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EX-5.1 - EX-5.1 - DUOYUAN PRINTING, INC.f53413a5exv5w1.htm
EX-99.1 - EX-99.1 - DUOYUAN PRINTING, INC.f53413a5exv99w1.htm
EX-23.2 - EX-23.2 - DUOYUAN PRINTING, INC.f53413a5exv23w2.htm
EX-23.1 - EX-23.1 - DUOYUAN PRINTING, INC.f53413a5exv23w1.htm
Table of Contents

As filed with the Securities and Exchange Commission on November 4, 2009
Registration No. 333-161813
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
 
Amendment No. 5
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
DUOYUAN PRINTING, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
         
Wyoming   3555   91-1922225
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
No. 3 Jinyuan Road
Daxing Industrial Development Zone
Beijing 102600, People’s Republic of China
Tel: +8610-6021-2222
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s 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:
     
Man Chiu Lee, Esq.
Hogan & Hartson LLP
Suite 2101, Two Pacific Place
88 Queensway
Hong Kong SAR, People’s Republic of China
Tel: +852-2151-5858
  Kurt J. Berney, Esq.
O’Melveny & Myers LLP
Plaza 66, 37th
Floor
1266 Nanjing Road West
Shanghai 200040, People’s Republic of China
Tel: +8621-2307-7000
 
 
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):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ Smaller Reporting Company o
(Do not check if a smaller reporting company)
 
 
CALCULATION OF REGISTRATION FEE
 
                     
      Proposed Maximum
         
Title of Each Class of
    Aggregate
      Amount of
 
Securities to Be Registered     Offering Price(1)       Registration Fee(2)(3)  
Common shares, par value $0.001 per share
    $ 77,955,213       $ 4,350 (4)
                     
 
(1) Estimated solely for the purpose of determining the amount of registration fee.
 
(2) Calculated in accordance with Rule 457(o) under the Securities Act of 1933.
 
(3) Includes offering price of common shares that the underwriters have the option to purchase to cover over-allotments, if any.
 
(4) 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.
 
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.
 


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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.
 
 
Subject to completion, dated November 4, 2009
 
6,455,918 Common Shares
 
     
DUOYUAN PRINTING, INC.   (DUOYUAN GLOBAL WATER LOGO)
 
$      per share
 
 
•  We are offering 5,500,000 common shares and the selling shareholders are offering 955,918 common shares of Duoyuan Printing, Inc. We will not receive any proceeds from the sale of our common shares by the selling shareholders.
 
•  We anticipate that the initial public offering price will be between $8.50 and $10.50 per common share.
 
•  This is our initial public offering and no public market currently exists for our common shares.
 
•  Trading symbol: New York Stock Exchange — “DYP”.
 
 
 
 
This investment involves risk. See “Risk Factors” beginning on page 13.
 
 
                 
    Per Share   Total
 
Public offering price
  $       $    
Underwriting discount
  $       $    
Proceeds, before expenses, to Duoyuan Printing, Inc. 
  $       $    
Proceeds, before expenses, to selling shareholders
  $       $  
 
 
 
The underwriters have a 30-day option to purchase up to 968,388 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.
 
Piper Jaffray Roth Capital Partners
 
The date of this prospectus is          , 2009.


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(GRAPHIC)
DUOYUAN PRINTING, INC. Langfang facility


 

 
DUOYUAN PRINTING, INC.
 
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 EX-5.1
 EX-23.1
 EX-23.2
 EX-99.1
 
 
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 management’s 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.


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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 “Management’s 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 China’s 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


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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
 
China’s Printing Industry
 
China’s printing industry has benefited from China’s 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, China’s printing industry is expected to remain one of the fastest growing in Asia.
 
From 2002 to 2007, the total annual output of China’s 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, China’s printing market grew from $51 billion in 2007 to $57 billion in 2008. Pira International estimates China’s 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 China’s 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.


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The demand for corrugated board is growing in response to the increased demand from industries such as food, beverages, electronic devices and toys. China’s 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.
 
China’s 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, China’s printing equipment industry grew at a higher rate than its overall printing industry. As noted above, the total annual output of China’s 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 China’s 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 China’s 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.


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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:
 
  •  our quality product offerings at competitive prices;
 
  •  our established market position;
 
  •  our wide product offerings;
 
  •  our nationwide sales and distribution network, with over 200 sales professionals in over 65 cities and 28 provinces throughout China; and
 
  •  our research and development team with over 200 researchers, engineers and technicians.
 
