recorded as derivative +instrument liabilities and periodically marked-to-market.  The fair +value of the Warrants and embedded derivative on inception were determined to be +$6,154 and $19,781, respectively, using the Cox-Rubinstein-Ross Binomial Lattice +Model (“Binomial Model”) with the following assumptions: expected life 5 years, +expected volatility – 59%, risk free interest rate – 2.88% and dividend rate – +0%.
+
 
+
After +allocating the gross proceeds to the fair value of the Warrants and the embedded +derivative instrument, the remaining proceeds were allocated as the initial +carrying value of the Convertible Debt.  The amount is accreted to its +face amount at maturity using the effective interest method. The effective +interest rate was determined to be 29.68%.
+

+
In early +December 2009, convertible notes totaling $2,500 were converted into 235,030 +common shares at the conversion price of $10.637. Make-Whole payments in the +amount of $625 were paid in common shares in lieu of cash at the end of December +2009.
+

+
On +December 30 and 31, 2009, the Company entered into Conversion Agreements with +the holders of the convertible notes which converted the outstanding principal +amount of $37,500 and accrued interest of $537 under the Notes, together with +Make-Whole payments in the amount of $9,261, into an aggregate of 4,582,561 +common shares of the Company using a conversion price per share set at $10.212, +which is 96% of the original conversion price of $10.637. 
+
 
+
As of December 31, 2009, all issued 1,504,184 warrants were +outstanding.
+

+
Accordingly, +the aggregated financing costs of $244 were included in finance costs for the +year ended December 31, 2009 and Make-Whole payments of $9,886 and inducement +costs of $3,394 arising from the 4% discount to the original conversion price +were included in other expense for the year ended December 31, +2009.
+

+
+
+ + + + + +
+
16.
+ 		+
Noncontrolling + interest
+
+
+
+
 
+
The +noncontrolling interests of the Company include other parties’ interests in the +following corporate subsidiaries: GaoKe Design, LICEG Ltd., Jinxiang and Power. +The noncontrolling ownership interests of these corporate subsidiaries were 49%, +10%, 20% and 38%, respectively, as of December 31, 2009.
+

+
Noncontrolling +interest in net gains (loss) of GaoKe Design totaled $386, $419 and $39 for +2009, 2008 and 2007, respectively. Noncontrolling interest in net losses of +Jinxiang totaled $126, $17 and $Nil for 2009, 2008 and 2007, respectively. +Noncontrolling interest in net losses of Power totaled $91 for 2009. Total +noncontrolling interest in net gains (loss) totaled $169, $402 and $39 for 2009, +2008 and 2007, respectively.
+

+
No +noncontrolling interest in net gains of LICEG Ltd. was recorded, as its minority +owner does not share in its net gains or losses, per the joint venture +agreement.
+

+
Noncontrolling +shareholders of Power injected capital totaling $35,453( RMB242,000,000) to +Power in 2009.
+

+
As of +December 31, 2009 and 2008, noncontrolling interests totaled $40,180 and $658, +respectively.

+
+
+
  +
+
+
+
F-28
+
+
+
+
+
+
  +
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
17.
+ 		+
Stockholders’ + equity
+
+
+
+

+
Common +stock
+
 
+
As of +December 31, 2007, net assets of Chardan (changed to A-Power after the 1/18/08 +Transaction) totaled $30,408, representing 7,000,000 issued and outstanding +common shares. On January 18, 2008, A-Power acquired 100% equity interest of +Head Dragon by issuing 13,000,000 shares of A-Power’s common stock to Mr. +Jinxiang Lu, the sole stockholder of Head Dragon, in exchange for all of the +issued and outstanding common stock of Head Dragon.
+

+
In +accordance with the terms of the stock purchase agreement described in Note 3, +the original stockholder of Head Dragon was entitled to receive 1,000,000 common +shares for each year in 2009, 2008 and 2007 because the Company’s consolidated +net operating profit on a U.S. GAAP basis for the fiscal years ended December +31, 2009, 2008 and 2007 met the required earnings thresholds. The Company +accounted for the issuance of these contingent, earn-out shares issued to the +accounting acquirer as a small stock dividend. Generally accepted accounting +principles +in the United States require that small stock dividends be recorded at fair +market value. Company management designated the stock dividend declaration dates +for the 2009, 2008 and 2007 earn-out shares as December 31, 2009, December 31, +2008 and January 18, 2008, respectively. The price of the Company’s common stock +on December 31, 2009, December 31, 2008 and January 18, 2008 was $18.29, $4.30 +and $12.60, respectively. Accordingly, $18,290, $4,300 and $12,600 were +transferred from retained earnings to paid-in capital to record the respective +2009, 2008 and 2007 stock dividends on the declaration dates. There was no +impact on the total amount of stockholders’ equity.
+

+
Convertible +preferred stock
+

+
Subsequent +to the closing of the 1/18/08 Transaction, A-Power offered to exchange one share +of its common shares for each of the 650,000 issued and outstanding shares of +Head Dragon convertible preferred stock. In January 2008, all 650,000 preferred +shares were tendered for exchange, and as a result, A-Power issued an additional +650,000 of its common shares.
+

+
Common +stock warrants
+
 
+
Chardan +issued common stock warrants in August 2005 as part of its initial public +offering. Each warrant entitled the holder to purchase from Chardan one share of +common stock at an exercise price of $5.00 commencing on the latter of the +completion of a business combination or one year from the effective date of the +initial public offering and expiring four years from the effective date of the +offering. The warrants would be redeemable, at Chardan’s option, at a price of +$.01 per warrant upon 30 days' notice after the warrants become exercisable, +only in the event that the last sale price of the common stock was at least +$8.50 per share for any 20 trading days within a 30 trading day period ending on +the third day prior to the date on which notice of redemption is +given.
+

+
As a +result of the merger of Chardan into A-Power, the warrants were exercisable into +A-Power’s common shares. In February 2008, A-Power sent out redemption notices +to all of the holders of its issued and outstanding callable common shares +purchase warrants. The warrants were exercised for A-Power common shares at +$5.00 per warrant. Approximately 11,866,303 of the 11,881,270 warrants that were +then issued and outstanding were exercised at a price of $5.00 per warrant. +Holders of the 14,967 warrants that were not exercised were paid $0.01 per +warrant and the warrants were extinguished. The gross proceeds received by +A-Power from this redemption were approximately $59,330, which has been and will +continue to be used as working capital and for other corporate purposes. After +the redemption of the warrants, the Company had approximately 32,706,938 common +shares issued and outstanding.
+

+
At +December 31, 2008, the Company had no warrants outstanding.
+

+
As +described in Note 15 above, the Company issued 1,504,184 five-year Warrants +(“2009 Warrants”) on June 18, 2009 in connection with its issuance of $40,000 +Senior Convertible notes. The initial strike price of the 2009 Warrants is +$10.637 per warrant, subject to full ratchet anti-dilution protection until June +19, 2011 and thereafter subject to weighted average anti-dilution +protection.
+

+
As of +December 31, 2009, all of the 2009 Warrants were outstanding.

+
+
+
  +
+
+
+
F-29
+
+
+
+
+
+
  +
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
2007 +Equity Plan
+

+
On +January 18, 2008, the stockholders of Chardan approved the 2007 Equity Plan +and, in connection with the 1/18/08 Transaction, A-Power assumed the Plan. The +purpose of the Plan is to enable the Company to offer its employees, officers, +directors, and consultants whose past, present and/or potential contributions to +the Company have been, are, or will be important to the Company’s success, an +opportunity to acquire a proprietary interest in the Company.
+
 
+
The Company has reserved 2,000,000 +common shares for issuance pursuant to awards granted under the Plan. +Under the Plan, the stock option +price per share for options granted is generally based on the market price of +the Company’s common share on the date of grant and no option can be exercised +later than ten years from the date it was granted. The stock options generally +vest over three to four years. At December 31, 2009, there were options +outstanding to acquire 1,592,939 shares at an average exercise price of $11.61 +per share. The estimated fair value of all awards granted during the year ended +December 31, 2009 was $6,039, which was based on the assumptions of +risk-free interest rates between 1.36% to 1.91%, expected dividend yield of 0%, +expected lives between 3 to 4 years and expected volatility of 59.27%. The +following table summarizes the status of these plans as of December 31, +2009:
+
 
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   + +
2007 Equity Plan
+ 		  +
+
2007 + Equity Plan pool
+ 		  +   + +
2,000,000
+ 		  +
+
Stock + options outstanding
+ 		  +   + +
1,592,939
+ 		  +
+
Equity + available for grant
+ 		  +   + +
407,061
+ 		  +
+
+
+
+
+
+

+
The +compensation cost charged to expense for the 2007 Equity Plan was $1,602 for the +year ended December 31, 2009.
+

+
The +weighted average exercise prices for options granted and exercisable and the +weighted average remaining contractual life for options outstanding as of +December 31, 2009 and 2008 were as follows:
+

