As filed with the Securities
and Exchange Commission on October 30, 2009
Registration
No. 333-161813
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 4
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
DUOYUAN PRINTING,
INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Wyoming
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3555
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91-1922225
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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No. 3 Jinyuan
Road
Daxing Industrial Development
Zone
Beijing 102600, Peoples
Republic of China
Tel: +8610-6021-2222
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Pioneer Corporate
Services
214 W. Lincolnway
Suite 23
Cheyenne, Wyoming
82001
Tel:
(307) 635-1458
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent for
Service)
Copies to:
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Man Chiu Lee, Esq.
Hogan & Hartson LLP
Suite 2101, Two Pacific Place
88 Queensway
Hong Kong SAR, Peoples Republic of China
Tel: +852-2151-5858
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Kurt J. Berney, Esq.
OMelveny & Myers LLP
Plaza 66,
37th
Floor
1266 Nanjing Road West
Shanghai 200040, Peoples Republic of China
Tel: +8621-2307-7000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after
effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration number of the earlier effective registration
statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act of 1933, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering: o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
Accelerated
Filer o
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Accelerated
Filer o
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Non-Accelerated
Filer þ
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Smaller Reporting
Company o
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(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Title of Each Class of
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Aggregate
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Amount of
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Securities to Be
Registered
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Offering Price(1)
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Registration Fee(2)(3)
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Common shares, par value $0.001 per share
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$
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75,703,754
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$
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4,225
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(4)
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(1)
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Estimated solely for the purpose of
determining the amount of registration fee.
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(2)
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Calculated in accordance with
Rule 457(o) under the Securities Act of 1933.
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(3)
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Includes offering price of common
shares that the underwriters have the option to purchase to
cover over-allotments, if any.
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(4)
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Pursuant to Rule 457(p) under
the Securities Act of 1933, we are offsetting payment of the
registration fees against the $3,851 that has already been paid
with respect to the
Form S-1
filed with the Commission on September 4, 2009 (File
No. 333-
141507), and subsequently withdrawn pursuant to a Registration
Withdrawal Request filed on September 9, 2009.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until this Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The information in
this prospectus is not complete and may be changed. We and the
selling shareholders may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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Subject
to completion, dated October 30 2009
6,269,462 Common
Shares
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DUOYUAN PRINTING, INC.
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$
per share
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We are offering 5,500,000 common shares and the selling
shareholders are offering 769,462 common shares of Duoyuan
Printing, Inc. We will not receive any proceeds from the sale of
our common shares by the selling shareholders.
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We anticipate that the initial public offering price will be
between $8.50 and $10.50 per common share.
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This is our initial public offering and no public market
currently exists for our common shares.
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Trading symbol: New York Stock Exchange
DYP.
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This investment involves risk. See Risk Factors
beginning on page 13.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to Duoyuan Printing, Inc.
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$
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$
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Proceeds, before expenses, to selling shareholders
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$
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$
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The underwriters have a
30-day
option to purchase up to 940,419 additional common shares
from us to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Piper
Jaffray |
Roth Capital Partners |
The date of this prospectus
is ,
2009.
DUOYUAN PRINTING, INC.
Langfang facility |
DUOYUAN
PRINTING, INC.
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We and the selling shareholders have not authorized
anyone to provide you with additional or different information.
This prospectus is not an offer to sell, nor is it seeking an
offer to buy, these securities in any state where the offer or
sale is not permitted.
This prospectus includes market size, market share and industry
data that we have obtained from market research, publicly
available information and various industry publications. The
third party sources from which we have obtained information
generally state that the information contained therein has been
obtained from sources believed to be reliable. We have not
independently verified any of the data from third party sources
nor have we verified the underlying economic assumptions relied
upon by those third parties. Similarly, industry forecasts and
market research, which we believe to be reliable based upon
managements knowledge of the industry, have not been
verified by any independent sources.
Until ,
2009 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscription.
i
SUMMARY
This summary highlights selective information contained
elsewhere in this prospectus. It does not contain all of the
information that you should consider before investing in our
common shares. You should read the entire prospectus carefully,
including the sections entitled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and our consolidated
financial statements and the accompanying notes, before making a
decision to invest in our common shares.
Overview
We are a Wyoming corporation and a leading offset printing
equipment supplier in China, headquartered in Beijing. Through
our principal operating subsidiary, Duoyuan Digital Press
Technology Industries (China) Co., Ltd., or Duoyuan China, and
Duoyuan Chinas manufacturing subsidiaries, namely Langfang
Duoyuan Digital Technology Co., Ltd., or Langfang Duoyuan, and
Hunan Duoyuan Printing Machinery Co., Ltd., or Hunan Duoyuan, we
design, manufacture and sell offset printing equipment used in
the offset printing process. The offset printing process
includes the following three stages:
(1) pre-press, which is the transfer of images
to printing plates; (2) press, which is the
transfer of images from printing plates to another media, such
as paper; and (3) post-press, which is the last
step of the offset printing process that includes cutting,
folding, binding, collating and packaging. We manufacture one
product under the pre-press product category (a
computer-to-plate system, or CTP system) and fifteen products
across four product lines under the press product category
(single color small format presses, single color large format
presses, multicolor small format presses and multicolor large
format presses). We plan to begin commercial production and sale
of certain post-press products, including a cold-set corrugated
paper machine, which makes corrugated cardboard paper, by the
end of 2010. In addition, we plan to begin commercial production
and sale of two other post-press products, namely an automatic
booklet maker and an automatic paper cutter, for which we have
developed prototypes, in 2011.
To enhance our market position, we have made and continue to
make investments in research and development. Our Langfang
Duoyuan research and development and technical support center
and our Hunan Duoyuan technical support center have advanced
design test tools, which we believe enable us to develop new and
enhanced products with improved functionality. Our research and
development team and our manufacturing department work closely
together to optimize manufacturing processes and develop
commercially viable products. In addition, they incorporate
regular feedback from our sales and marketing personnel,
enabling us to timely and cost-effectively introduce products
tailored to end-user needs. Furthermore, our China-based
research and development and manufacturing operations provide us
with a distinct competitive advantage in international markets
by enabling us to leverage low-cost technical expertise, labor,
raw materials and facilities. Our investments in research and
development, technical innovation and commitment to meet the
needs of our end-user customers have allowed us to create and
introduce four new and enhanced products in the year ended
June 30, 2009.
Our nationwide distribution network in China consists of over 85
distributors located in over 65 cities and 28 provinces in
China. Our nationwide distribution network, which we believe,
based on our experience in the industry, to be one of the
largest among Chinese offset printing equipment suppliers,
enables us to be more responsive to local market demands than
many of our competitors. We support our distributors sales
efforts through coordinated marketing efforts. We regularly
attend industry trade shows and exhibitions to showcase our
products, as well as present seminars and training programs to
our potential and existing distributors, as well as potential
and existing end-user customers, to highlight the functions and
capacities of our products. To maintain good relationships with
our end-user customers, we provide certain services during the
one-year warranty period associated with our
1
products. During this period, we provide training, technical
support, warranty and repair services for complex technical
issues to our distributors who work with our end-user customers.
We believe our pricing is competitive with Chinese and
international offset printing equipment manufacturers. We
believe the relatively low operation, labor and raw material
costs in China, our ability to produce a substantial majority of
our key components in-house, our efficient production processes
and our effective inventory management give us a cost
competitive advantage. Our cost advantage allows us to offer
quality products at lower prices, thus making our products
attractive in China and certain international markets.
Our revenue grew 32.2% from $67.8 million in the year ended
June 30, 2007 to $89.6 million in the year ended
June 30, 2008 and 18.9% to $106.6 million in the year
ended June 30, 2009. Our net income grew 89.3% from
$14.0 million in fiscal 2007 to $26.5 million in
fiscal 2008 and 23.2% to $32.6 million in fiscal 2009. For
fiscal 2007, 2008 and 2009, our multicolor large format presses
and our multicolor small format presses were our best selling
products. For fiscal 2007, 2008 and 2009, we derived 72.3%,
81.4% and 83.3% of our revenue from the sale of our multicolor
presses, respectively. For the same periods, our multicolor
large format presses accounted for approximately 46.7%, 52.0%
and 51.2% of our revenue, respectively, and our multicolor small
format presses accounted for approximately 25.6%, 29.4% and
32.1% of our revenue, respectively.
Industry
Chinas
Printing Industry
Chinas printing industry has benefited from Chinas
rapid economic growth. This growth has increased demand for
publication printing needs, such as newspapers, magazines and
books, and commercial printing needs, such as corporate
brochures, product catalogues and labels, manuals and
directories, conference and advertising materials, and printed
packaging materials. Pira International reported that China was
the third largest printing market in the world behind the United
States and Japan. After taking into account the effects of the
current economic environment, Chinas printing industry is
expected to remain one of the fastest growing in Asia.
From 2002 to 2007, the total annual output of Chinas
printing industry grew from $29.5 billion to
$64.4 billion, according to the Printing and Printing
Equipment Industries Association of China, representing a
compound annual growth rate, or CAGR, of 17% per annum.
According to Pira International, Chinas printing market
grew from $51 billion in 2007 to $57 billion in 2008.
Pira International estimates Chinas printing market will
grow to $60 billion by the end of 2009, and projects the
market to grow by 28% total from 2009 to 2014, or a CAGR of 5.1%
per annum, after taking into account the effects of the current
economic environment.
In line with global trends, package printing represents the
largest segment in the Chinese printing industry. According to
the Printing and Printing Equipment Industries Association of
China, China produced $20.5 billion of package printing in
2007, accounting for 32% of the total output of Chinas
printing industry that year. Pira International projects that
package printing to become the largest segment by 2014, followed
by commercial printing.
Based on another report issued by Pira International, corrugated
paper and corrugated board accounted for the largest share of
the corrugated packaging materials in 2007. The consumption of
corrugated paper in China grew at a CAGR of 14.2% per annum from
2003 to 2007 reaching a market size of $4.4 billion by the
end of 2007. Pira International estimates the consumption of
corrugated paper to grow at a CAGR of 8.2% per annum from 2008
to 2013.
2
The demand for corrugated board is growing in response to the
increased demand from industries such as food, beverages,
electronic devices and toys. Chinas output of corrugated
board in 2007 accounted for 18.6 million tons of the global
total of 109 million tons, and this output is projected to
grow at a CAGR of 6.2% per annum from 2008 to 2013, according to
Pira International.
The printing industry in China is currently transitioning from
single color printing to multicolor printing. A few years ago,
most high quality multicolor printing was handled by large and
sophisticated printing companies in the coastal areas,
especially in the Pearl River Delta region. Presently, almost
every major city in China has printing companies that can meet a
wide spectrum of printing demands, from simple single color
works to fairly high quality multicolor printing. Multicolor
printing is becoming a mainstream capability that almost every
Chinese printing company must have to sustain its
competitiveness in the marketplace.
Chinas
Printing Equipment Industry
We operate in the Chinese printing equipment industry, which we
believe is highly correlated with the overall Chinese printing
industry.
Over the past several years, Chinas printing equipment
industry grew at a higher rate than its overall printing
industry. As noted above, the total annual output of
Chinas printing industry grew from $29.5 billion in
2002 to $64.4 billion in 2007 representing a CAGR of 17%
per annum. The total annual output of Chinas printing
equipment industry, however, grew from $0.9 billion to
$2.5 billion, representing a CAGR of 23% per annum over the
same period.
Taking into account of the effects of the current economic
environment, Pira International projects Chinas printing
equipment to grow by 34% total from 2009 to 2014, or a CAGR of
6.0% per annum.
We believe that demand for Chinese-made offset printing
equipment is strong and that the market share of domestically
made offset printing equipment has been increasing in recent
years. For example, according to the Printing and Printing
Equipment Industries Association of China, although the amount
of imported printing equipment increased annually from
$1.3 billion in 2002 to $1.7 billion in 2004, the
total amount of imported printing equipment has since declined
each year to reach $1.6 billion in 2007. We believe this
decline in imported printing equipment is a result of leading
Chinese printing equipment manufacturers increased
investments in research and development and improved engineering
standards, both of which improve Chinese printing equipment
manufacturers ability to compete against international
competitors for market share in China.
We believe two major entry barriers limit the potential
competition we face from Chinese offset printing equipment
producers. First, the offset printing equipment industry in
China is particularly capital intensive due to high production
costs, and second, we believe few manufacturers have the
technical knowledge required to compete in our industry. We
believe our position as an existing and leading offset printing
equipment supplier in China gives us market advantages over
potential competitors seeking to enter this market.
We derive all of our revenue from sales to our distributors in
China. In 2007, according to the Printing and Printing Equipment
Industries Association of China, there were an estimated 90,000
licensed printing companies in China. This estimate did not
include the possible significant number of printing companies
that operate in China without licenses. Printing companies in
China purchase prepress, press and post-press printing equipment
from foreign and Chinese equipment providers, including
companies like us through our distributors.
3
Our
Strengths, Strategy and Risks
We believe that the following competitive strengths enable us to
compete effectively in and capitalize on the growing offset
printing equipment industry in China:
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our quality product offerings at competitive prices;
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our established market position;
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our wide product offerings;
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our nationwide sales and distribution network, with over 200
sales professionals in over 65 cities and 28 provinces
throughout China; and
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our research and development team with over 200 researchers,
engineers and technicians.
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Our strategy is to capitalize on our competitive strengths to
expand our current market share and to benefit from the
anticipated growth in Chinas offset printing equipment
industry. Our strategy consists of the following key elements:
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adjust and expand production facilities to improve efficiency
and margins;
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expand our higher margin product offerings;
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improve our products functionality through research and
development efforts;
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expand our market share in China, and establish distribution
networks outside of China; and
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pursue selective strategic acquisitions.
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We expect to face risks and uncertainties related to our ability
to:
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develop and sell new products;
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establish and maintain our relationships with our distributors;
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manage our distribution network;
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expand our manufacturing capacity;
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attract and retain key management and research and development
personnel;
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build our brand and expand into international markets; and
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protect our intellectual property rights.
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See Risk Factors for a detailed discussion of these
and other risks that we face.
4
Recent
Developments
The following is a summary of our selected unaudited
consolidated financial results for the three months ended
September 30, 2009 compared to our selected unaudited
consolidated financial results for the three months ended
September 30, 2008. Our first quarter 2010 results may not
be indicative of our full year results for our fiscal year
ending June 30, 2010 or future quarterly periods. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus for information regarding trends and other
factors that may influence our results of operations and for
recent quarterly operating results.
Selected
Unaudited Consolidated Financial Information
for the Three Months Ended September 30, 2009 and
2008
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Three Months Ended
September 30,
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2008
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2009
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% of
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% of
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$
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revenue
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$
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revenue
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(dollars in thousands)
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Revenues, net
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26,179
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100.0
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%
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33,295
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100.0
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%
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Cost of revenues
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12,331
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47.1
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15,788
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47.4
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Gross profit
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13,848
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52.9
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17,507
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52.6
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Research and development expenses
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694
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2.7
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364
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1.1
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Selling expenses
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2,547
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9.7
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3,157
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9.5
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General and administrative expenses
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932
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3.6
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1,490
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4.5
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Income from operations
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9,675
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36.9
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12,496
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37.5
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Change in fair value of derivative instruments
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55
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0.2
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111
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0.3
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Other income (expense), net
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Non-operating expenses
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(1
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)
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0.0
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Interest expense
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(212
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)
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(0.8
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)
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(234
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(0.7
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Interest income and other income
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34
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0.1
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31
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0.1
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Other expense, net
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(179
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)
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(0.7
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)
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(203
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(0.6
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)
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Income before provision for income taxes and noncontrolling
interest
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9,551
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36.4
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12,404
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37.2
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Provision for income taxes
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927
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3.5
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2,409
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7.2
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Net income
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8,624
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32.9
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9,995
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30.0
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Less: Net income attributable to noncontrolling interest
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109
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0.4
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158
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0.5
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Net income attributable to Duoyuan Printing, Inc.
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8,515
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32.5
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9,837
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29.5
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Other comprehensive income
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|
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Foreign currency translation gain
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256
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1.0
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183
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|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Duoyuan Printing, Inc.
|
|
|
8,771
|
|
|
|
33.5
|
%
|
|
|
10,020
|
|
|
|
30.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenue increased by $7.1 million, or 27.2%, from
$26.2 million for the three months ended September 30,
2008 to $33.3 million for the three months ended
September 30, 2009, primarily as a result of an increase in
the volume of our products sold during this period. Revenue for
our pre-press printing equipment increased by $0.1 million,
or 12.7%, from $0.8 million for the three months ended
September 30, 2008 to $0.9 million for the three
months ended September 30, 2009. Revenue for our
5
press printing equipment for the three months ended
September 30, 2009 increased by $6.7 million, or
25.6%, when compared to the three months ended
September 30, 2008. This increase was mainly attributable
to an increase in the volume of our multicolor presses sold
during this period.
Our cost of revenue increased by $3.5 million, or 28.0%,
from $12.3 million for the three months ended
September 30, 2008 to $15.8 million for the three
months ended September 30, 2009. This increase was
primarily due to an increase in the volume of our products sold
during this period, particularly sales of our multicolor
presses. This increase in sales contributed to the increase in
consumption of raw materials and components across our pre-press
and press product categories as our revenue increased by 27.2%
from the three months ended September 30, 2009 to the three
months ended September 30, 2008. As a percentage of
revenue, our cost of revenue increased 0.3% from 47.1% for the
three months ended September 30, 2008 to 47.4% for the
three months ended September 30, 2009. This increase was
mainly due to the increase in our depreciation expense for
capital expenditures made in prior years.
Our income from operations increased by $2.8 million, or
29.1%, from $9.7 million for the three months ended
September 30, 2008 to $12.5 million for the three
months ended September 30, 2009. This increase was mainly
due to increased multicolor press sales, which generated higher
revenue for us.
Our provision for income taxes increased by $1.5 million,
or 159.9%, from $0.9 million for the three months ended
September 30, 2008 to $2.4 million for the three
months ended September 30, 2009. This increase was
primarily due to the increase in our revenue by 27.2% over the
same period and the increase in income tax rate for Duoyuan
China. The income tax rate for Duoyuan China in 2008 was 12.5%.
Beginning on January 1, 2009, the income tax rate for
Duoyuan China increased to 25.0% as a result of the expiration
of preferential tax treatments granted to Duoyuan China in prior
years. Our effective tax rates were 9.7% for the three months
ended September 30, 2008 and 19.4% for the three months
ended September 30, 2009.
As a result of the foregoing, our net income attributable to
Douyuan Printing, Inc. increased by $1.3 million, or
15.5%, from $8.5 million for the three months ended
September 30, 2008 to $9.8 million for the three
months ended September 30, 2009. As a percentage of
revenue, our net income decreased 3.0% from 32.5% for the three
months ended September 30, 2008 to 29.5% for the three
months ended September 30, 2009.
Our
Corporate Structure
We were organized under the laws of the State of Nevada on
August 10, 1998. On July 27, 2005, we merged with
Asian Financial, Inc., a Wyoming corporation, for the purpose of
changing our domicile from Nevada to Wyoming. From our inception
until the equity transfer described below, we were a shell
company without operations, revenue or employees, other than
officers and directors.
On October 6, 2006, we closed an equity transfer with
Duoyuan Investments Limited, a British Virgin Islands company
with operating subsidiaries in China. Pursuant to the equity
transfer, we issued 47,100,462 common shares to Duoyuan
Investments Limited in exchange for all of Duoyuan Investments
Limiteds equity interest in Duoyuan China, its wholly
owned subsidiary. Duoyuan China manufactured single color offset
printing presses, among other products. As a result of this
equity transfer Duoyuan China became our wholly owned
subsidiary, and Duoyuan Investments Limited, a company wholly
owned by Wenhua Guo, the chairman of our board of directors,
became our controlling shareholder. Upon the completion of the
equity transfer, we commenced our offset printing equipment
business. We conduct our business through our principal
operating subsidiary, Duoyuan China, and Duoyuan Chinas
manufacturing subsidiaries, namely Langfang Duoyuan and Hunan
Duoyuan.
6
On November 2, 2006, we closed the transactions
contemplated by a securities purchase agreement by and between
us and certain investors. Pursuant to the securities purchase
agreement, we issued an aggregate of 6,132,622 common shares to
the private placement investors for an aggregate purchase price
of $23.5 million. This private placement was made pursuant
to the exemption from the registration provisions of the
Securities Act of 1933, as amended, provided by
Section 4(2) of the Securities Act, and Rule 506 of
Regulation D promulgated thereunder, for issuances not
involving a public offering.
On October 15, 2009, we changed our name to Duoyuan
Printing, Inc.
The following chart summarizes our corporate structure,
including our subsidiaries:
|
|
* |
Represents our minority shareholders, consisting of the
pre-equity transfer investors and the investors from the private
placement in November 2006.
|
Office
Location
Our principal executive offices are located at No. 3
Jinyuan Road, Daxing Industrial Development Zone, Beijing
102600, Peoples Republic of China. Our telephone number at
this address is +8610-6021-2222. Our agent for service of
process and our registered office in Wyoming is Pioneer
Corporate Services located at 214 W. Lincolnway,
Suite 23, Cheyenne, Wyoming, 82001.
Investor inquiries should be directed to us at the address and
telephone number of our principal executive offices set forth
above. Our website is www.duoyuan.com. The information
contained on our website is not incorporated by reference into
this prospectus and is not part of this prospectus.
7
Conventions
that Apply to this Prospectus
Unless otherwise indicated and except where the context
otherwise requires, references in this prospectus to:
|
|
|
|
|
we, us, our company,
the company and our are to Duoyuan
Printing, Inc., a Wyoming corporation, its predecessor entities
and subsidiaries;
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|
|
|
single color presses are to single color small
format presses and single color large format presses,
collectively;
|
|
|
|
multicolor presses are to multicolor small format
presses and multicolor large format presses,
collectively; and
|
|
|
|
fiscal 2007, fiscal 2008 and
fiscal 2009 are to our years ended June 30,
2007, June 30, 2008 and June 30, 2009, respectively.
|
Unless otherwise indicated and except where the context
otherwise suggests, our financial information presented in this
prospectus, including the audited consolidated financial
statements and related notes, has been prepared in accordance
with U.S. GAAP.
For fiscal 2007, 2008 and 2009, our income statements were
translated at the average rates of RMB7.81 to $1.00, RMB7.26 to
$1.00 and RMB6.83 to $1.00, respectively. We make no
representation that the Renminbi or U.S. dollar amounts
referred to in this prospectus could have been or could be
converted into U.S. dollars or Renminbi, as the case may
be, at any particular rate or at all. See Risk
Factors Risks Related to Doing Business in
China Government control of currency conversion and
exchange rate fluctuations may materially and adversely affect
our business for discussions of the effects of currency
control and fluctuating exchange rates on the value of our
shares. Any discrepancies in any table between totals and sums
of the amounts listed are due to rounding.
Solely for your convenience, the foreign currency figures from
the Printing and Printing Equipment Industries Association of
China, have been translated into U.S. dollars at the rate
of RMB6.83 to $1.00.
8
THE
OFFERING
|
|
|
Common shares offered by Duoyuan Printing, Inc.
|
|
5,500,000 common shares. |
|
|
|
Common shares offered by the selling shareholders
|
|
769,462 common shares. |
|
|
|
Over-allotment option
|
|
We have granted the underwriters an option exercisable for
30 days after the date of this prospectus to purchase up to
an additional 940,419 common shares from us at the public
offering price less underwriting discounts, solely for the
purpose of covering over-allotments, if any. |
|
|
|
Total common shares offered
|
|
6,269,462 common shares. |
|
|
|
Common shares outstanding immediately after this offering
|
|
31,375,050 common shares (or 32,315,469 common shares
assuming the underwriters exercise their over-allotment option
in full). |
|
|
|
Offering price
|
|
We currently estimate that the initial public offering price
will be between $8.50 and $10.50 per common share. |
|
Use of proceeds
|
|
We estimate that we will receive net proceeds from this offering
of approximately $47.4 million, assuming an initial public
offering price of $9.50 per common share, the midpoint of the
estimated range of the initial public offering price. If the
underwriters exercise their over-allotment option in full, we
estimate that our net proceeds will be approximately
$56.0 million. We intend to use our net proceeds from this
offering as follows: |
|
|
|
to build a factory to manufacture cold-set
corrugated paper machines at our Langfang Duoyuan facility;
|
|
|
|
to improve and upgrade our existing manufacturing
facilities and production lines; and
|
|
|
|
for general corporate purposes.
|
|
Risk factors
|
|
See Risk Factors and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in our common shares. |
|
Lock-up
|
|
Of our outstanding common shares, 24,167,822 are subject to
180-day
lock-up
agreements with our underwriters,
Piper Jaffray & Co., or Piper Jaffray.
Subject to certain exceptions, neither we nor any of our
directors, executive officers, employees and existing
shareholders who are subject to these contractual
lock-ups
will, for a period of 180 days following the date of this
prospectus, offer, sell or contract to sell any of |
9
|
|
|
|
|
our common shares or securities convertible into or exchangeable
or exercisable for any of our common shares. See
Underwriting. |
|
Dividend policy
|
|
We do not anticipate paying any cash dividends in the near
future. |
|
Listing
|
|
The New York Stock Exchange has authorized the listing of our
common shares. |
|
New York Stock Exchange symbol
|
|
DYP. |
Unless otherwise indicated, all information in this prospectus:
|
|
|
|
|
assumes no exercise of the underwriters over-allotment
option;
|
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|
|
reflects the grant of 875,000 restricted common shares to
certain employees, including members of our executive management
team, but excluding our chief executive officer and chief
financial officer, pursuant to our 2009 Omnibus Incentive Plan;
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|
|
|
assumes the number of shares to be outstanding immediately after
the completion of this offering, excludes 875,000 common shares
reserved for future issuances under our 2009 Omnibus Incentive
Plan and 180,000 common shares issuable upon the exercise of
options granted concurrently with the listing of our common
shares on the New York Stock Exchange; and
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|
|
|
reflects the filing of our amended and restated articles of
incorporation and the adoption of our amended and restated
bylaws prior to the completion of this offering.
|
10
Summary
Consolidated Financial Information
You should read the summary consolidated financial information
set forth below in conjunction with our consolidated financial
statements and related notes, Selected Consolidated
Financial Information, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations. The summary consolidated statements of income
and other comprehensive income for each of the three years ended
June 30, 2007, 2008 and 2009, the summary consolidated
balance sheets as of June 30, 2008 and 2009, and the
summary consolidated statements of cash flows for each of the
three years ended June 30, 2007, 2008, and 2009 have been
derived from our audited consolidated financial statements that
are included elsewhere in this prospectus. The consolidated
financial statements are prepared and presented in accordance
with U.S. GAAP. Our historical results are not necessarily
indicative of results to be expected for future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of
Income
|
|
Year Ended
June 30,
|
|
and Other Comprehensive
Income
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except for share
and per share data)
|
|
|
Revenue, net
|
|
$
|
67,812
|
|
|
$
|
89,628
|
|
|
$
|
106,591
|
|
Cost of revenue
|
|
|
37,694
|
|
|
|
44,462
|
|
|
|
50,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,118
|
|
|
|
45,166
|
|
|
|
56,257
|
|
Research and development expenses
|
|
|
1,046
|
|
|
|
1,683
|
|
|
|
1,768
|
|
Selling expenses
|
|
|
7,827
|
|
|
|
8,705
|
|
|
|
9,726
|
|
General and administrative expenses
|
|
|
3,078
|
|
|
|
4,472
|
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18,167
|
|
|
|
30,306
|
|
|
|
40,289
|
|
Liquidated damages (expenses) income, net of settlement
|
|
|
(2,119
|
)
|
|
|
235
|
|
|
|
|
|
Change in fair value of derivative instruments
|
|
|
|
|
|
|
73
|
|
|
|
194
|
|
Other expense, net
|
|
|
(21
|
)
|
|
|
(535
|
)
|
|
|
(1,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
16,027
|
|
|
|
30,079
|
|
|
|
38,514
|
|
Minority interest
|
|
|
241
|
|
|
|
382
|
|
|
|
464
|
|
Provision for income taxes
|
|
|
1,807
|
|
|
|
3,238
|
|
|
|
5,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13,979
|
|
|
|
26,459
|
|
|
|
32,597
|
|
Foreign currency translation gain
|
|
|
1,834
|
|
|
|
8,200
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
15,813
|
|
|
$
|
34,659
|
|
|
|
32,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic and diluted
|
|
$
|
0.61
|
|
|
$
|
1.06
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic
and diluted
|
|
|
23,041,021
|
|
|
|
25,000,050
|
|
|
|
25,000,050
|
|
11
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
Consolidated Balance
Sheets
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Cash
|
|
$
|
14,200
|
|
|
$
|
31,044
|
|
Working
capital(1)
|
|
|
55,587
|
|
|
|
75,337
|
|
Total current assets
|
|
|
72,017
|
|
|
|
94,214
|
|
Total assets
|
|
|
112,905
|
|
|
|
148,551
|
|
Total current liabilities
|
|
|
16,431
|
|
|
|
18,877
|
|
Total liabilities
|
|
|
17,805
|
|
|
|
20,057
|
|
Minority interest
|
|
|
1,293
|
|
|
|
1,762
|
|
Total shareholders equity
|
|
|
93,806
|
|
|
|
126,732
|
|
|
|
(1) |
Working capital is equal to total current assets less total
current liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
Consolidated Statements of Cash
Flows
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
(4,200
|
)
|
|
$
|
16,801
|
|
|
$
|
29,842
|
|
Cash flows used in investing activities
|
|
|
(11,081
|
)
|
|
|
(10,524
|
)
|
|
|
(16,189
|
)
|
Cash flows provided by (used in) financing activities
|
|
|
19,171
|
|
|
|
(1,092
|
)
|
|
|
2,929
|
|
12
RISK
FACTORS
An investment in our common shares involves a high degree of
risk. You should carefully consider the risks and uncertainties
described below together with all other information contained in
this prospectus, including the matters discussed under
Special Note Regarding Forward-Looking Statements,
before you decide to invest in our common shares. You should pay
particular attention to the fact that we are a holding company
with substantial operations in China and are subject to legal
and regulatory environments that in many respects differ from
those of the United States. If any of the following risks, or
any other risks and uncertainties that are not presently
foreseeable to us, actually occur, our business, financial
condition, results of operations, liquidity and our future
growth prospects would be materially and adversely affected. You
should also consider all other information contained in this
prospectus before deciding to invest in our common shares.
Risks
Related to Our Business
The
market for offset printing equipment is very competitive, and if
we are unable to compete successfully, our business may be
materially and adversely affected.
The offset printing equipment industry is extremely competitive
and is characterized by rapid technological changes. Our
products compete against those offered by several
top-tier Chinese and international companies, particularly
German and Japanese companies.
|
|
|
|
|
Small Format Press Producers. Our
competitors in the small format press market in China include
Chinese companies such as Yingkou Gronhi Offset Printing
Machinery Co., Ltd., Yingkou Saxin Printing Machine Co., Ltd,
Liaoning Dazu Guanhua Printing Equipment Co. Ltd., Weifang
Huaguang Precision Printing Machinery Co., Ltd., Shandong Weihai
Hamada (JV) Printing Machinery Co., Ltd. and Shandong Weihai
Printing Machinery Co., Ltd. Our international competitors
include Heidelberger Druckmaschinen AG, a German company, and
Hamada Printing Press Co., Ltd. and Ryobi, Ltd., two major
Japanese small format press manufacturers.
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|
|
|
Large Format Press Producers. Our
competitors in the large format press market in China include
Chinese companies such as Beiren Printing Machinery Holdings
Limited, Shanghai Electric Group Printing & Packaging
Machinery Co., Ltd. and Jiangxi Zhongjing Group Co., Ltd. Our
international competitors include German manufacturers such as
Heidelberger Druckmaschinen AG, Man Roland Druckmaschinen AG,
and Koenig & Bauer Group (KBA) and Japanese
manufacturers such as Mitsubishi Heavy Industries, Ltd., Komori
Corporation, Shinohara Machinery Co. Ltd., Sakurai Graphic
Systems Corp. and Ryobi Ltd. Adast a.s., one of the largest
Eastern European manufacturers, is another international
competitor.
|
Some of our competitors, particularly our international
competitors, have significantly greater financial, technical,
manufacturing, sales, marketing and other resources than we do
and have achieved greater name recognition for their products
and technologies than we have. Because of this, we may not be
able to successfully increase our market penetration or our
overall share of the offset printing equipment market in China
or internationally. In addition, companies not currently in
direct competition with us may introduce competing products in
the future. Although we attempt to develop and introduce
innovative products to meet end-user customer demand, products
or technologies developed by other offset printing equipment
suppliers could render our products or technologies obsolete or
noncompetitive. Customers may defer or change their purchasing
decisions in anticipation of the introduction of new products or
the actual introduction of new products by us or our competitors.
13
Increased competition may result in price reductions, increased
sales incentive offers, lower gross margins and loss of market
share, which could require us to increase investments in
research and development, sales and marketing efforts, and other
means of market expansion. Our competitors products may be
more competitive in terms of market acceptance, price, quality
and performance. We may be adversely affected if we are unable
to maintain current product cost reductions or achieve future
product cost reductions, including warranty costs.
If we fail to address any of these competitive challenges and we
are unable to compete successfully, there could be a material
adverse effect on our business, financial condition and
operating results.
We
face risks and difficulties due to our recent growth, and may be
unable to sustain our recent profitability and growth
rates.
Our revenue grew from $67.8 million for the year ended
June 30, 2007 to $89.6 million for the year ended
June 30, 2008 and to $106.6 million for the year ended
June 30, 2009. We will continue to encounter risks and
difficulties in connection with our significant growth,
including our potential failure to:
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|
|
implement, adapt or modify our business model and strategy;
|
|
|
|
manage our investments in new businesses and facility expansion
or construction, including the cold-set corrugated paper machine
factory at Langfang Duoyuan that we intend to build;
|
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|
maintain our current and develop new relationships with
distributors;
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|
manage our expanding operations and product offerings;
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|
maintain adequate control of expenses, inventory and receivables;
|
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|
|
attract, retain and motivate qualified personnel;
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|
protect our reputation and enhance customer loyalty;
|
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|
implement additional and improve existing administrative,
financial and operations systems, procedures and
controls; and
|
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|
|
anticipate and adapt to changes in the offset printing industry,
government regulations, technology and other competitive and
market dynamics.
|
If we fail to successfully deal with these risks and
difficulties due to our recent growth, we could experience
disruptions in our business, any of which could materially
affect our business, financial condition and results of
operations.
In addition, although our sales have increased rapidly in recent
years, we expect that our operating expenses will increase as we
expand, and we may not maintain or increase our profitability.
Some of the factors which may contribute to our inability to
sustain our recent profitability and growth include:
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|
|
|
|
competitors offering comparable products at lower prices;
|
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|
|
decreases in the average selling prices of our products,
particularly our single color presses;
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|
|
superior product innovations by competitors;
|
14
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|
rising raw materials and manufacturing costs;
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|
|
changes in our management and key personnel; and
|
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|
|
increased operating expenses relating to research and
development, sales and marketing efforts and general and
administrative expenses as we seek to grow our business.
|
As a result of these and additional factors, we may experience
lower revenue and higher expenses and we may therefore fail to
maintain our recent profitability and growth rates, achieve our
revenue targets, limit our operating expenses
and/or
remain profitable in the future.
We may
be unsuccessful in developing and selling new products or in
penetrating new markets for which we have limited experience,
particularly the post-press market.
Our revenue growth has been primarily from sales of our press
products. Our future success depends, in part, on our ability to
develop and sell new press products, as well as new pre-press
and post-press products in a cost-effective and timely manner.
We continually evaluate expenditures for planned product
developments and choose among alternatives based upon our
expectations of future market trends.
We may expand into business areas for which we do not have
significant experience. One area of planned expansion is the
cold-set corrugated paper machine product line, which we expect
to begin commercial production and sale by the end of 2010. Many
factors, some of which are beyond our control, could materially
and adversely affect our ability to turn this and other products
into profitable businesses, including:
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|
our limited experience in these new businesses;
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the existence of larger more established competitors;
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our potential inability to sell new products to existing
end-user customers or to locate new end-user customers;
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the timing and completion of our introduction of new designs;
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the quality, price and performance of our products and those of
our competitors;
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our customer service capabilities and responsiveness; and
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any unexpected expenses and costs related to the expansion.
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Failure to effectively manage these factors may result in our
inability to successfully develop new products and expand into
new markets, including the post-press market, which could
materially and adversely affect our financial condition and
results of operations and result in a loss of business
opportunities.
We
depend on distributors for all of our revenue and will rely on
adding distributors for most of our revenue growth. Failure to
maintain relationships with our distributors or to otherwise
expand our distribution network could negatively affect our
ability to effectively sell our products.
We depend on distributors for all of our revenue. We do not have
long-term distribution agreements, and all our distribution
agreements have one-year terms. As our existing distribution
agreements expire, we may be unable to renew with our desired
distributors on favorable terms or at all. We compete for
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quality distributors with both our international and Chinese
competitors. In addition, we rotate our sales and marketing
personnel among our seven regional markets periodically to
reduce our reliance on any single employees relationship
with distributors in any market. This practice may make us less
attractive to some distributors. Any disruption of our
distribution network, including our failure to renew our
existing distribution agreements with our desired distributors,
could negatively affect our ability to effectively sell our
products.
We may
be unable to effectively manage our distribution network, and
our business, prospects and brand may be materially and
adversely affected by our distributors
actions.
Our ability to manage the activities of our independent
distributors is limited. Our distributors could take one or more
of the following actions, any of which may have a material
adverse effect on our business, prospects and brand:
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sell products that compete with our products, possibly including
counterfeit products with the Duoyuan name;
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sell our products outside their designated territory, possibly
in violation of the distribution rights of other distributors;
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fail to adequately promote our products;
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fail to provide proper training and service to our end-user
customers; or
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violate the anti-corruption laws of China, the United States or
other countries.
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Failure to adequately manage our distribution network or
non-compliance by distributors with our distribution agreements
could harm our corporate image among our end-user customers and
disrupt our sales, which could result in a failure to meet our
sales goals. Furthermore, we could be liable for actions taken
by our distributors, including violations of applicable law in
connection with the marketing or sales of our products, such as
the PRC anti-corruption laws and the United States Foreign
Corrupt Practices Act. In particular, we may be held liable
under U.S. law for actions taken by our distributors even
though all of our distributors are
non-U.S. companies
that are not subject to the Foreign Corrupt Practices Act. Our
distributors may violate these laws or otherwise engage in
illegal practices with respect to their sales or marketing of
our products. If our distributors violate these laws, we could
be required to pay damages or fines, which may materially and
adversely affect our business, financial condition and results
of operations. In addition, our brand, reputation, sales or the
price of our common shares could be adversely affected if we
become the target of any negative publicity as a result of
actions taken by our distributors.
If the
market for printing equipment does not grow at the rate we
expect or at all, including due to a decrease in the demand for
commercial printing services, our revenue and profitability may
be materially and adversely affected.
The development of our business depends, in large part, on
continued growth in the demand for quality printing equipment in
China, including demand driven by providers of commercial
printing services in China and on the maintenance or growth of
the general selling prices of pre-press, press and post-press
products in the market. Although the Chinese printing equipment
market has grown rapidly, the growth may not continue at the
same rate or at all.
A variety of factors, including economic, regulatory, political
and social instability, could contribute to a decrease in the
demand for quality offset printing equipment or commercial
printing services. In addition, we believe the average price
charged for regular and low-end commercial printing services has
16
been decreasing. We also believe that the average selling price
of press products, particularly the less sophisticated single
color printing equipment, has been decreasing. If there is a
decrease in the demand for or the price of offset printing
equipment, including as a result of decreased demand for
commercial printing services, our revenue and profitability may
be materially and adversely affected.
If we
fail to accurately project demand for our products, we may
encounter problems of inadequate supply or oversupply, which may
materially and adversely affect our business, financial
condition and operating results.
Our distribution agreements contain annual sales targets for
each distributor, and we take such targets into account when we
formulate our overall operation plans. We forecast demand for
our products based on rolling projections from our distributors.
The varying sales and purchasing cycles of our distributors,
however, make it difficult for us to forecast future demand
accurately.
If we overestimate demand, we may purchase more raw materials or
components than required. If we underestimate demand, our third
party suppliers may have inadequate raw material or product
component inventories, which could interrupt our manufacturing,
delay shipments and result in lost sales. In particular, we are
seeking to reduce our procurement and inventory costs by
matching our inventories closely with our projected
manufacturing needs and by deferring our purchase of raw
materials and components, from time to time, in anticipation of
supplier price reductions. If we have excess products, we may
need to lower prices to stimulate demand. We also risk new
material inventory obsolescence if we do not sell components
before the end of their shelf life. As we seek to balance
inventory cost savings and production flexibility, we may fail
to accurately forecast or meet demand. Our inability to
accurately predict and timely meet our demand could materially
and adversely affect our business, financial condition and
operating results.
If we
cannot obtain sufficient raw materials and components that meet
our production demand and standards at a reasonable cost, or at
all, our business may be materially and adversely
affected.
The key raw materials and components used in the manufacturing
of our products are steel, iron and electronic components. We
produce a substantial majority of our key components in-house at
our Hunan Duoyuan facility. We purchase all other raw materials
and components from Chinese suppliers.
For fiscal 2007, 2008 and 2009, purchases from our largest
supplier accounted for 9.5%, 8.8% and 10.7% of our total raw
materials and components purchases, respectively. For the same
periods, our ten largest suppliers combined accounted for 54.6%,
55.7% and 57.4% of our total raw materials and components
purchases, respectively. If any supplier is unwilling or unable
to provide us with raw materials and components in the required
quantities and at acceptable costs and quality, we may not be
able to find alternative sources on satisfactory terms in a
timely manner, or at all. In addition, some of our suppliers may
fail to meet qualifications and standards required by our
end-user customers, which could impact our ability to purchase
raw materials and components.
Our inability to find or develop alternative supply sources for
raw materials or components that meet our production demand and
standards could result in production delays or reductions as
well as shipment delays. The prices of our raw materials and
components could also increase, and we may not be able to pass
these price increases on to our end-user consumers. For example,
steel prices in China decreased during the year ended
June 30, 2006 but, increased significantly during fiscal
2007 and fiscal 2008. Should any of these events occur, our
business may be materially and adversely affected.
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Our
distributors have reduced or terminated their purchases in the
past, and could reduce or terminate their purchases in the
future, which could materially and adversely affect our
business.
We do not have long-term distribution agreements with our
distributors, who could reduce their purchases or cease
purchasing our products altogether. If major distributors elect
to purchase products from another manufacturer, our operating
results could be harmed through, among other things, decreased
sales volumes and write-offs of accounts receivable and
inventory related to products we have manufactured for these
distributors. In addition, any decline in demand for our
products, including any negative development affecting our major
distributors or the printing industry in general, would likely
harm our sales and operating results.
A substantial portion of our backlog is scheduled for delivery
within 90 days or less, and our distributors may cancel or
change their purchase orders or delivery times for products they
have ordered from us without penalty. In addition, a significant
portion of our operating expenses are fixed in advance based on
projected sales. Accordingly, if sales are below expectations in
any given quarter, the resulting impact on our business,
financial conditions and operating results will be more
significant given our inability to adjust spending in the short
term to compensate for this shortfall.
We may
be unable to successfully expand our manufacturing capacity,
which could result in material delays, quality issues, increased
costs and loss of business opportunities, and, if we fail to
accurately gauge demand for our products or our product and
end-user customer initiatives fail, we may have overcapacity,
which may materially and adversely affect our
business.
We intend to upgrade our existing in-house production facilities
for our key components and build a new factory at Langfang
Duoyuan to manufacture cold-set corrugated paper machines, a
post-press product. These projects may not be constructed in
time or within budget. We may also experience quality control
issues as we implement these manufacturing upgrades and ramp up
production. Any material delay in completing these projects, or
any substantial increase in costs or quality issues in
connection with these projects, could materially and adversely
affect our business, financial condition, results of operations
and business opportunities.
Our decision to upgrade our existing production facilities and
build a new cold-set corrugated paper machine factory at
Langfang Duoyuan is based on the sale of current products, our
growth strategy and market trends. However, market demand could
shift and result in lower than anticipated demand for and sales
of our existing or future products, such as our cold-set
corrugated paper machines. Our marketing initiatives to promote
our existing and new products may not result in the anticipated
level of end-user customer demand, resulting in production
overcapacity or excess inventory for us, which may have a
material adverse effect on our profitability.
We are
exposed to potential product liability claims that may be costly
to defend against, and, if successful, may materially and
adversely affect our business.
As a manufacturer of offset printing equipment, our business
exposes us to product liability risks. Claims against us may
also result from actions taken by our distributors over whom we
exercise little to no control. The malfunctioning of our
products could potentially cause financial loss, property damage
or personal injuries. If our products are not properly designed
or manufactured or if they do not perform adequately, we could
be subject to claims for damages based on legal theories,
including product liability. Product liability claims may be
expensive to defend and may potentially result in large
financial judgments being made against us, which could adversely
affect our financial performance. We do not maintain liability
insurance, so we are responsible for any expenses we might incur
in connection with such claims. Even if a product liability or
other claim is not successful, the adverse publicity, time and
expense of defending such a claim may interfere with or
negatively impact our business and materially and adversely
impact our results of operations and reputation.
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If we
fail to meet evolving end-user customer demand and requirements
for offset printing equipment, including through product
enhancements or new product introductions, or if our products do
not compete effectively, our financial conditions and operating
results may be negatively and adversely affected.
The offset printing equipment industry is characterized by
evolving technological change, frequent new product
developments, periodic product obsolescence, high industry
standards, changing information technologies and evolving
distribution channels. We must adapt quickly to new and changing
technologies and their related applications and to introduce new
products offerings with improved features and functionality. We
could incur substantial costs to keep pace with the
technological changes and may fail to adapt to these changes.
Our future success largely depends on our ability to
continuously develop new products with the quality levels our
end-user customers demand and new services to support them.
Despite our investments in research and development, we may fail
to develop new products. Our new products may not achieve market
acceptance or be manufactured at competitive costs or in
sufficient volume. Our failure to enhance our existing products
and services or to develop and introduce new products and
services that meet changing end-user customer requirements and
evolving technological standards would adversely impact our
ability to sell our products and our financial condition and
operating results may be negatively and adversely affected.
Third
party use of the Duoyuan trademark name may dilute
its value and materially and adversely affect our reputation,
goodwill and brand.
We have a license from Duoyuan Investments Limited, our majority
shareholder, wholly owned by Wenhua Guo, the chairman of our
board of directors, to use the Duoyuan trademark
name. Duoyuan Investments Limited, however, may license the
Duoyuan trademark name to others for products
unrelated to printing, which may create confusion regarding our
brand. In addition, some of our distributors use the Chinese
characters of our name, Duoyuan, in their company
names, and we may be unable to prevent such use. The use of
Duoyuan in the legal names of these distributors may
confuse our end-user customers who may associate our name with
the distributor and incorrectly believe our distributors are our
affiliates. Due to ambiguities in Chinese intellectual property
law, the cost of enforcement and our prior lack of enforcement,
we may be unable to prevent third parties from using the
Duoyuan trademark name.
We may
undertake acquisitions which may have a material adverse effect
on our ability to manage our business and may be
unsuccessful.
Our growth strategy may involve the acquisition of new
technologies, businesses, products or services or the creation
of strategic alliances in areas in which we do not currently
operate. These acquisitions could require that our management
develop expertise in new areas, manage new business
relationships and attract new types of customers. Furthermore,
acquisitions may require significant attention from our
management, and the diversion of our managements attention
and resources could have a material adverse effect on our
ability to manage our business. We may also experience
difficulties integrating acquisitions into our existing business
and operations. Future acquisitions may also expose us to
potential risks, including risks associated with:
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integration of new operations, services and personnel;
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unforeseen or hidden liabilities;
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diversion of resources from our existing businesses and
technologies;
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inability to generate sufficient revenue to offset the costs of
acquisitions; and
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potential loss of, or harm to, relationships with employees or
customers.
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Any of these risks may have a material adverse effect on our
ability to manage our business and the acquisitions may be
unsuccessful.
If our
efforts to expand into international markets are unsuccessful,
our business and financial conditions could be materially and
adversely affected.
Our long-term business strategy relies in part on establishing
an international distribution network in parts of Africa, the
Middle East and Asia. Risks affecting our international
expansion include challenges caused by geographic distance,
language, cultural differences and the burdens of complying with
a wide variety of laws and regulations which differ from those
to which we are accustomed, including:
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international import and export legislation;
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financial condition, expertise and performance of potential
international distributors;
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foreign tax consequences;
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trade and tariff restrictions;
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quotas; and
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inability to effectively enforce contractual or other legal
rights.
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These risks could result in increased and unbudgeted costs
associated with servicing international markets, which could in
turn materially and adversely affect our business and financial
condition.
Our
business is capital intensive and our growth strategy may
require additional capital which may not be available on
favorable terms or at all.
We believe that our current cash and cash flows from operations
will be sufficient to meet our present and reasonably
anticipated cash needs to maintain current operations. We may,
however, require additional cash resources due to changed
business conditions, planned expansion of our manufacturing
capacity and product offerings (for example, our plans to expand
our existing property to build a cold-set corrugated paper
machine factory at Langfang Duoyuan) or other investments or
acquisitions we may decide to pursue. If our own financial
resources are insufficient to satisfy our capital requirements,
we may seek to sell additional equity or debt securities or
obtain additional credit facilities. The sale of additional
equity securities could result in dilution of shareholders
holdings. The incurrence of indebtedness would result in
increased debt service obligations and could require us to agree
to operating and financial covenants that would restrict our
operations. Financing may not be available in amounts or on
terms acceptable to us, if at all. Any failure by us to raise
additional funds on terms favorable to us, or at all, could
limit our ability to expand our business operations and could
harm our overall business prospects.
Any
interruption in our production process could materially impair
our financial performance and adversely affect our relationships
with our distributors.
Our manufacturing operations are complicated and integrated,
involving the coordination of raw materials and components (some
purchased from third parties), internal production processes and
external distribution processes. While these operations are
modified on a regular basis in an effort to improve
manufacturing and distribution efficiency and flexibility, we
may experience difficulties in coordinating the various aspects
of our manufacturing processes, thereby causing downtime and
delay. For example, due to increased demand for our multicolor
presses, we transferred some of our employees from the single
color press production line to the multicolor press production
line. Production of
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multicolor presses involves a more complicated manufacturing
process that required additional training for these transferred
employees and ultimately resulted in some production delays. We
manufacture, assemble and store almost all of our products, as
well as conduct most of our research and development activities,
at our manufacturing facilities. We do not maintain
back-up
facilities, so we depend on our manufacturing facilities for the
continued operation of our business. A natural disaster or other
unanticipated catastrophic event, including power interruption,
water shortage, storm, fire, earthquake, terrorist attack or
war, could significantly impair our ability to manufacture our
products and operate our business and delay our research and
development activities. Our facilities and certain manufacturing
equipment would be difficult to replace and could require
substantial replacement time. Catastrophic events may also
destroy our inventory. The occurrence of such an event could
materially and adversely affect our business and operations. In
addition, any interruption in our production, even if temporary,
could delay our delivery to our distributors, who deliver to
end-user customers. Any production interruption
and/or
delivery delays could negatively affect our business and
potentially our reputation. Any interruption of our business
operations could have a material adverse effect on our business,
financial condition and operating results and may negatively
affect our relationships with our distributors.
We do
not have insurance coverage to protect us against
losses.
We do not maintain insurance coverage for our equipment or
manufacturing facilities, and we do not have any business
liability, loss of data or business interruption insurance
coverage for our operations in China. If any claims for injury
are brought against us, or if we experience any business
disruption, litigation or natural disaster, we might incur
substantial costs and diversion of resources, which would
materially and adversely affect our business, financial
condition and operating results.
Environmental
claims or failure to comply with any present or future
environmental regulations may require us to spend additional
funds and may materially and adversely affect our
business.
We are subject to environmental laws and regulations that affect
our operations, facilities and products in China. Any failure to
comply with any present or future environmental laws and
regulations could result in the assessment of damages or
imposition of fines against us, suspension of production,
cessation of our operations or even criminal sanctions. New laws
and regulations could also require us to acquire costly
equipment or to incur other significant expenses. Our failure to
control the use of, or adequately restrict the discharge of,
hazardous substances could subject us to potentially significant
monetary damages and fines or suspension of our business
operations, which may harm our results of operations.
In connection with the construction of our Langfang Duoyuan
facility, which became operational in October 2000, we obtained
the required environmental protection assessment. We were also
required to obtain a pollutant discharging permit from the
governmental authorities in connection with the discharge of
certain pollutants prior to commencing operations. We have not
received this permit yet. Pursuant to the Regulations of Hebei
Province on the Administration and Supervision of Environmental
Pollution Prevention, effective March 1, 2008, our failure
to timely obtain this permit may result in us being reprimanded
by the relevant governmental authorities, which may result in a
monetary fine in an amount equal to three times any illegal
gains, or RMB5,000 to RMB10,000, if we have no illegal gains,
subject to the discretion of the governmental authorities. If we
are deemed to have materially violated the regulation regarding
the discharge of pollutants, the governmental authorities may
order us to comply with the regulation within a time limit. If
more stringent regulations are adopted in the future, the
related compliance costs could be substantial. Any failure by us
to control the use or adequately restrict the discharge of
hazardous substances could subject us to potentially significant
monetary damages and fines or suspensions in our business
operations.
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In connection with the construction of our Hunan Duoyuan
facility, which became operational in March 2004, we didnt
obtain the required environmental protection assessment. We were
also required to obtain a pollutant discharging permit. We have
not received this permit yet. Pursuant to the Provisional
Measures of Hunan Province on the Administration and Supervision
of Pollutant Discharging Permit, effective January 1, 2004,
our failure to obtain this permit, may result in us being
prohibited the discharge of pollutants. We may not obtain a
required approval of our potential construction project.
The
loss of key personnel, failure to attract or retain specialized
technical and management personnel and recent replacements of
our chief executive officer and chief financial officer could
materially and adversely affect our business.
We rely heavily on the services of our key personnel, including
Wenhua Guo, the chairman of our board of directors, Christopher
Patrick Holbert, our chief executive officer, Xiqing Diao, our
chief operating officer, William D. Suh, our chief financial
officer, and Yubao Wei, our chief technology officer, each of
whom are a significant asset to us. Our future success will
depend on our ability to retain these key personnel and attract
and retain other skilled managerial, engineering, technical and
sales and marketing personnel. Competition for such key
personnel, particularly technical personnel, is intense in the
offset printing equipment industry, and we may fail to attract
and retain a sufficient number of technical personnel to support
our anticipated growth. Despite the incentives we provide, our
current employees may not continue to work for us. If additional
personnel are required for our operations in the future, we may
not be able to obtain the services of additional personnel
necessary for our growth.
Turnover in our senior management could significantly deplete
institutional knowledge held by our existing senior management
team and impair our operations, which could harm our business.
On June 29, 2009, Wenhua Guo resigned as our chief
executive officer. Mr. Diao served as our interim chief
executive officer from July 9, 2009 until we appointed
Christopher Patrick Holbert as our chief executive officer on
August 26, 2009. During the year ended June 30, 2008,
Gene Michael Bennett and William Milewski, who served as our
chief financial officers from July 19, 2007 to
December 20, 2007 and from March 1, 2008 to
May 21, 2008, respectively, resigned. From
December 20, 2007 to March 1, 2008 and again from
May 21, 2008 to October 1, 2008, Baiyun Sun, our
controller, served as our interim chief financial officer. We
appointed William Suh as our chief financial officer effective
as of October 1, 2008, with Ms. Sun continuing to
serve as our controller. During the transition periods when we
had only an interim chief financial officer, certain of our
projects were subject to delay or put on hold which may have a
material adverse effect on our financial condition and operating
results.
In addition, if any of our key personnel joins a competitor or
forms a competing company, we may not be able to replace them
easily and we may lose end-user customers, business partners,
key professionals and staff members as a result. All of our key
personnel have entered into employment agreements with us, which
include confidentiality and non-disclosure provisions. However,
if any disputes arise between these key personnel and us, it is
not clear, in light of uncertainties associated with the Chinese
legal system, what the court decisions will be and the extent to
which these court decisions could be enforced in China, where
all of these key personnel reside and hold some of their assets.
See Risks Related to Doing Business in
China Uncertainties with respect to the Chinese
legal system could limit the legal protections available to our
shareholders and us.
The
successful management of our printing operations and growth may
suffer because our senior management team has a limited history
of working together.
Our success depends, in large part, upon the services of our
senior management team. A significant portion of our senior
management team, namely our chief executive officer and chief
financial officer, has been in place for 12 months or less.
These executives do not have previous management experience with
us and may not fully integrate themselves into our business or
manage effectively our growth. Our
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failure to assimilate these new executives, the failure of these
new executives to perform effectively, or the loss of any of
these new executives, could adversely affect our business,
financial condition, and results of operations. We do not carry
key person life insurance on any of our executive officers.
Failure
to protect our proprietary technologies or maintain the right to
certain technologies may materially and adversely affect our
ability to compete.
We believe that the protection of our intellectual property
rights will continue to be important to the success of our
business. We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure
to protect our intellectual property rights. We have also
entered into confidentiality or license agreements with our
employees, business partners and other third parties. We have
implemented procedures to control access to and distribution of
documents and other proprietary information. These efforts may
fail to adequately protect our intellectual property rights.
Further, these agreements do not prevent others from
independently developing technologies that are equivalent or
superior to our technology. In addition, unauthorized parties
may attempt to copy or otherwise obtain and use our proprietary
technology. Monitoring unauthorized use of technology is
difficult, particularly in China, where the laws may not protect
our proprietary rights as fully as do the laws of the United
States.
Currently, we have eight patents registered in China. Patents
might not be issued for our future applications, and any issued
patents may not protect or benefit us or otherwise give us
adequate protection from competing products. For example, issued
patents may be circumvented or challenged and declared invalid
or unenforceable or provide only limited protection for our
technologies. We also cannot be certain that others will not
design around our patented technology, independently develop our
proprietary technology or develop effective competing
technologies on their own.
We may
be exposed to infringement or misappropriation claims by third
parties, which, if determined adversely against us, could
disrupt our business and subject us to significant liability to
third parties.
We rely upon certain proprietary confidential information,
trademarks, know-how, trade secrets and improvements and
continuing technological innovation to develop and maintain our
competitive position. In addition, we have eight registered
patents that we use in our business. Our product development
teams conduct patent searches of Chinese patents with guidance
and oversight from our in-house patent team. Our product
development projects are approved only if the result of the
patent search indicates that development of the proposed
products will not infringe on any third party intellectual
property rights. However, due to the complex nature of offset
printing technology patents, the uncertainty of construing the
scope of the patents, inadequate oversight or guidance from our
in-house patent team, and other limitations inherent to these
patent searches, the risk of our infringing on third party
intellectual property rights cannot be fully eliminated.
Third parties may claim that one or more of our products or our
various processes infringe upon their patents or other
intellectual property. A successful claim of patent or other
intellectual property infringement could subject us to
significant damages or an injunction preventing the manufacture,
sale or use of our affected products or otherwise limit our
freedom to operate. The legal protection of intellectual
property in China is significantly more limited than in the
United States and many other countries and may afford us little
or no effective protection.
Technologies licensed to and relied on by us may be subject to
infringement or corresponding claims by others which could
damage our ability to rely on such technologies. In addition,
although we endeavor to ensure that companies that work with us
possess appropriate intellectual property rights or licenses, we
cannot fully avoid the risks of intellectual property rights
infringement created by suppliers of components used in our
products or companies with which we collaborate on research and
development activities. Our current or potential competitors,
many of which have substantial resources and have made
substantial investments in competing technologies, may have
obtained or may obtain patents that
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will prevent, limit or interfere with our ability to make, use
or sell our products in China or other countries. The defense of
intellectual property claims, including patent infringement
suits, and related legal and administrative proceedings can be
both costly and time-consuming and may significantly divert the
efforts and resources of our technical and management personnel.
Furthermore, an adverse determination in any such litigation or
proceeding to which we may become a party could cause us to:
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pay damage awards;
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seek licenses from third parties;
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pay additional ongoing royalties, which could decrease our
profit margins;
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redesign our products; or
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be restricted by injunctions.
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These factors could effectively prevent us from pursuing some or
all of our business and result in our customers or potential
customers deferring, canceling or limiting their purchase or use
of our products, which could have a material adverse effect on
our financial condition and results of operations.
We may
be exposed to potential risks relating to our internal control
over financial reporting and our ability to have those controls
attested to by our independent auditors for the year ending
June 30, 2010, in accordance with the Sarbanes-Oxley Act of
2002.
We are required by the Securities and Exchange Commission to
include a report of management on our internal control over
financial reporting in our annual reports. In addition, the
independent registered public accounting firm auditing a
companys financial statements must attest to and report on
managements assessment of the effectiveness of our
internal control over financial reporting and the operating
effectiveness of our internal controls. Our management has
concluded that our internal control over our financial reporting
is not effective and has material weaknesses. Our independent
registered public accounting firm is not yet required to attest
to our managements assessment until the year ending
June 30, 2010, but once it is required to do so it may
issue a report that is qualified if it is not satisfied with our
controls at that time or the level at which our controls are
documented, designed, operated or reviewed. We have identified
significant deficiencies or material weaknesses in our internal
controls that we may not be able to remediate in a timely
manner, and investors and others may lose confidence in the
reliability of our financial statements. We can provide no
assurance that we will be in compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, be able to rectify the material
weaknesses we have identified or receive a positive attestation
from our independent auditors in the future. Any of these
possible outcomes could result in loss of investor confidence in
the reliability of our reporting processes, which could
adversely affect the price of our shares.
The
termination and expiration or unavailability of preferential tax
treatments once available to us may materially and adversely
affect our business.
Prior to January 1, 2008, enterprises established in China
were generally subject to 30% state and 3% local enterprise
income tax rate. However, enterprises that satisfied certain
conditions enjoyed preferential tax treatments. For example, in
accordance with the Foreign Invested Enterprise Income Tax Law,
which was effective until December 31, 2007, a
foreign-invested manufacturing enterprise scheduled to operate
for a period not less than ten years would be exempted from
paying income tax in its first and second years of generating
profit, followed by a 50% reduction in its tax rate in the
third, fourth and fifth years subject to the approval of
relevant tax authorities. Duoyuan China, which we believe
qualifies as a manufacturing enterprise scheduled to operate
more than ten years, enjoyed an income tax exemption for its
first two profitable years (2004 and 2005) and a 50% income
tax reduction for the
24
next three years (2006 through 2008). Since the definition of
manufacturing enterprise is unclear and subject to discretionary
interpretation and enforcement by the PRC authorities, if
Duoyuan China is deemed not qualified for such preferential tax
treatment in the prior periods by relevant tax authorities, it
may be required to refund prior tax benefits received.
Effective January 1, 2008, the PRC National Peoples
Congress enacted the PRC Enterprise Income Tax Law. The new
Enterprise Income Tax Law generally imposes a single uniform
income tax rate of 25% on all Chinese enterprises, including
foreign-invested enterprises, and eliminates or modifies most of
the tax exemptions, reductions and preferential treatments
available under the previous tax laws and regulations, subject
to the State Councils further regulation. According to the
new Enterprise Income Tax Law and relevant implementation rules,
the specific foreign-invested enterprises which used to enjoy a
tax holiday in accordance with the state laws, regulations or
the relevant rules will continue to enjoy it under the new tax
law until the expiration of such tax holiday. As a result,
Duoyuan China enjoyed the 50% tax reduction for the calendar
year 2008 with an applicable income tax rate of 12.5%. Beginning
on January 1, 2009, Duoyuan China became subject to the 25%
income tax rate. Our other two subsidiaries, Langfang Duoyuan
and Hunan Duoyuan, were both granted five-year income tax
exemptions beginning with their first profitable year, by the
relevant local governments. However, these preferential tax
treatments granted by the local governments were not supported
by relevant state laws and regulations, thus Langfang Duoyuan
and Hunan Duoyuan may be ordered by relevant authorities to
refund these tax benefits. Langfang Duoyuan became subject to
the 25% income tax rate beginning on January 1, 2008.
Pursuant to the preferential tax treatments granted by the local
government, Hunan Duoyuan will become subject to the 25% income
tax rate beginning on January 1, 2010. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies Taxes and Incentives.
If we are required to refund the tax benefits we received, our
financial condition and result of operation could be materially
and adversely affected.
The
newly enacted PRC tax law affects tax exemptions on dividends
received by us and increases the enterprise income tax rate
applicable to us.
According to the PRC enterprise income tax law applicable prior
to January 1, 2008, dividends paid to us by our Chinese
subsidiaries were exempted from the Chinese enterprise income
tax. However, such tax exemption ceased after January 1,
2008, when the new PRC Enterprise Income Tax Law and its
implementation rules became effective. Under the new Enterprise
Income Tax Law, dividends 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 enterprises jurisdiction of
incorporation has a tax treaty with the PRC that provides for a
reduced rate of withholding tax. We are a company incorporated
in the State of Wyoming, United States. As the tax treaty
between China and the United States does not have such a
reduced rate of withholding tax on dividends, if we are
considered a non-resident enterprise, our dividend income
received from our PRC subsidiary will be subject to a 10%
withholding tax. The new Enterprise Income Tax Law also provides
that 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. According to the
Implementing Rules of PRC Enterprise Income Tax Law, de
facto management organization means organizations
implementing substantive and comprehensive management and
control over the production and business operations, staff,
accounts and property of an enterprise. On April 22, 2009,
the State Administration of Taxation promulgated a circular
which set out criteria for determining whether de facto
management bodies are located in China for overseas
incorporated, domestically controlled enterprises. However, as
this circular only applies to enterprises incorporated under
laws of foreign countries or regions that are controlled by PRC
enterprises or groups of PRC enterprises, it remains unclear how
the tax authorities will determine the location of de
facto
25
management bodies for overseas incorporated enterprises
that are controlled by individual PRC residents like us.
Although substantially all members of our management are located
in China, it is unclear whether Chinese tax authorities would
require (or permit) us to be treated as PRC resident
enterprises. If we are deemed a Chinese tax resident enterprise,
we may be subject to an enterprise income tax rate of 25% on our
worldwide income, excluding dividends received directly from
another Chinese tax resident. As a result of such changes, our
historical tax rates will not be indicative of our tax rates for
future periods and the value of our common shares may be
adversely affected.
We conduct all of our business through our Chinese subsidiaries
and almost all of income will be derived from these
subsidiaries. Currently, we have not received any dividend
payments from our Chinese subsidiaries and we, as a holding
company, do not have any revenue because all revenues are
reported by the Chinese subsidiaries.
Our
foreign shareholders may be subject to PRC withholding tax on
the dividends payable by us and upon gains realized on their
sales of our shares if we are deemed a PRC resident
enterprise.
Under the new PRC Enterprise Income Tax law, non-PRC enterprise
shareholders may be subject to a 10% withholding tax upon
dividends payable by us and gains realized on their sales or
other dispositions of our shares, if such income is deemed as
sourcing from China. Accordingly, under the new Enterprise
Income Tax Law, (1) if the enterprise that distributes
dividends is domiciled in the PRC, or (2) if gains are
realized from transferring equity interests of enterprises
domiciled in the PRC, then such dividends or capital gains are
treated as China-sourced income. It is not clear how
domicile may be interpreted under the new Enterprise
Income Tax law. It remains unclear whether the gains our non-PRC
enterprise shareholders may realize will be regarded as income
from within China if we are deemed a PRC resident enterprise
under the new Enterprise Income Tax Law. If we are deemed a PRC
resident enterprise and investors sales of our shares and
dividends payable by us are deemed as gains sourced from China,
investors sales of our shares and dividends payable by us
may be subject to withholding tax. However, if investors do not
pay the withholding tax, there is no certainty regarding whether
penalties will be imposed or the type of penalties. Any such
withholding tax or penalties imposed upon our shareholders will
reduce the returns on your investment in our shares.
We may
be unable to ensure compliance with U.S. economic sanctions
laws, especially when we sell our products to distributors over
which we have limited control.
The United States Department of the Treasurys Office of
Foreign Assets Control administers certain laws and regulations
that impose penalties on U.S. persons and, in some
instances, foreign entities owned or controlled by
U.S. persons, for conducting activities or transacting
business with certain countries, governments, entities or
individuals subject to U.S. economic sanctions. We will not
engage in or fund, directly or indirectly, any activity or
business with any country, government, entity or individual that
U.S. economic sanctions laws prohibit U.S. persons, or
foreign entities owned or controlled by U.S. persons, from
engaging in or funding. However, we sell our products through
independent
non-U.S. distributors
which are responsible for interacting with the end-user
customers of our products. Although none of these independent
non-U.S. distributors
are located in or conduct business with countries subject to
U.S. economic sanctions such as Cuba, Sudan, Iran, Syria
and Myanmar, we may not be able to ensure that such
non-U.S. distributors
comply with any applicable U.S. economic sanctions laws. As
a result of the foregoing, actions could be taken against us
that could materially and adversely affect our reputation and
have a material and adverse effect on our business, financial
condition, results of operations and prospects.
26
The
slowdown of Chinas economy caused in part by the recent
challenging global economic conditions may adversely affect our
business, results of operations and financial
condition.
Chinas economy has experienced a slowdown after the second
quarter of 2007, when the quarterly growth rate of Chinas
gross domestic product reached 11.9%. A number of factors have
contributed to this slowdown, including appreciation of the
Renminbi, which has adversely affected Chinas exports, and
tightening macroeconomic measures and monetary policies adopted
by the Chinese government aimed at preventing overheating of
Chinas economy and controlling Chinas high level of
inflation. The slowdown has been further exacerbated by the
challenging global economic conditions in the financial services
and credit markets, which in recent months has resulted in
extreme volatility and dislocation of the global capital and
credit markets.
It is uncertain how long the challenging global economic
conditions in the financial services and credit markets will
continue and how much of an adverse impact it will have on the
global economy in general and the Chinese economy specifically.
In response to the challenging global economic conditions, in
September 2008 the Chinese government began to loosen economic
measures and monetary policies by reducing interest rates and
decreasing the statutory reserve rates for banks. On
November 5, 2008, the State Council of China announced an
economic stimulus plan in the amount of $585 billion to
stimulate economic growth and bolster domestic demand. We cannot
assure you that the economic stimulus plan or various
macroeconomic measures and monetary policies adopted by the
Chinese government to guide economic growth and the allocation
of resources will be effective in sustaining the growth of the
Chinese economy. The slowdown of Chinas economy could lead
to lower demand for commercial printing services in China,
because demand for commercial printing services is dependent on
strong general economic activities and conditions. Lower demand
for commercial printing services may decrease demand for offset
printing equipment, which could decrease demand for our products
and adversely and materially affect our business, results of
operations and financial condition.
Claims
by our shareholders are subordinate to existing and future
liabilities and obligations of our Chinese
subsidiaries.
Because all of our assets are held by our Chinese subsidiaries,
the claims of our shareholders will be structurally subordinate
to all existing and future liabilities and obligations and trade
payables of our Chinese subsidiaries. In the event of our
bankruptcy, liquidation or reorganization, our assets and those
of our Chinese subsidiaries will be available to satisfy the
claims of our shareholders only after all of our
subsidiaries liabilities and obligations have been paid in
full.
Risks Related to Doing Business in China
Recent
Chinese regulations relating to the establishment of offshore
special purpose companies by Chinese residents may subject our
Chinese resident shareholders to personal liability and limit
our ability to acquire Chinese companies or inject capital into
our Chinese subsidiaries, limit our Chinese subsidiaries
ability to distribute profits to us, or otherwise materially and
adversely affect our business.
The State Administration of Foreign Exchange, or SAFE, issued
the Notice on Issues Relating to the Administration of Foreign
Exchange in Fund-Raising and Reverse Investment Activities of
Domestic Residents Conducted via Offshore Special Purpose
Companies in October 2005, which became effective in November
2005 namely Notice 75, and an implementing rule in May 2007
namely Notice 106, collectively the SAFE Rules. According to the
SAFE Rules, Chinese residents, including both legal persons and
natural persons (including Chinese citizens and foreign
citizens) who reside in China, are required to register with the
SAFE or its local branch before establishing or controlling any
company outside China, referred to in the SAFE rules as an
offshore special purpose company, for the purpose of
financing that offshore company with their ownership interests
in the assets of or their interests in
27
any Chinese enterprise. In addition, a Chinese resident that is
a shareholder of an offshore special purpose company is required
to amend its SAFE registration with the local SAFE branch with
respect to that offshore special purpose company in connection
with the injection of equity interests or assets of a Chinese
enterprise in the offshore company or overseas fund raising by
the offshore company, or any other material change in the
capital of the offshore company, including any increase or
decrease of capital, transfer or swap of share, merger,
division, long-term equity or debt investment or creation of any
security interest. The SAFE Rules apply retroactively. As a
result, Chinese residents who have established or acquired
control of offshore companies that have made onshore investments
in China in the past were required to complete the relevant
registration procedures with the competent local SAFE branch. If
any Chinese resident failed to file its SAFE registration for an
existing offshore company, any dividends remitted by the onshore
entity to its overseas parent since April 21, 2005 will be
considered to be an evasion of foreign exchange purchase rules,
and the payment of the dividend will be illegal. As a result of
any illegal action of this type, both the onshore entity and its
actual controlling person(s) can be fined. In addition, failure
to comply with the registration procedures may result in
restrictions on the relevant onshore entity, including
prohibitions on the payment of dividends and other distributions
to its offshore parent or affiliate and capital inflow from the
offshore company. Chinese resident shareholders of the offshore
company may also be subject to penalties under Chinese foreign
exchange administration regulations.
Our majority shareholder, Duoyuan Investments Limited, is wholly
owned by Wenhua Guo, who is the chairman of our board of
directors and a Chinese citizen as defined in the SAFE Rules. We
have asked Mr. Guo, and will ask our future shareholders
and beneficial owners who are Chinese residents, to make the
necessary applications and filings as required under Notice 75
and other related rules. Mr. Guo had submitted the
application in September 2006 pursuant to Notice 75. Because of
lack of implementation procedures, SAFE did not issue a
registration certificate to Mr. Guo. In May 2007, SAFE
promulgated the Notice 106 and set out the relevant procedures.
Mr. Guo resubmitted his application with SAFE at the end of
August 2009. SAFE is still reviewing his application. We cannot
provide any assurances that he can obtain such SAFE
registration. Moreover, due to uncertainty concerning the
reconciliation of Notice 75 with other approval or registration
requirements, it remains unclear how Notice 75, and any future
legislation concerning offshore or cross-border transactions,
will be interpreted, amended and implemented by the relevant
government authorities. We will attempt to comply, and attempt
to ensure that Mr. Guo and our future shareholders and
beneficial owners who are subject to these rules comply, with
the relevant requirements. However, we cannot provide any
assurances that all of our shareholders and beneficial owners
who are Chinese residents will comply with our request to make
or obtain any applicable registrations or comply with other
requirements required by Notice 75 or other related rules. The
failure or inability of our Chinese resident shareholders or
beneficial owners to register with the SAFE in a timely manner
pursuant to the SAFE Rules, or the failure or inability of any
future Chinese resident shareholders or beneficial owners to
make any required SAFE registration or comply with other
requirements under the SAFE Rules, may subject these
shareholders or beneficial owners to fines or other sanctions
and may also limit our ability to contribute additional capital
into or provide loans to our Chinese subsidiaries, limit our
Chinese subsidiaries ability to pay dividends to us, repay
shareholder loans or otherwise distribute profits or proceeds
from any reduction in capital, share transfer or liquidation to
us, or otherwise adversely affect us.
We may
not be able to enforce our legal rights in China or elsewhere,
which could materially and adversely affect our
business.
Although we are incorporated in the State of Wyoming, United
States, all of our operations are in China. Our operating
subsidiaries are formed under Chinese law, and all of our assets
are located in China. As a result, most of our material
agreements are governed by Chinese law. Since all of our revenue
is derived from our operations in China, our business, financial
condition and results of operations are subject to legal
developments in China. There is no assurance that we will be
able to
28
enforce any of our material agreements or that remedies will be
available outside of China with respect to our material
agreements. The legal system and enforcement of laws in China
may not be as transparent as those in the United States. The
Chinese judiciary is relatively inexperienced in enforcing
corporate and commercial law, leading to a high degree of
uncertainty regarding the outcome of any litigation. The
inability to enforce or obtain a remedy under any of our future
agreements could result in a significant loss of business,
business opportunities or capital.
It may
be difficult to serve us with legal process or enforce judgments
against us or members of our management.
A substantial majority of our executive officers and our
directors reside outside of the United States. Because our
operations, assets and officers and directors are located
outside of the United States, it may not be possible for
U.S. investors to enforce their legal rights, effect
service of process upon our directors or officers or enforce
civil or criminal judgments of U.S. courts against us or
our directors and executive officers under U.S. federal
securities laws. Moreover, we have been advised by our PRC
counsel, Commerce & Finance Law Offices, that
Chinas treaties do not provide for reciprocal recognition
and enforcement of judgments by U.S. courts.
We may
have difficulty establishing adequate management, legal and
financial controls in China, which could impair our planning
processes and make it difficult to provide accurate reports of
our operating results.
China has historically not followed Western-style management and
financial reporting concepts and practices, and its access to
modern banking, computer and other control systems has been
limited. We may have difficulty hiring and retaining a
sufficient number of qualified employees to work in China with
skills in these areas. As a result, we may experience difficulty
establishing management, legal and financial controls,
collecting financial data, preparing financial statements, books
of account and corporate records and instituting business
practices that meet U.S. standards. Consequently, it may be
difficult for our management to forecast our needs and present
accurate operating results.
The
Chinese government could change its policies toward private
enterprises, which could materially and adversely affect our
business.
Our business is subject to political and economic uncertainties
in China and may be adversely affected by its political,
economic and social developments. Over the past several years,
the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and
greater economic decentralization. The Chinese government may
not continue to pursue these policies or may alter them to our
detriment from time to time. Changes in policies, laws and
regulations, including their interpretation, or the imposition
of confiscatory taxation, restrictions on currency conversion,
restrictions or prohibitions on dividend payments to
shareholders, devaluations of currency or the nationalization or
other expropriation of private enterprises could have a material
adverse effect on our business. Nationalization or expropriation
could result in the total loss of our investment in China.
Economic,
political and social conditions in China could materially and
adversely affect our business.
All of our business, assets and operations are located in China.
The economy of China differs from the economies of most
developed countries in many respects, including government
involvement, level of development, growth rate, control of
foreign exchange and allocation of resources. The economy of
China has been transitioning from a planned economy to a more
market-oriented economy. Although the Chinese government has
recently implemented measures emphasizing the utilization of
market forces for economic reform, reduction of state ownership
of productive assets and establishment of sound corporate
governance in business enterprises, a substantial portion of
productive assets in China is still owned by the Chinese
government. In addition, the Chinese government continues to
play a significant
29
role in regulating industry by imposing industrial policies. It
also exercises significant control over Chinas economic
growth through the allocation of resources, controlling payment
of foreign currency-denominated obligations, setting monetary
policy and providing preferential treatment to particular
industries or companies. Therefore, the Chinese
governments involvement in the economy could adversely
affect our business, financial condition or operating results.
The Chinese government has implemented various measures from
time to time to control the rate of economic growth. Some of
these measures benefit the overall economy of China, but may
have a negative effect on our business, financial condition and
operating results.
Government
control of currency conversion and exchange rate fluctuations
may materially and adversely affect our business.
All of our revenue and expenses are denominated in Renminbi, the
currency of China. A portion of such revenue may be converted
into other currencies to meet our foreign currency obligations.
In addition, we incur approximately 1% of our expenses in
foreign currencies, mostly for professional services such as
auditors, attorneys and other intermediaries. Foreign exchange
transactions under our capital account, including principal
payments with respect to foreign currency-denominated
obligations, continue to be subject to significant foreign
exchange controls and require the approval of the SAFE in China.
These limitations could affect our ability to obtain foreign
exchange through debt or equity financing or to obtain foreign
exchange for capital expenditures.
The Renminbi is reported to be measured against a basket of
currencies determined by the Peoples Bank of China. The
Renminbi may appreciate or depreciate significantly in value
against the U.S. dollar in the long term, depending on the
fluctuation of the basket of currencies against which it is
currently valued, or it may be permitted to enter into a full
float, which may also result in a significant appreciation or
depreciation of the Renminbi against the U.S. dollar.
Because all of our earnings and cash assets are denominated in
Renminbi and our financial reporting is denominated in
U.S. dollars, fluctuations in the exchange rates between
the U.S. dollar and the Renminbi will affect our financial
results reported in U.S. dollars terms without giving
effect to any underlying change in our business, financial
condition or results of operations. Fluctuations in the exchange
rate will also affect the relative value of any dividend we
issue that will be exchanged into U.S. dollars and earnings
from, and the value of, any U.S. dollar denominated
investments we make in the future.
Historically, we have not engaged in exchange rate hedging
activities. Although we may implement hedging strategies to
mitigate exchange rate risk, these strategies may not eliminate
our exposure to foreign exchange rate fluctuations and may
involve costs and risks of their own, such as ongoing management
time and expertise, external costs to implement the strategy and
potential accounting implications.
Uncertainties
with respect to the Chinese legal system could limit the
protections available to our shareholders and us.
The Chinese legal system is based on written statutes and their
interpretation by the Supreme Peoples Court. Although the
Chinese government has introduced new laws and regulations to
modernize its business, securities and tax systems, China does
not yet possess a comprehensive body of business law. Because
Chinese laws and regulations are relatively new, interpretation,
implementation and enforcement of these laws and regulations
involve uncertainties and inconsistencies. Therefore, it may be
difficult to enforce contracts under Chinese law. These
uncertainties could materially and adversely affect our
business, financial condition and operating results. In
addition, as the Chinese legal system develops, changes in these
laws and regulations, their interpretation or their enforcement
may have a material adverse effect on our business operations.
Moreover, interpretative case law does not have the same
precedential value in China as in the United States, so legal
compliance in China may be more difficult or expensive. These
uncertainties could limit the legal protections available to us
and other foreign investors, including our shareholders.
30
We may
be unable to complete a business combination transaction
efficiently or on favorable terms due to complicated merger and
acquisition regulations which became effective on
September 8, 2006, as amended on June 22,
2009.
The new Regulation on Mergers and Acquisitions of Domestic
Companies by Foreign Investors governs the approval process by
which a Chinese company may participate in an acquisition of
assets or equity interests. Depending on the structure of the
transaction, the new M&A rules will require the Chinese
parties to make a series of applications to certain government
agencies. In some instances, the application process may require
the presentation of economic data concerning a transaction,
including appraisals of the target business and evaluations of
the acquirer, which are designed to allow the government to
assess the transaction. Government approvals will have
expiration dates by which a transaction must be completed and
reported to the government agencies. Compliance with the new
M&A rules is likely to be more time consuming and expensive
than in the past and the government can now exert more control
over the combination of two businesses. Accordingly, due to the
new M&A rules, our ability to engage in business
combination transactions has become significantly more
complicated, time consuming and expensive, and we may not be
able to negotiate a transaction that is acceptable to our
shareholders or sufficiently protect their interests in a
transaction. The new M&A rules allow Chinese government
agencies to assess the economic terms of a business combination
transaction. Parties to a business combination transaction may
have to submit to the Ministry of Commerce and other relevant
government agencies an appraisal report, an evaluation report
and the acquisition agreement, all of which form part of the
application for approval, depending on the structure of the
transaction. The new M&A rules also prohibit a transaction
at an acquisition price obviously lower than the appraised value
of the Chinese business or assets and, in certain transaction
structures, requires that consideration must be paid within
defined periods, generally not in excess of a year. The new
M&A rules also limit our ability to negotiate various terms
of the acquisition, including aspects of the initial
consideration, contingent consideration, holdback provisions,
indemnification provisions and provisions relating to the
assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are
prohibited. Therefore, the new M&A rules may impede our
ability to negotiate and complete a business combination
transaction on financial terms that satisfy our investors and
protect our investors economic interests.
The
new provisions of the PRC Employment Contract Law may
substantially increase our labor-related costs in the
future.
The PRC Employment Contract Law, which became effective as of
January 1, 2008, contains many more provisions favorable to
employees than prior labor regulations in effect in China. This
may substantially increase our labor-related costs in our future
operations. According to the new law, an employee is entitled to
terminate his or her employment relationship with his or her
employer for certain causes, such as delay in payment of wages
or social insurance contribution or dissatisfactory labor
protection, and under such circumstances the employer is liable
to pay compensation to the employee. The amount of such
compensation payment shall be one months salary for each
year that the employee has served the employer. If the monthly
wage of an employee is three times greater than the average
monthly wage in the previous year for employees as announced by
the peoples government at the municipal level directly
under the central government or at the city-with-district level
where the Employer is located, the rate for the financial
compensations paid to him shall be three times the average
monthly wage of employees and shall be for not more than
12 years of work. An employer shall also be liable to
compensate an employee when the employer decides not to renew an
existing employment contract that is about to expire, unless the
employee refuses to renew the employment contract even though
the employer offers equal or more favorable terms than those in
the existing employment contract. In addition, an employer is
obligated to conclude an open-ended employment contract with an
employee after two consecutive terms of fixed-term employment,
which means the employer will be liable to pay damages to an
employee if it terminates this employee without cause, until the
employee reaches an age at which he or she is eligible for
pension. We may have greater difficulty terminating
underperforming employees and may incur higher level of labor
costs in order to
31
comply with the provisions of the new law, which may have a
material adverse effect on our business, financial condition and
operating results.
The
contractual arrangements entered into between our Chinese
subsidiaries may be subject to audit or challenge by the Chinese
tax authorities. Any finding that our Chinese subsidiaries owe
additional taxes could substantially reduce our net earnings and
the value of our shareholders investments.
Under Chinese laws and regulations, arrangements and
transactions among affiliated parties may be subject to audit or
challenge by the Chinese tax authorities. We could face material
and adverse tax consequences if the Chinese tax authorities
determine that the contractual arrangements between our Chinese
subsidiaries do not represent arms-length prices and, as a
result, apply a transfer pricing adjustment to any of our
income. A transfer pricing adjustment could, among other things,
result in a reduction of the expense deductions recorded by our
Chinese subsidiaries for PRC tax purposes or an increase in
taxable income, any of which could increase our tax liabilities.
In addition, the Chinese tax authorities may impose late payment
fees and other penalties on our Chinese subsidiaries for
under-paid taxes.
We
rely principally on dividends and other distributions paid by
our Chinese subsidiaries. Limitations on the ability of our
Chinese subsidiaries to pay dividends to us could have a
material adverse effect on our business.
We are a holding company and we rely principally on dividends
and other distributions paid by our Chinese subsidiaries for our
cash and financing requirements, including the funds necessary
to pay dividends and other cash distributions to our
shareholders, service any debt we may incur and pay our
operating expenses. If our Chinese subsidiaries incur debt on
their own behalf, the instruments governing the debt may
restrict their ability to pay dividends or make other
distributions to us. Furthermore, relevant Chinese laws and
regulations permit payments of dividends by our Chinese
subsidiaries only out of their respective retained earnings
after tax, if any, determined in accordance with Chinese
accounting standards and regulations.
Under Chinese laws and regulations, each of our operating
subsidiaries is required to set aside a portion of its net
income each year to fund certain statutory reserves. These
reserves, together with the registered equity, are not
distributable as cash dividends. As of June 30, 2009, we
had statutory reserves of $9.4 million and total
shareholders equity of $126.7 million. As a result of
these Chinese laws and regulations, each of our Chinese
subsidiaries is restricted in its ability to transfer a portion
of its net assets to us, including in the form of dividends,
loans or advances. Limitations on the ability of our Chinese
subsidiaries to pay dividends to us could adversely limit our
ability to grow, make investments or acquisitions that could be
beneficial to our businesses, pay dividends or otherwise fund
and conduct our business.
If the China Securities Regulation Commission, or
CSRC, or another PRC regulatory agency, determines that CSRC
approval is required for this offering, it could adversely
affect our business and reputation and the resale price of our
shares, and may also create uncertainties for this
offering.
On August 8, 2006, six Chinese regulatory agencies,
including the Ministry of Commerce, the State Assets Supervision
and Administration Commission, the State Administration for
Taxation, the State Administration for Industry and Commerce,
the CSRC, and the State Administration of Foreign Exchange, or
SAFE, jointly issued the Regulations on Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, which became
effective on September 8, 2006. This regulation, among
other things, includes provisions that require that an offshore
special purpose vehicle formed for purposes of overseas listing
of equity interests in Chinese companies and controlled directly
or indirectly by Chinese companies or individuals obtain the
approval of the CSRC prior to the listing and trading of such
special purpose vehicles securities on an overseas stock
exchange.
32
On September 21, 2006, CSRC published on its website
procedures regarding its approval of overseas listings by
special purpose vehicles. The CSRC approval procedures require
the filing of a number of documents with CSRC, and it would take
several months to complete the approval process.
The application of this new regulation remains unclear with no
consensus currently existing among leading Chinese law firms
regarding the scope or the applicability of the CSRC approval
requirement. Commerce & Finance Law Offices, which we
have engaged in relation to these CSRC rules, has advised us
that, based on their understanding of current Chinese laws,
regulations and rules, including the New Merger Regulation, and
the CSRC procedures announced on September 21, 2006, this
regulation does not require us to submit an application to the
CSRC for its approval of this offering of our shares and their
listing and trading on the New York Stock Exchange unless we are
clearly required to do so by possible later rules of the CSRC.
If the CSRC requires that we obtain its approval prior to the
completion of this offering, this offering will be delayed until
we obtain CSRC approval, which may take several months or may be
unattainable. If prior CSRC approval is required but not
obtained, we may face regulatory actions or other sanctions from
the CSRC or other Chinese regulatory agencies. These regulatory
agencies may impose fines and penalties on our operations in
China, limit our operating privileges in China or take other
actions that could have a material adverse effect on our
business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our shares. The
CSRC or other Chinese regulatory agencies may also take actions
requiring us, or making it advisable for us, to halt this
offering before settlement and delivery of the shares offered
hereby. Consequently, if you engage in market trading or other
activities in anticipation of and prior to settlement and
delivery, you do so at the risk that settlement and delivery may
not occur.
Also, if the CSRC subsequently requires that we obtain its
approval, we may be unable to obtain a waiver of the CSRC
approval requirement, if and when procedures are established to
obtain such a waiver. Any uncertainties
and/or
negative publicity regarding this CSRC approval requirement
could have a material adverse effect on the trading price of our
shares.
Compliance with the new regulations is likely to be more time
consuming and expensive than in the past and the government can
now exert more control over the combination of two businesses.
Accordingly, due to this regulation, our ability to engage in
business combination transactions has become significantly more
complicated, time consuming and expensive, and we may not be
able to negotiate a transaction that is acceptable to our
shareholders or sufficiently protect their interests in a
transaction. The new regulation allows Chinese government
agencies to assess the economic terms of a business combination
transaction. Parties to a business combination transaction may
have to submit to the Ministry of Commerce and other relevant
government agencies an appraisal report, an evaluation report
and the acquisition agreement, all of which form part of the
application for approval, depending on the structure of the
transaction. The regulations also prohibit a transaction at an
acquisition price obviously lower than the appraised value of
the Chinese business or assets and in certain transaction
structures, require that consideration must be paid within
defined periods, generally not in excess of a year. The
regulation also limits our ability to negotiate various terms of
the acquisition, including aspects of the initial consideration,
contingent consideration, holdback provisions, indemnification
provisions and provisions relating to the assumption and
allocation of assets and liabilities. Transaction structures
involving trusts, nominees and similar entities are prohibited.
Therefore, such regulation may impede our ability to negotiate
and complete a business combination transaction on financial
terms that satisfy our investors and protect our investors
economic interests.
33
We
face risks related to health epidemics and other outbreaks that
may disrupt our operations and have a material adverse effect on
our business and results of operations.
Our business could be materially and adversely affected by the
effects of H1N1 flu (swine flu), avian flu, severe acute
respiratory syndrome or other epidemics or outbreaks. In April
2009, an outbreak of H1N1 flu (swine flu) first occurred in
Mexico and quickly spread to other countries, including the
U.S. and China. In the last decade, China has suffered
health epidemics related to the outbreak of avian influenza and
severe acute respiratory syndrome. Any prolonged occurrence or
recurrence of H1N1 flu (swine flu), avian flu, severe acute
respiratory syndrome or other adverse public health developments
in China may have a material adverse effect on our business and
operations. These health epidemics could result in severe travel
restrictions and closures that would restrict our ability to
ship our products. Potential outbreaks could also lead to
temporary closure of our manufacturing facilities, our
suppliers facilities
and/or our
end-user customers facilities, leading to reduced
production, delayed or cancelled orders, and decrease in demand
for our products. Any future health epidemic or outbreaks that
could disrupt our operations
and/or
restrict our shipping abilities may have a material adverse
effect on our business and results of operations.
We may
be exposed to monetary fines by the local housing authority and
claims from our employees in connection with Hunan
Duoyuans non-compliance with regulations with respect to
contribution of housing provident funds for
employees.
According to the relevant PRC regulations on housing provident
funds, PRC enterprises are required to contribute housing
provident funds for their employees. The monthly contributions
must be at least 5% of each employees average monthly
income in the previous year. Our subsidiaries in the PRC, other
than Hunan Duoyuan, have complied with the housing provident
funds regulations. Hunan Duoyuan has not paid such funds for its
employees since its establishment and the accumulated unpaid
amount is approximately RMB 2.2 million. Under local
regulations on collection of housing provident funds in Shaoyang
City where Hunan Duoyuan is located, the local housing authority
may require Hunan Duoyuan to rectify its non-compliance by
setting up bank accounts and making payment and relevant filings
for the unpaid housing funds for its employees within a
specified time period. If Hunan Duoyuan fails to do so within
the specified time period, the local housing authority may
impose a monetary fine of RMB 10,000 to RMB 50,000 on it and may
also apply to the local peoples court for enforcement.
Hunan Duoyuan employees may also be entitled to claim payment of
such funds individually. So far, we have not received any notice
from the local housing authority or any claim from our current
and former employees regarding Hunan Duoyuans
non-compliance with the regulations. If any of the foregoing
happens, our reputation, financial condition and results of
operations could be materially and adversely affected.
Risks
Associated with this Offering and our Common Shares
We do
not know whether a market will develop for our common shares or
what the market price of our common shares will
be.
Before this offering, there was no public trading market for our
common shares. If a market does not develop or is not sustained,
it may be difficult for you to sell your shares at an attractive
price or at all. It is possible that in one or more future
periods our operating results may be below the expectations of
public market analysts and investors and, as a result of these
and other factors, the price of our common shares may decline.
The
price of our common shares may be volatile.
The trading price of our common shares following this offering
may fluctuate substantially. The price of our common shares that
will prevail in the market after this offering may be lower than
the price you
34
pay, depending on many factors, some of which are beyond our
control and may not be related to our operating performance. The
price of our common shares may fluctuate as a result of:
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price and volume fluctuations in the overall stock market from
time to time;
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significant volatility in the market price and trading volume of
comparable companies;
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actual or anticipated changes in our earnings or fluctuations in
our operating results or in the expectations of securities
analysts;
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announcements of technological innovations, new products,
strategic alliances or significant agreements by us or by our
competitors;
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significant developments relating to our relationships with our
customers or suppliers;
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end-user customer demand for our products;
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general economic conditions and trends;
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catastrophic events;
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sales of large blocks of our shares; and
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recruitment or departure of key personnel.
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In the past, following periods of volatility in the market price
of a companys securities, securities class action
litigation has often been brought against that company. Because
of the potential volatility of our share price, we may become
the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert
managements attention and resources from our business.
Future
sales of our common shares in the public market, or the
perception that such sales could occur, could lower our share
price and impair our ability to raise funds in new equity
offerings.
Future sales of a substantial number of our common shares in the
public market, or the perception that such sales could occur,
could adversely affect the prevailing market price of our common
shares and could make it more difficult for us to raise funds
through future public offerings of our equity securities.
After this offering, approximately 31,375,050 common shares will
be outstanding. Of these shares, approximately
7,207,228 common shares, including the
6,269,462 common shares sold in this offering, will be
freely tradable, without restriction, in the public market. Of
our outstanding common shares, 24,167,822 are subject to
180-day
contractual
lock-up
agreements with our underwriters. Piper Jaffray may, in its
discretion, permit our directors, executive officers, employees
and existing shareholders who are subject to these contractual
lockups to sell shares prior to the expiration of the
lock-up
agreements. See Underwriting. The common shares
subject to these
lock-up
agreements will become eligible for sale in the public market
upon expiration of these
lock-up
agreements, subject to limitations imposed by Rule 144
under the Securities Act of 1933, as amended, or Securities Act.
See Shares Eligible for Future Sales. If the holders
of our common shares were to attempt to sell a substantial
amount of their holdings at once, the market price of our common
shares could decline. Moreover, the perceived risk of this
potential dilution could cause shareholders to attempt to sell
their common shares and investors to short our common shares, a
practice in which an investor sells shares that he or she does
not own at prevailing market prices, hoping to purchase shares
later at a lower price to cover the sale. As each of
35
these events would cause the number of common shares being
offered for sale to increase, our common shares market
price would likely further decline. All of these events could
combine to make it very difficult for us to sell equity or
equity-related securities in the future at a time and price that
we deem appropriate.
We do
not intend to pay dividends in the foreseeable
future.
To date, we have paid no dividends. Our board of directors does
not intend to pay any dividends in the foreseeable future. The
holders of our common shares are entitled to receive dividends
when, as and if declared by our board of directors out of
legally available funds. As a result, a return on an investment
in our common shares may be realized only through a sale of such
shares, if at all.
We
have not held any annual shareholder meetings since we acquired
Duoyuan China in 2006, and as a result, our shareholders have
limited ability to exercise their voting rights.
We have not held an annual meeting of shareholders since we
acquired Duoyuan China in 2006. Under Wyoming law, the district
court of the county in which a corporations principal
office is located may summarily order a meeting be held upon
application of any member or other person entitled to
participate in an annual or regular meeting, if an annual
meeting was not held within fifteen months after the
corporations last annual meeting. Because we have not held
regular shareholders meetings, our shareholders
ability to exercise their voting rights may be limited.
Wenhua
Guo, the chairman of our board of directors and beneficial owner
of 70.25% of our common shares, has substantial influence over
us, and his interests may not be aligned with the interests of
our other shareholders.
Wenhua Guo, the chairman of our board of directors, beneficially
owns 70.25% of our outstanding common shares prior to this
offering, and he will beneficially own approximately 55.98% of
our common shares following this offering, assuming no exercise
of the underwriters over-allotment option. As a result, he
has significant influence over our business, including decisions
regarding mergers, consolidations, the sale of all or
substantially all of our assets, election of directors, and
other significant corporate actions, which may at times conflict
with the interests of our other shareholders. This concentration
of ownership may also have the effect of discouraging, delaying
or preventing a future change of control, which in turn could
prevent our shareholders from recognizing a gain in the event
that a favorable offer is extended.
We
have the right to issue additional common shares and preferred
shares without the consent of our shareholders. This would have
the effect of diluting our shareholders ownership in us
and could decrease the value of our shares.
As of the date of this prospectus, we have
100,000,000 shares authorized for issuance, of which
25,000,050 common shares are issued and outstanding, with
74,999,950 authorized common shares available for issuance for
any purpose without shareholder approval. In addition, on or
prior to completion of this offering, we will grant 875,000
restricted common shares and unvested options to purchase
180,000 common shares. The issuance of additional shares would
dilute shareholders percentage ownership of us. We have
outstanding warrants to acquire 1,226,972 common shares.
In addition, our articles of incorporation authorize the
issuance of preferred shares, the rights, preferences,
designations and limitations of which may be set by our board of
directors. While no preferred shares are currently outstanding,
our articles of incorporation authorize the issuance of up
to 1,000,000 preferred shares at the discretion of our
board of directors. Preferred shares may be issued upon the
filing of amended articles of incorporation and the payment of
required fees, requiring no further shareholder action. If
issued, the rights, preferences, designations and limitations of
the preferred shares would be set by our board of directors and
could operate to the disadvantage of our outstanding
36
common shares. These terms could include, among others,
preferences as to dividends and distributions on liquidation.
You
will experience immediate and substantial dilution in your
investment.
The offering price of the common shares is substantially higher
than the net tangible book value per share of our common shares,
which was $5.03 as of June 30, 2009. Therefore, when you
purchase our common shares in this offering at an assumed
initial public offering price of $9.50, which is the mid-point
of the price range set forth on the cover of this prospectus,
you will incur immediate dilution of $3.98 per common share.
Holders of the common shares will experience further dilution if
options, warrants or other rights to purchase our common shares
that are outstanding or that we may issue in the future are
exercised or converted, or if we issue additional shares of our
common shares, at prices lower than our net tangible book value
at such time.
The
conversion of outstanding derivative securities could cause our
shareholders ownership to be diluted and may decrease the
value of our shareholders investments.
Outstanding derivative securities and current and future
obligations to issue our securities to various parties may
dilute the value of our shareholders investments. On
October 9, 2006, as part of our compensation to them, we
issued to CCG Investor Relations Partners, LLC warrants to
acquire 37,287 shares at a strike price of $4.61 per share.
On November 2, 2006, we issued warrants to Roth Capital
Partners, LLC to purchase 613,260 shares at a strike price
of $4.21 per share for a term of five years. These warrants are
exercisable at any time after June 30, 2008 on a cashless
or net exercise basis. In addition, in December 2007 we issued
to 25 of our November 2006 private placement investors warrants
to purchase 576,425 shares at a strike price of $5.76 per
share for a term of five years starting on June 30, 2008,
which are exercisable at any time after June 30, 2008 on a
cashless basis. For as long as these warrants are outstanding
and exercisable, the warrant holder will have an opportunity to
profit from a rise in the market price of our common shares
without assuming the risks of ownership. The outstanding
warrants may have an adverse effect on the terms upon which we
can obtain additional capital. We expect that the warrant
holders will exercise the warrants at a time when we are able to
obtain equity capital on terms more favorable than the exercise
prices provided by the warrants. Holders of our common shares do
not have pre-emptive rights.
We
will retain broad discretion in using the net proceeds from this
offering and may spend a substantial portion in ways with which
you do not agree.
Our management will retain broad discretion to allocate the net
proceeds we receive from this offering. The net proceeds may be
applied in ways with which you and other investors in the
offering may not agree, or which do not increase the value of
your investment. Our management might not be able to achieve a
significant return, if any, on any investment of these net
proceeds.
37
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, principally
in the sections entitled Summary, Risk
Factors, Use of Proceeds,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business. Generally, the words expect,
estimate, anticipate,
predict, believe, plan,
will, may, should,
intend, continue, and similar
expressions or the negative thereof or comparable terminology
are intended to identify forward-looking statements which
include, but are not limited to, statements concerning our
expectations and those of our directors and officers regarding
our working capital requirements, financing requirements,
business prospects, and other statements of expectations,
beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not
historical facts. Such statements are not guarantees of future
performance and subject to certain risks and uncertainties,
including the matters set forth in this prospectus, which could
cause actual results or outcomes to differ materially from those
projected. Although we do not make forward-looking statements
unless we believe we have a reasonable basis for doing so, we
cannot guarantee their accuracy, and actual results may differ
materially from those we anticipated due to a number of
uncertainties, many of which cannot be foreseen. Undue reliance
should not be placed on these forward-looking statements which
speak only as of the date hereof. Our actual results could
differ materially from those anticipated in these
forward-looking statements for many reasons, including, among
others, the risks we face that are described in the section
entitled Risk Factors and elsewhere in this
prospectus. We do not ordinarily make projections of our future
operating results and undertake no obligation (and expressly
disclaim any obligation) to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.
We believe it is important to communicate our expectations to
our investors. There may be events in the future, however, that
we are unable to predict accurately or over which we have no
control. The risk factors listed on the previous pages, as well
as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe
in our forward-looking statements. Before you invest in our
common shares, you should be aware that the occurrence of the
events described in the previous risk factors and elsewhere in
this prospectus could negatively impact our business, operating
results, financial condition and the price of our common shares.
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. These forward-looking statements include,
without limitation, statements relating to:
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our goals and strategies;
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our future business development, results of operations and
financial condition;
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our ability to maintain a strong relationship with distributors
or end-user customers or to expand our distribution network;
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our ability to control our operating costs and expenses;
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our ability to generate revenue in new post-press products;
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changes in our management team and other key personnel;
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introduction by our competitors of new or enhanced products;
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38
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the effect of competition on demand for and prices of our
products;
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fluctuations in general economic conditions;
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Chinese tax policies and regulations; and
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expected growth and change in the Chinese printing equipment
market.
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This prospectus also contains data related to the Chinese
printing industry, the Chinese printing equipment industry and
broad macroeconomic factors that we believe drive the growth of
the Chinese printing equipment market. These market data and
industry statistics, based on independent industry publications
and other publicly available information, include projections
that are based on a number of assumptions. The Chinese printing
equipment market may not expand at the rates projected by the
market data, or at all. The failure of the market to grow at the
projected rates may have a material adverse effect on our
business and the market price of our common shares. In addition,
the complex and changing nature of the Chinese printing
industry, the Chinese printing equipment industry and the broad
macroeconomic factors discussed in this prospectus subject any
projections or estimates relating to the growth prospects or
future conditions of the Chinese printing equipment market to
significant uncertainties. If any one or more of the assumptions
underlying the market data proves to be incorrect, actual
results may differ from the projections based on these
assumptions. You should not place undue reliance on these
forward-looking statements.
The forward-looking statements contained in this prospectus
speak only as of the date of this prospectus or, if obtained
from third party studies or reports, the date of the
corresponding study or report, and are expressly qualified in
their entirety by the cautionary statements in this prospectus.
Since we operate in an emerging and evolving environment and new
risk factors emerge from time to time, you should not rely upon
forward-looking statements as predictions of future events.
Except as otherwise required by the securities laws of the
United States, we undertake no obligation to update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise, to reflect events or
circumstances after the date of this prospectus or to reflect
the occurrence of unanticipated events.
39
USE OF
PROCEEDS
We estimate that we will receive $47.4 million in net
proceeds from our sale of 5,500,000 common shares sold by us in
this offering. Our net proceeds from this offering represent the
amount we expect to receive after paying the underwriting
discounts and commissions and other expenses of the offering
payable by us. For purposes of estimating our net proceeds, we
have assumed that the initial public offering price of our
common shares will be $9.50 per common share, which is the
midpoint of the price range set forth on the cover page of this
prospectus. A $1.00 increase, or decrease, in the assumed
initial public offering price would increase, or decrease, net
proceeds to us from this offering by approximately
$5.1 million after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
Our management will have significant flexibility in applying the
net proceeds of this offering. We intend to use our net proceeds
from this offering as follows:
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approximately $30.0 million to build a factory to
manufacture cold-set corrugated paper machines at our Langfang
Duoyuan facility;
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approximately $10.0 million to improve and upgrade our
existing manufacturing facilities and production lines; and
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the balance for general corporate purposes.
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We pursue acquisitions of other businesses as part of our
business strategy and may use a portion of the net proceeds to
fund acquisitions. We have no agreement with respect to any
future acquisition, although we assess opportunities on an
ongoing basis and from time to time have discussions with other
companies about potential transactions.
Pending their use, we will invest the net proceeds of this
offering in a variety of capital preservation investments,
including short-term or long-term interest-bearing, marketable
securities.
We will not receive any of the proceeds from the sale by the
selling shareholders of our common shares in this offering,
including any common shares sold by the selling shareholders
upon exercise of the underwriters over-allotment option.
40
DIVIDEND
POLICY
We have not declared or paid any dividends on our common shares
and we do not anticipate paying any cash dividends in the near
future. The timing, amount and form of future dividends, if any,
will depend, among other things, on our future results of
operations and cash flows, our general financial condition and
future prospects, our capital requirements and surplus,
contractual restrictions, the amount of distributions, if any,
received by us from our Chinese subsidiaries, and other factors
deemed relevant by our board of directors. Any future dividends
on our common shares would be declared by and subject to the
discretion of our board of directors.
41
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2009:
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on an actual basis;
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on an as adjusted basis to reflect the sale by us of
5,500,000 shares of common shares in this offering by us at
an assumed initial public offering price of $9.50 per share,
which is the midpoint of the price range set forth on the cover
page of this prospectus, after deducting estimated underwriting
discounts and commissions and other offering expenses, assuming
the underwriters do not exercise their over-allotment option.
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You should read this table together with the sections of this
prospectus entitled Use of Proceeds and
Managements Discussion and Analysis of Financial
Condition and Results of Operations as well as our
financial statements and related notes and the other financial
information appearing elsewhere in this prospectus.
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As of June 30,
2009
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Actual
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As Adjusted
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(in thousands)
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Lines of credit
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$
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14,357
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$
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14,357
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Shareholders equity:
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Common shares, $0.001 par value per share,
100,000,000 shares authorized, 25,000,050 issued and
outstanding, actual and shares issued and outstanding as adjusted
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25
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31
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Preferred shares, $0.001 par value per share,
1,000,000 shares authorized, no shares issued and
outstanding, actual and no shares issued and outstanding as
adjusted
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Additional paid-in capital
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27,263
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74,649
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Statutory reserves
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9,429
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9,429
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Retained earnings
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79,226
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79,226
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Accumulated other comprehensive income
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10,789
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10,789
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Total shareholders equity
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126,732
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174,124
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Total capitalization
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$
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141,089
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$
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188,481
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A $1.00 increase or decrease in the assumed initial public
offering price per share would increase or decrease each of
total shareholders equity and total capitalization by
approximately $5.1 million, after deducting the estimated
underwriting discounts and estimated offering expenses payable
by us and assuming no exercise by the underwriters of their
over-allotment option.
On or prior to the completion of this offering, we will grant
875,000 restricted common shares without payment of
consideration to certain employees, including members of our
executive management team, but excluding our chief executive
officer and chief financial officer, pursuant to our 2009
Omnibus Incentive Plan. The grant of 875,000 restricted common
shares will be a one-time bonus stock award to approximately 50
employees and will be contingent upon the closing of our public
offering. The common shares under the grant will be restricted
and subject to a six month cliff vesting period. An additional
875,000 shares are reserved for issuance under our 2009 Omnibus
Incentive Plan.
The outstanding share information as of June 30, 2009 shown
in the table above excludes 1,226,972 shares of common
shares issuable upon the exercise of warrants outstanding as of
June 30, 2009.
The outstanding share information as of June 30, 2009 shown
in the table above does not include options to purchase 180,000
common shares to be granted concurrently with the listing of our
common shares on the New York Stock Exchange to certain of our
officers. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsEmployee
Share-Based Compensation Expenses.
42
DILUTION
Purchasers of our common shares in the offering will suffer an
immediate and substantial dilution in net tangible book value
per share. Dilution is the amount by which the initial public
offering price paid by purchasers of our common shares exceeds
the net tangible book value per common share after the offering.
Net tangible book value represents the amount of our total
tangible assets reduced by our total liabilities. Tangible
assets equal our total assets less goodwill and intangible
assets. Net tangible book value per share represents our net
tangible book value divided by the number of shares of common
shares outstanding. As of June 30, 2009, our net tangible
book value was $125.7 million and our net tangible book
value per share was $5.03.
After giving effect to (1) the grant of
875,000 restricted common shares to certain employees,
including members of our executive management team, but
excluding our chief executive officer and chief financial
officer, pursuant to our 2009 Omnibus Incentive Plan,
(2) the sale of 5,500,000 common shares in the offering by
us at an initial public offering price of $9.50 per share,
which is the midpoint of the price range set forth on the cover
page of this prospectus, and (3) after deduction of
underwriting discounts and commissions and estimated offering
expenses, our adjusted net tangible book value as of
June 30, 2009 would have been $173.1 million, or $5.52
per share. This represents an immediate increase in net tangible
book value of $0.49 per share to existing shareholders and an
immediate dilution of $3.98 per share to new investors
purchasing shares in the offering. The following table
illustrates this per share dilution:
|
|
|
|
|
Assumed public offering price per share
|
|
$
|
9.50
|
|
Net tangible book value per share as of June 30, 2009
|
|
|
5.03
|
|
Increase in net tangible book value per share attributable to
new investors
|
|
|
0.49
|
|
Adjusted net tangible book value per share after the offering
|
|
|
5.52
|
|
Dilution per share to new investors
|
|
|
3.98
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price per share would increase or decrease our net
tangible book value per share after the offering by
approximately $0.16, and dilution per share to new investors by
approximately $0.84, after deducting the estimated underwriting
discounts and estimated offering expenses payable by us.
The following table illustrates, on the as adjusted basis
described above as of June 30, 2009, the total number of
shares held, total consideration paid and average price per
share paid by existing shareholders and by new investors for
common shares purchased from us, assuming the sale of our common
shares in the offering at an initial public offering price of
$9.50 per share, which is the midpoint of the price range
set forth on the cover page of this prospectus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming Exercise of
Over-Allotment Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price Per
|
|
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Existing shareholders
|
|
|
25,875,050(1
|
)
|
|
|
80
|
%
|
|
$
|
27,288,040
|
|
|
|
31
|
%
|
|
$
|
1.05
|
|
|
|
|
|
New investors
|
|
|
6,440,419
|
|
|
|
20
|
|
|
|
61,183,980
|
|
|
|
69
|
|
|
|
9.50
|
|
|
|
|
|
Total
|
|
|
32,315,469
|
|
|
|
100
|
%
|
|
$
|
88,472,020
|
|
|
|
100
|
%
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming No Exercise of
Over-Allotment Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price Per
|
|
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Existing shareholders
|
|
|
25,875,050
|
(1)
|
|
|
82
|
%
|
|
$
|
27,288,040
|
|
|
|
34
|
%
|
|
$
|
1.05
|
|
|
|
|
|
New investors
|
|
|
5,500,000
|
|
|
|
18
|
|
|
|
52,250,000
|
|
|
|
66
|
|
|
|
9.50
|
|
|
|
|
|
Total
|
|
|
31,375,050
|
|
|
|
100
|
%
|
|
$
|
79,538,040
|
|
|
|
100
|
%
|
|
$
|
2.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reflects the issuance of 875,000 restricted common shares which
will be granted to certain employees, including members of our
executive management team, but excluding our chief executive
officer and chief financial officer, without payment of
consideration on or prior to the completion of this offering.
|
As of the date of this prospectus, 1,750,000 common shares have
been reserved for future issuances under our 2009 Omnibus
Incentive Plan, of which 875,000 restricted common shares will
be granted to certain employees, including members of our
executive management team, but excluding our chief executive
officer and chief financial officer, on or prior to the
completion of this offering. As of the date of this prospectus,
we have not granted any options to purchase our common shares.
The data in the table above does not include options to purchase
180,000 common shares to be granted concurrently with the
listing of our common shares on the New York Stock Exchange to
certain of our officers. If we issue additional shares or
options that are exercised under our 2009 Omnibus Incentive
Plan, new investors will experience further dilution.
The data in the tables above assume that outstanding options and
warrants to purchase common shares are not exercised. As of
June 30, 2009, warrants to purchase 1,226,972 common shares
at a weighted average exercise price of $4.95 per common share
were outstanding. If all those options and warrants had been
exercised, and assuming the exercise of the options to purchase
180,000 common shares that are to be issued at the time of the
listing of our common shares on the New York Stock Exchange, the
dilution to new investors purchasing shares in the offering as
of June 30, 2009 would have increased by $0.24 per
share to $4.22 per share. To the extent we issue additional
warrants that are exercised, new investors will experience
further dilution.
44
RECENT
DEVELOPMENTS
The following is a summary of our selected unaudited
consolidated financial results for the three months ended
September 30, 2009 compared to our selected unaudited
consolidated financial results for the three months ended
September 30, 2008. Our first quarter 2010 results may not
be indicative of our full year results for our fiscal year
ending June 30, 2010 or future quarterly periods. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus for information regarding trends and other
factors that may influence our results of operations and for
recent quarterly operating results.
Selected
Unaudited Consolidated Financial Information
for the Three Months Ended September 30, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
$
|
|
|
revenue
|
|
|
$
|
|
|
revenue
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Revenues, net
|
|
|
26,179
|
|
|
|
100.0
|
%
|
|
|
33,295
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
12,331
|
|
|
|
47.1
|
|
|
|
15,788
|
|
|
|
47.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,848
|
|
|
|
52.9
|
|
|
|
17,507
|
|
|
|
52.6
|
|
Research and development expenses
|
|
|
694
|
|
|
|
2.7
|
|
|
|
364
|
|
|
|
1.1
|
|
Selling expenses
|
|
|
2,547
|
|
|
|
9.7
|
|
|
|
3,157
|
|
|
|
9.5
|
|
General and administrative expenses
|
|
|
932
|
|
|
|
3.6
|
|
|
|
1,490
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,675
|
|
|
|
36.9
|
|
|
|
12,496
|
|
|
|
37.5
|
|
Change in fair value of derivative instruments
|
|
|
55
|
|
|
|
0.2
|
|
|
|
111
|
|
|
|
0.3
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expenses
|
|
|
(1
|
)
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(212
|
)
|
|
|
(0.8
|
)
|
|
|
(234
|
)
|
|
|
(0.7
|
)
|
Interest income and other income
|
|
|
34
|
|
|
|
0.1
|
|
|
|
31
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(179
|
)
|
|
|
(0.7
|
)
|
|
|
(203
|
)
|
|
|
(0.6
|
)
|
Income before provision for income taxes and noncontrolling
interest
|
|
|
9,551
|
|
|
|
36.4
|
|
|
|
12,404
|
|
|
|
37.2
|
|
Provision for income taxes
|
|
|
927
|
|
|
|
3.5
|
|
|
|
2,409
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
8,624
|
|
|
|
32.9
|
|
|
|
9,995
|
|
|
|
30.0
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
109
|
|
|
|
0.4
|
|
|
|
158
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Duoyuan Printing, Inc.
|
|
|
8,515
|
|
|
|
32.5
|
|
|
|
9,837
|
|
|
|
29.5
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
256
|
|
|
|
1.0
|
|
|
|
183
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Duoyuan Printing, Inc.
|
|
|
8,771
|
|
|
|
33.5
|
%
|
|
|
10,020
|
|
|
|
30.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenue increased by $7.1 million, or 27.2%, from
$26.2 million for the three months ended September 30,
2008 to $33.3 million for the three months ended
September 30, 2009, primarily as a result of an increase in
the volume of our products sold during this period. Revenue for
our pre-press printing equipment increased by $0.1 million,
or 12.7%, from $0.8 million for the three months ended
45
September 30, 2008 to $0.9 million for the three
months ended September 30, 2009. Revenue for our press
printing equipment for the three months ended September 30,
2009 increased by $6.7 million, or 25.6%, when compared to
the three months ended September 30, 2008. This increase
was mainly attributable to an increase in the volume of our
multicolor presses sold during this period.
Our cost of revenue increased by $3.5 million, or 28.0%,
from $12.3 million for the three months ended
September 30, 2008 to $15.8 million for the three
months ended September 30, 2009. This increase was
primarily due to an increase in the volume of our products sold
during this period, particularly sales of our multicolor
presses. This increase in sales contributed to the increase in
consumption of raw materials and components across our pre-press
and press product categories as our revenue increased by 27.2%
from the three months ended September 30, 2009 to the three
months ended September 30, 2008. As a percentage of
revenue, our cost of revenue increased 0.3% from 47.1% for the
three months ended September 30, 2008 to 47.4% for the
three months ended September 30, 2009. This increase was
mainly due to the increase in our depreciation expense for
capital expenditures made in prior years.
Our income from operations increased by $2.8 million, or
29.1%, from $9.7 million for the three months ended
September 30, 2008 to $12.5 million for the three
months ended September 30, 2009. This increase was mainly
due to increased multicolor press sales, which generated higher
revenue for us.
Our provision for income taxes increased by $1.5 million,
or 159.9%, from $0.9 million for the three months ended
September 30, 2008 to $2.4 million for the three
months ended September 30, 2009. This increase was
primarily due to the increase in our revenue by 27.2% over the
same period and the increase in income tax rate for Duoyuan
China. The income tax rate for Duoyuan China in 2008 was 12.5%.
Beginning on January 1, 2009, the income tax rate for
Duoyuan China increased to 25.0% as a result of the expiration
of preferential tax treatments granted to Duoyuan China in prior
years. Our effective tax rates were 9.7% for the three months
ended September 30, 2008 and 19.4% for the three months
ended September 30, 2009.
As a result of the foregoing, our net income attributable to
Duoyuan Printing Inc. increased by $1.3 million, or 15.5%,
from $8.5 million for the three months ended
September 30, 2008 to $9.8 million for the three
months ended September 30, 2009. As a percentage of
revenue, our net income decreased 3.0% from 32.5% for the three
months ended September 30, 2008 to 29.5% for the three
months ended September 30, 2009.
46
CORPORATE
HISTORY AND STRUCTURE
We were organized under the laws of the State of Nevada on
August 10, 1998. On July 27, 2005, we merged with
Asian Financial, Inc., a Wyoming corporation, for the purpose of
changing our domicile from Nevada to Wyoming. From our inception
until October 6, 2006, we were a shell company without
operations, revenue or employees, other than officers and
directors.
On October 6, 2006, we completed an equity transfer with
Duoyuan Investments Limited and issued 47,100,462 common shares
to Duoyuan Investments Limited in exchange for all of Duoyuan
Investments Limiteds equity interest in Duoyuan China, its
wholly owned subsidiary. Duoyuan China manufactured single color
offset printing presses, among other products. As a result of
this equity transfer, Duoyuan China became our wholly owned and
principal operating subsidiary, and Duoyuan Investments Limited,
a company wholly owned by Wenhua Guo, the chairman of our board
of directors, became our controlling shareholder. Upon the
completion of the equity transfer, we commenced our offset
printing equipment business. We conduct our business through our
principal operating subsidiary, Duoyuan China, and Duoyuan
Chinas manufacturing subsidiaries, namely Langfang Duoyuan
and Hunan Duoyuan.
On November 2, 2006, we closed the transactions
contemplated by a securities purchase agreement dated
October 24, 2006 by and between us and certain investors.
Pursuant to the securities purchase agreement, we issued an
aggregate of 6,132,622 common shares to the investors for an
aggregate purchase price of $23.5 million. This private
placement was made pursuant to the exemption from the
registration provisions of the Securities Act provided by
Section 4(2) of the Securities Act, and Rule 506 of
Regulation D promulgated thereunder, for issuances not
involving a public offering.
On October 15, 2009, we changed our name to Duoyuan
Printing, Inc.
Through our principal operating subsidiary, Duoyuan China, and
Duoyuan Chinas manufacturing subsidiaries, namely Langfang
Duoyuan and Hunan Duoyuan, we design, manufacture and sell
offset printing equipment used in the offset printing process.
Our
Subsidiaries
Our
Principal Operating Subsidiary
Duoyuan China, our principal operating subsidiary, was
incorporated on June 21, 2001 under the laws of the PRC by
Duoyuan Industries (Holding), Inc., or Duoyuan Industries, a
British Virgin Islands company, wholly owned by Wenhua Guo. In
2001, Duoyuan China purchased certain offset printing equipment
manufacturing related assets from Beijing Duoyuan Electric Co.
Ltd., or Duoyuan Electric, a PRC company, which since 1994 was
in the business of manufacturing single color small format
presses, among other products. Duoyuan Electric sold certain raw
materials and semi-finished products to Duoyuan China. Duoyuan
Electric also transferred a trademark to Duoyuan China without
charge. On October 29, 2002, Duoyuan Investments Limited
purchased all of Duoyuan Industries interests in Duoyuan
China. Upon the completion of the equity transfer with Duoyuan
Investments Limited on October 6, 2006, Duoyuan China
became our wholly owned subsidiary and we commenced our offset
printing equipment business.
Duoyuan Chinas principal business activities include
marketing and sale of our offset printing equipment, technical
support to our distributors and overall strategic planning and
management of our business.
Our
Manufacturing Subsidiaries
Langfang Duoyuan was incorporated on October 27, 2000 under
the laws of the PRC by Beijing Yinhang Yinlu Advertisement Co.
Ltd., or Beijing Advertisement, and Beijing Huiyuan Duoyuan
Digital Printing Technology Research Institute, or Huiyuan
Institute, each an entity controlled by Wenhua Guo. At the time
of Langfang Duoyuans incorporation, Beijing Advertisement
and Huiyuan Institute held an equity interest in Langfang
Duoyuan of 5% and 95%, respectively. Pursuant to an equity
transfer agreement dated as of March 25, 2002, Duoyuan
China acquired all of Beijing Advertisements 5% interest
in Langfang Duoyuan for RMB1.5 million. Pursuant to an
equity transfer agreement dated as of October 16, 2005,
Duoyuan
47
China acquired an additional 90% equity interest in Langfang
Duoyuan from Huiyuan Institute for RMB36 million. Huiyuan
Institute remains the holder of a 5% equity interest in Langfang
Duoyuan.
Langfang Duoyuans principal business activities include
manufacturing our CTP system and two of our press products,
namely our single color small format presses and multicolor
small format presses.
Hunan Duoyuan was incorporated on March 10, 2004. In
December 2003, Duoyuan China participated in a public auction
and entered into an agreement, as further supplemented in May
2004, to purchase certain assets (including real property,
manufacturing facilities and intellectual property) from Hunan
Printing Machinery Co., Ltd., which was a bankrupt state owned
PRC enterprise. Duoyuan China paid RMB38 million for those
assets. Hunan Printing Machinery Co., Ltd. was then one of the
major large format press manufacturers in China approved by the
Chinese government to produce multicolor printing equipment.
Duoyuan China acquired certain assets from Hunan Printing
Machinery Co., Ltd. for its multicolor printing equipment and
large format printing equipment production capacity. After the
acquisition of the assets of Hunan Printing Machinery Co., Ltd.
in December 2003, Duoyuan China and Langfang Duoyuan
incorporated Hunan Duoyuan on March 10, 2004, with each
holding an 88% and 12% equity interest in Hunan Duoyuan,
respectively.
Hunan Duoyuans principal business activities include
manufacturing two of our press products, namely our single color
large format presses and multicolor large format presses.
The entities formed or controlled by Wenhua Guo that were
involved in the foregoing transactions do not operate in the
same industry as Duoyuan China. These entities do not compete
with Duoyuan China.
The following chart summarizes our corporate structure,
including our subsidiaries, as of the date of this prospectus:
|
|
* |
Represents our minority shareholders, consisting of the
pre-equity transfer investors and the investors from the private
placement in November 2006.
|
48
SELECTED
CONSOLIDATED FINANCIAL INFORMATION
You should read the selected consolidated financial information
set forth below in conjunction with our consolidated financial
statements and related notes, Summary Consolidated
Financial Information, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations. The selected consolidated statements of income
and other comprehensive income for the years ended June 30,
2005, 2006, 2007, 2008 and 2009, the selected consolidated
balance sheets as of June 30, 2005, 2006, 2007, 2008 and
2009, and the selected consolidated statements of cash flows for
the years ended June 30, 2005, 2006, 2007, 2008, and 2009
have been derived from our audited consolidated financial
statements that are included elsewhere in this prospectus. The
consolidated financial statements are prepared and presented in
accordance with U.S. GAAP. Our historical results are not
necessarily indicative of results to be expected for future
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of
Income
|
|
Year Ended
June 30,
|
|
and Other Comprehensive
Income
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except for share
and per share data)
|
|
|
Revenue, net
|
|
$
|
26,469
|
|
|
$
|
43,747
|
|
|
$
|
67,812
|
|
|
$
|
89,628
|
|
|
$
|
106,591
|
|
Cost of revenue
|
|
|
16,887
|
|
|
|
22,478
|
|
|
|
37,694
|
|
|
|
44,462
|
|
|
|
50,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,582
|
|
|
|
21,269
|
|
|
|
30,118
|
|
|
|
45,166
|
|
|
|
56,257
|
|
Research and development expenses
|
|
|
680
|
|
|
|
1,037
|
|
|
|
1,046
|
|
|
|
1,683
|
|
|
|
1,768
|
|
Selling expenses
|
|
|
3,025
|
|
|
|
3,753
|
|
|
|
7,827
|
|
|
|
8,705
|
|
|
|
9,726
|
|
General and administrative expenses
|
|
|
2,406
|
|
|
|
2,896
|
|
|
|
3,079
|
|
|
|
4,472
|
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,471
|
|
|
|
13,583
|
|
|
|
18,167
|
|
|
|
30,306
|
|
|
|
40,289
|
|
Liquidated damages (expenses) income, net of settlement
|
|
|
|
|
|
|
|
|
|
|
(2,119
|
)
|
|
|
235
|
|
|
|
|
|
Change in fair value of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(957
|
)
|
Interest expense
|
|
|
(505
|
)
|
|
|
(742
|
)
|
|
|
(742
|
)
|
|
|
(730
|
)
|
|
|
(1,188
|
)
|
Interest and other income
|
|
|
997
|
|
|
|
503
|
|
|
|
721
|
|
|
|
195
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
492
|
|
|
|
(239
|
)
|
|
|
(21
|
)
|
|
|
(535
|
)
|
|
|
(1,969
|
)
|
Income before minority interest and provision for income taxes
|
|
|
3,963
|
|
|
|
13,344
|
|
|
|
16,027
|
|
|
|
30,077
|
|
|
|
38,514
|
|
Minority interest
|
|
|
86
|
|
|
|
187
|
|
|
|
241
|
|
|
|
381
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
3,877
|
|
|
|
13,157
|
|
|
|
15,786
|
|
|
|
29,697
|
|
|
|
38,051
|
|
Provision for income taxes
|
|
|
|
|
|
|
261
|
|
|
|
1,807
|
|
|
|
3,238
|
|
|
|
5,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,877
|
|
|
$
|
12,896
|
|
|
|
13,979
|
|
|
|
26,460
|
|
|
|
32,597
|
|
Other comprehensive income Foreign currency translation gain
|
|
|
|
|
|
|
426
|
|
|
|
1,834
|
|
|
|
8,200
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,877
|
|
|
$
|
13,322
|
|
|
$
|
15,813
|
|
|
$
|
34,660
|
|
|
$
|
32,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of shares
|
|
|
18,867,436
|
|
|
|
18,867,436
|
|
|
|
23,041,021
|
|
|
|
25,000,050
|
|
|
|
25,000,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earning per share
|
|
$
|
0.21
|
|
|
$
|
0.68
|
|
|
$
|
0.61
|
|
|
$
|
1.06
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
Consolidated Balance
Sheets
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Cash
|
|
$
|
294
|
|
|
$
|
3,740
|
|
|
$
|
7,816
|
|
|
$
|
14,200
|
|
|
$
|
31,044
|
|
Working
capital(1)
|
|
|
(6,405
|
)
|
|
|
6,945
|
|
|
|
30,935
|
|
|
|
55,587
|
|
|
|
75,337
|
|
Total current assets
|
|
|
22,002
|
|
|
|
34,906
|
|
|
|
51,267
|
|
|
|
72,017
|
|
|
|
94,214
|
|
Total assets
|
|
|
37,467
|
|
|
|
50,544
|
|
|
|
80,280
|
|
|
|
112,905
|
|
|
|
148,551
|
|
Total current liabilities
|
|
|
28,406
|
|
|
|
27,962
|
|
|
|
20,332
|
|
|
|
16,431
|
|
|
|
18,877
|
|
Total liabilities
|
|
|
28,406
|
|
|
|
27,962
|
|
|
|
20,332
|
|
|
|
17,805
|
|
|
|
20,057
|
|
Minority interest
|
|
|
327
|
|
|
|
527
|
|
|
|
801
|
|
|
|
1,293
|
|
|
|
1,762
|
|
Total shareholders equity
|
|
|
8,734
|
|
|
|
22,055
|
|
|
|
59,147
|
|
|
|
93,806
|
|
|
|
126,732
|
|
|
|
(1) |
Working capital is equal to total current assets less total
current liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
Consolidated Statements of Cash
Flows
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
(9,883
|
)
|
|
$
|
4,933
|
|
|
$
|
(4,200
|
)
|
|
$
|
16,801
|
|
|
$
|
29,842
|
|
Cash flows used in investing activities
|
|
|
(2,609
|
)
|
|
|
(1,563
|
)
|
|
|
(11,081
|
)
|
|
|
(10,524
|
)
|
|
|
(16,189
|
)
|
Cash flows provided by (used in) financing activities
|
|
|
11,858
|
|
|
|
|
|
|
|
19,171
|
|
|
|
(1,092
|
)
|
|
|
2,929
|
|
50
MANAGEMENTS
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with the
financial statements and related notes appearing elsewhere in
this prospectus. This discussion includes forward-looking
statements that involve risks and uncertainties. You should
review the section titled Risk Factors of this
prospectus for a discussion of important factors that could
cause our actual results and the timing of selected events to
differ materially from those described in or implied by these
forward-looking statements.
Overview
We are a Wyoming corporation and a leading offset printing
equipment supplier in China, headquartered in Beijing. Through
our principal operating subsidiary, Duoyuan China, and Duoyuan
Chinas manufacturing subsidiaries, namely Langfang Duoyuan
and Hunan Duoyuan, we design, manufacture and sell offset
printing equipment used in the offset printing process. We
manufacture one product under the pre-press product category (a
CTP system) and fifteen products across four product lines under
the press product category (single color small format presses,
single color large format presses, multicolor small format
presses and multicolor large format presses). We plan to begin
commercial production and sale of certain post-press products,
including a cold-set corrugated paper machine, which makes
corrugated cardboard paper, by the end of 2010. In addition, we
plan to begin commercial production and sale of two other
post-press products, namely an automatic booklet maker and an
automatic paper cutter, for which we have developed prototypes,
in 2011.
Our revenue grew 32.2% from $67.8 million in the year ended
June 30, 2007 to $89.6 million in the year ended
June 30, 2008 and 18.9% to $106.6 million in the year
ended June 30, 2009. Our net income grew 89.3% from
$14.0 million in fiscal 2007 to $26.5 million in
fiscal 2008 and 23.2% to $32.6 million in fiscal 2009. For
fiscal 2007, 2008 and 2009, our income from operations was
$18.2 million, $30.3 million and $40.3 million,
respectively. Our operating results reflect our continuous
growth in sales of our multicolor presses, which are generally
more expensive and more profitable. For fiscal 2007, 2008 and
2009, our multicolor large format presses and our multicolor
small format presses were our best selling products. For fiscal
2007, 2008 and 2009, we derived 72.3%, 81.4% and 83.3% of our
revenue from the sale of our multicolor presses, respectively.
For the same periods, our multicolor large format presses
accounted for approximately 46.7%, 52.0% and 51.2% of our
revenue, respectively, and our multicolor small format presses
accounted for approximately 25.6%, 29.4% and 32.1% of our
revenue, respectively.
Outlook
We derive all of our revenue from sales of our pre-press and
press equipment to our distributors in China. Chinas
printing equipment industry grew from approximately
$908 million in 2002 to approximately $2.5 billion in
2007, according to the Printing and Printing Equipment
Industries Association of China, representing a CAGR of 23% per
annum. Taking into account of the effects of the current
economic environment, Pira International projects Chinas
printing equipment market to grow by 34% total from 2009 to
2014, or a CAGR of 6.0% per annum.
Our business expansion plans focus on developing and
manufacturing higher quality and more efficient multicolor
presses, post-press products and machines servicing the
packaging market. Package printing represents the largest
segment in Chinas printing industry. According to the
Printing and Printing Equipment Industries Association of China,
Chinas overall printing industry reached
$64.4 billion in 2007, of which approximately
$20.5 billion was related to package printing, accounted
for 32% of the Chinas printing industry that year. Pira
International projects that package printing to become the
largest segment by 2014, followed by commercial printing.
51
We dedicate a large portion of our research and development
expenses to creating and improving our press products,
particularly our multicolor presses. In addition, we plan to
begin commercial production and sale of a new product targeting
the packaging market, namely a cold-set corrugated paper
machine, a machine that makes corrugated cardboard paper, by the
end of 2010. We also plan to begin commercial production and
sale of two post-press products, namely an automatic booklet
maker and an automatic paper cutter, for which we have developed
prototypes, in 2011.
Principal
Factors Affecting Our Results of Operations
The following factors have had, and we expect that they will
continue to have, a significant effect on the development of our
business, financial condition and results of operations:
Growth
of the Overall Printing Industry, Printing Equipment Market and
Packaging Equipment Market in China
We believe the growing market for print products and printing
equipment in China has affected and will continue to affect our
financial condition by increasing market demand for our
products. According to Pira International, the total annual
output of Chinas printing industry grew from
$29.5 billion to $64.4 billion from 2002 to 2007.
Similarly, Chinas printing equipment market grew from
approximately $0.9 billion in 2002 to approximately
$2.5 billion in 2007, according to the Printing and
Printing Equipment Industries Association of China, representing
a CAGR of 23% per annum. Pira International projects that the
market for printing equipment in China will grow at a CAGR of
6.0% per annum between 2009 and 2014. Package printing is an
important segment within Chinas printing industry. In
2007, package printing accounted for 32% of Chinas
printing industry. Pira International projects that package
printing to become the largest segment by 2014, followed by
commercial printing. However, any adverse changes in
Chinas economic conditions may adversely affect demand for
print and printed packaging materials, and consequently our
products. See Risk Factors Risks Related to
Our Business If the market for printing equipment
does not grow at the rate we expect or at all, including due to
a decrease in the demand for commercial printing services, our
business may be materially and adversely affected.
Expansion
of Our Production Capacity and Acquisitions
In connection with our launch into the post-press business, we
plan to use approximately $30.0 million of the proceeds
from this offering to build a new factory to manufacture
cold-set corrugated paper machines at our Langfang Duoyuan
facility. To meet the potential increase in demand for our
products and to improve our overall product quality and
manufacturing efficiency, we plan to use approximately
$10.0 million of the proceeds from this offering to improve
and upgrade our existing manufacturing facilities and
productions lines at Langfang Duoyuan and Hunan Duoyuan. We
expect these projects will be completed by the end of 2010. We
will also consider strategic acquisitions to increase our
production capacity and obtain new technology for additional
products. As our production capacity increases, we also plan to
expand our distribution network and end-user customer base.
Fluctuations
in Raw Material Costs
Price fluctuations in raw materials and components impact our
gross profits and results of operations. Our operations require
substantial quantities of various raw materials, particularly
steel and iron, and electronic components. These materials and
components have been and continue to be susceptible to
significant price fluctuations. For example, steel prices in
China decreased during fiscal 2006, but increased significantly
during fiscal 2007 and 2008, increasing our raw material costs
as a percentage of revenue. For fiscal 2008 and 2009, raw
material costs accounted for approximately 90% and 88%,
respectively, of our production costs. We attempt to minimize
the effect of price fluctuations in raw materials and components
by:
|
|
|
|
|
producing a substantial majority of our key components in-house,
as measured by the cost of revenue, and purchasing other
off-the-shelf components from third party suppliers;
|
52
|
|
|
|
|
buying in large quantities to increase our purchasing leverage;
|
|
|
|
entering into year-long supply contracts for raw materials and
components on favorable terms; and
|
|
|
|
reducing raw material and component consumption through research
and development and increased automation of our manufacturing
process.
|
Ultimately, we may need to raise our product prices sufficiently
in order to recover higher raw material and component costs and
maintain our profit margin.
Product
Mix
Our revenue and, as described in greater detail below, gross
margins in any given period will be directly impacted by our
product mix. Due to the technological complexity and high
capital requirements of multicolor presses, the number of
companies selling multicolor presses in China is significantly
smaller than those selling single color presses. As a result,
our multicolor presses have a higher average unit sales price,
which can be substantially greater than that of single color
presses, and generate better gross profits. Also, sales prices
and margins for our single color presses have faced consistent
downward pressure because of increased competition.
Changes
in PRC Tax Regulations
Our Chinese subsidiaries have enjoyed significant tax
preferential treatments. These preferential tax treatments were
applicable to foreign-invested manufacturing enterprises
scheduled to operate for a period of not less than ten years in
accordance with the Foreign Invested Enterprise Income Tax Law,
which was effective until December 31, 2007. The additional
tax that would otherwise be payable without such preferential
tax treatments totaled $4.5 million for fiscal 2007,
$7.9 million for fiscal 2008 and $4.3 million for
fiscal 2009. See Risk Factors Risks Related to
Our Business The termination and expiration or
unavailability of preferential tax treatments once available to
us may materially and adversely affect our business.
As a result of recent changes in the Chinese enterprise income
tax laws, we expect that our tax expenses will be increase
significantly. In addition, as explained below, some of the tax
preferences we previously received were granted by local
governments and not supported by relevant state laws and
regulations. As a result, our Chinese subsidiaries may be
ordered by relevant authorities to refund these tax benefits. In
addition, as a result of the changes in Chinese tax laws, our
historical operating results will not be indicative of our
operating results for future periods. See
Critical Accounting Policies Taxes
and Incentives below.
Impact
of Recent Currency Exchange Rate Increase
We use the U.S. dollar as the reporting currency for our
financial statements. Our operations are conducted through our
Chinese subsidiaries. On July 21, 2005, the Chinese
government changed its policy of benchmarking the value of the
Renminbi to the U.S. dollar and, as a result, the Renminbi
has appreciated by approximately 17.5% from RMB8.28 to $1.00 on
July 21, 2005 to RMB6.83 to $1.00 on June 30, 2009. In
converting our Renminbi income statement amount into
U.S. dollars, the average translation rates used for fiscal
2007, 2008 and 2009 were RMB7.81 to $1.00, RMB7.26 to $1.00 and
RMB6.83 to $1.00, respectively. Our U.S. dollar denominated
operating results for these periods have benefited as a result
of the appreciation of the Renminbi against the U.S. dollar.
53
Internal
Control Over Financial Reporting
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
periodic reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commissions rules and forms and that such information 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. In designing and evaluating the disclosure controls
and procedures, our management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and our management necessarily is required
to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of June 30, 2009, we carried out an evaluation, under
the supervision and with the participation of our management,
including our then chief executive officer and our chief
financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on
the foregoing, our then chief executive officer and chief
financial officer concluded that because of the material
weakness in internal control over financial reporting described
below, our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) were not
effective as of June 30, 2009.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, which is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. GAAP. Our 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 our assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. GAAP and that our
receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.
Any system of internal control, no matter how well designed, has
inherent limitations, including the possibility that a control
can be circumvented or overridden and misstatements due to error
or fraud may occur and not be detected in a timely manner. Also,
because of changes in conditions, internal control effectiveness
may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with
respect to financial statement preparation.
A material weakness is a deficiency, or a 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 financial statements will
not be prevented or detected on a timely basis. A significant
deficiency is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit
attention by those responsible for oversight of our financial
reporting.
Our management assessed the effectiveness of our internal
control over financial reporting as of June 30, 2009. In
making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated
Framework.
54
During its assessment of the effectiveness of internal control
over financial reporting as of June 30, 2009, our
management identified a material weakness related to the
following:
Lack of Internal Audit Function Although we
maintain an internal audit department, the scope and
effectiveness goal of internal audit function have not been
identified. Due to this weakness, we may be ineffective in the
timely prevention or detection of errors in the recording of
accounting transactions, which may have a material impact on our
financial statements.
In light of the foregoing, our management has concluded that our
internal control over financial reporting was not effective as
of June 30, 2009. Our ineffective internal control over
financial reporting could result in material misstatements in
our annual or interim financial statements that would not be
prevented or detected. However, nothing has come to the
attention of our management that causes them to believe that any
material inaccuracies or errors exist in our financial
statements as of June 30, 2009. The reportable conditions
and other areas of our internal control over financial reporting
identified by us as needing improvement have not resulted in a
material restatement of our financial statements. We are not
aware of any instance where such reportable conditions or other
identified areas of weakness have resulted in a material
misstatement or omission in any report we have filed with or
submitted to the Securities and Exchange Commission.
Our management has identified the steps necessary to address the
material weakness described above as follows:
Our internal auditors are responsible for auditing our key
financial areas, including sales (including rebates), cost of
sales, accounts receivable, payables and expenses, inventory and
other material accounts. They are also responsible for detecting
any internal control deficiencies. We are still in process of
identifying various internal audit requirements and also in
process of implementing the necessary audit procedures to
fulfill those requirements. In addition, we have engaged an
outside consultant to assist us in setting up internal audit
processes to identify internal control weaknesses, testing our
internal controls and remedying any deficiencies. The outside
consultant will also advise us in becoming compliant with
Sarbanes Oxley Act Section 404 requirements.
We believe that the foregoing step will help to remediate the
material weaknesses identified above, and we will continue to
monitor the effectiveness of these steps and make any changes
that our management deems appropriate.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections 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 and procedures may deteriorate.
There were no changes in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended) during
fiscal 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
Components
of Revenue and Expenses
Revenue,
net
Our revenue is reported net of value-added taxes, or VAT, that
are levied on our products. As of June 30, 2009, all of our
products were subject to VAT at a rate of 17% of the gross sales
price. We also offer
55
sales rebates as an incentive for large purchase orders. These
sales rebates are recorded as a reduction of our revenue.
We derive all of our revenue from the sale of our offset
printing equipment to distributors in China. We sell products in
the pre-press and press product categories of printing equipment
with substantially all our revenue being derived from the sale
of our press printing equipment. Pre-press printing equipment
comprised approximately 5.6%, 3.6% and 3.8% of our revenue for
fiscal 2007, 2008 and 2009, respectively. Press printing
equipment comprised approximately 94.4%, 96.4% and 96.2% of our
revenue for fiscal 2007, 2008 and 2009. For fiscal 2007, 2008
and 2009, within the press category of our printing equipment,
we derived 72.3%, 81.4% and 83.3% of our revenue from the sale
of our multicolor presses, respectively. For fiscal 2007, 2008
and 2009, we derived 23.2%, 16.7% and 14.4% of our revenue from
the sale of our single color presses, respectively.
For fiscal 2007, 2008 and 2009, our multicolor large format
presses and our multicolor small format presses were our best
selling products. For fiscal 2007, 2008 and 2009, our multicolor
large format presses accounted for approximately 46.7%, 52.0%
and 51.2% of our revenue, respectively, and our multicolor small
format presses accounted for approximately 25.6%, 29.4% and
32.1% of our revenue, respectively.
Because of the increasing market demand for multicolor presses
in China, which typically have higher profit margins than single
color presses, we plan to continue to expand our multicolor
press production capacities, product offerings and sales
network. Our multicolor presses incorporate our advanced
technologies, making them highly automated and efficient, and
help reduce potential human errors. Our multicolor small format
presses offer a relatively low-cost solution for end-user
customers with high quality multicolor printing needs, such as
corporate brochures, product catalogues, labels and small
packages. Our multicolor large format presses, which require
relatively large investments compared to our other press
products, are suitable for end-user customers with high-quality
multicolor printing needs, such as posters, large packages, and
banners. Our multicolor large format presses are also capable of
printing at a faster speed than our other press products, making
them ideal for time sensitive printing needs.
Although we expect that our multicolor presses will continue to
be our best selling products in the near future, we expect that
sales of our pre-press product and single color presses will
continue growing as the printing industry in China continues
expanding. Our CTP system is more technologically advanced than
products using the traditional pre-press processing method. Our
CTP system improves printing plate quality and eliminates the
labor and chemical intensive multiple step processes associated
with traditional pre-press processing methods. Although
computer-to-plate technology is relatively new in China, we
believe that there is revenue growth potential for our CTP
system with increased market acceptance. We also expect to see
revenue growth with our single color presses, which are
typically suited for end-user customers who are entering offset
printing from type-set printing or need to print works that are
mostly single colored, such as books. Our single color presses
require low initial investments and minimal operating skills
compared to our multicolor presses. We also expect to generate
revenue from our post-press line of business, particularly from
the manufacture and sale of our cold-set corrugated paper
machines, which we expect to launch by the end of 2010.
56
The following table provides a breakdown of our revenue, by
product category, for the periods indicated:
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Year Ended
June 30
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2007
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2008
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2009
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|
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% of
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|
|
|
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% of
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% of
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$
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Revenue
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$
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Revenue
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$
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Revenue
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(dollars in thousands)
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Pre-press
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CTP system
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$
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3,769
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5.6
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%
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$
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3,184
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3.6
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%
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$
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4,004
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3.8
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%
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Press
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Single color small-format presses
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6,021
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8.9
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4,328
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4.8
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4,436
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4.2
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Single color large-format presses
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9,730
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14.3
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10,700
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11.9
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10,903
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10.2
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Multicolor small-format presses
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17,350
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25.6
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26,366
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29.4
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34,207
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32.1
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Multicolor large-format presses
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31,671
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46.7
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46,597
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52.0
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54,593
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51.2
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Adjustments
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(729
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)
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(1.1
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)
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(1,547
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)
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(1.7
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)
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(1,552
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)
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(1.5
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)
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Revenue, net
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$
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67,812
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100.0
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%
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$
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89,628
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100.0
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%
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$
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106,591
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100.0
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%
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In fiscal 2007, 2008 and 2009, sales to distributors in China
accounted for all of our revenue. We use an extensive
distribution network to reach a broad end-user customer base. We
generally make sales on a purchase order and short-term
agreement basis. We do not have long-term purchase orders with
any of our distributors. No single distributor accounted for
more than 5.0% of our revenue for fiscal 2007, 2008 and 2009.
Adjustments to revenue accounted for 1.1%, 1.7% and 1.5% for
fiscal 2007, 2008 and 2009, respectively, for sales rebates paid
to distributors as part of our incentive program that rewards
those distributors who meet or exceed their sales targets in the
prior year. We provide sales rebates, or discounts of 2% to 5%,
to distributors who place large purchase orders with us. The
greater the dollar amount of the purchase order, the higher the
percentage rebate we offer. We pay sales rebates at the end of
each calendar year. We intend to continue this incentive program.
Cost
of Revenue
Our cost of revenue consists primarily of direct costs to
manufacture our products, including component and raw material
costs, salaries and related manufacturing personnel expenses,
production plant and equipment depreciation and repair and
maintenance costs. Our costs of revenue were $37.7 million,
$44.5 million and $50.3 million for fiscal 2007, 2008
and 2009, respectively.
The direct costs of manufacturing a new product are generally
highest when a new product is first introduced due to
(1) start-up
costs associated with manufacturing a new product and
(2) generally higher raw material and component costs due
to lower initial production volumes. As production volumes
increase, we typically improve our manufacturing efficiencies
and are able to strengthen our purchasing power by buying raw
materials and components in greater quantities, which decreases
raw material and component costs. In addition, we are able to
lower or help offset rising raw material and component costs by
identifying lower-cost raw materials and components. Also, when
production volumes become sufficiently large, we often gain
further cost efficiencies by producing our key components
in-house at our Hunan Duoyuan facility.
Our principal raw materials are steel, iron and electronic
components. We purchase our raw materials and components from
Chinese suppliers, manufacturing a substantial majority of our
key components in-house. As a result, we believe we currently
have a relatively low cost base compared to other printing
equipment manufacturers, especially when compared to
international printing equipment manufacturers.
57
The relatively low operation, labor and raw material costs in
China have historically allowed us to achieve lower costs as we
increase purchase volumes and make improvements in manufacturing
processes.
Primarily due to a drop in commodity prices as a result of the
global economic slowdown, the overall cost of our raw materials
in fiscal 2009 decreased by 3% compared to fiscal 2008. We
expect raw material costs to remain relatively unchanged for the
remaining calendar 2009, because of existing supply agreements.
However, we believe that raw materials, components and wages in
China will increase as a result of Chinas further economic
development. Once global economic conditions improve and our
existing supply agreements expire, we expect our raw material
costs will increase.
As we focus on manufacturing more advanced products and new
product lines, we may find it necessary to use more expensive
raw materials and components. We plan to mitigate future
increases in raw material and component costs by using more
common resources across our product lines, increasing in-house
manufacturing of our key components and adopting more uniform
manufacturing and assembly practices. In addition, to minimize
and control raw material waste and increase production
efficiency, we continue to make investments to improve and
further automate our manufacturing process.
Gross
Margins
Our gross profit margins for fiscal 2007, 2008 and 2009 were
44.4%, 50.4% and 52.8%, respectively. Our gross profit margins
are impacted by changes in the average selling prices of our
products, product sales mix and cost of revenue. The average
selling prices for our products may decline if competitors lower
their prices and we respond by reducing prices for some of our
products to compete more effectively or if we choose to lower
our prices to gain market share. For example, in fiscal 2008 and
fiscal 2009, we lowered the prices of our entry level single
color small format presses to gain market share. Alternatively,
we are able to increase our average selling prices in certain
circumstances, such as when we introduce new or enhanced
products. For example, in fiscal 2008 we introduced a new model
of our multicolor large format presses, Model DY4104, that has
all of the existing features of our other multicolor large
format presses, but is also capable of printing on packaging
materials directly. Currently, this is the most expensive
product we sell. Also, in fiscal 2009, we introduced a new model
of our multicolor large format presses, Model PZ-4660AL, which
is an enhanced version or our existing Model PZ-4660. This new
model produces printed materials in brighter colors and is more
automated than our existing model.
Since the average selling prices and gross profit margins of our
products vary by product line, changes in our product sales mix
will also impact our overall gross profit margins. Our more
sophisticated and technologically advanced products, such as our
CTP system and multicolor presses, generally have higher gross
profit margins than our less sophisticated and low technology
products, such as our single color presses. Therefore, product
mix impacts our overall gross profit margins. For fiscal 2007,
2008 and 2009, the overall gross profit margins for our CTP
system were 42.6%, 47.1% and 47.2%, respectively, and the
overall gross profit margins for our multicolor presses were
49.7%, 51.2% and 53.3% for the same periods. For fiscal 2007,
2008 and 2009, the overall gross profit margins for our single
color presses were 28.5%, 46.5% and 46.1%, respectively.
Given recent market trends and to better offset raw material
costs and maintain our gross profit, we have been adjusting our
product mix by increasing our production and sale of multicolor
presses while decreasing our production and sale of single color
presses. As a result, our gross profit margins increased by 2.4%
from 50.4% in fiscal 2008 to 52.8% in fiscal 2009, primarily due
to the increase in the proportion of revenue from sales of our
multicolor presses.
Lastly, our gross profit margins are also affected by changes in
our cost of revenue and our ability to manage such cost as
described in further detail Cost of
Revenue above.
58
Research
and Development Expenses
Our research and development expenses consist primarily of costs
associated with designing, developing and testing our products.
Among other things, these costs include employee compensation
and benefits for our research and development team, expenditures
on purchases of supplies and raw materials, depreciation
expenses related to equipment used for research and development
and other related costs. Our research and development team
focuses its efforts on upgrading and enhancing our existing
products and designing new products, discovering new ways to
improve our press printing equipment, particularly our
multicolor presses, and developing new post-press printing
equipment. Our research and development expenses for fiscal
2007, 2008 and 2009 were $1.0 million, $1.7 million
and $1.8 million, respectively.
Our research and development expenses as a percentage of revenue
were 1.5%, 1.9% and 1.7% for fiscal 2007, 2008 and 2009,
respectively. From fiscal 2007 to fiscal 2008, our research and
development expenses as a percentage of revenue increased mainly
due to increased costs from the purchase of raw materials and an
increase in salary expenses as we hired additional engineers.
We plan to upgrade our existing products and design new
products, particularly multicolor presses as well as certain
post-press equipment like our cold-set corrugated paper machine.
We plan to continue investing in research and development to
maintain and enhance our market competitiveness.
Selling
Expenses
Our selling expenses consist primarily of employee subsidies and
benefits for our sales and marketing staff, transportation costs
and marketing, sales, advertising, travel and entertainment
activities expenses. Our selling expenses were
$7.8 million, $8.7 million and $9.7 million for
fiscal 2007, 2008 and 2009, respectively.
From fiscal 2007 to fiscal 2009, our selling expenses increased
primarily as a result of increased sales and marketing
activities, the hiring of additional sales representatives and
increased transportation costs. In fiscal 2009, our selling
expenses as a percentage of revenue decreased by 0.6% to 9.1%
from 9.7% in fiscal 2008 mainly due to increased sales volume,
which created economies of scale, reducing our per unit selling
expenses. In fiscal 2008, our selling expenses as a percentage
of revenue decreased by 1.8% to 9.7% from 11.5% in fiscal 2007,
as our transportation costs remained steady and we improved our
selling and marketing efficiencies.
Because we sell all of our products to distributors, our selling
expenses as a percentage of revenue are significantly lower than
manufacturers that primarily sell directly to end-user
customers. While we intend to continue to sell our products
exclusively to distributors, we plan to build our brand
recognition through increased marketing activities both inside
and outside of China, which may increase our sales and marketing
expenses in terms of actual amounts, as well as a percentage of
revenue. In the near term, we expect that certain components of
our selling expenses will increase as we continue to build brand
recognition through increased marketing activities both inside
and outside of China. Specifically, we expect that advertising
expenses will increase as we increase our advertising in
magazines and trade journals and expand into new forms of media,
including online advertising. In addition, we anticipate that
exhibition expenses will increase as we plan to participate in
more trade shows and exhibitions all across China to develop and
enhance our reputation in the printing and packaging industries.
We also expect salary expenses to increase as we continue to
hire additional sales representatives to help broaden our
end-user customer base. This anticipated increase in selling
expenses will be a direct result of our plan to grow, strengthen
and support our nationwide distribution network.
59
General
and Administrative Expenses
Our general and administrative expenses consist primarily of
employee compensation and benefits for our general management,
finance and administrative staff, depreciation and amortization
with respect to equipment used for general corporate purposes,
consultant fees and other expenses incurred for general
corporate purposes. Our general and administrative expenses were
$3.1 million, $4.5 million and $4.5 million for
fiscal 2007, 2008 and 2009, respectively.
We anticipate we will incur more expenses as we seek more
guidance and services from attorneys, investors relationship
consultants and auditors as our business expands. Our general
and administrative expenses as a percentage of revenue were
4.5%, 5.0% and 4.2% for fiscal 2007, 2008 and 2009,
respectively. In general, as a percentage of revenue, we expect
that general and administrative expenses will decrease as we
increase our staffing level at a slower rate than we increase
our revenue.
Employee
Share-Based Compensation Expenses
We account for employee share-based compensation expenses based
on the fair value of share option grants at the date of the
grant, and we record employee share-based compensation expenses
to the extent that the fair value of those grants are determined
to be greater than the price paid by the employee. We did not
incur any employee share-based compensation expenses in fiscal
2007, 2008 or 2009.
On or prior to the completion of this offering, we will grant
875,000 restricted common shares to certain employees, including
members of our executive management team, but excluding our
chief executive officer and chief financial officer, pursuant to
our 2009 Omnibus Incentive Plan. The grant of
875,000 restricted common shares will be a one-time bonus
stock award to approximately 50 employees and will be
contingent upon the closing of our public offering. The common
shares under the grant will be restricted and subject to a six
month cliff vesting period. As a result of this common share
grant, we will incur employee share-based compensation charges
of $8.3 million beginning in this fiscal quarter ending
December 31, 2009, assuming an initial public offering
price of $9.50 per common share, the midpoint of the
estimated range of the initial public offering price.
In addition, concurrent with the listing of our common shares on
the New York Stock Exchange, we will grant to certain officers
options to purchase up to 180,000 common shares at or above
the initial public offering price. These options will vest over
a period of four years. The grant of options to these officers
will result in additional stock-based compensation expense.
Liquidated
Damages Expense
Liquidated damages expense relates to our failure to timely
register for resale certain private placement shares and
terminate related party transactions. We recorded liquidated
damages expenses of $2.1 million for fiscal 2007. We
settled the claims for liquidated damages in the third quarter
of fiscal 2008, and we reversed the accrual and recognized a net
liquidated damages gain of $0.2 million for fiscal 2008.
See Critical Accounting Policies
Liquidated Damages Expense.
Other
Income (Expense)
Other expense is comprised primarily of interest expense from
five short-term loans we have with the Bank of Agriculture,
Chongwen branch in the aggregate amount of $14.4 million as
of June 30, 2009. Other expense is net of interest income
from our interest bearing checking accounts.
60
Minority
Interests
Minority interests refer to the 5% equity interest in Langfang
Duoyuan and 0.6% equity interest in Hunan Duoyuan held by
Huiyuan Institute. For a summary of Huiyuan Institutes
equity ownership, see Business Our
Subsidiaries Our Manufacturing Subsidiaries.
Income allocated to the minority interests was
$0.2 million, $0.4 million and $0.5 million for
fiscal 2007, 2008 and 2009, respectively.
Provision
for Income Taxes
Our provision for income taxes was $1.8 million,
$3.2 million and $5.5 million for fiscal 2007, 2008
and 2009, respectively. Our effective tax rate was 11.4%, 10.9%
and 14.3% for the same periods.
Foreign
Currency Translation Adjustments
Although all of our revenue and expenses are denominated in
Renminbi, we use the U.S. dollar for financial reporting
purposes. Our results of operations and cash flows are
calculated based on the average exchange rate during the
relevant periods. Our assets and liabilities are calculated
based on the uniform exchange rate announced by the
Peoples Bank of China at the end of the relevant periods.
Our share capital is calculated based on historical exchange
rates. This practice is in compliance with U.S. GAAP.
Critical
Accounting Policies
We prepare our financial statements in accordance with
U.S. GAAP, which requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosure of
contingent assets and liabilities. We evaluate our estimates and
judgments, including those related to sales, returns, pricing
concessions, bad debts, inventories, investments, fixed assets,
intangible assets, income taxes and other contingencies, based
on our historical experience and various other assumptions that
we believe are reasonable under the circumstances. Actual
results may differ from these estimates under different
assumptions or circumstances.
We believe the following accounting policies are critical to the
portrayal of our financial condition and results of operations
and require difficult, subjective or complex management
judgments, often as a result of the need to estimate the effects
of matters that are inherently uncertain.
Revenue
Recognition
We recognize revenue in accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition, which
specifies that revenue is realized or realizable and earned when
four criteria are met:
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persuasive evidence of an arrangement exists, such as sales
contracts;
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|
product is shipped or services have been rendered;
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the price to the buyer is fixed or determinable; and
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collectability of payment is reasonably assured.
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In accordance with Statement of Financial Accounting Standards,
or SFAS, No. 48, Revenue Recognition when Right of
Return Exists, revenue is recorded net of an estimate of
markdowns, price concessions and warranty costs. Markdowns
represent price adjustments on sale of units whose model is
nearing the end of its cycle and the model is planned to be
discontinued; price concessions represent price adjustments on
contractual agreements for the sale of units; and warranty costs
represent costs to
61
repair previously sold units still under warranty for
manufacturers defects. Such amounts are based on
managements evaluation of historical experience, current
industry trends and estimated costs.
We sell our products solely to distributors. Master distribution
agreements are signed with each distributor. The agreements list
all terms and conditions with the exception of delivery, price
and quantity terms, which are evidenced separately in purchase
orders. Title transfers when products are shipped. There are no
instances where receivables from distributors are not due and
payable until goods purchased from us are sold by the
distributors. We do not sell products to distributors on a
consignment basis. Our distributors have a right of return on
our products within one month after shipping only if our
products exhibit any manufacturing defects and it cannot be
repaired. We did not have any returns during fiscal 2007, 2008
or 2009 and did not provide for any allowance for sales returns.
We recognize revenue when the goods are shipped and title has
passed. Sales revenue represents the invoiced value of goods,
net of VAT. All of our products that are sold in China are
subject to a Chinese VAT at a rate of 17% of the gross sales
price or at a rate approved by the Chinese local government.
This VAT may be offset by the VAT paid by us on raw materials
and other materials included in the cost of producing their
finished products. The VAT on sales may also be offset by the
VAT paid on equipment purchases. Our distributors are all
equipped to install our products and we are not contractually
obligated to perform any installation services. As a result,
there is no substantial performance required on our part and
there is no impact on our recognition of revenues.
Purchase prices of products are fixed and customers are not
allowed to renegotiate pricing after the contracts are signed.
The agreements with our distributors do not include cancellation
or termination clauses.
Credit limits are assigned to each distributor. As a distributor
builds a sales and credit history with us, the credit limit can
be increased. Credit limits are periodically reviewed by
management and reductions to credit limits are made if deemed
necessary.
We estimate sales rebates to distributors based on the projected
annual sales and corresponding cash receipts. These rebates are
paid at the end of each calendar year. We account for the sales
rebates in accordance with Emerging Issues Task Force Issue
01-09,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors
Products). Sales rebates are included as a reduction of
revenue and accounts receivable to be received by us.
For fiscal 2007, 2008, and 2009, the aggregate amounts
referenced above of the markdowns, price concessions, warranty
costs, and sales rebates were immaterial to the consolidated
financial statements taken as a whole for each of those years.
Accounts
Receivable, Trade and Allowance for Doubtful
Accounts
During the normal course of business, we extend unsecured
preferred credit terms to some of our distributors, specifically
those distributing our multicolor presses. We assign credit
limits to each distributor. As a distributor builds a sales
history with us, we may adjust its credit limits. Our management
reviews these credit limits from time to time and makes
adjustments as it deems advisable.
For single color presses, distributors must pay the entire
purchase price before shipment. For multicolor presses,
distributors are required to pay between 50% and 70% of the
purchase price before shipment. Our sales representatives
evaluate the creditworthiness of these distributors in order to
determine their installment payment schedules for the remaining
30% to 50% of the multicolor press purchase prices. These
installment payment schedules, entered into at the time a
distributor signs a purchase order, generally last for six to
nine months.
62
We review accounts receivable on a quarterly basis to determine
if the allowance for doubtful accounts is adequate. We record a
reserve for doubtful accounts when collection of the full amount
is no longer probable. Our reserves of $1.2 million and
$1.4 million as of June 30, 2008 and 2009,
respectively, were consistent with our historical experience and
we consider them adequate.
Inventories
We record inventories at the lower of cost or market, using the
weighted-average method. We review our inventory on a regular
basis for possible obsolete goods by examining our
products shelf life and distributor demand to determine if
any reserve is necessary for potential obsolescence. However,
most of our products are manufactured on a purchase order basis.
We determined that no reserves were necessary as of
June 30, 2008 and 2009.
Valuation
of Share-Based Compensation
We account for share-based compensation to our employees in
accordance with SFAS No. 123(R) and will record
compensation expense over the requisite service periods to the
extent of the fair value of the options.
Liquidated
Damages Expense
Liquidated damages expense relates to our failure to timely
register for resale certain private placement shares and
terminate related party transactions. We recorded liquidated
damages expenses of $2.1 million for fiscal 2007. We
settled the claims for liquidated damages in the third quarter
of fiscal 2008, and we reversed the accrual and recognized a net
liquidated damages gain of $0.2 million for fiscal 2008.
The registration liquidated damages meet the definition of a
registration payment arrangement as defined in Financial
Accounting Standards Boards, or FASB, Staff Position
No. EITF 00-19-2,
Accounting for Registration Payment Arrangements, or
EITF 00-19-2.
In accordance with
EITF 00-19-2,
paragraph 7, the contingent obligation to make future
payments or otherwise transfer consideration under a
registration payment and related party arrangement is recognized
and measured separately. In accordance with
FASB Interpretation No. 14, Reasonable
Estimation of the Amount of Loss, we have recorded an
expense and a liability equal to the minimum estimated loss. In
November 2007, we reached a settlement with our private
placement investors, who agreed to waive the liquidated damages
due in exchange for warrants or cash payments. Therefore, we
reversed the accrual and recognized a gain, which is included in
liquidated damages as a credit balance in our financial
statements.
Impairment
of Long-Lived Assets, Including Intangible Assets and Fixed
Assets
We review our long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset may no longer be recoverable.
When these events occur, we measure impairment by comparing the
carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to result from the use
of the assets and their eventual disposition. If the sum of the
expected undiscounted cash flows is less than the carrying
amount of the assets, we recognize an impairment loss based on
the fair value of the assets. We have determined that there was
no impairment of long-lived assets.
As of June 30, 2009, we expect the long-lived intangible
assets on our consolidated balance sheet, primarily related to
the land use rights for Langfang Duoyuan and Hunan Duoyuan, to
be fully recoverable.
63
Income
Taxes
We recognize deferred income taxes for temporary differences
between the tax basis of assets and liabilities and their
reported amounts in the financial statements, net operating loss
carry-forwards and credits by applying enacted statutory tax
rates applicable to future years.
We reduce deferred tax assets by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
We provide for current income taxes in accordance with the laws
of the relevant tax authorities.
Taxes
and Incentives
Prior to January 1, 2008, our subsidiaries were governed by
the FIE Income Tax Law and various local income tax laws, or
collectively the Old Income Tax Laws.
Beginning on January 1, 2008, the New EIT Law replaced the
Old Income Tax Laws for domestic Chinese enterprises and foreign
invested enterprises, or FIEs. Generally, the income tax rate of
25% in accordance with the New EIT Law replaced the 33% rate
applicable to domestic Chinese enterprises and foreign invested
enterprises, or FIEs. The New EIT Law, however, permits
companies, whether foreign-invested or domestic, to continue to
enjoy their preferential tax treatment granted in accordance
with the ten prevailing tax laws and regulations, adjusted by
certain transitional phase-out rules.
According to the Old Income Tax Laws, upon approval by the PRC
tax authorities, FIEs scheduled to operate for ten years or more
and engaged in manufacturing and production may be exempt from
income taxes for two years, commencing with their first
profitable year of operations, after taking into account any
losses brought forward from prior years, and thereafter with a
50% reduction for the next three years. For tax filing purposes
in China, all yearly periods refer to calendar years.
As a foreign-invested manufacturing enterprise scheduled to
operate for a period of not less than ten years in accordance
with the FIE Income Tax Law, Duoyuan China enjoyed a two-year
tax exemption followed by a three-year 50% tax reduction.
Duoyuan China began to generate net profit in the calendar year
ended December 31, 2004. Therefore, Duoyuan China had an
income tax exemption for the calendar years ended
December 31, 2004 and 2005, and enjoyed a 50% tax reduction
for the calendar years ended December 31, 2006, 2007 and
2008. Under the phase-out rules, enterprises established before
the promulgation date of the New EIT Law and which were granted
tax holidays under the then effective tax laws or regulations
may continue to enjoy their tax holidays until their expiration.
Duoyuan China, an enterprise established before the promulgation
date of the New EIT Law, continued to enjoy its two-year 50%
reduction of the enterprise income tax until the end of 2008,
and therefore was subject to a 12.5% tax rate for the calendar
year ended December 31, 2008. Beginning on January 1,
2009, Duoyuan China became subject to the 25% income tax rate
under the New EIT Law. See Risk Factors Risks
Related to Our Business The termination and
expiration or unavailability of preferential tax treatments once
available to us may have a material adverse effect on our
business, financial condition and operating results.
Our Langfang Duoyuan facility is located in a Special Economic
and High Technology Zone, and the Administration Committee of
such zone has granted Langfang Duoyuan a special income tax rate
for doing business in the special zone. With this approval from
the local government, Langfang Duoyuan is exempted from income
taxes for five years, commencing with its first year of
profitable operations. Langfang Duoyuan began to generate net
profit in the calendar year ended December 31, 2003.
Therefore, Langfang Duoyuan enjoyed an income tax exemption for
the calendar years 2003 through 2007. Langfang Duoyuan became
subject to the 25% income tax rate starting January 1,
2008, under the New EIT Law. Because this tax preferential
treatment was granted by the local government and was not
supported by the state laws and regulations, we face a risk of
being ordered to refund these prior tax benefits. See Risk
Factors Risks
64
Related to Our Business The termination and
expiration or unavailability of preferential tax treatments once
available to us may materially and adversely affect our
business.
Prior to the incorporation of Hunan Duoyuan, we negotiated with
Hunan Shaoyang Treasury Department for an income tax exemption.
The Hunan Shaoyang Treasury Department granted Hunan Duoyuan a
five year income tax exemption commencing with its first year of
profitable operations. Hunan Duoyuan began to generate net
profit in the calendar year ended December 31, 2005.
Therefore, Hunan Duoyuan enjoys an income tax exemption for the
calendar years 2005 through 2009. Pursuant to the tax
preferential treatment granted by the local government, Hunan
Duoyuan will become subject to the 25% income tax rate starting
January 1, 2010, under the New EIT Law. Because this tax
preferential treatment was granted by the local government and
was not supported by the state laws and regulations, we face a
risk of being ordered to refund these prior tax benefits. See
Risk Factors Risks Related to Our
Business The termination and expiration or
unavailability of preferential tax treatments once available to
us may have a material adverse effect on our business, financial
condition and operating results.
The following table reconciles the U.S. statutory rates to
our effective tax rates for fiscal 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
U.S. statutory rates
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
(34
|
)
|
China income taxes
|
|
|
33
|
|
|
|
33
|
|
|
|
25
|
|
China income tax exemption
|
|
|
(23.2
|
)
|
|
|
(22.3
|
)
|
|
|
(11.2
|
)
|
Other(a)
|
|
|
1.6
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rates
|
|
|
11.4
|
%
|
|
|
10.9
|
%
|
|
|
14.3
|
%
|
|
|
(a) |
The 1.6%, 0.2% and 0.5% represent $2,720,474, $423,888 and
$1,399,143 of expenses incurred by us that are not subject to
China income tax for fiscal 2007, 2008 and 2009, respectively.
|
VAT
Enterprises or individuals who sell commodities, engage in
repair and maintenance, or import and export goods in China are
subject to a VAT in accordance with Chinese laws. The VAT
standard rate is 17% of the gross sales price. A credit is
available whereby VAT paid on the purchases of equipment,
semi-finished products or raw materials used in finished
products can be used to offset the VAT due on sales of the
finished products.
The VAT on sales amounted to $19.8 million,
$28.9 million, and $32.4 million for fiscal 2007, 2008
and 2009, respectively. The VAT on purchases amounted to
$7.3 million, $20.1 million and $23.9 million for
fiscal 2007, 2008 and 2009, respectively. Our sales and
purchases are recorded net of VAT, which is not impacted by the
tax preferential treatments.
Fair
Value of Financial Instruments
On July 1, 2008, we adopted SFAS No. 157,
Fair Value Measurements, or SFAS 157.
SFAS 157 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement
and enhances disclosures requirements for fair value measures.
The carrying amounts reported in the consolidated balance sheets
for receivables and current liabilities each qualify as
financial instruments and are a reasonable estimate of fair
value because of the short period of time between the
origination
65
of such instruments and their expected realization and their
current market rate of interest. The three levels of valuation
hierarchy are defined as follows:
|
|
|
|
|
Level 1 inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in
active markets.
|
|
|
|
Level 2 inputs to the valuation methodology include quoted
prices for similar assets and liabilities in active markets and
inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the
financial instrument.
|
|
|
|
Level 3 inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
|
We analyze all financial instruments with features of both
liabilities and equity under SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, or
SFAS 150, SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, or
SFAS 133, and
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock, or
EITF 00-19.
Under
EITF 00-19,
our warrants were required to be recorded as a liability at fair
value and marked to market each reporting period.
As of June 30, 2009, the outstanding principal on our
short-term loans was $14.4 million. We concluded that the
carrying value of the short term loan is a reasonable estimate
of fair value because the amounts are due within one year and
the stated interest rate approximates current rates available.
As of June 30, 2009, we determined that certain inputs to
the fair value measurement of the warrant liability falls under
level 3 of the valuation hierarchy, since there was no
observable market price for certain inputs significant to the
valuation model used to determine the fair value of the warrant
liability, and also rendered the fair value calculation under
the same classification. We carry warrant liability at fair
value totaling $1.2 million as of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Fair Value Measurements at
June 30, 2009
|
|
|
|
as of
|
|
|
Using Fair Value
Hierarchy
|
|
Liabilities
|
|
June 30, 2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Warrant liability
|
|
$
|
1,180,477
|
|
|
|
|
|
|
|
|
|
|
$
|
1,180,477
|
|
Except for the derivative liabilities and the short term loan,
we did not identify any other non-recurring assets and
liabilities that are required to be presented on the
consolidated balance sheet at fair value in accordance with
SFAS 157.
SFAS 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of
FASB Statement No. 115, became applicable and
effective for us on July 1, 2008. SFAS 159 provides us
with the irrevocable option to elect fair value for the initial
and subsequent measurement for certain financial assets and
liabilities on a
contract-by-contract
basis with the difference between the carrying value before
election of the fair value option and the fair value recorded
upon election as an adjustment to beginning retained earnings.
We chose not to elect the fair value option.
Selected
Quarterly Results of Operations
The following table presents our selected unaudited consolidated
quarterly results of operations for the nine quarters in the
period from April 1, 2007 to June 30, 2009. You should
read the following information in conjunction with our audited
consolidated financial statements and related notes included
elsewhere in this prospectus. We have prepared the unaudited
consolidated quarterly financial information on the same basis
as our audited consolidated financial statements. The unaudited
consolidated quarterly financial information includes all
adjustments, consisting only of normal and
66
recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for
the quarters presented. Our quarterly operating results have
fluctuated and will continue to fluctuate from period to period.
The operating results for any quarter are not necessarily
indicative of the operating results for any future period or for
a full year. Factors that may cause our revenue and results of
operations to vary or fluctuate include those discussed in the
Risk Factors section of this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Revenue, net
|
|
$
|
19,207
|
|
|
$
|
22,645
|
|
|
$
|
25,444
|
|
|
$
|
16,022
|
|
|
$
|
25,516
|
|
|
$
|
26,179
|
|
|
$
|
36,837
|
|
|
$
|
17,412
|
|
|
$
|
26,163
|
|
Cost of revenue
|
|
|
10,629
|
|
|
|
11,210
|
|
|
|
12,191
|
|
|
|
7,835
|
|
|
|
13,226
|
|
|
|
12,331
|
|
|
|
16,609
|
|
|
|
8,354
|
|
|
|
13,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,578
|
|
|
|
11,435
|
|
|
|
13,253
|
|
|
|
8,187
|
|
|
|
12,290
|
|
|
|
13,848
|
|
|
|
20,228
|
|
|
|
9,058
|
|
|
|
13,123
|
|
Research and development expenses
|
|
|
169
|
|
|
|
163
|
|
|
|
170
|
|
|
|
225
|
|
|
|
1,125
|
|
|
|
694
|
|
|
|
490
|
|
|
|
286
|
|
|
|
298
|
|
Selling expenses
|
|
|
2,623
|
|
|
|
2,189
|
|
|
|
2,366
|
|
|
|
1,411
|
|
|
|
2,738
|
|
|
|
2,547
|
|
|
|
2,952
|
|
|
|
1,476
|
|
|
|
2,751
|
|
General and administrative expenses
|
|
|
1,492
|
|
|
|
784
|
|
|
|
1,269
|
|
|
|
1,272
|
|
|
|
1,147
|
|
|
|
932
|
|
|
|
1,345
|
|
|
|
1,056
|
|
|
|
1,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,294
|
|
|
|
8,299
|
|
|
|
9,448
|
|
|
|
5,279
|
|
|
|
7,280
|
|
|
|
9,675
|
|
|
|
15,441
|
|
|
|
6,240
|
|
|
|
8,933
|
|
Liquidated damage (expenses) income, net of settlement
|
|
|
(942
|
)
|
|
|
(707
|
)
|
|
|
|
|
|
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
(15
|
)
|
|
|
55
|
|
|
|
109
|
|
|
|
30
|
|
|
|
|
|
Other income (expense), net
|
|
|
457
|
|
|
|
(128
|
)
|
|
|
(264
|
)
|
|
|
(206
|
)
|
|
|
64
|
|
|
|
(179
|
)
|
|
|
(1,135
|
)
|
|
|
(106
|
)
|
|
|
(549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
3,809
|
|
|
|
7,464
|
|
|
|
9,184
|
|
|
|
6,103
|
|
|
|
7,329
|
|
|
|
9,551
|
|
|
|
14,415
|
|
|
|
6,164
|
|
|
|
8,384
|
|
Minority interest
|
|
|
40
|
|
|
|
93
|
|
|
|
152
|
|
|
|
50
|
|
|
|
85
|
|
|
|
109
|
|
|
|
169
|
|
|
|
72
|
|
|
|
113
|
|
Provision for income taxes
|
|
|
728
|
|
|
|
616
|
|
|
|
588
|
|
|
|
821
|
|
|
|
1,213
|
|
|
|
927
|
|
|
|
1,604
|
|
|
|
1,181
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,041
|
|
|
|
6,755
|
|
|
|
8,444
|
|
|
|
5,232
|
|
|
|
6,031
|
|
|
|
8,515
|
|
|
|
12,642
|
|
|
|
4,911
|
|
|
|
6,529
|
|
Foreign currency translation gain
|
|
|
910
|
|
|
|
908
|
|
|
|
2,079
|
|
|
|
3,266
|
|
|
|
1,946
|
|
|
|
256
|
|
|
|
308
|
|
|
|
(227
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,951
|
|
|
$
|
7,663
|
|
|
$
|
10,523
|
|
|
$
|
8,498
|
|
|
$
|
7,977
|
|
|
$
|
8,771
|
|
|
$
|
12,950
|
|
|
$
|
4,684
|
|
|
$
|
6,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
|
(unaudited)
|
|
|
Revenue, net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
55.3
|
|
|
|
49.5
|
|
|
|
47.9
|
|
|
|
48.9
|
|
|
|
51.8
|
|
|
|
47.1
|
|
|
|
45.1
|
|
|
|
48.0
|
|
|
|
49.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
44.7
|
|
|
|
50.5
|
|
|
|
52.1
|
|
|
|
51.1
|
|
|
|
48.2
|
|
|
|
52.9
|
|
|
|
54.9
|
|
|
|
52.0
|
|
|
|
50.2
|
|
Research and development expenses
|
|
|
0.9
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
1.4
|
|
|
|
4.4
|
|
|
|
2.7
|
|
|
|
1.3
|
|
|
|
1.6
|
|
|
|
1.1
|
|
Selling expenses
|
|
|
13.7
|
|
|
|
9.7
|
|
|
|
9.3
|
|
|
|
8.8
|
|
|
|
10.7
|
|
|
|
9.7
|
|
|
|
8.0
|
|
|
|
8.5
|
|
|
|
10.5
|
|
General and administrative expenses
|
|
|
7.7
|
|
|
|
3.4
|
|
|
|
5.0
|
|
|
|
7.9
|
|
|
|
4.5
|
|
|
|
3.6
|
|
|
|
3.7
|
|
|
|
6.0
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
22.4
|
|
|
|
36.7
|
|
|
|
37.1
|
|
|
|
33.0
|
|
|
|
28.6
|
|
|
|
36.9
|
|
|
|
41.9
|
|
|
|
35.9
|
|
|
|
34.2
|
|
Liquidated damage (expenses) income, net of settlement
|
|
|
(4.9
|
)
|
|
|
(3.1
|
)
|
|
|
0.0
|
|
|
|
5.9
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Change in fair value of derivative instruments
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.5
|
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Other income (expense), net
|
|
|
2.4
|
|
|
|
(0.6
|
)
|
|
|
(1.0
|
)
|
|
|
(1.3
|
)
|
|
|
0.3
|
|
|
|
(0.7
|
)
|
|
|
(3.1
|
)
|
|
|
(0.6
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
19.9
|
|
|
|
33.0
|
|
|
|
36.1
|
|
|
|
38.1
|
|
|
|
28.8
|
|
|
|
36.4
|
|
|
|
39.1
|
|
|
|
35.5
|
|
|
|
32.1
|
|
Minority interest
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Provision for income taxes
|
|
|
3.8
|
|
|
|
2.7
|
|
|
|
2.3
|
|
|
|
5.1
|
|
|
|
4.8
|
|
|
|
3.5
|
|
|
|
4.4
|
|
|
|
6.8
|
|
|
|
6.7
|
|
Net income
|
|
|
15.9
|
|
|
|
29.9
|
|
|
|
33.2
|
|
|
|
32.7
|
|
|
|
23.7
|
|
|
|
32.5
|
|
|
|
34.2
|
|
|
|
28.3
|
|
|
|
25.0
|
|
Foreign currency translation gain
|
|
|
4.7
|
|
|
|
4.0
|
|
|
|
8.2
|
|
|
|
20.4
|
|
|
|
7.6
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
(1.3
|
)
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
20.6
|
%
|
|
|
33.9
|
%
|
|
|
41.4
|
%
|
|
|
53.0
|
%
|
|
|
31.3
|
%
|
|
|
33.5
|
%
|
|
|
35.2
|
%
|
|
|
27.0
|
%
|
|
|
25.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Our net income has fluctuated significantly during the nine
quarters in the period from April 1, 2007 to June 30,
2009. Historically, quarterly fluctuation has been primarily due
to lower sales during the third and fourth quarters of each
fiscal year and higher sales during the first and second
quarters of each fiscal year.
Our first and second quarter revenues in fiscal 2007 and fiscal
2008 were sequentially higher compared to third and fourth
quarter revenues in fiscal 2007 and fiscal 2008. We typically
recognize more revenue during the first and second quarter of
each fiscal year due to the following reasons:
|
|
|
|
|
Most businesses operate on a calendar year basis. These
businesses tend to make capital expenditures conservatively in
the beginning of the calendar year and spend more aggressively
towards the end of the calendar year to meet their annual
budgets.
|
|
|
|
Our distributors sell more products to our end-user customers
during the fourth quarter to take advantage of our sales rebate
program, which ends in December of each year.
|
Similarly our sequential revenues in the third and fourth
quarter of each fiscal year are lower than the immediately prior
quarter because of seasonality, namely the holiday season in
China during those quarters. Many businesses in China operate on
reduced hours, if at all, during the time surrounding the
Chinese Lunar New Year Holiday.
We introduced two new or enhanced models (one single color large
format press and one multicolor large format press) in the
second quarter of fiscal 2009. We also introduced one enhanced
model (multicolor large format press) in the third quarter of
fiscal 2009 and one new model (single color small format press)
in the fourth quarter of fiscal 2009. New product introductions
contributed to revenues in each period being higher than the
corresponding periods in the prior years.
Our cost of revenue can vary significantly from quarter to
quarter, but generally it is in proportion to the number of
products we sell in any given quarter. We typically incur higher
costs in the first and second quarters of each fiscal year
primarily due to the increase in the volume of our products sold.
For the nine quarters in the period from April 1, 2007 to
June 30, 2009, our gross profit margins ranged from 44.7%
to 54.9%. The gross profit margin of 44.7% in the quarter ended
June 30, 2007 was primarily due to the sale of old
inventory from Hunan Duoyuan at 20% below their costs. The gross
profit margin of 48.2% in the quarter ended June 30, 2008
was primarily due to sale of sample products at 50% below their
costs. Higher gross profit margins in other quarters were due to
an increase in sales of higher margin products, namely our
multicolor presses. However, due to the challenging global
economic conditions and competitive pressures, we reduced the
selling prices of three single color press models and one
multicolor small format press model between 2% to 4% during
fiscal 2009. Our gross profit margins, however, remained
relatively unchanged by increased sale of our higher priced
multicolor presses as well as by introducing new products at
higher selling prices.
Our selling expenses as a percentage of revenue ranged from 8.0%
to 13.7% during the nine quarters beginning from April 1,
2007 to June 30, 2009. Our selling expenses for the quarter
ended June 30, 2007 was 13.7% of revenues. During this
quarter, we decided to focus on selling more technologically
advanced products like our multicolor presses and incurred
significant
start-up
costs. In order to promote our brand and increase awareness for
our multicolor presses, we began attending exhibitions and trade
shows across China.
In general, our research and development expenses comprise of
salaries and raw materials and supply costs for the development,
improvement and testing of new and existing products. During the
quarters ended June 30, 2008 and September 30, 2008,
our research and development expenses increased as we
68
hired additional engineers and specialists. Our research and
development costs also increased during these periods as we
increased our purchases of raw materials in connection with
product development. As a result of this investment in research
and development, we introduced new products during the quarters
ended December 31, 2008, March 31, 2009 and
June 30, 2009.
Liquidated damages expense relates to our failure to timely
register for resale certain private placement shares and
terminate related party transactions. We recorded liquidated
damages expenses during the quarters ended June 30, 2007
and September 30, 2007. We settled the claims for
liquidated damages in the quarter ended March 31, 2008, and
we reversed the accrual and recognized a net liquidated damages
gain.
Langfang Duoyuan leased part of its manufacturing plant during
the quarter ended June 30, 2007. Thus, we had other income
during this quarter. This lease was terminated in May 2007 and
we did not recognize rental income in subsequent quarters. Our
other expenses increased during the quarter ended
December 31, 2008 because we expensed the amounts incurred
in connection with our proposed initial public offering due to
market uncertainty.
The significant increase in our provision for income taxes since
the quarter ended March 31, 2008 is primarily due to an
increase in the applicable tax rate of Langfang Duoyuan from 0%
to 25%. This new tax rate for Langfang Duoyuan went into effect
on January 1, 2008. Also, an increase in our provision for
income taxes during the quarter ended March 31, 2009 is
primarily due to an increase in the applicable tax rate of
Duoyuan China from 12.5% to 25%. This new tax rate for Duoyuan
China went into effect on January 1, 2009. We expect that
our provision for income taxes will increase with any increase
in our income from operations.
Foreign currency translation reflects the appreciation of the
Renminbi against the U.S. dollar. The Renminbi against the
U.S. dollar at April 1, 2007 was RMB 7.72 to $1.00 USD
and it appreciated to RMB6.83 to $1.00 USD at June 30, 2009.
For the remaining quarters of 2009, we expect that our
multicolor presses, as a percentage of revenue, will continue to
increase as end-user customers in China are increasingly
demanding sophisticated offset printing equipment, such as our
multicolor presses, to produce high quality printing materials
more efficiently.
69
Results
of Operations
The following table sets forth selected data from our
consolidated statements of income and other comprehensive income
for the periods indicated as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
|
(dollars in thousands)
|
|
|
Revenue, net
|
|
|
67,812
|
|
|
|
100.0
|
%
|
|
|
89,628
|
|
|
|
100.0
|
%
|
|
|
106,591
|
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
37,694
|
|
|
|
55.6
|
|
|
|
44,462
|
|
|
|
49.6
|
|
|
|
50,334
|
|
|
|
47.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,118
|
|
|
|
44.4
|
|
|
|
45,166
|
|
|
|
50.4
|
|
|
|
56,257
|
|
|
|
52.8
|
|
Selling expenses
|
|
|
7,827
|
|
|
|
11.5
|
|
|
|
8,705
|
|
|
|
9.7
|
|
|
|
9,726
|
|
|
|
9.1
|
|
General and administrative expenses
|
|
|
3,078
|
|
|
|
4.6
|
|
|
|
4,472
|
|
|
|
5.0
|
|
|
|
4,474
|
|
|
|
4.2
|
|
Research and development
|
|
|
1,046
|
|
|
|
1.5
|
|
|
|
1,683
|
|
|
|
1.9
|
|
|
|
1,768
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18,167
|
|
|
|
26.8
|
|
|
|
30,306
|
|
|
|
33.8
|
|
|
|
40,289
|
|
|
|
37.8
|
|
Liquidated damage, net of settlement
|
|
|
(2,119
|
)
|
|
|
(3.1
|
)
|
|
|
235
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Change of the fair value of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
0.1
|
|
|
|
194
|
|
|
|
0.2
|
|
Other income (expense), net
|
|
|
(21
|
)
|
|
|
(0.1
|
)
|
|
|
(535
|
)
|
|
|
(0.6
|
)
|
|
|
(1,969
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
16,027
|
|
|
|
23.7
|
|
|
|
30,079
|
|
|
|
33.6
|
|
|
|
38,514
|
|
|
|
36.2
|
|
Minority interest
|
|
|
241
|
|
|
|
0.4
|
|
|
|
382
|
|
|
|
0.4
|
|
|
|
464
|
|
|
|
0.4
|
|
Provision for income taxes
|
|
|
1,807
|
|
|
|
2.7
|
|
|
|
3,238
|
|
|
|
3.6
|
|
|
|
5,454
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13,979
|
|
|
|
20.6
|
|
|
|
26,459
|
|
|
|
29.5
|
|
|
|
32,596
|
|
|
|
30.7
|
|
Foreign currency translation gain
|
|
|
1,834
|
|
|
|
2.7
|
|
|
|
8,200
|
|
|
|
9.1
|
|
|
|
329
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
15,813
|
|
|
|
23.3
|
%
|
|
$
|
34,659
|
|
|
|
38.7
|
%
|
|
$
|
32,925
|
|
|
|
31.0
|
%
|
Comparison
of Fiscal 2008 and Fiscal 2009
Revenue,
net
Our revenue increased by $17.0 million, or 18.9%, from
$89.6 million for fiscal 2008 to $106.6 million for
fiscal 2009, primarily as a result of an increase in revenue
from all our products. Specifically, revenue for our pre-press
printing equipment increased by $0.8 million, or 25.7%,
from $3.2 million for fiscal 2008 to $4.0 million for
fiscal 2009. In addition, revenue for our press printing
equipment for fiscal 2009 increased by $16.1 million, or
18.4%, when compared to fiscal 2008. Specifically, the increase
in revenue of our press printing equipment was primarily due to
increased sales for our presses. We sold more units of our
multicolor presses, which generally have higher prices than our
single color presses, during fiscal 2009 than in fiscal 2008. We
sold 19 more multicolor large format presses, generally our most
expensive products, in fiscal 2009 compared to fiscal 2008 and
generated $8.0 million of additional revenue in fiscal 2009
compared to fiscal 2008. We also sold 51 more multicolor small
format presses, generally our second most expensive products, in
fiscal 2009 compared to fiscal 2008 and generated
$7.8 million of additional revenue in fiscal 2009 compared
to fiscal 2008. This increase in revenue was not a result of any
price increases as we did not increase the prices of our
multicolor presses during fiscal 2009. Our top five selling
models, which accounted for more than 72% of our total revenue
in fiscal 2009, were all multicolor presses.
70
Pre-press
Printing Equipment
CTP System. Revenue for our CTP system
increased by $0.8 million, or 25.7%, from $3.2 million
for fiscal 2008 to $4.0 million for fiscal 2009. We believe
that the increase in revenue for our CTP system was a result of
increased market acceptance and our increased marketing
activities. During fiscal 2009, we promoted our CTP system at
more exhibitions and trade shows when compared to the prior year.
Press
Printing Equipment
Revenue from the sale of our press printing equipment increased
by $16.1 million, or 18.4%, from $88.0 million for
fiscal 2008 to $104.1 million for fiscal 2009. This
increase was primarily due to an increase in demand for our
multicolor presses. We sold more units of our multicolor presses
when compared to the prior year.
Single Color Small Format
Press. Revenue for our single color small
format presses increased by $0.1 million, or 2.5%, from
$4.3 million for fiscal 2008 to $4.4 million for
fiscal 2009. Due to increased competition, demand for our single
color small format presses decreased and we sold fewer single
color small format presses for fiscal 2009 when compared to the
prior year. The slight increase in revenue was mainly due to the
appreciation of the Renminbi against the U.S. dollar.
Single Color Large Format
Press. Revenue for our single color large
format presses increased by $0.2 million, or 1.9%, from
$10.7 million for fiscal 2008 to $10.9 million for
fiscal 2009. This increase was primarily due to the increased
demand for a new single color large format press, Model DY66T,
which we introduced in October 2008. We promoted Model DY66T to
our distributors as a complementary product to our multicolor
presses at trade shows and exhibitions we attended during fiscal
2009. This model offers similar functionality to one of our
existing single color large format presses, Model J4109, but
costs less than Model J4109. This increase in revenue from Model
DY66T was offset by a decrease in revenue from J4109 of
$1.2 million for fiscal 2009 when compared to the prior
year.
Multicolor Small Format Press. Revenue
for our multicolor small format presses increased by
$7.8 million, or 29.7%, from $26.4 million for fiscal
2008 to $34.2 million for fiscal 2009. We believe the
increased demand for our multicolor small format press was
partially a result of increased marketing activities, which
resulted in increased sales volume. The increase in the number
of units sold was a result of increased purchases by our
existing and new end-user customers seeking upgrades to
multicolor presses from single color presses. We promoted our
multicolor small format presses at more exhibitions and trade
shows during fiscal 2009 when compared to the prior year.
Specifically, for fiscal 2009 due to our increased marketing
efforts, we recognized an increase in revenue by
$3.3 million when compared to fiscal 2008 due to the sale
of Model DY456, a printing machine that prints colorful
books, magazines, corporate brochures, product catalogues,
labels and small packages. We also increased the promotion of
Model DY452, a highly automated multicolor small format press
mainly used for shorter print runs such as corporate brochures,
conference documents, labels and small packages. This increase
in promotion of Model DY452 attributed to an increase in our
revenue from the sale of this product by $3.5 million over
the prior year.
Multicolor Large Format Press. Revenue
for our multicolor large format presses increased by
$8.0 million, or 17.2%, from $46.6 million for fiscal
2008 to $54.6 million for fiscal 2009. We believe the
increased demand for our multicolor large format presses was
partially a result of increased marketing activities, which
resulted in an increase in sales volume for our existing
products, and new demand for two products we introduced in
fiscal 2009. The increase in the number of units sold was a
result of increased purchases by our existing and new end-user
customers seeking upgrades to multicolor presses from single
color presses. Specifically, we introduced into the market a new
multicolor large format press, Model DY474II, in November 2008.
This highly automated and energy efficient machine, which is an
enhanced version of an
71
existing product, Model DY474, has been well received since its
introduction. It has new features such as plate cocking and a
color pilotless control function. It generated $3.8 million
in revenue for fiscal 2009. We also introduced into the market
another new multicolor large format press, PZ-4660AL, in
February 2009. This is an enhanced version of an existing
product produces printed materials in brighter colors and is
more automated. It generated $3.1 million in revenue for
fiscal 2009.
Cost
of Revenue
As a percentage of revenue, the cost of revenue decreased by
2.4% from 49.6% for fiscal 2008 to 47.2% for fiscal 2009. This
decrease was mainly due to the increase in sales of our
multicolor presses, which overall have lower costs and higher
gross profit margins than our single color presses.
Our cost of revenue increased by $5.8 million, or 13.2%,
from $44.5 million for fiscal 2008 to $50.3 million
for fiscal 2009. This increase was primarily due to an increase
in the volume of our products sold during this period,
particularly the sale of our multicolor presses. This increase
in sales contributed to the increase in consumption of raw
materials and components across our two product categories as
our revenue increased by 18.9% from fiscal 2008 to fiscal 2009.
Gross
Profit
Our gross profit margin increased by 2.4% from 50.4% for fiscal
2008 to 52.8% for fiscal 2009. The increase in gross profit and
gross profit margin during this period was due to the increased
production and sale of our multicolor presses, which have higher
gross profits and gross profit margins than our single color
presses.
Our gross profit increased by $11.1 million, or 24.6%, from
$45.2 million for fiscal 2008 to $56.3 million for
fiscal 2009.
Selling
Expenses
As a percentage of revenue, selling expenses decreased by 0.6%
from 9.7% for fiscal 2008 to 9.1% for fiscal 2009. This decrease
was mainly due to our increased sales volume, which created
economies of scale, reducing our per unit selling expenses.
Selling expenses increased by $1.0 million, or 11.7%, from
$8.7 million for fiscal 2008 to $9.7 million for
fiscal 2009. This increase was primarily due to an increase in
salary expense to our sales professionals and an increase in
shipping and handling costs.
General
and Administrative Expenses
As a percentage of revenue, general and administrative expenses
decreased from 5.0% for fiscal 2008 to 4.2% for fiscal 2009.
This decrease was mainly a function of our revenue increasing
faster than our administrative expenses.
General and administrative expenses remained constant at
$4.5 million for fiscal 2008 and 2009.
Research
and Development Expenses
As a percentage of revenue, research and development expenses
decreased from 1.9% for fiscal 2008 to 1.7% for fiscal 2009.
This decrease was mainly because of the increase in our revenue
increasing faster than our research and development expenses.
Research and development expenses increased by
$0.1 million, or 5.0%, from $1.7 million for fiscal
2008 to $1.8 million for fiscal 2009. This increase was
primarily due to an increase in salary expenses
72
of our research and development team. Specifically, we hired an
additional six engineers in fiscal 2009, increasing our research
and development team to 208 employees and salary expenses
increased by $0.2 million, or 27.2%, from $0.8 million
in fiscal 2008 to $1.0 million in fiscal 2009.
Income
from Operations
Income from operations increased by $10.0 million, or
32.9%, from $30.3 million for fiscal 2008 to
$40.3 million for fiscal 2009. The increase was due to the
increased sale of our multicolor presses, which generated higher
revenue for us.
Liquidated
Damage Expenses
Liquidated damages expense relates to our failure to timely
register for resale certain private placement shares and
terminate related party transactions. We recorded liquidated
damages and expenses of $2.1 million for fiscal 2007. We
settled the claims for liquidated damages in the third quarter
of fiscal 2008, and we reversed the accrual and recognized a net
liquidated damages gain of $0.2 million for fiscal 2008.
See Critical Accounting Policies
Liquidated Damages Expense. There was no such expense for
fiscal 2009.
Other
Income (Expenses)
Other expenses increased by $1.5 million, or 268.0%, from
$0.5 million for fiscal 2008 to $2.0 million for
fiscal 2009.
Our interest expense increased by $0.5 million from
$0.7 million for fiscal 2008 to $1.2 million for
fiscal 2009 as our borrowing increased by $3.0 million from
$11.4 million for fiscal 2008 to $14.4 million for
fiscal 2009. Interest expense was offset by $0.2 million of
interest income for fiscal 2008 and fiscal 2009.
In addition, in accordance with SEC Staff Accounting Bulletin,
Topic 5A, in the second quarter of fiscal 2009, we expensed
$1.0 million incurred in connection with our proposed
initial public offering due to market uncertainty.
Minority
Interest
Minority interest increased by $0.1 million, or 21.5%, from
$0.4 million for fiscal 2008 to $0.5 million for
fiscal 2009. The increase in minority interest is mainly due to
the increase of net income in Langfang Duoyuan and Hunan Duoyuan.
Provision
for Income Taxes
Provision for income taxes increased $2.3 million, or
68.5%, from $3.2 million for fiscal 2008 to
$5.5 million for fiscal 2009. Our effective tax rates for
fiscal 2008 and 2009 were 10.9% and 14.3%, respectively. The
increase in the provision for income taxes was attributable to
the increase in net income by 18.9% over the same period and the
increase in income tax rates of Duoyuan China and Langfang
Duoyuan.
Duoyuan China began paying income taxes on January 1, 2006.
The income tax rate for Duoyuan China in the first half of
fiscal 2008 was 16.5%, and the income tax rate for Duoyuan China
in the second half of fiscal 2008 was 12.5%. Beginning on
January 1, 2009, the income tax rate for Duoyuan China
increased to 25%.
Pursuant to the tax preferential treatment granted by the local
government, Langfang Duoyuan was exempt from paying taxes prior
to calendar year 2008. Langfang Duoyuan began paying income
taxes
73
on January 1, 2008. The income tax rate for Langfang
Duoyuan was 0% in the first half of fiscal 2008 and 25% in the
second half of fiscal 2008.
Pursuant to the tax preferential treatment granted by the local
government, Hunan Duoyuan is tax exempted through calendar year
2009.
Net
Income
As a result of the foregoing, net income increased by
$6.1 million, or 23.2%, from $26.5 million for fiscal
2008 to $32.6 million for fiscal 2009.
As a percentage of revenue, net income increased 1.2% from 29.5%
for fiscal 2008 to 30.7% for fiscal 2009.
Foreign
Currency Translation Adjustment
The foreign currency translation adjustment decreased by
$7.9 million, or 96.0%, from $8.2 million for fiscal
2008 to $0.3 million for fiscal 2009. The foreign currency
translation adjustment reflects the appreciation of the Renminbi
against the U.S. dollar. Our assets and liabilities are
translated at a rate of RMB6.85 to $1.00 at June 30, 2008
and RMB6.83 to $1.00 at June 30, 2009. Our results of
operations are translated at an average rate of RMB7.26 for
fiscal 2008 and RMB6.83 to $1.00 for fiscal 2009. Our equity
accounts are translated at historical rates.
Comparison
of Fiscal 2007 and Fiscal 2008
Revenue,
net
Our revenue increased $21.8 million, or 32.2%, from
$67.8 million for fiscal 2007 to $89.6 million for
fiscal 2008. This increase was primarily due to increased demand
for our multicolor presses. Our top five selling models, which
represented more than 75% of our total revenue in fiscal 2008,
were all multicolor presses. This increase in revenue from our
multicolor presses was offset by a decrease in revenue from our
CTP system and single color small format presses.
Pre-press
Printing Equipment
CTP System. Revenue for our CTP system
decreased by $0.6 million, or 15.5%, from $3.8 million
for fiscal 2007 to $3.2 million for fiscal 2008. This
decrease was primarily due to increased competition from Chinese
competitors. For most of fiscal 2007, we believe we were the
dominant manufacturer of computer-to-plate pre-press products in
China. By the end of the third quarter of fiscal 2007, we became
aware of a number of Chinese competitors that entered the
computer-to-plate pre-press market, decreasing our market share
and demand for our CTP system.
Press
Printing Equipment
Revenue for our press printing equipment increased by
$23.2 million, or 35.8%, from $64.8 million for fiscal
2007 to $88.0 million for fiscal 2008. This increase was
primarily due to an increase in demand for our multicolor
presses.
Single Color Small Format
Press. Revenue for our single color small
format presses decreased by $1.7 million, or 28.1%, from
$6.0 million for fiscal 2007 to $4.3 million for
fiscal 2008. This decrease was primarily due to increased
competition from Chinese competitors, decrease in our single
color small format product offerings and decreased marketing
efforts. Demand for our single color small format presses, a
less sophisticated and low technology product, decreased as more
Chinese manufacturers entered the single color small format
press business, increasing competition. The low barrier to entry
74
allows manufacturers to enter this market with relative low
cost. As part of our plan to focus on selling more
technologically advanced products like our multicolor presses,
we discontinued the manufacture of five different models of our
single color small format presses in fiscal 2008. For these same
reasons, we also decreased marketing efforts for our single
color small format presses, instead increasing our marketing
efforts for our multicolor presses.
Single Color Large Format
Press. Revenue for our single color large
format presses increased by $1.0 million, or 10.0%, from
$9.7 million for fiscal 2007 to $10.7 million for
fiscal 2008. This increase was primarily due to the increased
demand for a new single color large format press, Model J4109,
which we introduced in fiscal 2007. Model J4109, which is an
enhanced version of Models DY166 and J4105, gained market
acceptance during fiscal 2008 and we recognized revenue of
$4.9 million from the sale of this product. This increase
in revenue for Model J4109 was offset by a decrease in revenue
for Models DY166 and J4105 of $4.3 million for fiscal 2008
when compared to fiscal 2007.
Multicolor Small Format Press. Revenue
for our multicolor small format presses increased by
$9.0 million, or 52.0%, from $17.4 million for fiscal
2007 to $26.4 million for fiscal 2008. This increase was
primarily due to increased demand. We believe the increase in
demand for our multicolor small format presses was partially a
result of increased marketing activities. During fiscal 2008, we
increased our marketing efforts by advertising our products in a
greater number of magazines and trade journals more frequently
than in fiscal 2007. In addition, we performed more
demonstrations of our multicolor small format presses to our
end-user customers to showcase the quality of the printed
materials as well as the speed and ease of use in fiscal 2008
when compared to fiscal 2007.
Multicolor Large Format Press. Revenue
for our multicolor large format presses increased by
$14.9 million, or 47.1%, from $31.7 million for fiscal
2007 to $46.6 million for fiscal 2008. This increase was
primarily due to increased demand. We believe the increase in
demand for our multicolor large format presses was partially a
result of increased marketing activities. During fiscal 2008, we
increased our marketing efforts by advertising our products in a
greater number of magazines and trade journals more frequently
than in fiscal 2007. In addition, we performed more
demonstrations of our multicolor large format presses to our
end-user customers to showcase the quality of the printed
materials as well as the speed and ease of use in fiscal 2008
when compared to fiscal 2007. The increase in revenue is also a
result of the revenue recognized from the sale of Model DY4104,
a new multicolor large format press that we introduced to the
market in fiscal 2008. Model DY4104, a highly automated and
energy efficient machine, has been well received since its
introduction to the market. It is capable of printing on larger
sheets of paper than our existing multicolor large format press
models and it is capable of printing on packaging materials
directly. We recognized revenue from the sale of this new
product in the amount of $8.1 million during fiscal 2008.
Cost
of Revenue
As a percentage of revenue, the cost of revenue decreased by
6.0% from 55.6% for fiscal 2007 to 49.6% for fiscal 2008. This
decrease was mainly due to the increase in sales of our
multicolor presses, which overall have lower costs and higher
gross profit margins than our single color presses. In addition,
we began manufacturing our key components in-house in fiscal
2007 at Hunan Duoyuan, reducing the per unit cost of our
products.
Our cost of revenue increased by $6.8 million, or 18.0%,
from $37.7 million for fiscal 2007 to $44.5 million
for fiscal 2008. This increase was primarily due to an increase
in the volume of our products sold during this period,
particularly the sale of our multicolor presses. Most of our
increases were from the purchase of additional raw materials,
such as steel and iron, as more materials were needed to
manufacture our multicolor presses. Our raw material costs
increased by $5.7 million, or 16.7%, from
$34.2 million in fiscal 2007 to $39.9 million in
fiscal 2008. Also, our labor costs increased
75
by $0.4 million, or 16.7%, from $2.3 million in fiscal
2007 to $2.7 million in fiscal 2008 primarily due to
employees working additional hours to produce a greater volume
of products. Lastly, our depreciation expense had increased by
$0.9 million, or 164.6%, from $0.6 million in fiscal
2007 to $1.5 million in fiscal 2008 mainly due to the
purchase of new manufacturing equipment to be used at Hunan
Duoyuan. This increase in cost of revenue was partially offset
by a reduction of $0.2 million in our parts costs for
repairs of our manufacturing equipment.
Gross
Profit
Our gross profit margin increased from 44.4% in fiscal 2007 to
50.4% for fiscal 2008. The increase in gross profit and gross
profit margin during this period was due to the increased
production and sale of our multicolor presses, which have higher
gross profits and gross profit margins than our single color
presses.
As a result of the factors above, our gross profit increased by
$15.1 million, or 50.0%, from $30.1 million for fiscal
2007 to $45.2 million for fiscal 2008.
Selling
Expenses
As a percentage of revenue, selling expenses decreased by 1.8%
from 11.5% in fiscal 2007 to 9.7% in fiscal 2008. This decrease
was mainly due to our increased sales volume, which created
economies of scale, reducing our per unit selling expenses.
Selling expenses increased by $0.9 million, or 11.2%, from
$7.8 million for fiscal 2007 to $8.7 million for
fiscal 2008. This increase was primarily due to an increase in
the salaries and commissions of our sales staff, our advertising
expenses and participation in industry trade conferences.
The salaries and commissions paid to our sales staff increased
by $1.3 million, or 49.3%, from $2.6 million in fiscal
2007 to $3.9 million in fiscal 2008. The increase in
salaries and commissions was primarily due to the hiring of 14
new sales employees during the year and bonuses awarded to our
sales personnel for meeting or exceeding their sales and
performance targets.
Our advertising expenses increased by $0.3 million, or
21.4%, from $1.1 million in fiscal 2007 to
$1.4 million in fiscal 2008. This increase was primarily
due to an increase in print advertising for our products in
magazine and trade journals, and the costs of preparing
exhibition and promotional materials.
General
and Administrative Expenses
As a percentage of revenue, general and administrative expenses
increased from 4.5% in fiscal 2007 to 5.0% in fiscal 2008. This
increase was mainly because of the reasons described below.
General and administrative expenses increased by
$1.4 million, or 45.3%, from $3.1 million for fiscal
2007 to $4.5 million for fiscal 2008. This increase was
primarily due to an increase in professional fees paid to our
auditors and attorneys and an increase in reserve for doubtful
accounts.
Our professional fees increased by $0.4 million from $3,903
in fiscal 2007 to $0.4 million in fiscal 2008 as we paid
the outstanding balance due to our auditors and attorneys. In
addition, we increased our reserve for doubtful accounts by
$0.7 million, or 136.3%, from $0.5 million in fiscal
2007 to $1.2 million in fiscal 2008. We increased our
reserve for doubtful accounts as we increased sales of our
multicolor presses. For multicolor presses, distributors are not
required to pay for the entire purchase price before shipment
unlike for our single color presses. Instead distributors for
our multicolor presses are required to pay 50% to 70% of the
purchase price before shipment, based on their preferred credit
76
terms. Because of the increase in sales of multicolor presses
and the greater risk of non-payment and incomplete or partial
payment from our distributors, we increased our reserve for
doubtful accounts.
Research
and Development Expenses
As a percentage of revenue, research and development expenses
increased from 1.5% in fiscal 2007 to 1.9% in fiscal 2008. This
increase was mainly because of increase in salary expenses as a
result of the six new engineers we hired and the increased costs
from the purchase of raw materials in connection with our sample
product development, as described below.
Research and development expenses increased by
$0.7 million, or 61.0%, from $1.0 million for fiscal
2007 to $1.7 million for fiscal 2008. This increase was
primarily due to an increase in salary expenses of our research
and development team and increased costs from the purchase of
raw materials in connection with our sample product development.
Specifically, we hired an additional six engineers in fiscal
2008, increasing our research and development team to
202 employees and salary expenses increased by
$0.2 million, or 21.7%, from $1.0 million in fiscal
2007 to $1.2 million in fiscal 2008.
Income
from Operations
Income from operations increased by $12.1 million, or
66.8%, from $18.2 million for fiscal 2007 to
$30.3 million for fiscal 2008.
The increase was due to the increased sale of our multicolor
presses, which generated higher revenue for us.
Liquidated
Damages Expense
Liquidated damages expense relates to our failure to timely
register for resale certain private placement shares and
terminate related party transactions. We recorded liquidated
damages expenses of $2.1 million for fiscal 2007. We
settled the claims for liquidated damages in the third quarter
of fiscal 2008, and we reversed the accrual and recognized a net
liquidated damages gain of $0.2 million for fiscal 2008.
See Critical Accounting Policies
Liquidated Damages Expense.
Other
Income (Expenses)
Other expenses increased by $0.5 million from $20,734 for
fiscal 2007 to $0.5 million for fiscal 2008.
We had interest expense of $0.7 million from our short-term
borrowing in each of fiscal 2007 and fiscal 2008. In fiscal
2007, our interest expense was offset by non-operating rental
income of $0.4 million. In fiscal 2008, we did not
recognize any rental income.
Minority
Interest
Minority interest increased by $0.2 million, or 58.6%, from
$0.2 million for fiscal 2007 to $0.4 million for
fiscal 2008. The increase in minority interest is mainly due to
the increase of net income in Langfang Duoyuan and Hunan Duoyuan.
Provision
for Income Taxes
Provision for income taxes increased $1.4 million, or
79.2%, from $1.8 million for fiscal 2007 to
$3.2 million for fiscal 2008. This increase in the
provision for income taxes was attributable to the increase in
net income by 32.2% over the same period and the increase in
income tax rates of Duoyuan China and Langfang Duoyuan. Our
effective tax rates for fiscal 2007 and fiscal 2008 were 11.4%
and 10.9%, respectively.
77
Duoyuan China began paying income tax on January 1, 2006.
The income tax rate for Duoyuan China in the first half of
fiscal 2008 was 16.5%, and the income tax rate for Duoyuan China
in the second half of fiscal 2008 was 12.5%. Beginning on
January 1, 2009, the income tax rate for Duoyuan China
increased to 25%. Pursuant to the tax preferential treatment
granted by the local government, Langfang Duoyuan was exempt
from paying taxes prior to calendar year 2008. Langfang Duoyuan
began paying income tax on January 1, 2008. The income tax
rate for Langfang Duoyuan was 0% in the first half of fiscal
2008 and 25% in the second half of fiscal 2008. Pursuant to the
tax preferential treatment granted by the local government,
Hunan Duoyuan is tax exempted through calendar year 2009.
Due to various special tax rates, preferential tax treatments
and incentives that have been granted to us in China, our taxes
in recent years have been relatively low. The additional amounts
of tax that we would have otherwise been required to pay had we
not enjoyed the various preferential tax treatments would have
been $4.5 million in fiscal 2007 and $7.9 million in
fiscal 2008.
Net
Income
As a result of the foregoing, net income increased by
$12.5 million, or 89.3%, from $14.0 million for fiscal
2007 to $26.5 million for fiscal 2008.
As a percentage of revenue, net income increased 8.9% from 20.6%
for fiscal 2007 to 29.5% for fiscal 2008.
Foreign
Currency Translation Adjustment
The foreign currency translation adjustment increased by
$6.4 million, or 347.0%, from $1.8 million for fiscal
2007 to $8.2 million for fiscal 2008. The increase in the
foreign currency translation adjustment is due to the
appreciation of the Renminbi against the U.S. dollar. Our
assets and liabilities are translated at a rate of RMB7.60 to
$1.00 at June 30, 2007 and RMB6.85 to $1.00 at
June 30, 2008. Our results of operations are translated at
an average rate of RMB7.81 for fiscal 2007 and RMB7.26 to $1.00
for fiscal 2008. Our equity accounts are translated at
historical rates.
Liquidity
and Capital Resources
We relied primarily on cash flows from operating activities and
our bank loans for our capital requirements for fiscal 2007,
2008 and 2009. We expect that our future capital expenditures
primarily will be to build a factory to manufacture cold-set
corrugated paper machines at our Langfang Duoyuan facility and
improve and upgrade our existing manufacturing facilities and
production lines. We expect that approximately
$40.0 million of our cash resources will be required for
these projects, of which, approximately $30.0 million will
be incurred to build a factory to manufacture cold-set
corrugated paper machines at our Langfang Duoyuan facility and
approximately $10.0 million will be incurred to improve and
upgrade our existing manufacturing facilities and production
lines. Since we have not encountered any difficulties in meeting
our cash obligations to date, we believe that cash flows from
operating activities and our bank loans will be sufficient to
meet our presently anticipated cash needs for at least the next
12 months.
Our long-term liquidity needs will relate primarily to working
capital to pay our suppliers, as well as any increases in
manufacturing capacity or acquisitions of third party businesses
or licenses that we may seek. We expect to meet these
requirements primarily through revolving short-term bank
borrowings, as well as our cash flows from operations, which we
expect will increase with the planned increase in our
manufacturing capacity. We believe our working capital is
sufficient for these current requirements, though we may require
additional cash due to changing business conditions or other
future developments, including any investments or acquisitions
we may decide to pursue. If our existing cash is insufficient to
meet our requirements, we may seek to sell additional equity
securities or increase our
78
borrowing level. The actual amount and timing of our future
capital requirements may differ materially from our estimate
depending on our actual results of operations.
The actual amount and timing of our future capital requirements
may differ materially from our estimate depending on our actual
results of operations. As of June 30, 2007, 2008 and 2009,
we had cash of $7.8 million, $14.2 million and
$31.0 million, respectively. For a discussion of our
current level of borrowing, see Sources and Uses of
Cash below. There is no seasonal fluctuation to our
borrowing requirements.
Sources
and Uses of Cash
The following table sets forth cash flow data for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(4,200
|
)
|
|
$
|
16,801
|
|
|
$
|
29,842
|
|
Net cash used in investing activities
|
|
|
(11,081
|
)
|
|
|
(10,524
|
)
|
|
|
(16,189
|
)
|
Net cash (used in) provided by financing activities
|
|
|
19,171
|
|
|
|
(1,092
|
)
|
|
|
2,929
|
|
Effect of exchange rate changes on cash
|
|
|
186
|
|
|
|
1,199
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in cash
|
|
|
4,076
|
|
|
|
6,384
|
|
|
|
16,844
|
|
Cash at beginning of period
|
|
|
3,740
|
|
|
|
7,816
|
|
|
|
14,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
7,816
|
|
|
$
|
14,200
|
|
|
$
|
31,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, the maturities for our bank loans were
as follows:
|
|
|
|
|
Description of Bank
Loan
|
|
Amount
|
|
|
Loan from Bank of Agriculture, Chongwen branch due
March 12, 2010. Quarterly interest only payment at 5.841%
per annum, secured by land use rights and buildings
|
|
$
|
1,465,000
|
|
Loan from Bank of Agriculture, Chongwen branch due July 3,
2009. Quarterly interest only payment at 8.217% per annum,
secured by land use rights and buildings
|
|
|
2,930,000
|
|
Loan from Bank of Agriculture, Chongwen branch due July 10,
2009. Quarterly interest only payment at 8.217% per annum,
secured by land use rights and buildings
|
|
|
2,930,000
|
|
Loan from Bank of Agriculture, Chongwen branch due July 17,
2009. Quarterly interest only payment at 8.217% per annum,
secured by land use rights and buildings
|
|
|
4,102,000
|
|
Loan from Bank of Agriculture, Chongwen branch due July 24,
2009. Quarterly interest only payment at 8.217% per annum,
secured by land use rights and buildings
|
|
|
2,930,000
|
|
|
|
|
|
|
Total
|
|
$
|
14,357,000
|
|
|
|
|
|
|
As of the date of this prospectus, we have five short-term loans
in the aggregate amount of $14.4 million pursuant to our
line of credit with Bank of Agriculture, Chongwen branch, in
China. On July 3, 2009, we refinanced our loan due
July 3, 2009 with a short-term loan due July 2, 2010.
On July 10, 2009, we
79
refinanced our loan due July 10, 2009 with a short-term
loan due July 9, 2010. On July 17, 2009, we refinanced
our loan due July 17, 2009 with a short-term loan due
July 16, 2010. On July 24, 2009, we refinanced our
loan due July 24, 2009 with a short-term loan due
July 23, 2010. No consideration was issued for renewal of
the loans. Each of our short-term loans has an expiration date
of no longer than one year and each loan has an interest rate of
5.841%. Interest on our loans is accrued quarterly. These
outstanding loans are secured by land use rights and buildings
for our Hunan Duoyuan facility. We plan to either repay the debt
as it matures or refinance the debt. These loans were made under
our RMB100.0 million ($14.6 million) revolving credit
line. We are allowed to refinance these loans by entering into
new short-term loan agreements.
Banks in China are subject to national banking regulations and
may withdraw our credit line if regulations change. If the Bank
of Agriculture were to withdraw our credit line, we would use
cash on hand or external financing to repay amounts outstanding.
We provide our financial information as well as other
documentation required by the bank on a quarterly basis. We have
not had any indication from the bank that it intends to not
renew the short-term loan agreements. We are continually
monitoring our relationship with the Bank of Agriculture in
light of the challenging global economic conditions.
Operating
Activities
Net cash provided by operating activities for fiscal 2007, 2008
and 2009 was generated from our net income of
$14.0 million, $26.5 million and $32.6 million,
respectively, as adjusted in each year for non-cash items such
as depreciation and amortization, and for changes in various
assets and liabilities such as accounts receivable, accounts
payable and inventories.
Net cash provided by operating activities increased by
$13.0 million, or 77.6%, from $16.8 million for fiscal
2008 to $29.8 million for fiscal 2009. The increase in
operating cash flows was mainly due to $32.6 million in net
income during this period. This increase was offset by a
$4.2 million increase in accounts receivable,
$2.0 million increase in inventory and $0.7 million
decrease in accounts payable. The increase in accounts
receivable was primarily due to an increase in sales of our
multicolor presses. In general, for sale of our multicolor
presses, distributors pay 50% to 70% of purchase price before
shipment. The remaining 30% to 50% are paid in installments over
six to nine months. The increase in inventory was primarily due
to an increase in production of multicolor presses. We had more
work in progress inventory to meet the future demand of our
multicolor presses. The decrease in accounts payable was
primarily because we paid our suppliers more promptly during
fiscal 2009 than during fiscal 2008.
Net cash provided by operating activities increased from net
operating cash used of $4.2 million for fiscal 2007 to net
operating cash provided by $16.8 million for fiscal 2008.
This increase was primarily due to an increase in net income
from $14.0 million to $26.5 million over the same
period. This increase in operating cash flows was offset by
(1) an increase in accounts receivable of
$9.7 million, (2) an increase in inventory of
$1.6 million and (3) a decrease in accounts payable of
$1.3 million. The increase in accounts receivable was
primarily due to a marked increase in sales of our multicolor
presses. In addition, we selectively granted preferred credit
terms to distributors who distributed our multicolor presses,
reducing the amount of advanced payments due to us as a reward
for meeting or exceeding their sales targets in the prior year.
The increase in inventory was primarily due to an increase in
production of multicolor presses. More raw materials are needed
to produce multicolor presses than single color presses.
Accounts payable decreased because we shortened the payment
periods for several key suppliers. We agreed to a shorter
payment schedule with these suppliers in order to obtain
favorable pricing on raw materials.
80
Investing
Activities
Net cash used in investing activities for fiscal 2007, 2008 and
2009 was $11.1 million, $10.5 million and
$16.2 million, respectively.
Net cash used in investing activities increased by
$5.7 million, or 53.8%, from $10.5 million for fiscal
2008 to $16.2 million for fiscal 2009. The main uses of our
cash in investing activities included equipment acquisition,
purchase prepayments and expenses related to the launching of
our new post-press products, namely our cold-set corrugated
paper machine. We expended $3.9 million to purchase
manufacturing equipment to produce certain key components
in-house. We also expended $1.4 million to purchase new
manufacturing equipment for the future production of our
cold-set corrugated paper machine, which we anticipate to
commercially produce and sell by the end of 2010. In addition,
we spent $6.3 million to purchase electroplating and
non-crystal plating equipment that will treat and protect the
external surfaces of our press and post-press products. This
equipment also features a temperature-controlling precision
meter which monitors and cools the internal temperature while
the external surface is treated. We also made a prepayment of
$4.5 million to purchase new manufacturing equipment for
the future production of our cold-set corrugated paper machine.
Net cash used in investing activities decreased by
$0.6 million, or 5.0%, from $11.1 million for fiscal
2007 to $10.5 million for fiscal 2008. For fiscal 2008, our
investing activities included improving and upgrading our
production lines and manufacturing facilities at Langfang
Duoyuan
and/or Hunan
Duoyuan, and purchasing machinery and equipment to use at these
facilities. Net cash used in investing activities also included
expenses related to the launching of a new post-press product,
namely our cold-set corrugated paper machine. Specifically, we
expended (1) $2.1 million to improve and upgrade our
production lines and manufacturing facilities at Langfang
Duoyuan and Hunan Duoyuan, (2) $1.5 million to
purchase machinery and equipment, including a JY sand mixer,
which is used for heating and shaping parts for our press
products, and a double-post low temperature wax injector to
improve the casting manufacturing of our press parts,
(3) $4.3 million for land clearing and site
preparation services for building our cold-set corrugated paper
machine factory at Langfang Duoyuan and
(4) $2.6 million as prepayment for new manufacturing
equipment to produce our cold-set corrugated paper machine.
Currently, our main uses of cash for investing activities are
payments for equipment, building and structural improvements and
prepayments to purchase new manufacturing equipment for the
future production of our cold-set corrugated paper machine. In
connection with our entry into the cold-set corrugated paper
machine business and efforts to upgrade our existing
facilities,we expect to increase net cash used in investing
activities. We expect that approximately $40.0 million of
our cash resources will be required for these projects, of
which, approximately $30.0 million, will be incurred to
build a factory to manufacture cold-set corrugated paper
machines at our Langfang Duoyuan facility and approximately
$10.0 million will be incurred to improve and upgrade our
existing manufacturing facilities and production lines.
Financing
Activities
Cash provided by and used in our financing activities consists
of borrowings from and repayments to our short-term loans.
Net cash provided by financing activities increased by
$4.0 million, or 368.1%, from net cash used in financing
activities of $1.1 million for fiscal 2008 to net cash
provided by financing activities of $2.9 million for fiscal
2009. We borrowed an additional $2.9 million, net, during
this period to pay for our operating expenses.
Net cash used in financing activities was $1.1 million for
fiscal 2008, which was the result of our payment for lines of
credit exceeding proceeds by approximately $2.75 million
offsetting with a
81
decrease in restricted cash of $2.1 million, compared to
net cash provided by financing activities of $19.2 million
for fiscal 2007, which was the result of a private placement we
completed in November 2006. We did not engage in any private
placement fundraising activities in fiscal 2008.
Contractual
Obligations
The following table sets forth our contractual obligations as of
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(in thousands)
|
|
|
Long Term Debt Obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
234
|
|
|
|
200
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
Purchase Obligations
|
|
|
383
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment Obligations under Line of Credit
|
|
|
14,357
|
|
|
|
14,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,974
|
|
|
$
|
14,940
|
|
|
$
|
34
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have an office lease agreement with Duoyuan Information
Terminal Manufacture (Langfang) Co., Ltd., a related party. The
lease commenced on July 1, 2008 and will expire on
December 31, 2009. As of June 30, 2009, the remaining
rent commitment was $0.1 million. In addition, we lease
sales offices in 16 Chinese provinces, with the latest lease to
expire on December 2010. The remaining rent commitment was
$0.1 million as of June 30, 2009.
In August 2008, Langfang Duoyuan entered into a packing material
equipment purchase agreement with Beijing Jingneng
Mechanical & Electrical Equipments Ltd. As of
June 30, 2009, $0.4 million, or approximately 5% of
the total commitment, remained on this agreement. As of
June 30, 2009, total remaining minimum purchase payment
pursuant to these agreements was $0.4 million.
Other than the contractual obligations set forth and described
above, we do not have any other operating lease obligations or
repayment obligations under lines of credit.
Capital
Expenditures
Our capital expenditures for fiscal 2007, 2008 and 2009 were
$11.1 million, $10.5 million and $16.2 million,
respectively.
Our capital expenditures for fiscal 2009 were used primarily for
purchasing surface treatment equipment at our Hunan Duoyuan
facility. Specifically, we expended $6.3 million for the
surface treatment equipment. We also had capital expenditure of
$3.9 million for purchasing various manufacturing equipment
for our production of key components as well as
$1.4 million for the future production of our cold-set
corrugated press at our Langfang Duoyuan facility. Furthermore,
we made $4.5 million purchase prepayments and expenses
related to the launching of our new post-press products, namely
our cold-set corrugated paper machine.
For fiscal 2008, our capital expenditures were primarily for
improving and upgrading our production lines and manufacturing
facilities at Langfang Duoyuan
and/or Hunan
Duoyuan, and purchase machinery and equipment to use at these
facilities. Our capital expenditures in fiscal 2008 also
included expenses related to the launching of a new post-press
product, namely our cold-set corrugated paper machine.
Specifically, we expended (1) $2.1 million to improve
and upgrade our production lines and
82
manufacturing facilities at Langfang Duoyuan and Hunan Duoyuan,
(2) $1.5 million to purchase machinery and equipment,
including a JY sand mixer, which is used for heating and shaping
parts for our press products, and a double-post low temperature
wax injector to improve the casting manufacturing of our press
parts, (3) $4.3 million for land clearing and site
preparation services for building our cold-set corrugated paper
machine factory at Langfang Duoyuan and
(4) $2.6 million as prepayment for new manufacturing
equipment to produce our cold-set corrugated paper machines.
Our capital expenditures for fiscal 2007 was primarily for
improving and upgrading our production lines and manufacturing
facilities at Langfang Duoyuan
and/or Hunan
Duoyuan, and purchasing machinery and equipment to use at these
facilities.
In connection with our entry into the cold-set corrugated paper
machine business and efforts to upgrade our existing facilities,
we expect our capital expenditures to increase. We expect that
approximately $40.0 million of our cash resources will be
required for these projects, of which, approximately
$30.0 million will be incurred to build a factory to
manufacture cold-set corrugated paper machines at our Langfang
Duoyuan facility and approximately $10.0 million will be
incurred to improve and upgrade our existing manufacturing
facilities and production lines.
Our future capital requirements will depend on many factors
including our rate of revenue growth, the timing and extent of
spending to support research and development efforts, the
expansion of manufacturing and sales activities and the
introduction of new products. In connection with the anticipated
launch of our cold-set corrugated paper machine product line, we
may enter into agreements or letters of intent with respect to
potential investments in, or acquisitions of, complementary
businesses, products or technologies, which may require us to
seek additional equity or debt financing. The sale of additional
equity securities or convertible debt securities would result in
additional dilution to our shareholders. Additional debt would
result in increased interest expense and could result in
covenants that would restrict our operations. We have not made
arrangements to obtain additional financing and additional
financing, if required, may be unavailable in amounts or on
terms acceptable to us, if at all.
Off-Balance
Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Recently
Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS 141R, Business
Combinations, which replaces SFAS 141. SFAS 141R
retains the purchase method of accounting for acquisitions, but
requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting
as well as requiring the expensing of acquisition-related costs
as incurred. Furthermore, SFAS 141R provides guidance for
recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature
and financial effects of the business combination.
SFAS 141R is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. We
are evaluating the impact, if any, that the adoption of this
statement will have on its consolidated results of operations or
consolidated financial position.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51.
SFAS 160 amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It is
intended to eliminate the diversity in practice regarding the
accounting for transactions between equity and noncontrolling
interests by requiring that they be treated as equity
transactions. Further, it requires consolidated net income to be
reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest. SFAS 160
also establishes a single
83
method of accounting for changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation,
requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated, requires expanded
disclosures in the consolidated financial statements that
clearly identify and distinguish between the interests of the
parents owners and the interests of the noncontrolling
owners of a subsidiary, among others. SFAS 160 is effective
for fiscal years beginning on or after December 15, 2008,
with early adoption permitted, and it is to be applied
prospectively. SFAS 160 is to be applied prospectively as
of the beginning of the fiscal year in which it is initially
applied, except for the presentation and disclosure
requirements, which must be applied retrospectively for all
periods presented. We are evaluating the impact that
SFAS 160 will have on its consolidated financial position
or consolidated results of operations.
In February 2008, the FASB issued FSP
FAS 157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13. FSP
FAS 157-1
indicates that it does not apply under SFAS 13,
Accounting for Leases, and other accounting
pronouncements that address fair value measurements for purposes
of lease classification or measurement under SFAS 13. This
scope exception does not apply to assets acquired and
liabilities assumed in a business combination that are required
to be measured at fair value under SFAS 141 or
SFAS 141R, regardless of whether those assets and
liabilities are related to leases.
Also in February 2008, the FASB issued FSP
FAS 157-2,
Effective Date of FASB Statement No. 157. With
the issuance of FSP
FAS 157-2,
the FASB agreed to: (a) defer the effective date in
SFAS 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually), and (b) remove certain
leasing transactions from the scope of SFAS 157. The
deferral is intended to provide the FASB time to consider the
effect of certain implementation issues that have arisen from
the application of SFAS 157 to these assets and liabilities.
In March 2008, the FASB issued SFAS 161, Disclosures
about Derivative Instruments and Hedging Activities
An Amendment of SFAS No. 133. SFAS 161 is
intended to improve financial reporting of derivative
instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better
understand the effects of derivatives and hedging on an
entitys financial position, financial performance and cash
flows. To achieve this increased transparency, SFAS 161 requires
(1) the disclosure of the fair value of derivative
instruments and gains and losses in a tabular format;
(2) the disclosure of derivative features that are credit
risk-related; and (3) cross-referencing within the
footnotes. SFAS 161 is effective on January 1, 2009.
We have adopted SFAS 161.
In June 2008, the FASB issued
EITF 07-5,
Determining whether an Instrument (or Embedded Feature) is
indexed to an Entitys Own Stock.
EITF 07-5
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS 133 specifies that a contract that
would otherwise meet the definition of a derivative but is both
(a) indexed to our own stock and (b) classified in
stockholders equity in the statement of financial position
would not be considered a derivative financial instrument.
EITF 07-5
provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed
to an issuers own stock and thus able to qualify for the
SFAS 133 paragraph 11(a) scope exception. This
standard triggers liability accounting on all options and
warrants exercisable at strike prices denominated in any
currency other than the functional currency in China (Renminbi).
We have adopted
EITF 07-5
effective July 1, 2009. See Note 14 to our Notes to
Consolidated Financial Statements for fiscal 2007, 2008 and 2009
included elsewhere in this prospectus.
84
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities, to
address the question of whether instruments granted in
share-based payment transactions are participating securities
prior to vesting. FSP
EITF 03-6-1
indicates that unvested share-based payment awards that contain
rights to dividend payments should be included in earnings per
share calculations. The guidance will be effective for fiscal
years beginning after December 15, 2008. We are currently
evaluating the requirements of FSP
EITF 03-6-1
and the impact that its adoption will have on the consolidated
results of operations or consolidated financial position.
In October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset in a
Market That Is Not Active, which clarifies the application
of SFAS 157 when the market for a financial asset is
inactive. Specifically, FSP
FAS 157-3
clarifies how (1) managements internal assumptions
should be considered in measuring fair value when observable
data are not present, (2) observable market information
from an inactive market should be taken into account, and
(3) the use of broker quotes or pricing services should be
considered in assessing the relevance of observable and
unobservable data to measure fair value. We are currently
evaluating the impact of adoption of FSP FAS
157-3 on our
consolidated financial statements.
In April 2009, the FASB issued FSP
FAS 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. FSP
FAS 157-4
amends SFAS 157 and provides additional guidance for
estimating fair value in accordance with SFAS 157 when the
volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on
identifying circumstances that indicate a transaction is not
orderly for fair value measurements. FSP
FAS 157-4
shall be applied prospectively with retrospective application
not permitted. FSP
FAS 157-4
shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. An entity early adopting FSP
FAS 157-4
must also early adopt FSP
FAS 115-2
and 124-2,
Recognition and Presentation of Other-Than-Temporary
Impairments. Additionally, if an entity elects to early
adopt either FSP
FAS 107-1
and 28-1,
Interim Disclosures about Fair Value of Financial
Instruments or FSP
FAS 115-2
and 124-2,
it must also elect to early adopt this FSP. We have determined
that this new FSP did not have a material impact on the
consolidated financial statements.
In April 2009, the FASB issued FSP
FAS 115-2
and 124-2.
FSP FAS
115-2 amends
SFAS 115, Accounting for Certain Investments in Debt
and Equity Securities, SFAS 124, Accounting for
Certain Investments Held by Not-for-Profit Organizations,
and
EITF 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets,
to make the other-than-temporary impairments guidance more
operational and to improve the presentation of
other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the
entitys management assert it has both the intent and
ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent
to sell the security, and it is more likely than not it will not
have to sell the security before recovery of its cost basis.
This FSP provides increased disclosure about the credit and
noncredit components of impaired debt securities that are not
expected to be sold and also requires increased and more
frequent disclosures regarding expected cash flows, credit
losses, and an aging of securities with unrealized losses.
Although this FSP does not result in a change in the carrying
amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss
for a held-to-maturity security be recognized in a new category
of other comprehensive income and be amortized over the
remaining life of the debt security as an increase in the
carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP
FAS 157-4.
Also, if an entity elects to early adopt either FSP
FAS 157-4
or FSP FAS
107-1 and
28-1, the
entity also is required to
85
early adopt this FSP. We have determined that this new FSP did
not have a material impact on the consolidated financial
statements.
In April 2009, the FASB issued FSP
FAS 107-1
and 28-1.
This FSP amends SFAS 107, to require disclosures about fair
value of financial instruments not measured on the balance sheet
at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for
these assets and liabilities were only disclosed annually. This
FSP applies to all financial instruments within the scope of
SFAS 107 and requires all entities to disclose the
method(s) and significant assumptions used to estimate the fair
value of financial instruments. This FSP shall be effective for
interim periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009.
An entity may early adopt this FSP only if it also elects to
early adopt FSP
FAS 157-4
and 115-2
and 124-2.
This FSP does not require disclosures for earlier periods
presented for comparative purposes at initial adoption. In
periods after initial adoption, this FSP requires comparative
disclosures only for periods ending after initial adoption. We
are currently evaluating the disclosure requirements of this new
FSP.
In June 2009, the FASB issued SFAS 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles A Replacement of FASB
Statement No. 162. This standard establishes the FASB
Accounting Standards Codification as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with U.S. GAAP. The codification
does not change current U.S. GAAP, but is intended to
simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a
particular topic in one place. The codification is effective for
interim and annual periods ending after September 15, 2009,
and as of the effective date, all existing accounting standard
documents will be superseded. The codification is effective in
the third quarter of 2009, and accordingly, our quarterly report
on
Form 10-Q
for the quarter ending September 30, 2009 and all
subsequent public filings will reference the codification as the
sole source of authoritative literature.
Seasonality
Typically, we recognize lower revenue during our third fiscal
quarter from January to March each year due to the Chinese Lunar
New Year holiday, when our factories close for one week. Our
distributors, who are all in China, are also on holiday during
this time of the year. Typically, our second fiscal quarter,
from October to December each year, is our strongest quarter
because most Chinese businesses complete planned purchases of
capital goods during this period.
Inflation
Inflationary factors, such as increases in the cost of our
products and overhead costs, could impair our operating results.
Although we do not believe that inflation has had a material
impact on our financial position or results of operations to
date, a high rate of inflation may have an adverse effect on our
ability to maintain current levels of gross profit and selling,
general and administrative expenses as a percentage of revenue
if the selling prices of our products do not increase with these
increased costs.
Other
Events
Reverse
Stock Split
Effective as of July 17, 2007, our Board of Directors
approved and we effected a 1 for 2.68189924 reverse split of our
then issued and outstanding shares. All share and per share
prices used in our financial statements and notes thereto have
been retroactively restated to reflect this reverse stock split.
86
We had 67,047,481 pre-split shares issued and outstanding prior
to the reverse stock split and 25,000,050 shares issued and
outstanding after the reverse stock split.
Changes
in Officers
William D. Suh was appointed as our chief financial officer by
our board of directors effective as of October 1, 2008.
Effective upon the appointment of Mr. Suh as our chief
financial officer, Baiyun Sun no longer served as our interim
chief financial officer. Ms. Sun continues to serve as our
controller.
Wenhua Guo resigned as our chief executive officer effective as
of June 29, 2009. He continues to serve as our chairman of
the board.
Xiqing Diao, our chief operating officer, also acted as our
interim chief executive officer from July 9, 2009 until
Christopher Patrick Holbert was appointed as our chief executive
officer by our board of directors effective as of
August 26, 2009.
Quantitative
and Qualitative Information about Market Risk
Exchange
Rate Sensitivity
Although we maintain our books and records in Renminbi, the
functional currency of China, we use the U.S. dollar as the
reporting currency of our financial statements. The exchange
rate between the U.S. dollar and the Renminbi is subject to
the foreign exchange quotation publicized by the Peoples
Bank of China daily. Results of operations and cash flows are
translated at average exchange rates during the period, assets
and liabilities are translated at the unified exchange rate as
quoted by the Peoples Bank of China at the end of the
period and equity is translated at historical exchange rates.
Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other
than Renminbi are included in the results of operations as
incurred. Gains and losses from foreign currency transactions
are included in the results of operations. There were no
material transaction gains or losses for fiscal 2009.
Although the conversion of the Renminbi is highly regulated in
China, the value of the Renminbi against the value of the
U.S. dollar (or any other currency) may fluctuate and be
affected by, among other things, changes in Chinas
political and economic conditions. Under the currency policy in
effect in China today, the Renminbi is permitted to fluctuate in
value within a narrow band against a basket of certain foreign
currencies. China is currently under significant international
pressures to liberalize this currency policy, and if such
liberalization occur, the value of the Renminbi could appreciate
or depreciate against the U.S. dollar. The exchange rate of
the Renminbi as of June 30, 2009 was RMB6.83 to $1.00. This
floating exchange rate, and any appreciation of the Renminbi
that may result from such rate, could have various adverse
effects on our business, as described in Risk
Factors Risks Related to Doing Business in
China Government control of currency conversion and
exchange rate fluctuations may materially and adversely affect
our business.
Our exposure to foreign exchange risk primarily relates to cash
and cash equivalents denominated in U.S. dollars as a
result of our past issuance of common shares through private
placements. For example, to the extent that we need to convert
U.S. dollars received in the private placements into
Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the
Renminbi amount that we receive from the conversion. Conversely,
if we decide to convert our Renminbi into U.S. dollars for
the purpose of making dividend payments on our common shares or
for other business purposes, appreciation of the
U.S. dollar against the Renminbi would have a negative
effect on the U.S. dollar amount available to us. In
addition, fluctuations in the exchange rate would
87
affect our financial results reported in U.S. dollar terms
without giving effect to any underlying change in our business
or results of operations.
At June 30, 2009, our outstanding financial instruments
with foreign currency exchange rate risk exposure had an
aggregate fair value of approximately $23.5 million
(including our
non-U.S. dollar-denominated
fixed rate debt). The potential increase in the fair values of
these instruments resulting from a 10% adverse change in quoted
foreign currency exchange rates would be approximately
$2.4 million at June 30, 2009. We have not entered
into any foreign currency instruments for trading purposes at
June 30, 2009.
We currently do not hedge our exposure to fluctuations in the
Renminbi to U.S. dollar exchange rate. We may choose to
reduce our exposures through financial instruments (hedges) that
provide offsets or limits to our exposures when considered
appropriate.
Exchange
Controls
Chinese law allows enterprises owned by foreign investors to
remit their profits, dividends and bonuses earned in China to
other countries, and the remittance does not require prior
approval by the SAFE regulations formerly required extensive
documentation and reporting, some of which was burdensome and
delayed payments. If there is a return to payment restrictions
and reporting, the ability of a Chinese company to attract
investors will be reduced. Also, current investors may not be
able to obtain the profits of the business which they own as a
result of other restrictions that the Chinese government may
impose. Relevant Chinese law and regulation permit payment of
dividends only from retained earnings, if any, determined in
accordance with Chinese accounting standards and regulations. It
is possible that the Chinese tax authorities may require changes
in our reported income that would limit our ability to pay
dividends and other distributions. Chinese law requires
companies to set aside a portion of net income to fund certain
reserves which amounts are not distributable as dividends. These
rules and possible changes could restrict a company in China
from repatriating funds to us and our shareholders as dividends.
Interest
Rate Risk
We are exposed to interest rate risk due primarily to our
short-term loans. As of June 30, 2009, we had
RMB98.0 million ($14.4 million) outstanding on our
bank lines of credit which are subject to interest rate change
risk. Although the interest rates on our short-term loans are
fixed during their respective terms, the terms are typically
12 months or less and interest rates are subject to change
upon renewal. The interest rates on our short-term loans are
determined by reference to the benchmark interest rates set by
the Peoples Bank of China. Since April 28, 2006, the
Peoples Bank of China has increased the benchmark interest
rate of Renminbi bank loans with a term of 6 to 12 months
12 times, seven consecutive increases followed by five
consecutive decreases, by 0.27% on most occasions. As a result,
from 2006 to the three months ended March 31, 2009, the
benchmark interest rate for these Renminbi bank loans increased
from 5.85% to 7.47% then decreased to 5.31% and the interest
rate applicable to us increased from 6.696% to 8.217% then
decreased to 5.841% over the same period. Any future increase in
the Peoples Bank of Chinas benchmark interest rate
will result in an increase in our interest expenses.
As of June 30, 2009, our short term loans with exposure to
interest rate risk had an aggregate fair value of approximately
$14.4 million. The potential change in fair market value
for these short term loans from an adverse 10% change in quoted
interest rates across all maturities, often referred to as a
parallel shift in the yield curve, would be approximately
$1.4 million as of June 30, 2009. We have not hedged
our exposure to interest rate risk and have not entered into any
interest rate sensitive instruments for trading purposes as of
June 30, 2009. We monitor interest rates in conjunction
with our cash requirements to determine the appropriate level of
debt balances relative to other sources of funds.
88
INDUSTRY
Overview
We are a leading offset printing equipment supplier in China.
Our products are primarily used by printing companies and
businesses in China to meet their various printing needs,
including publication printing needs, such as newspapers,
magazines and books, and commercial printing needs, such as
corporate brochures, product catalogues and labels, manuals and
directories, conference and advertising materials, and printed
packaging materials. We believe that Chinas printing
industry is highly correlated with Chinas printing
equipment industry, and may serve as a guide to Chinas
overall equipment industry dynamics and expenditures on printing
equipment.
Chinas
Printing Industry
Chinas printing industry has benefited from Chinas
rapid economic growth. This growth has increased demand for
publication printing needs, such as newspapers, magazines and
books, and commercial printing needs, such as corporate
brochures, product catalogues and labels, manuals and
directories, conference and advertising materials, and printed
packaging materials. Pira International reported that China was
the third largest printing market in the world behind the United
States and Japan. After taking into account the effects of the
current economic environment, Chinas printing industry is
expected to remain one of the fastest growing in Asia.
From 2002 to 2007, the total annual output of Chinas
printing industry grew from $29.5 billion to
$64.4 billion, according to the Printing and Printing
Equipment Industries Association of China, representing a CAGR
of 17% per annum.
Source: the Printing and Printing Equipment Industries
Association of China
According to Pira International, Chinas printing market
grew from $51 billion in 2007 to $57 billion in 2008.
Pira International estimates Chinas printing market will
grow to $60 billion by the end of 2009, and projects the
market to grow by 28% total from 2009 to 2014, or a CAGR of 5.1%
per annum, after taking into account the effects of the current
economic environment.
In line with global trends, package printing represents the
largest segment in the Chinese printing industry. According to
the Printing and Printing Equipment Industries Association of
China, China produced $20.5 billion of package printing in
2007, accounting for 32% of the total output of Chinas
89
printing industry that year. Pira International projects that
package printing to become the largest segment by 2014, followed
by commercial printing.
Based on another report issued by Pira International, corrugated
paper and corrugated board accounted for the largest share of
the corrugated packaging materials in 2007. The consumption of
corrugated paper in China grew at a CAGR of 14.2% per annum from
2003 to 2007 reaching a market size of $4.4 billion by the
end of 2007. Pira International estimates the consumption of
corrugated paper to grow at a CAGR of 8.2% per annum from 2008
to 2013.
The demand for corrugated board is growing in response to the
increased demand from industries such as food, beverages,
electronic devices and toys. Chinas output of corrugated
board in 2007 accounted for 18.6 million tons of the global
total of 109 million tons, and this output is projected to
grow at a CAGR of 6.2% per annum from 2008 to 2013, according to
Pira International.
The printing industry in China is currently transitioning from
single color printing to multicolor printing. A few years ago,
most high quality multicolor printing was handled by large and
sophisticated printing companies in the coastal areas,
especially in the Pearl River Delta region. Presently, almost
every major city in China has printing companies that can meet a
wide spectrum of printing demands, from simple single color
works to fairly high quality multicolor printing. Multicolor
printing is becoming a mainstream capability that almost every
Chinese printing company must have to sustain its
competitiveness in the marketplace.
Chinas
Printing Equipment Industry
We operate in the Chinese printing equipment industry, which we
believe is highly correlated with the overall Chinese printing
industry.
Over the past several years, Chinas printing equipment
industry grew at a higher rate than its overall printing
industry. As noted above, the total annual output of
Chinas printing industry grew from $29.5 billion in
2002 to $64.4 billion in 2007, representing a CAGR of 17%
per annum. The total annual output of Chinas printing
equipment industry, however, grew from $0.9 billion to
$2.5 billion, representing a CAGR of 23% per annum for the
same periods.
Source: the Printing and Printing Equipment Industries
Association of China
90
Taking into account of the effects of the current economic
environment, Pira International projects Chinas printing
equipment to grow by 34% total from 2009 to 2014, or a CAGR of
6.0% per annum.
We believe that demand for Chinese made offset printing
equipment is strong and that the market share of domestically
made offset printing equipment has been increasing in recent
years. For example, according to the Printing and Printing
Equipment Industries Association of China, although the amount
of imported printing equipment increased annually from
$1.3 billion in 2002 to $1.7 billion in 2004, the
total amount of imported printing equipment has since declined
each year to reach $1.6 billion in 2007. We believe this
decline in imported printing equipment is a result of leading
Chinese printing equipment manufacturers increased
investments in research and development and improved engineering
standards, both of which improve Chinese printing equipment
manufacturers ability to compete against international
competitors for market share in China.
We believe two major entry barriers limit the potential
competition we face from Chinese offset printing equipment
producers. First, the offset printing equipment industry in
China is particularly capital intensive due to high production
costs, and second, we believe few manufacturers have the
technical knowledge required to compete in our industry. We
believe our position as an existing and leading offset printing
equipment supplier in China gives us market advantages over
potential competitors seeking to enter this market.
We derive all of our revenue from sales to our distributors in
China. In 2007, according to the Printing and Printing Equipment
Industries Association of China, there were an estimated 90,000
licensed printing companies in China. This estimate did not
include the possible significant number of printing companies
that operate in China without licenses. Printing companies in
China purchase pre-press, press and post-press printing
equipment from foreign and Chinese equipment providers,
including companies like us through our distributors.
91
BUSINESS
Overview
We are a Wyoming corporation and a leading offset printing
equipment supplier in China, headquartered in Beijing. Through
our principal operating subsidiary, Duoyuan China, and Duoyuan
Chinas manufacturing subsidiaries, namely Langfang Duoyuan
and Hunan Duoyuan, we design, manufacture and sell offset
printing equipment used in the offset printing process. The
offset printing process includes the following three stages:
(1) pre-press, which is the transfer of images
to printing plates; (2) press, which is the
transfer of images from printing plates to another media, such
as paper; and (3) post-press, which is the
last step of the offset printing process that includes cutting,
folding, binding, collating and packaging. We manufacture one
product under the pre-press product category (a CTP system) and
fifteen products across four product lines under the press
product category (single color small format presses, single
color large format presses, multicolor small format presses and
multicolor large format presses). We plan to begin commercial
production and sale of certain post-press products, including a
cold-set corrugated paper machine, a machine which makes
corrugated cardboard paper, by the end of 2010. In addition, we
plan to begin commercial production and sale of two other
post-press products, namely an automatic booklet maker and an
automatic paper cutter, for which we have developed prototypes,
in 2011.
To enhance our market position, we have made and continue to
make investments in research and development. Our Langfang
Duoyuan research and development and technical support center
and our Hunan Duoyuan technical support center have advanced
design test tools, which we believe enable us to develop new and
enhanced products with improved functionality. Our research and
development team and our manufacturing department work closely
together to optimize manufacturing processes and develop
commercially viable products. In addition, they incorporate
regular feedback from our sales and marketing personnel,
enabling us to timely and cost-effectively introduce products
tailored to end-user needs. Furthermore, our China-based
research and development and manufacturing operations provide us
with a distinct competitive advantage in international markets
by enabling us to leverage low-cost technical expertise, labor,
raw materials and facilities. Our investment in research and
development, technical innovation and commitment to meet the
needs of our end-user customers have allowed us to create and
introduce four new and enhanced products in the year ended
June 30, 2009.
Our nationwide distribution network in China consists of over 85
distributors located in over 65 cities and 28 provinces in
China. Our nationwide distribution network, which we believe,
based on our experience in the industry, to be one of the
largest among Chinese offset printing equipment suppliers,
enable us to be more responsive to local market demands than
many of our competitors. We support our distributors sales
efforts through coordinated marketing efforts. We regularly
attend industry trade shows and exhibitions to showcase our
products, as well as present seminars and training programs to
our potential and existing distributors, as well as potential
and existing end-user customers, to highlight the functions and
capacities of our products. To maintain good relationships with
our end-user customers, we provide certain services during the
one-year warranty period associated with our products. During
this period, we provide training, technical support, warranty
and repair services for complex technical issues to our
distributors who work with our end-user customers.
We believe our pricing is competitive with Chinese and
international offset printing equipment manufacturers. We
believe the relatively low operation, labor and raw material
costs in China, our ability to produce a substantial majority of
our key components in-house, our efficient production processes
and our effective inventory management gives us a cost
competitive advantage. Our cost advantage allows us to offer
quality products at lower prices, thus making our products
attractive in China and certain international markets.
92
Our revenue grew 32.2% from $67.8 million in the year ended
30, 2007 to $89.6 million in the year ended June 30,
2008 and 18.9%% to $106.6 million in the year ended
June 30, 2009. Our net income grew 89.3% from
$14.0 million in fiscal 2007 to $26.5 million in
fiscal 2008 and 23.2% to $32.6 million in fiscal 2009. For
fiscal 2007, 2008 and 2009, our multicolor large format presses
and our multicolor small format presses were our best selling
products. For fiscal 2007, 2008 and 2009, we derived 72.3%,
81.4% and 83.3% of our revenue from the sale of our multicolor
presses, respectively. For the same periods, our multicolor
large format presses accounted for approximately 46.7%, 52.0%
and 51.2% of our revenue, respectively, and our multicolor small
format presses accounted for approximately 25.6%, 29.4% and
32.1% of our revenue, respectively.
Our
Strengths
We believe that the following competitive strengths enable us to
compete effectively in and capitalize on the growing offset
printing equipment industry in China:
Quality
Products at Competitive Prices
We are able to offer high quality products at prices that are
competitive with both foreign and domestic companies. We
attribute our cost advantage to our ability to control material
and labor costs in China, our ability to produce a substantial
majority of our key components in-house, our efficient
production processes and effective inventory management.
Established
Market Position
Based on the revenue of our press products, the Printing and
Printing Equipment Industries Association of China ranked us as
one of the top three Chinese offset printing equipment providers
in 2006. Our current market position is primarily contributable
to the manufacturing and sale of our multicolor presses.
Wide
Product Offerings
We believe we are one of the first in China to develop,
commercially produce and sell CTP Systems, a pre-press product.
We manufacture fifteen products across four product lines under
the press product category (single color small format presses,
single color large format presses, multicolor small format
presses and multicolor large format presses). By the end of
2010, we plan to enter into the post-press market by
commercially producing and selling our cold-set corrugated paper
machines, and we plan to introduce our automatic booklet makers
and automatic paper cutters in 2011.
Large
Sales, Distribution and Service Network
Our nationwide distribution network includes more than 85
distributors located in over 65 cities and 28 provinces in
China. This nationwide distribution network, which we believe,
based on our experience in the industry, is one of the largest
among Chinese offset printing equipment suppliers, is enhanced
by our integrated marketing, sales and service team that
includes over 200 professionals. Together with our distributors,
we provide comprehensive pre-sales and post-sales services to
our end-user customers.
Research
and Development Capabilities
We have over 200 experienced researchers, engineers and
technicians working at either our research and development and
technical support center at Langfang Duoyuan and our technical
support center at Hunan Duoyuan. Our research and development
team not only develop new technologies and products, but also
discover ways to improve the functionality and performance of
our existing products.
93
Our
Strategies
Our strategy is to capitalize on our competitive strengths to
expand our current market share and to benefit from the
anticipated growth in Chinas offset printing equipment
industry. Our strategy consists of the following key elements:
Adjust
and expand production facilities to improve efficiency and
margins
We are continually upgrading our facilities and production
methods to improve efficiency. For example, we plan to renovate
our foundry plant and surface treatment workshop to improve the
aesthetic quality of our products. In keeping with our plans to
sell more high margin products, we plan to designate more
production lines to build technologically advanced products,
such as our multicolor presses. We also plan to build a new
cold-set corrugated paper machine factory at Langfang Duoyuan.
Expand
High Margin Product Offerings
Multicolor presses have a higher gross margin than single color
presses. As such, we have made efforts over the past three years
to increase the sale of multicolor presses by increasing our
marketing efforts and launching new and enhanced multicolor
press models. In addition to our plans to offer more multicolor
press products, we also plan to increase our revenue by
introducing other higher margin products, such as our cold-set
corrugated paper machines. We believe that by focusing our
selling efforts on higher end and more technologically advanced
products, we can further improve our margins and strengthen our
market position in China.
Improve
Product Functionality through Research and
Development
Our research and development initiatives include improving the
functionality and efficiency of our existing products, as well
as developing new products and models. We will continue to
devote the necessary resources to our research and development
team to maintain and improve the quality, functionality and
technological competitiveness of our products.
Focused
Market Expansion
Currently, all of our revenue is generated from sales to
distributors in China. We plan, however, to expand into certain
overseas markets, including Africa, the Middle East and some
Asian countries, on a selective basis. We believe our quality
products and competitive prices not only gives us market
advantages in China, but would also make our products attractive
to customers outside of China.
Pursue
Selective Strategic Acquisitions
We intend to grow our business through strategic and selective
acquisitions of offset printing equipment related technologies,
equipment
and/or
assets to further strengthen our product offerings and market
position.
94
Our
Products
We categorize our products according to the three stages of the
offset printing process: pre-press, press and post-press. The
following table shows an overview of the types of products we
offer, or plan to offer, within these three stages:
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|
|
|
|
|
|
|
|
Pre-Press
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|
Press(2)
|
|
Post-Press(3)
|
|
Products
|
|
CTP
System(1)
|
|
Single Color Small Format Press
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|
Cold-set Corrugated Paper
Machine(4)
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Single Color Large Format Press
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Automatic Booklet
Maker(5)
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|
|
|
|
Multicolor Small Format Press
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Automatic Paper
Cutter(5)
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Multicolor Large Format Press
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Functionality
|
|
Digital formatting and processing to transfer image onto
printing plates
|
|
Transfer of images from printing plates to another media, such
as paper
|
|
Cutting, folding, binding, collating and packaging
|
|
|
|
|
|
|
|
Revenue for fiscal
2009(6)
(in thousands)
|
|
$4,004
|
|
$104,139
|
|
N/A
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|
|
|
|
|
|
|
(1)
|
We also offer a complimentary plate developer upon request to
those end-user customers who purchase our CTP system. Our plate
developer is an optional complementary product to our CTP System.
|
(2)
|
We also offer a complimentary automatic plate puncher upon
request to those end-user customers who purchase our press
products. Our automatic plate puncher is an optional
complementary product to our press products.
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(3)
|
We do not manufacture or sell any post-press products.
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(4)
|
We plan to manufacture and sell this post-press product by the
end of 2010.
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(5)
|
We plan to manufacture and sell this post-press product by the
end of 2011.
|
(6)
|
Revenue figure before adjustments.
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Pre-press
Printing Equipment
Traditionally, in the pre-press stage of the offset printing
process, a plate developer or other light-sensitive emulsion is
used in combination with photomechanical exposure and various
processing procedures to transfer images onto printing plates,
which are then mounted onto an offset press. This method is
being replaced by more technologically advanced methods,
including CTP technology, which use digital formatting and
processing to transfer images onto printing plates.
The following describes our pre-press product, namely our CTP
system, and its key features and competitive advantages:
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CTP System. CTP technology improves the
quality of the printing plates and the efficiency of the offset
printing process by eliminating the labor and chemical intensive
multiple step processes associated with the traditional
pre-press processing method. Fully automated CTP technology
reduces the risk of human error and offers improved consistency
and higher quality compared to the traditional pre-press method.
Although CTP technology has been adopted by printing companies
in Europe and the United States, most of our end-user customers
in China did not begin using CTP technology until 2002. This is
largely because CTP technology related products are
significantly more costly than existing pre-press printing
equipment. Although a majority of CTP technology related
products in China are imported from overseas manufacturers, such
as Japan and the United States, we also offer our own CTP
technology related product, namely our CTP system. We believe
our CTP system offers similar functionality, quality and
efficiencies when compared to those manufactured by
international producers, but at a more competitive price. For
the technological features of our CTP system, see
Technology CTP Technology
below.
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95
Press
Printing Equipment
In the press stage of the offset printing process, images on
printing plates are transferred onto another printing medium,
such as paper. In this stage of the offset printing process,
sheets of paper or other printing media are fed into the press.
Offset lithographic process, based on the principle that oil and
water repel each other, is used for the image transfer.
On the press, printing plates are dampened first by water
rollers and then by ink rollers. The ink rollers distribute the
ink onto the specific image areas on the printing plates. Water
distributed by the water rollers keeps the ink off the non-image
areas of the printing plate. Each printing plate then transfers
its image onto a rubber blanket, which in turn transfers the
image onto the printing media. The printing plate itself does
not touch the printing media, hence the term offset printing.
Our press products are sheet-fed, which means individual sheets
of paper or paperboard are fed into the presses. The graphic
below illustrates the basic press process:
The following describes our primary press products and their key
features and competitive advantages:
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Single Color Small Format Press. Single
color small format presses have one set of press rollers
dedicated to a single color. Generally, printing on a single
color press requires that a sheet of paper be processed four
times, requiring precise adjustments for overprint. Typically,
small format presses have a maximum sheet in-take width of 520
mm (about 20.5 inches). Our single color small format
presses have a maximum sheet width of up to 560 mm (about
22.0 inches), and incorporate our advanced technologies,
making them efficient and requiring minimal operating skills.
Our single color small format presses require low initial
investment and are typically suitable for end-user customers who
are transitioning into offset printing from type-set printing or
have single color printing needs, such as book printing.
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Single Color Large Format Press. Like
single color small format presses, single color large format
presses also have one set of press rollers dedicated to a single
color. Single color large format presses generally have maximum
sheet in-take width larger than 520 mm (about 20.5 inches)
and are able to handle thick and ultra-thick sheets of paper.
Our single color large format presses have a maximum sheet width
of 740 mm (about 29.1 inches) and incorporate our advanced
technologies, making them efficient and requiring minimal
operating skills. Our single color large format presses require
relatively low initial investment compared to our multicolor
presses and are typically suitable for end-user customers with
basic single color printing needs, such as pamphlets.
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96
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Multicolor Small Format
Press. Multicolor small format presses
generally have four sets of rollers dedicated to different
colors typically, black, magenta, cyan, and
yellow to generate all other colors. Multicolor
printing equipment generally require more operational skills
compared to single color printing equipment. Our multicolor
small format presses incorporate our advanced technologies,
making them highly automated and efficient and help reduce
potential human errors. Our multicolor small format presses
offer a relatively low-cost solution for end-user customers with
high quality multicolor printing needs, such as corporate
brochures, product catalogues, labels and small packages.
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Multicolor Large Format Press. Like
multicolor small format presses, multicolor large format presses
also have four sets of rollers dedicated to different
colors typically, black, magenta, cyan, and
yellow to generate all other colors. Multicolor
large format presses, combining multicolor capability with the
ability to handle thick and ultra-thick sheets of paper, are the
most robust type of products among our press products. Our
multicolor large format presses incorporate our advanced
technologies, making them highly automated and efficient, and
help reduce potential human errors. Our multicolor large format
presses require relatively large investments compared to our
other press products, and are suitable for end-user customers
with high-quality multicolor printing needs, such as posters,
large packages and banners. Our multicolor large format presses
are also able to print at faster speeds compared to our other
press products, making them ideal for time sensitive printing
needs.
|
Post-press
Printing Equipment
In the post-press stage of the offset printing process, printed
materials undergo various processes, including cutting, folding,
binding and collating to produce the final printed product. The
post-press stage also includes packaging, packaging materials
and processes related thereto. We plan to commercially
manufacture and sell the following products under this product
category:
|
|
|
|
|
Cold-set Corrugated Paper
Machine. Corrugated paper equipment makes
corrugated cardboard paper. Currently, many corrugated paper
equipment use hot-set glue technology, which we believe can
result in lower quality
and/or
damaged cardboard, and also generally requires higher equipment
and operating costs. We plan to introduce a cold-set corrugated
paper machine that utilizes cold-set gluing technology, which we
believe can generate better quality products, is more efficient
and provide greater energy savings. We intend to build a factory
to manufacture cold-set corrugated paper machines at our
Langfang Duoyuan facility, and have conducted related land
clearing and site preparation services. We are also designing
workshops and production lines and procuring equipment for this
cold-set corrugated paper machine factory. We plan to
commercially manufacture and sell cold-set corrugated paper
machines by the end of 2010.
|
|
|
|
Automatic Booklet Maker. Automatic
booklet makers assemble individual sheets of paper into
booklets. Stacks of paper are either manually fed or
automatically transported via collators into the automatic
booklet makers, where they are then jogged, stapled,
and/or
folded into separate document sets. Trimmers cut away any
undesired margins for a clean and crisp presentation. We have
produced prototypes of our automatic booklet makers, which we
believe are more efficient compared to similar products
currently in the market. We plan to begin commercial production
and sale of this product in 2011.
|
|
|
|
Automatic Paper Cutter. Automatic paper
cutters are generally designed for high volume industrial use as
they cut hundreds of sheets of paper at a time on a continuous
basis. We have produced prototypes of our automatic paper
cutters, which we believe are more efficient and precise
compared to similar products currently in the market. We plan to
begin commercial production and sale of this product in 2011.
|
97
Financial
Information about Products & Geographic
Areas
The following table summarizes the percentage of revenue
generated by each product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
Pre-press
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CTP System
|
|
|
5.6
|
%
|
|
|
3.6
|
%
|
|
|
3.8
|
%
|
|
|
|
|
Press
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single Color Small Format Presses
|
|
|
8.9
|
|
|
|
4.8
|
|
|
|
4.2
|
|
|
|
|
|
Single Color Large Format Presses
|
|
|
14.3
|
|
|
|
11.9
|
|
|
|
10.2
|
|
|
|
|
|
Multicolor Small Format Presses
|
|
|
25.6
|
|
|
|
29.4
|
|
|
|
32.1
|
|
|
|
|
|
Multicolor Large Format Presses
|
|
|
46.7
|
|
|
|
52.0
|
|
|
|
51.2
|
|
|
|
|
|
Adjustments
|
|
|
(1.1
|
)
|
|
|
(1.7
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from our single color presses have been consistently
declining as a percentage of our revenue while revenue from our
multicolor presses, in particular our multicolor large format
presses, have been generally increasing as a percentage of our
revenue. This is due to the growing market demand for multicolor
presses. End-user customers in China are increasingly demanding
sophisticated offset printing equipment, such as our multicolor
presses, to produce high quality printing materials more
efficiently. However, single color presses are still in demand
for those end-user customers who are price sensitive, new to the
printing business, or looking to replace or upgrade their
existing single color printing equipment.
We generate all of our revenue from sales to distributors in
China, with Middle China being the single largest market,
representing 22.0% of our revenue for the year ended
June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
Regional
Markets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North China
|
|
|
13.0
|
%
|
|
|
8.1
|
%
|
|
|
7.7
|
%
|
|
|
|
|
South China
|
|
|
18.6
|
|
|
|
26.9
|
|
|
|
21.8
|
|
|
|
|
|
Middle China
|
|
|
22.0
|
|
|
|
19.2
|
|
|
|
22.0
|
|
|
|
|
|
East China
|
|
|
14.2
|
|
|
|
15.0
|
|
|
|
17.1
|
|
|
|
|
|
Northeast China
|
|
|
7.4
|
|
|
|
8.0
|
|
|
|
8.4
|
|
|
|
|
|
Northwest China
|
|
|
14.2
|
|
|
|
8.6
|
|
|
|
11.8
|
|
|
|
|
|
Southwest China
|
|
|
10.6
|
|
|
|
14.2
|
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For a map of the regional markets where our distributors are
located, see Distribution and
Marketing Distribution.
|
(2)
|
Our products are sold to distributors in China. According to our
distributors, they have sold our products to certain end-user
customers in Saudi Arabia, Ghana, Tunisia, South Africa, India,
Pakistan, Vietnam and Brazil in the years ended June 30,
2007, 2008 and 2009. Our distributors reported that the
percentage of revenue generated by sales to end-user customers
outside of China was less than 2% for these periods.
|
Manufacturing
and Assembly
Our manufacturing and assembly operations involve the
(1) coordination of raw materials and components procured
from third party Chinese suppliers, (2) internal production
processes and (3) external distribution processes. We
manufacture, assemble and test our products at our two
manufacturing facilities located at Langfang and Hunan, China.
Our Langfang Duoyuan facility is located at the Langfang
Economic-Technological Development Zone, Langfang, Hebei
Province, China. Our Hunan Duoyuan facility is located at
No. 362 Baoqing Xi Road, Shaoyang, Hunan Province, China.
Langfang
98
Duoyuan primarily manufactures our CTP system, single color
small format presses and multicolor small format presses. Hunan
Duoyuan primarily manufactures our single color large format
presses and multicolor large format presses. Both of our
facilities at Langfang Duoyuan and Hunan Duoyuan have advanced
and high-precision processing machines, tools and measuring
devices.
We produce both standardized and customized products,
emphasizing precision and quality in our production and
assembly. Single color small format presses and multicolor small
format presses are relatively standard in design, so we hold an
optimum inventory of these presses. We also maintain a small
inventory of large format presses to better meet the needs of
our distributors and end-user customers. Most of our single
color large format presses and multicolor large format presses,
however, are built upon order, with subsystems or features that
can be added later if desired. Our flexible production methods,
which utilize standard models and product designs, enable us to
meet changing market demands while controlling production costs.
We have implemented a rigid quality control system for our
products, and have complied with the ISO 9001 Quality Assurance
System Standards since September 1996, and with the ISO 14001
Environmental Management System Standards since March 1999.
We produce a substantial majority of our key components in-house
at Hunan Duoyuan. In-house production of our key components
better ensures the quality of our products, protects our
intellectual property rights, reduces production costs and
limits our exposure to supplier-related risks. Because we
produce a substantial majority of our key components in-house,
we believe we currently have a relatively low cost base compared
to other printing equipment manufacturers, especially when
compared to international printing equipment manufacturers. We
purchase all other raw materials and components from Chinese
suppliers, some of whom produce particular components based on
our specific demands and designs.
Our Langfang Duoyuan facility has workshops covering several
production processes, including raw material inspection,
mechanical processing of components, and assembly of components
into finished products. Our Langfang Duoyuan facility is ISO
9001 and ISO 14001 certified.
Our Hunan Duoyuan facility has an integrated manufacturing
process featuring 13 workshops covering several production
processes, including model casting, heat treatment, raw
finishing, refined finishing and mechanical processing of
components and assembly of components into finished products.
Since steel is one of our key raw materials, our Hunan Duoyuan
facility has its own foundry plant on site to process the steel
and certain components necessary to produce our press products.
Our Hunan Duoyuan facility is ISO 9001 certified.
We intend to build a factory to manufacture cold-set corrugated
paper machines at our Langfang Duoyuan facility and have
conducted related land clearing and site preparation services.
We are also designing workshops and production lines and
procuring equipment for this cold-set corrugated paper machine
factory. We plan to commercially manufacture and sell cold-set
corrugated paper machines by the end of 2010.
Distribution
and Marketing
Distribution
Network
We sell our products through distributors. Our nationwide
distribution network in China consists of over 85 distributors
located in over 65 cities and 28 provinces in China. Our
nationwide distribution network, which we believe, based on our
experience in the industry, to be one of the largest among
Chinese offset printing equipment suppliers, enable us to be
more responsive to local market demands than many of our
competitors. We also have 16 local representative offices in 16
Chinese provinces. Our local representatives at these offices
contact potential key local end-user customers and then refer
them to our distributors when the end-user customers are ready
to purchase our products.
A distributor may distribute various models of our products
within one or both of our product categories. Our distributors
may distribute products of our competitors, but may not
distribute similar or competing products.
99
We generally have a diverse group of end-user customers
throughout China for each of our current pre-press and press
products, and our sales are not concentrated to or depended on
one or a few major distributors. We have made a conscious effort
to prevent a single distributor from covering too large a
distribution territory to ensure that no particular distributor
monopolizes the sales of our products in any one region. We
believe our end-user customer and distributor diversity reduces
our exposure to potential market risks. For the year ended
June 30, 2009, no single distributor accounted for more
than 3% of our sales revenue, and our top five distributors
accounted for approximately 13% of our revenue for the same
period.
We select distributors based on their prior sales performance.
We also make selections based on factors such as sales
experience, knowledge of offset printing equipment, contacts in
the offset printing equipment industry, reputation and market
coverage. We regularly evaluate the performance of our
distributors and terminate distributors who fail to meet their
sales targets at the end of their agreement term. We believe
this helps us maximize our penetration of target markets and our
sales opportunities. Members of our service staff call our
distributors frequently and members of our senior management
visit our distributors every other month to assist with business
strategies and strengthen our relationship with our distributors.
We believe we have a relatively established and stable
distribution network. Approximately 89% of our distributors have
been working with us for over two years, and approximately 75%
of them have been working with us for over five years. Our
distribution network provides us with established access to
end-user customers throughout China, enables us to be responsive
to local market demand, allows us to effectively diversify our
end-user customer base and facilitates our efforts to improve
our market penetration.
100
As indicated in the map above, our distributors are widely
dispersed throughout each major region of China. As of
June 30, 2009, we had 12 distributors in North China, 18
distributors in South China, 16 distributors in Middle
China, 13 distributors in East China, 5 distributors in
Northeast China, 12 distributors in Northwest China and 11
distributors in Southwest China. We currently do not have
distributors outside of China, but we plan to establish an
international distribution network in parts of Africa, the
Middle East and Asia. According to our distributors, sales to
end-user customers outside of China accounted for less than 2%
of our revenue for fiscal 2007, 2008 and 2009. These sales were
accomplished through our Chinese distributors, with the support
of our sales and marketing team.
Our distributors are engaged and compensated on a competitive
basis based on their sales performance. We enter into annual
distribution agreements with distributors specifying the terms
of sales targets for any given year. For distributors who meet
or exceed their sales targets, we provide incentives in the form
of sales rebates. For distributors who distribute our multicolor
presses, we also extend preferred credit terms. Based on a
distributors performance, we may extend credit of up to
three times the monthly average sales we realized from that
distributor during the previous year. We do not extend credit to
distributors that have distributed our products for less than
six months. Although distributors may have a variety of payment
arrangements with the end-user customers, we do not factor these
arrangements into our consideration when deciding their
preferred credit terms or installment payment schedules. We
assess distributors credit worthiness on an individual
basis depending on (1) their sales performances,
(2) their payment and credit histories, (3) the
duration and extent of their dealings with us, (4) their
market position and reputation in the offset printing equipment
sector and (5) their sales and marketing abilities. We also
lend products to high-performing distributors for display and
demonstration purposes, for up to three months.
Marketing
We support our distributors sales efforts through
coordinated marketing efforts. We advertise our products in
industry trade journals and magazines. We provide several types
of product brochures and materials to our distributors as well
as potential and existing end-user customers in an effort to
familiarize them with our products features and
capabilities. In addition, we attend and participate in industry
trade shows and exhibitions, which we believe is the most
important venue to promote our products and corporate image and
to showcase our new product offerings. We also regularly host
seminars and training programs on the latest developments in
offset printing equipment technologies for potential and
existing distributors, as well as potential and existing
end-user customers. During these seminars and training programs,
we demonstrate our latest products to the attendees to promote
purchases from them.
Suppliers
and Raw Materials
The key raw materials and components used to manufacture our
products are steel, iron and electronic components. We produce a
substantial majority of our key components in-house at our Hunan
Duoyuan facility. We purchase all other raw materials and
components from Chinese suppliers through non-exclusive purchase
orders and supply contracts. The purchase order or supply
contract specifies the price for the raw material or component
and design-related specifications, if any. Although we allow for
adjustments in the price for certain raw materials such as steel
and iron under extraordinary circumstances, the prices for our
raw materials are generally fixed for the effective term of the
supply contracts. Our supply contracts are generally renewable
on an annual basis. We maintain multiple supply sources for each
of our key raw materials and other standard off-the shelf parts
so as to minimize any potential disruption of our operations and
maintain supply stability. We purchase certain specialized
components, such as springs, from a single supplier. Some of our
suppliers produce components for us based on our specified
designs, and we do not believe we would have difficulty
replacing these suppliers should any of them become unavailable.
101
For fiscal 2007, 2008 and 2009, purchases from our largest
supplier accounted for 9.5%, 8.8% and 10.7%, respectively, of
our total purchases of raw materials and components. For the
same periods, our ten largest suppliers combined accounted for
54.6%, 55.7% and 57.4%, respectively, of our total purchases of
raw materials and components. See Risk Factors
Risks Related to Our Business If we cannot obtain
sufficient raw materials and components that meet our production
demand and standards at a reasonable cost, or at all, our
business may be materially and adversely affected.
Technology
We believe our technical innovation and precision engineering
enable us to offer a broad range of high-quality and durable
offset printing equipment. We utilize and incorporate advanced
technologies to our products, which enhance automation for
processes such as sheet-feeding, image transfer, ink dispensing
and overall centralized control. These technological
advancements increase print quality, reduce operator workload
and make our products more competitive. The following chart
briefly describes the principal technologies we use and their
functionalities:
|
|
|
Technology
|
|
Functionality
|
|
Sheet-feeding system
|
|
Automatically measures and adjusts sheet placement and feeding
|
Sheet-guiding technology
|
|
Reduces paper jams and ensures sheet transfer
|
Centralized monitoring and automatic regulation
|
|
Automatically monitors and regulates timing of sheet feeding
|
Centralized subsystems
|
|
Regulate and control sub-systems, such as sheet-feeding, front
and side layout, and reduces preparation time
|
Cam-controlled hem front design
|
|
Increases printing speed and improves accuracy of sheet transfer
|
Multiple front lay guides
|
|
Increase printing efficiency
|
Front lay and transfer gripping sheet control with localization
technology
|
|
Improves operating stability and print speed
|
Photoelectric detecting and auto
lock-up
|
|
Automatically detect printing errors
|
Double-diameter impression cylinders
|
|
Produce higher quality print work while handling thicker sheets
|
Anti-triangle 7 oclock cylinder alignment
|
|
Assures consistent ink application and prevents dot deformation
|
Data memory
|
|
Stores data on memory chip for repetitive print jobs
|
Semi-automatic plate-changing
|
|
Reduces preparation time and increases efficiency during manual
transfer of printing plates
|
Pneumatic engagement and disengagement unit
|
|
Improves print adjustment accuracy
|
Continuous alcohol
|
|
Improves color application quality and automatically adjusts
press speed
|
CPC technology
|
|
Controls ink dispensation quantity and color hue adjustment
|
102
CTP
System
We have also developed advanced technologies for our CTP system,
which allow our end-user customers to efficiently customize
printing plates according to their needs. These technologies
include (1) open data interface technology allowing for
customized workflow control systems, (2) multiple printing
plate compatibility technology and (3) data storage
technology. The following table provides a brief description of
these technologies and their functionality in our CTP system:
|
|
|
CTP Technology
|
|
Functionality
|
|
Variable laser modulation
|
|
Increases printing plate transfer speed and efficiency
|
Intelligent data center
|
|
Enables files transfer to CTP system through a network
|
Open data interface
|
|
Customizes workflow control and monitoring
|
User-friendly interface
|
|
Ensures simple and safe operation
|
Plate compatibility
|
|
Enables use of different types of printing plates
|
Recognition
for our Products
We have received over 20 technology awards, recognitions of
achievement or endorsements from the Chinese government, various
industry associations and consumer interest associations for our
technological achievement as well as quality and reliability of
our products. In addition, our offset printing equipment has
been endorsed by the China Consumer Protection Fund as reliable
products. We did not and do not have any affiliation with these
associations. These associations did not receive any
compensation from us for these awards, recognitions of
achievement or endorsements.
Intellectual
Property
Our copyrights, trademarks, trade secrets and other intellectual
property rights are critical to our business. We rely on
trademark and copyright laws, trade secret protection,
non-competition and confidentiality
and/or
licensing agreements with our executive officers, distributors,
research and development personnel and others to protect our
intellectual property rights. Other than as described herein, we
do not possess any licenses to use third partys
intellectual property rights nor do we license to third parties
any intellectual property rights we own.
We have the following eight patents registered with the China
Patent Bureau: (1) a vacuum chamber paper sheet lifting and
advancing device, expiring on May 22, 2013, (2) a
single-fiber field pattern used in multicolor press imaging
system, expiring on May 22, 2013, (3) a print
appearance design, expiring on January 31, 2015,
(4) an automatic printing oil cleaning device for presses,
expiring on September 25, 2010, (5) an automatic
pressure detection device for presses, expiring on
October 18, 2017, (6) a paper discoloration prevention
device for presses, expiring on October 18, 2017,
(7) an automatic water roll cleaning device for presses,
expiring on October 18, 2017, and (8) an automatic
plate change mechanism for presses, expiring on October 18,
2017. In addition, we have three applications pending for
Chinese patent registration. We currently have a number of
consultants that work for us on various technological issues.
Each of these consultants are contractually obligated to assign
to us all intellectual property rights produced by such
consultants during the consulting period.
The protection afforded to our intellectual property rights may
be inadequate. It may be possible for third parties to obtain
and use, without our consent, intellectual property that we own
or are licensed to use. Unauthorized use of our intellectual
property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely
affect our business. See Risk Factors Risks
Related to Our Business Failure to protect our
proprietary technologies or maintain the right to certain
technologies may materially and adversely affect our ability to
compete.
103
We may also be subject to litigation involving claims of patent
infringement or violation of other intellectual property rights
of third parties. In 1999, we implemented and continue to follow
a procedure under which our product development teams are
required to conduct a patent search of Chinese patents at the
beginning of the product development process for each product.
Typically, our research and development team conducts this
search with guidance and oversight from our in-house patent
team. A product development project is approved only if the
result of the patent search indicates that development of the
proposed product will not infringe on any third party
intellectual property rights. We believe that our risk of
infringing third party intellectual property rights can be
effectively reduced by our adherence to these procedures. To
date, we have neither been sued on the basis of alleged
infringement of third party intellectual property rights nor
have we received any notification from third parties alleging
infringement of their intellectual property rights. However, due
to the complex nature of offset printing technology patents and
the uncertainty of construing the scope of these patents, as
well as the limitations inherent in our patent searches, the
risk of infringing on third party intellectual property rights
cannot be fully eliminated. See Risk Factors
Risks Related to Doing Business in China We may be
exposed to infringement or misappropriation claims by third
parties, which, if determined adversely against us, could
disrupt our business and subject us to significant liability to
third parties.
Research &
Development
Research &
Development Team
We believe quality product design is an important factor in
maintaining our competitiveness in the offset printing equipment
market. As of June 30, 2009, our research and development
team included 141 researchers, engineers and technicians
working at our research and development and technical support
center at Langfang Duoyuan and 67 technicians working at our
Hunan Duoyuan technical support center. The research and
development team at Langfang Duoyuan focuses on designing and
building prototypes for new products, as well as improving the
functionality of existing products. The technical support team
at Langfang Duoyuan focuses on testing prototypes and improving
product efficiency, with particular focus on our pre-press and
small format press products. The technical support team at Hunan
Duoyuan focuses on testing prototypes and improving production
efficiency, with particular focus on our large format press
products. Since Hunan Duoyuan is also our in-house production
base for certain key components used in our products, the
technicians at Hunan Duoyuan also engage in development and
improvement of steel foundry casting techniques and mechanical
processing techniques. Our research and development efforts have
led to eight patents in China, covering a wide range of offset
printing equipment.
The quality of our product design is based on a strong research
and development team staffed with experienced researchers,
engineers and technicians. The expertise of our research and
development team covers a broad range of disciplines, including
printing, image processing, mechanical engineering, automation
and computer sciences. We believe we have a strong and balanced
research and development team and are not dependent on a small
number of key researchers. Almost all of the members of our
research and development team have obtained at least a
bachelors degree and the majority of the members of our
research and development team have been with us for over five
years.
In addition to improving our existing product offerings, our
research and development efforts also focus on the development
of new products, as well as the development of new production
methodologies to improve our manufacturing processes. We follow
advanced project selection procedures prior to the development
of new products, including the use of detailed market and
technological analyses.
Our research and development team utilizes advanced design and
test tools such as three-dimensional design software and digital
simulation platforms, to test our product designs. We can design
specific
104
offset printing equipment components using three dimensional
design software and export the designs directly onto the
simulation platform before testing them in real world settings.
All new products are subject to rigorous testing prior to
commencement of commercial production, and prototypes are often
delivered to end-user customers for their trial use. We begin
manufacturing new products only after the prototypes from trial
production pass our internal quality inspection and achieve
favorable end-user customer satisfaction. This integrated
approach allows us to identify potential difficulties in
commercializing a product, and make appropriate adjustments to
develop cost efficient manufacturing processes prior to mass
production.
We recognize the importance of customer satisfaction with our
newly developed products and continue to seek feedback from our
end-user customers even after the formal launch of a product.
Feedback from our major end-user customers, collected by our
sales and service professionals, are categorized and
prioritized, then forwarded to our research and development team
to evaluate for research potential. We believe this process
keeps us in touch with our end-user customers needs and
improves our design efficiency, consistency and accuracy.
End-User
Customers
Our end-user customers are diverse, operating in different
industries, including publishing, commercial printing and
packaging. Sales to end-user customers in China accounted for
more than 98% of our revenue for fiscal 2007, 2008 and 2009.
According to our distributors, sales to end-user customers
outside of China accounted for less than 2% of our revenue for
the same periods. These sales were accomplished through our
Chinese distributors, with the support of our sales and
marketing team.
We offer a range of products to our end-user customers, who have
varying printing needs and purchasing budgets. Our ability to
offer a wide range of solutions, in terms of pricing and
technological sophistication, is one of our competitive
advantages. The following table describes our solution package
offerings:
|
|
|
|
|
Solutions
|
|
End-User Customer Printing
Needs
|
|
Featured Products
|
|
Economy(1)
|
|
Transitional printing needs to upgrade to offset printing from
type-set printing
|
|
Plate developer and single color small format presses
|
Standard(2)
|
|
General commercial printing needs
|
|
CTP system and single color small format presses
|
Premium(2)
|
|
High-quality printing needs involving thick paper
|
|
CTP system, single color small format presses and multicolor
small format presses
|
Note
Printing(3)
|
|
Commercial note printing needs involving extra-thin paper
|
|
CTP system and single color small format presses
|
Multicolor(2)
|
|
High-quality multicolor printing needs
|
|
CTP system and multicolor presses
|
Advanced(2)
|
|
High quality and time-sensitive multicolor printing needs
|
|
CTP system and multicolor presses
|
Packaging(1)
|
|
Package printing needs
|
|
Single color presses and multicolor presses
|
|
|
(1)
|
We plan to include our cold-set corrugated paper machine in this
solution package in 2010 and our automatic paper cutter in this
solution package when we introduce this product in 2011.
|
(2)
|
We also offer a complimentary plate developer to our CTP system
in this solution package. We plan to include our automatic
booklet maker and automatic paper cutter in this solution
package when we introduce these two products in 2011.
|
(3)
|
We also offer a complimentary plate developer to our CTP system
in this solution package. We plan to include our automatic paper
cutter in this solution package when we introduce this product
in 2011.
|
105
End-User
Customer Service and Support
Together with our distributors, we offer sales and post-sales
services to our end-user customers. Our distributors handle
common post-sales issues for our end-user customers, and we
assist our end-user customers with more sophisticated and
complex issues. Our service team includes personnel from our
sales, service and research and development departments to
ensure timely installation and operation of our products at the
end-user customers sites.
Our local representatives consult with our end-user customers
and distributors to customize a best-fit printing solution based
on the end-user customers individual printing needs, as
well as such end-user customers budget considerations.
After product delivery, our distributors are responsible for
installation and configuration. After our products are installed
and operating at the end-user customers site, our service
team provides training and technical support to our distributors
to ensure satisfactory test runs of our products. For those who
purchase our single color large format presses and multicolor
large format presses, we may keep service staff at our
distributor sites for up to two weeks to assist with meeting
end-user customers needs and to provide in-depth training
to our distributors. We provide this service team staffing upon
distributors request.
To generate good relationships with our end-user customers, we
provide certain services to them during the one year warranty
period. During the warranty period, we provide training,
technical support, warranty and repair services for complex
technical issues. Our local representative offices make good
efforts to distribute replacement components to distributors
and/or
end-user customers within 24 hours of such request. We also
provide regular overhaul and upgrade services during the
warranty period. Our service team also solicits end-user
customer feedback and forwards the feedback to our research and
development team to evaluate for product research potential. We
believe this integral part of our post-sales service helps us
determine market needs and changing end-user customer demands.
As of June 30, 2009, we had 211 marketing, sales and
service professionals providing customer service and support in
over 65 cities and 28 provinces in China. Of these
employees, 24 were maintenance technicians.
Competition
We operate in a competitive industry characterized by demanding
technological requirements and evolving industry standards. We
compete primarily on the basis of our brand recognition and
industry reputation, comprehensive product offerings, quality
and performance of our products, established distribution
network, research and development capacities and competitive
cost advantage. As a result of generally lower operating, labor
and raw material costs in China, we are able to charge lower
prices compared to our international competitors while
maintaining comparable product quality. Our efforts to produce a
substantial majority of our key components in-house allow us to
lower our raw materials and component costs, reduce our
dependency on key suppliers and improve our workflow and quality
control.
Small
Format Press Producers
We believe there are three tiers of products in Chinas
single color small format and multicolor small format press
sector, namely top tier, middle tier and bottom tier. Top tier
products generally feature (1) advanced structural or
mechanical designs, (2) advanced automation,
(3) higher efficiency and (4) high print quality. We
believe top tier small format press manufacturers focus on
developing strong internal research and development capacities.
We believe that as the market demand for advanced offset
printing equipment increases, the market share occupied by top
tier Chinese manufacturers will also increase. In addition
to us, other top tier Chinese manufacturers in the small
format press sector include Yingkou Saxin Printing Machine Co.,
Ltd, Liaoning Dazu Guanhua Printing Equipment Co. Ltd., Weifang
Huaguang Precision Printing Machinery Co., Ltd., Shandong Weihai
Hamada (JV) Printing Machinery Co., Ltd. and Shandong Weihai
Printing Machinery Co., Ltd.
106
Among our international competitors in the small format press
sector, we believe Heidelberger Druckmaschinen AG is one of the
few German producers, with Japanese producers supplying most of
the single color small format presses and multicolor small
format presses in the international market. The major Japanese
small format press producers include Hamada Printing Press Co.,
Ltd. and Ryobi, Ltd.
Large
Format Press Producers
There are a few Chinese companies producing single color large
format presses and many of these companies are not capable of
producing multicolor large format presses. Major Chinese
producers in the large format press sector include Beiren
Printing Machinery Holdings Limited, Shanghai Electric Group
Printing & Packaging Machinery Co., Ltd. and Jiangxi
Zhongjing Group Co., Ltd.
Our competitors in the large format press sector are mainly
international companies that include German and Japanese
producers. The major international producers include
Heidelberger Druckmaschinen AG, Man Roland Druckmaschinen AG,
Koenig & Bauer Group (KBA), Mitsubishi Heavy
Industries, Ltd. and Komori Corporation. Other important
international manufacturers include Shinohara Machinery Co.
Ltd., Sakurai Graphic Systems Corp and Ryobi Ltd., as well as
Adast a.s., the largest Eastern European manufacturer.
These international producers possess stronger research and
development capabilities and enjoy established recognition in
the global market. Their products are more user friendly to
serve the sophisticated needs of high-end customers. We believe,
however, that their products are typically priced higher than
our products.
Environmental
Regulations
Our manufacturing processes may generate noise, water waste,
gaseous waste and other industrial waste. We are subject to a
variety of Chinese national and local environmental laws and
regulations related to our operations, including regulations
governing the storage, discharge and disposal of hazardous
substances in the ordinary course of our manufacturing
processes. The major environmental regulations applicable to us
include the Environmental Protection Law, the Prevention and
Control of Water Pollution Law and related Implementation Rules,
the Prevention and Control of Air Pollution Law and related
Implementation Rules, the Prevention and Control of Solid Waste
Pollution Law and the Prevention and Control of Noise Pollution
Law.
As of the date of this prospectus, we are not a party to any
legal proceedings involving PRC environmental laws and
regulations and we have not received any environment violation
notice from the relevant PRC government authorities.
Employees
As of June 30, 2009, we had 1,339 employees, with
264 employees at Duoyuan China, 368 employees at
Langfang Duoyuan and 707 employees at Hunan Duoyuan. The
table below sets forth the aggregate number of employees in our
three Chinese subsidiaries categorized by function and the
percentage of each category of our total employees as of
June 30, 2009:
|
|
|
|
|
|
|
|
|
Functions
|
|
Employees
|
|
|
Percentage
|
|
|
Management
|
|
|
144
|
|
|
|
10.8
|
%
|
Sales and Marketing
|
|
|
211
|
|
|
|
15.8
|
|
Production
|
|
|
776
|
|
|
|
58.0
|
|
Research and Development
|
|
|
208
|
|
|
|
15.4
|
|
|
|
|
|
|
|
|
|
|
Total number of employees
|
|
|
1,339
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
107
We believe we have good relationships with our employees, and we
have not experienced any significant labor disputes. The labor
union of Duoyuan China maintains a cooperative relationship with
us. We are not a party to any collective bargaining agreement
and our employees are not represented by any collective
bargaining agreement. All our employees are based in China and
are full-time. Most of our employees have executed employment
agreements governed by PRC law. These employment agreements are
for one-year terms and may be renewed upon notice from the
employee and with our consent. We adopted a new form of
employment contract pursuant to the PRC Labor Contract Law,
which became effective on January 1, 2008, after the
current employment contracts expired. After ten years of
employment, an employee may enter into an employment agreement
with us for an indefinite period of time. We may terminate
employees for cause, without notice or severance. If we
terminate employment due to economic downturn or performance
related reasons, we are obligated to give 30 days advance
notice or pay one months salary as severance in lieu of
notice. In addition, we may pay additional severance in the
amount of one months salary for each year that an employee
has served with us. If the monthly wage of an employee is three
times greater than the average monthly wage in the previous year
for employees as announced by the peoples government at
the municipal level directly under the central government or at
the city-with-district level where the Employer is located, the
rate for the financial compensations paid to him shall be three
times the average monthly wage of employees and shall be for not
more than 12 years of work. An employee may resign without
good reason upon one months notice, or resign for good
reason without notice.
As required by PRC regulations, we participate in various
employee benefit plans implemented by municipal and provincial
governments, including pension, work-related injury insurance,
medical insurance and unemployment insurance. We make
contributions to these employee benefit plans at specified
percentages of the salaries, bonuses and certain allowances we
pay to our employees, capped at maximum amounts determined by
the local government from time to time. According to the
relevant PRC regulations on housing provident funds, PRC
enterprises are required to contribute housing provident funds
for their employees. Our subsidiaries in the PRC, other than
Hunan Duoyuan, have complied with the relevant PRC regulations
on housing provident funds. For details, see Risk
Factors Risks Related to Doing Business in
China We may be exposed to monetary fines by the
local housing authority and claims from our employees in
connection with Hunan Duoyuans non-compliance with
regulations with respect to contribution of housing provident
funds for employees.
We may incur additional labor costs due to the implementation of
the PRC Labor Contract Law that became effective on
January 1, 2008. For details, see Risk
Factors Risks Related to Doing Business in
China The new provisions of the PRC Employment
Contract Law may substantially increase our labor-related costs
in the future.
Properties
Duoyuan China leases 3,080 square meters of space, located
at No. 3 Jinyuan Road, Daxing Industrial Development Zone,
Beijing, China, from Duoyuan Information Terminal Manufacture
(Langfang) Co., Ltd., or Duoyuan Information, a company owned by
Wenhua Guo, the chairman of our board of directors. The property
is used as an office building. Duoyuan China originally leased
the property at No. 3 Jinyuan Road from Duoyuan Clean Water
Technology Industries (China) Co., Ltd., or Duoyuan Water, a
company owned by Mr. Guo. The initial lease had a five-year
term from January 1, 2003 to December 31, 2007 and was
extended for one year. As a result of the property transfer
between Duoyuan Water and Duoyuan Information, in which Duoyuan
Information became the new owner of the property at No. 3
Jinyuan Road, the initial lease with Duoyuan Water was
terminated. We entered into a new lease with Duoyuan Information
for a period from July 1, 2008 to December 31, 2009,
with an annual rent payment of $0.2 million.
108
Langfang Duoyuan was granted land use rights from the Chinese
government for 133,333 square meters of land located to the
east of Jinzhiguang Electronic Company, Langfang
Economic-Technological Development Area, Langfang, Hebei
Province, China. The land use rights have a
50-year term
and will expire on September 29, 2052. In addition to the
land use rights, Langfang Duoyuan also has ownership of
9,333 square meters of office building and
21,593 square meters of production facilities located at
this site. Langfang Duoyuan currently does not have an
outstanding mortgage or pledge on the properties located at this
site.
Hunan Duoyuan was granted land use rights from the Chinese
government for 229,281 square meters of land for industrial
use located at No. 362 Baoqing Xi Road Shaoyang, Hunan
Province, China. The land use rights have a
50-year term
and will expire on May 19, 2054. In addition to the land
use rights, Hunan Duoyuan also has ownership of
68,068 square meters of office building and production
facilities located at this site. All of Hunan Duoyuans
land and buildings have been mortgaged under a Maximum Amount
Mortgage Contract (which will expire in July 2010) to China
Agricultural Bank as security interests of Duoyuan Chinas
debt obligations.
We believe our properties and facilities have been adequately
maintained, are generally in good condition and are suitable and
adequate for our business.
We intend to build a factory to manufacture cold-set corrugated
paper machines at our Langfang Duoyuan facility, and have
conducted related land clearing and site preparation services.
We are also designing workshops and production lines and
procuring equipment for this cold-set corrugated paper machine
factory at Langfang Duoyuan. We plan to commercially manufacture
and sell cold-set corrugated paper machines by the end of 2010.
Legal
Proceedings
Neither we nor any of our direct or indirect subsidiaries is a
party to, nor is any of our property the subject of, any legal
proceedings other than ordinary routine litigation incidental to
our respective businesses. There are no proceedings pending in
which any of our officers, directors, promoters or control
persons is adverse to us or any of our subsidiaries or in which
any of these persons is taking a position or has a material
interest that is adverse to us. There are no proceedings pending
in which any of our officers, directors, promoters or control
persons is adverse to us.
We are not a party to any administrative or judicial proceeding
arising under U.S. federal, state or local environmental
laws or their Chinese counterparts.
109
REGULATIONS
This section summarizes the most significant regulations or
requirements that affect our business activities in China.
Certain of these regulations and requirements, such as those
relating to tax, foreign currency exchange, dividend
distribution, regulation of foreign exchange in certain onshore
and offshore transactions and regulations of overseas listings,
may affect our shareholders rights to receive dividends
and other distributions from us.
Our business is the design, manufacturing, and sales of offset
printing equipment. Pursuant to PRC laws and regulation, our
business is in one of the industries the Chinese government
encourages or permits foreign investment in.
Environmental
Regulations
On December 26, 1989, the Standing Committee of the
National Peoples Congress issued the Environment
Protection Law, setting forth the legal framework for
environment protection in China. The Environmental Protection
Law requires the State Administration of Environmental
Protection to implement uniform supervision and administration
of environmental protection standards nationwide and to
establish national waste discharge standards. Local
environmental protection bureaus are responsible for
environmental protection in their jurisdictions and may set
stricter local standards which are required to be registered at
the State Administration of Environmental Protection. Companies
are required to comply with the stricter of the two standards.
Enterprises producing environmental contamination and other
public hazards must incorporate the relevant environmental
protection standards into their planning and establish
environmental protection systems. These companies must also
adopt effective measures to prevent environmental contamination
and hazardous emissions, such as waste gas, waste water,
deposits, dusts, pungent gases and radioactive matters as well
as noise, vibration and magnetic radiation. Companies
discharging contaminated wastes in excess of the discharge
standards prescribed by the State Administration of
Environmental Protection must pay non-standard discharge fees in
accordance with national regulations and be responsible for the
applicable remediation. Government authorities may impose
different penalties against persons or companies in violation of
the environmental protection laws and regulations depending on
individual circumstances. Such penalties may include warnings,
fines, imposition of deadlines for remediation, orders to cease
certain operations, orders to reinstall contamination prevention
and remediation facilities that have been removed or left
unused, imposition of administrative actions against the
responsible persons or orders to close down the company. Where
the violation is deemed serious, responsible persons may be
required to pay damages, and may be subject to criminal
liability.
Our manufacturing processes may generate noise, water waste,
gaseous waste and other industrial wastes. Our operations are
subject to a variety of PRC national and local environmental
laws and regulations, including regulations regarding the
storage, discharge and disposal of hazardous substances in the
ordinary course of our manufacturing processes. The major
environmental regulations applicable to us include the
Environmental Protection Law, the Prevention and Control of
Water Pollution Law and related Implementation Rules, the
Prevention and Control of Air Pollution Law and related
Implementation Rules, the Prevention and Control of Solid Waste
Pollution Law and the Prevention and Control of Noise Pollution
Law. We believe we are in compliance with all of these
applicable environmental regulations in all material respects.
As of June 30, 2009, we were not a party to any legal
proceedings involving PRC environmental laws and regulations and
we had not received any environment violation notices from the
relevant PRC governmental authorities.
Restriction
on Foreign Businesses
The principal regulation governing foreign ownership of offset
printing equipment manufacturing businesses in China is the
Foreign Investment Industrial Guidance Catalogue issued by the
Ministry of
110
Commerce and the National Development and Reform Commission and
became effective on December 1, 2007. Pursuant to the
Foreign Investment Industrial Guidance Catalogue and related
regulations, our business is in one of the industries the
Chinese government is encouraging or permitting foreign
investments in. Foreign investment in offset printing equipment
manufacturing business in China is subject to approval from the
Ministry of Commerce
and/or its
local authorized counterpart, depending on the scale of the
business and total amount of foreign investment. The
establishment of Duoyuan China, was approved by the relevant
Bureau of Commerce. Duoyuan China has obtained the necessary
foreign-invested manufacturing enterprise approval certificate,
which is effective until June 2031. Foreign-invested
manufacturing enterprises reinvestments in an industry
that is currently encouraged or permitted by the PRC government
in accordance with the Foreign Investment Industrial Guidance
Catalogue does not require the approval from the Ministry of
Commerce or its local authorized counterparts. Such
foreign-invested manufacturing enterprises reinvestment is,
however, subject to the application to and registration with the
relevant local administration for commerce and industry. In
addition, the foreign-invested manufacturing enterprises should
file with the original examination and approval authority within
30 days from the date that the invested enterprise is
established. The establishment of our Chinese subsidiaries,
Langfang Duoyuan and Hunan Duoyuan, has been registered with the
competent administration for commerce and industry and Duoyuan
China has filed with its original examination and approval
authority.
Regulation
of Foreign Currency Exchange and Dividend Distribution
Foreign
currency exchange
The principal regulations governing foreign currency exchange in
China are the Foreign Currency Administration Regulations
(1996), as amended. Under these regulations, the Renminbi is
convertible for current account items, including the
distribution of dividends, interest payments, trade and
service-related foreign exchange transactions. However,
conversion of the Renminbi for capital account items, such as
direct investment, loans, repatriation of investment and
investment in securities outside China, is subject to SAFE or
its local branch.
The dividends paid by a subsidiary to its shareholders are
deemed income of the shareholders and are taxable in China.
Pursuant to the Administration Rules of the Settlement, Sale and
Payment of Foreign Exchange (1996), foreign-invested enterprises
in China may purchase or remit foreign exchange, subject to a
cap approved by the SAFE, for settlement of current account
transactions without the approval of the SAFE. Foreign exchange
transactions under the capital account are still subject to
limitations and require approvals from, or registration with,
the SAFE and other relevant Chinese governmental authorities.
Dividend
distribution
The principal regulations governing distribution of dividends of
foreign holding companies include the Foreign Investment
Enterprise Law (1986), as amended, and the Administrative Rules
under the Foreign Investment Enterprise Law (2001). Under these
regulations, Chinese companies with foreign investment may pay
dividends only out of their accumulated profits, if any,
determined in accordance with Chinese accounting standards and
regulations. In addition, foreign-invested enterprises in China
are required to allocate at least 10% of their respective
accumulated profits each year, if any, to fund certain reserve
funds unless these reserves have reached 50% of the
companys registered capital. These reserves are not
distributable as cash dividends. Our Chinese subsidiary, Duoyuan
China, a foreign-invested enterprise in China, is restricted
from distributing dividends to us until it has met these
requirements. The principal regulation governing the
distribution of dividends of Langfang Duoyuan and Hunan Duoyuan
is PRC Company Law (2006). According to the PRC Company Law,
when a company distributes its after-tax profits of the current
year, it shall reserve 10% of the profits as its statutory
common reserve. Such reservation of funds may cease if the
aggregate balance of the common reserve reaches 50% or more of
111
the companys registered capital. If the aggregate balance
of the companys statutory common reserve is insufficient
to make up for the companys losses from the previous year,
then the current years profits shall first be used for
making up the losses before the profit can be reserved for the
statutory common reserve. After the losses have been made up and
common reserves have been reserved, the remaining profits may be
distributed to shareholders.
According to the new PRC Enterprise Income Tax Law and the
implementation rules on PRC Enterprise Income Tax Law (2008), if
a foreign legal person with no office or premises in the PRC is
not deemed to be a resident enterprise for Chinese tax purposes,
dividends paid to this foreign legal person from business
operations in China will be subject to a withholding tax at the
rate of 10% unless it is entitled to reduction or elimination of
such tax, such as in accordance with relevant tax treaties. To
the best of our knowledge, the tax treaty between the PRC and
the U.S. prescribes no such elimination or reduction.
Under PRC Enterprise Income Tax Law and its implementation
rules, if a company incorporated outside China has its de
facto management organization located within China, the
company would be classified as a resident enterprise and thus
would be subject to an enterprise income tax rate of 25% on all
of its income on a worldwide basis, with the possible exclusion
of dividends received directly from another Chinese tax resident.
SAFE
regulations on overseas investment of chinese residents and
employee stock options
The SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fund-Raising and Reverse
Investment Activities of Domestic Residents Conducted via
Offshore Special Purpose Companies in October 2005, which became
effective in November 2005, and an implementing rule in May
2007, or collectively the SAFE Rules. According to the SAFE
Rules, Chinese residents, including both legal persons and
natural persons, who reside in China, are required to register
with the SAFE or its local branch before they establish or gain
control over any company outside China, which the SAFE Rules
refers to as an offshore special purpose company,
for the purpose of financing that offshore company with their
ownership interests in the assets of or their interests in any
Chinese enterprise. In addition, a Chinese resident that is a
shareholder of an offshore special purpose company is required
to amend its SAFE registration with the local SAFE branch with
respect to that offshore special purpose company in connection
with the injection of equity interests or assets of a Chinese
enterprise in the offshore company or overseas fund raised by
the offshore company, or any other material changes in the
capital of the offshore company, including any increase or
decrease of capital, transfer or exchange of shares, merger,
division, long-term equity or debt investment or creation of any
security interests. The registration and filing procedures under
the SAFE Rules are prerequisites for other approval and
registration procedures necessary for capital inflow from the
offshore special purpose company, such as inbound investments or
shareholder loans, or capital outflow to the offshore special
purpose company, such as the payment of profits, dividend
distributions, liquidating distributions, equity sale proceeds,
or the return of funds upon a capital reduction. The SAFE
regulations retroactively required registration by
March 31, 2006 of direct or indirect investments previously
made by Chinese residents in offshore special purpose companies.
If a Chinese shareholder with a direct or indirect stake in an
offshore special purpose company fails to comply with the
required SAFE registration, the Chinese subsidiaries of such
offshore special purpose company may be prohibited from making
(1) profit distributions or (2) proceed payments from
any reduction in capital, share transfer or liquidation of the
Chinese subsidiary to the offshore special purpose company. In
addition, failure to comply with the various SAFE registrations
could result in liability under Chinese law for violating the
relevant foreign exchange rules.
Our majority shareholder is Duoyuan Investment Limited, which is
wholly owned by Wenhua Guo, our chairman, who is a Chinese
resident as defined in the SAFE Rules. Mr. Guo has applied
for registration
112
with the relevant branch of SAFE, as currently required, in
connection with his equity interests in us and our acquisitions
of equity interests in our Chinese subsidiaries. We attempt to
comply and attempt to ensure that Mr. Guo, who is subject
to Notice No. 75 and other related rules, complies with the
relevant requirements of the SAFE Rules. Moreover, because of
uncertainty over how the SAFE Rules will be interpreted and
implemented, and how or whether SAFE Rules will apply to us, we
cannot predict how it will affect our business operations or
future strategies. For example, our present and prospective
Chinese subsidiaries ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign
currency denominated borrowings, may be subject to compliance
with the SAFE Rules by Mr. Guo or our future Chinese
resident shareholders. In addition, such Chinese residents may
not always be able to complete the necessary registration
procedures required by the SAFE Rules. We also have little
control over either our present or prospective direct or
indirect shareholders or the outcome of such registration
procedures. The failure or inability by Mr. Guo or our
future Chinese resident shareholders to comply with the SAFE
Rules, if SAFE requires it, may subject them to fines or other
sanctions and may also limit our ability to contribute
additional capital into or provide loans to our Chinese
subsidiaries (including using our net proceeds from this
offering for these purposes), limit our Chinese
subsidiaries ability to pay dividends to us, repay
shareholder loans or otherwise distribute profits or proceeds
from any reduction in capital, share transfer or liquidation to
us, or otherwise adversely affect us. Failure by our Chinese
resident shareholders to comply with SAFE filing requirements
described above could result in liability to these shareholders
or our Chinese subsidiaries under Chinese laws for evasion of
applicable foreign exchange restrictions.
On December 25, 2006, the Peoples Bank of China
issued the Administration Measures on Individual Foreign
Exchange Control, and the corresponding Implementation Rules
were issued by SAFE on January 5, 2007. Both of these
regulations became effective on February 1, 2007. According
to these regulations, all foreign exchange matters relating to
employee stock holding plans, share option plans or similar
plans in which Chinese citizens participation require
approval from the SAFE or its authorized branch.
On March 28, 2007, SAFE promulgated the Application
Procedure of Foreign Exchange Administration for Domestic
Individuals Participating in Employee Stock Option Holding Plan
or Stock Option Plan of Overseas Listed Company, or the Stock
Option Rule. The purpose of the Stock Option Rule is to regulate
foreign exchange administration of Chinese citizens who
participate in employee stock holding plans and stock option
plans of offshore listed companies. According to the Stock
Option Rule, if a Chinese citizen participates in any employee
stock holding plan or stock option plan of an offshore listed
company, a Chinese domestic agent or the Chinese subsidiary of
the offshore listed company is required to file, on behalf of
the individual, an application with the SAFE to obtain approval
for an annual allowance with respect to the purchase of foreign
exchange in connection with stock holding or stock option
exercises. This restriction exists because a Chinese citizen may
not directly use offshore funds to purchase stock or exercise
stock options. Concurrent with the filing of the required
application with the SAFE, the Chinese domestic agent or the
Chinese subsidiary must obtain approval from the SAFE to open a
special foreign exchange account at a Chinese domestic bank to
hold the funds required in connection with the stock purchase or
option exercise, any returned principal profits upon sales of
stock, any dividends issued on the stock and any other income or
expenditures approved by the SAFE. The Chinese domestic agent or
the Chinese subsidiary also is required to obtain approval from
the SAFE to open an offshore special foreign exchange account at
an offshore trust bank to hold offshore funds used in connection
with any employee stock holding plans.
All proceeds obtained by a Chinese citizen from dividends
acquired from the offshore listed company through employee stock
holding plans or stock option plans, or sales of the offshore
listed companys stock acquired through other methods, must
be remitted back to China after relevant offshore expenses are
deducted. The foreign exchange proceeds from these sales can be
converted into Renminbi or transferred to the individuals
foreign exchange savings account after the proceeds have been
remitted
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back to the special foreign exchange account opened at a Chinese
bank. If stock options are exercised in a cashless exercise, the
Chinese individuals exercising them are required to remit the
proceeds to the special foreign exchange account. Although the
Stock Option Rule has been promulgated recently and many issues
require further interpretation, we and our Chinese employees who
have been granted stock options will be subject to the Stock
Option Rule when we become an offshore listed company.
On May 29, 2007, the SAFE issued an operating procedure for
the Circular on Foreign Exchange Issues Related to Equity
Finance and Return Investments by Domestic Residents through
Offshore Special Purpose Vehicles. Under SAFE Notice
No. 106, employees stock holding plans of offshore special
purpose companies must be filed with the SAFE in accordance with
the ordinary procedures of overseas investment registration, and
employees stock option plans of offshore special purpose
companies must be filed with the SAFE while applying for the
registration for the establishment of the offshore special
purpose company. After the employees exercise their options,
they must apply for the amendment to the registration for the
offshore special purpose company with the SAFE.
If we or our Chinese employees fail to comply with the Stock
Option Rule, we
and/or our
Chinese employees may face sanctions imposed by foreign exchange
authority or any other Chinese government authorities.
Regulation
of Merger and Acquisitions of Domestic Enterprises by Foreign
Investors
On August 8, 2006, six Chinese regulatory agencies,
including the Ministry of Commerce, the State Assets Supervision
and Administration Commission, the State Administration for
Taxation, the State Administration for Industry and Commerce,
the China Securities Regulation Commission and the SAFE,
jointly issued the new Regulation on Mergers and Acquisitions of
Domestic Companies by Foreign Investors, which became effective
on September 8, 2006 as amended on June 22, 2009.
Under the new M&A rules, equity or assets merger and
acquisition of Chinese enterprises by foreign investors will be
subject to the approval from the Ministry of Commerce or its
competent local branches. This regulation also includes
provisions that purport to require special purpose companies
formed for purposes of offshore listing of equity interests in
Chinese companies to obtain the approval of the China Securities
Regulation Commission prior to the listing and trading of
their securities on any offshore stock exchange. As defined in
the new M&A rules, a special purpose vehicle is an offshore
company that is directly or indirectly established or controlled
by Chinese entities or individuals for the purposes of an
overseas listing.
On September 21, 2006, the China Securities
Regulation Commission published on its official website
procedures regarding its approval of offshore listings by
special purpose vehicles. The China Securities
Regulation Commission approval procedures require the
filing of a number of documents with the China Securities
Regulation Commission and it would take several months to
complete the approval process. The application of this new
M&A rules with respect to offshore listings of special
purpose companies remains unclear with no consensus currently
existing among leading Chinese law firms regarding the scope of
the applicability of the China Securities
Regulation Commission approval requirement.
Our Chinese counsel, Commerce & Finance Law Offices,
has advised us that, based on the their understanding of current
Chinese laws, regulations and rules, including the new M&A
rules and the China Securities Regulation Commission
procedures announced on September 21, 2006:
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the China Securities Regulation Commission currently has
not issued any definitive rule or interpretation requiring
offerings like this offering to be subject to this new procedure;
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the new M&A rules do not require us to submit an
application to the China Securities Regulation Commission
for its approval prior to the issuance and sales of our common
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shares, or the listing and trading of our common share on the
New York Stock Exchange, unless we are clearly required to do so
by possible later rules of the China Securities
Regulation Commission; and
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the issuance and sales of our common shares and the listing and
trading of our common shares on the New York Stock Exchange do
not conflict with or violate this new regulation.
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Regulation
of Loans Between a Foreign Company and its Chinese
Subsidiary
A loan made by foreign investors as shareholders in a
foreign-invested enterprise is considered to be foreign debt in
China and subject to several PRC laws and regulations, including
the Foreign Exchange Control Regulations of 1997, the Interim
Measures on Foreign Debts of 2003, or the Interim Measures, the
Statistical Monitoring of Foreign Debts Tentative Provisions of
1987 and its Implementing Rules of 1998, the Administration of
the Settlement, Sale and Payment of Foreign Exchange Provisions
of 1996, and the Notice of the SAFE in Respect of Perfection of
Issues Relating Foreign Debts, dated October 21, 2005.
Under these regulations, a shareholder loan in the form of
foreign debt made to a foreign-invested enterprise does not
require the prior approval of the SAFE. However, such foreign
debt must be registered with and recorded by the SAFE or its
local branch in accordance with relevant PRC laws and
regulations. Duoyuan China can legally borrow foreign exchange
loans up to their borrowing limits, which is defined as the
difference between the amount of their respective total
investment and registered capital as approved
by the Ministry of Commerce or its local counterparts. Interest
payments, if any, on the loans are subject to a 10% withholding
tax unless any such foreign shareholders jurisdiction of
incorporation has a tax treaty with China that provides for a
different withholding agreement.
Pursuant to Article 18 of the Interim Measures on Foreign
Debts of 2003, if the amount of foreign exchange debt of Duoyuan
China exceed their respective borrowing limits, we are required
to apply to the relevant PRC authorities to increase the total
investment amount and registered capital to allow the excess
foreign exchange debt to be registered with the SAFE.
Taxation
Prior to January 1, 2008, entities established in China
were generally subject to a 30% state and 3% local enterprise
income tax rate. However, entities that satisfied certain
conditions enjoyed preferential tax treatments. In accordance
with the Foreign Invested Enterprise Income Tax Law, effective
until December 31, 2007, any foreign-invested manufacturing
enterprise scheduled to operate for a period not less than ten
years were exempted from paying income tax in its first two
years of making profit and is allowed a 50% reduction in its tax
rate in the next three years. As a result, Duoyuan China had
enjoyed a two-year exemption from enterprise income tax rate for
its first two profitable years ended December 31, 2004 and
2005 and thereafter a preferential state enterprise income tax
rate of 16.5% for the succeeding two years ended
December 31, 2006 and 2007, respectively.
On March 16, 2007, the PRC National Peoples Congress
enacted the new Enterprise Income Tax Law, which, together with
its related implementation rules issued by the PRC State Council
on December 6, 2007, became effective on January 1,
2008. The new Enterprise Income Tax Law generally imposes a
single uniform income tax rate of 25% on all Chinese
enterprises, including foreign-invested enterprises, and
eliminates or modifies most of the tax exemptions, reductions
and preferential treatments available under the previous tax
laws and regulations. Under the new Enterprise Income Tax Law,
enterprises that used to enjoy preferential tax treatments
would, in accordance with any detailed directives to be issued
by the state council, (1) in the case of preferential tax
rates, continue to enjoy the tax rates which will be gradually
increased to the new tax rates over a period of five years
beginning January 1, 2008 or (2) in the case of
preferential tax exemption or reduction for a specified term,
continue to enjoy the
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preferential tax holiday until the expiration of such term. On
December 26, 2007, the PRC State Council issued a Notice of
the State Council Concerning Implementation of Transitional
Rules for Enterprise Income Tax Incentives. According to
Circular 39, with the effectiveness of the new Enterprise Income
Tax Law, the enterprises that were granted a fixed term tax
exemption or reduction will continue to enjoy the preferential
tax holiday until the expiration of such term. As a result,
Duoyuan China enjoyed the reduced tax rate of 12.5% for the
calendar year 2008, and beginning January 1, 2009, it has
been subject to an income tax rate of 25%.
According to the Applicable Preferential Policy for
Beijing Duoyuan Electric (Group) Company investing in Langfang
Economic and Technological Development Zone issued by the
Administration Committee of Langfang Economic and Technological
Development Zone, the Administration Committee granted Langfang
Duoyuan a five-year income tax exemption from calendar year
2003, which was its first profitable year, until
December 31, 2007. Because this tax preferential treatment
was granted by the local government and was not supported by the
state laws and regulations, we face a risk of being ordered to
refund these prior tax benefits. Langfang Duoyuan is subject to
an income tax rate of 25% starting January 1, 2008, under
the new Enterprise Income Tax Law.
According to Treasury Bureau of Shaoyang Citys
Relevant Preferential Policy on Duoyuan China acquiring Hunan
Printing equipment Limited Liability Company issued by the
Treasury Bureau of Shaoyang City, the Treasury Bureau of
Shaoyang City exempted Hunan Duoyuans income tax from
calendar year 2005, which was its first profitable year, until
December 31, 2009. Because this tax preferential treatment
was also granted by the local government and was not supported
by the state laws and regulations, we face a risk of being
ordered us to refund these prior tax benefits. Pursuant to the
tax preferential treatment granted by the local government,
Hunan Duoyuan will be subject to an income tax rate of 25%
starting January 1, 2010, under the new Enterprise Income
Tax Law.
We are a corporation incorporated under the laws of the State of
Wyoming, U.S. We conduct substantially all of our business
through our Chinese subsidiaries and we derive all of our income
from these subsidiaries. Prior to January 1, 2008,
dividends derived by foreign legal persons from business
operations in China exempted from the Chinese enterprise income
tax. However, such tax exemption ceased after January 1,
2008 with the effectiveness of the new Enterprise Income Tax Law.
Under the new Enterprise Income Tax Law, if we are not deemed to
be a resident enterprise for Chinese tax purposes, a withholding
tax at the rate of 10% would be applicable to any dividends paid
by our Chinese subsidiaries to us. However, if we are deemed to
have a de facto management organization in China, we
would be classified as a resident enterprise for Chinese tax
purposes and thus would be subject to an enterprise income tax
rate of 25% on all of our income, including interest income on
the proceeds from this offering on a worldwide basis. Although
substantially all members of our management are located in
China, it is unclear whether Chinese tax authorities would
require (or permit) us to be treated as PRC resident
enterprises. If we are deemed a Chinese tax resident enterprise,
we may be subject to an enterprise income tax rate of 25% on our
worldwide income, excluding dividends received directly from
another Chinese tax resident. As a result of such changes, our
historical tax rates will not be indicative of our tax rates for
future periods and the value of our common shares may be
adversely affected.
Pursuant to the Provisional Regulation of China on Value Added
Tax which was issued by the State Council in December, 1993 and
amended to take effect starting in January 2009, all entities
and individuals that are engaged in the sale of goods, the
provision of repairs and replacement services and the
importation of goods in China are generally required to pay
value-added taxes at a rate of 17.0% of the gross sales proceeds
received, less any deductible value-added taxes already paid or
borne by the taxpayer. Further, when exporting goods, the
exporter is entitled to a portion of or all the refund of
value-added taxes that it has already paid or borne.
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MANAGEMENT
Directors
and Executive Officers
The following table sets forth information regarding our board
of directors and executive officers as of the date of this
prospectus. In connection with the completion of the equity
transfer on October 6, 2006, our directors and executive
officers at that time resigned and were completely replaced with
the executive officers and directors of Duoyuan China. There is
no family relationship between and among our directors and
executive officers.
Also provided herein are brief descriptions of the business
experience of each director and executive officer during the
past five years and an indication of directorships held by each
director in other companies subject to the reporting
requirements under U.S. securities laws. The business
address of each of our directors and executive officers is
No. 3 Jinyuan Road, Daxing Industrial Development Zone,
Beijing, Peoples Republic of China 102600.
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Name
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Age
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Position
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Directors
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Wenhua
Guo(1)
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47
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Chairman of Board of Directors
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Xiqing
Diao(2)
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40
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Director, Chief Operating Officer
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Lianjun Cai
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58
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Director
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Punan Xie
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73
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Director
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James Zhang
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38
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Director
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Officers
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Christopher Patrick Holbert
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39
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Chief Executive Officer
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William D. Suh
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44
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Chief Financial Officer
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Wenzhong Liu
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42
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Vice President of Sales and Marketing
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Yubao Wei
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42
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Chief Technology Officer
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Baiyun
Sun(3)
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55
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Former Interim Chief Financial Officer
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Gene Michael
Bennett(4)
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62
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Former Chief Financial Officer
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William
Milewski(5)
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46
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Former Chief Financial Officer
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(1)
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Mr. Guo served as our chief executive officer from October 6,
2006 until he resigned on June 29, 2009.
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(2)
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Mr. Diao served as our interim chief executive officer from July
9, 2009 to August 26, 2009.
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(3)
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Ms. Sun served as our interim chief financial officer from
December 20, 2007 to March 1, 2008, and May 21, 2008 to October
1, 2008. She currently serves as our controller.
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(4)
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Mr. Bennett served as our chief financial officer from July 18,
2007 to December 20, 2007.
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(5)
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Mr. Milewski served as our chief financial officer from March 1,
2008 to May 21, 2008.
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Our Directors
Wenhua Guo, Chairman of the Board of
Directors. Mr. Guo is the founder of
Duoyuan China and has served as the chairman of our board of
directors and chief executive officer since the closing of the
equity transfer on October 6, 2006 until June 29,
2009, the effective date of his resignation as our chief
executive officer. Mr. Guo remains as the chairman of our
board of directors. Before Mr. Guo founded Duoyuan China,
he was a physics teacher at Beijing Chemical Institute from 1983
to 1989. Mr. Guo is also chairman of Duoyuan Electric
Group, a privately owned Chinese company that focuses on
property management services, and the founder, chairman and
chief executive officer of Duoyuan Global Water Inc, a British
Virgin Islands company and a leading China-based domestic water
treatment equipment supplier. Mr. Guo received a
bachelors degree in physics from Beijing Normal
University, China.
Xiqing Diao, Director and Chief Operating
Officer. Mr. Diao has served as our
director and chief operating officer since November 2005.
Mr. Diao also served as our interim chief executive officer
from July 9, 2009 to August 26, 2009. He served as
vice general manager of Duoyuan Water from August to November
2005, assistant general manager of Duoyuan Electric (Tianjin)
Auto Water Pump Co., Ltd.,
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an automobile parts manufacturer, from January to July 2005, and
general manager of Operations of Duoyuan Electric Group from
January 2003 to December 2004. From May 2001 to December 2002,
Mr. Diao served as general manager of No. 1 Division
of Duoyuan Water. He was also certified as an ISO9001:2000
Internal Auditor and an ISO14000 Internal Auditor in 2004.
Mr. Diao received a bachelors degree in mechanics
from Tianjin Textile Technology Institute, China.
Lianjun Cai, Director. Mr. Cai has
served as our director and chairman of our compensation
committee of the board of directors since April 2007.
Mr. Cai served as director of Industrial Committee of
Daxing Industrial Development Zone in Beijing, a local
government agency that manages real estate development in Daxing
Industrial Development Zone, from 2001 to 2004. From 1999 to
2001, he served as general manager of the Management Committee
of Daxing Industrial Development Zone, a local government agency
that manages land use and development of land located in Daxing
Industrial Development Zone. Mr. Cai received a
bachelors degree in economy management from Beijing
Communist Party Committee School, China.
Punan Xie, Director. Mr. Xie has
served as our director and chairman of our nominating and
corporate governance committee since April 2007. Since 2001,
Mr. Xie has served as emeritus professor at Beijing
Institute of Printing. Mr. Xie served as vice principal of
Beijing Institute of Printing from 1987 to 2001. He was the
section chief of the Research Department, director of faculty of
the Printing Faculty and assistant to the president of the
Beijing Institute of Printing from 1985 to 1987. He served as
director of the Program of Print Engineering of the National
Higher Education Committee, vice director of the National
Standard Committee of Printing Equipment, and vice director of
Educational Committee of China Printing Technical Association.
Mr. Xie was a technical committee member of China Printing
Equipment and Appliance Association, counselor of the expert
consultative committee of the Beijing government, valuator for
the National Science and Technology Achievement Award and
national expert of evaluation of light-industry products and
printing equipment import. Mr. Xie received a bachelor of
science degree in printing mechanism from the Moscow Institute
of Printing, Russia.
James Zhang, Director. Mr. Zhang
has served as our director and chairman of our audit committee
since August 2009. Since July 2008, he has served as the chief
financial officer of Allyes Online Media, a subsidiary of Focus
Media Group. Mr. Zhang is a qualified chartered accountant
in the United Kingdom, and has over 14 years of experience
in accounting and finance. Prior to joining Allyes Online Media,
Mr. Zhang was the chief financial officer of CGen Digital
Media Ltd. (which was subsequently acquired by Focus Media), one
of the largest in-store television advertising operators in
China, from May 2007 to March 2008. Mr. Zhang was the chief
financial officer of China Paradise Electronics Retail Limited,
a company listed on the Hong Kong Stock Exchange, from August
2005 to January 2007. Prior to joining China Paradise
Electronics, Mr. Zhang was the chief financial officer and
chief information officer of B&Q China, a leading home
improvement retail chain in China, from September 2001 to May
2005. From 1995 to 2001, Mr. Zhang worked for
PricewaterhouseCoopers in London as an audit manager and senior
consultant. Mr. Zhang obtained a bachelors degree in
business economics from Queen Mary & Westfield
College, University of London, United Kingdom and a Master of
Business Administration from Darwin College, University of
Cambridge, United Kingdom in 1993 and 2001, respectively.
Our
Executive Officers
Christopher Patrick Holbert, Chief Executive
Officer. Mr. Holbert has served as our
chief executive officer since August 2009. He served as a member
of our board of directors and as the chairman of our audit
committee and a member of our compensation and nominating and
corporate governance committees from July 2007 to August 2009.
From September 2008 until August 2009, he served as a member of
the board of directors of Duoyuan Global Water Inc. From August
2008 to August 2009, Mr. Holbert served as vice president
of Vision China Media Inc., which operates one of the largest
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out-of-home
advertising networks in China. From July 2006 to October 2008,
he served as the chief financial officer of China Techfaith
Wireless Communications Technology Limited, a cell phone handset
producer. From 2005 to 2006, he served as the director of
finance for CDC Corporation, a company that develops software,
online games and other internet applications. From 2004 to 2005,
he served as director of Sarbanes-Oxley Act of 2002 compliance
at Chinadotcom Corporation, the predecessor of CDC Corporation.
From 2003 to 2004, he served as vice president of finance of
Newpalm China, a subsidiary of Chinadotcom Corporation. From
2001 to 2003, he was the founding partner of Expat-CFO Services
Limited, a Shanghai-based financial consultancy providing advice
on doing business in China. Mr. Holbert has also served as
an auditor and consultant with Deloitte Touche Tohmatsu. He is a
certified public accountant and has 14 years of experience
in the field of accounting and financial management.
Mr. Holbert received a bachelors degree in science
with a concentration in accounting from Bowie State University,
United States.
William D. Suh, Chief Financial
Officer. Mr. Suh has served as our chief
financial officer since October 1, 2008. Prior to joining
us and since 1990, Mr. Suh was an accountant with
Ganze & Company, a CPA firm in Napa, California, where
he was elected to the partnership in 1997. Mr. Suh has
extensive experience in public accounting, including auditing,
tax planning, and financial and accounting consulting services,
and has worked in various industries, including manufacturing,
distribution, wineries and vineyards. He has advised numerous
private companies in the areas of business planning, strategic
planning, budgeting, reporting, and financing. Mr. Suh is a
CPA in the State of California, and a member of both the
American Institute of Certified Public Accountants and the
California Society of CPAs. Mr. Suh received a Bachelor of
Arts in Accounting from Pacific Union College in California.
Wenzhong Liu, Vice President of Sales and
Marketing. Mr. Liu has served as our
vice president of sales and marketing since November 2005. He
served as assistant general manager of sales at Duoyuan China
from July to October 2005, interim general manager of sales at
Duoyuan China from November 2004 to June 2005, and sales
representative at Duoyuan China from January 2001 to October
2004. Mr. Liu received a bachelors degree in science
from Luoyang Engineering Institute, China.
Yubao Wei, Chief Technology
Officer. Mr. Wei has served as our chief
technology officer since December 2007. He served as the general
manager of production of Duoyuan China from July 2004 to
December 2007 and as general manager of technology of Duoyuan
China from July 2003 to June 2004. Mr. Wei received a
masters degree in engineering from Tsinghua University,
China.
Baiyun Sun, Former Interim Chief Financial
Officer. Ms. Sun served as our interim
chief financial officer from December 20, 2007 to
March 1, 2008, and then from May 21, 2008 to
October 1, 2008. Prior to that, she served as our chief
financial officer from October 6, 2006 to July 18,
2007, our director and vice president between June 2001 and
April 2007 and chief accountant of Duoyuan Electric Group from
January 1994 to May 2001. Ms. Sun received a
bachelors degree in accounting from Beijing Finance and
Commerce Institute, China. Ms. Sun currently serves as our
controller.
Gene Michael Bennett, Former Chief Financial
Officer. Mr. Bennett served as our chief
financial officer from July 18, 2007 to December 20,
2007. Mr. Bennett served as our director and our audit
committee chairman between April 2007 and July 2007. He resigned
from our board of directors on July 18, 2007.
Mr. Bennett was a partner at Nexis Investment Consulting
Corporation (Beijing), which provides consulting services to
companies seeking to become public companies, between 2004 and
2007, where he assisted Chinese companies to raise funding and
assisted U.S. companies to find appropriate mergers and
acquisitions candidates and investment opportunities. He was a
partner at ProCFO from 2000 to 2004, where he provided temporary
chief financial officer services to companies with such needs.
Mr. Bennett received a bachelors degree in finance
and accounting and a master of business administration degree
from Michigan State University, United States.
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William Milewski, Former Chief Financial
Officer. Mr. Milewski served as our
chief financial officer from March 1, 2008 to May 21,
2008. Prior to joining us, he served as chief financial officer
of Foster Partners Asia, an executive recruitment firm, between
2006 and 2008. Prior to serving at Foster Partners Asia, he
served as co-founder and chief financial officer of Bbmao.com
Co. Ltd., Chinas first metasearch engine provider. From
2003 to 2005, Mr. Milewski served as chief financial
officer of POINTek, Inc., an optical components manufacturer.
Mr. Milewski received a bachelors degree in economics
and French from George Washington University, United States, and
a master of business administration degree from the University
of Hartford, United States.
Legal
Proceedings
To the best of our knowledge, during the past five years, none
of our directors or executive officers was involved in any of
the following: (1) any bankruptcy petition filed by or
against any business of which such person was a general partner
or executive officer either at the time of the bankruptcy or
within two years prior to that time, (2) any conviction in
a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor
offenses), (3) being subject to any order, judgment, or
decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her
involvement in any type of business, securities or banking
activities, and (4) being found by a court of competent
jurisdiction (in a civil action), the Securities and Exchange
Commission or the Commodities Futures Trading Commission to have
violated a federal or state securities or commodities law, and
the judgment has not been reversed, suspended or vacated.
Board of
Directors
Our board of directors consists of five members, namely
(1) Wenhua Guo, (2) Xiqing Diao, (3) Lianjun Cai,
(4) Punan Xie and (5) James Zhang. Our directors hold
office until our annual meeting of shareholders, where their
successor will be duly elected and qualified, or until the
directors death, resignation or removal, whichever is
earlier. We have not held an annual meeting of shareholders
since we acquired Duoyuan China in 2006. See Risk
Factors Risks Related to Our Business We
have not held any annual shareholder meetings since we acquired
Duoyuan China in 2006, and as a result, our shareholders have
limited ability to exercise their voting rights.
Director
Independence
Our board of directors consists of five members, three of whom
have been determined by us to be independent directors within
the meaning of the independent director guidelines of the New
York Stock Exchange Rules.
Committees
of Our Board of Directors
To enhance our corporate governance, we have established three
committees under our board of directors: an audit committee, a
compensation committee, and a nominating and corporate
governance committee. We have adopted a charter for each of
these committees. The committees have the following functions
and members.
Audit
Committee
Our audit committee reports to our board of directors regarding
the appointment of our independent public accountants, the scope
and results of our annual audits, compliance with our accounting
and financial policies and managements procedures and
policies relating to the adequacy of our internal accounting
controls. Our audit committee consists of James Zhang, Lianjun
Cai and Punan Xie. Mr. Zhang, having accounting and
financial management expertise, serves as the chairman of the
audit committee. Our board of directors has determined that
Mr. Zhang meets the definition of independent
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director under the applicable requirements of
Rule 303A of the New York Stock Exchange Rules and
Rule 10A-3
of the Securities Exchange Act of 1934, as amended. We expect
that within one year of our initial public offering our audit
committee will consist solely of independent directors.
Our audit committee is responsible for, among other things:
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the appointment, evaluation, compensation, oversight and
termination of the work of our independent auditor (including
resolution of disagreements between management and the
independent auditor regarding financial reporting);
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an annual performance evaluation of the audit committee;
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establishing procedures for the receipt, retention and treatment
of complaints regarding accounting, internal accounting
controls, auditing matters or potential violations of law, and
the confidential, anonymous submission by our employees of
concerns regarding questionable accounting or auditing matters
or potential violations of law;
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ensuring that it receives an annual report from our independent
auditor describing our internal control procedures and any steps
taken to deal with material control deficiencies and attesting
to the auditors independence and describing all
relationships between the auditor and us;
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reviewing our annual audited financial statements and quarterly
financial statements with management and our independent auditor;
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reviewing and approving all proposed related party transactions;
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reviewing our policies with respect to risk assessment and risk
management;
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meeting separately and periodically with management and our
independent auditor; and
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reporting regularly to our board of directors.
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Compensation
Committee
Our compensation committee assists the board of directors in
reviewing and approving the compensation structure of our
directors and executive officers, including all forms of
compensation to be provided to our directors and executive
officers. In addition, the compensation committee reviews stock
compensation arrangements for all of our other employees.
Members of the compensation committee are not be prohibited from
direct involvement in determining their own compensation. Our
chief executive officer will not be permitted to be present at
any committee meeting during which his or her compensation is
deliberated. Our compensation committee consists of Lianjun Cai,
Punan Xie and James Zhang, with Mr. Cai serving as the
chairman of the compensation committee. Our board of directors
has determined that all of the members of our compensation
committee meet the definition of independent
director under the applicable requirements of the New York
Stock Exchange Rules.
Our compensation committee is responsible for, among other
things:
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reviewing and approving corporate goals and objectives relevant
to the compensation of our chief executive officer, evaluating
the performance of our chief executive officer in light of those
goals and objectives and setting the compensation level of our
chief executive officer based on this evaluation;
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121
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reviewing and making recommendations to the board with respect
to the compensation of our executives, incentive compensation
and equity-based plans that are subject to board
approval; and
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providing annual performance evaluations of the compensation
committee.
|
Nominating
and Corporate Governance Committee
Our nominating and corporate governance committee assists the
board of directors in identifying and selecting or recommending
individuals qualified to become our directors, developing and
recommending corporate governance principles and overseeing the
evaluation of our board of directors and management. Our
nominating and corporate governance committee consists of Punan
Xie, Lianjun Cai and James Zhang, with Mr. Xie serving as
the chairman of the nominating and corporate governance
committee. Our board of directors has determined that all of the
members of our nominating and corporate governance committee
meet the definition of independent director under
the applicable requirements of the New York Stock Exchange Rules.
Our nominating and corporate governance committee is responsible
for, among other things:
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selecting and recommending to our board nominees for election or
re-election to our board, or for appointment to fill any vacancy;
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reviewing annually with our board the current composition of the
board of directors with regards to characteristics such as
independence, age, skills, experience and availability of
service to us;
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selecting and recommending to our board the names of directors
to serve as members of the audit committee and the compensation
committee, as well as the nominating and corporate governance
committee itself;
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advising our board of directors periodically with regards to
significant developments in the law and practice of corporate
governance as well as our compliance with applicable laws and
regulations, and making recommendations to our board of
directors on all matters of corporate governance and on any
remedial action to be taken; and
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monitoring compliance with our code of business conduct and
ethics, including reviewing the adequacy and effectiveness of
our procedures to ensure proper compliance.
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Code of
Business Conduct and Ethics
In anticipation of this offering, our board of directors adopted
a code of business conduct and ethics applicable to our
directors, officers and employees.
122
COMPENSATION
DISCUSSION AND ANALYSIS
Overview
During the year ended June 30, 2009, our compensation
committee was responsible for setting our compensation policies
and approving the amount and form of executive compensation. The
primary objectives of our compensation committee with respect to
our executive compensation program were to attract and retain
highly talented and dedicated executives and to align
executives incentives with the creation of shareholder
value. As of June 30, 2009, our compensation committee
consisted of Lianjun Cai, Christopher Patrick Holbert and Punan
Xie. Mr. Cai served as the chairman of our compensation
committee.
During fiscal 2009, our named executive officers consisted of
Xiqing Diao, our interim chief executive officer and chief
operating officer, Wenhua Guo, our former chief executive
officer, William D. Suh, our chief financial officer, and Baiyun
Sun, our former interim chief financial officer.
Determining
Executive Compensation
In determining the amounts of compensation paid to our named
executive officers during fiscal 2009, our compensation
committee generally reviewed and considered the level of
compensation paid to comparable executives at two publicly
listed companies in China: Beiren Printing Machinery Holdings
Limited, or Beiren, and Shanghai Electric Printing &
Package Machinery Co., Ltd., or Shanghai Electric. Our
compensation committee chose these companies because they are
Chinese companies operating in the offset printing industry that
are of similar size and in a similar stage of development as us.
Our compensation committee did not benchmark or
specifically target our base salary or annual discretionary
incentive compensation based on this data. Instead, our
compensation committee reviewed the publicly-available
compensation information paid by these companies to their named
executive officers in order to obtain a general understanding of
Beiren and Shanghai Electrics current compensation
practices and ranges.
Elements
of Compensation
During fiscal 2009, our executive compensation consisted of an
annual base salary and an annual discretionary cash bonus
program. We did not grant, and have not historically granted,
any stock, stock option or other types of equity compensation.
We may implement a long-term equity incentive plan in the
future. However, due to the adverse impact of Chinese tax laws,
we currently do not consider these types of awards desirable.
Base
Salary
Each of our named executive officers base salary is
supplemented by a position subsidy and a household subsidy,
which together represent a living allowance.
Although these subsidies are not required under Chinese law,
they are common practice for Chinese companies when compensating
their executives, and our compensation committee noted that both
Beiren and Shanghai Electric paid these subsidies. Consistent
with our historic practice, our compensation committee utilized
a 75%, 15% and 10% ratio for base salary, position subsidy and
household subsidy, respectively, during fiscal 2009. Based on
its review of the comparative data, our compensation committee
believed that this ratio to be consistent with the ratios used
by other Chinese companies, including Beiren and Shanghai
Electric.
123
The table below sets forth the base salary, position subsidy and
household subsidy paid to our named executive officers for
fiscal 2009:
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Base
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|
Position
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Household
|
|
|
|
|
Name and Position
|
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Salary
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|
|
Subsidy
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|
Subsidy
|
|
|
Total
|
|
|
Wenhua
Guo(1)
Chairman and Former Chief Executive Officer
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|
$
|
28,100
|
|
|
$
|
5,400
|
|
|
$
|
3,600
|
|
|
$
|
37,100
|
|
William Suh
Chief Financial Officer
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|
$
|
149,000
|
|
|
|
|
|
|
|
|
|
|
$
|
149,000
|
|
Xiqing
Diao(2)
Chief Operating Officer
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|
$
|
24,900
|
|
|
$
|
4,900
|
|
|
$
|
3,100
|
|
|
$
|
32,900
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|
Baiyun
Sun(3)
Former Interim Chief Financial Officer
|
|
$
|
28,100
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|
|
$
|
5,400
|
|
|
$
|
3,600
|
|
|
$
|
37,100
|
|
|
|
(1)
|
Mr. Guo resigned as our chief executive officer effective
as of June 29, 2009.
|
(2)
|
Mr. Diao, our chief operating officer, also served as our
Interim Chief Executive Officer from July 9, 2009 to
August 26, 2009.
|
(3)
|
Ms. Sun served as our interim chief financial officer from
December 20, 2007 until February 28, 2008. She served
as our interim chief financial officer and controller for the
remainder of fiscal 2008 after May 21, 2008. On
October 1, 2008, Mr. Suh was appointed as our chief
financial officer. Upon his appointment, Ms. Sun resigned
as interim chief financial officer. Ms. Sun currently
serves as our controller.
|
Wenhua
Guo, Baiyun Sun and Xiqing Diao
The base salaries of Wenhua Guo, Baiyun Sun and Xiqing Diao for
fiscal 2009 were primarily determined by our compensation
committees review of (1) the base salaries paid by
Beiren and Shanghai Electric and (2) our internal annual
base salary level for each category of executive officers,
supplemented by the position subsidy and the household subsidy.
The base salary for Mr. Guo, Ms. Sun and Mr. Diao may
be lower than compensation paid by Beiren or Shanghai Electric
to their officers, but we generally do not pay Mr. Guo,
Ms. Sun and Mr. Diao higher compensation than those paid by
Beiren and Shanghai Electric. We may pay Mr. Guo,
Ms. Sun and Mr. Diao compensation in the higher end of
the compensation range when he or she has performed well in a
given year. We may pay compensation to Mr. Guo,
Ms. Sun and Mr. Diao in the lower end of the compensation
range when his or her performance in a certain year is not
deemed satisfactory, or when his or her experience level is not
believed to be comparable to those at Beiren or Shanghai
Electric holding similar positions.
Our compensation committee reviewed the compensation paid by
each of Beiren and Shanghai Electric to their chief executive
officer
and/or
general managers during fiscal 2008. In its review, our
compensation committee noted that Beirens general manager
was paid approximately $47,200 in annual compensation. Our
compensation committee also noted that Shanghai Electric
reported paying its executive general manager approximately
$85,000 in annual compensation for fiscal 2008. Upon review of
this information, our compensation committee increased
Mr. Guos salary from $32,020 in fiscal 2008 to
$37,100 in fiscal 2009, a 16% increase.
Similarly, our compensation committee noted that the reported
fiscal 2008 annual compensation for Beirens financial
manager was approximately a total of $36,500 and it was $71,000
for the financial manager of Shanghai Electric. Upon review of
this information, our compensation committee increased
124
Ms. Suns base salary from $32,020 in fiscal 2008 to
$37,100 in fiscal 2009, a 16% increase. During fiscal 2009,
Ms. Sun served as interim chief financial officer until
September 30, 2008.
In addition, our compensation committee reviewed the
compensation paid by each of Beiren and Shanghai Electric to
their director and deputy general manager
and/or
executive director during fiscal 2008. In its review, our
compensation committee noted that Beirens deputy general
manager was paid approximately $34,600 in annual compensation.
Our compensation committee also noted that Shanghai Electric
reported paying its deputy general manager approximately $71,200
in annual compensation for fiscal 2008. Upon review of this
information, our compensation committee increased
Mr. Diaos salary from $18,500 in fiscal 2008 to
$32,900 in fiscal 2009, a 77.8% increase.
Chief
Financial Officer
Effective October 1, 2008, William Suh was appointed as our
chief financial officer. When determining the base salary for
our chief financial officer, our compensation committee adopted
a different methodology than the one used for our other
executives because our chief financial officer had prior work
experience outside China and was familiar with U.S. GAAP, a
key consideration in his hire. For our chief financial officer,
our compensation committee reviewed and considered
publicly-available salary information for chief financial
officers of the following Chinese companies, each of which is
listed on a U.S. stock exchange:
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eLong, Inc.
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Fuwei Films (Holdings) Co., Ltd.
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Sohu.com Inc.
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Trina Solar Ltd.
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Sina.com, Inc.
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Canadian Solar Inc.
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AsiaInfo Holdings, Inc.
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Home Inns & Hotels Management Inc.
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WuXi PharmaTech (Cayman) Inc.
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Mindray Medical International Ltd.
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E-House
(China) Holdings Ltd.
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New Oriental Education & Technology Group, Inc.
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Perfect World Co., Ltd.
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Verigy Ltd.
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Spreadtrum Communications, Inc.
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Himax Technologies, Inc.
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Yingli Green Energy Holding Co. Ltd.
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China GrenTech Corp. Ltd.
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LDK Solar Hi-tech Co., Ltd.
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Suntech Power Holdings Co. Ltd.
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China Sunergy Co., Ltd.
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Actions Semiconductor Co., Ltd.
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Acorn International, Inc.
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|
Vimicro International Corp.
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Qiao Xing Mobile Communication Co., Ltd.
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|
China Medical Technologies Inc.
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Simcere Pharmaceutical Group
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Baidu.com, Inc.
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Tongjitang Chinese Medicines Company
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|
Focus Media Holding Ltd.
|
Xinhua Finance Media Ltd.
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|
China Techfaith Wireless Communication Technology Ltd.
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JA Solar Holdings Co. Ltd.
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Hurray! Holding Co., Ltd.
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Solarfun Power Holdings Co., Ltd.
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Comtech Group, Inc.
|
While these companies span a wide range of industries and are
not restricted to the offset printing equipment industry, our
compensation committee selected them for review to better
understand the compensation practices and ranges for chief
financial officers of companies operating in China that were
also listed on a U.S. stock exchange. These companies are
also comparable to us in terms of size and capitalization.
Based on its review of the compensation paid by these companies
to their chief financial officers, our compensation committee
determined that the annual base salary for our chief financial
officer should range from $120,000 to $200,000. Our compensation
committee generally believed that a chief financial officer who
is familiar with U.S. GAAP, familiar with U.S. public
company reporting requirements
and/or
125
fluent in both English and Chinese should command a
substantially higher salary than Chinese candidates who speak
and write only Chinese and are familiar only with Chinese
accounting principles.
Our compensation committee also considered other subjective
factors to determine the precise compensation amount for
Mr. Suh, including his past work experience and the level
of responsibility required of our chief financial officer. The
actual base salary amount was negotiated with the officer at the
time of his hire. Based on this information, our compensation
committee approved an annual base salary of $192,000 for
Mr. Suh.
Discretionary
Annual Bonus
Consistent with our historical practice, for fiscal 2009, our
compensation committee had the authority to award discretionary
annual cash bonuses to our executive officers, including each of
the named executive officers. The annual discretionary bonuses
are intended to compensate and reward the executives for their
individual contributions, as reviewed and determined by our
compensation committee on a subjective basis, to our revenue
increase and business operations in any given year. Our
compensation committees decision to award discretionary
annual bonuses, if any, and the amount of such bonuses to
individual executives are generally determined separate and
apart from its consideration of base salary increases due to our
compensation committees belief that each form of
compensation is designed for a different purpose. Six of our
executive officers were eligible to receive annual discretionary
bonuses during fiscal 2009. William Suh did not receive a bonus
during fiscal 2009 due to his short tenure with us.
For each fiscal year where our revenue increased, including for
fiscal 2009, our compensation committee sets aside a portion of
our revenue growth ( e.g. , the growth in revenue during
the most recently completed fiscal year as compared to the prior
fiscal year) as a discretionary bonus pool for our eligible
executive officers. Our compensation committee considers several
factors when determining the bonus pool size for any given
fiscal year, including general industry and market conditions,
our sales and profit growth, our gross and net profit margins
and how actual growth rates and margins compared to our internal
target growth rates and margins established at the beginning of
the fiscal year.
Additionally, our compensation committee conducts performance
reviews of our executive officers who are eligible for
discretionary bonuses. During the performance review, our
compensation committee assigns each executive officer a score
based on his or her performance. Our compensation committee then
determines the average score of all the executive officers
reviewed and applies a pre-established formula to yield an
annual bonus pool the size of 0.5% to 1% of our revenue growth.
If the average performance score is low, the bonus pool will be
closer to the lower end of the range. A high average performance
score will lead to a bonus pool rate to be closer the high end
of the range.
For fiscal 2009, our bonus pool was 0.85% of our revenue growth.
In establishing the pool, our compensation committee considered
our 18.9% increase in revenue from fiscal 2008 to fiscal 2009
and our 23.2% increase in net income during the same period.
In determining each named executive officers individual
discretionary bonus for fiscal 2009, our compensation committee
established an internal bonus structure, as described below,
based on individual qualitative performance benchmarks.
Wenhua Guos fiscal 2009 discretionary bonus performance
benchmarks included (1) increase overall sales and profit
growth; (2) accomplish strategic activities such as
introducing new and enhanced products to the market; and
(3) recruiting and overseeing the management team. Based on
his significant contributions to the growth of our revenue and
profit in fiscal 2009 (as described above), Mr. Guo was
awarded a discretionary bonus of $10,500 for fiscal 2009.
126
Baiyun Suns performance benchmarks included
(1) timely and accurate preparation of our financial data
and (2) assisting Mr. Guo in devising and carrying out
financial strategies. Our compensation committee determined that
Ms. Sun met these performance benchmarks and awarded her a
discretionary bonus of $10,500 for fiscal 2009.
Xiqing Diaos performance benchmarks included
(1) increase overall sales and (2) continuity of
production. Our compensation committee determined that
Mr. Diao met these performance benchmarks and awarded him a
discretionary bonus of $8,300 for fiscal 2009.
The following table shows the bonus pool scores and
discretionary bonus amounts for our executive officers,
including our named executive officers, for the year ended
June 30, 2009:
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|
|
|
|
|
|
|
|
|
|
Bonus
|
|
|
Amount of
|
|
Name and Position
|
|
Pool Score
|
|
|
Bonus
|
|
|
Wenhua
Guo(1)
|
|
|
|
|
|
|
|
|
Chairman and Former Chief Executive Officer
|
|
|
19
|
%
|
|
$
|
10,500
|
|
William Suh
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
Xiqing Diao
|
|
|
|
|
|
|
|
|
Chief Operating Officer
|
|
|
15
|
%
|
|
$
|
8,300
|
|
Wenzhong Liu
|
|
|
|
|
|
|
|
|
Vice President of Sales and Marketing
|
|
|
31
|
%
|
|
$
|
17,000
|
|
Baiyun
Sun(2)
|
|
|
|
|
|
|
|
|
Former Interim Chief Financial Officer
|
|
|
15
|
%
|
|
$
|
10,500
|
|
Yubao Wei
|
|
|
|
|
|
|
|
|
Chief Technology Officer
|
|
|
15
|
%
|
|
$
|
8,300
|
|
|
|
(1)
|
Mr. Guo resigned as our chief executive officer effective
as of June 29, 2009.
|
(2)
|
Ms. Sun served as our interim chief financial officer from
December 20, 2007 to March 1, 2008, and May 21,
2008 to October 1, 2008. She currently serves as our
controller.
|
Retirement
Benefits
Our Chinese employees, including each of our named executive
officers (excluding William Suh), participate in pension
programs implemented by Chinese municipal and provincial
governments. Our Chinese employees are required to contribute 8%
of his or her monthly base salary to these pension programs.
Therefore, we withhold and pay such amounts on behalf of these
employees. The amount in the Salary column of the
Summary compensation Table below includes each applicable
employees 8% pension contribution. Municipal statistics
bureaus calculate the average monthly salary for employees in a
city and establish a pension contribution range. If an
employees actual monthly salary falls within the
prescribed range, his or her actual monthly salary will be used
to calculate his or her pension contribution amount. If an
employees actual monthly salary is outside the range, the
average monthly salary calculated by the municipal statistics
bureaus will be used to calculate his or her pension
contribution amount.
In addition, we are required to contribute 20% of the
employees monthly salary before tax to the pension
programs described above. The monthly base salaries of Wenhua
Guo and Baiyun Sun both exceeded the prescribed salary range.
Pursuant to PRC regulations, the average monthly salaries
established by municipal statistic bureaus, instead of these
individuals actual monthly salaries, were used to
calculate their respective pension contribution amounts. Our 20%
contribution to the pension program is reflected in the
All Other Compensation column of the Summary
Compensation table below.
127
No retirement or pension benefits are determined by an
employees compensation level or years of service.
Other
Compensation
Other than the annual salary for our executive officers, the
bonus that may be awarded to executive officers at the
discretion of our compensation committee and arrangements with
executive officers for the use of a company car, we do not
provide any other benefits and perquisites for our executive
officers. However, our compensation committee may, in its
discretion, provide benefits and perquisites to executive
officers if it deems such provisions advisable.
Summary
Compensation Table
The following table sets forth information regarding
compensation received by our named executive officers for the
years indicated. The compensation of our other executive
officers, including Yubao Wei and Wenzhong Liu, did not exceed
$100,000 per year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonequity
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
Share
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
Name and Principal
Position
|
|
Year
|
|
Salary(1)(2)
|
|
Bonus(1)(3)
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation(1)(4)
|
|
Total(1)
|
|
Wenhua
Guo(5)
|
|
|
2009
|
|
|
|
37,100
|
|
|
|
10,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450
|
|
|
|
49,050
|
|
Chairman and Former
|
|
|
2008
|
|
|
|
32,020
|
|
|
|
35,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,294
|
|
|
|
68,514
|
|
Chief Executive Officer
|
|
|
2007
|
|
|
|
25,615
|
|
|
|
21,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,587
|
|
|
|
49,702
|
|
William D. Suh
|
|
|
2009
|
|
|
|
149,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,000
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xiqing Diao
|
|
|
2009
|
|
|
|
32,900
|
|
|
|
8,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450
|
|
|
|
42,650
|
|
Chief Operating Officer
|
|
|
2008
|
|
|
|
18,500
|
|
|
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,196
|
|
|
|
32,196
|
|
|
|
|
2007
|
|
|
|
16,900
|
|
|
|
11,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,073
|
|
|
|
29,573
|
|
Baiyun
Sun(6)
|
|
|
2009
|
|
|
|
37,100
|
|
|
|
10,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450
|
|
|
|
49,050
|
|
Former Interim
|
|
|
2008
|
|
|
|
32,020
|
|
|
|
27,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,294
|
|
|
|
61,114
|
|
Chief Financial Officer
|
|
|
2007
|
|
|
|
25,615
|
|
|
|
19,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,587
|
|
|
|
47,402
|
|
|
|
(1)
|
Amounts set forth in these columns were paid to or received by
the executive in Renminbi and were converted into U.S. dollars
based on the conversion rate in effect on June 30, 2009.
|
(2)
|
The amount in the Salary column includes each
executives 8% contribution to the pension programs. We
withhold and pay such percentage on behalf of the employee. For
Mr. Guo and Ms. Sun, their contribution was
approximately $1,450 and $1,450 in fiscal 2009, respectively.
|
(3)
|
Amounts represent the annual discretionary bonus paid to each
applicable executive during the respective fiscal year. For more
information on the annual discretionary bonuses paid in fiscal
2009, see the Compensation Discussion and Analysis
above.
|
(4)
|
Amounts represent our required contribution to the employee
contribution pension program, which amount typically represents
20% of the employees annual base salary before taxes.
|
(5)
|
Mr. Guo resigned as our chief executive officer effective
as of June 29, 2009.
|
(6)
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Ms. Sun served as our interim chief financial officer from
December 20, 2007 to March 1, 2008, and May 21,
2008 to October 1, 2008. She currently serves as our
controller.
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Employment
Contracts
All of our executive officers, except William D. Suh and
Christopher Patrick Holbert, have executed standard employment
agreements with us, which are governed by Chinese law. Our
standard employment agreements are for a fixed period of one
year and may be renewed upon both parties consents. After
ten years of employment, an employee may enter into an
employment agreement with us for an indefinite period of time.
We did not enter into any new employment agreement with
Ms. Sun for her temporary interim chief financial officer
positions. Ms. Sun remained bound by her existing
employment agreement during such time and currently.
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Other than the amount of compensation, the terms and conditions
of the employment agreements for our executive officers are
substantially the same as those of our standard employment
agreements for non-executive employees. Pursuant to our standard
employment agreements, we may terminate employees for cause,
without notice or severance. If we terminate employment due to
economic downturn or performance related reasons, we are
obligated to give 30 days advance notice or pay
one-months salary as severance in lieu of notice. In
addition, we may pay additional severance in the amount of
one-months salary for each year that an employee has
served with us. If the monthly wage of an employee is three
times greater than the average monthly wage in the previous year
for employees as announced by the peoples government at
the municipal level directly under the central government or at
the city-with-district level where the Employer is located, the
rate for the financial compensations paid to him shall be three
times the average monthly wage of employees and shall be for not
more than 12 years of work. An employee may resign without
good reason upon one months notice, or resign for good
reason without notice.
In the event Mr. Guo or Ms. Sun were to be terminated
by us due to economic considerations or unsuitability for their
respective positions, we would be obligated to pay each of them
up to 12 months of their respective salaries (as of
June 30, 2009).
William D. Suh was appointed our chief financial officer,
effective as of October 1, 2008. Pursuant to the employment
agreement between us and Mr. Suh, Mr. Suh will
(a) receive a base salary of $192,000 per year, subject to
annual increases at the discretion of our compensation
committee, (b) receive a grant of 100,000 stock options to
purchase our common shares at the public offering price on the
effective date of our public offering and listing of our common
shares on the NASDAQ Stock Markets Global Market or Global
Select Market, the New York Stock Exchange or another comparable
national stock exchange or marketplace approved by our board of
directors, with a quarter of the options to vest and become
exercisable on October 1, 2010 and the remainder of the
options to vest ratably on a monthly basis through
October 1, 2013, (c) be eligible for annual bonuses,
the amount of which is subject to the sole discretion of our
compensation committee, and (d) be eligible to receive any
other perquisites and benefits offered to our executive
officers. For a discussion of how our compensation committee
determined Mr. Suhs compensation, see
Base Salary Chief Financial
Officers above.
Christopher Patrick Holbert was appointed our chief executive
officer, effective as of August 26, 2009. Pursuant to the
employment agreement between us and Mr. Holbert,
Mr. Holbert will (a) receive a monthly base salary of
RMB125,280, subject to annual increases at the discretion of our
compensation committee, (b) receive an annual retention
bonus of RMB410,010, (c) be eligible for additional annual
bonuses, the amount of which is subject to the sole discretion
of our compensation committee, and (d) be eligible to
receive any other perquisites and benefits offered to our
executive officers.
Pursuant to Mr. Suhs employment agreement, we may
terminate Mr. Suh without cause and Mr. Suh may resign
with or without good reason, upon thirty days written
notice. Termination by us with cause will be immediate, without
written notice. Upon termination by us without cause,
Mr. Suh is entitled to severance payment of six months of
salary, which could either be paid in lump sum or in six-month
installments. To be eligible for such severance payments,
Mr. Suh must comply with certain confidentiality provisions
and other covenants as stipulated in our employment agreement
with Mr. Suh.
Pursuant to Mr. Holberts employment agreement, we may
terminate Mr. Holbert without cause, upon at least thirty
days written notice. Mr. Holbert may resign with or
without good reason, upon at least sixty days written
notice. Termination by us with cause will be immediate. Upon
termination by us without cause, Mr. Holbert is entitled to
severance payment of six months of salary, which could either be
paid in lump sum or in six-month installments. To be eligible
for such severance payment, Mr. Holbert must comply with
certain confidentiality provisions and other covenants as
stipulated in our employment agreement with Mr. Holbert.
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Termination
of Employment and
Change-in-Control
Arrangements
Gene
Michael Bennett
Gene Michael Bennett served as our chief financial officer from
July 18, 2007 to December 20, 2007. Upon his
resignation, Mr. Bennett executed a letter of resignation
and separation agreement, effective December 20, 2007.
Pursuant to his agreement, Mr. Bennett continued to serve
as an independent outside consultant for a six-month period
until June 20, 2008, during which time we paid him $5,000
per month. Mr. Bennett was entitled to no additional
compensation from us upon his resignation.
William
Milewski
William Milewski served as our chief financial officer from
March 1, 2008 to May 21, 2008. Upon his resignation,
Mr. Milewski executed a letter of resignation and
separation agreement, effective May 31, 2008. Pursuant to
his agreement, Mr. Milewski received a bonus equal to one
month base salary in recognition of the contributions he made
during his employment with us. He also continued to serve as an
independent outside consultant for an eight-month period until
January 21, 2009, during which time he received $3,500 per
month. Mr. Milewskis consulting agreement became
effective June 2008 and the first payment under the consulting
agreement was made in July 2008. Mr. Milewski is entitled
to no additional compensation from us due to his resignation.
Grants of
Plan-Based Awards
During fiscal 2009, neither we nor our subsidiaries granted any
stock, stock option or other types of equity compensation, or
any non-equity incentive plan compensation awards, to any
executive officers.
Outstanding
Equity Awards at Fiscal Year-End
We did not have any outstanding equity awards as of
June 30, 2009.
Option
Exercises and Stock Vested
Because we have not previously granted any equity compensation
to the named executive officers, there were no stock option
exercises or vesting of stock during fiscal 2009.
2009
Omnibus Incentive Plan
On October 16, 2009, our board of directors approved the
Duoyuan Printing, Inc. 2009 Omnibus Incentive Plan.
The granting of awards under the new equity plan will generally
be within the discretion of our compensation committee.
Accordingly, it is not possible as of the date of this
prospectus to determine the nature or amount of any such awards
that may be subject to future grants to our officers, employees
and other participants in the 2009 Omnibus Incentive Plan. The
2009 Omnibus Incentive Plan is not the exclusive means of
providing incentive compensation to executives and other
employees eligible to participate in the 2009 Omnibus Incentive
Plan, and we reserve the right to pay incentive compensation to
them under another plan or without regard to any plan in
appropriate circumstances.
The following summary description of the material features of
the 2009 Omnibus Incentive Plan is not intended to be exhaustive
and is qualified by reference to the 2009 Omnibus Incentive Plan.
Purpose
and Eligibility
The purpose of the 2009 Omnibus Incentive Plan is to enhance our
ability to attract, retain and motivate highly qualified
officers, employees, non-employee directors and other persons to
serve our
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company and our affiliates and to expend maximum effort to
improve our business results and earnings, by providing to such
officers, employees, non-employee directors and other persons an
opportunity to acquire or increase a direct proprietary interest
in our operations and future success through ownership of our
common shares.
Awards may be granted under the plan to our officers, directors,
including non-employee directors, and other employees or any of
our subsidiaries or other affiliates, to any individual who is
an advisor, consultant or other provider of services to us or
our subsidiaries or other affiliates, and to any other
individuals who are approved by the board of directors as
eligible to participate in the 2009 Omnibus Incentive Plan. Only
our or any of our subsidiaries employees are eligible to
receive incentive stock options.
Effective
Date and Term
The 2009 Omnibus Incentive Plan became effective
October 16, 2009 and will expire on October 16, 2019
unless earlier terminated by our board of directors.
Administration,
Amendment and Termination
Our board of directors will have the power and authority to
administer the 2009 Omnibus Incentive Plan. In accordance with
the terms of the plan, the board of directors will delegate this
power and authority to its compensation committee. The
compensation committee will have the authority to interpret the
terms and intent of the 2009 Omnibus Incentive Plan, determine
eligibility for and terms of awards for participants and make
all other determinations necessary or advisable for the
administration of the 2009 Omnibus Incentive Plan. To the extent
permitted by law, the board or compensation committee may
delegate authority under the plan to a member of the board of
directors.
The compensation committee may amend, suspend or terminate the
2009 Omnibus Incentive Plan at any time with respect to any
common shares as to which awards have not been made. No such
action may amend the 2009 Omnibus Incentive Plan without the
approval of shareholders if the amendment is required to be
submitted for shareholder approval by applicable law, rule or
regulation, including rules of the New York Stock Exchange.
Awards
Awards under the 2009 Omnibus Incentive Plan may be made in the
form of:
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stock options, which may be either incentive stock options or
non-qualified stock options;
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stock appreciation rights;
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restricted stock;
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restricted stock units;
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dividend equivalent rights;
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performance shares;
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performance units;
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other stock-based awards, including unrestricted shares; or
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any combination of the foregoing.
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Any of the foregoing awards may be made subject to attainment of
performance goals over a performance period of one or more years.
An incentive stock option is an option that meets the
requirements of Section 422 of the Internal Revenue Code,
and a non-qualified stock option is an option that does not meet
those requirements. A stock appreciation right, or SAR, is a
right to receive upon exercise, in the form of common share,
cash or a combination thereof, the excess of the fair market
value of one common share on the exercise date over the grant
price of such SAR. Restricted stock is an award of common share
on which are imposed restrictions over restricted periods that
subject the shares to a substantial risk of forfeiture, as
defined in Section 83 of the Internal Revenue Code.
Restricted stock units are awards that represent a conditional
right to receive common shares in the future and that may be
made subject to the same types of restrictions and risk of
forfeiture as restricted stock. Dividend equivalent rights are
awards entitling the recipient to receive credits, which may be
paid currently in cash or common shares or which may be deemed
to be reinvested in additional shares, that are based on cash
distributions that would have been paid on the shares specified
in the rights if the shares had been issued to and held by the
recipient. Performance shares are awards of common shares, the
value for which at the time the common share is payable is
determined by the extent to which the applicable performance
criteria have been met. Performance units are similar to
performance shares except that the award is a performance-based
right to receive common shares in the future, subject to one or
more other restrictions. Unrestricted shares are awards of
common shares that are free of restrictions other than those
imposed under federal or state securities laws.
Shares
Subject to 2009 Omnibus Incentive Plan
Subject to adjustment as described below, a total of 1,750,000
common shares will be available for issuance under the 2009
Omnibus Incentive Plan. Shares issued under the 2009 Omnibus
Incentive Plan may be authorized but unissued shares or treasury
shares.
Any shares covered by an award, or portion of an award, granted
under the 2009 Omnibus Incentive Plan that is forfeited or
canceled, expires or is settled in cash will be deemed not to
have been issued for purposes of determining the maximum number
of shares available for issuance under the 2009 Omnibus
Incentive Plan.
Shares issued under the 2009 Omnibus Incentive Plan through the
settlement, assumption or substitution of outstanding awards or
obligations to grant future awards resulting from the
acquisition of another entity will not reduce the maximum number
of shares available for issuance under the 2009 Omnibus
Incentive Plan. In the case of a SAR, only the actual number of
shares issued upon exercise of the SAR will be deemed issued for
purposes of determining the maximum number of shares available
for issuance.
The 2009 Omnibus Incentive Plan has a number of additional
limitations on the shares reserved for issuance or amount of
awards that may be granted. A maximum of 528,000 shares may
be issued pursuant to incentive stock options. From and after
the transition period set forth in Treasury regulations
promulgated under Internal Revenue Code section 162(m), no
participant may be awarded options or SARs for more than
437,500 shares in any calendar year. A maximum of
218,750 shares of awards other than options or SARs may be
awarded to any participant in any calendar year. The maximum
amount that may be earned as an annual incentive award or other
cash award in any calendar year by any one participant shall be
$4.0 million and the maximum amount that may be earned as a
performance award or other cash award in respect of a
performance period by any one participant shall be
$12.0 million. The foregoing limitations are subject to
adjustment as described below.
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Terms
and Conditions of Awards
Terms and
Conditions of Options
An option granted under the 2009 Omnibus Incentive Plan will be
exercisable only to the extent that it is vested on the date of
exercise. No option may be exercisable more than ten years from
the option grant date. The compensation committee may include in
the option agreement the period during which an option may be
exercised following termination of employment or service.
The exercise price per share under each option granted under the
2009 Omnibus Incentive Plan may not be less than 100%, or 110%
in the case of an incentive stock option granted to a ten
percent shareholder, of the fair market value of the common
shares on the option grant date. For so long as the common
shares remain listed on the New York Stock Exchange, the fair
market value of the common shares will be the closing price of
the common shares as reported on the New York Stock Exchange on
the option grant date. If there is no closing price reported on
the option grant date, the fair market value will be deemed
equal to the closing price as reported on the New York Stock
Exchange for the last preceding date on which sales of the
common shares were reported. If the common shares are listed on
more than one established stock exchange, the fair market value
will be the closing price of the common shares reported on the
exchange selected by the board of directors. If the common
shares are not at the time listed or admitted to trading on a
stock exchange, fair market value will be the mean between the
highest bid and lowest asked prices or between the high and low
sale prices of the common shares. If the common shares are not
listed on any stock exchange or traded in the over-the-counter
market, fair market value will be as determined in good faith by
the board of directors in a manner consistent with
Section 409A of the Internal Revenue Code.
Except upon the occurrence of a merger or other transaction
described below, no amendment or modification may be made to an
outstanding option which reduces the option price, either by
lowering the option price or by canceling the outstanding option
and granting a replacement option with a lower option price.
Payment of the option price for shares purchased pursuant to the
exercise of an option may be made in cash or in cash equivalents
acceptable to us, through a broker-assisted cashless exercise,
the tender to us of common shares or by a combination of cash
payment, cashless exercise,
and/or
tender of shares or any other method that is approved by the
compensation committee.
Each option will become vested and exercisable at such times and
under such conditions as the compensation committee may approve
consistent with the terms of the 2009 Omnibus Incentive Plan.
In the case of incentive stock options, the aggregate fair
market value of the common shares determined on the option grant
date with respect to which such options are exercisable for the
first time during any calendar year may not exceed $100,000.
Incentive stock options are non-transferable during the
optionees lifetime. Awards of non-qualified stock options
are generally non-transferable, except for transfers by will or
the laws of descent and distribution. The compensation committee
may, in its discretion, determine that an award of non-qualified
stock options also may be transferred to family members by gift
or other transfers deemed not to be for value.
The compensation committee may impose restrictions on any common
shares acquired pursuant to the exercise of an option as it
deems advisable, including minimum holding period requirements
or restrictions under applicable federal securities laws, under
the requirements of any stock exchange or
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market upon which the common shares are then listed
and/or
traded, or under any blue sky or state securities laws
applicable to the common shares.
Terms and
Conditions of Stock Appreciation Rights
SARs may be granted in conjunction with all or a part of any
option or other award granted under the 2009 Omnibus Incentive
Plan, or without regard to any option or other award. The
compensation committee will determine at the SAR grant date or
thereafter the time or times at which and the circumstances
under which a SAR may be exercised in whole or in part, the time
or times at which and the circumstances under which a SAR will
cease to be exercisable, the method of exercise, the method of
settlement, the form of consideration payable in settlement,
whether or not a SAR will be in tandem or in combination with
any other grant, and any other terms and conditions of any SAR.
Exercisability of SARs may be subject to future service
requirements, to the achievement of one or more of the
performance objectives that are described below under
Corporate Performance Objectives or to
such other terms and conditions as the compensation committee,
in its sole discretion, may impose.
Upon exercise of a SAR, the holder will be entitled to receive,
in the specified form of consideration, the excess of the fair
market value of one common share on the exercise date over the
grant price of such SAR, as determined by the compensation
committee. The grant price of a SAR may not be less than the
fair market value of a common share on the grant date. Except
upon the occurrence of a merger or other transaction described
below, no amendment or modification may be made to an
outstanding SAR which would be considered a repricing under the
rules of the stock exchange under which the shares are listed
without the consent of the shareholders.
Awards of SARs are generally nontransferable, except for
transfers by will or the laws of descent and distribution.
Terms and
Conditions of Restricted Stock and Restricted Stock
Units
Subject to the provisions of the 2009 Omnibus Incentive Plan,
the compensation committee will determine the terms and
conditions of each award of restricted stock and restricted
stock units, including the restricted period for all or a
portion of the award, the restrictions applicable to the award
and the purchase price, if any, for the common shares subject to
the award. Unless otherwise determined by the compensation
committee, to the extent permitted or required by law as
determined by the compensation committee, holders of shares of
restricted stock will have the right during the restricted
period to exercise full voting rights with respect to those
shares and the right to receive any dividends declared or paid
with respect to the shares. Awards of restricted stock and
restricted stock units may be subject to satisfaction of
individual performance objectives or one or more of the
performance objectives that are described below under
Corporate Performance Objectives.
The restrictions and the restricted period may differ with
respect to each participant. An award will be subject to
forfeiture if events specified by the compensation committee
occur before the lapse of the restrictions.
Awards of restricted stock and restricted stock units are
generally nontransferable during the restricted period or before
satisfaction of any other restrictions applicable to the awards.
Terms and
Conditions of Dividend Equivalent Rights
The compensation committee is authorized to grant dividend
equivalents to a participant in connection with an award under
the 2009 Omnibus Incentive Plan, or without regard to any other
award. Dividend equivalents will entitle the participant to
receive cash or common shares equal in value to dividends paid,
or other periodic payments made, with respect to a specified
number of common shares. Dividend
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equivalents may be paid or distributed when accrued or will be
deemed to have been reinvested in additional common shares or in
awards under the 2009 Omnibus Incentive Plan, and will be
subject to such risks of forfeiture as the compensation
committee may specify. Dividend equivalents are generally
nontransferable, except for transfers by will or the laws of
descent and distribution.
Terms and
Conditions of Performance Units and Performance Shares
The compensation committee may award performance shares and
performance units in such amounts and upon such terms as the
compensation committee may determine. Each performance share
will have an initial value that is equal to the fair market
value of a common share on the date of grant. Each performance
unit will have an initial value set by the compensation
committee. The compensation committee may set performance goals
in its discretion which, depending on the extent to which they
are met, will determine the value
and/or
number of performance units or performance shares that will be
paid out to a participant. The compensation committee may, in
its sole discretion, pay earned performance units or performance
shares in the form of cash or in common shares equal to the
value of the earned performance units or performance shares. Any
common shares issued based upon performance units or performance
shares may be granted subject to any restrictions that the
compensation committee deems appropriate.
Terms and
Conditions of Other Stock-Based Awards
The compensation committee may also grant other types of
equity-based or equity-related awards, including the grant or
offer for sale of unrestricted shares, in such amounts and
subject to such terms and conditions as the compensation
committee may determine. Any such awards may involve the
transfer of actual common shares to participants, or payment in
cash or otherwise of amounts based on the value of the common
shares. Any other stock-based awards granted by the compensation
committee may be subject to performance goals established by the
compensation committee in its discretion.
Effect
of Corporate Transactions
Adjustment
of Shares Subject to 2009 Omnibus Incentive Plan
In the event of any increase or decrease in the number of our
outstanding shares, or in the event such shares are changed into
or exchanged for a different number or kind of shares or other
securities of ours on account of any recapitalization,
reclassification, stock split, reverse split, combination of
shares, exchange of shares, stock dividend or other distribution
payable in capital stock, the compensation committee will
adjust, among other award terms, the number and kind of shares
or property that may be delivered in connection with awards and
the exercise price, grant price or purchase price relating to
any award in such manner as the compensation committee
determines to be necessary to prevent dilution or enlargement of
the rights of participants.
Effect of
Corporate Transactions
Subject to the exceptions described below, upon the occurrence
of a corporate transaction, as defined in the 2009
Omnibus Incentive Plan, all outstanding shares of restricted
stock and all stock units will become immediately vested, and
the common shares subject to outstanding stock units will be
delivered immediately before the occurrence of the corporate
transaction. In addition, either of the following two actions
will be taken:
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fifteen days before the scheduled completion of the corporate
transaction, all options and stock appreciation rights will
become immediately exercisable and will remain exercisable for a
period of fifteen days, or
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instead of providing for accelerated vesting in awards under the
2009 Omnibus Incentive Plan in connection with the corporate
transaction, the compensation committee may provide that awards,
whether or not exercisable, will be terminated and the holders
of awards will receive a cash payment, or the delivery of common
shares, other securities or a combination of cash, shares and
securities equivalent to such cash payment, equal to the value
of the award.
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These actions will not apply to any corporate transaction to the
extent that provision is made in writing in connection with the
corporate transaction for the assumption or continuation of the
outstanding awards, or for the substitution for such outstanding
awards of similar awards relating to the stock of the successor
entity, or a parent or subsidiary of the successor entity, with
appropriate adjustments to the number of common shares that
would be delivered and the exercise price, grant price or
purchase price relating to any such award. If an award is
assumed or substituted in connection with a corporate
transaction and the holder is terminated without cause within a
year following a change in control, the award will be fully
vested and may be exercised in full, to the extent applicable,
beginning on the date of such termination and for the one-year
period immediately following such termination or for such longer
period as the compensation committee shall determine.
A corporate transaction means:
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a dissolution or liquidation or a merger, consolidation, or
reorganization with one or more other entities in which we are
not the surviving entity;
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a sale of substantially all of our assets to another person or
entity; or
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any transaction which results in any person or entity, other
than Mr. Wenhua Guo or Duoyuan Investments Limited, owning
50% or more of the combined voting power of all classes of our
shares.
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If we are the surviving entity in any reorganization, merger, or
consolidation of the company with one or more other entities
which does not constitute a corporate transaction, any option or
stock appreciation right outstanding under the 2009 Omnibus
Incentive Plan will apply to the securities to which a holder of
the number of our shares subject to the option or stock
appreciation right would have been entitled immediately
following the transaction, with a corresponding proportionate
adjustment of the exercise price. In such an event, stock units
will be adjusted so as to apply to the securities that a holder
of the number of our shares subject to the stock units would
have been entitled to receive immediately following the
transaction.
The compensation committee may provide in any agreement under
the 2009 Omnibus Incentive Plan for different provisions to
apply to an award under the plan than those described above.
Corporate
Performance Objectives
Section 162(m) of the Internal Revenue Code limits public
companies to an annual deduction for federal income tax purposes
of $1,000,000 for compensation paid to their chief executive
officer and the three most highly compensated executive officers
determined at the end of each year. Performance-based
compensation is excluded from this limitation. The 2009 Omnibus
Incentive Plan is designed to permit the compensation committee
to grant awards that qualify as performance-based for purposes
of satisfying the conditions of Section 162(m) at such time
as the 2009 Omnibus Incentive Plan becomes subject to
Section 162(m).
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Section 162(m) requires that, to qualify as
performance-based, the compensation must be paid solely on
account of the attainment of one or more pre-established,
objective performance goals. In the case of compensation
attributable to 2009 Omnibus Incentive Plan awards other than
options, the performance goal requirement is deemed satisfied if
the vesting of such awards is subject to the achievement of
performance goals based on objective business criteria. To
establish performance objectives for these awards, the
compensation committee will exclusively use business criteria
specified in the 2009 Omnibus Incentive Plan. The performance
objectives may be stated either on an absolute or relative basis
and may be based on one or more of such business criteria. The
business criteria are:
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net earnings or net income;
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operating earnings;
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pretax earnings;
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earnings per share;
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share price, including growth measures and total shareholder
return;
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earnings before interest and taxes;
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earnings before interest, taxes, depreciation
and/or
amortization;
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sales or revenue growth, whether in general, by type of product
or service, or by type of customer;
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gross or operating margins;
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return measures, including return on assets, capital,
investment, equity, sales or revenue;
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cash flow, including operating cash flow, free cash flow, cash
flow return on equity and cash flow return on investment;
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productivity ratios;
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expense targets;
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market share;
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financial ratios as provided in our and our subsidiaries
credit agreements;
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working capital targets;
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completion of acquisitions of businesses or companies;
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completion of divestitures and asset sales; and
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any combination of any of the foregoing business criteria.
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The business criteria may be used to measure our performance or
the performance of any of our subsidiaries or affiliates as a
whole or any business unit of any of the foregoing or any
combination thereof, as the compensation committee deems
appropriate. The compensation committee also may compare the
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performance measures listed above against the performance of a
group of comparative companies, or a published or special index
that the compensation committee, in its sole discretion, deems
appropriate. We may use the share price performance measure as
compared to various stock market indices. The compensation
committee also has the authority to provide for accelerated
vesting of any award based on the achievement of performance
goals pursuant to the performance measures listed above.
Director
Compensation
Only our non-employee directors are compensated for serving on
our board of directors, and the payments vary depending on the
non-employee directors experiences and expertise.
Additionally, our non-employee directors receive $1,000 for
attending each meeting of our board of directors at which there
is a quorum, whether in person or by telephone, up to a maximum
of $5,000 per fiscal year. There are no other fees or
reimbursements paid to our non-employee directors, except for
reimbursements for the traveling expenses incurred due to
participation in our board of director meetings.
The following table sets forth the compensation paid during
fiscal 2009 to our directors:
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Change in
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Pension Value
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and
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Fees
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Nonqualified
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Earned
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Non-Equity
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Deferred
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or Paid in
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Share
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Options
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Incentive Plan
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Compensation
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All Other
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Name of Director
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Cash(1)
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Awards
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Awards
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Compensation
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Earnings
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Compensation
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Total
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Wenhua
Guo(2)
Former Chief Executive Officer and Chairman
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Xiqing
Diao(3)
Chief Operating Officer
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Lianjun Cai
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$
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8,824
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$
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8,824
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Christopher Patrick
Holbert(4)
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$
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21,000
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$
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21,000
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Punan Xie
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$
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14,117
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$
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14,117
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(1)
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Amounts set forth in these columns were paid to or received by
the director in Renminbi and were converted into U.S. dollars
based on the conversion rate in effect on June 30, 2009.
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(2)
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Mr. Guo served as director during fiscal 2008. He did not
receive any compensation for his service as director.
Mr. Guo resigned as our chief executive officer effective
as of June 29, 2009.
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(3)
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Mr. Diao served as director during fiscal 2008. He did not
receive any compensation for his service as director.
Mr. Diao was appointed as our interim chief executive
officer effective as of July 9, 2009. He served in that
capacity until we appointed Mr. Holbert as our chief
executive officer on August 26, 2009.
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(4)
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Mr. Holbert served as director until his resignation in
August 2009. He became our chief executive officer on
August 26, 2009.
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Compensation
Committee Interlocks and Insider Participation
None of our executive officers served on our compensation
committee or on the compensation committee of another entity
during fiscal 2007, 2008 or 2009. None of our executive officers
served as director of another entity, other than affiliates of
Duoyuan China, during fiscal 2007, 2008 and 2009.
138
RELATED
PARTY TRANSACTIONS
The following is a description of our related party transactions:
Liquidated
Damages Related to Private Placement
In November 2006, we raised approximately $23.5 million by
issuing shares to certain investors in a private placement. We
were obligated to (1) register the resale of these shares
with the Securities and Exchange Commission within 90 days
of the closing of the private placement, pursuant to a
registration rights agreement, and (2) terminate certain
related party transactions. We failed to timely register for
resale the private placement shares and terminate the related
party transactions, resulting in liquidated damages. We recorded
liquidated damages and expenses of $2.1 million for the
year ended June 30, 2007. There was no interest charge for
late payment.
In November 2007, we reached a settlement with the private
placement investors to waive the respective liquidated damages
owed to them in exchange for either cash or warrants for common
shares. Each private placement investor made its own election
and, accordingly, we issued to 25 of these private placement
investors warrants to purchase 576,425 common shares, and we
paid a total of $0.4 million in cash to 10 of these private
placement investors. The private placement investors agreed that
the our issuance of these warrants and our payments of cash
constituted full satisfaction of our obligations to pay them
liquidated damages with respect to the penalties under the
securities purchase agreement dated October 24, 2006 and
the registration rights agreement. We settled the claims for
liquidated damages in the third quarter of fiscal 2008.
Make Good
Escrow Arrangement
As an inducement to participate in the private placement and as
set forth in the securities purchase agreement dated
October 24, 2006, Wenhua Guo had agreed to cause Duoyuan
Investments Limited to deposit 6,899,177 common shares in escrow
to be released to Duoyuan Investments Limited or the private
placement investors pursuant to the terms set forth in the make
good escrow agreement dated October 24, 2006. Duoyuan
Investments Limited retained the voting power and dividend
rights of these escrow shares until any release of the shares to
the private placement investors. The make good escrow agreement
set forth annual performance and financial benchmarks for us to
meet for each year ended June 30, 2006, 2007 and 2008. A
third of the escrow shares would be released promptly to the
private placement investors after each annual notification to
the escrow agent of our failure to meet the performance and
financial benchmarks for any applicable year. A third of the
escrow shares would be released promptly to Duoyuan Investments
Limited after each annual notification of our success in meeting
the performance and financial benchmarks for any applicable
year. We met all annual performance and financial benchmarks for
the years ended June 30, 2006, 2007, and 2008. All escrow
shares have been released to Duoyuan Investments Limited.
Real
Property Related Transactions
Duoyuan China leases property at No. 3 Jinyuan Road, which
consists of 3,080 square meters of space, from Duoyuan
Information, a company owned by Wenhua Guo, the chairman of our
board of directors. The property is used as an office building.
Duoyuan China originally leased the property at No. 3
Jinyuan Road from Duoyuan Water, a company owned by
Mr. Guo. The initial lease had a five-year term from
January 1, 2003 to December 31, 2007 and was extended
for one year. The annual rent was $136,002. As a result of the
property transfer between Duoyuan Water and Duoyuan Information,
in which Duoyuan Information became the new owner of the
property at No. 3 Jinyuan Road, the initial lease with
Duoyuan Water was terminated. We entered into a new lease with
Duoyuan Information for a period from July 1, 2008 to
December 31, 2009, with annual rent payment of
$0.2 million. Pursuant to the terms of the now terminated
lease with Duoyuan Water, Duoyuan Chinas rental payments
included electricity and water utility costs. During the term of
the lease, Duoyuan Water paid Duoyuan
139
Chinas portion of the electricity and water bill. As a
result, such utility costs became Duoyuan Chinas payable
to Duoyuan Water. In addition, Duoyuan China transferred some of
its employees to Duoyuan Water. The social welfare tax
associated with these employees accrued before the transfer,
thus that amount became Duoyuan Chinas payable to Duoyuan
Water. Between July 2007 and December 2007, Duoyuan China paid
RMB3.4 million ($0.5 million) to Duoyuan Water for
these accrued payable payments accumulated during calendar years
2005 to 2007. By December 31, 2007, all accrued payables
Duoyuan China owed to Duoyuan Water under the terminated lease
had been settled.
Langfang Duoyuan leased part of its manufacturing plant to
Duoyuan Water Treatment Equipment Manufacturing (Langfang) Co.,
Ltd, a company 80% owned by Mr. Guo. The lease is valid
from October 1, 2004 to September 30, 2009. On
May 25, 2007, pursuant to a termination agreement, Langfang
Duoyuan and Duoyuan Water Treatment Equipment Manufacturing
(Langfang) Co., Ltd terminated the lease. Total rental income
for the year ended June 30, 2007 was $0.4 million. We
did not receive any rental income for fiscal 2008 and 2009.
Intellectual
Property Transfer
Pursuant to a letter of trademark use authorization dated
June 30, 2001, Duoyuan Water granted Duoyuan China the use
of the Duoyuan trademark name. Duoyuan Water
transferred the Duoyuan trademark name, along with
other trademarks Duoyuan Water owned, to Duoyuan Investments
Limited effective as of August 21, 2008. On October 2008,
Duoyuan China and Duoyuan Investments Limited entered into a
registered trademark usage license agreement, pursuant to which
Duoyuan Investments Limited granted Duoyuan China a royalty free
and perpetual license to use the trademarks owned by Duoyuan
Investments Limited, including the Duoyuan trademark
name.
Pursuant to a letter of patent use authorization dated
June 30, 2001, Huiyuan Institute granted Duoyuan China the
permanent use of a patent for an automatic offset press ink
system quick cleaning device. On December 26, 2002,
pursuant to an assignment agreement, Huiyuan Institute assigned
this patent to Duoyuan China without charge. On March 11,
2008, Duoyuan China and Huiyuan Institute terminated the
original letter of patent use authorization with a termination
of letter of patent use authorization.
Sales and
Purchase Transactions with Related Parties
After the completion of our Langfang Duoyuan facility, there
were approximately $0.4 million in surplus construction
materials, which Langfang Duoyuan sold to Duoyuan China at cost.
As of December 31, 2006, Duoyuan China had failed to settle
this account and violated the related party transaction
covenants under the securities purchase agreement dated
October 24, 2006. As of June 30, 2007, this receivable
account had been fully settled.
Duoyuan China previously engaged Tianjin Automobile Water Pump
Co., Ltd., of which Mr. Wenhua Guo is the sole shareholder,
as its supplier of certain key parts and components. Duoyuan
China made prepayments to Tianjin Automobile Water Pump Co.,
Ltd. for these parts and components. These pre-payments became
related party receivables to Duoyuan China. As of
December 31, 2006, Duoyuan China failed to settle this
account, which amounted to $38,716, and violated the related
party transaction covenants under the securities purchase
agreement. During the year ended June 30, 2007, Duoyuan
China paid $1.6 million to Tianjin Automobile Water Pump
Co., Ltd., and this account was fully settled as of
June 30, 2007. We do not plan to engage in any further
related party transactions with Tianjin Automobile Water Pump
Co., Ltd. in the future.
Loans or
Debt with Related Parties
As of June 30, 2005, Duoyuan China received various
short-term loans from Duoyuan Water totaling $2.5 million.
The loans were non-interest bearing and due on demand. These
short-term loans became
140
related party payables to Duoyuan Water. During the year ended
June 30, 2006, Duoyuan China paid Duoyuan Water
$1.7 million relating to these loans. During the six months
ended December 31, 2006, Douyuan China paid Duoyuan Water
$0.5 million relating to these loans. As of June 30,
2007, these short-term loans were fully settled.
During 2006, Duoyuan China also made several short-term loans to
Duoyuan Water. The loans were
non-interest
bearing and due on demand. These short-term loans became related
party receivables to Duoyuan China. Duoyuan China failed to
settle this receivable account, which amounted to
$3.4 million, as of December 31, 2006. As of
June 30, 2007, these short-term loans were fully settled.
Promissory
Note Conversions
We issued a non-interest bearing convertible promissory note to
Dempsey Mork, our former founder, president and chief executive
officer who resigned upon the completion of the equity transfer
in October 2006, for the principal amount of $50,000, as
reimbursement for his payment of certain operational fees and
costs we incurred prior to the equity transfer. This note was
converted into 372,871 common shares on September 15, 2006.
We also issued a non-interest bearing convertible promissory
note to Millennium Capital, Inc. for the principal amount of
$20,000, as reimbursement of funding assistance it provided to
us prior to the equity transfer. Millennium Capital, Inc. is
controlled by Jonathan Mork, the son of Dempsey Mork and a
director of Roth Capital Partners, our placement agent for the
November 2006 private placement. This note was also converted
into 372,871 common shares on September 15, 2006. For more
information on the Dempsey Mork, Jonathan Mork and Millennium
Capital, Inc. see Selling Security Holders.
Indebtedness
of Management
None.
Review,
Approval or Ratification of Transactions with Related
Persons
Under our Related Party Transaction Procedures, all related
party transactions must be reviewed and approved by our audit
committee. As such, we have conducted and will continue to
conduct a review of all related party transactions for potential
conflicts of interest on an ongoing basis. All such transactions
relating to executive officers, directors, and employees must be
approved by our audit committee. The standard applied by the
audit committee in reviewing a related party transaction is
whether such transaction is in the best interests of the company
and its shareholders. In determining whether to approve or
ratify such a transaction, the audit committee will take into
account, among other factors it deems appropriate, whether the
transaction is on terms no more favorable than terms generally
available to an unaffiliated third-party under the same or
similar circumstances and the extent of the related partys
interest in the transaction.
Under our Related Party Transaction Procedures, prior to
entering into a related party transaction, the related party or
responsible management personnel must provide notice of the
transaction to our chief financial officer or chief executive
officer. Once the chief financial officer or the chief executive
officer is notified about a proposed related party transaction,
the officer, director, or employee responsible for that related
party transaction must then prepare a memorandum regarding the
proposed related party transaction for review by the compliance
officer. Once reviewed by the compliance officer, the memorandum
and any supporting information will be delivered to the audit
committee for its consideration. If the related party
transaction involves a member of the audit committee, the matter
will be forwarded to all of the directors who qualify as
independent directors and are not involved in the related party
transaction for their consideration. The audit committee or the
independent directors, as applicable, will then review and
consider the matter and take appropriate action by a majority
vote. In addition, the chief financial officer or chief
executive officer shall report to the full board of directors at
least quarterly on the status of all existing or proposed
related party transactions.
141
PRINCIPAL
SHAREHOLDERS
The following table sets forth, as of the date of this
prospectus, with respect to the beneficial ownership of our
common shares:
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names and addresses of each person known to us to own
beneficially more than 5% of our common shares; and
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each of our directors and executive officers who beneficially
own our common shares, and ownership by all of our directors and
executive officers as a group.
|
As of the date of this prospectus, we have a total of 25,000,050
common shares issued and outstanding.
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission, as consisting of sole
or shared voting power (including the power to vote or direct
the vote)
and/or sole
or shared investment power (including the power to dispose of or
direct the disposition of) with respect to the security through
any contract, arrangement, understanding, relationship or
otherwise, subject to community property laws where applicable.
Except as indicated below, and subject to applicable community
property laws, the persons named in the table below have sole
voting and investment power with respect to our common shares
shown as beneficially owned by them. A shareholder is also
deemed to be, as of any date, the beneficial owner of all
securities that such shareholder has the right to acquire within
60 days after that date through (1) the exercise of
any option, warrant or right, (2) the conversion of a
security, (3) the power to revoke a trust, discretionary
account or similar arrangement, or (4) the automatic
termination of a trust, discretionary account or similar
arrangement.
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Common Shares
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Beneficially Owned Prior
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to this Offering
|
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|
Common Shares Beneficially Owned
After this
Offering(1)
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Name and Address of Beneficial
Owner
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Number(2)
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%(2)
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Number
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%
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Directors and Executive Officers
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Directors
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Wenhua
Guo(3)
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Chairman
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17,562,355
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(3)(4)
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70.25
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%
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17,562,355
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(3)(4)
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55.98
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%
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Xiqing Diao
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Director and Chief Operating Officer
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241,620
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|
|
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0.77
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%
|
Lianjun Cai
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Director
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Punan Xie
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Director
|
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James Zhang
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|
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|
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|
|
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|
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Director
|
|
|
|
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|
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Executive Officers
|
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|
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Christopher Patrick Holbert
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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William D. Suh
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|
|
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|
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|
|
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|
|
|
|
|
|
|
Chief Financial Officer
|
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|
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Wenzhong Liu
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Vice President of Sales and Marketing
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28,200
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0.09
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%
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Yubao Wei
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|
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Chief Technology Officer
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7,200
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|
|
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0.02
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%
|
All Directors and Executive Officers as a Group (9
members)
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17,562,355
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70.25
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%
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17,839,375
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|
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56.86
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%
|
142
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
|
Beneficially Owned Prior
|
|
|
|
|
|
|
to this Offering
|
|
|
Common Shares Beneficially Owned
After this
Offering(1)
|
|
Name and Address of Beneficial
Owner
|
|
Number(2)
|
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|
%(2)
|
|
|
Number
|
|
|
%
|
|
|
Principal Shareholders
|
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|
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Duoyuan Investments Limited
No. 3 Jinyuan Road
Daxing Industrial Development Zone
Beijing, Peoples Republic of China, 102600
|
|
|
17,562,355
|
(3)(4)
|
|
|
70.25
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%
|
|
|
17,562,355
|
(3)(4)
|
|
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55.98
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%
|
Barry M. Kitt
4965 Preston Park Blvd., Ste 240
Plano, TX 75093
|
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1,961,698
|
(5)
|
|
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7.85
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%
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|
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1,961,698
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(5)
|
|
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6.25
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%
|
Pinnacle China Fund, L.P.
4965 Preston Park Blvd., Ste 240
Plano, TX 75093
|
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1,599,613
|
(5)
|
|
|
6.40
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%
|
|
|
1,599,613
|
(5)
|
|
|
5.10
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%
|
|
|
(1) |
Assumes the underwriters do not exercise their
over-allotment
option. The underwriters may choose to exercise the
over-allotment
option in full, in part or not at all.
|
|
|
(2) |
The percentage of beneficial ownership is based on
25,000,050 common shares outstanding as of the date of this
prospectus, excluding 875,000 restricted common shares to be
granted to certain employees, including members of our executive
management team, but excluding our chief executive officer and
chief financial officer, on or prior to the completion of this
offering, pursuant to our 2009 Omnibus Incentive Plan.
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission. Unless otherwise
indicated, each of the shareholders named in this table has sole
voting and dispositive power with respect to the common shares
shown as beneficially owned by such shareholder. The address for
all of our directors and executive officers is
c/o Duoyuan
Printing, Inc., No. 3 Jinyuan Road, Daxing Industrial
Development Zone, Beijing, Peoples Republic of China,
102600.
|
|
|
(3)
|
Duoyuan Investments Limited, a British Virgin Islands company,
is the direct holder of 17,562,355 common shares. All of the
equity interests of Duoyuan Investments Limited is held by
Wenhua Guo, the chairman of our board of directors, who may be
deemed the beneficial owner of the 17,562,355 common shares
owned by Duoyuan Investments Limited.
|
(4)
|
As an inducement to participate in the November 2006 private
placement and as set forth in the securities purchase agreement
dated October 24, 2006, Wenhua Guo had agreed to cause
Duoyuan Investments Limited to deposit 6,899,177 common shares
in escrow to be released to Duoyuan Investments Limited or the
private placement investors pursuant to the terms set forth in a
make good escrow agreement dated October 24, 2006. Duoyuan
Investments Limited retained the voting power and dividend
rights of these escrow shares until any release of the shares to
the private placement investors. The make good escrow agreement
set forth annual performance and financial benchmarks for us to
meet for each year ended June 30, 2006, 2007 and 2008. A
third of the escrow shares would be released promptly to the
private placement investors after each annual notification to
the escrow agent of our failure to meet the performance and
financial benchmarks for any applicable year. A third of the
escrow shares would be released promptly to Duoyuan Investments
Limited after each annual notification of our success in meeting
the performance and financial benchmarks for any applicable
year. We met all annual performance and financial benchmarks for
the years ended June 30, 2006, 2007 and 2008. All escrow
shares have been or will be released to Duoyuan Investments
Limited.
|
(5)
|
Pinnacle China Fund, L.P. is the direct holder of 1,440,627
common shares and a warrant to purchase 158,986 common shares.
Pinnacle China Fund, L.P.s general partner is Pinnacle
China Advisers, L.P. Pinnacle China Advisers, L.P.s
general partner is Pinnacle China Management, L.L.C. Pinnacle
China Management, L.L.C. is managed by Kitt China Management,
L.L.C., managed by Barry M. Kitt. As a result of
Mr. Kitts control over these entities, Mr. Kitt
may be deemed the beneficial owner of the 1,599,613 common
shares beneficially owned by Pinnacle China Fund, L.P.
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Pinnacle Fund, L.P. is the direct holder of 362,085 common
shares. Pinnacle Fund, L.P.s general partner is Pinnacle
Advisers, L.P. Pinnacle Advisers, L.P.s general partner is
Pinnacle Fund Management, LLC. The sole member of Pinnacle
Fund Management, LLC is Mr. Kitt. As a result of
Mr. Kitts control over these entities, Mr. Kitt
may be deemed the beneficial owner of the 362,085 common shares
owned by Pinnacle Fund, L.P.
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Mr. Kitt expressly disclaims beneficial ownership of the
1,961,698 common shares beneficially owned by Pinnacle China
Fund, L.P. and Pinnacle Fund, L.P.
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143
SELLING
SECURITY HOLDERS
The selling shareholders are selling 769,462 shares of our
common shares, which were issued to them in our November 2006
private placement. None of our pre-equity transfer investors,
which include certain investors, members of our former
management team and their affiliates, is selling shares in this
offering.
We effected a
1-for-2.68189924
reverse share split on July 17, 2007. With respect to
fractional shares, each holder of our common shares who would
otherwise have been entitled to a fraction of a share upon
surrender of such holders certificate(s) received one
common share. The number of our outstanding and issued shares
prior to the reverse share split was 67,047,481. Upon the
effectiveness of the reverse share split, the number of our
outstanding and issued shares became 25,000,050. The following
information about selling security holders reflects the reverse
share split described above.
Pre-Equity
Transfer Investors
The shares issued to the pre-equity transfer investors were
issued at various times over a period of eight years since the
time of our incorporation until the equity transfer, pursuant to
the exemption from the registration provisions of the Securities
Act provided by Section 4(2) of the Securities Act, and
Rule 506 of Regulation D promulgated thereunder, for
issuances not involving a public offering.
The pre-equity transfer shares include
(1) 382,868 shares issued to investors in a private
placement in December 1998, (2) 372,871 shares issued
to Dempsey Mork, our former founder, president and chief
executive officer who resigned upon the completion of the equity
transfer, upon the conversion of a non-interest bearing
convertible promissory note on September 15, 2006,
(3) 372,871 shares issued to Millennium Capital, Inc.
upon the conversion of a separate non-interest bearing
convertible promissory note on September 15, 2006 and
(4) 176,463 shares issued to members of our former
management team and their affiliates between 1998 and 2005,
including Dempsey Mork, Randall A. Baker, our former vice
president who resigned in 2002, and Norbert LeBouef, our former
chief financial officer who resigned at the closing of the
equity transfer. See Related Party
Transactions Promissory Note Conversions for
description of the conversions of the two non-interest bearing
convertible promissory notes.
The pre-equity transfer investors are reasonably believed to be
accredited investors as defined in Regulation D
under the Securities Act, or were a spouse or relative of an
accredited investor who shared the same principal residence with
the accredited investor. Unless otherwise discussed in this
prospectus, the pre-equity transfer investors did not engaged in
any transactions with us during fiscal 2007, 2008, and 2009.
Private
Placement Investors
In November 2006, we issued common shares to certain investors
for an aggregate purchase price of $23.5 million. This
private placement was made pursuant to the exemption from the
registration provisions of the Securities Act provided by
Section 4(2) of the Securities Act, and Rule 506 of
Regulation D promulgated thereunder, for issuances not
involving a public offering. The private placement investors
were persons reasonably believed to be accredited
investors as defined in Regulation D under the
Securities Act. Pursuant to the securities purchase agreement
dated October 24, 2006, we agreed to file this registration
statement in order to enable the private placement investors to
sell their common shares. None of the private placement
investors or their officers had any prior material relationship
with us. We did not receive any other consideration from the
private placement investors besides than the proceeds from the
private placement.
144
Selling
Shareholders
The table below shows the number of shares owned by the selling
shareholders based upon information they have provided to us.
Percentages of shares beneficially owned by any person is
calculated by dividing the number of shares beneficially owned
by that person by the sum of the number of common shares
outstanding as of the date of this prospectus and the number of
common shares as to which that person has the right to acquire
voting or investment power as of the date of this prospectus, or
within 60 days thereafter. Unless otherwise indicated, the
selling shareholders have the sole power to direct the voting
and investment over the shares they own. This information is
based solely on information provided by or on behalf of the
selling shareholders set forth below, and we have not
independently verified the information.
Except as provided below, to our knowledge, no selling
shareholder nor any of their affiliates has held any position or
office with, been employed by or otherwise has had any material
relationship with us within the past three years other than as a
result of the ownership of our securities, unless disclosed
otherwise in this prospectus. Unless otherwise described below,
the selling shareholders have confirmed to us that they are not
broker-dealers or affiliates of a broker-dealer within the
meaning of Rule 405 of the Securities Act.
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Common Shares Beneficially
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Common Shares Beneficially
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Owned Prior to the
Offering
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Owned After the
Offering
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Number of
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Number of
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Shares
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Number of
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Shares
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Beneficially
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Percent
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Shares Being
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Beneficially
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Percent
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Selling Shareholder
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Owned
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of Class(%)
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Offered
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Owned
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of Class(%)
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The Frost National Bank Cust
FBO(1)
Renaissance US Growth Investment Trust PLC
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657,597
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(10)
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2.63
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195,313
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462,284
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(10)
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1.47
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The Frost National Bank Cust
FBO(2) US
Special Opportunities Trust PLC
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219,199
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(11)
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*
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65,104
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154,095
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(11)
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*
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The Frost National Bank
Cust FBO(3)
Renaissance Capital Growth & Income Fund III
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146,133
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(12)
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*
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43,403
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102,730
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(12)
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*
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The Northern Trust Comp Cust
FBO(4)
Premier RENN US Emerging Growth Fund Limited
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146,133
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(12)
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*
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43,403
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102,730
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(12)
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*
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Jayhawk Private Equity Fund,
L.P.(5)
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824,861
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(13)
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3.30
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244,992
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579,869
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(13)
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1.85
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Jayhawk Private Equity Co-Invest Fund,
L.P.(5)
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51,935
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(14)
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*
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15,425
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36,510
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(14)
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*
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SCG Private Holdings,
LLC(6)
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69,011
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*
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23,003
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46,008
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*
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Heller Capital Investments,
LLC(7)
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175,360
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(15)
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*
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52,083
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123,277
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(15)
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*
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Berlin Capital Growth,
L.P.(8)
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130,209
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*
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43,403
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86,806
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*
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MidSouth Investor
Fund LP(9)
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145,900
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(16)
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*
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43,333
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102,567
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(16)
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Selling Shareholder Shares in Total
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2,566,338
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(17)
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10.27
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769,462
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1,796,876
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(17)
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5.72
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(1) |
Russell Cleveland has investment and voting control over the
shares held by The Frost National Bank Cust FBO Renaissance US
Growth Investment Trust PLC. Mr. Cleveland is the
president of RENN Capital Group, Inc., which is the investment
advisor of Renaissance US Growth Investment Trust PLC.
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(2) |
Russell Cleveland has investment and voting control over the
shares held by The Frost National Bank Cust FBO US Special
Opportunities Trust PLC. Mr. Cleveland is the
president of RENN Capital Group, Inc., which is the investment
advisor of U.S. Special Opportunities Trust PLC.
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footnotes continued on following page
145
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(3) |
Russell Cleveland has investment and voting control over the
shares held by The Frost National Bank Cust FBO Renaissance
Capital Growth & Income Fund III.
Mr. Cleveland is the president of RENN Capital Group, Inc.,
which is the investment advisor of Renaissance Capital
Growth & Income Fund III, Inc.
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(4) |
Russell Cleveland has investment and voting control over the
shares held by The Northern Trust Comp Cust FBO Premier
RENN US Emerging Growth Fund Limited. Mr. Cleveland is
the president of RENN Capital Group, Inc., which is the
investment advisor of Premier RENN US Emerging Growth
Fund Limited.
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(5) |
Kent McCarthy has investment and voting control over the shares
held by Jayhawk Private Equity Fund, L.P. and Jayhawk Private
Equity Co-Invest Fund, L.P. Mr. McCarthy is the managing
member of Jayhawk Capital Management, L.L.C., which is the
general partner of Jayhawk Private Equity GP, L.P., which is the
general partner of Jayhawk Private Equity Fund, L.P. and Jayhawk
Private Equity Co-Invest Fund, L.P.
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(6) |
Dr. Michael Burry has investment and voting control over
the shares held by SCG Private Holdings, LLC.
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(7) |
Ronald I. Heller, chief investment officer of Heller Capital
Investments, LLC, has investment and voting control over the
shares held by Heller Capital Investments, LLC.
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(8) |
Thomas G. Berlin, managing member of Berlin Financial, Ltd,
which is the general partner of Berlin Capital Growth, L.P, has
investment and voting power over the shares held by Berlin
Capital Growth, L.P..
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(9) |
Lyman O. Heidtke, general partner for MidSouth Investor
Fund LP, has sole investment and voting control over the
shares held by MidSouth Investor Fund LP.
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(10) |
Includes warrants to purchase 71,658 shares.
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(11) |
Includes warrants to purchase 23,886 shares.
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(12) |
Includes warrants to purchase 15,924 shares.
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(13) |
Includes warrants to purchase 89,885 shares.
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(14) |
Includes warrants to purchase 5,659 shares.
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(15) |
Includes warrants to purchase 19,109 shares.
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(16) |
Includes warrants to purchase 15,899 shares.
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(17) |
Includes warrants to purchase 242,020 shares.
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Except as otherwise described above, none of the selling
shareholders have any material relationship with us other than
the private placement transaction described in this prospectus.
146
DESCRIPTION
OF SECURITIES TO BE REGISTERED
Our authorized capital stock consists of 101,000,000
shares, including 100,000,000 common shares and 1,000,000
preferred shares, with par value of $0.001 per share. As of the
date of this prospectus, we have 25,000,050 common shares issued
and outstanding. As of the same date, warrants to purchase
1,226,972 common shares have been granted, but no warrant has
been exercised. On or prior to the completion of this offering,
we will grant 875,000 restricted common shares to certain
employees, including members of our executive management team,
but excluding our chief executive officer and chief financial
officer, pursuant to our 2009 Omnibus Incentive Plan. The grant
of 875,000 restricted common shares will be a one-time bonus
stock award to approximately 50 employees and will be contingent
upon the closing of our public offering. The common shares under
the grant will be restricted and subject to a six month cliff
vesting period. Upon completion of this offering, we will have
31,375,050 common shares issued and outstanding.
The transfer agent and registrar for our common shares is
American Stock Transfer & Trust Company, whose
address is 59 Maiden Lane, New York, NY 10038, and whose phone
number is
(212) 936-5100.
The following summary description relating to our shares does
not purport to be complete and is qualified in its entirety by
reference to our articles of incorporation, as amended, and our
bylaws, as amended and restated.
Common
Shares
Holders of our common shares are entitled to one vote for each
share they own on matters submitted to a vote of shareholders.
They are entitled to receive pro rata any dividends, if any, as
may be declared by our board of directors out of funds legally
available thereafter. Holders of our common shares do not have
any preemptive or other rights to subscribe for additional
shares. Holders of our common shares are entitled to receive
ratably any assets for distribution to shareholders upon our
liquidation, dissolution or winding up. There are no conversion
or sinking fund provisions applicable to our common shares. All
of our outstanding common shares are fully paid and
nonassessable.
On November 2, 2006, we closed a private placement and
issued an aggregate of 6,132,622 shares to the private
placement investors for an aggregate purchase price of
$23.5 million. This private placement was made pursuant to
the exemption from the registration provisions of the Securities
Act provided by Section 4(2) of the Securities Act, and
Rule 506 of Regulation D promulgated thereunder, for
issuances not involving a public offering.
Pursuant to the securities purchase agreement dated
October 24, 2006, if the difference between our current
assets and current liabilities for the years ended June 30,
2006 is less than $3.5 million, we are then required to
immediately issue additional shares to each private placement
investor at no additional consideration. Because our June 30
audited working capital amount exceeded $3.5 million, we
were not required and did not issue any additional share to the
private placement investors.
As an inducement to participate in our November 2006 private
placement and as set forth in the securities purchase agreement,
Wenhua Guo had agreed to cause Duoyuan Investments Limited to
deposit 6,899,177 common shares in escrow to be released to
Duoyuan Investments Limited or the private placement investors
pursuant to the terms set forth in a make good escrow agreement
dated October 24, 2006. Duoyuan Investments Limited
retained the voting power and dividend rights of these escrow
shares until any release of the shares to the private placement
investors. The make good escrow agreement set forth annual
performance and financial benchmarks for us to meet for each
year ended June 30, 2006, 2007 and 2008. A third of the
escrow shares would be released promptly to the private
placement investors after each annual notification to the escrow
agent of our failure to meet the
147
performance and financial benchmarks for any applicable year. A
third of the escrow shares would be released promptly to Duoyuan
Investments Limited after each annual notification of our
success in meeting the performance and financial benchmarks for
any applicable year. We met all annual performance and financial
benchmarks for the years ended June 30, 2006, 2007 and
2008. All escrow shares have been or will be released to Duoyuan
Investments Limited.
We agreed to certain covenants under the securities purchase
agreement, including to hire a chief financial officer with
U.S. GAAP and auditing procedure expertise and knowledge,
who has either previously acted as chief financial officer for
an U.S. public company or has been a partner in an
U.S. accounting firm. The private placement investors
deposited $2.0 million of the private placement proceeds in
escrow. If we failed to hire a qualifying chief financial
officer, such funds would be returned to the private placement
investors. We also agreed to ensure our board of directors would
comprise of a majority of independent directors. The private
placement investors deposited an additional $2.0 million of
the private placement proceeds in escrow, which would be
returned to them should we fail to meet this covenant regarding
our board of directors. Effective as of April 23, 2007, we
had satisfied our covenants with respect to hiring a qualifying
chief financial officer and institute a board of directors with
independent directors. Consequently, the $4.0 million
escrow fund was released to us. Additionally, we agreed to use
commercially reasonable efforts to retain a nationally
recognized investors relations firm (including its overseas
offices or subsidiaries). We engaged CCG Investor Relations
Partners, LLC to be our investor relationship firm in October,
2006.
Pursuant to the securities purchase agreement, we agreed to
cease all related party transactions and to settle all
outstanding balances due to or from related parties by
December 31, 2006. We failed to timely terminate these
related party transactions and recorded liquidated damage. To
settle the liquidated damages resulting from our failure to meet
the related party transaction covenants, in November 2007 we
reached a settlement with the private placement investors who
agreed to waive all penalties due in exchange for warrants or
cash payments. See Warrants.
Registration
Rights
Concurrent with the securities purchase agreement, we and the
private placement investors entered into a registration rights
agreement dated October 24, 2006, pursuant to which we were
obligated to register the resale of the our common share. We are
obligated to include in such resale registration statement the
shares issued to the private placement investors, shares
issuable upon our delivery of certain additional shares (as
defined in the securities purchase agreement), and shares
issuable upon exercise of warrants, if any. The escrow shares
related to the make good escrow agreement dated October 24,
2006, if any were transferred to the private placement
investors, are also to be included in the resale registration
statement. We failed to timely register for resale, resulting in
liquidated damage equal to 1%, but capped at 8%, of the
aggregate private placement proceeds. We settled the claims for
liquidated damages in the third quarter of the year ended
June 30, 2008.
On November 18, 2008, we entered into a waiver agreement
with certain private placement investors who hold in aggregate a
majority of the common shares issued pursuant to the securities
purchase agreement. Pursuant to the waiver agreement, we shall
(1) file a registration statement with the Securities and
Exchange Commission, (2) cause the registration statement
to be declared effective under the Securities Act, and
(3) cause our common shares to be listed on the New York
Stock Exchange, on or before January 31, 2009. Pursuant to
the waiver agreement, the private placement investors waived
certain rights under the securities purchase agreement and the
registration rights agreement. The rights waived primarily
relate to certain sections in the securities purchase agreement
that (1) prohibit us from filing any registration statement
other than a resale registration statement for the private
placement investors and (2) require us to list our common
shares as promptly as possible following the effectiveness of
such a resale registration statement. We and the private
placement investors also agreed that the
148
aggregate amount of common shares the private placement
investors could include in the offering described above (on a
pro rata basis) shall be 20% of the offerings total amount
of common shares. We are not subject to any penalty, monetary or
otherwise, under the waiver agreement for not complying with the
January 31, 2009 date specified therein.
Warrants
On October 9, 2006, as part of our compensation to them, we
issued Investor Relations Partners, LLC warrants to acquire
37,287 common shares at the price of $4.61 per share.
On November 2, 2006, as part of our compensation to them,
we issued Roth Capital Partners warrants to purchase
613,260 shares of our common share at a strike price of
$4.21 per share for a term of five years. The warrants are
exercisable at any time after June 30, 2008 on a cashless
or net exercise basis. The common shares issuable upon the
exercise of the warrants have registration rights, but they are
not included in this registration statement.
In November 2007, we reached the maximum liquidated damage
amount stipulated by the securities purchase agreement. We
reached a settlement with the private placement investors who
agreed to waive all penalties due in exchange for warrants or
cash payments. Accordingly, we issued to 25 of the private
placement investors warrants to purchase 576,425 common shares
at a strike price of $5.76 per share for a term of five years
starting on June 30, 2008, and are exercisable at any time
after June 30, 2008 on a cashless basis at all times. For
the 10 private placement investors who elected to receive cash
payments, we paid them a total of $0.4 million. We settled
the claims for liquidated damages in the third quarter of the
year ended June 30, 2008.
Certain
Provisions of Wyoming Law and of Our Amended and Restated
Articles of Incorporation and Amended and Restated
Bylaws
On September 10, 2009, our board of directors deemed it
advisable and in the best interests of the company to amend and
restate our articles of incorporation. At our annual meeting on
October 15, 2009, our shareholders approved our amended and
restated articles of incorporation. We have set forth below a
summary of certain provisions of Wyoming law and of our amended
and restated articles of incorporation, and of our amended and
restated bylaws, which were adopted by our board of directors on
October 16, 2009. For a complete description, we refer you
to our amended and restated articles of incorporation and our
amended and restated bylaws attached as exhibits to the
registration statement which includes this prospectus.
Our Board
of Directors
Our bylaws provide that the number of directors shall be fixed
from time to time by the board of directors. Under Wyoming law,
if the shareholders approve of a change from fixed number of
directors to a variable number, the board of directors may
increase or decrease the number of directors within the
prescribed range without shareholder approval.
Our first board of directors will hold office until the first
annual meeting of shareholders and until their successors have
been duly elected and qualified or until there is a decrease in
the number of directors. Thereafter, directors will be elected
at annual shareholder meetings and shall hold office until the
next annual shareholder meeting, unless our articles of
incorporation or bylaws provide for staggered terms, or until
the directors prior death, resignation or removal.
Any vacancy on our board of directors occurring by reason of a
decrease in the number of directors, or by reason of the death,
resignation, disqualification, removal or inability to act, or
other cause, shall be filled by an affirmative vote of a
majority of the remaining directors.
149
Our directors are elected by a plurality vote of the
shareholders, who have no cumulative voting rights to elect
directors. Consequently, at each annual shareholder meeting, the
holders of a majority of our common shares can elect all of our
directors. Our directors may only be removed for cause by the
shareholders. A director may only be removed for cause by the
shareholders at a meeting called for the purpose of removing a
director and the meeting notice must state that the purpose, or
one of the purposes, of the meeting is removal of the director.
If a quorum exists, a director is removed for cause if the votes
approving the removal exceed the number of votes opposing the
removal. Currently, we do not have shareholder voting groups (as
defined below). However, if we do implement voting groups, and
one particular group has elected a specific director or
directors, then, under Wyoming law, only the shareholders of
that voting group can remove that director or directors.
Shareholder
Voting Groups
We have two classes of shares, preferred shares and common
shares. We do not have any preferred shares issued and
outstanding. We do not have voting groups, nor do we plan to do
so in the future. Holders of our common shares have equal voting
rights. Consequently, we have a single voting group comprised of
holders of our common shares.
Under Wyoming law, a voting group is defined as a class of
shareholders entitled to vote and be counted collectively as a
group on specific matters at a shareholder meeting. Under
Wyoming law, a corporation has broad discretion to create voting
groups. A corporation may provide, for example, that a certain
decision requires approval by a certain class of shares, even if
the decision was approved by all other shareholders. In another
instance, a corporation may provide that only one class of
shares has the power to decide a particular matter.
Amendment
to Our Bylaws
Generally speaking, our bylaws may be amended by our board of
directors or our shareholders. However, Wyoming law provides
that certain bylaw amendments must be approved by the
shareholders, such as a bylaw that changes the quorum or voting
requirements for shareholders. If a bylaw is approved by the
shareholders and it establishes the quorum and voting
requirements for our board of directors, such bylaw may only be
amended or repealed with shareholder approvals.
Advance
Notice of Director Nominations and New Business
Pursuant to Wyoming law, annual shareholder meeting notices need
not include a description of the purpose or purposes for which
the meeting is called for, except for certain matters such as
amending the articles of incorporation, voting on a plan of
merger, voting on a sale of assets outside the regular course of
business
and/or
voting on dissolution of the corporation. Pursuant to Wyoming
law, these fundamental corporate matters may be considered at an
annual shareholder meeting only if they were included in the
meeting notice.
Special shareholder meeting notices, however, shall contain a
description of the purpose or purposes for which the meeting is
called.
Nominations of director candidates for election at any meeting
of shareholders called for election of directors (the
election meeting) may be made by our board of
directors or any shareholder entitled to vote at such election
meeting. Nominations made by the board of directors shall be
made at the meeting of the board of directors, or by written
consent of the requisite number of directors in lieu of a
meeting, at which the date is set for the election meeting and
shall be approved by a majority of independent directors.
Shareholders making nominations must deliver notice to the de
facto secretary of the company setting forth certain information
and representations regarding the director candidate and the
shareholder making the nomination in accordance with the
requirements set forth in the companys bylaws.
150
Limitations
on Liability of Directors
In accordance with our amended and restated articles of
incorporation, no person who is or was a director of the Company
shall be personally liable to the Company or its shareholders
for monetary damages for breach of fiduciary duty except
liability for:
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receipt of a financial benefit to which he is not entitled;
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an intentional infliction of harm on the Company or its
shareholders;
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a violation of Wyoming law related to unlawful distributions; or
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an intentional violation of criminal law.
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Shareholder
Action by Written Consent
Any action permitted to be taken at a shareholder meeting may be
taken by written consent without a meeting, and without prior
notice, if signed by the holders of the minimum number of
outstanding shares required to authorize the action at a meeting
at which all shares entitled to vote on the action are present
and voted.
Special
Shareholders Meetings
A special shareholders meeting may be called by the board
of directors at any time. In order for a special
shareholders meeting to be called by shareholders, the
shareholders of 25% of all the votes entitled to be cast on any
issue proposed to be considered at a proposed special meeting
must sign and deliver one or more written demands for the
meeting.
Our
Registered Agent in Wyoming
Our agent for service of process and our registered office in
Wyoming is Pioneer Corporate Services located at
214 W. Lincolnway, Suite 23, Cheyenne, WY 82001.
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SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common shares, and although we will apply to list our common
shares on the New York Stock Exchange, a significant trading
market may not develop or be sustained in our common shares.
Upon completion of this offering, we will have outstanding
31,375,050 common shares, assuming no exercise of the
underwriters over-allotment option. All of the common
shares sold in this offering will be freely transferable by
persons other than our affiliates without
restriction or further registration under the Securities Act.
Sales of substantial amounts of additional common shares in the
public market after this offering, or the perception that such
sales may occur, could adversely affect prevailing market prices.
Common shares purchased by one of our affiliates may
not be resold in the United States, except pursuant to an
effective registration statement or an exemption from
registration, including an exemption under Rule 144 of the
Securities Act described below.
Lock-up
Agreements
We have agreed that we will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, to file
with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any of our
common shares, or publicly announce the intention to make any
offer, sale, pledge, disposition or filing, without the prior
written consent of Piper Jaffray for a period of
180 days after the date of this prospectus.
Of our outstanding common shares, 24,167,822 shares are
subject to the
180-day
lock-up
period and all of our shares will be subject to the volume and
other restrictions of Rule 144 after expiration of the
lock-up
period. Pursuant to the
lock-up
agreement, our directors, executive officers, employees and the
selling shareholders parties thereto have agreed that they will
not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any common shares or securities
convertible into or exchangeable or exercisable for any common
shares, enter into a transaction that would have the same
effect, or enter into any swap, hedge or other arrangement that
transfers, in whole or in part, any of the economic consequences
of ownership of our common shares, whether any of these
transactions are to be settled by delivery of our common shares
or other securities, in cash or otherwise, or publicly disclose
the intention to make any offer, sale, pledge or disposition, or
to enter into any transaction, swap, hedge or other arrangement,
without, in each case, the prior written consent of
Piper Jaffray for a period of 180 days after the date
of this prospectus. In addition, the 875,000 restricted common
shares to be granted at or prior to the completion of this
offering are being granted subject to the
180-day
lock-up
period.
The 180-day
lock-up
period is subject to adjustment under certain circumstances. If
in the event that either (1) during the last 17 days
of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up will
be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Piper Jaffray waives, in writing, such
an extension.
Rule 144
Under Rule 144 of the Securities Act, a person who is not
one of our affiliates at any time during the three months
preceding a sale and has beneficially owned restricted shares of
our common shares for at least six months are entitled to sell
an unlimited number of those shares in the United States
provided current public information about us is available and,
after one year, are entitled to sell an unlimited number of
those shares without restriction. Our affiliates who have
beneficially owned restricted shares
152
of our common shares for at least six months are entitled to
sell, within any three-month period, the number of shares that
does not exceed the greater of:
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1% of the number of our common shares then outstanding, which
will equal approximately common shares immediately after this
offering; or
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the average weekly reported trading volume of our common shares
on the New York Stock Exchange during the four calendar weeks
before a notice of the sale on Form 144 is filed with the
Securities and Exchange Commission by such person.
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Sales by affiliates under Rule 144 are also subject to
manner-of-sale
provisions, notice requirements and the availability of current
public information about us. However, all of these shares would
remain subject to
lock-up
arrangements and would only become eligible for sale when the
lock-up
period expires.
Rule 701
Rule 701 under the Securities Act, as currently in effect,
permits certain resales of shares in reliance upon Rule 144
but without compliance with specified restrictions, including
the holding period requirement, of Rule 144. On or prior to
the completion of this offering, we will grant 875,000
restricted common shares to certain employees, including members
of our executive management team but excluding our chief
executive officer and chief financial officer, pursuant to our
2009 Omnibus Incentive Plan. These employees may be entitled to
rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides
that non-affiliates who purchased shares under a written
compensation plan or contract may sell their shares in reliance
on Rule 144 without having to comply with the holding
period, public information, volume limitation or notice
provisions of Rule 144. However, all
Rule 701 shares are subject to
lock-up
agreements with the underwriters and will only become eligible
for sale at the expiration of the
lock-up
period or upon obtaining the prior written consent of Piper
Jaffray.
Registration
Rights
After this offering, assuming no exercise by the underwriters of
their over-allotment option, the holders of an aggregate
6,372,996 common shares will be entitled to registration rights
under a written agreement between us and such holders. This
agreement requires us, upon request of the holders, from time to
time to file registration statements to facilitate registered
sales by those holders of common shares in the United States. In
addition, the agreement provides that these holders may require
us to include their common shares in registration statements
filed by us relating to securities offerings of common shares in
the United States. We are required to indemnify the holders and
any underwriters in connection with sales of common shares
pursuant to any of these registration statements and we are
required to bear all expenses in connection with these
registrations. See Description of Securities to be
Registered Registration Rights for a more
detailed description of these registration rights. These holders
have agreed that, without the prior written consent of
Piper Jaffray on behalf of the underwriters, they will not,
during the period ending 180 days after the date of this
prospectus, exercise any of these registration rights. See
Lock-up
Agreements above.
153
TAXATION
The following sets forth the material PRC and
U.S. federal income tax consequences of an investment in
our common shares. It is based upon laws and relevant
interpretations thereof in effect as of the date of this
prospectus, all of which are subject to change. This discussion
does not deal with all possible tax consequences relating to an
investment in our common share, such as the tax consequences
under state, local and other tax laws.
Peoples
Republic of China Taxation
In 2007, the PRC National Peoples Congress enacted the new
Enterprise Income Tax Law, which became effective on
January 1, 2008. The new Enterprise Income Tax Law imposes
a single uniform income tax rate of 25% on all Chinese
enterprises, including foreign-invested enterprises, and levies
a withholding tax rate of 10% on dividends payable by Chinese
subsidiaries to their foreign shareholders unless any such
foreign shareholders jurisdiction of incorporation has a
tax treaty with China that provides for a different withholding
agreement. Under the new Enterprise Income Tax Law, enterprises
established outside China but deemed to have a de facto
management body within the country may be considered
resident enterprises for Chinese tax purposes and,
therefore, may be subject to an enterprise income tax rate of
25% on their worldwide income. Pursuant to the implementation
rules of the new Enterprise Income Tax Law, a de facto
management body is defined as a body that has material and
overall management control over the business, personnel,
accounts and properties of the enterprise. Although
substantially all members of our management are located in
China, it is unclear whether Chinese tax authorities would
require (or permit) us to be treated as PRC resident
enterprises. If we are deemed a Chinese tax resident enterprise,
we may be subject to an enterprise income tax rate of 25% on our
worldwide income, excluding dividends received directly from
another Chinese tax resident. As a result of such changes, our
historical tax rates will not be indicative of our tax rates for
future periods and the value of our common shares may be
adversely affected. See Risk Factors Risks
Related to Our Business The newly enacted PRC tax
law affects tax exemptions on dividends received by us and
increases the enterprise income tax rate applicable to us,
Regulations Taxation and
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies Taxes and Incentives. If
we are deemed a PRC resident enterprise and investors
sales of our shares and dividends payable by us are deemed as
gains sourced from China, investors sales of our shares
and dividends payable by us may be subject to withholding tax.
See Risk Factors Risks Related to Our
Business Our foreign shareholders may be subject to
PRC withholding tax on the dividends payable by us and upon
gains realized on their sales of our shares if we are deemed a
PRC resident enterprise.
United
States Federal Income Tax Consequences
The following is a discussion of certain material
U.S. federal income tax consequences of purchasing, owning
and disposing of our common shares. This discussion does not
purport to be a comprehensive description of all of the
U.S. tax considerations that may be relevant to a
particular persons decision to acquire our common shares
(including any state, local, other U.S. or
non-U.S. tax
consequences of the ownership of our common shares).
This discussion applies only to those holders that hold our
common shares as capital assets for U.S. tax purposes
(generally, for investment). This section does not apply to
holders that may be subject to special tax rules, including but
not limited to:
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dealers in securities or currencies;
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banks, insurance companies or certain financial institutions;
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tax-exempt organizations;
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regulated investment companies or real estate investment trusts;
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controlled foreign corporations;
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passive foreign investment companies;
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persons who hold or receive our common shares as
compensation; or
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holders that hold our common shares as part of a straddle,
hedging or conversion transaction.
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This section is based on the U.S. Internal Revenue Code of
1986, as amended, or the Code, its legislative history, existing
and proposed U.S. Treasury regulations, published rulings
and other administrative guidance of the U.S. Internal
Revenue Service and court decisions, all as in effect on the
date hereof. These laws are subject to change or different
interpretation by the U.S. Internal Revenue Service or a
court, possibly on a retroactive basis.
You are a U.S. holder if you are a beneficial
owner of our common shares and you are:
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a citizen or resident of the United States for federal income
tax purposes;
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a corporation, or other entity treated as a domestic corporation
for U.S. federal income tax purposes, created or organized
under the laws of the United States, any state thereof, or the
District of Columbia;
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an estate whose income is subject to U.S. federal income
tax regardless of its source; or
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a trust, if a U.S. court can exercise primary supervision
over the trusts administration and one or more
U.S. persons are authorized to control all substantial
decisions of the trust, or if the trust has a valid election in
effect under applicable U.S. Treasury regulations to be
treated as a United States person.
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You are a
non-U.S. holder
if you are a beneficial owner of our common shares and you are
not a U.S. holder or a partnership, or other entity treated
as a partnership for U.S. federal income tax purposes.
If a partnership (including for this purpose any entity treated
as a partnership for U.S. tax purposes) is a beneficial
owner of our common shares, the U.S. tax treatment of a
partner in the partnership generally will depend on the status
of the partner and the activities of the partnership. A holder
of our common shares that is a partnership and partners in such
a partnership should consult their own tax advisors about the
U.S. federal income tax consequences of holding and
disposing of our common shares.
YOU SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE
U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF OUR COMMON SHARES IN
YOUR PARTICULAR SITUATION.
U.S.
Holders
Taxation
of Distributions on Our Common Shares
Distributions (if any) made to U.S. holders on our common
shares generally will constitute dividends for U.S. federal
income tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under
U.S. federal income tax principles. To the extent these
distributions exceed our current and accumulated earnings and
profits, the excess will constitute a return of capital that is
155
applied against and reduces (but not below zero) the
U.S. holders adjusted tax basis in our common shares,
and then will be treated as gain from the sale of our common
shares.
Any dividends we pay to a U.S. holder that is treated as a
taxable corporation for U.S. federal income tax purposes
generally will qualify for the dividends-received deduction if
the applicable holding period and other requirements are
satisfied. For taxable years beginning on or before
December 31, 2010, certain qualified dividend
income will be taxable to a non-corporate U.S. holder
at the special reduced rates normally applicable to capital
gains (subject to certain limitations), provided that the
U.S. holder receiving the dividend satisfies applicable
holding period and other requirements.
If PRC taxes apply to any dividends paid to a U.S. holder
on our common shares, such taxes may be treated as foreign taxes
eligible for credit against such holders U.S. federal
income tax liability (subject to certain limitations), and a
U.S. holder may be entitled to certain benefits under the
income tax treaty between the United States and the PRC. The
rules governing foreign tax credits are complex.
U.S. holders should consult their own tax advisors
regarding the creditability of any such PRC tax and their
eligibility for the benefits of the income tax treaty between
the United States and the PRC.
Taxation
of Sale, Exchange or Other Taxable Disposition of Our Common
Shares
In general, a U.S. holder must treat any gain or loss
recognized upon a sale, taxable exchange, or other taxable
disposition of our common shares as capital gain or loss. Any
such capital gain or loss will be long-term capital gain or loss
if the U.S. holders holding period for the common
shares so disposed of exceeds one year. In general, a
U.S. holder will recognize gain or loss in an amount equal
to the difference between (1) the sum of the amount of cash
and the fair market value of any property received in such
disposition and (2) the U.S. holders adjusted
tax basis in the common shares so disposed of. Long-term capital
gain recognized by a non-corporate U.S. holder generally
will be subject to a maximum tax rate of 15 percent for tax
years beginning on or before December 31, 2010, after which
the maximum long-term capital gains tax rate is scheduled to
increase to 20 percent. The deduction of capital losses is
subject to various limitations.
If PRC taxes apply to any gain from the disposition of our
common shares by a U.S. holder, such taxes may be treated
as foreign taxes eligible for credit against such holders
U.S. federal income tax liability (subject to certain
limitations), and a U.S. holder may be entitled to certain
benefits under the income tax treaty between the United States
and the PRC. The rules governing foreign tax credits are
complex. U.S. holders should consult their own tax advisors
regarding the creditability of any such PRC tax and their
eligibility for the benefits of the income tax treaty between
the United States and the PRC.
Non-U.S.
Holders
Taxation
of Distributions on Our Common Shares
Distributions (if any) made to
non-U.S. holders
on our common shares will constitute dividends for
U.S. federal income tax purposes to the extent paid from
our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles. To the extent
these distributions exceed our current or accumulated earnings
and profits, the excess will constitute a return of capital that
is applied against, and will reduce, a
non-U.S. holders
basis in our common shares, but not below zero, and then will be
treated as gain from the sale of our common shares.
Dividends paid to a
non-U.S. holder
on our common shares generally will be subject to withholding of
U.S. federal income tax at a 30% rate, or any lower rate
that may be specified by an applicable income tax treaty. To
receive a reduced treaty rate, you must complete Internal
Revenue Service
Form W-8BEN
(or substitute form), certify under penalty of perjury that you
are eligible for benefits under the applicable treaty, and
provide other additional information as required. You must
periodically update the information
156
on such forms. Special certification and other requirements
apply to certain
non-U.S. holders
that are pass-through entities rather than corporations or
individuals. In addition, U.S. Treasury regulations provide
special procedures for payments of dividends through certain
intermediaries.
Dividends that (1) are effectively connected with the
conduct of a trade or business by a
non-U.S. holder
within the United States; and (2) if an income tax treaty
applies, are attributable to a permanent establishment, or, if
the
non-U.S. holder
is an individual, a fixed base in the United States, as provided
in the applicable treaty, are not subject to U.S. federal
withholding tax, provided that the
non-U.S. holder
satisfies certain certification and disclosure requirements,
including providing us with a properly executed Internal Revenue
Service
Form W-8ECI,
for effectively connected income, or
W-8BEN, for
treaty benefits, or such successor form as the IRS designates.
In such cases, dividends are subject to U.S. federal income
tax on a net income basis at applicable graduated individual or
corporate rates. In addition, a branch profits tax
may be imposed at a 30% rate (or any lower rate that may be
specified by an applicable income tax treaty) on dividends
received by a foreign corporation that are effectively connected
with the conduct of a trade or business in the United States.
If you are eligible for a reduced rate of U.S. federal
withholding tax under an income tax treaty, you may obtain a
refund of any excess amounts withheld by filing an appropriate
claim for refund together with the required information with the
IRS.
Taxation
of Sale, Exchange or Other Taxable Disposition of Our Common
Shares
A
non-U.S. holder
generally will not be subject to U.S. federal income or
withholding tax with respect to gain recognized on a sale or
other disposition of our common shares unless one of the
following applies:
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the gain is effectively connected with your conduct of a trade
or business in the United States and, if required by an
applicable tax treaty, attributable to a permanent establishment
or fixed base you maintain in the United States; in these cases,
you will be taxed on the net gain derived from the sale under
the regular graduated U.S. federal income tax rates, unless
an applicable treaty provides otherwise; if you are a foreign
corporation, you will be taxed on your net gain under regular
graduated U.S. federal income tax rates and, in addition,
you may be subject to a branch profits tax equal to 30% of your
effectively connected earnings and profits within the meaning of
the Code for the taxable year, as adjusted for specified items,
unless you qualify for a lower rate under an applicable income
tax treaty and demonstrate that you so qualify;
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if you hold our common shares as a capital asset and you are a
non-resident alien individual who is present in the United
States for 183 or more days in the taxable year of the sale or
other disposition, and you meet certain other conditions; in
this case, you will be subject to a flat 30% tax on the gain
derived from the sale, which may be offset by U.S. capital
losses, notwithstanding the fact that you are not considered a
resident of the United States; or
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we are or have been a U.S. real property holding
corporation, or USRPHC, for U.S. federal
income tax purposes at any time within the shorter of the
five-year period preceding your disposition or the period you
held our common shares; in general, a corporation is a USRPHC if
the fair market value of its U.S. real property
interests equals or exceeds 50% of the sum of the fair
market value of its worldwide real property interests plus its
other assets used or held for use in a trade or business. We
believe we are not currently and do not anticipate becoming a
USRPHC. If we are, have been or become a USRPHC, so long as our
common shares are, after the offering, and continues to be,
regularly traded on an established securities market within the
meaning of section 897(c)(3) of the Code, you will be
subject to U.S. federal income tax on the disposition of
our
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common shares under the USRPHC rules only if you hold or held
more than 5% of our common shares at any time during the shorter
of the five-year period preceding the date of your disposition
or your holding period.
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Information
Reporting and Backup Withholding
Under U.S. Treasury regulations, we must report annually to
the IRS and to you the gross amount of dividends we paid to you
and the tax withheld with respect to such dividends. These
reporting requirements apply regardless of whether withholding
was reduced or eliminated by an applicable income tax treaty.
Copies of the information returns reporting such dividends and
withholding also may be required to be made available to the tax
authorities in the country in which a
non-U.S. holder
resides under the provisions of an applicable income tax treaty.
Backup withholding, currently imposed at a rate of 28%, may
apply to payments of dividends by us. If you are a
U.S. holder, backup withholding will apply to you if you
fail to provide an accurate taxpayer identification number or
certification of exempt status or fail to report all interest
and dividends required to be shown on your federal income tax
returns. Certain U.S. holders (including, among others,
corporations) are not subject to backup withholding.
If you are a
non-U.S. holder,
and you fail to certify under penalties of perjury and in
accordance with applicable U.S. Treasury regulations that
you are a
non-U.S. holder
(and we do not have actual knowledge or reason to know that you
are a U.S. person as defined under the Code) you may be
subject to backup withholding.
The payment of proceeds to you on your sale or other disposition
of our common shares by or through a U.S. office of any
broker, U.S. or
non-U.S., is
subject to both backup withholding and information reporting,
unless you certify under penalties of perjury that you are a
non-U.S. holder
(and we do not have actual knowledge or reason to know that you
are a U.S. person as defined under the Code), or you
otherwise establish an exemption. In general, backup withholding
and information reporting will not apply to a payment to you of
proceeds on your sale or other disposition of our common shares
by or through a
non-U.S. office
of a
non-U.S. broker.
If, however, the broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation,
as defined in the Code, a foreign person that derives 50% or
more of its gross income for specified periods from the conduct
of a trade or business in the U.S., or a foreign partnership
with particular U.S. connections, such payments will be
subject to information reporting, but generally not backup
withholding, unless:
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the broker has documentary evidence in its records that you are
a
non-U.S. holder
and other specified conditions are met; or
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you otherwise establish an exemption.
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Any amounts withheld under the backup withholding rules do not
constitute a separate U.S. federal income tax. Rather, any
amounts withheld under the backup withholding rules may be
allowed as a refund or a credit against your U.S. federal
income tax liability, if any, if the required information is
timely furnished to the IRS.
The foregoing discussion of United States Federal Income Tax
Consequences does not address all aspects of U.S. federal
income taxes and does not deal with all tax considerations that
may be relevant to holders in light of their personal
circumstances or particular situations and is not based on an
opinion of counsel. Accordingly, you should consult your own tax
advisor with respect to the federal, state, local and
non-U.S. tax
consequences of your ownership and disposition of our common
shares in light of your particular tax situation.
158
ENFORCEABILITY
OF CIVIL LIABILITIES
We are a company incorporated under the laws of the State of
Wyoming in the United States. However, all of our business,
assets and operations are located in China. In addition, a
substantial majority of our directors and officers reside
outside of the United States. As a result, it may be difficult
for United States investors to effect service of process within
the United States upon us or such persons or to enforce against
us or them, judgments obtained in United States courts,
including judgments predicated upon the civil liability
provisions of the securities laws of the United States or any
State thereof.
Commerce & Finance Law Offices, our counsel as to Chinese
law, has advised us that there is uncertainty as to whether the
courts of China would (1) recognize or enforce judgments of
United States courts obtained against us or such persons
predicated upon the civil liability provisions of the securities
laws of the United States or any State thereof, or (2) be
competent to hear original actions brought in each respective
jurisdiction, against us or such persons predicated upon the
securities laws of the United States or any State thereof.
Commerce & Finance Law Offices has advised us that the
recognition and enforcement of foreign judgments are provided
for under the Chinese Civil Procedure Law. Chinese courts may
recognize and enforce foreign judgments in accordance with the
requirements of the Chinese Civil Procedure Law based either on
treaties between China and the country where the judgment is
made or in reciprocity between jurisdictions. China does not
have any treaties or other agreements with the United States
that provide for the reciprocal recognition and enforcement of
foreign judgments. As a result, it is uncertain whether a
Chinese court would enforce a judgment rendered by a court in
the United States.
We have appointed Pioneer Corporate Services located at 214 W.
Lincolnway, Suite 23, Cheyenne, Wyoming as our agent to receive
service of process with respect to any action brought against us
in a court in the United States.
159
UNDERWRITING
Piper Jaffray & Co. is acting as sole
book-running manager for this offering and as representative of
the underwriters. We and the selling shareholders have entered
into a firm commitment underwriting agreement with the
representative. Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell to the
underwriters, and each underwriter has agreed to purchase, the
number of shares listed next to its name in the following table:
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Number
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Underwriters
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of Shares
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Piper Jaffray & Co.
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ROTH Capital Partners, LLC
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Total
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6,269,462
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The underwriters have advised us and the selling shareholders
that they propose to offer the common shares to the public at
$ per common share. The
underwriters propose to offer the common shares to certain
dealers at the same price less a concession of not more than
$ per common share. The
underwriters may allow, and the dealers may reallow, a
concession of not more than $ per
common share on sales to certain other brokers and dealers.
After this offering, these figures may be changed by the
underwriters.
We have granted to the underwriters an option to purchase up to
an additional 940,419 common shares from us at the same
price to the public, and with the same underwriting discount, as
set forth above. The underwriters may exercise this option any
time during the
30-day
period after the date of this prospectus, but only to cover
over-allotments, if any. To the extent the underwriters exercise
the option, each underwriter will become obligated, subject to
certain conditions, to purchase approximately the same
percentage of the additional shares as it was obligated to
purchase under the purchase agreement.
We estimate that the total fees and expenses payable by us,
excluding underwriting discounts and commissions, will be
approximately $ .
The following table shows the underwriting fees to be paid to
the underwriters in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the
over-allotment option.
|
|
|
|
|
|
|
|
|
|
|
No Exercise
|
|
|
Full Exercise
|
|
|
Per share
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
We and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including civil
liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in
respect of those liabilities.
Piper Jaffray has informed us that neither it, nor any
other underwriter participating in the distribution of this
offering, will make sales of the common shares offered by this
prospectus to accounts over which they exercise discretionary
authority without the prior specific written approval of the
customer.
We and each of our directors, executive officers, certain
employees and the selling shareholders are subject to
lock-up
agreements that prohibit us and them from offering for sale,
selling, contracting to sell, granting any option for the sale
of, transferring or otherwise disposing of any common shares,
options or warrants to acquire our common shares or any security
or instrument related to such
160
common shares, option or warrant for a period of at least
180 days following the date of this prospectus without the
prior written consent of Piper Jaffray. The
lock-up
agreements provide exceptions for sales to underwriters pursuant
to the purchase agreement and certain other exceptions.
The 180-day
lock-up
period in all of the
lock-up
agreements is subject to extension if (1) during the last
17 days of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, or (2) we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
lock-up
period, in which case the restrictions imposed in these
lock-up
agreements shall continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event, unless
Piper Jaffray waives the extension in writing.
Prior to this offering, there has been no established trading
market for the shares. The New York Stock Exchange has approved
the listing of our common shares under the symbol
DYP. In connection with the listing, the
underwriters have undertaken that they will sell our common
shares so that (1) our common shares will have a price per
share of at least $4.00 at the time of listing and (2) we
will have at least 400 U.S. stockholders of 100 common
shares or more, at least 1,100,000 publicly held common shares
outstanding in the United States, and an aggregate market value
of publicly held common shares of at least $100 million in
the United States.
The initial public offering price for the common shares offered
by this prospectus was negotiated by us and the underwriters.
The factors considered in determining the initial public
offering price include the history of and the prospects for the
industry in which we compete, our past and present operations,
our historical results of operations, our prospectus for future
earnings, the recent market prices of securities of generally
comparable companies and the general condition of the securities
markets at the time of this offering and other relevant factors.
There can be no assurance that the initial public offering price
of the common shares will correspond to the price at which our
common shares will trade in the public market subsequent to this
offering or that an active public market for the common shares
will develop and continue after this offering.
To facilitate this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the
price of the common shares during and after this offering.
Specifically, the underwriters may over-allot or otherwise
create a short position in the common shares for their own
account by selling more common shares than we and the selling
shareholders have sold to them. Short sales involve the sale by
the underwriters of a greater number of common shares than they
are required to purchase in this offering. Covered
short sales are sales made in an amount not greater than the
underwriters option to purchase additional common shares
in this offering. The underwriters may close out any covered
short position by either exercising their option to purchase
additional common shares or purchasing common shares in the open
market. In determining the source of common shares to close out
the covered short position, the underwriters will consider,
among other things, the price of common shares available for
purchase in the open market as compared to the price at which
they may purchase common shares through the over-allotment
option. Naked short sales are sales in excess of
this option. The underwriters must close out any naked short
position by purchasing common shares in the open market. A naked
short position is more likely to be created if the underwriters
are concerned that there may be downward pressure on the price
of the common shares in the open market after pricing that could
adversely affect investors who purchase in this offering.
In addition, the underwriters may stabilize or maintain the
price of the common shares by bidding for or purchasing common
shares in the open market and may impose penalty bids. If
penalty bids are imposed, selling concessions allowed to
syndicate members or other broker-dealers participating in this
offering are reclaimed if common shares previously distributed
in this offering are repurchased, whether in connection with
stabilization transactions or otherwise. The effect of these
transactions may be to
161
stabilize or maintain the market price of the common shares at a
level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the
price of the common shares to the extent that it discourages
resales of the common shares. The magnitude or effect of any
stabilization or other transactions is uncertain. These
transactions may be effected on the New York Stock Exchange or
otherwise and, if commenced, may be discontinued at any time.
Some underwriters and selling group members may also engage in
passive market making transactions in our common shares. Passive
market making consists of displaying bids on the New York Stock
Exchange limited by the prices of independent market makers and
effecting purchases limited by those prices in response to order
flow. Rule 103 of Regulation M promulgated by the
Securities and Exchange Commission limits the amount of net
purchases that each passive market maker may make and the
displayed size of each bid. Passive market making may stabilize
the market price of the common shares at a level above that
which might otherwise prevail in the open market and, if
commenced, may be discontinued at any time.
This prospectus in electronic format may be made available on
the websites maintained by one or more of the underwriters or
selling group members, if any, participating in this offering
and one or more of the underwriters participating in this
offering may distribute prospectuses and prospectus supplements
electronically.
From time to time in the ordinary course of their respective
businesses, certain of the underwriters and their affiliates may
in the future engage in commercial banking or investment banking
transactions with us and our affiliates.
162
LEGAL
MATTERS
The validity of the common shares and certain legal matters as
to United States federal securities and New York law will be
passed upon for us by Hogan & Hartson LLP. Certain
legal matters as to United States federal securities and
New York law will be passed upon for the underwriters by
OMelveny & Myers LLP. The validity of the common
shares represented offered in this offering and certain other
legal matters as to the law of the State of Wyoming will be
passed upon for us by Karpan & White P.C. Certain
legal matters as to PRC law will be passed upon for us by
Commerce & Finance Law Offices and for the
underwriters by Tian Yuan Law Firm. Hogan & Hartson
LLP will rely upon Commerce & Finance Law Offices with
respect to matters governed by PRC law.
OMelveny & Myers LLP will rely upon Tian Yuan
Law Firm with respect to matters governed by PRC law.
EXPERTS
Our financial statements as of and for fiscal 2007, 2008 and
2009, included in this prospectus have been audited by Moore
Stephens Wurth Frazer and Torbet, LLP, Certified Public
Accountants, Brea, California, an independent registered public
accounting firm, as stated in its reports appearing elsewhere in
this prospectus. These financial statements have been so
included in reliance upon the reports of this firm given upon
their authority as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed a registration statement on
Form S-1
with the Securities and Exchange Commission, including exhibits,
schedules and amendments filed with this registration statement,
under the Securities Act with respect to the common shares to be
sold in this offering. This prospectus, which constitutes part
of the registration statement, does not include all of the
information contained in the registration statement and its
exhibits and schedules. For further information about us and our
common shares, you should refer to the registration statement
and its exhibits and schedules filed as part of the registration
statement for additional information. Whenever we make reference
in this prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you
should refer to the exhibits filed with the registration
statement for copies of the actual contract, agreement or other
documents. Statements contained in this prospectus as to the
contents of any contract or other document referred to in this
prospectus are not necessarily complete and, where that contract
is an exhibit to the registration statement, each statement is
qualified in all respects by reference to the exhibit to which
the reference relates.
You can read, inspect without charge and obtain a copy of the
registration statement or any of our other materials we file or
filed with the Securities and Exchange Commission at the
Securities and Exchange Commissions Public Reference Room
free of charge at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain copies of the
documents at prescribed rates by contacting the Securities and
Exchange Commissions Public Reference Room at
(202) 551-8090.
Please call the Securities and Exchange Commission, at its
toll-free number at
1-800-SEC-0330
for further information on the operation of the public reference
room. In addition, the Securities and Exchange Commission
maintains a website at
http://www.sec.gov
that contains reports, proxy and information statements and
other information that we file electronically with the
Securities and Exchange Commission.
We intend to furnish our shareholders written annual reports
containing financial statements audited by our independent
auditors, and make available to our shareholders quarterly
reports containing unaudited interim financial statements.
163
ASIAN
FINANCIAL, INC.
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Contents
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Page
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Asian Financial, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Asian Financial, Inc. and subsidiaries as of June 30, 2009
and 2008, and the related consolidated statements of income and
other comprehensive income, shareholders equity, and cash
flows for each of the years in the three-year period ended
June 30, 2009. Asian Financial, Inc.s management is
responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Asian Financial, Inc. and
subsidiaries as of June 30, 2009 and 2008, and the
consolidated results of its operations and its cash flows for
each of the years in the three-year period ended June 30,
2009 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Moore
Stephens Wurth Frazer and Torbet, LLP
Brea, California
September 2, 2009
F-2
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
AS OF
JUNE 30, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
31,044,070
|
|
|
$
|
14,199,700
|
|
Accounts receivable, net of allowance for doubtful accounts of
$1,401,689 and $1,178,328 as of June 30, 2009 and 2008,
respectively
|
|
|
37,259,616
|
|
|
|
33,184,833
|
|
Inventories
|
|
|
25,883,242
|
|
|
|
23,950,551
|
|
Other receivables
|
|
|
26,912
|
|
|
|
682,084
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
94,213,840
|
|
|
|
72,017,168
|
|
|
|
|
|
|
|
|
|
|
PLANT AND EQUIPMENT, net
|
|
|
43,123,153
|
|
|
|
34,130,651
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
3,939,476
|
|
|
|
4,003,128
|
|
Advances on equipment purchases
|
|
|
7,274,677
|
|
|
|
2,753,610
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
11,214,153
|
|
|
|
6,756,738
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
148,551,146
|
|
|
$
|
112,904,557
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Lines of credit
|
|
$
|
14,357,000
|
|
|
$
|
11,380,200
|
|
Accounts payable
|
|
|
756,116
|
|
|
|
1,489,255
|
|
Other liabilities
|
|
|
2,251,419
|
|
|
|
1,858,112
|
|
Taxes payable
|
|
|
1,512,727
|
|
|
|
1,702,986
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
18,877,262
|
|
|
|
16,430,553
|
|
|
|
|
|
|
|
|
|
|
DERIVATIVE INSTRUMENT LIABILITIES
|
|
|
1,180,477
|
|
|
|
1,374,824
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST
|
|
|
1,761,712
|
|
|
|
1,292,843
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Preferred shares; $0.001 par value; 1,000,000 shares
authorized; no shares issued and outstanding as of June 30,
2009 and 2008
|
|
|
|
|
|
|
|
|
Common shares; $0.001 par value; 100,000,000 shares
authorized; 25,000,050 shares issued and outstanding as of
June 30, 2009 and 2008
|
|
|
25,000
|
|
|
|
25,000
|
|
Additional paid-in capital
|
|
|
27,263,040
|
|
|
|
27,263,040
|
|
Statutory reserves
|
|
|
9,428,573
|
|
|
|
6,000,090
|
|
Retained earnings
|
|
|
79,226,497
|
|
|
|
50,058,176
|
|
Accumulated other comprehensive income
|
|
|
10,788,585
|
|
|
|
10,460,031
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
126,731,695
|
|
|
|
93,806,337
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
148,551,146
|
|
|
$
|
112,904,557
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the these
consolidated financial statements.
See report of independent registered public accounting
firm.
F-3
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
FOR THE
YEARS ENDED JUNE 30, 2009, 2008 AND 2007
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
REVENUE, net
|
|
$
|
106,590,583
|
|
|
$
|
89,627,677
|
|
|
$
|
67,811,867
|
|
COST OF REVENUE
|
|
|
50,334,043
|
|
|
|
44,461,903
|
|
|
|
37,693,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
56,256,540
|
|
|
|
45,165,774
|
|
|
|
30,118,188
|
|
RESEARCH AND DEVELOPMENT EXPENSES
|
|
|
1,768,050
|
|
|
|
1,683,304
|
|
|
|
1,045,543
|
|
SELLING EXPENSES
|
|
|
9,725,635
|
|
|
|
8,704,958
|
|
|
|
7,826,958
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,473,655
|
|
|
|
4,472,196
|
|
|
|
3,078,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
40,289,200
|
|
|
|
30,305,316
|
|
|
|
18,166,836
|
|
LIQUIDATED DAMAGES, net of settlement
|
|
|
|
|
|
|
235,492
|
|
|
|
(2,119,428
|
)
|
CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
|
|
|
194,347
|
|
|
|
73,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE), net
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating (expenses)
|
|
|
(956,936
|
)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,188,111
|
)
|
|
|
(729,934
|
)
|
|
|
(742,083
|
)
|
Interest income and other income
|
|
|
175,781
|
|
|
|
194,878
|
|
|
|
721,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(1,969,266
|
)
|
|
|
(535,056
|
)
|
|
|
(20,734
|
)
|
INCOME BEFORE MINORITY INTEREST AND PROVISION FOR INCOME TAXES
|
|
|
38,514,281
|
|
|
|
30,078,864
|
|
|
|
16,026,674
|
|
MINORITY INTEREST
|
|
|
463,553
|
|
|
|
381,633
|
|
|
|
240,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES
|
|
|
38,050,728
|
|
|
|
29,697,231
|
|
|
|
15,786,090
|
|
PROVISION FOR INCOME TAXES
|
|
|
5,453,924
|
|
|
|
3,237,707
|
|
|
|
1,806,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
32,596,804
|
|
|
|
26,459,524
|
|
|
|
13,979,147
|
|
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
328,554
|
|
|
|
8,199,861
|
|
|
|
1,834,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$
|
32,925,358
|
|
|
$
|
34,659,385
|
|
|
$
|
15,813,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
|
|
|
25,000,050
|
|
|
|
25,000,050
|
|
|
|
23,041,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED EARNING PER SHARE
|
|
$
|
1.30
|
|
|
$
|
1.06
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the these
consolidated financial statements.
See report of independent registered public accounting
firm.
F-4
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
FOR
THE YEARS ENDED JUNE 30, 2009, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Shares
|
|
|
Additional
|
|
|
Retained earnings
|
|
|
Other
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Paid-In
|
|
|
Statutory
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Reserves
|
|
|
Unrestricted
|
|
|
Income
|
|
|
Total
|
|
|
BALANCE, June 30, 2006
|
|
|
17,562,388
|
|
|
$
|
17,562
|
|
|
$
|
5,992,339
|
|
|
$
|
1,871,198
|
|
|
$
|
13,748,397
|
|
|
$
|
425,857
|
|
|
$
|
22,055,353
|
|
Shares due to reorganization on August 31, 2006
|
|
|
1,305,040
|
|
|
|
1,305
|
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for cash, $1.43 per share
|
|
|
6,132,622
|
|
|
|
6,133
|
|
|
|
21,272,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,278,139
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,979,147
|
|
|
|
|
|
|
|
13,979,147
|
|
Adjustment to statutory reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,411,403
|
|
|
|
(1,411,403
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,834,313
|
|
|
|
1,834,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2007
|
|
|
25,000,050
|
|
|
$
|
25,000
|
|
|
$
|
27,263,040
|
|
|
$
|
3,282,601
|
|
|
$
|
26,316,141
|
|
|
$
|
2,260,170
|
|
|
$
|
59,146,952
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,459,524
|
|
|
|
|
|
|
|
26,459,524
|
|
Adjustment to statutory reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,717,489
|
|
|
|
(2,717,489
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,199,861
|
|
|
|
8,199,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2008
|
|
|
25,000,050
|
|
|
$
|
25,000
|
|
|
$
|
27,263,040
|
|
|
$
|
6,000,090
|
|
|
$
|
50,058,176
|
|
|
$
|
10,460,031
|
|
|
$
|
93,806,337
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,596,804
|
|
|
|
|
|
|
|
32,596,804
|
|
Adjustment to statutory reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,428,483
|
|
|
|
(3,428,483
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328,554
|
|
|
|
328,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2009
|
|
|
25,000,050
|
|
|
$
|
25,000
|
|
|
$
|
27,263,040
|
|
|
$
|
9,428,573
|
|
|
$
|
79,226,497
|
|
|
$
|
10,788,585
|
|
|
$
|
126,731,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the these
consolidated financial statements.
See report of independent registered public accounting
firm.
F-5
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
FOR
THE YEARS ENDED JUNE 30, 2009, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,596,804
|
|
|
$
|
26,459,524
|
|
|
$
|
13,979,147
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
463,553
|
|
|
|
381,633
|
|
|
|
240,584
|
|
Depreciation
|
|
|
2,826,707
|
|
|
|
2,239,063
|
|
|
|
882,842
|
|
Amortization
|
|
|
80,115
|
|
|
|
75,297
|
|
|
|
70,047
|
|
Loss on fixed assets disposal
|
|
|
|
|
|
|
1,458
|
|
|
|
|
|
Bad debt expense
|
|
|
218,516
|
|
|
|
589,901
|
|
|
|
322,305
|
|
Change in fair value of derivative instruments
|
|
|
(194,347
|
)
|
|
|
(73,112
|
)
|
|
|
|
|
Liquidated damages penalty
|
|
|
|
|
|
|
706,476
|
|
|
|
2,119,428
|
|
Gain from settlement of liquidated damages
|
|
|
|
|
|
|
(941,968
|
)
|
|
|
|
|
Transaction gain
|
|
|
(63,357
|
)
|
|
|
|
|
|
|
|
|
Write-off of deferred expenses
|
|
|
661,250
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,156,829
|
)
|
|
|
(9,740,414
|
)
|
|
|
(9,452,582
|
)
|
Inventories
|
|
|
(2,036,858
|
)
|
|
|
(1,566,856
|
)
|
|
|
(2,440,076
|
)
|
Other receivables
|
|
|
(5,992
|
)
|
|
|
51,706
|
|
|
|
71,457
|
|
Other receivables related parties
|
|
|
|
|
|
|
|
|
|
|
913,154
|
|
Deferred expense
|
|
|
|
|
|
|
(661,250
|
)
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
42,230
|
|
|
|
(43,198
|
)
|
Accounts payable
|
|
|
(739,264
|
)
|
|
|
(1,287,681
|
)
|
|
|
(10,935,839
|
)
|
Customer deposits
|
|
|
|
|
|
|
|
|
|
|
(19,265
|
)
|
Other payables
|
|
|
|
|
|
|
(104,471
|
)
|
|
|
(341,354
|
)
|
Other payables related parties
|
|
|
|
|
|
|
(386,960
|
)
|
|
|
(455,164
|
)
|
Other liabilities
|
|
|
388,655
|
|
|
|
538,634
|
|
|
|
312,551
|
|
Taxes payable
|
|
|
(197,261
|
)
|
|
|
477,886
|
|
|
|
576,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
29,841,692
|
|
|
|
16,801,096
|
|
|
|
(4,199,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(11,678,852
|
)
|
|
|
(7,925,596
|
)
|
|
|
(13,314,596
|
)
|
Advances on equipment purchases
|
|
|
(4,509,743
|
)
|
|
|
(2,598,661
|
)
|
|
|
2,233,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(16,188,595
|
)
|
|
|
(10,524,257
|
)
|
|
|
(11,080,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from private placement
|
|
|
|
|
|
|
|
|
|
|
21,278,139
|
|
Proceeds from lines of credit
|
|
|
14,363,400
|
|
|
|
10,739,820
|
|
|
|
15,050,400
|
|
Payments for lines of credit
|
|
|
(11,434,400
|
)
|
|
|
(13,493,620
|
)
|
|
|
(15,060,400
|
)
|
Payments to settle liquidated damages
|
|
|
|
|
|
|
(436,000
|
)
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
2,097,490
|
|
|
|
(2,097,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,929,000
|
|
|
|
(1,092,310
|
)
|
|
|
19,170,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
262,273
|
|
|
|
1,198,810
|
|
|
|
186,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH
|
|
|
16,844,370
|
|
|
|
6,383,339
|
|
|
|
4,076,650
|
|
CASH, beginning of year
|
|
|
14,199,700
|
|
|
|
7,816,361
|
|
|
|
3,739,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, end of year
|
|
$
|
31,044,070
|
|
|
$
|
14,199,700
|
|
|
$
|
7,816,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of the these
consolidated financial statements.
See report of independent registered public accounting
firm.
F-6
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
JUNE
30, 2009
|
|
Note 1
|
Organization
Background and Principal Activities
|
Asian Financial, Inc. (AFI) was
organized under the laws of the State of Nevada on
August 10, 1998. On July 27, 2005, AFI merged with
Asian Financial, Inc. (a Wyoming entity) for the purpose of
changing its domicile from Nevada to Wyoming. AFI has no
operations and generated no revenues since inception. On
July 17, 2007, the Company effected a
1-for-2.68189924
reverse stock split of its common stock. All share and per share
amounts used in the Companys consolidated financial
statements and notes thereto have been retroactively restated to
reflect the
1-for-2.68189924
reverse stock split.
Duoyuan Investments Limited (Duoyuan BVI) is a
British Virgin Islands company that owns 100% of the equity
interest of Duoyuan Digital Press Technology Industries (China)
Co., Ltd. (Duoyuan China). Duoyuan China has two
subsidiaries, a 99.4% ownership in Hunan Duoyuan Printing
Machinery Co., Ltd. and 95% ownership in Langfang Duoyuan
Digital Technology Co., Ltd (collectively referred to as the
Duoyuan Interest).
On August 31, 2006, Asian Financial, Inc. entered into a
definitive Equity Transfer Agreement with Duoyuan BVI to acquire
the Duoyuan Interest in exchange for 47,100,462 new
shares (pre-split) (equivalent to 17,562,388 post-split shares)
of common stock in Asian Financial, Inc. Prior to the
acquisition, Asian Financial, Inc. had 3,500,000 shares
(pre-split) (equivalent to 1,305,040 post-split shares) of
outstanding common stock. Accordingly, at the closing, there
were 50,600,462 shares (pre-split) (equivalent to
18,867,428 post-split shares) of common stock outstanding. The
Equity Transfer Agreement became effective October 6, 2006.
The stock exchange transaction has been accounted as a reverse
acquisition and recapitalization of the Company whereby Duoyuan
BVI is deemed to be the accounting acquirer (legal acquiree) and
the Company to be the accounting acquiree (legal acquirer). The
historical financial statements for periods prior to
October 6, 2006 are those of Duoyuan BVI, except that the
equity section and earnings per share have been retroactively
restated to reflect the reverse acquisition. As a result of the
equity transfer, Duoyuan China became Asian Financial,
Inc.s wholly-owned subsidiary, and Mr. Wenhua Guo,
the sole shareholder of Duoyuan BVI, became the controlling
shareholder.
Duoyuan Digital Press Technology Industries (China) Co.,
Ltd. (Duoyuan China) was originally
established and wholly-owned by Duoyuan Industries (Holding)
Inc. (Duoyuan Industries), a British Virgin Islands
company. In September 2002, Duoyuan Industries entered into an
Equity Transfer Agreement with Duoyuan BVI, whereby Duoyuan BVI
acquired 100% of the equity in Duoyuan China from Duoyuan
Industries. Mr. Wenhua Guo is the sole shareholder of
Duoyuan Industries. Duoyuan China was incorporated in the
Peoples Republic of China (PRC) in 2001 with
the registered capital of $6,000,000. Subsequently, Duoyuan
China increased its registered capital to $19,000,000. As of
June 30, 2007, $18,000,000 was contributed to Duoyuan China
from the Company, and the remaining $1,000,000 was received in
July and August 2007. The capital was raised through a private
placement to accredited investors (see Note 14). On
August 21, 2007, Duoyuan China received its business
license requiring $25,000,000 registered capital. As of
June 30, 2009, Duoyuan China owns 95.0% of Langfang Duoyuan
Digital Technology Co., Ltd. and 88.0% of Hunan Duoyuan Printing
Machinery Co., Ltd.
Langfang Duoyuan Digital Technology Co., Ltd.
(Langfang Duoyuan) is located in the city of
Langfang, China, and it produces primarily pre-press and small
format offset printing presses (in both single and multi
colors). Langfang Duoyuan is 95% owned by Duoyuan China and 5%
by Beijing
See report of independent registered public accounting
firm.
F-7
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 1
|
Organization
Background and Principal
Activities (Continued)
|
Huiyuan Duoyuan Research Institute Co., Ltd. Langfang Duoyuan
owns 12% of Hunan Duoyuan Printing Machinery Co. Ltd.
Hunan Duoyuan Printing Machinery Co., Ltd. (Hunan
Duoyuan) is located in Hunan, China , and it
mainly produces large format offset printing presses (in both
single and multi colors). Hunan Duoyuan was established on
March 10, 2006, and is 88% owned by Duoyuan China and 12%
by Langfang Duoyuan.
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
The
reporting entity and principles of consolidation
The consolidated financial statements of Asian Financial, Inc.
and subsidiaries (the Company) reflect the
activities of Asian Financial, Inc., Duoyuan China
100%, Langfang Duoyuan 95.0%, and Hunan
Duoyuan 99.4%. All intercompany balances and
transactions have been eliminated in consolidation.
Basis of
presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America, and have been
consistently applied.
Use of
estimates
The preparation of financial statements in conformity with
generally accepted accounting principles of the United States of
America 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. The significant
estimates made in the preparation of the Companys
consolidated financial statements relate to allowance for
doubtful accounts, reserves for inventory obsolescence, as well
as the fair value of its warrants carried as derivative
instruments marked to market each reporting period. Management
believes that the estimates used in preparing its financial
statements are reasonable and prudent. Actual results could
materially differ from these estimates upon which the carrying
values were based.
Foreign
currency translation
The reporting currency of the Company is the U.S. dollar.
The Company uses their local currency Chinese Renminbi
(RMB), as their functional currency. In accordance
with Statement of Financial Accounting Standards
(SFAS) 52, Foreign Currency Translation,
results of operations and cash flows are translated at average
exchange rates during the period, assets and liabilities are
translated at the unified exchange rate as quoted by the
Peoples Bank of China at the end of the period, and equity
is translated at historical exchange rates.
Translation adjustments amounted to $10,788,585 and $10,460,031
as of June 30, 2009 and June 30, 2008, respectively.
Asset and liability accounts at June 30, 2009 were
translated at RMB6.83 to $1.00, as compared to RMB6.85 to $1.00
at June 30, 2008. The average translation rates applied to
the consolidated statements of income for the years ended
June 30, 2009, 2008 and 2007 were RMB6.83 to $1.00, RMB7.26
to $1.00, and RMB7.81 to $1.00, respectively.
See report of independent registered public accounting
firm.
F-8
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
In accordance with SFAS 95, Statement of Cash
Flows, cash flows from the Companys operations is
calculated based upon the local currencies using the average
translation rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash
flows will not necessarily agree with changes in the
corresponding balances on the consolidated balance sheets.
Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other
than the functional currency are included in the results of
operations as incurred. Gains and losses from foreign currency
transactions are included in the results of operations for the
periods presented. There were no material transaction gains or
losses for the years ended June 30, 2009, 2008 and 2007.
Comprehensive
income
SFAS 130, Reporting Comprehensive Income,
establishes standards for reporting and display of comprehensive
income and its components in financial statements. It requires
that all items that are required to be recognized under
accounting standards as components of comprehensive income be
reported in financial statements that is displayed with the same
prominence as other financial statements. The accompanying
consolidated financial statements include the provisions of
SFAS 130.
Revenue
recognition
The Company recognizes revenue in accordance with the Securities
and Exchange Commissions (SEC) Staff
Accounting Bulletin (SAB) No. 104,
Revenue Recognition, which specifies that revenue is
realized or realizable and earned when four criteria are met:
|
|
|
|
|
Persuasive evidence of an arrangement exists. (The Company
considers its sales contracts to be persuasive evidence of an
arrangement.)
|
|
|
|
Product is shipped or services have been rendered.
|
|
|
|
The sellers price to the buyer is fixed or determinable.
|
|
|
|
Collectability of payment is reasonably assured.
|
In accordance with SFAS 48, Revenue Recognition when
Right of Return Exists, revenue is recorded net of an
estimate of markdowns, price concessions and warranty costs.
Markdowns represent price adjustments on sale of units whose
model is nearing the end of its cycle and the model is planned
to be discontinued; price concessions represent price
adjustments on contractual agreements for the sale of units; and
warranty costs represent costs to repair previously sold units
still under warranty for manufacturers defects. Such
amounts are based on managements evaluation of historical
experience, current industry trends and estimated costs.
The Company sells its products solely to its distributors.
Master distribution agreements are signed with each distributor.
The agreements list all terms and conditions with the exception
of delivery, price and quantity terms, which are evidenced
separately in purchase orders. Title transfers when products are
shipped. There are no instances where receivables from
distributors are not due and payable until goods
See report of independent registered public accounting
firm.
F-9
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
purchased from the Company are sold by the distributors. The
Company does not sell products to distributors on a consignment
basis. Its distributors have a right of return within one month
after shipping only if the Companys products exhibit any
manufacturing defects and it cannot be repaired. The Company had
no returns during the years ended June 30, 2009, 2008 and
2007 and did not provide for any allowance for sales returns.
The Company recognizes revenue when the goods are shipped and
title has passed. Sales revenue represents the invoiced value of
goods, net of a value-added tax (VAT). All of the
Companys products that are sold in the PRC are subject to
a Chinese VAT at a rate of 17% of the gross sales price or at a
rate approved by the Chinese local government. This VAT may be
offset by the VAT paid by the Company on raw materials and other
materials included in the cost of producing their finished
products. The VAT on sales may also be offset by the VAT paid on
equipment purchases. The Companys distributors are all
equipped to install the Companys products and the Company
is not contractually obligated to perform any installation
services. As a result, there is no substantial performance
required on the Companys part and there is no impact on
the Companys recognition of revenues.
Purchase prices of products are generally fixed and customers
are not allowed to renegotiate pricing after the contracts are
signed. The Companys agreements with its distributors do
not include cancellation or termination clauses.
Credit limits are assigned to each distributor. As a distributor
builds a sales and credit history with the Company, the credit
limit can be increased. Credit limits are periodically reviewed
by management and reductions to credit limits are made if deemed
necessary.
The Company estimates sales rebates to distributors based on the
projected annual sales and corresponding cash receipts. These
rebates are paid at the end of each calendar year. The Company
accounts for the sales rebates in accordance with Emerging
Issues Task Force (EITF) Issue
01-09,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors
Products). Sales rebates are included as a reduction of
revenue and accounts receivable to be received by the Company.
For the years ended June 30, 2009, 2008, and 2007, the
aggregate amount of the aforementioned markdowns, price
concessions, warranty costs, and sales rebates were immaterial
to the consolidated financial statements taken as a whole for
each of those years.
Accounts
receivable
The Companys business operations are conducted in the PRC.
During the normal course of business, the Company extends
unsecured credit to its customers by selling on various credit
terms from six to nine months. Management reviews its accounts
receivable on a quarterly basis to determine if the allowance
for doubtful accounts is adequate. An estimate for doubtful
accounts is recorded in the period of the related sales. The
Companys existing reserve is consistent with its
historical experience and considered adequate by management.
Known bad debts are written off against allowance for doubtful
accounts when identified. The Company recorded an allowance for
doubtful accounts for trade accounts
See report of independent registered public accounting
firm.
F-10
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
receivables aged between nine months and one year at 15%, and
currently the Company does not have any outstanding balance aged
over one year.
The following represents the changes of allowance for doubtful
accounts:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance, beginning of period
|
|
$
|
1,178,328
|
|
|
$
|
498,648
|
|
Provision for bad debts
|
|
|
218,516
|
|
|
|
589,901
|
|
Foreign currency translation adjustments
|
|
|
4,845
|
|
|
|
89,779
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
1,401,689
|
|
|
$
|
1,178,328
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories are stated at the lower of cost (weighted average
method) or market. The Company reviews its inventory on a
regular basis for possible obsolete goods to determine if any
reserves are necessary. As of June 30, 2009 and 2008, the
Company determined that no reserves were necessary.
Intangible
assets
All land in the PRC is owned by the government. However, the
government grants rights to use the land. Land use rights are
valid for a limited period of time, depending on their use.
Under PRC regulations, the term of land use rights is
50 years for industrial property. As such, the Company has
the right to use the land for 50 years and has elected to
amortize the cost of rights over 50 years using the
straight-line method.
Intangible assets of the Company are reviewed each reporting
period to determine whether their carrying value has become
impaired. The Company considers assets to be impaired if the
carrying value exceeds future projected cash flows from related
operations. The Company also re-evaluates the periods of
amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives. As of
June 30, 2009, the Company expects these assets to be fully
recoverable.
Plant and
equipment
Plant and equipment are stated at cost less accumulated
depreciation. Major renewals are charged directly to the plant
and equipment accounts, while replacements, maintenance, and
repairs which do not improve or extend the respective lives of
the assets are expensed currently. Depreciation is computed
using the straight-line method over the estimated useful lives
of the assets with 5% residual value. Estimated useful lives of
the assets are as follows:
|
|
|
|
|
|
|
Estimated Useful Life
|
|
|
Buildings
|
|
|
30 Years
|
|
Office equipment
|
|
|
3-10 Years
|
|
Motor vehicles
|
|
|
4-10 Years
|
|
Machinery and equipment
|
|
|
5-10 Years
|
|
See report of independent registered public accounting
firm.
F-11
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
Construction-in-progress
represents the costs incurred in connection with the
construction of buildings or additions to the Companys
plant facilities. Interest incurred during construction is
capitalized into
construction-in-progress.
All other interest is expensed as incurred. No depreciation is
provided for construction in-progress until such
time as the assets are completed and are placed into service.
The cost and related accumulated depreciation and amortization
of assets sold or otherwise retired are eliminated from the
accounts and any gain or loss is included in operations.
Long-lived assets of the Company are reviewed each reporting
period to determine whether their carrying value has become
impaired in accordance with SFAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. The
Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations.
The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant
revised estimates of the remaining useful lives of the assets.
As of June 30, 2009, the Company expects these assets to be
fully recoverable.
Advances
on equipment purchases
The Company makes advances to certain vendors for equipment
purchases. The Company transfers the amounts advanced to the
equipment accounts upon receipt of the equipment purchased.
These advances are classified as noncurrent, as the advances
relate to equipment accounts and the ultimate delivery of the
equipment may exceed one year from the date the advances are
made.
Concentration
of risk
Cash includes cash on hand and demand deposits in accounts
maintained with state-owned banks within the PRC and an offshore
account with DBS Bank. Cash deposits at these financial
institutions are not covered by insurance from the
U.S. government. Total cash in state-owned banks and DBS
Bank at June 30, 2009 and 2008 amounted to $31,036,332 and
$14,192,775, respectively. To date, the Company has not
experienced any losses in such accounts.
For the year ended June 30, 2009, one supplier accounted
for 11% of the Companys total purchases. This supplier
represents 12% of total accounts payable as of June 30,
2009. For the year ended June 30, 2008, one supplier
accounted for approximately 12% of total purchases. This
supplier represents 14% of the Companys total accounts
payable as of June 30, 2008.
For the year ended June 30, 2009, the Companys top
five customers accounted for 13% of the Companys total
sales. These customers represent 14% of total accounts
receivable as of June 30, 2009. For the year ended
June 30, 2008, the Companys top five customers
accounted for 21.6% of the total sales. These customers
represent 15% of total accounts receivable as of June 30,
2008.
The Companys operations are carried out in the PRC.
Accordingly, the Companys business, financial condition
and results of operations may be influenced by the political,
economic and legal environments in the PRC, and by the general
state of the PRCs economy. The Companys operations
in the PRC are subject to specific considerations and
significant risks not typically associated with companies in
North America and Western Europe. These include risks
associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Companys
results may be
See report of independent registered public accounting
firm.
F-12
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
adversely affected by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods
of taxation, among other things.
Liquidated
damages
The liquidated damages associated with the registration of the
shares and the settlement of all outstanding related party
balances are treated in accordance with Financial Accounting
Standards Board (FASB) Staff Position
(FSP)
EITF 00-19-2,
Accounting for Registration Payment Arrangement,
which requires the Company to recognize an expense and a
liability equal to minimum estimated losses.
Financial
instruments
SFAS 107, Disclosures about Fair Value of Financial
Instruments, defines financial instruments and requires
disclosure of the fair value of financial instruments held by
the Company. SFAS 157, Fair Value Measurements,
adopted July 1, 2008, defines fair value, establishes a
three-level valuation hierarchy for disclosures of fair value
measurement and enhances disclosures requirements for fair value
measures. The carrying amounts reported in the consolidated
balance sheets for receivables and payables qualify as financial
instruments and reflect reasonable estimates of fair value
because of the short period of time between the origination of
such instruments and their expected realization. The three
levels of valuation hierarchy are defined as follows:
|
|
|
|
|
Level 1 inputs to the valuation methodology which are
quoted prices (unadjusted) for identical assets or liabilities
in active markets.
|
|
|
|
Level 2 inputs to the valuation methodology that includes
quoted prices for similar assets and liabilities in active
markets, and inputs that are observable for the asset or
liability, either directly or indirectly, substantially for the
full term of the financial instrument.
|
|
|
|
Level 3 inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
|
The Company analyzes all financial instruments with features of
both liabilities and equity under SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,
SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, and
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock. In accordance with
EITF 00-19,
the Companys warrants were required to be recorded as a
liability at fair value and marked to market each reporting
period.
As of June 30, 2009, the outstanding principal on the
Companys short term loans amounted to $14,357,000.
Management concluded the carrying value of the short term loans
is a reasonable estimate of fair value because the amounts are
due within one year and the stated interest rate approximates
current rates available.
As of June 30, 2009, the Companys management
determined that certain inputs to the fair value measurement of
the Companys warrant liability falls under level 3 of
the valuation hierarchy, since
See report of independent registered public accounting
firm.
F-13
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
there was no observable market price for certain inputs
significant to the valuation model used to determine the fair
value of the warrant liability, and also rendered the fair value
calculation thereof under the same classification. The
Companys warrant liability is carried at fair value
totaling $1,180,477 as of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
as of
|
|
|
Fair Value Measurement
|
|
|
|
June 30,
|
|
|
at June 30, 2009
|
|
|
|
2009
|
|
|
Using Fair Value
Hierarchy
|
|
Liabilities
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Warrant liability
|
|
$
|
1,180,477
|
|
|
|
|
|
|
|
|
|
|
$
|
1,180,477
|
|
Except for the derivative liabilities and the short term loans,
the Company did not identify any other non-recurring assets and
liabilities that are required to be presented on the
consolidated balance sheets at fair value in accordance with
SFAS 157.
SFAS 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of
FASB Statement No. 115, became effective for the
Company on July 1, 2008. SFAS 159 provides the Company
with the irrevocable option to elect fair value for the initial
and subsequent measurement for certain financial assets and
liabilities on a
contract-by-contract
basis with the difference between the carrying value before
election of the fair value option and the fair value recorded
upon election as an adjustment to beginning retained earnings.
The Company chose not to elect the fair value option.
Income
taxes
The Company accounts for income taxes in accordance with
SFAS 109, Accounting for Income Taxes. Under
the asset and liability method as required by SFAS 109,
deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets
and liabilities. Under SFAS 109, the effect on deferred income
taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance
is recognized if it is more likely than not that some portion,
or all of, a deferred tax asset will not be realized. Since the
Companys operations are domiciled in the PRC, and the PRC
taxable income mirrors that of GAAP income, there are no
material temporary differences that would result in deferred tax
assets or liabilities. As such, no valuation allowances were
necessary at June 30, 2009 and 2008 for taxable income from
the PRC. However, the Company has certain deferred taxes as a
result of net operating losses for U.S. income tax
purposes. (See Note 10.)
In July 2007, the Company adopted FASB Interpretation
No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109, which clarifies the
accounting and disclosure for uncertain tax positions.
FIN 48 prescribes a recognition threshold and measurement
attribute for recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition.
See report of independent registered public accounting
firm.
F-14
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
Under FIN 48, evaluation of a tax position is a two-step
process. The first step is to determine whether it is more
likely than not that a tax position will be sustained upon
examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The
second step is to measure a tax position that meets the
more-likely-than-not threshold to determine the amount of
benefit to be recognized in the financial statements. A tax
position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to
meet the more-likely-than-not recognition threshold should be
recognized in the first subsequent period in which the threshold
is met. Previously recognized tax positions that no longer meet
the more-likely-than-not criteria should be de-recognized in the
first subsequent financial reporting period in which the
threshold is no longer met. The adoption of FIN 48 did not
have a material effect on the Companys consolidated
financial statements.
China
income tax
The Companys subsidiaries are governed by the Income Tax
Law of the PRC concerning Foreign Investment Enterprises and
Foreign Enterprises and various local income tax laws (the
Income Tax Laws).
Beginning on January 1, 2008, the new Enterprise Income Tax
(EIT) law replaced the existing laws for Domestic
Enterprises (DES) and Foreign Investment Enterprises
(FIEs).
The key changes are:
a. The new standard EIT rate of 25% replaced the 33% rate
currently applicable to both DES and FIEs, except for High Tech
companies who pay a reduced rate of 15%;
b. Companies established before March 16, 2007, will
continue to enjoy tax holiday treatment approved by local
government for a grace period of either for the next five years
or until the tax holiday term is completed, whichever is sooner.
These companies will pay the standard tax rate as defined in
point a above when the grace period expires.
Duoyuan China was established before March 16, 2007, and
therefore qualify to continue to enjoy the reduced tax rate as
described below.
Prior to March 16, 2007, upon approval by the PRC tax
authorities, FIEs scheduled to operate for a period of
10 years or more and engaged in manufacturing and
production may be exempt from income taxes for two years,
commencing with their first profitable year of operations, after
taking into account any losses brought forward from prior years
and thereafter with a 50% reduction for the subsequent three
years.
Duoyuan China has been a wholly foreign-owned enterprise since
its inception. This entity status allowed Duoyuan China a
two-year income tax exemption and a 50% income tax reduction for
the following three years. Duoyuan China also had operating
losses prior to the calendar year ended December 31, 2003,
and started to generate a net profit for the calendar year ended
December 31, 2004. Therefore Duoyuan China had an income
tax exemption for the calendar years ended December 31,
2004 and
See report of independent registered public accounting
firm.
F-15
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
2005, and 50% income tax reduction for the calendar years ended
December 31, 2006, 2007, and 2008. Thus, income tax rate
for Duoyuan China for the calendar years ended December 31,
2006 and 2007 was 16.5% and for the calendar year ended
December 31, 2008 was 12.5%. Duoyuan China is subject to an
income tax rate of 25% starting January 1, 2009, under the
newly unified corporate income tax rate.
Langfang Duoyuan is located in a Special Economic and High
Technology Zone and the PRC tax authority has offered a special
income tax rate to Langfang Duoyuan for doing business in the
special zone. With the approval of the local government,
Langfang Duoyuan is exempt from income taxes for five years,
commencing with their first profitable year of operations.
Langfang Duoyuan has operating losses prior to the calendar year
ended December 31, 2002, and started to generate a net
profit for the calendar year ended December 31, 2003.
Therefore, Langfang Duoyuan had an income tax exemption for the
years ended December 31, 2003, through December 31,
2007. Langfang Duoyuan is subject to an income tax rate of 25%
starting January 1, 2008, under the newly unified corporate
income tax rate.
Prior to acquiring Hunan Duoyuan, the shareholders negotiated
with the Hunan Shaoyang Treasury Department to obtain an income
tax exemption benefit. The Treasury Department granted the
company a five-year income tax exemption commencing with the
first profitable year of operations. In addition, the Treasury
Department granted a 50% refund of income taxes based upon the
amount of income taxes paid by Hunan Duoyuan. Hunan Duoyuan had
an operating loss in the first year of operations ended
December 31, 2004, and started to generate a net profit for
the calendar year ended December 31, 2005.
Therefore Hunan Duoyuan has an income tax exemption for the
years ended December 31, 2005 through December 31,
2009. Hunan Duoyuan will become subject to income tax at a rate
of 25% starting January 1, 2010, under the newly unified
corporate income tax rate.
PRC laws require that before a foreign invested enterprise can
legally distribute profits to its partners, it must satisfy all
tax liabilities, provide for losses in previous years, and make
allocations in proportions made at the discretion of the board
of directors, after the statutory reserve. The statutory
reserves include the surplus reserve fund and the common welfare
fund, and represent restricted retained earnings.
During the years ended June 30, 2009, 2008 and 2007, the
provision for income taxes amounted to approximately $5,454,000,
$3,238,000 and $1,807,000, respectively. The estimated tax
savings due to this tax exemption for the years ended
June 30, 2009, 2008 and 2007 amounted to approximately
$4,272,000, $7,865,000 and $4,510,000, respectively. The net
effect on earnings per share had the income tax been applied
would decrease basic and diluted earnings per share from $1.30
to $1.13, $1.06 to $0.74 and $0.61 to $0.49 for the years ended
June 30, 2009, 2008 and 2007, respectively.
See report of independent registered public accounting
firm.
F-16
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
The following table reconciles the U.S. statutory rates to
the Companys effective tax rate for the years ended
June 30, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
U.S. statutory rates
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
(34
|
)
|
China income taxes
|
|
|
25
|
|
|
|
33
|
|
|
|
33
|
|
China income tax exemption
|
|
|
(11.2
|
)
|
|
|
(22.3
|
)
|
|
|
(23.2
|
)
|
Other(a)
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rates
|
|
|
14.3
|
%
|
|
|
10.9
|
%
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
The 0.5%, 0.2%, and 1.6% represent $1,399,143, $423,888 and
$2,720,474 of expenses incurred by the Company that are not
subject to China income tax for the years ended June 30,
2009, 2008 and 2007, respectively.
|
Value
added tax
Enterprises or individuals who sell commodities, engage in
repair and maintenance or import goods in the PRC are subject to
a value added tax in accordance with PRC laws. The VAT standard
rate is 17% of the gross sales price. A credit is available
whereby VAT paid on the purchases of semi-finished products or
raw materials used in the production of the Companys
finished products can be used to offset the VAT due on sales of
the finished products. A credit is also available for VAT paid
on the purchases of equipment.
VAT on sales and VAT on purchases amounted to approximately
$32,442,000 and $23,892,000 for the year ended June 30,
2009, approximately $28,937,000 and $20,122,000 for the year
ended June 30, 2008 and approximately $19,791,000 and
$7,258,000 for the year ended June 30, 2007, respectively.
Sales and purchases are recorded net of VAT collected and paid
as the Company acts as an agent because the VAT is not impacted
by the income tax holiday.
Shipping
and handling
Shipping and handling costs related to goods sold are included
in selling expenses. Shipping and handling costs were
approximately $1,396,000, $960,000 and $1,128,000 for the years
ended June 30, 2009, 2008 and 2007, respectively.
Advertising
costs
Advertising costs are expensed as incurred and included in
selling expenses. Advertising costs were approximately
$1,436,000, $1,357,000 and $1,118,000 for the years ended
June 30, 2009, 2008 and 2007, respectively.
See report of independent registered public accounting
firm.
F-17
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
Research
and development costs
Research and development costs are expensed as incurred. The
costs of material and equipment acquired or constructed for
research and development activities, and have alternative future
uses, either in research and development, marketing, or sales,
are capitalized as plant and equipment and depreciated over
their estimated useful lives.
Recent
accounting pronouncements
In December 2007, the FASB issued SFAS 141R, Business
Combinations, which replaces SFAS 141. SFAS 141R
retains the purchase method of accounting for acquisitions, but
requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting
as well as requiring the expensing of acquisition-related costs
as incurred. Furthermore, SFAS 141R provides guidance for
recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature
and financial effects of the business combination.
SFAS 141R is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited.
The Company is evaluating the impact, if any, that the adoption
of this statement will have on its consolidated results of
operations or consolidated financial position.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51.
SFAS 160 amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It is
intended to eliminate the diversity in practice regarding the
accounting for transactions between equity and noncontrolling
interests by requiring that they be treated as equity
transactions. Further, it requires consolidated net income to be
reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest. SFAS 160
also establishes a single method of accounting for changes in a
parents ownership interest in a subsidiary that do not
result in deconsolidation, requires that a parent recognize a
gain or loss in net income when a subsidiary is deconsolidated,
requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the
interests of the parents owners and the interests of the
noncontrolling owners of a subsidiary, among others. SFAS 160 is
effective for fiscal years beginning on or after
December 15, 2008, with early adoption permitted, and it is
to be applied prospectively. SFAS 160 is to be applied
prospectively as of the beginning of the fiscal year in which it
is initially applied, except for the presentation and disclosure
requirements, which must be applied retrospectively for all
periods presented. The Company is evaluating the impact that
SFAS 160 will have on its consolidated financial position or
consolidated results of operations.
In February 2008, the FASB issued FSP
FAS 157-1,
Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13. FSP
FAS 157-1
indicates that it does not apply under SFAS 13,
Accounting for Leases, and other accounting
pronouncements that address fair value measurements for purposes
of lease classification or measurement under SFAS 13. This
scope exception does not apply to assets acquired and
liabilities assumed in a business combination that are required
to be measured at fair value under SFAS 141 or
SFAS 141R, regardless of whether those assets and
liabilities are related to leases.
See report of independent registered public accounting
firm.
F-18
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
Also in February 2008, the FASB issued FSP
FAS 157-2,
Effective Date of FASB Statement No. 157. With
the issuance of FSP
FAS 157-2,
the FASB agreed to: (a) defer the effective date in
SFAS 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually), and (b) remove certain
leasing transactions from the scope of SFAS 157. The
deferral is intended to provide the FASB time to consider the
effect of certain implementation issues that have arisen from
the application of SFAS 157 to these assets and liabilities.
In March 2008, the FASB issued SFAS 161, Disclosures
about Derivative Instruments and Hedging Activities
An Amendment of SFAS No. 133. SFAS 161 is
intended to improve financial reporting of derivative
instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better
understand the effects of derivatives and hedging on an
entitys financial position, financial performance and cash
flows. To achieve this increased transparency, SFAS 161
requires (1) the disclosure of the fair value of derivative
instruments and gains and losses in a tabular format;
(2) the disclosure of derivative features that are credit
risk-related; and (3) cross-referencing within the
footnotes. SFAS 161 is effective on January 1, 2009.
The Company has adopted SFAS 161.
In June 2008, the FASB issued
EITF 07-5,
Determining whether an Instrument (or Embedded Feature) is
indexed to an Entitys Own Stock.
EITF 07-5
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS 133 specifies that a contract
that would otherwise meet the definition of a derivative but is
both (a) indexed to the Companys own stock and
(b) classified in stockholders equity in the
statement of financial position would not be considered a
derivative financial instrument.
EITF 07-5
provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed
to an issuers own stock and thus able to qualify for the
SFAS 133 paragraph 11(a) scope exception. This
standard triggers liability accounting on all options and
warrants exercisable at strike prices denominated in any
currency other than the functional currency in China (Renminbi).
The Company will adopt
EITF 07-5
effective July 1, 2009. See note 14 which discusses
the effect on the Companys consolidated financial
statements.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities, to
address the question of whether instruments granted in
share-based payment transactions are participating securities
prior to vesting. FSP
EITF 03-6-1
indicates that unvested share-based payment awards that contain
rights to dividend payments should be included in earnings per
share calculations. The guidance will be effective for fiscal
years beginning after December 15, 2008. The Company is
currently evaluating the requirements of FSP
EITF 03-6-1
and the impact that its adoption will have on the consolidated
results of operations or consolidated financial position.
In October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset in a
Market That Is Not Active, which clarifies the application
of SFAS 157 when the market for a financial asset is inactive.
Specifically, FSP
FAS 157-3
clarifies how (1) managements internal assumptions
should be considered in measuring fair value when observable
data are not present, (2) observable market information
from an inactive market should be taken into account, and
(3) the use of broker quotes or pricing services should be
considered in assessing the relevance of observable and
See report of independent registered public accounting
firm.
F-19
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
unobservable data to measure fair value. The Company is
currently evaluating the impact of adoption of FSP
FAS 157-3
on the Companys consolidated financial statements.
In April 2009, the FASB issued FSP
FAS 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. FSP
FAS 157-4
amends SFAS 157 and provides additional guidance for
estimating fair value in accordance with SFAS 157 when the
volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on
identifying circumstances that indicate a transaction is not
orderly for fair value measurements. FSP
FAS 157-4
shall be applied prospectively with retrospective application
not permitted. FSP
FAS 157-4
shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. An entity early adopting FSP
FAS 157-4
must also early adopt FSP
FAS 115-2
and 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments. Additionally, if an entity elects to early
adopt either FSP
FAS 107-1
and 28-1,
Interim Disclosures about Fair Value of Financial
Instruments or FSP
FAS 115-2
and 124-2,
it must also elect to early adopt this FSP. The Company has
determined that this new FSP did not have a material impact on
the consolidated financial statements.
In April 2009, the FASB issued FSP
FAS 115-2
and 124-2.
FSP
FAS 115-2
amends SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, SFAS 124,
Accounting for Certain Investments Held by
Not-for-Profit
Organizations, and
EITF 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets,
to make the
other-than-temporary
impairments guidance more operational and to improve the
presentation of
other-than-temporary
impairments in the financial statements. This FSP will replace
the existing requirement that the entitys management
assert it has both the intent and ability to hold an impaired
debt security until recovery with a requirement that management
assert it does not have the intent to sell the security, and it
is more likely than not it will not have to sell the security
before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired
debt securities that are not expected to be sold and also
requires increased and more frequent disclosures regarding
expected cash flows, credit losses, and an aging of securities
with unrealized losses. Although this FSP does not result in a
change in the carrying amount of debt securities, it does
require that the portion of an
other-than-temporary
impairment not related to a credit loss for a
held-to-maturity
security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt
security as an increase in the carrying value of the security.
This FSP shall be effective for interim and annual periods
ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. An entity may
early adopt this FSP only if it also elects to early adopt FSP
FAS 157-4.
Also, if an entity elects to early adopt either FSP
FAS 157-4
or FSP
FAS 107-1
and 28-1,
the entity also is required to early adopt this FSP. The Company
has determined that this new FSP did not have a material impact
on the consolidated financial statements.
In April 2009, the FASB issued FSP
FAS 107-1
and 28-1.
This FSP amends SFAS 107, to require disclosures about fair
value of financial instruments not measured on the balance sheet
at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for
these assets and liabilities were only disclosed annually. This
FSP applies to all financial instruments within the scope of
SFAS 107 and requires all entities to disclose the method(s) and
significant
See report of independent registered public accounting
firm.
F-20
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 2
|
Summary
of Significant Accounting
Policies (Continued)
|
assumptions used to estimate the fair value of financial
instruments. This FSP shall be effective for interim periods
ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. An entity may
early adopt this FSP only if it also elects to early adopt FSP
FAS 157-4
and 115-2
and 124-2.
This FSP does not require disclosures for earlier periods
presented for comparative purposes at initial adoption. In
periods after initial adoption, this FSP requires comparative
disclosures only for periods ending after initial adoption. The
Company is currently evaluating the disclosure requirements of
this new FSP.
In June 2009, the FASB issued SFAS 168, The FASB
Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting Principles a
Replacement of FASB Statement No. 162
(SFAS 168). This Standard establishes the FASB
Accounting Standards
Codificationtm
(the Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with U.S. GAAP. The Codification
does not change current U.S. GAAP, but is intended to
simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a
particular topic in one place. The Codification is effective for
interim and annual periods ending after September 15, 2009,
and as of the effective date, all existing accounting standard
documents will be superseded. The Codification is effective in
the third quarter of 2009, and accordingly, the Quarterly Report
on
Form 10-Q
for the quarter ending September 30, 2009 and all
subsequent public filings will reference the Codification as the
sole source of authoritative literature.
Reclassifications
and correction
Certain prior period amounts have been reclassified for
consistent presentation with the current period.
|
|
Note 3
|
Earnings
Per Share
|
The Company reports earnings per share in accordance with the
provisions of SFAS 128, Earnings Per Share.
SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average
common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could
occur if securities or other contracts to issue common stock
were exercised and converted into common stock.
The following is a reconciliation of the basic and diluted
earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
For the years ended June 30, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for earnings per share
|
|
$
|
32,596,804
|
|
|
$
|
26,459,524
|
|
|
$
|
13,979,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic computation
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
25,000,050
|
|
|
|
25,000,050
|
|
|
|
23,041,021
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
1.30
|
|
|
$
|
1.06
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See report of independent registered public accounting
firm.
F-21
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
Note 3
Earnings Per Share (Continued)
At June 30, 2009 and 2008, 1,226,972 warrants, whose
weighted average exercise price is $4.95, were excluded from the
calculation of diluted earnings per share because of their
anti-dilutive effect.
|
|
Note 4
|
Supplemental
Disclosure of Cash Flow Information
|
Cash paid for interest amounted to $1,186,225, $957,684 and
$750,736 for the years ended June 30, 2009, 2008 and 2007,
respectively.
Cash paid for income taxes amounted to $4,970,955, $2,831,179
and $1,355,095 for the years ended June 30, 2009, 2008 and
2007, respectively.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
6,494,433
|
|
|
$
|
7,282,772
|
|
Work-in-process
|
|
|
13,125,837
|
|
|
|
10,984,027
|
|
Finished goods
|
|
|
6,262,972
|
|
|
|
5,683,752
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
25,883,242
|
|
|
$
|
23,950,551
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6
|
Plant and
Equipment
|
Plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Buildings
|
|
$
|
13,699,189
|
|
|
$
|
13,643,084
|
|
Office equipment
|
|
|
928,051
|
|
|
|
924,251
|
|
Motor vehicles
|
|
|
382,372
|
|
|
|
322,447
|
|
Plant and machinery
|
|
|
32,008,907
|
|
|
|
20,305,152
|
|
Construction-in-progress
|
|
|
4,286,527
|
|
|
|
4,268,971
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
51,305,046
|
|
|
|
39,463,905
|
|
Less: accumulated depreciation
|
|
|
(8,181,893
|
)
|
|
|
(5,333,254
|
)
|
|
|
|
|
|
|
|
|
|
Plant and equipment, net
|
|
$
|
43,123,153
|
|
|
$
|
34,130,651
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended June 30, 2009,
2008 and 2007 amounted to approximately $2,827,000, $2,239,000
and $883,000, respectively.
Interest costs totaling approximately $141,000 was capitalized
into
construction-in-progress
for the year ended June 30, 2008. No interest costs were
capitalized into
construction-in-progress
for the years ended June 30, 2009 and 2007.
See report of independent registered public accounting
firm.
F-22
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 7
|
Intangible
Assets
|
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Intangible land use rights
|
|
$
|
4,457,876
|
|
|
$
|
4,439,619
|
|
Less: accumulated amortization
|
|
|
(518,400
|
)
|
|
|
(436,491
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,939,476
|
|
|
$
|
4,003,128
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense for the years ended June 30,
2009, 2008 and 2007 amounted to $80,115, $75,297 and $70,047,
respectively.
|
|
Note 8
|
Related
Party Transactions
|
The Company leased office space from Duoyuan China Water Recycle
Technology Industry Co., a related party. On June 30, 2008,
the Company and Duoyuan Water Recycle Technology Industry Co.
terminated the lease pursuant to a termination agreement. The
title of property transferred to Duoyuan Information Terminal
Manufacture (Langfang) Co., Ltd., a related party, which
Mr. Wenhua Guo is the sole shareholder. On July 1,
2008, the Company entered into a lease agreement with Duoyuan
Information Terminal Manufacture (Langfang) Co., Ltd., from
July 1, 2008 to December 31, 2009. For the years ended
June 30, 2009, 2008 and 2007, rental expense related to
this office lease amounted to $164,610 $154,784 and $143,992
(See Note 12).
The Company had a lease agreement to rent part of its
manufacturing plant located in Lanfang Duoyuan with Duoyuan
Water Treatment Equipment Manufacturing (Langfang) Co., Ltd.
(lessee), a company 80% owned by Mr. Wenhua Guo, from
October 1, 2004 to September 30, 2009. On May 25,
2007, the Company and the lessee terminated the lease pursuant
to a termination agreement. Total rental income related to this
lease for the year ended June 30, 2007 was approximately
$447,000, and is included in other income in the accompanying
consolidated statement of income. There was no such rental
income for the years ended June 30, 2009 and 2008.
See report of independent registered public accounting
firm.
F-23
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
The lines of credit represent short-term loan amounts due to a
bank which are due normally within one year. These loans can be
renewed with the bank. The loans were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Loan from Bank of Agriculture, Chongwen branch due
March 12, 2010, interest rate of 5.841% per annum, interest
only paid quarterly, secured by land use rights and buildings
|
|
$
|
1,465,000
|
|
|
$
|
|
|
Loan from Bank of Agriculture, Chongwen branch due
March 13, 2009 , interest rate of 8.570% per annum,
interest only paid quarterly, secured by land use rights and
buildings
|
|
|
|
|
|
|
1,459,000
|
|
Loan from Bank of Agriculture, Chongwen branch due July 3,
2009, interest rate of 8.217% per annum, interest only paid
quarterly, secured by land use rights and buildings
|
|
|
2,930,000
|
|
|
|
|
|
Loan from Bank of Agriculture, Chongwen branch due July 10,
2009, interest rate of 8.217% per annum, interest only paid
quarterly, secured by land use rights and buildings
|
|
|
2,930,000
|
|
|
|
2,918,000
|
|
Loan from Bank of Agriculture, Chongwen branch due July 17,
2009, interest rate of 8.217% per annum, interest only paid
quarterly, secured by land use rights and buildings
|
|
|
4,102,000
|
|
|
|
4,085,200
|
|
Loan from Bank of Agriculture, Chongwen branch due July 24,
2009, interest rate of 8.217% per annum, interest only paid
quarterly, secured by land use rights and buildings
|
|
|
2,930,000
|
|
|
|
2,918,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,357,000
|
|
|
$
|
11,380,200
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 and 2008, the carrying value of the
collateralized fixed assets amounted to $4,206,000 and
$4,304,772, respectively.
Total interest expense for the above short term loans, net of
capitalized interest, amounted to approximately $1,186,000,
$817,000 and $751,000 for the years ended June 30, 2009,
2008 and 2007, respectively.
Asian Financial, Inc. was incorporated in the U.S. and has
incurred net operating losses for income tax purposes for the
year ended June 30, 2009. The net operating loss
carryforwards for U.S. income taxes is $2,862,715 which may
be available to reduce future years taxable income. These
carryforwards will expire, if not utilized, starting in 2027
through 2028. Management believes that the realization of the
benefits from these losses appears uncertain due to the
Companys limited operating history and continuing losses
for U.S. income tax purposes. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset to
reduce the asset to zero. Management reviews the valuation
allowance periodically and makes adjustments as warranted.
See report of independent registered public accounting
firm.
F-24
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 10
|
Taxes
Payable (Continued)
|
Taxes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
VAT (credit) payable
|
|
$
|
(313,382
|
)
|
|
$
|
359,725
|
|
Income tax payable
|
|
|
1,740,765
|
|
|
|
1,253,988
|
|
Others
|
|
|
85,344
|
|
|
|
89,273
|
|
|
|
|
|
|
|
|
|
|
Total taxes payable
|
|
$
|
1,512,727
|
|
|
$
|
1,702,986
|
|
|
|
|
|
|
|
|
|
|
The Company has cumulative undistributed earnings of foreign
subsidiaries of approximately $84.6 million as of
June 30, 2009, which is included in retained earnings on
the consolidated balance sheets and will continue to be
indefinitely reinvested in international operations.
Accordingly, no provision has been made for U.S. deferred
taxes related to future repatriation of these earnings, nor has
it been determined to be practicable to estimate the amount of
income taxes that would have to be provided if we concluded that
such earnings will be remitted in the future.
Significant components of the Companys deferred tax assets
and liabilities at June 30, 2009 were as follows
(tax-effected amounts shown):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
China
|
|
|
Total
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
973,323
|
|
|
$
|
|
|
|
$
|
973,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
973,323
|
|
|
|
|
|
|
|
973,323
|
|
Valuation allowance
|
|
|
(973,323
|
)
|
|
|
|
|
|
|
(973,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Companys deferred tax assets
and liabilities at June 30, 2008 were as follows
(tax-effected amounts shown):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
China
|
|
|
Total
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
428,545
|
|
|
$
|
|
|
|
$
|
428,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
428,545
|
|
|
|
|
|
|
|
428,545
|
|
Valuation allowance
|
|
|
(428,545
|
)
|
|
|
|
|
|
|
(428,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11
|
Statutory
Reserves and Dividends
|
The laws and regulations of the PRC require that before a
foreign-invested enterprise can legally distribute profits, it
must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations in proportions determined
at the discretion of the board of directors, after the statutory
See report of independent registered public accounting
firm.
F-25
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 11
|
Statutory
Reserves and Dividends (Continued)
|
reserve. The statutory reserves include the surplus reserve fund
and the enterprise fund. Additionally, the Chinese government
restricts distributions of registered capital and the additional
investment amounts required by a foreign-invested enterprise.
Approval by the Chinese government must be obtained before
distributions of these amounts can be returned to the
shareholders.
Statutory
surplus reserve fund
The Company is required to transfer 10% of its net income, as
determined in accordance with the PRC accounting rules and
regulations, to a statutory surplus reserve fund until such
reserve balance reaches 50% of the Companys registered
capital.
The transfer to this reserve must be made before distribution of
any dividends to shareholders. For the years ended June 30,
2009, 2008 and 2007, the Company transferred $3,428,483,
$2,717,489 and $1,411,403 , respectively, to this reserve. The
surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years losses,
if any. It may also be utilized for business expansion or
converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them,
provided that the remaining reserve balance after such issue is
not less than 25% of the registered capital.
The remaining reserve to fulfill the 50% registered capital
requirement amounted to approximately $4,640,000 and $8,900,000
as of June 30, 2009 and 2008, respectively.
Enterprise
fund
The enterprise fund may be used to acquire fixed assets or to
increase the working capital to expend on production and
operation of the business. No minimum contribution is required
and, to date, the Company has not made any contributions to this
fund.
|
|
Note 12
|
Operating
Leases
|
The Company entered into a lease arrangement for an office space
with Duoyuan China Water Recycle Technology Industry Co. from
January 1, 2008 to December 31, 2008. On June 30,
2008, the title of leased property transferred to Duoyuan
Information Terminal Manufacture (Langfang) Co., Ltd., a related
party (see Note 8), and the lease arrangement with Duoyuan
China Water Recycle Technology Industry Co. was terminated on
that date. On July 1, 2008, the Company entered into a
lease agreement with Duoyuan Information Terminal Manufacture
(Langfang) Co. Ltd. with annual lease payments totaling $164,610.
In addition, the Company leases sixteen sales offices in sixteen
different Chinese provinces with various terms with latest
office lease due to expire in December 2010. The monthly lease
amounts for these offices are de minimis.
See report of independent registered public accounting
firm.
F-26
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 12
|
Operating
Leases (Continued)
|
Total lease expense for the years ended June 30, 2009, 2008
and 2007 was $236,421, $154,784 and $143,992, respectively.
Total future minimum lease payments at June 30, 2009, are
as follows:
|
|
|
|
|
Years Ending June 30,
|
|
Amount
|
|
|
2010
|
|
$
|
200,039
|
|
2011
|
|
|
33,696
|
|
Thereafter
|
|
|
|
|
Note 13
Retirement Plan
The Companys retirement plan includes two parts: the first
to be paid by the Company is 20% of the employees actual
salary in the prior year. The other part, paid by the employee,
is 8% of the actual salary. The Companys contributions
amounted to approximately $1,103,000, $891,000 and $503,000 for
the years ended June 30, 2009, 2008 and 2007.
Note 14
Shareholders Equity
On October 25, 2006, Asian Financial, Inc. entered into a
definitive Security Purchase Agreement with unrelated investors
(the Purchase Agreement). The transaction closed on
November 2, 2006. In accordance with the Purchase
Agreement, Asian Financial, Inc. issued 6,132,622 shares of
common stock for a purchase price of approximately $3.84 per
share or a total of $23,549,200.
The financing was conducted through a private placement to
accredited investors and is exempted from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended
(the Securities Act). In conjunction with the
private placement, the Company agreed to register the shares
with the SEC within 90 days of the closing. The Company
also agreed to make the registration statement effective no
later than the 150th day following the closing date or the
fifth trading day following the date on which the Company is
notified by the SEC that such registration statement will not be
reviewed or is no longer subject to further review and comments,
whichever date is earlier. If the registration statement is not
filed or declared effective pursuant to the above timeline or if
the registration statement ceases to be effective for more than
an aggregate of 45 trading days, the Company is required to pay
the investors monthly liquidated damages equal to 1% of the
aggregate investment amount. The total amount of the liquidated
damages payable by the Company was capped at 8% of the total
investment amount paid by the investors. Additionally, pursuant
to the Purchase Agreement, the Company agreed to cease all
related party transactions and to settle all outstanding
balances due to or from related parties by December 31,
2006. Failure to terminate the related party transactions was to
result in a monthly cash penalty of 1% of the proceeds with a
cap of 4%. Penalties were expensed as incurred and totaled
$2,119,428 through December 31, 2007. During the year ended
June 30, 2008, the Company paid cash of $436,000 and issued
576,425 warrants valued at $1,447,936, and the investors agreed
to waive all future penalties under the registration rights
related to obtaining timely effectiveness of the registration
statement. The fair value of the warrants was calculated using
the Cox-Ross-Rubinstein (CRR) binomial model with
the following assumptions: market price $5.76,
5-year term,
volatility of 42%, risk free interest rate of 2.09% and no
dividends. Pursuant to SFAS 133 and
EITF 00-19,
the warrants explicitly provide the holder with the right to
request the Company to cash-settle the warrants. Therefore, the
warrants did not meet the criteria established under
EITF 00-19
and triggered liability accounting. As such, the Company
recorded liability of $1,447,936 on December 31, 2007, the
grant
See report of independent registered public accounting
firm.
F-27
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 14
|
Shareholders
Equity (Continued)
|
date. As of June 30, 2009, the fair value of these warrants
was $1,180,477 and the Company recorded a gain of $194,347 for
the change of fair value for the year then ended.
The changes in the fair value of derivative instrument
liabilities were as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Balance, June 30, 2007
|
|
$
|
|
|
Value of warrant liability on grant date
|
|
|
1,447,936
|
|
Change in fair value of derivative instruments
|
|
|
(73,112
|
)
|
|
|
|
|
|
Balance, June 30, 2008
|
|
|
1,374,824
|
|
Change in fair value of derivative instruments
|
|
|
(194,347
|
)
|
|
|
|
|
|
Balance, June 30, 2009
|
|
$
|
1,180,477
|
|
|
|
|
|
|
As discussed above, the Company incurred liquidated damages for
failure to register the resale of securities as well as to
terminate all related party transactions pursuant to the
Purchase Agreement. In November 2007, the Company reached a
settlement with the investors who agreed to waive all penalties
due in exchange for warrants or cash payments of $1,883,936.
The following is a reconciliation of liquidated damages for the
year ended June 30, 2008:
|
|
|
|
|
Liquidated damages expense accrued at June 30, 2007
|
|
$
|
2,119,428
|
|
Settlement payments with warrants and cash payments
|
|
|
(1,883,936
|
)
|
|
|
|
|
|
Net gain from reversal of liquidated damages expense at
June 30, 2008
|
|
$
|
235,492
|
|
|
|
|
|
|
The Company had no gain or loss from the liquidated damages
during the year ended June 30, 2009, since an agreement was
reached and settled during the year ended June 30, 2008.
At closing, as part of the compensation to the placement agent,
Roth Capital Partners, LLC (Roth Capital), the
Company issued to Roth Capital warrants to acquire
613,260 shares of common stock, exercisable at any time
after June 30, 2008. The warrants have a strike price equal
to $4.21. In addition, the Company issued to CCG, an investor
relations firm, warrants to acquire 37,287 shares of common
stock. The warrants have a strike price equal to $4.61. The
warrants have a term of five years starting from July 1,
2008, and will permit cashless or net exercise at all times. The
shares underlying the warrants will have registration rights.
The warrant contains a standard antidilution provision for stock
dividends, stock splits, stock combination, recapitalization and
a change of control transaction.
See report of independent registered public accounting
firm.
F-28
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
|
|
Note 14
|
Shareholders
Equity (Continued)
|
The warrants meet the conditions for equity classification
pursuant to SFAS 133 and
EITF 00-19.
Therefore, these warrants were classified as equity and
accounted for as common stock issuance cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
Life
|
|
|
Balance, June 30, 2007
|
|
|
650,547
|
|
|
|
|
|
|
$
|
4.23
|
|
|
|
|
|
Granted
|
|
|
576,425
|
|
|
|
576,425
|
|
|
|
5.76
|
|
|
|
5.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
|
1,226,972
|
|
|
|
1,226,972
|
|
|
$
|
4.95
|
|
|
|
5.00
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009
|
|
|
1,226,972
|
|
|
|
1,226,972
|
|
|
$
|
4.95
|
|
|
|
4.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 2 under recent accounting
pronouncements, in June 2008, the FASB issued
EITF 07-5.
EITF 07-5
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Early application is not permitted.
This standard triggers liability accounting on all options and
warrants exercisable at strike prices denominated in any
currency other than the functional currency in China (Renminbi).
Accordingly, 613,260 warrants issued to Roth Capital and 37,287
warrants issued to CCG will be recorded as a liability beginning
fiscal year ending June, 30, 2010, and interim periods within
that fiscal year. The fair value of the warrants will be
calculated using the Cox-Ross-Rubinstein (CRR)
binomial model with the following assumptions: market price
$5.76,
5-year term,
volatility of 42%, risk free interest rate of 2.09% and no
dividends. Currently, the estimated liability of approximately
$1,732,000 as of June 30, 2009, will be recorded during the
fiscal year ending June 30, 2010 and the off-setting entry
will be against stockholders equity. This adjustment will
have no impact on the Companys earnings.
Note 15
Commitments and Contingencies
Equipment purchase agreement
In August 2008, Langfang Duoyuan entered into a packing material
equipment purchase agreement with Beijing Jingneng
Mechanical & Electrical Equipments Ltd. As of
June 30, 2009, $382,877, or 5% of the total commitment,
remains outstanding on this agreement.
Litigation
The Company is subject to various legal matters in the ordinary
course of business. After taking into consideration the
Companys legal counsels evaluation of these matters,
the Company has determined that the resolution of these matters
will not have a material adverse effect on the Companys
consolidated financial statements.
See report of independent registered public accounting
firm.
F-29
ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2009 (Continued)
Note 16
Subsequent Events
On July 3, 2009, the Company renewed the $2,930,000 bank
loan due on July 3, 2009 from Bank of Agriculture, Chongwen
branch. The new loan is due on July 2, 2010, with an
interest rate of 5.841% per annum, secured by land use rights
and buildings.
On July 10, 2009, the Company renewed the $2,930,000 bank
loan due on July 10, 2009 from Bank of Agriculture,
Chongwen branch. The new loan is due on July 9, 2010, with
an interest rate of 5.841% per annum, secured by land use rights
and buildings.
On July 17, 2009, the Company renewed the $4,102,000 bank
loan due on July 17, 2009 from Bank of Agriculture,
Chongwen branch. The new loan is due on July 16, 2010, with
an interest rate of 5.841% per annum, secured by land use rights
and buildings.
On July 24, 2009, the Company renewed the $2,930,000 bank
loan due on July 24, 2009 from Bank of Agriculture,
Chongwen branch. The new loan is due on July 23, 2010, with
an interest rate of 5.841% per annum, secured by land use rights
and buildings.
On August 26, 2009, the Company announced the appointment
of Mr. Christopher Patrick Holbert to serve as the new
Chief Executive Officer of the Company, effective
August 26, 2009.
The Company has performed an evaluation of subsequent events
through the date these consolidated financial statements were
issued.
See report of independent registered public accounting
firm.
F-30
6,269,462 Common
Shares
DUOYUAN PRINTING,
INC.
PROSPECTUS
|
|
Piper Jaffray
|
Roth Capital Partners
|
,
2009
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth an itemization of expenses, which
are expected to be incurred in connection with this offering.
|
|
|
|
|
Securities and Exchange Commission registration fee
|
|
$
|
3,850
|
|
Financial Industry Regulatory Authority, Inc. filing fee
|
|
|
7,400
|
|
New York Stock Exchange listing fee
|
|
|
150,000
|
|
Blue sky qualification fees and expenses
|
|
|
25,000
|
|
Legal fees and expenses
|
|
|
539,000
|
|
Accounting fees and expenses
|
|
|
60,000
|
|
Printing fees and expenses
|
|
|
112,000
|
|
Other fees and expenses
|
|
|
302,750
|
|
|
|
|
|
|
Total
|
|
$
|
1,200,000
|
|
|
|
|
|
|
All amounts are estimated except the Securities and Exchange
Commission registration fee and Financial Industry Regulatory
Authority, Inc. filing fee.
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
The Wyoming Business Corporation Act (W.S.
17-16-851
and
17-16-856)
authorizes indemnification for directors, officers and other
individuals where such person: (1) conducted himself in
good faith; and (2) reasonably believed that his conduct
was in or at least not opposed to the corporations best
interests; and (3) in the case of any criminal proceeding,
he had no reasonable cause to believe his conduct was unlawful;
or (4) he engaged in conduct for which broader
indemnification has been made permissible or obligatory under a
provision of the articles of incorporation, as authorized by
W.S.
17-16-202(b)(v).
Article 6 of the companys amended and restated
articles of incorporation provides that to the fullest extent
now or hereafter permitted by the Wyoming Business Corporation
Act, no person who is or was a director of the company shall be
personally liable to the company or its shareholders for
monetary damages for breach of fiduciary duty as a director
except liability for (a) receipt of a financial benefit to
which he is not entitled; (b) an intentional infliction of
harm on the corporation or its shareholders; (c) a
violation of
W.S. 17-16-833
which relates to unlawful distributions; and (d) an
intentional violation of criminal law. The amended and restated
articles of incorporation further provides that no amendment to
or repeal of Article 6 shall apply to or have any effect on
the liability of any director for or with respect to acts or
omissions occurring prior to such amendment or repeal.
Article 7 of the companys amended and restated
articles of incorporation provides that the company may
indemnify a director for liability as defined in
W.S. 17-16-850(a)(v)
for liability to any person for any action taken or failure to
take any action as a director except liability for the reasons
noted in (a) through (d) of Article 6. The companys
amended and restated articles of incorporation further provides
in Article 12 that the company shall indemnify, to the
fullest extent permitted by the Wyoming Business Corporation
Act, as amended, and pursuant to the bylaws, each person who is
or was a director or officer of the company from and against all
expenses, liabilities or other matters arising out of or in any
way related to their status as such or their acts, omissions or
services rendered in such capacities.
II-1
The companys amended and restated bylaws provide in
Article 6 that the company shall indemnify directors,
officers, employees and agents to the fullest extent permitted
by Wyoming law, through board resolution or board contract.
As provided in Article 13 of the companys amended and
restated articles of incorporation, we have the power to and
intend to purchase and maintain insurance on behalf of any
person who is or was a director or officer against any loss
arising from any claim asserted against him or her and incurred
by him or her in that capacity, or arising out of his or her
status as such, whether or not the company would have the power
to indemnify him or her against such liability, subject to
certain exclusions and limits of the amount of coverage.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
Each issuance set forth below was made in reliance upon the
exemptions from registration requirements under
Section 4(2) of the Securities Act. When appropriate, we
determined that the purchasers of securities described below
were sophisticated investors who had the financial ability to
assume the risk of their investment in our securities and
acquired such securities for their own account and not with a
view to any distribution thereof to the public. Where required
by applicable law, the certificates evidencing the securities
bear legends stating that the securities are not to be offered,
sold or transferred other than pursuant to an effective
registration statement under the Securities Act or an exemption
from such registration requirements.
Since July 1, 2004, we have issued and sold the following
unregistered securities in private placement transactions exempt
from registration under Section 4(2) of the Securities Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Shares or
|
|
|
|
|
|
|
|
Shares Eligible
|
|
|
|
Date of Sale or
Issuance
|
|
Title
|
|
for Exercise
|
|
|
Purchaser
|
|
November 2,
2006(1)
|
|
Restricted Common Shares
|
|
|
6,132,622
|
|
|
Private Placement Investors
|
October 9,
2006(2)
|
|
Warrants
|
|
|
37,287
|
|
|
CCG Investor Relations
Partners, LLC
|
November 2,
2006(3)
|
|
Warrants
|
|
|
613,260
|
|
|
Roth Capital Partners, LLC
|
December 31,
2007(4)
|
|
Warrants
|
|
|
576,425
|
|
|
Private Placement Investors
|
|
|
(1)
|
On November 2, 2006, we closed the transactions
contemplated by the securities purchase agreement, by and
between us and certain investors. Pursuant to the securities
purchase agreement, we issued an aggregate of 6,132,622 common
shares to the private placement investors for an aggregate
purchase price of $23.5 million. This financing was
conducted through a private placement to accredited investors
and is exempt from registration pursuant to Section 4(2) of
the Securities Act. The securities sold pursuant to the
securities purchase agreement have not been registered under the
Securities Act or any state securities laws and may not be
offered or sold in the United States in the absence of an
effective registration statement or exemption from registration
requirements.
|
(2)
|
As part of our compensation to CCG Investor Relations Partners,
LLC, we issued warrants to acquire 37,287 common shares at the
strike price of $4.61 per share.
|
(3)
|
As part of our compensation to Roth Capital Partners, we issued
to Roth Capital Partners warrants to purchase 613,260 common
shares at a strike price of $4.21 per share for a term of five
years. These warrants are exercisable at any time after
June 30, 2008 on a cashless or net exercise basis. The
common shares issuable upon the exercise of the warrants have
registration rights pursuant to a registration rights agreement,
but they are not included in this registration statement.
|
(4)
|
In December 2007 we issued to 25 of the private placement
investors warrants to purchase 576,425 common shares to settle
certain liquidated damage we had incurred pursuant to the
securities purchase agreement. These warrants, dated as of
December 31, 2007, have a strike price of $5.76 for a term
of five years starting on June 30, 2008, and are
exercisable any time after June 30, 2008 on a cashless
basis at all times for a term of five years.
|
II-2
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
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1
|
.1*
|
|
Form of Underwriting Agreement between the Company and the
underwriters named therein.
|
|
2
|
.1
|
|
Equity Transfer Agreement dated August 31, 2006 between the
Company and Duoyuan Investments Limited (Incorporated by
reference to Exhibit 2.1 to Current Report on Form 8-K (File No.
000-27129) filed with the Securities and Exchange Commission on
September 6, 2006).
|
|
3
|
.1
|
|
Amended and Restated Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to Amendment
No. 3 to Registration Statement on Form S-1 (File
No. 333-161813) filed with the Securities and Exchange
Commission on October 16, 2009).
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the Company (Incorporated by
reference to Exhibit 3.2 to Amendment No. 3 to
Registration Statement on
Form S-1
(File
No. 333-161813)
filed with the Securities and Exchange Commission on
October 16, 2009).
|
|
4
|
.1
|
|
Securities Purchase Agreement, dated October 24, 2006, between
the Company and certain Investors identified therein
(Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 333-141507) filed
with the Securities and Exchange Commission on July 5, 2007).
|
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4
|
.2
|
|
Amendment to Securities Purchase Agreement, dated November 28,
2007, between the Company and certain Investors identified
therein (Incorporated by reference to Exhibit 4.4 to
Amendment No. 4 to Registration Statement on Form S-1 (File No.
333-141507) filed with the Securities and Exchange Commission on
February 11, 2008).
|
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4
|
.3
|
|
Registration Rights Agreement, dated October 24, 2006, between
the Company and certain Investors identified therein
(Incorporated by reference to Exhibit 4.1 to Current Report on
Form 8-K (File No. 000-27129) filed with the Securities and
Exchange Commission on October 25, 2006).
|
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4
|
.4
|
|
Warrant issued to Roth Capital Partners, LLC, dated November 2,
2006 (Incorporated by reference to Exhibit 4.2 to Amendment No.
4 to Registration Statement on Form S-1 (File No.
333-141507) filed with the Securities and Exchange Commission on
February 11, 2008).
|
|
4
|
.5
|
|
Form of Warrant, dated December 31, 2007, issued to certain
investors party to the Securities Purchase Agreement dated
October 24, 2006 (filed as exhibit 4.1 hereto) in satisfaction
of related party penalties in relation thereto (Incorporated by
reference to Exhibit 4.3 to Amendment No. 4 to Registration
Statement on Form S-1 (File No. 333-141507) filed with the
Securities and Exchange Commission on February 11, 2008).
|
|
4
|
.6
|
|
Form of Certificate representing the common share, par value
$0.001, of the Company (Incorporated by reference to Exhibit 4.5
to Annual Report on Form 10-K (File No. 000-27129)
filed with the Securities and Exchange Commission on September
26, 2008).
|
|
4
|
.7
|
|
Waiver Agreement, dated as of November 18, 2008, among the
Company and the Investors (Incorporated by reference to Exhibit
10.1 to Current Report on Form 8-K
(File No. 000-27129) filed with the Securities and
Exchange Commission on November 19, 2008).
|
|
4
|
.8
|
|
Investor Warrants Proposal Letter, dated September 19, 2007
(Incorporated by reference to Exhibit 4.8 to Amendment No. 9 to
Registration Statement on Form S-1 (File No. 333-141507) filed
with the Securities and Exchange Commission on July 10, 2009).
|
|
4
|
.9
|
|
Form of Investor Warrants Proposal Supplemental Letter, dated
October 26, 2007 (Incorporated by reference to Exhibit 4.9 to
Amendment No. 9 to Registration Statement on Form S-1 (File No.
333-141507) filed with the Securities and Exchange Commission on
July 10, 2009).
|
II-3
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
4
|
.10
|
|
Waiver Agreement, dated as of August 24, 2009, among the Company
and the Investors (Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K (File No. 000-27129) filed with
the Securities and Exchange Commission on August 31, 2009).
|
|
5
|
.1*
|
|
Opinion of Karpan & White P.C., as to legality of offered
securities.
|
|
10
|
.1
|
|
Lease Agreement, dated December 25, 2007, between Duoyuan Clean
Water Technology Industries (China) Co., Ltd. and Duoyuan
Digital Press Technology Industries (China) Co., Ltd.
(Incorporated by reference to Exhibit 10.7 to Amendment No. 5 to
Registration Statement on Form S-1 (File No. 333-141507) filed
with the Securities and Exchange Commission on March 14, 2008).
|
|
10
|
.2±
|
|
Form of Employment Agreement (Incorporated by reference to
Exhibit 10.8 to Amendment No. 4 to Registration Statement on
Form S-1 (File No. 333-141507) filed with the Securities and
Exchange Commission on February 11, 2008).
|
|
10
|
.3
|
|
Share Transfer Agreement, dated October 16, 2005, between
Beijing Huiyuan Duoyuan Digital Printing Technology Research
Institute and Duoyuan Digital Press Technology Industries
(China) Co., Ltd. (Incorporated by reference to Exhibit 10.9 to
Amendment No. 4 to Registration Statement on Form S-1 (File No.
333-141507) filed with the Securities and Exchange Commission on
February 11, 2008).
|
|
10
|
.4
|
|
Property Lease Agreement, dated June 27, 2008, between Duoyuan
Information Terminal Manufacture (Langfang) Co., Ltd. and
Duoyuan Digital Press Technology Industries (China) Co., Ltd.
(Incorporated by reference to Exhibit 10.4 to Amendment No. 7 to
Registration Statement on Form S-1 (File No. 333-141507) filed
with Securities and Exchange Commission on March 27, 2009).
|
|
10
|
.5
|
|
Letter of Patent Use Authorization, dated June 30, 2001, from
Beijing Huiyuan Duoyuan Digital Printing Technology Research
Institute to Duoyuan Digital Technology Industry (China) Co.
Ltd. (Incorporated by reference to Exhibit 10.14 to Amendment
No. 1 to Registration Statement on Form S-1 (File No.
333-141507) filed with the Securities and Exchange Commission on
July 5, 2007).
|
|
10
|
.6
|
|
Termination of Letter of Patent Use Authorization, dated March
11, 2008, from Beijing Huiyuan Duoyuan Digital Printing
Technology Research Institute to Duoyuan Digital Press
Technology Industries (China) Co., Ltd. (see Exhibit 10.5)
(Incorporated by reference to Exhibit 10.24 to Amendment
No. 5 to Registration Statement on Form S-1 (File No.
333-141507) filed with the Securities and Exchange Commission on
March 14, 2008).
|
|
10
|
.7
|
|
Assignment of Patent Agreement, dated December 26, 2002, between
Beijing Huiyuan Duoyuan Digital Technology Institute and Duoyuan
Digital Press Technology Industries (China) Co., Ltd.
(Incorporated by reference to Exhibit 10.7 to Amendment No. 7 to
Registration Statement on Form S-1 (File No. 333-141507) filed
with Securities and Exchange Commission on March 27, 2009).
|
|
10
|
.8
|
|
Registered Trademark Usage License Agreement, dated October
2008, between Duoyuan Digital Press Technology Industries
(China) Co., Ltd. and Duoyuan Investments Limited. (Incorporated
by reference to Exhibit 10.8 to Amendment No. 7 to Registration
Statement on Form S-1 (File No. 333-141507) filed with
Securities and Exchange Commission on March 27, 2009).
|
|
10
|
.9
|
|
Maximum Amount Mortgage Contract, dated July 28, 2007, among
Agriculture Bank of China Chongwen Sub-branch, Duoyuan Digital
Press Technology Industries (China) Co., Ltd, and Hunan Duoyuan
Printing Machinery Co., Ltd. (Incorporated by reference to
Exhibit 10.21 to Amendment No. 4 to Registration Statement on
Form S-1 (File No. 333-141507) filed with the Securities and
Exchange Commission on February 11, 2008).
|
II-4
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.10±
|
|
Employment Agreement, dated as of July 18, 2007, between the
Company and Gene Michael Bennett (Incorporated by reference
to Exhibit 10.22 to Amendment No. 5 to Registration Statement on
Form S-1 (File No. 333-141507) filed with the Securities and
Exchange Commission on March 14, 2008).
|
|
10
|
.11±
|
|
Separation Agreement and Release of All Claims, dated as of
December 20, 2007, between Asian Financial, Inc. and Gene
Michael Bennett (Incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K (File No. 000-27129) filed with the
Securities and Exchange Commission on December 27, 2007).
|
|
10
|
.12±
|
|
Employment Agreement, dated as of March 1, 2008, between the
Company and William Milewski (Incorporated by reference to
Exhibit 10.23 to Amendment No. 5 to Registration Statement on
Form S-1 (File No. 333-141507) filed with the Securities and
Exchange Commission on March 14, 2008).
|
|
10
|
.13±
|
|
Separation Agreement and Release, dated as of May 21, 2008,
between the Company and William Milewski (Incorporated by
reference Exhibit 10.1 to the Current Report on Form 8-K (File
No. 000-27129) filed with the Securities and Exchange Commission
on May 27, 2008).
|
|
10
|
.14±
|
|
Employment Agreement, dated as of September 30, 2008, between
the Company and William D. Suh (Incorporated by reference
Exhibit 10.1 to the Current Report on Form 8-K (File No.
000-27129) filed with the Securities and Exchange Commission on
October 1, 2008).
|
|
10
|
.15±
|
|
Convertible Promissory Note covering the fiscal years ended
December 31, 1995 through 1999 (Incorporated by reference to
Exhibit 10.18 to Amendment No. 4 to Registration Statement on
Form S-1 (File No. 333-141507) filed with the Securities and
Exchange Commission on February 11, 2008).
|
|
10
|
.16±
|
|
Convertible Promissory Note covering the fiscal years ended
December 31, 2003 through 2004 (Incorporated by reference to
Exhibit 10.19 to Amendment No. 4 to Registration Statement
on Form S-1 (File No. 333-141507) filed with the Securities and
Exchange Commission on February 11, 2008).
|
|
10
|
.17
|
|
Letter of Trademark Use Authorization dated June 30, 2001, from
Duoyuan Water Environmental Protection Technology Industry
(China) Co., Ltd. to Duoyuan Technology Industry (China) Co.,
Ltd. (Incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to Registration Statement on Form S-1 (File No.
333-141507) filed with the Securities and Exchange Commission on
July 5, 2007).
|
|
10
|
.18±
|
|
English translation of Employment Agreement, dated as of
December 26, 2007, between Duoyuan Digital Press Technology
Industries (China) Co., Ltd. and Wenhua Guo (Incorporated by
reference to Exhibit 10.18 to Amendment No. 8 to Registration
Statement on Form S-1 (File No. 333-141507) filed with the
Securities and Exchange Commission on June 12, 2009).
|
|
10
|
.19±
|
|
English translation of Employment Agreement, dated as of
December 26, 2007, between Duoyuan Digital Press Technology
Industries (China) Co., Ltd. and Baiyun Sun (Incorporated by
reference to Exhibit 10.19 to Amendment No. 8 to Registration
Statement on Form S-1 (File No. 333-141507) filed with the
Securities and Exchange Commission on June 12, 2009).
|
|
10
|
.20±
|
|
English translation of Employment Agreement, dated as of
December 26, 2007, between Duoyuan Digital Press Technology
Industries (China) Co., Ltd. and Xiqing Diao (Incorporated by
reference to Exhibit 10.20 to Amendment No. 8 to Registration
Statement on Form S-1 (File No. 333-141507) filed with the
Securities and Exchange Commission on June 12, 2009).
|
II-5
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.21±
|
|
English translation of Employment Agreement, dated as of
December 26, 2007, between Duoyuan Digital Press Technology
Industries (China) Co., Ltd. and Wenzhong Liu (Incorporated by
reference to Exhibit 10.21 to Amendment No. 8 to Registration
Statement on Form S-1 (File No. 333-141507) filed with the
Securities and Exchange Commission on June 12, 2009).
|
|
10
|
.22±
|
|
English translation of Employment Agreement, dated as of
December 26, 2007, between Duoyuan Digital Press Technology
Industries (China) Co., Ltd. and Yubao Wei (Incorporated by
reference to Exhibit 10.22 to Amendment No. 8 to Registration
Statement on Form S-1 (File No. 333-141507) filed with the
Securities and Exchange Commission on June 12, 2009).
|
|
10
|
.23
|
|
English Translation of Loan Agreement, dated as of July 4, 2008,
between Duoyuan Digital Press Technology Industries (China) Co.
Ltd. and Agricultural Bank of China (Incorporated by reference
to Amendment No. 9 to Registration Statement on Form S-1 (File
No. 333-141507) filed with the Securities and Exchange
Commission on July 10, 2009).
|
|
10
|
.24
|
|
English Translation of Loan Agreement, dated as of July 11,
2008, between Duoyuan Digital Press Technology Industries
(China) Co. Ltd. and Agricultural Bank of China (Incorporated by
reference to Amendment No. 9 to Registration Statement on Form
S-1 (File No. 333-141507) filed with the Securities and Exchange
Commission on July 10, 2009).
|
|
10
|
.25
|
|
English Translation of Loan Agreement, dated as of July 18,
2008, between Duoyuan Digital Press Technology Industries
(China) Co. Ltd. and Agricultural Bank of China (Incorporated by
reference to Amendment No. 9 to Registration Statement on Form
S-1 (File No. 333-141507) filed with the Securities and Exchange
Commission on July 10, 2009).
|
|
10
|
.26
|
|
English Translation of Loan Agreement, dated as of July 25,
2008, between Duoyuan Digital Press Technology Industries
(China) Co. Ltd. and Agricultural Bank of China (Incorporated by
reference to Amendment No. 9 to Registration Statement on Form
S-1 (File No. 333-141507) filed with the Securities and Exchange
Commission on July 10, 2009).
|
|
10
|
.27
|
|
English Translation of Loan Agreement, dated as of March 13,
2009, between Duoyuan Digital Press Technology Industries
(China) Co. Ltd. and Agricultural Bank of China (Incorporated by
reference to Amendment No. 9 to Registration Statement on Form
S-1 (File No. 333-141507) filed with the Securities and Exchange
Commission on July 10, 2009).
|
|
10
|
.28±
|
|
Employment Agreement, dated as of August 26, 2009, between the
Company and Christopher Patrick Holbert (Incorporated by
reference to Amendment No. 10 to Registration Statement on Form
S-1 (File No. 333-141507) filed with the Securities and Exchange
Commission on September 4, 2009).
|
|
10
|
.29
|
|
English Translation of Loan Agreement, dated July 3, 2009,
between Duoyuan Digital Press Technology Industries (China) Co.
Ltd. and Agricultural Bank of China (Incorporated by reference
to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 333-161813) filed with the Securities and Exchange
Commission on September 29, 2009).
|
|
10
|
.30
|
|
English Translation of Loan Agreement, dated July 10, 2009,
between Duoyuan Digital Press Technology Industries (China) Co.
Ltd. and Agricultural Bank of China (Incorporated by reference
to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 333-161813) filed with the Securities and Exchange
Commission on September 29, 2009).
|
|
10
|
.31
|
|
English Translation of Loan Agreement, dated July 17, 2009,
between Duoyuan Digital Press Technology Industries (China) Co.
Ltd. and Agricultural Bank of China (Incorporated by reference
to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 333-161813) filed with the Securities and Exchange
Commission on September 29, 2009).
|
|
10
|
.32
|
|
English Translation of Loan Agreement, dated July 24, 2009,
between Duoyuan Digital Press Technology Industries (China) Co.
Ltd. and Agricultural Bank of China (Incorporated by reference
to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 333-161813) filed with the Securities and Exchange
Commission on September 29, 2009).
|
II-6
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.33±
|
|
Duoyuan Printing, Inc. 2009 Omnibus Incentive Plan (Incorporated
by reference to Exhibit 10.33 to Amendment No. 3 to
Registration Statement on
Form S-1
(File
No. 333-161813)
filed with the Securities and Exchange Commission on
October 16, 2009).
|
|
10
|
.34±
|
|
Form of Incentive Stock Option Agreement (Incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K
(File No. 000-27129) filed with the Securities and Exchange
Commission on October 22, 2009).
|
|
10
|
.35±
|
|
Form of Non-Qualified Stock Option Agreement (non-Directors)
(Incorporated by reference to Exhibit 10.3 to the Current Report
on Form 8-K (File No. 000-27129) filed with the Securities and
Exchange Commission on October 22, 2009).
|
|
10
|
.36±
|
|
Form of Non-Qualified Stock Option Agreement (Directors)
(Incorporated by reference to Exhibit 10.4 to the Current Report
on Form 8-K (File No. 000-27129) filed with the Securities and
Exchange Commission on October 22, 2009).
|
|
10
|
.37±
|
|
Form of Restricted Stock Agreement (non-Directors) (Incorporated
by reference to Exhibit 10.5 to the Current Report on Form 8-K
(File No. 000-27129) filed with the Securities and Exchange
Commission on October 22, 2009).
|
|
10
|
.38±
|
|
Form of Restricted Stock Agreement (Directors) (Incorporated by
reference to Exhibit 10.6 to the Current Report on Form 8-K
(File No. 000-27129) filed with the Securities and Exchange
Commission on October 22, 2009).
|
|
10
|
.39±
|
|
Form of Restricted Stock Unit Agreement (non-Directors)
(Incorporated by reference to Exhibit 10.7 to the Current Report
on Form 8-K (File No. 000-27129) filed with the Securities and
Exchange Commission on October 22, 2009).
|
|
10
|
.40±
|
|
Form of Restricted Stock Unit Agreement (Directors)
(Incorporated by reference to Exhibit 10.8 to the Current Report
on Form 8-K (File No. 000-27129) filed with the Securities and
Exchange Commission on October 22, 2009).
|
|
10
|
.41±
|
|
Form of Unrestricted Stock Agreement (non-Directors)
(Incorporated by reference to Exhibit 10.9 to the Current Report
on Form 8-K (File No. 000-27129) filed with the Securities and
Exchange Commission on October 22, 2009).
|
|
10
|
.42±
|
|
Form of Unrestricted Stock Agreement (Directors) (Incorporated
by reference to Exhibit 10.10 to the Current Report on Form 8-K
(File No. 000-27129) filed with the Securities and Exchange
Commission on October 22, 2009).
|
|
14
|
.1
|
|
Code of Business Conduct and Ethics of the Company (Incorporated
by reference to Exhibit 14.1 to Annual Report on Form 10-K (File
No. 000-27129) filed with the Securities and Exchange
Commission on September 14, 2009).
|
|
21
|
.1
|
|
List of the Companys subsidiaries (Incorporated by
reference to Exhibit 21.1 to Annual Report on Form 10-K (File
No. 000-27129) filed with the Securities and Exchange Commission
on September 14, 2009).
|
|
23
|
.1*
|
|
Consent of Moore Stephens Wurth Frazer and Torbet, LLP.
|
|
23
|
.2*
|
|
Consent of Commerce & Finance Law Offices.
|
|
23
|
.3
|
|
Consent of Karpan & White P.C. (Included in Exhibit 5.1).
|
|
99
|
.1*
|
|
Legal Opinion of Commerce & Finance Law Office.
|
|
99
|
.2
|
|
Consent of the Printing and Printing Equipment Industries
Association of China (Incorporated by reference to Exhibit 99.2
to Registration Statement on Form S-1 (File No. 333-161813)
filed with the Securities and Exchange Commission on
September 9, 2009).
|
|
99
|
.3
|
|
Consent of Pira International (Incorporated by reference to
Exhibit 99.3 to Registration Statement on
Form S-1
(File
No. 333-161813)
filed with the Securities and Exchange Commission on
September 9, 2009).
|
|
|
± |
Management contract or compensatory plan or arrangement.
|
II-7
|
|
(b)
|
Financial
Statement Schedules
|
Schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the
consolidated financial statements and the accompanying notes.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the purchase agreement,
certificates in such denominations and registered in such names
as required by the underwriter to permit prompt delivery to each
purchaser.
(a) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) That, for the purpose of determining liability under
the Securities Act to any purchaser:
(i) If the registrant is relying on Rule 430B
(Section 230.430B of this chapter):
(A) Each prospectus filed by the registrant pursuant to
Rule 424(b)(3) (§ 230.424(b)(3) of this chapter)
shall be deemed to be part of the registration statement as of
the date the filed prospectus was deemed part of and included in
the registration statement; and
(B) Each prospectus required to be filed pursuant to
Rule 424(b)(2), (b)(5), or (b)(7)
(§ 230.424(b)(2), (b)(5), or (b)(7) of this chapter)
as part of a registration statement in reliance on
Rule 430B relating to an offering made pursuant to
Rule 415(a)(1)(i), (vii), or (x)
(§ 230.415(a)(1)(i), (vii), or (x) or this
chapter) for the purpose of providing the information required
by section 10(a) of the Securities Act shall be deemed to
be part of and included in the registration statement as of the
earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date
shall be deemed to be a new effective date of the registration
statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof. Provided, however, that no statement
made in a registration statement or prospectus that is part of
the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
effective date, supersede or modify any statement that was made
in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such effective date; or
II-8
(ii) If the registrant is subject to Rule 430C, each
prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in
a document incorporated or deemed incorporated by reference into
the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use.
(4) That, for the purpose of determining liability of the
registrant under the Securities Act to any purchaser in the
initial distribution of the securities: The undersigned
registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered
or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
(b) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned hereunto duly authorized
in Beijing, PRC, on October 30, 2009.
DUOYUAN PRINTING, INC.
(Registrant)
/s/ Christopher
Patrick Holbert
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By:
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Christopher Patrick Holbert
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Title:
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Chief Executive Officer
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(principal executive officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
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Dated: October 30, 2009
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/s/ Christopher
Patrick Holbert
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Christopher Patrick Holbert
Chief Executive Officer
(principal executive officer)
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Dated: October 30, 2009
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/s/ William
D. Suh
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William D. Suh
Chief Financial Officer
(principal financial officer and
principal accounting officer)
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Dated: October 30, 2009
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*
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Wenhua Guo
Chairman of the Board of Directors
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Dated: October 30, 2009
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*
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Xiqing Diao
Director and Chief Operating Officer
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Dated: October 30, 2009
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*
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Lianjun Cai
Director
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Dated: October 30, 2009
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*
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Punan Xie
Director
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Dated: October 30, 2009
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*
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James Zhang
Director
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* Signed by Christopher Patrick Holbert pursuant to powers
of attorney