AutoChina International Limited (“AutoChina” or the “Company”)
(NASDAQ: AUTC), China’s largest commercial vehicle sales,
servicing, leasing, and support network, today announced that the
Company (i) is being investigated by the U.S. Securities and
Exchange Commission (“SEC”), and (ii) expects to restate its
previously issued financial statements for the year ended December
31, 2009, and subsequent periods to recognize a derivative
liability relating to the Earn-out Share Provision (“Earn-out”),
which was part of its initial business combination in 2009 (see
full description and background of Earn-out at the end of this
release).
The staff of the SEC is conducting a non-public investigation
relating to AutoChina and, in that connection, AutoChina and one of
its officers have received subpoenas for information. The SEC has
informed AutoChina and the officer that neither the existence of
the investigation nor the service of subpoenas means that the SEC
has concluded that any violations of law have occurred. AutoChina
has cooperated, and will continue to fully cooperate, with the SEC
regarding this matter, including voluntarily providing information
beyond that formally requested by the SEC staff, in an effort to
assist in an expeditious conclusion of the staff’s
investigation.
With respect to the Earn-out shares, AutoChina’s original
accounting treatment recorded the Earn-out shares, upon issuance,
as an adjustment to the par value of ordinary shares and additional
paid-in capital and included such shares in the calculation of
earnings per share from the date of issuance. This accounting
treatment for the Earn-out was modeled after a number of
U.S.-listed precedents, which the Company believed to be in
accordance with U.S. GAAP and which was approved and signed off by
Crowe Horwath, AutoChina’s prior independent registered public
accounting firm, as part of the Company’s 2009 audit.
AutoChina sought additional guidance from the Office of the
Chief Accountant (“OCA”) of the SEC regarding the Earn-out’s
accounting treatment after consultation with PwC during its annual
audit process. Subsequently, members of the SEC staff notified
AutoChina that while they agree the Earn-out Provision does not
constitute compensation, they do not agree with the Company’s past
accounting for shares issued pursuant to the Earn-out as stock
dividends, if and when they occur. Instead, the SEC staff members
believe the Earn-out should be treated as a derivative financial
instrument, and as a result, a liability should have been initially
recorded at its fair value at the time of the initial business
combination. Thereafter, any gain or loss in the fair value of the
derivative would be recorded in the Company's income statement at
the end of each reporting period.
The Company has not yet determined the exact effect of this
potential change to its previously reported financial statements.
However, the reclassification of the Earn-out as a derivative
financial instrument would result in a new liability being reported
on the balance sheet, with changes in the valuation of this
liability appearing in the income statement as non-cash
adjustments. Shareholders should keep in mind the possible
reclassification of the Earn-out when relying on AutoChina’s
previously issued financial statements.
This reclassification is not anticipated to affect the Company’s
underlying business operations.
The Company anticipates further discussions with members of the
OCA, as it believes that restatement is not warranted in this
situation. However, the Company is working diligently with its
advisors, legal counsel, PwC, and Crowe Horwath to prepare the
necessary documents and be in a position to file restated financial
statements if and when it becomes necessary to do so.
In addition, during AutoChina’s 2010 year-end process, the
Company identified a material weakness in its internal control over
financial reporting as of December 31, 2010, due to a lack of
requisite internal U.S. GAAP experience, with which PwC concurs.
The Company is assessing the situation and working to address the
material weakness. No other material weakness has been identified
by the Company or PwC to date, but the audit is not yet complete.
It is possible that the completion of the audit may result in
additional findings.
To date, the Company’s Audit Committee is not aware of any
situation, such as fraud involving senior management, that it has
reasonably concluded should necessitate the initiation of a formal
investigation. The Company expects that it will not file its Annual
Report on Form 20-F for the year ended December 31, 2010, on time
and will file a Form 12b-25 with the SEC for an extension.
Mr. Yong Hui Li, AutoChina’s Chairman and CEO, stated, “We have
devoted much time and effort to analyzing AutoChina’s 2010
financial and operational results and are all working expeditiously
to file all appropriate documentation with the SEC. As the
restatement relates only to the Earn-out, this potential change in
accounting treatment is not anticipated to negatively impact our
operations, nor have we encountered any issues relating to the
accounting treatment of the leasing of our commercial vehicles,
operations, management background, or business practices. We expect
our operations to move forward, allowing us to work toward
achieving our previously announced goals for the year. At this
time, we are unable to determine when AutoChina will file its Form
20-F, but will keep investors apprised of our progress.”
Background on Earn-out Share Provision
The Earn-out was part of the Share Exchange Agreement by which
AutoChina completed its initial business combination in April 2009.
Pursuant to the Earn-out, AutoChina was required to issue between
5% and 20% of the number of ordinary shares outstanding as of
December 31 of the fiscal year immediately prior to each such
Earn-out issuance for achieving certain EBITDA thresholds in each
of the five years following the initial business combination,
through the year ending December 31, 2013. Honest Best Int’l Ltd.
(“Honest Best”), the sole shareholder of the target acquired in the
initial business combination and an entity affiliated with
AutoChina’s founder, Chairman, and Chief Executive Officer Mr. Yong
Hui Li, receives the shares issued, if any, pursuant to the
Earn-out.
In February 2011, the Company reached an agreement with Honest
Best to cancel and waive its rights to receive the Earn-out out for
fiscal years after 2011 (i.e. 2012 and 2013). In addition, for
fiscal years 2010 and 2011, the Earn-out provisions that provided
for shares to be issued at EBITDA growth rates of less than 70%
were also cancelled and waived, such that a minimum of 70% EBITDA
growth must be achieved in either respective year in order for any
Earn-out shares to be issued. Under the changed provision, the
possible Earn-out share issuances are 15% to 20%, instead of the
previous 5% to 20%.
About AutoChina International Limited:
AutoChina International Limited is China’s largest commercial
vehicle sales, servicing, leasing, and support network. AutoChina’s
operating subsidiary was founded in 2005 by nationally recognized
Chairman and CEO, Yong Hui Li. The Company owns and operates 333
commercial vehicle financing centers across China; and primarily
provides sales-type leasing and support services for local
customers. The Company’s website is
http://www.autochinaintl.com.
Safe Harbor Statement
This press release may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995
about the Company. Forward-looking statements are statements that
are not historical facts. Such forward-looking statements, based
upon the current beliefs and expectations of the Company's
management, are subject to risks and uncertainties, which could
cause actual results to differ from the forward-looking statements.
The following factors, among others, could cause actual results to
meaningfully differ from those set forth in the forward-looking
statements:
- Continued compliance with government
regulations;
- Changing legislation or regulatory
environments;
- Requirements or changes affecting the
businesses in which the Company is engaged;
- Industry trends, including factors
affecting supply and demand;
- Labor and personnel relations;
- Credit risks affecting the Company's
revenue and profitability;
- Changes in the “commercial vehicle” or
“heavy truck” industry;
- The Company’s ability to effectively
manage its growth, including implementing effective controls and
procedures and attracting and retaining key management and
personnel;
- Changing interpretations of generally
accepted accounting principles;
- General economic conditions; and
- Other relevant risks detailed in the
Company’s filings with the Securities and Exchange Commission.
The information set forth herein should be read in light of such
risks. The Company does not assume any obligation to update the
information contained in this press release.
Autochina International Limited (MM) (NASDAQ:AUTC)
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Autochina International Limited (MM) (NASDAQ:AUTC)
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