+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   +
Options
+
Outstanding
+ 		   +
Weighted
+
Average
+
Exercise
+
Price
+ 		   +
Weighted
+
Average
+
Remaining
+
Contractual
+
Term
+
(Years)
+ 		   +
Aggregate
+
Intrinsic
+
Value
+ 		 
+
Outstanding + at December 31, 2008
+ 		  560,833   13.95   9.07   — 
+
Issued
+ 		  1,037,900   —   —   — 
+
Cancelled
+ 		  (5,794)  —   —   — 
+
Exercised
+ 		  —   —   —   — 
+
Outstanding + at December 31, 2009
+ 		  1,592,939  $10.29  $8.88  $12,738 
+
Exercisable + at December 31, 2009
+ 		  581,539  $11.61  $8.57  $3,886 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

+
+
+ + + + + +
+
18.
+ 		+
Statutory + reserves
+
+
+
+
 
+
In +accordance with the laws and regulations of the PRC, it is required that before +an enterprise registered in the PRC distributes profits, it must first satisfy +all tax liabilities, provide for losses in previous years, and make allocations +to its statutory surplus reserve. The Company’s PRC subsidiaries are required to +transfer 10 percent of their after-tax profit to a statutory surplus reserve +fund until the reserve balance reaches 50 percent of its registered capital, +which must be completed prior to dividend distribution. As of December 31, +2009, total registered capital of all the Company’s subsidiaries in the PRC was +$293,397 (RMB2,011,171). Statutory reserves represent restricted retained +earnings.
+

+
Statutory +reserves may be utilized to offset prior years’ losses or to increase registered +capital. Usage of the statutory reserves should not result in its balance +falling below 25 percent of registered capital, unless the reserves are used to +reduce incurred losses. In 2009, $Nil additional statutory surplus reserves were +made by the Company’s PRC subsidiaries, and the balances of statutory surplus +reserves at December 31, 2009 and 2008 totaled $4,155 and $4,155 +respectively.

+
+
+
  +
+
+
+
F-30
+
+
+
+
+
+
  +
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
19.
+ 		+
Employee welfare + plan
+
+
+
+
 
+
The +Company has established its own employee welfare plan in accordance with PRC +laws and regulations. The Company records welfare expenses as incurred. The +total expense for the plan was $634, $456 and $216 for the years ended December +31, 2009, 2008 and 2007, respectively.
+

+
+
+ + + + + +
+
20.
+ 		+
Income + taxes
+
+
+
+
 
+
A-Power +is incorporated in the BVI and therefore is not subject to income tax under the +relevant jurisdiction.
+

+
The +Company’s holding company subsidiaries, Head Dragon and Easy Flow, are +incorporated in Hong Kong and do not generate any operating income, therefore +they are not subject to income tax under the relevant jurisdiction. Its +operating subsidiaries are incorporated in the PRC and Thailand and are subject +to income taxes as described below.
+

+
Prior to +December 31, 2007, the statutory tax rate of the PRC Enterprise Income tax +(“EIT”) was 33% (30% of national income tax plus 3% local income +tax).
+
 
+
On March +16, 2007, the National People’s Congress passed the new Enterprise Income Tax +law (the “new EIT law”) which imposes a single income tax rate of 25% for most +domestic enterprises and foreign investment enterprises (FIE). The new EIT +law was effective as of January 1, 2008. The new EIT law provides a +five-year transition period from its effective date for those enterprises which +were established before March 16, 2007 and which were entitled to a preferential +lower tax rate under the then effective tax laws or regulations, as well as +grandfathering tax holidays.
+

+
GaoKe +Energy registered as an Foreign Investment Enterprise (“FIE”) in August 2006, +entitling it to a 100% exemption from PRC income tax for two years starting with +the year ended December 31, 2007, and a 50% exemption from PRC income tax for +three years starting with the year ended December 31, 2009. The new EIT law +eliminated the preferential tax treatment available to FIEs; however, the +preferential tax treatment has been grandfathered for FIEs registered prior to +the law taking effect, including GaoKe Energy. As such, GaoKe Energy was not +subject to income taxes in 2007 or 2008 and should be subject to national income +tax at a rate of 12.5% (50% of 25%) for 2009, 2010, and 2011 before converting +to the full income tax rate in 2012 of the tax rate established by the new EIT +law of 25%. However, no tax provision has been provided for GaoKe +Energy in 2009 because it was able to obtain a full income tax exemption for +2009 from local tax authorities.
+

+
GaoKe +Design was incorporated in May 2003 and was subject to the full income tax rate +of 33% prior to January 1, 2008 and to the full income tax rate of 25% for years +beginning after January 1, 2008, the effective date of the new EIT +law.
+

+
LICEG +Ltd. was incorporated in August 2007, but did not begin generating income until +2008. As such, no income tax provision was made for LICEG Ltd in 2007 and 2008. +It is subject to the full income tax rate of 25% for the year ended December 31, +2009.
+

+
Ruixiang +was incorporated in July 2007, and Jinxiang was incorporated in January 2008. +Both of them were subject to the full income tax rate of 25%.
+
 
+
+
+
+
  +
+
+
+
F-31
+
+
+
+
+
+
  +
+
+
+
+

+ +
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
A +reconciliation between the provision for income taxes computed by applying the +relevant statutory tax rates in PRC (25% in 2009, 25% in 2008, 33% in 2007) and +the Company’s actual provision for income taxes is as follows:
+

+
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   +
Years Ended December 31,
+ 		 
  +   +
2009
+ 		   +
2008
+ 		   +
2007
+ 		 
+
Net + (loss) profit before income taxes and noncontrolling + interest
+ 		 $(14,731) $28,918  $15,253 
  +             
+
(Recovery) + provision for income taxes at statutory rates
+ 		  (3,683)  7,230   5,033 
+
Effect + of tax exemption
+ 		  (9,329)  (8,645)  (5,793)
             
+
Non-deductable + expense
+ 		  14,804   1,486   950 
+
Total + provision for income taxes
+ 		 $1,792  $71  $190 
             
+
Provision + for income taxes – current
+ 		  3,716   435   190 
+
Provision + for income taxes – future
+ 		  (1,924)  (364)  — 
+
Total + provision for income taxes
+ 		 $1,792  $71  $190 
+
+
+
+
+
+
+
+
+
+
+
+
+
 
+
+
+
  +
+
+
+
F-32
+
+
+
+
+
+
  +
+
+

+
 A-Power Energy Generation Systems, +Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+
 
+
The +Company calculated deferred tax assets and liabilities using 12.5% for Gaoke +Energy and 25% for other subsidiaries, the tax rate applicable in 2010. The +temporary differences that have given rise to the deferred tax asset of $2,321 +and $364 at December 31, 2009 and 2008, respectively, consist of the +following:
+
 
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
   
+ 		  +
December 31,
+ 		   +
December 31,
+ 		 
+
   
+ 		  +
2009
+ 		   +
2008
+ 		 
+
Accounts + receivable
+ 		 $121  $70 
+
Prepayments, + deposits, and other receivables  
+ 		  (85)  2 
+
Inventory
+ 		  51   — 
+
Property, + plant and equipment, net
+ 		  22   — 
+
Intangible + Assets
+ 		  25   — 
+
Accounts + payable
+ 		  (22)  395 
+
Accued + and other payables
+ 		  1,836   — 
+
Unearned + revenue
+ 		  354   — 
  +  $2,302  $467 
+
Other
+ 		  (12)  (103)
+
Net + deferred income tax assets
+ 		 $2,290  $364 
  +         
+
Deferred + income tax assets
+ 		 $2,321  $364 
+
Deferred + income tax liabilities
+ 		  31   — 
+
Net + deferred income tax assets
+ 		 $2,290  $364 
+
+
+
+
+
+
+
+
+
+

+
The +valuation allowance on future tax assets and liabilities is considered on an +individual entity basis. As the Company expects to generate sufficient taxable +income in the future, no allowance is recorded.
+

+
The +Company’s future asset for income taxes includes unrecognized tax benefits, +interest, and penalties which relate to tax years still subject to review by +taxing authorities. The Company has assessed that there was no significant +uncertain tax position requiring recognition in its financial statements. There +were no material interest or penalties incurred for the years ended December 31, +2009, 2008 and 2007.
+

+
+
+ + + + + +
+
21.
+ 		+
Loss (earnings) per + share
+
+
+
+

+
For the +years ended December 31, 2009, 2008 and 2007, respectively, basic loss +(earnings) per share equaled $(0.49), $0.96 and $1.17, based on basic weighted +average number of shares outstanding of 34,199,100, 29,824,158 and 13,000,000, +respectively. For the years ended December 31, 2009, 2008 and 2007, +respectively, diluted (loss) earnings per share equaled $(0.49), $0.94 and +$1.17, respectively, based on diluted weighted average number of shares +outstanding of 34,199,100, 30,432,434 and 13,000,000, respectively. The weighted +average numbers of shares outstanding during 2007 has been restated to reflect +the recapitalization on January 18, 2008.
+

+
The +Company calculated earnings per share on the basis of the 1/18/08 Transaction +having existed through the entire year, and included the 2007 and 2008 earn-out +shares issued to Mr. Jinxiang Lu in basic and diluted earnings per share +calculations from the issuance date and measurement date, respectively (as +described in Note 3). The effect of earn-out shares that have yet to be earned +(as described in Note 3) have not been considered in the diluted earnings per +share calculation since the shares are contingently issuable.