Our strategy is to capitalize on our competitive strengths to expand our current market share and to benefit from the anticipated growth in China’s offset printing equipment industry. Our strategy consists of the following key elements:
 
  •  adjust and expand production facilities to improve efficiency and margins;
 
  •  expand our higher margin product offerings;
 
  •  improve our products’ functionality through research and development efforts;
 
  •  expand our market share in China, and establish distribution networks outside of China; and
 
  •  pursue selective strategic acquisitions.
 
We expect to face risks and uncertainties related to our ability to:
 
  •  develop and sell new products;
 
  •  establish and maintain our relationships with our distributors;
 
  •  manage our distribution network;
 
  •  expand our manufacturing capacity;
 
  •  attract and retain key management and research and development personnel;
 
  •  build our brand and expand into international markets; and
 
  •  protect our intellectual property rights.
 
See “Risk Factors” for a detailed discussion of these and other risks that we face.


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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 unaudited consolidated financial statements for the three months ended September 30, 2009 are not available at this time. 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 “Management’s 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


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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 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 Limited’s 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 China’s manufacturing subsidiaries, namely Langfang Duoyuan and Hunan Duoyuan.


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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:
 
(COMPANY STRUCTURE LOGO)
 
* 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, People’s 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.


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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;
 
  •  “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.


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THE OFFERING
 
Common shares offered by Duoyuan Printing, Inc.
5,500,000 common shares.
 
Common shares offered by the selling shareholders
955,918 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 968,388 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
6,455,918 common shares.
 
Common shares outstanding immediately after this offering
31,375,050 common shares (or 32,343,438 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 not being offered in this offering, 23,697,970 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


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contract to sell any of 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;
 
  •  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;
 
  •  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
 
  •  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.


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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 “Management’s 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  
 


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    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  

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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.
 
  •  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.


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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:
 
  •  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;
 
  •  maintain our current and develop new relationships with distributors;
 
  •  manage our expanding operations and product offerings;
 
  •  maintain adequate control of expenses, inventory and receivables;
 
  •  attract, retain and motivate qualified personnel;
 
  •  protect our reputation and enhance customer loyalty;
 
  •  implement additional and improve existing administrative, financial and operations systems, procedures and controls; and
 
  •  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:
 
  •  competitors offering comparable products at lower prices;
 
  •  decreases in the average selling prices of our products, particularly our single color presses;
 
  •  superior product innovations by competitors;


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  •  rising raw materials and manufacturing costs;
 
  •  changes in our management and key personnel; and
 
  •  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:
 
  •  our limited experience in these new businesses;
 
  •  the existence of larger more established competitors;
 
  •  our potential inability to sell new products to existing end-user customers or to locate new end-user customers;
 
  •  the timing and completion of our introduction of new designs;
 
  •  the quality, price and performance of our products and those of our competitors;
 
  •  our customer service capabilities and responsiveness; and
 
  •  any unexpected expenses and costs related to the expansion.
 
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 employee’s 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:
 
  •  sell products that compete with our products, possibly including counterfeit products with the “Duoyuan” name;
 
  •  sell our products outside their designated territory, possibly in violation of the distribution rights of other distributors;
 
  •  fail to adequately promote our products;
 
  •  fail to provide proper training and service to our end-user customers; or
 
  •  violate the anti-corruption laws of China, the United States or other countries.
 
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


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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 management’s 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:
 
  •  integration of new operations, services and personnel;
 
  •  unforeseen or hidden liabilities;
 
  •  diversion of resources from our existing businesses and technologies;
 
  •  inability to generate sufficient revenue to offset the costs of acquisitions; and
 
  •  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:
 
  •  international import and export legislation;
 
  •  financial condition, expertise and performance of potential international distributors;
 
  •  foreign tax consequences;
 
  •  trade and tariff restrictions;
 
  •  quotas; and
 
  •  inability to effectively enforce contractual or other legal rights.
 
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 didn’t 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:
 
  •  pay damage awards;
 
  •  seek licenses from third parties;
 
  •  pay additional ongoing royalties, which could decrease our profit margins;
 
  •  redesign our products; or
 
  •  be restricted by injunctions.
 
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 company’s financial statements must attest to and report on management’s 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 management’s 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


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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 People’s 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 Council’s 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 “Management’s 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 enterprise’s 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


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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 Treasury’s 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.


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The slowdown of China’s economy caused in part by the recent challenging global economic conditions may adversely affect our business, results of operations and financial condition.
 
China’s economy has experienced a slowdown after the second quarter of 2007, when the quarterly growth rate of China’s gross domestic product reached 11.9%. A number of factors have contributed to this slowdown, including appreciation of the Renminbi, which has adversely affected China’s exports, and tightening macroeconomic measures and monetary policies adopted by the Chinese government aimed at preventing overheating of China’s economy and controlling China’s 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 China’s 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


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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


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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 China’s 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


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role in regulating industry by imposing industrial policies. It also exercises significant control over China’s 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 government’s 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 People’s 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 People’s 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.


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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 month’s 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 people’s 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


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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 arm’s-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 vehicle’s securities on an overseas stock exchange.


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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.


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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 Duoyuan’s 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 employee’s 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 people’s 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 Duoyuan’s 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


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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:
 
  •  price and volume fluctuations in the overall stock market from time to time;
 
  •  significant volatility in the market price and trading volume of comparable companies;
 
  •  actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts;
 
  •  announcements of technological innovations, new products, strategic alliances or significant agreements by us or by our competitors;
 
  •  significant developments relating to our relationships with our customers or suppliers;
 
  •  end-user customer demand for our products;
 
  •  general economic conditions and trends;
 
  •  catastrophic events;
 
  •  sales of large blocks of our shares; and
 
  •  recruitment or departure of key personnel.
 
In the past, following periods of volatility in the market price of a company’s 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 management’s 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 7,677,080 common shares, including the 6,455,918 common shares sold in this offering, will be freely tradable, without restriction, in the public market. Of our outstanding common shares not being offered in this offering, 23,697,970 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


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lower price to cover the sale. As each of 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 corporation’s 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 corporation’s 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


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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.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements, principally in the sections entitled “Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s 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:
 
  •  our goals and strategies;
 
  •  our future business development, results of operations and financial condition;
 
  •  our ability to maintain a strong relationship with distributors or end-user customers or to expand our distribution network;
 
  •  our ability to control our operating costs and expenses;
 
  •  our ability to generate revenue in new post-press products;
 
  •  changes in our management team and other key personnel;
 
  •  introduction by our competitors of new or enhanced products;


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  •  the effect of competition on demand for and prices of our products;
 
  •  fluctuations in general economic conditions;
 
  •  Chinese tax policies and regulations; and
 
  •  expected growth and change in the Chinese printing equipment market.
 
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.


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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:
 
  •  approximately $30.0 million to build a factory to manufacture cold-set corrugated paper machines at our Langfang Duoyuan facility;
 
  •  approximately $10.0 million to improve and upgrade our existing manufacturing facilities and production lines; and
 
  •  the balance for general corporate purposes.
 
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.


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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.


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CAPITALIZATION
 
The following table sets forth our capitalization as of June 30, 2009:
  •  on an actual basis;
  •  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.
You should read this table together with the sections of this prospectus entitled “Use of Proceeds” and “Management’s 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.
                 
    As of June 30, 2009  
    Actual     As Adjusted  
    (in thousands)  
 
Lines of credit
  $ 14,357     $ 14,357  
                 
Shareholders’ equity:
               
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
    25       31  
                 
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
           
                 
Additional paid-in capital
    27,263       74,649  
                 
Statutory reserves
    9,429       9,429  
                 
Retained earnings
    79,226       79,226  
                 
Accumulated other comprehensive income
    10,789       10,789  
                 
Total shareholders’ equity
    126,732       174,124  
                 
Total capitalization
  $ 141,089     $ 188,481  
                 
 
 
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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Employee Share-Based Compensation Expenses.”


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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
    6,468,388       20       61,449,686       69       9.50          
Total
    32,343,438       100 %   $ 88,737,726       100 %   $ 2.74          
                                                 
 


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    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 100,000 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 $0.23 per share to $4.21 per share. To the extent we issue additional warrants that are exercised, new investors will experience further dilution.

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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 unaudited consolidated financial statements for the three months ended September 30, 2009 are not available at this time. 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 “Management’s 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


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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 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.


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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 Limited’s 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 China’s 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 China’s 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 China’s 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 Duoyuan’s 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 Advertisement’s 5% interest in Langfang Duoyuan for RMB1.5 million. Pursuant to an equity transfer agreement dated as of October 16, 2005, Duoyuan


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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 Duoyuan’s 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 Duoyuan’s 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:
 
(COMPANY STRUCTURE LOGO)
 
* Represents our minority shareholders, consisting of the pre-equity transfer investors and the investors from the private placement in November 2006.


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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 “Management’s 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  
                                         
 


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    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  

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MANAGEMENT’S 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 China’s 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. China’s 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 China’s 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 China’s printing industry. According to the Printing and Printing Equipment Industries Association of China, China’s 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 China’s printing industry that year. Pira International projects that package printing to become the largest segment by 2014, followed by commercial printing.