+
+
+
  +
+
+
+
F-33
+
+
+
+
+
+
  +
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
22.
+ 		+
Related party balances and + transactions
+
+
+
+
 
+
Related +party balances
+

+
Related +party balances consisted of the following at December 31, 2009 and 2008, +respectively:
+
 
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
   
+ 		  + +
December 31,
+ 		  +   + +
December 31,
+ 		  +
+
   
+ 		  + +
2009
+ 		  +   + +
2008
+ 		  +
+
Amount + Due From:  
+ 		  +    +   +    +
+
Head + Dragon Ground Heating Pump Company (“Heating”)
+ 		  + +
 $
+ 		+
22
+ 		  +   + +
 $
+ 		+
22
+ 		  +
+
Jinxiang + Lu – CEO and a director
+ 		  +   + +
—
+ 		  +   +   + +
1,192
+ 		  +
+
Liaoning + High-Tech Furnace Insulation and Anti-Corrosion Engineering, Ltd. + (“Furnace”)
+ 		  +   + +
83
+ 		  +   +   + +
83
+ 		  +
+
  +  
+ 		  + +
$
+ 		+
105
+ 		  +   + +
$
+ 		+
1,297
+ 		  +
+
Amount + Due To:  
+ 		  +   +   +   +   +   +   +   +
+
Shenyang + Xiangfeng New Energy Engineering Ltd. (“Xiangfeng”)
+ 		  + +
 $
+ 		+
1,316
+ 		  +   + +
 $
+ 		+
1,311
+ 		  +
+
Jinxiang + Lu – CEO and a director
+ 		  +   + +
2,842
+ 		  +   +   + +
—
+ 		  +
+
John + Lin  - COO and a director
+ 		  +   + +
—
+ 		  +   +   + +
9
+ 		  +
+
  +  
+ 		  + +
$
+ 		+
4,158
+ 		  +   + +
$
+ 		+
1,320
+ 		  +
+
+
+
+
+
+

+
Heating +and Furnace are related to the Company because these entities are controlled by +Mr. Lu, the CEO and director of the Company. All amounts are unsecured, +non-interest bearing with no fixed terms of repayment.
+

+
Xiangfeng +is related to the Company because it is controlled by Mr. John Lin, the COO and +director of the Company. The amount due to Xiangfeng is unsecured, non-interest +bearing with no fixed terms of repayment.
+

+
Related +party transactions  
+

+
Consulting +services by Chardan Capital
+

+
On March +1, 2008, the Company entered into a consulting agreement with Chardan Capital to +provide a variety of services, including advice and assistance in meeting U.S. +public reporting requirements and accounting standards, Sarbanes-Oxley +compliance, corporate structuring and development, stockholder relations, +corporate finance and operational capitalization, transfer agent matters and +such other similar services as requested and agreed to by Chardan Capital in +exchange for a fee of $20 per month. Dr. Richard D. Propper, a director of the +Company until his resignation in March 2008, is a managing member of Chardan +Capital. Total fees charged to the Company during the year ended December 31, +2009 and 2008 amounted to $119 and $200, respectively.  No such fees +charged to the Company during the year ended December 31, 2007.
+

+
A-Power +loan guarantee to Chardan Capital
+

+
In April +2008, the Company entered into a commitment to guarantee a $3,000 loan +obligation of Chardan Capital. As of December 31, 2009, Chardan had repaid the +bank loan fully and the related collateral was released. See Note +4.

+
+
+
  +
+
+
+
F-34
+
+
+
+
+
+
  +
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+
 
+
As of +December 31, 2008, Mr. Lu the CEO and director of the Company, was obligated to +pay the company $1,192. In order to finance working capital for the Company, on +March 26, 2009 and May 6, 2009, Head Dragon entered into two loan agreements +with Mr. Lu to borrow $3,000 and $1,000 respectively, from Mr. Lu. Both loans +are for a one year term, unsecured, and non-interest bearing. After offset of +loans receivable and payable, as of December 31, 2009, the Company was obligated +to pay Mr. Lu $2,808.
+

+
On +February 9, 2010, The Company had repaid $2,808 to Mr. Lu.
+

+
The +Company, neither directly nor indirectly, makes loans, extends credit, maintains +credit or arranges for the extension of credit or renews an extension of credit +in the form of a personal loan to or for any director or executive officer of +the Company, in compliance with the provisions of the Sarbanes-Oxley Act of +2002. Except as set forth in the discussion above, none of the Company’s +directors or executive officers has been involved in any transactions with the +Company or any of its directors, executive officers, affiliates or associates +which are required to be disclosed herein.
+
 
+
+
+ + + + + +
+
23.
+ 		+
Supplemental disclosure of + non-cash financing +activities
+
+
+
+

+
During +the year ended December 31, 2009, the Company issued Senior Convertible Notes +and warrants to purchase common shares for an aggregate purchase price of +$40,000.  Subsequently but before December 31, 2009, all Senior +Convertible Notes were converted to the Company’s common +shares.  Among the conversions, the outstanding Senior Convertible +Notes with principal amount of $37,500 and accrued interest of $537, together +with a Make-Whole payment in the amount of $9,261, into an aggregate of +4,582,561 common shares of the Company using a conversion price per share +set at $10.212, which is 96% of the original conversion price of +$10.637.  The reduction of the conversion price per share resulted in +inducement costs of $3,394 for the year ended December 31, 2009.  See +Note 15.
+

+
No such +non-cash financing activities existed for the years ended December 31, 2008 and +2007.
+

+
+
+ + + + + +
+
24.
+ 		+
Commitments and + contingencies
+
+
+
+

+
+
+ + + + + +
+
(a)
+ 		+
The + Company is committed to purchasing subcontracting services and project + supplies related to the fulfillment of its distributed power generation + contracts.  The total commitment to subcontractors and suppliers + remaining as of December 31, 2009 was approximately $205,631 (RMB1.4 + billion) and $19,215 (RMB131 million) respectively.  Included in + prepayments, deposits and other receivables are payments of $40,345 + (RMB275.4 million) to be applied against these + commitments.
+
+
+
+
 
+
+
+ + + + + +
+
(b)
+ 		+
In + February 2007, the Company entered into an agreement with Norwin A/S to + acquire its license and trademark to manufacture wind turbines for a total + payment of $3,500. As of December 31, 2008, $1,750 had been paid by the + Company and classified as a deposit on intangible assets. The Company + committed to pay the remaining $1,750 by February 15, 2009. On January 28, + 2010, $1,200 had been paid by the Company, leaving a remaining balance of + $550 outstanding.
+
+
+
+

+
+
+ + + + + +
+
(c)
+ 		+
In + May 2007, the Company entered into an agreement with Fuhrlander AG to + acquire its license to manufacture and sell wind turbines for a total + payment of $6,400 (Euro 4.5 million). As of December 31, 2009, this amount + had been paid by the Company and classified as an intangible + asset.
+
+
+
+

+
The +Company also committed to pay $5,100 (Euro 3.5 million) in training fees as part +of this agreement before it receives the license. As of December 31, 2009, +$2,200 (Euro 1.5 million) had been paid by the Company and had been classified +as an intangible asset. The remaining balance of $2,928 (Euro 2.0 million) has +not been paid by the Company as of December 31, 2009 because Fuhrlander is +required to provide us technology documents, which as of December 31, 2009 had +not been provided.
+

+
In a +separate parts purchase agreement with Fuhrlander, the Company also committed to +the purchase of $17,900 (Euro 12.7 million) in parts inventory. As of December +31, 2009, $6,500 (Euro 4.6 million) in parts inventories had been purchased by +the Company against this commitment.

+
+
+
  +
+
+
+
F-35
+
+
+
+
+
+
  +
+
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
(d)
+ 		+
In + June 2008, the Company entered into an operating lease agreement for its + Beijing offices, which runs through June 2011. The total commitment + remaining as of December 31, 2009 was approximately $185 (RMB + 1,260,000).
+
+
+
+

+
+
In May +2009, the company entered into an operating lease agreement for its operating +office based in Shenyang Downtown mall, which runs through Apr 30, 2010. The +total commitment remaining as of December 31, 2009 was approximately $11 (RMB +77,000).
+
+

+
+
In +January 2010, the company renewed an operating lease agreement for GaoKe Energy +Beijing operating office, which runs through Apr 30, 2010. The total commitment +remaining as of December 31, 2009 was approximately $9 (RMB +60,000).
+
+

+
+
+ + + + + +
+
(e)
+ 		+
In + October 2005, the Company entered into an agreement with LICEG (“JV + Agreement”) to set up a joint-venture company, LICEG Ltd., which was + incorporated in August 2007 (See Note 1). Per the JV Agreement, the + Company shall pay LICEG $5,274 (RMB 36,000,000) when LICEG fulfills its + obligations specified in the JV Agreement, to obtain the listed licenses + and settle with LICEG’s existing employees. LICEG expects to fulfill its + obligations within the fiscal year +2010.
+
+
+
+

+
+
+ + + + + +
+
(f)
+ 		+
On + March 3, 2009, the Company entered into an agreement with GE Commercial + shanghai Co., Ltd.(“GE”) to purchase gearboxes. GE committed to supply 100 + sets, 300 sets and 500 sets of gearboxes in 2010, 2011 and 2012 + respectively. To secure these rights, the company committed to pay GE a + total of $10,900. Pursuant to payment schedule, $1,900 was to be paid + before November 30, 2009, $7,600 is to be paid before March 01, + 2010 and the remaining $1,400 is to be paid before July, 01, + 2010. As of December 31, 2009, the company did not make the + scheduled payment.
+
+
+
+

+
+
+ + + + + +
+
(g)
+ 		+
On + July 28, 2009, the Company entered into a short-term loan agreement + totaling $7,325 (RMB50,000,000) with Shanghai Pudong Development Bank. + Pursuant to the loan agreement, the loan bears interest at 5.841% per + annum and due for repayment on July 27, 2010. GaoKe Energy provided a + guarantee for the loan.
+
+
+
+

+
+
+ + + + + +
+
(h)
+ 		+
On + August 18, 2009, the Company entered into definitive agreements to form + two joint ventures (“JVs”) with Jiangsu Miracle Logistics System + Engineering Co. Ltd. (“Jiangsu Miracle”). The first JV, called Shenyang + Tianxiang Wind Equipments Manufacturing Co., Ltd. (“Shenyang Tianxiang”), + will manufacture rotor blades, hubs, nacelle covers, and other key + components for wind turbines. A-Power is committed to contribute + approximately $1,500 (RMB10.2 million) in cash for 51% of its registered + capital. The second JV, Shenyang Tianrui Wind Equipments Sales Company + Co., Ltd. (“Shenyang Tianrui”) will engage in marketing and sales of the + wind turbine components made by Shenyang Tianxiang. A-Power is committed + to contribute $359 (RMB2.45 million) in cash for 49% of its registered + capital.
+
+
+
+

+
In a +separate parts purchase agreement with Jiangsu Miracle effective in January, +2010, the Company also committed to pay $4,230 (RMB 29.9 million) to purchase 22 +sets main frame for 2.7 MW wind turbines. The Company also committed that +20% advance for purchased components will be paid, 70% will be paid upon +receipt of quality inspection certification and package statement,and the +remaining 10% will be paid upon delivery of components.
+

+
+
+ + + + + +
+
(i)
+ 		+
In + October 2008, the Company entered into an agreement with Shandong Shuanyi + Group Company Ltd. to purchase 15 sets of cabin covers and deflector + shield of 750 KW wind turbine components, totalling $260 (RMB1.8 million). + The Company committed to pay an advance of $78 (RMB530,000) upon the + effective date of the contract, an additional $176(RMB1.2 million) upon + receipt of the components, and the remaining $10 (RMB70,000) upon the + completion of the quality warranty period. As of December 31, 2009, the + advance of $78 (RMB530,000) was paid by Company and the remaining + $186(RMB1.2million) has not been paid since only 5 sets of components were + received.
+
+
+
+

+
+
+ + + + + +
+
(j)
+ 		+
In + October 2008, the Company entered into an agreement with Qinhuangdao + Yaohua Glass steel Company Ltd. to purchase 17 sets of cabin covers and + deflector shields of 750 KW wind turbine components, totalling $357 + (RMB2.4 million). The Company committed to pay an advance of $107 + (RMB730,000) upon the effective date of the contract, an additional $234 + (RMB1.6 million) upon receipt of the components, and the remaining $13 + (RMB90,000) upon the completion of the quality warranty period. As of + December 31, 2009, the advance of $20 (RMB139,800) was paid by the Company + and the remaining $337 (RMB2.3million) has not been paid since no + components were received.
+
+
+

+
+
+
  +
+
+
+
F-36
+
+
+
+
+
+
  +
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
(k)
+ 		+
In + July 2009, we entered into a technology transfer agreement with Shenyang + Huaren, to use Shenyang Huaren’s proprietary technology to commercially + produce and sell 1.5 MW wind turbines. To secure these rights, we agreed + to pay Shenyang Huaren RMB 4.0 million, including an initial transfer fee + of RMB2.0 million within 15 days of executing the agreement, RMB 1.0 + million within one month of receiving technology transfer documents from + Shenyang Huaren, RMB 0.5 million within 15 days of producing the initial + prototype and RMB0.5 million within 15 days of connection of a wind + turbine to the grid. As of December 31, 2009, we haven’t made any payments + yet.
+
+
+
+

+
+
+ + + + + +
+
(l)
+ 		+
In + January 2010, we entered into a technology license agreement (the “W2E + Agreement”) with W2E Technologies to manufacture, operate, service and + sell advanced T8x 2.0 MW wind turbines. Under the license agreement, W2E + Technologies granted us an exclusive right to manufacture, operate, + service and sell its T8x 2.0 MW wind turbines in China and the United + States beginning in January 2010. In addition, we have obtained + non-exclusive rights to market these turbines in international markets + outside of China and the United States. Under the technology license, + during the term of the agreement, we have the right to any additional + know-how in relation to the manufacturing, selling, erecting, + commissioning, operating, maintaining and monitoring of the T8x 2.0 MW + wind turbines without charge. To secure these rights, we agreed to pay W2E + Technologies a transfer fee of approximately $1,400 (EUR 1.0 million), an + additional approximately $2,000 (EURO 1.5 million) upon achievement of + certain technology transfer and turbine assembly milestones and further + minimum royalty payments of approximately $4,200 (EURO 3.0 million) over a + period of seven years following the first commission of wind turbines. The + company paid W2E Technologies approximately $1,400 (EUR 1.0 million) in + February, 2010
+
+
+

+
+
+
  +
+
+
+
F-37
+
+
+
+
+
+
  +
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
25.
+ 		+
Financial + Instruments
+
+
+
+

+
Fair +Value
+

+
The +carrying amounts reported in the statements of financial position for current +assets and current liabilities that qualify as financial instruments are a +reasonable estimate of fair value due of the short maturity of those +instruments. Non-current financial instruments, including accounts receivable +and notes receivable, have been discounted to present fair value at a rate of +5.40%. These discounted financial instruments are due within two years of +December 31, 2009.
+

+
Credit +risk
+

+
It is +business custom in the PRC to pay deposits on major purchases and to require +deposits on major sales contracts. As such, the Company’s exposure to credit +risk is limited.
+

+
Currency +risk
+

+
The Company’s indirect subsidiaries use +RMB as their functional currency and maintain RMB-denominated bank accounts. As +the Company uses U.S. Dollars as its reporting currency, substantial changes in +the exchange rates between these two currencies may result in a material +cumulative translation adjustment. As the RMB is not a freely convertible +currency, there is no certainty that RMB could be converted to U.S. Dollars upon +request.
+

+
Derivative +financial instruments
+
 
+
The +Company’s primary objective for holding derivative financial instruments is to +manage currency risk. The Company records derivative instruments as assets or +liabilities, measured at fair value. The recognition of gains or losses +resulting from changes in fair values of those derivative instruments is based +on the use of each derivative instrument and whether it qualifies for hedge +accounting.
+
 
+
The +Company has entered into foreign currency forward contracts to hedge certain of +its foreign currency cash flow exposures in the inventory purchase transactions +with Fuhrlander, a German supplier in Wind Business segment. A foreign currency +forward contract is a commitment to deliver a certain amount of currency at a +certain price on a specific date in the future. By entering into these +contracts, the Company is locked into a future currency exchange rate, which +limits its exposure to the movement in foreign currency exchange +rates.
+

+
The +foreign currency forward contracts do not qualify for hedge accounting and, as a +result, the Company records forward contracts as liabilities, measure at fair +value, at balance sheet dates, and the changes in fair value of the foreign +currency forward contracts are recognized in the statement of +income.

+
+
+
  +
+
+
+
F-38
+
+
+
+
+
+
  +
+
+

+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
Derivative +financial instruments - continued
+
 
+
+
As of +December 31, 2009, the Company had the following losses on its outstanding +foreign currency forward contracts:

+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   +
December 31,
+ 		   +
December 31,
+ 		 
  +   +
2009
+ 		   +
2008
+ 		 
  +       
+
Forward + contract #1 (i)
+ 		 $229  $- 
+
Forward + contract #2 (ii)
+ 		  219   - 
+
Forward + contract #3 (iii)
+ 		  68   - 
  +         
+
Total
+ 		 $516  $- 
+
+
+
+
+
+
+

+
+ + + + + + +
+ +
(i)
+ 		+
On + September 24, 2009, Ruixiang entered a foreign currency forward contract + with a notional amount of $6,009 (Euro 4, 187,000) with Huaxia Bank. See + Note 13. The contract fixed the exchange rate between Euro and RMB at + 10.11 with maturity date on September 24, +2010.
+
+
+
 
+
+ + + + + + +
+ +
(ii)
+ 		+
On + October 22, 2009, Ruixiang entered a foreign currency forward contract + with a notional amount of $4,824 (Euro 3,361,000) with Huaxia Bank. See + Note 13. The contract fixed the exchange rate between Euro and RMB at + 10.231 with maturity date on April 20, +2010.
+
+
+
 
+
+ + + + + + +
+ +
(iii)
+ 		+
On + October 27, 2009, Ruixiang entered a foreign currency forward contract + with a notional amount of $1,695 (Euro 1,181,000) with Huaxia Bank. See + Note 13. The contract fixed the exchange rate between Euro and RMB at + 10.18 with maturity date on April 23, +2010.
+
+
+
 
+
The +Company recorded a loss on foreign currency forward contracts of $516, $Nil, and +$Nil for the year ended December 31, 2009, 2008 and 2007, +respectively.
+

+
+
+ + + + + +
+
26.
+ 		+
Economic + Dependence
+
+
+
+

+
During +2009, no individual customer represented over 10% of revenue, and no individual +supplier represented over 10% of cost of sales. As of December 31, 2009, five +customers represented 17%, 13%, 12%, 10% and 10% of total accounts receivable, +respectively, and two suppliers represented 12% and 10% of total accounts +payable.
+

+
During +2008, one customer represented 29% of total gross revenue, and no individual +supplier represented over 10% of total cost of sales. As of December 31, 2008, +three customers represented 50%, 16%, and 11% of total accounts receivable, +respectively, and one supplier represented 15% of total accounts +payable.
+

+
During +2007, three customers individually comprised 43%, 23% and 19% of revenue and +three suppliers individually accounted for 14%, 12% and 11% of total cost of +sales. At December 31, 2007, two customers individually represented 48% and 19% +of total accounts receivable, three suppliers individually represented 25%, 13% +and 12% of total accounts payable.
+

+
Each of +the customers and suppliers with significant representations noted above are +customers or suppliers of the Company’s Distributed Power Generation +segment.

+
+
+
  +
+
+
+
F-39
+
+
+
+
+
+
  +
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
27.
+ 		+
Segmented + Information
+
+
+
+
 
+
Effective +January 1, 2009, the Company has two operating segments: Distributed Power +Generation and Wind Business. The Distributed Power Generation segment consists +of GaoKe Energy and its subsidiary, Gaoke Design, and Power which are engaged in +the distributed power generation business, and Shoulong, a Thailand company +engaged in Construction of distributed power generation systems. The Wind +Business segment consists of Ruixiang, Jinxiang, Longxiang and Yixiang, which +manufacture wind-power turbines.  A-Power and its other subsidiaries, +Head Dragon, Easy Flow, and LICEG Ltd., are aggregated as an All Others segment. +The All Other segment includes revenue from LICEG Ltd., all head office expenses +and all expenses resulting from the Convertible Debt and Notes conversion. The +Wind Business segment commenced operations in 2008, and no revenue had been +generated in this segment as of December 31, 2008.
+
 
+
Financial +information with respect to the reportable segments and reconciliation to the +amounts reported in the Company’s consolidated financial statements +follows:
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
  +   +
Distributed
+
Power
+
Generation
+ 		   +
Wind
+
Business
+ 		   +
All Others
+ 		   +
Elimination
+ 		   +
Consolidated
+ 		 
  +                
+
For + the Year Ended December 31, 2009
+ 		               
  +                
+
Revenues + from external customers
+ 		 $261,117  $32,741  $17,394  $-  $311,252 
                     
+
Intersegment  revenue
+ 		  -   -   3,369   (3,369)  - 
                     
+
Segment + profit or (loss)
+ 		  37,907   5,199   (59,510)  (288)  -16,692 
                     
+
Income + tax expense (benefit)
+ 		  (186)  1,933   45   —   1,792 
                     
+
Segment + assets
+ 		  381,303   209,142   340,564   (575,652)  355,357 
                     
+
Interest + Expense, net
+ 		  -   173   196   —   369 
                     
+
Property, + plant and equipment, net
+ 		  12,886   45,338   1,499   (1,106)  58,617 
                     
+
Depreciation
+ 		  734   205   80   -   1,019 
                     
+
Intangible + Assets, net and deposits on intangible assets
+ 		  1,508   25,852   709   -   28,069 
                     
+
Capital + expenditures
+ 		  817   24,011   117   -   24,945 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

+
+
+
  +
+
+
+
F-40
+
+
+
+
+
+
  +
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
27.
+ 		+
Segmented Information - + continued
+
+
+
+

+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
For + the Year Ended December 31, 2008
+ 		               
  +                
+
Revenues + from external customers
+ 		 $256,760  $-  $8,106  $—  $264,866 
                     
+
Inter-segment + revenue
+ 		  —   —   14,343    (14,343)  — 
                     
+
Segment + profit (loss)
+ 		  32,988   (392)  (3,275)   804   28,516 
                     
+
Income + tax expense (benefit)
+ 		  (73)  -   143    -   71 
                     
+
Segment + assets
+ 		  136,984   77,274   238,133    246,853   205,537 
                     
+
Interest + Expense, net
+ 		  23   -   131    -   153 
                     
+
Property, + plant and equipment, net
+ 		  12,859   26   1,428    -   14,312 
                     
+
Depreciation
+ 		  337   3   45    -   385 
                     
+
Intangible + Assets, net and deposits on intangible assets
+ 		  1,548   20,606   732    -   22,886 
                     
+
Capital + expenditures
+ 		  6,532   25,795   1,769  -   34,097 
  +                     
+
For + the Year Ended December 31, 2007
+ 		                    
  +                     
+
Revenues + from external customers
+ 		 $152,544  $-  $-  $-  $152,544 
                     
+
Intersegment  revenue
+ 		  -   -   -    -   - 
                     
+
Segment + profit or (loss)
+ 		  17,903   -   (2,689)   -   15,214 
                     
+
Income + tax expense (benefit)
+ 		  -   -   -    -   - 
                     
+
Segment + assets
+ 		  64,720   -   3,729    -   68,449 
                     
+
Interest + Expense, net
+ 		  65   -   904    -   969 
                     
+
Property, + plant and equipment, net
+ 		  2,502   -   -    -   2,502 
                     
+
Depreciation
+ 		  187   -   -    -   187 
                     
+
Intangible + Assets, net and deposits on intangible assets
+ 		  -   4,124   -    -   4,124 
                     
+
Capital + expenditures
+ 		  495   4,124   -  -   4,619 
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

+
+
+
  +
+
+
+
F-41
+
+
+
+
+
+
  +
+
+
+
 
+
A-Power +Energy Generation Systems, Ltd. and Subsidiaries
+
Notes +to Consolidated Financial Statements
+
(Year +Ended December 31, 2009)
+
(In +Thousands of United States dollars, Except per Share Amounts)
+

+
+
+ + + + + +
+
28.
+ 		+
Changes in Presentation of + Comparative Statements
+
+
+
+

+
Certain +reclassifications have been made in prior years’ financial statements in order +to conform to the basis of presentation for the current year.
+

+
+
+ + + + + +
+
29.
+ 		+
Subsequent + Events
+
+
+
+

+
+ + + + + +
+
(a)
+ 		+
On + December 16, 2009, Power entered into an Joint Venture Agreement (the "LLC + Agreement") with United States Renewable Energy Group Wind Partners + I, LLC, a Delaware limited liability company ("USREG + Wind").  USREG Wind is indirectly jointly owned and controlled + by US Renewable Energy Group, an investment and consulting firm, and Cielo + Wind Services, Inc. ("Cielo"), a U.S. wind energy project + developer.  Under the LLC Agreement, Power and USREG Wind have + agreed to establish, co-own and co-manage a Delaware limited liability + company (the “Project Company”) that will own, design, develop, construct, + manage and operate a wind energy power plant to be located in Texas with a + total nameplate capacity of 600 MW (the "Project"). Power will own + a 49% interest in the Project Company in exchange for a cash capital + contribution of $36,625 which was fully paid on February + 12, 2010, and USREG Wind will own a 51% interest in the Project + Company in exchange for its transfer of certain land rights and + other Project rights to the Project + Company. 
+
+
+

+
As a 49% +owner of the Project Company, Power will not have management control over +day-to-day operations of the Project Company but will retain voting control over +certain major decisions affecting the Project Company such as entering into any +Project financing, sale of the Project, entering into major contracts, or +dissolution of the Project Company. The LLC Agreement designates Ruixiang, to be +the exclusive manufacturer and supplier of turbines to the +Project.  The Project is expected to be primarily constructed by GaoKe +Energy.   
+

+
+ + + + + +
+
(b)
+ 		+
On + September 16, 2009, the Company signed a contract to acquire 100% of + EVATECH Co., Ltd. ("EVATECH") of Kyoto, Japan, a 22-year-old designer and + manufacturer of industrial equipment for LCDs (liquid crystal displays), + PDPs (plasma display panels) and, amorphous-silicon (a-Si) photovoltaic + (PV) panels. The total consideration was $49,900 in cash. On + January 25, 2010, the Company paid $49,900. The Company expects to receive + rebates amounting $22, 455 from various levels of the local government + ($9,980 from the Liaoning Provincial Government, $9,980 from the Shenyang + Municipal Government, and $2,495 from the Hunnan New District Government + in Shenyang.)
+
+
+

+
+ + + + + +
+
(c)
+ 		+
On + January 21, 2010, the Company entered into a securities purchase agreement + with certain institutional investors pursuant to which we sold such + investors 5,777,932 of our common shares at a price of $14.37 per share, + together with two series of warrants to purchase an additional 2,888,968 + shares.  2,099,823 of the warrants are exercisable at $16.90 per + share and the remainder are exercisable at $16.91 per + share.  All of the warrants will be initially exercisable six + months after January 21, 2010 and will remain exercisable for a five-year + period thereafter.  The gross proceeds of the offering (which + closed on January 21, 2010) was +$83,000.
+
+
+
 
+
+
+
+
+
+
+
F-42
+
+
+
+
+
+
+
+
+
+
+
+
 
+
+
EXHIBIT INDEX
+
 
+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
Exhibit
+
No.
+ 		  + +
Description of Document
+
  +   +   +
+
1.1
+ 		  + +
Amended + and Restated Memorandum of Association of A-Power Energy Generation + Systems, Ltd. (incorporated by reference to Exhibit 1.1 of Amendment No. 1 + to the annual report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on December 2, 2009)
+
  +   +   +
+
1.2
+ 		  + +
Amended + and Restated Articles of Association of A-Power Energy Generation Systems, + Ltd. (incorporated by reference to Exhibit 1.2 of Amendment No. 1 to the + annual report on Form 20-F (file no. 001-33820) filed with the Securities + and Exchange Commission on December 2, 2009)
+
  +   +   +
+
2.1
+ 		  + +
Form + of Unit Purchase Option granted to EarlyBird Capital, Inc., as + representative of the underwriters (incorporated by reference to Exhibit + 4.4 of the registration statement on Form S-1 of Chardan South China + Acquisition Corporation (file no. 333-125018) filed with the Securities + and Exchange Commission on May 17, 2005)
+
  +   +   +
+
2.2
+ 		  + +
Amendment + to Unit Purchase Option granted to EarlyBird Capital, Inc., as + representative of the underwriters, dated April 16, 2007 (incorporated by + reference to Exhibit 4.7 of the annual report on Form 10-KSB of Chardan + South China Acquisition Corporation (file no. 000-51432-07771156) filed + with the Securities and Exchange Commission on April 17, + 2007)
+
  +   +   +
+
2.3
+ 		  + +
Form + of Warrant Agreement between Continental Stock Transfer & Trust + Company and A-Power Energy Generation Systems, Ltd. (as successor to + Chardan South China Acquisition Corporation) (incorporated by reference to + Exhibit 4.5 of Amendment No. 3 to the registration statement on Form S-1 + of Chardan South China Acquisition Corporation (file no. 333-125018) filed + with the Securities and Exchange Commission on July 28, + 2005)
+
  +   +   +
+
2.4
+ 		  + +
Warrant + Clarification Agreement with Continental Stock Transfer & Trust + Company, dated April 16, 2007 (incorporated by reference to Exhibit 4.6 of + the annual report on Form 10-KSB of Chardan South China Acquisition + Corporation (file no. 000-51432-07771156) filed with the Securities and + Exchange Commission on April 17, 2007)
+
  +   +   +
+
2.5
+ 		  + +
Registration + Rights Agreement among A-Power Energy Generation Systems, Ltd. (as + successor to Chardan China Acquisition Corp. III) and Li Zhang, Kerry + Propper, Jiangnan Huang, Chardan Capital Partners and SUJG, Inc. + (incorporated by reference to Exhibit 10.11 of the registration statement + on Form S-1 of Chardan South China Acquisition Corporation (file no. + 333-125018) filed with the Securities and Exchange Commission on May 17, + 2005)
+
  +   +   +
+
4.1
+ 		  + +
Stock + Purchase Agreement, dated April 14, 2007, between A-Power Energy + Generation Systems, Ltd. (as successor to Chardan South China Acquisition + Corporation and China Energy Technology Limited) and Jinxiang Lu + (incorporated by reference to Annex A of the proxy statement/prospectus + contained in the registration statement on Form S-4 (file no. 333-142894) + originally filed with the Securities and Exchange Commission on May 11, + 2007)
+
  +   +   +
+
4.2
+ 		  + +
Form + of Agreement and Plan of Merger between Chardan South China Acquisition + Corporation and China Energy Technology Limited (incorporated by reference + to Exhibit 2.2 of our registration statement on Form S-4 (file no. + 333-142894) filed with the Securities and Exchange Commission on May 11, + 2007)
+
+
+
+
+

+
+
+
  +
+
+
+
+
+
+
+
+
+
+
  +
+
+
+

+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
4.3
+ 		  + +
Investment + Management Trust Agreement between A-Power Energy Generation Systems, Ltd. + (as successor to Chardan China Acquisition Corp. III) and Continental + Stock Transfer & Trust Company (incorporated by reference to Exhibit + 10.7 of the registration statement on Form S-1 of Chardan South China + Acquisition Corporation (file no. 333-125018) filed with the Securities + and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.4
+ 		  + +
Form + of Stock Escrow Agreement among A-Power Energy Generation Systems, Ltd. + (as successor to Chardan China Acquisition Corp. III), Continental Stock + Transfer & Trust Company, and Li Zhang, Kerry Propper, Jiangnan Huang, + Chardan Capital Partners and SUJG, Inc. (incorporated by reference to + Exhibit 10.8 of the registration statement on Form S-1 of Chardan South + China Acquisition Corporation (file no. 333-125018) filed with the + Securities and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.5
+ 		  + +
Letter + Agreement between Chardan China Acquisition Corp. III and Chardan Capital, + LLC regarding administrative support for period between initial public + offering and effective date of business combination or liquidation of + Chardan China Acquisition Corp. III (incorporated by reference to Exhibit + 10.9 of the registration statement on Form S-1 of Chardan South China + Acquisition Corporation (file no. 333-125018) filed with the Securities + and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.6
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), EarlyBird + Capital, Inc. and Dr. Richard D. Propper (incorporated by reference to + Exhibit 10.1 of the registration statement on Form S-1 of Chardan South + China Acquisition Corporation (file no. 333-125018) filed with the + Securities and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.7
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), EarlyBird + Capital, Inc. and Li Zhang (incorporated by reference to Exhibit 10.2 of + the registration statement on Form S-1 of Chardan South China Acquisition + Corporation (file no. 333-125018) filed with the Securities and Exchange + Commission on May 17, 2005)
+
  +   +   +
+
4.8
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), + EarlyBirdCapital, Inc. and Kerry Propper (incorporated by reference to + Exhibit 10.3 of the registration statement on Form S-1 of Chardan South + China Acquisition Corporation (file no. 333-125018) filed with the + Securities and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.9
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), + EarlyBirdCapital, Inc. and Jiangnan Huang (incorporated by reference to + Exhibit 10.4 of the registration statement on Form S-1 of Chardan South + China Acquisition Corporation (file no. 333-125018) filed with the + Securities and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.10
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), + EarlyBirdCapital, Inc. and Chardan Capital Partners (incorporated by + reference to Exhibit 10.5 of the registration statement on Form S-1 of + Chardan South China Acquisition Corporation (file no. 333-125018) filed + with the Securities and Exchange Commission on May 17, + 2005)
+
  +   +   +
+
4.11
+ 		  + +
Letter + Agreement, dated April 30, 2005, among A-Power Energy Generation Systems, + Ltd. (as successor to Chardan China Acquisition Corp. III), + EarlyBirdCapital, Inc. and SUJG, INC. (incorporated by reference to + Exhibit 10.6 of the registration statement on Form S-1 of Chardan South + China Acquisition Corporation (file no. 333-125018) filed with the + Securities and Exchange Commission on May 17, 2005)
+
  +   +   +
+
4.12
+ 		  + +
Cooperation + Agreement, dated September 16, 2005, between Liaoning GaoKe Energy Group + Company Limited and Tsinghua University (incorporated by reference to + Exhibit 10.14 of Amendment No. 2 of our registration statement on Form S-4 + (file no. 333-142894) filed with the Securities and Exchange Commission on + October 11, 2007)
+
  +   +   +
+
4.13
+ 		  + +
Cooperation + Agreement, dated June 25, 2005, between Liaoning GaoKe Energy Group + Company Limited and China Academic Sciences Guangzhou Energy Institute + (incorporated by reference to Exhibit 10.15 of Amendment No. 2 of our + registration statement on Form S-4 (file no. 333-142894) filed with the + Securities and Exchange Commission on October 11, 2007)
+
  +   +   +
+
4.14
+ 		  + +
A-Power + Energy Generation Systems, Ltd. 2007 Equity Plan (incorporated by + reference to Annex D of the proxy statement/prospectus contained in our + registration statement on Form S-4 (file no. 333-142894) originally filed + with the Securities and Exchange Commission on May 11, + 2007)
+
  +   +   +
+
4.15
+ 		  + +
Form + of 2007 Equity Plan Notice of Grant of Stock Option and Stock Option + Agreement (for participants resident in the PRC) (incorporated by + reference to Exhibit 4.15 of our Annual Report on Form 20-F (file no. + 001-33820) filed with the Securities and Exchange Commission on July 11, + 2008)
+
+
+

+
+
+
  +
+
+
+
+
+
+
+
+
+
+
  +
+
+
+

+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+ +   + +
Form + of 2007 Equity Plan Notice of Grant of Stock Option and Stock Option + Agreement (for U.S. participants) (incorporated by reference to Exhibit + 4.16 of our Annual Report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on July 11, 2008)
+
  +   +   +
+
4.17
+ 		  + +
Form + of 2007 Equity Plan Notice of Grant of Stock Option and Stock Option + Agreement (for international participants resident outside the PRC) + (incorporated by reference to Exhibit 4.17 of our Annual Report on Form + 20-F (file no. 001-33820) filed with the Securities and Exchange + Commission on July 11, 2008)
+
  +   +   +
+
4.18
+ 		  + +
Securities + Purchase Agreement, dated June 18, 2009, between A-Power Energy Generation + Systems, Ltd. and the investors named therein (incorporated by reference + to Exhibit 4.18 of Amendment No. 1 to the annual report on Form 20-F (file + no. 001-33820) filed with the Securities and Exchange Commission on + December 2, 2009)
+
  +   +   +
+
4.19
+ 		  + +
Form + of Senior Convertible Note, dated June 19, 2009, issued by A-Power Energy + Generation Systems, Ltd. (incorporated by reference to Exhibit 4.19 of + Amendment No. 1 to the annual report on Form 20-F (file no. 001-33820) + filed with the Securities and Exchange Commission on December 2, + 2009)
+
  +   +   +
+
4.20
+ 		  + +
Form + of Warrant, dated June 19, 2009, issued by A-Power Energy Generation + Systems, Ltd. (incorporated by reference to Exhibit 4.20 of Amendment No. + 1 to the annual report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on December 2, 2009)
+
  +   +   +
+
4.21
+ 		  + +
Form + of Put Agreement, dated June 19, 2009, between A-Power Energy Generation + Systems, Ltd. and the investors named therein (incorporated by reference + to Exhibit 4.21 of Amendment No. 1 to the annual report on Form 20-F (file + no. 001-33820) filed with the Securities and Exchange Commission on + December 2, 2009)
+
  +   +   +
+
4.22
+ 		  + +
Pledge + Agreement, dated June 19, 2009, by and among Jinxiang Lu, A-Power Energy + Generation Systems, Ltd. and Hudson Bay Fund LP (incorporated by reference + to Exhibit 4.22 of Amendment No. 1 to the annual report on Form 20-F (file + no. 001-33820) filed with the Securities and Exchange Commission on + December 2, 2009)
+
  +   +   +
+
4.23
+ 		  + +
Letter + Agreement, dated June 19, 2009, between A-Power Energy Generation Systems, + Ltd. and Jinxiang Lu (incorporated by reference to Exhibit 4.23 of + Amendment No. 1 to the annual report on Form 20-F (file no. 001-33820) + filed with the Securities and Exchange Commission on December 2, + 2009)
+
  +   +   +
+
4.24
+ 		  + +
Registration + Rights Agreement, dated June 18, 2009, by and among A-Power Energy + Generation Systems, Ltd. and the investors named therein (incorporated by + reference to Exhibit 4.24 of Amendment No. 1 to the annual report on Form + 20-F (file no. 001-33820) filed with the Securities and Exchange + Commission on December 2, 2009)
+
  +   +   +
+
4.25
+ 		  + +
Voting + Agreement, dated June 19, 2009, by and among A-Power Energy Generation + Systems, Ltd., Jinxiang Lu and John S. Lin (incorporated by reference to + Exhibit 4.25 of Amendment No. 1 to the annual report on Form 20-F (file + no. 001-33820) filed with the Securities and Exchange Commission on + December 2, 2009)
+
  +   +   +
+
4.26
+ 		  + +
Lock-up + Agreement, dated June 19, 2009, between A-Power Energy Generation Systems, + Ltd. and each of Jinxiang Lu and John S. Lin (incorporated by reference to + Exhibit 4.26 of Amendment No. 1 to the annual report on Form 20-F (file + no. 001-33820) filed with the Securities and Exchange Commission on + December 2, 2009)
+
  +   +   +
+
4.27
+ 		  + +
License + Agreement, dated May 23, 2007, between Liaoning GaoKe Energy Group Company + Limited and Führlander AG (incorporated by reference to Exhibit 4.27 to + our Annual Report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on June 30, 2009)
+
  +   +   +
+
4.28
+ 		  + +
Know-how + License Use Agreement, dated January 12, 2009, by and among Liaoning GaoKe + Energy Group Company Limited, Shenyang Lucky Wind Power Equipments Co., + Ltd and Führlander AG (incorporated by reference to Exhibit 4.28 to our + Annual Report on Form 20-F (file no. 001-33820) filed with the Securities + and Exchange Commission on June 30, 2009)
+
  +   +   +
+
4.29
+ 		  + +
License + Agreement, dated February 16, 2007, between Liaoning GaoKe Energy Group + Company Limited and Norwin A/S (incorporated by reference to Exhibit 4.29 + to our Annual Report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on June 30, 2009)
+
  +   +   +
+
4.30
+ 		  + +
Technology + License Use Agreement, dated January 12, 2009, by and among Liaoning GaoKe + Energy Group Company Limited, Shenyang Gold Lucky Electric Power + Equipments Co., Ltd and Norwin A/S (incorporated by reference to Exhibit + 4.30 to our Annual Report on Form 20-F (file no. 001-33820) filed with the + Securities and Exchange Commission on June 30, + 2009)
+
+
+

+
+
+
  +
+
+
+
+
+
+
+
+
+
+
  +
+
+
+

+
+
+
+
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
4.31
+ 		  + +
Form + of Conversion Agreement between A-Power Energy Generation Systems, Ltd. + and the investors named therein (incorporated by reference to Exhibit 99.2 + of our Form 6-K (file no. 001-33820) filed with the Securities and + Exchange Commission on December 21, 2009)
+
  +   +   +
+
4.32
+ 		  + +
Form + of Confirmation Letter between A-Power Energy Generation Systems, Ltd. and + the investors named therein (incorporated by reference to Exhibit 99.3 of + our Form 6-K (file no. 001-33820) filed with the Securities and Exchange + Commission on December 21, 2009)
+
  +   +   +
+
4.33
+ 		  + +
Form + of Securities Purchase Agreement, dated January 21, 2010, between A-Power + Energy Generation Systems, Ltd. and the investors named therein + (incorporated by reference to Exhibit 99.1 of our Form 6-K (file no. + 001-33820) filed with the Securities and Exchange Commission on January + 21, 2010)
+
  +   +   +
+
4.34
+ 		  + +
Form + of [A/B] Warrant, dated January 21, 2010, issued by A-Power Energy + Generation Systems, Ltd. (incorporated by reference to Exhibit 99.2 of our + Form 6-K (file no. 001-33820) filed with the Securities and Exchange + Commission on January  21, 2010)
+
  +   +   +
+
4.35
+ 		  + +
Form + of Registration Rights Agreement, dated January 21, 2010,by and among + A-Power Energy Generation Systems, Ltd. and the investors named therein + (incorporated by reference to Exhibit 99.3 of our Form 6-K (file no. + 001-33820) filed with the Securities and Exchange Commission on January + 21, 2010)
+
  +   +   +
+
4.36
+ 		  + +
Form + of Voting Agreement , dated January 21, 2010, by and among A-Power Energy + Generation Systems, Ltd., Jinxiang Lu and John S. Lin (incorporated by + reference to Exhibit 99.4 of our Form 6-K (file no. 001-33820) filed with + the Securities and Exchange Commission on January 21, + 2010)
+
  +   +   +
+
4.37
+ 		  + +
Form + of Lock-up Agreement, dated January 21, 2010, between A-Power Energy + Generation Systems, Ltd. and each of Jinxiang Lu and John S. Lin + (incorporated by reference to Exhibit 99.5 of our Form 6-K (file no. + 001-33820) filed with the Securities and Exchange Commission on January + 21, 2010)
+
  +   +   +
+
4.38**
+ 		  + +
Agreement + for Product Design & Development and Licensing of Wind Turbine + Technology, dated December 30, 2009, by and between A-Power Energy + Generation Systems, Ltd. and W2E Technologies GmbH
+
  +   +   +
+
 4.39*
+ 		  + +
Memorandum + of Understanding on Framework of Cooperation, dated January 28, 2008, + between A-Power Energy Generation Systems, Ltd. and Furhlander + AG
+
  +   +   +
+
 4.40*
+ 		  + +
Amended + and Restated Limited Liability Company Agreement, dated December 16, 2009, + between United States Renewable Energy Group Wind Partners I, LLC and + Shenyang Power Group Company
+
  +   +   +
+
 4.41*
+ 		  + +
Amendment + No. 1 to Amended and Restated Limited Liability Company Agreement, dated + February 12, 2010, between United States Renewable Energy Group Wind + Partners I, LLC and Shenyang Power Group
+
   
+
 4.42
+ 		 Stock + Purchase Agreement, dated September 19, 2009, between Liaoning GaoKe + Energy Group Company Limited and EVATECH Co. Ltd (incorporated by + reference to Exhibit 99.1 of our Form 6-K (file no. 001-33820) filed with + the Securities and Exchange Commission on December 2, 2009)
  +   +   +
+
8.1*
+ 		  + +
List + of Subsidiaries
+
  +   +   +
+
11.1
+ 		  + +
Code + of Conduct and Policy Regarding Reporting Possible Violations + (incorporated by reference to Annex G of the proxy statement/prospectus + contained in our registration statement on Form S-4 (file no. 333-142894) + originally filed with the Securities and Exchange Commission on May 11, + 2007)
+
  +   +   +
+
12.1*
+ 		  + +
Principal + Executive Officer Certification Pursuant to Section 302 of the + Sarbanes-Oxley Act of 2002
+
  +   +   +
+
12.2*
+ 		  + +
Principal + Financial Officer Certification Pursuant to Section 302 of the + Sarbanes-Oxley Act of 2002
+
  +   +   +
+
13.1*±
+ 		  + +
Principal + Executive Officer Certification Pursuant to Section 906 of the + Sarbanes-Oxley Act of 2002
+
  +   +   +
+
13.2*±
+ 		  + +
Principal + Financial Officer Certification Pursuant to Section 906 of the + Sarbanes-Oxley Act of 2002
+
  +   +   +
+
23.1*
+ 		  + +
Consent + of MSCM LLP
+
+
+
+
+
+
 
+
* Filed +with this Annual Report on Form 20-F.
+

+
** A +portion of the Exhibit was omitted and has been filed separately with the +Secretary of the Commission pursuant to an SEC order granting confidential +treatment thereof. Filed with this Annual Report on Form 20-F
+
 
+
+
± This +certification is furnished pursuant to Rule 13a-14(b) and Section 1350 of +Chapter 63 of Title 18 of the United States Code and will not be deemed filed +for purposes of Section 18 of the Exchange Act, or otherwise subject to +liability of that section. This certification will not be deemed to be +incorporated by reference into any filing under the Securities Act or the +Exchange Act. + +
 
+
+
+
  +
+
+
+
+
+
+
+
+
+
+
  +
+
+
+
+
+ + \ No newline at end of file diff --git a/tests/issues/regression/test_3dp_bare_textnode_headers.py b/tests/issues/regression/test_3dp_bare_textnode_headers.py index f5a31ed44..ea1963a78 100644 --- a/tests/issues/regression/test_3dp_bare_textnode_headers.py +++ b/tests/issues/regression/test_3dp_bare_textnode_headers.py @@ -18,11 +18,11 @@ 121 corpus fixtures, it was the only remaining behavioural difference between ``.items`` with the legacy path and without it. -CORPUS NOTE. The 20-F asserted here lives in ``tests/fixtures/parity_gate``, which -is tracked, so this test runs in CI. Its 10-K twin (``0000927356-01-000369``) is -in ``tests/fixtures/text_boundary_corpus``, which is gitignored — asserting on -that one alone would make this test skip in CI while passing locally, which is how -parity evidence was lost before. It is checked opportunistically below. +CORPUS NOTE. Both filings asserted here live in ``tests/fixtures/parity_gate``, +which is tracked, so this test runs in CI. The 10-K twin (``0000927356-01-000369``) +was copied there from the gitignored ``text_boundary_corpus`` on 2026-10-02: while +it lived only there its test skipped in CI, and a sibling test on that corpus went +stale for five days without anyone seeing it. """ import pathlib @@ -33,8 +33,7 @@ FIXTURES = pathlib.Path(__file__).parent.parent.parent / "fixtures" TRACKED_20F = FIXTURES / "parity_gate" / "20-F" / "0000928385-01-500187.html" -IGNORED_10K = (FIXTURES / "text_boundary_corpus" / "e1_1996_2001" / "10-K" - / "0000927356-01-000369.html") +TRACKED_10K = FIXTURES / "parity_gate" / "10-K" / "0000927356-01-000369.html" class FixtureFiling: @@ -100,12 +99,8 @@ def test_the_20f_document_really_has_no_block_structure(): assert not [n for n in nodes if isinstance(n, ParagraphNode)] -@pytest.mark.skipif( - not IGNORED_10K.exists(), - reason="text_boundary_corpus is gitignored; present on developer machines only", -) def test_2001_10k_finds_item_7_without_the_legacy_parser(): - filing = FixtureFiling(IGNORED_10K, "10-K") + filing = FixtureFiling(TRACKED_10K, "10-K") assert TenK(filing).items == ["Item 7"] assert _without_legacy(TenK)(filing).items == ["Item 7"] diff --git a/tests/issues/regression/test_dt1f1_item_9at.py b/tests/issues/regression/test_dt1f1_item_9at.py index 599500ae0..1d92e6067 100644 --- a/tests/issues/regression/test_dt1f1_item_9at.py +++ b/tests/issues/regression/test_dt1f1_item_9at.py @@ -54,8 +54,8 @@ FIXTURES = pathlib.Path(__file__).parent.parent.parent / "fixtures" GATE_10K = FIXTURES / "parity_gate" / "10-K" / "0001193125-10-073212.html" -ABS_10K = (FIXTURES / "text_boundary_corpus" / "e5_2020_2026" / "10-K" - / "0001193125-21-101193.html") +# Copied from the gitignored text_boundary_corpus on 2026-10-02 so this runs in CI +ABS_10K = FIXTURES / "parity_gate" / "10-K" / "0001193125-21-101193.html" class FixtureFiling: @@ -163,10 +163,6 @@ def test_the_designation_is_one_letter_and_optional(): assert not re.fullmatch(_ITEM_SEP, "(T). Controls and Procedures") -@pytest.mark.skipif( - not ABS_10K.exists(), - reason="text_boundary_corpus is gitignored; present on developer machines only", -) def test_a_regulation_ab_sub_number_does_not_become_an_item(): """The asset-backed issuer filing must not gain items from this change. diff --git a/tests/issues/regression/test_dt1f1_wrapped_item_headers.py b/tests/issues/regression/test_dt1f1_wrapped_item_headers.py index e75a5fab1..a0f76adb6 100644 --- a/tests/issues/regression/test_dt1f1_wrapped_item_headers.py +++ b/tests/issues/regression/test_dt1f1_wrapped_item_headers.py @@ -31,12 +31,11 @@ extraction boundary moved: verify what the section now contains before updating it, rather than re-recording the new number. -CORPUS NOTE. The 20-F and 10-K asserted unconditionally live in -``tests/fixtures/parity_gate``, which is tracked, so this test runs in CI. The -2010 20-F that carries five of the eight lookups is in -``tests/fixtures/text_boundary_corpus``, which is gitignored — anchoring only on -that one would pass locally and skip in CI, which is how parity evidence has -been lost here before. It is checked opportunistically at the bottom. +CORPUS NOTE. Every filing asserted here lives in ``tests/fixtures/parity_gate``, +which is tracked, so this test runs in CI. The 2010 20-F that carries five of the +eight lookups was copied there from the gitignored ``text_boundary_corpus`` on +2026-10-02, after its test skipped in CI and went stale for five days (#1361 +changed three item lengths and only the CI-visible pins were updated). """ import pathlib import re @@ -50,8 +49,7 @@ FIXTURES = pathlib.Path(__file__).parent.parent.parent / "fixtures" TRACKED_20F = FIXTURES / "parity_gate" / "20-F" / "0001062993-16-008650.html" TRACKED_10K = FIXTURES / "parity_gate" / "10-K" / "0000950153-99-001234.html" -IGNORED_20F = (FIXTURES / "text_boundary_corpus" / "e3_2009_2014" / "20-F" - / "0001144204-10-017467.html") +WRAPPED_20F = FIXTURES / "parity_gate" / "20-F" / "0001144204-10-017467.html" class FixtureFiling: @@ -186,10 +184,6 @@ def test_a_bare_item_number_is_not_read_as_a_page_number(): ) -@pytest.mark.skipif( - not IGNORED_20F.exists(), - reason="text_boundary_corpus is gitignored; present on developer machines only", -) def test_2010_20f_resolves_all_eight_wrapped_items_without_the_legacy_parser(): """The filing this defect was measured on. @@ -198,7 +192,7 @@ def test_2010_20f_resolves_all_eight_wrapped_items_without_the_legacy_parser(): line width. Five of these (5, 6, 11, 12, 15) are on the dt1f.1 work list; 16D-16F came with them. """ - filing = FixtureFiling(IGNORED_20F, "20-F") + filing = FixtureFiling(WRAPPED_20F, "20-F") report = _without_legacy(TwentyF)(filing) # Items 5 and 6 grew by 150 and 20 characters when the fast_table 8-column cap diff --git a/tests/meta/test_section_parity_ratchet.py b/tests/meta/test_section_parity_ratchet.py index 4bdecf401..e7c6f8d42 100644 --- a/tests/meta/test_section_parity_ratchet.py +++ b/tests/meta/test_section_parity_ratchet.py @@ -237,6 +237,12 @@ # item-separator fix was measured on (TenK.items == ['Item 8'] before # it), so it guards two fixes at once and must stay measurable. ("10-K", "0001376474-16-000635"), + # Copied into parity_gate on 2026-10-02 because regression tests assert + # on them (3dp, dt1f1 9A(T), dt1f1 wrapped headers) and, read from the + # era corpus, those tests skipped in CI; one went stale for five days. + ("10-K", "0000927356-01-000369"), + ("10-K", "0001193125-21-101193"), + ("20-F", "0001144204-10-017467"), } )