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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 China’s printing industry grew from $29.5 billion to $64.4 billion from 2002 to 2007. Similarly, China’s 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 China’s printing industry. In 2007, package printing accounted for 32% of China’s printing industry. Pira International projects that package printing to become the largest segment by 2014, followed by commercial printing. However, any adverse changes in China’s 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;


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  •  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.


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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 Commission’s 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.”


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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


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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.


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The following table provides a breakdown of our revenue, by product category, for the periods indicated:
 
                                                 
    Year Ended June 30  
    2007     2008     2009  
          % of
          % of
          % of
 
    $     Revenue     $     Revenue     $     Revenue  
    (dollars in thousands)  
 
Pre-press
                                               
CTP system
  $ 3,769       5.6 %   $ 3,184       3.6 %   $ 4,004       3.8 %
Press
                                               
Single color small-format presses
    6,021       8.9       4,328       4.8       4,436       4.2  
Single color large-format presses
    9,730       14.3       10,700       11.9       10,903       10.2  
Multicolor small-format presses
    17,350       25.6       26,366       29.4       34,207       32.1  
Multicolor large-format presses
    31,671       46.7       46,597       52.0       54,593       51.2  
Adjustments
    (729 )     (1.1 )     (1,547 )     (1.7 )     (1,552 )     (1.5 )
                                                 
Revenue, net
  $ 67,812       100.0 %   $ 89,628       100.0 %   $ 106,591       100.0 %
                                                 
 
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.


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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 China’s 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.


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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.


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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.


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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 Institute’s 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 People’s 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:
 
  •  persuasive evidence of an arrangement exists, such as sales contracts;
 
  •  product is shipped or services have been rendered;
 
  •  the price to the buyer is fixed or determinable; and
 
  •  collectability of payment is reasonably assured.
 
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


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repair previously sold units still under warranty for manufacturer’s defects. Such amounts are based on management’s 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 Vendor’s 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.


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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 Board’s, 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.


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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


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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


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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 Company’s 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


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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 %
                                                                         


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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


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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.


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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.


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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


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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


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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 23.2% 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


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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


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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


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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


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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 89.3% 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.


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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


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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


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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.


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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 $7.3 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


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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 $7.3 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


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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


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method of accounting for changes in a parent’s 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 parent’s 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 entity’s 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 Entity’s 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 issuer’s 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.


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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) management’s 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 entity’s 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


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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.


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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 People’s 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 People’s 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 China’s 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


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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 People’s Bank of China. Since April 28, 2006, the People’s 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 People’s Bank of China’s 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.


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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 China’s printing industry is highly correlated with China’s printing equipment industry, and may serve as a guide to China’s overall equipment industry dynamics and expenditures on printing equipment.
 
China’s Printing Industry
 
China’s printing industry has benefited from China’s 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, China’s printing industry is expected to remain one of the fastest growing in Asia.
 
From 2002 to 2007, the total annual output of China’s 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.
 
(BAR CHART)
 
Source: the Printing and Printing Equipment Industries Association of China
 
According to Pira International, China’s printing market grew from $51 billion in 2007 to $57 billion in 2008. Pira International estimates China’s 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 China’s


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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. China’s 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.
 
China’s 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, China’s printing equipment industry grew at a higher rate than its overall printing industry. As noted above, the total annual output of China’s 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 China’s printing equipment industry, however, grew from $0.9 billion to $2.5 billion, representing a CAGR of 23% per annum for the same periods.
 
(BAR CHART)
 
Source: the Printing and Printing Equipment Industries Association of China


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Taking into account of the effects of the current economic environment, Pira International projects China’s 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.


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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 China’s 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.


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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.


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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 China’s 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.


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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:
 
             
   
Pre-Press
 
Press(2)
 
Post-Press(3)
 
Products
 
•    CTP System(1)
 
•    Single Color Small Format Press
 
•    Cold-set Corrugated Paper Machine(4)
       
•    Single Color Large Format Press
 
•    Automatic Booklet Maker(5)
       
•    Multicolor Small Format Press
 
•    Automatic Paper Cutter(5)
       
•    Multicolor Large Format Press
   
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
             
 
(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.
(3) We do not manufacture or sell any post-press products.
(4) We plan to manufacture and sell this post-press product by the end of 2010.
(5) We plan to manufacture and sell this post-press product by the end of 2011.
(6) Revenue figure before adjustments.
 
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: