Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
(Mark
One)
o |
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT
OF 1934
|
OR
x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the fiscal year ended December 31, 2007
OR
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from ___________________
to
___________________
OR
o |
SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
Date
of
event requiring this shell company report _______________
Commission
file number: 001-33176
Fuwei
Films (Holdings) Co., Ltd.
(Exact
name of Registrant as specified in its charter)
_______________________________________________________________
(Translation
of Registrant’s name into English)
Cayman
Islands
(Jurisdiction
of incorporation or organization)
No.
387
Dongming Road
Weifang
Shandong
People’s
Republic of China, Postal Code: 261061
(Address
of principal executive offices)
_____________________________________________________________
Securities
registered or to be registered pursuant to Section 12(b) of the
Act.
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Title
of each class
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Name
of each exchange on which registered
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|
|
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|
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Ordinary
Shares
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NASDAQ
Global Market
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Securities
registered or to be registered pursuant to Section 12(g) of the
Act.
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.
As
of
April 11, 2008, there were 13,062,500 ordinary shares outstanding.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
o
Yes x No
If
this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934.
o
Yes x No
Note
-
Checking the box will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
x
Yes o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated filer
o
Non-accelerated filer x
Indicate
by check mark which financial statement item the registrant has elected to
follow
o
Item 17 x Item
18
If
this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes x
No
SPECIAL
NOTE ON FORWARD-LOOKING STATEMENTS
This
Annual Report contains many statements that are “forward-looking” and uses
forward-looking terminology such as “anticipate,” “believe,” “expect,”
“estimate,” “future,” “intend,” “may,” “ought to,” “plan,” “should,” “will,”
negatives of such terms or other similar statements. You should not place undue
reliance on any forward-looking statement due to its inherent risk and
uncertainties, both general and specific. Although we believe the assumptions
on
which the forward-looking statements are based are reasonable and within the
bounds of our knowledge of our business and operations as of the date of this
annual report, any or all of those assumptions could prove to be inaccurate.
As
a result, the forward-looking statements based on those assumptions could also
be incorrect. The forward-looking statements in this annual report include,
without limitation, statements relating to:
·
|
our
goals and strategies;
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·
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our
future business development, results of operations and financial
condition;
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·
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our
ability to protect our intellectual property
rights;
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·
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expected
growth of and changes in the PRC BOPET film industry and in the demand
for
BOPET film products;
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·
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projected
revenues, profits, earnings and other estimated financial
information;
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·
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our
ability to maintain and strengthen our position as a leading provider
of
BOPET film products in China;
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·
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our
ability to maintain strong relationships with our customers and
suppliers;
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·
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our
planned use of proceeds;
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·
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effect
of competition in China on demand for and price of our products and
services; and
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·
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PRC
governmental policies regarding our
industry.
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The
forward-looking statements included in this Annual Report are subject to risks,
uncertainties and assumptions about our businesses and business environments.
These statements reflect our current views with respect to future events and
are
not a guarantee of future performance. Actual results of our operations may
differ materially from information contained in the forward-looking statements
as a result of risk factors some of which are described under “Risk Factors” and
elsewhere in this Annual Report and include, among other things:
·
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competition
in the BOPET film industry;
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·
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growth
of, and risks inherent in, the BOPET film industry in
China;
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·
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uncertainty
as to future profitability and our ability to obtain adequate financing
for our planned capital expenditure
requirements;
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·
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uncertainty
as to our ability to continuously develop new BOPET film products
and keep
up with changes in BOPET film
technology;
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·
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risks
associated with possible defects and errors in our
products;
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·
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uncertainty
as to our ability to protect and enforce our intellectual property
rights;
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·
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uncertainty
as to our ability to attract and retain qualified executives and
personnel; and
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·
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uncertainty
in acquiring raw materials on time and on acceptable terms, particularly
in view of the volatility in the prices of petroleum products in
recent
years.
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These
risks and uncertainties are not exhaustive. Other sections of this Annual Report
include additional factors which could adversely impact our business and
financial performance. The forward-looking statements contained in this Annual
Report speak only as of the date of this annual report 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 Annual Report. Since we operate in an emerging and evolving environment
and
new risk factors and uncertainties 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 to reflect events
or circumstances after the date of this Annual Report or to reflect the
occurrence of unanticipated events.
Introduction
This
annual report on Form 20-F includes our audited consolidated financial
statements as of December 31, 2005, 2006, and 2007 and for the years ended
December 31, 2005, 2006 and 2007.
Our
ordinary shares are listed on the Nasdaq Global Market, or NASDAQ, under the
symbol “FFHL”.
Except
as
otherwise required and for purposes of this Annual Report only:
·
|
“Fuwei”,
“Company”, “us” or “we” refer to Fuwei Films (Holding) Co., Ltd.. The term
“you” refers to holders of our ordinary
shares.
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·
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“China”
or “PRC” and the “Chinese government” refer to the People’s Republic of
China and its government.
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·
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All
references to “Renminbi,” or “Rmb” are to the legal currency of China, all
references to “U.S. dollars,” “dollars,” “$” or “US” are to the legal
currency of the United States and all references to “Hong Kong dollars” or
“HK$” are to the legal currency of Hong Kong. Any discrepancies in any
table between totals and sums of the amounts listed are due to
rounding.
|
PART
I
Item
1. Identity of Directors, Senior Management and Advisers
Not
Applicable.
Item
2. Offer Statistics and Expected Timetable
Not
Applicable.
Item
3. Key Information
A. Selected
financial data.
The
following selected financial data should be read in conjunction with Item 5
-
the “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the Financial Statements and Notes thereto included elsewhere in
this Annual Report.
The
selected financial data at December 31, 2005, 2006 and 2007 and the years ended
December 31, 2005, 2006 and 2007 have been prepared in accordance with U. S.
GAAP, derived from and should be read with our audited consolidated financial
statements, including notes to the consolidated financial statements, included
in this Annual Report beginning on page F-1.
Certain
factors that affect the comparability of the information set forth in the
following table are described in the “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and the Financial Statements and
related notes thereto included elsewhere in this Annual Report.
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Year
Ended
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December
31,
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2005
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2006
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2007
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(in
thousands, except per share data)
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(RMB)
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(RMB)
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(RMB)
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(US$)
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Statement
of Operations Data:
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Revenues
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346,205
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436,884
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449,373
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59,083
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Gross
profit
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87,115
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102,543
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99,842
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13,127
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Operating
income
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65,999
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78,017
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64,266
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8,450
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Interest
expense
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(13,747
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)
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(12,884
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)
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(12,643
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)
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(1,662
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)
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Income
before income taxes
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57,069
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68,422
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51,941
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6,829
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Net
income
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57,128
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67,665
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47,260
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6,214
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Earnings
per share
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Basic
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74,096
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61.46
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3.62
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0.48
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Diluted
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74,096
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61.37
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3.62
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0.48
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As of
December 31,
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2005
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2006
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2007
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(in
thousands)
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(RMB)
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(RMB)
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(RMB)
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(US$)
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Balance
Sheet Data:
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Cash
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7,427
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249,939
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30,909
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4,237
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Accounts
receivable, net
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46,129
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75,530
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58,195
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7,978
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Inventories
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24,887
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23,783
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41,670
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5,712
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Total
current assets
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93,349
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371,687
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211,842
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29,041
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Property,
plant and equipment, net
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303,596
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317,690
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493,562
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67,661
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Total
assets
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440,361
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738,082
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738,975
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101,304
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Short-term
bank loans
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248,046
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239,678
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188,027
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25,776
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Total
current liabilities
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367,401
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272,175
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226,445
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31,043
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Total
shareholders’ equity
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72,960
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465,907
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512,530
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70,262
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If
our
subsidiary Shandong Fuwei was not entitled to a reduced enterprise income tax,
or EIT, rate of 0% for the period/year ended December 31, 2005 and 2006, and
rate of 7.5% for the year ended December 2007, it would have had an EIT rate
of
15%. Net income and basic and diluted earnings per share would be reduced by
the
following amounts:
|
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Year
ended December 31,
|
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2005
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2006
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2007
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2007
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(RMB)
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(RMB)
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|
(RMB)
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(US$)
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Net
income
|
|
|
(8,736
|
)
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|
(10,453
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)
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(4,340
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)
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(571
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)
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Earnings
per share
|
|
|
|
|
|
|
|
|
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|
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|
basic
|
|
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(11,331
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)
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(9.50
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)
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(0.33
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)
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(0.04
|
)
|
diluted
|
|
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(11,331
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)
|
|
(9.48
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)
|
|
(0.33
|
)
|
|
(0.04
|
)
|
The
2007
RMB amounts included in the above selected financial data have been translated
into U.S. dollars at the rate of US $1.00 = RMB 7.2946, which was the noon
buying rate for U.S. dollars in effect on December 29, 2006 in the City of
New
York for cable transfer in RMB per U.S. dollar as certified for custom purposes
by the Federal Reserve Bank. No representation is made that the RMB amounts
could have been, or could be, converted into U.S. dollars at that rate or at
any
other certain rate on December 31, 2007, or at any other date.
Exchange
Rate Information
On
July
21, 2005 the Chinese government changed its policy of pegging the value of
the
Renminbi to the U.S. dollar. This revaluation of the Renminbi was based on
a
conversion of Renminbi into United States dollars at an exchange rate of
US$1.00=RMB8.11. Under the new policy, the Renminbi will be permitted to
fluctuate within a band against a basket of certain foreign currencies. In
2007
this change in policy resulted initially in an approximately 11.0% appreciation
in the value of the Renminbi against the U.S. dollar compared to 2005 and could
result in further and more significant appreciations. Although the Company
generates substantially all of its revenue in Renminbi which has become more
valuable in U.S. dollars, the Company’s U.S. dollars cash deposits are subject
to foreign currency translations which will impact net income.
We
have
calculated and presented our financial statements in Renminbi. Our business
is
primarily conducted in China and denominated in Renminbi. Reports will
be made
to shareholders and will be expressed in Renminbi. The conversion of Renminbi
into U.S. dollars in this Annual Reports is based on the noon buying rate
in The
City of New York for cable transfers of Renminbi as certified for customs
purposes by the Federal Reserve Bank of New York. Unless otherwise noted,
The
2007 RMB amounts included in the accompanying consolidated balance sheet
has
been translated into U.S. dollars at the rate of US$1.00 = RMB 7.2946,
being the
noon buy rate for U.S. dollars in effect on December 31, 2007 in the City
of New
York for cable transfer in RMB per U.S. dollar as certified for custom
purposes
by the Federal Reserve Bank. The Company used average exchange rate of
US$1=RMB 7.6058
to
translate the consolidated statement of operations and statement of cash
flow
for the year ended December 31, 2007 and historical rate for the statement
of
stockholders’ equity for the year ended December 31, 2007. We make no
representation that any Renminbi or U.S. dollar amounts could have been,
or
could be, converted into U.S. dollars or Renminbi, as the case may be,
at any
particular rate, the rates stated below, or at all. The Chinese government
imposes controls over its foreign currency reserves in part through direct
regulation of the conversion of Renminbi into foreign exchange and though
restrictions on foreign trade.
The
following table sets forth various information concerning exchange rates between
the Renminbi and the U.S. dollar for the periods indicated. These rates are
provided solely for your convenience and are not necessarily the exchange rates
that we used in this annual report or will use in the preparation of our
periodic reports or any other information to be provided to you. The source
of
these rates is the Federal Reserve Bank of New York.
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Average
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High
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Low
|
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Period-end
|
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(Rmb
per U.S.$1.00)
|
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2002(1)
|
|
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8.2770
|
|
|
8.2800
|
|
|
8.2669
|
|
|
8.2800
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|
2003(1)
|
|
|
8.2770
|
|
|
8.2800
|
|
|
8.2765
|
|
|
8.2769
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|
2004(1)
|
|
|
8.2768
|
|
|
8.2774
|
|
|
8.2764
|
|
|
8.2765
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|
2005(1)
|
|
|
8.1472
|
|
|
8.2765
|
|
|
8.0702
|
|
|
8.0709
|
|
2006(1)8
|
|
|
7.9723
|
|
|
8.0702
|
|
|
7.8041
|
|
|
7.8041
|
|
2007(1)
|
|
|
7.6038
|
|
|
7.7881
|
|
|
7.2946
|
|
|
7.2946
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|
October
2007(2)
|
|
|
7.5019
|
|
|
7.5158
|
|
|
7.4682
|
|
|
7.4682
|
|
November
2007(2)
|
|
|
7.4209
|
|
|
7.4582
|
|
|
7.3850
|
|
|
7.3850
|
|
December
2007(2)
|
|
|
7.3672
|
|
|
7.4070
|
|
|
7.2946
|
|
|
7.2946
|
|
January
2008(2)
|
|
|
7.2429
|
|
|
7.2946
|
|
|
7.1965
|
|
|
7.1965
|
|
February
2008(2)
|
|
|
7.1639
|
|
|
7.1973
|
|
|
7.1110
|
|
|
7.1110
|
|
March
2008(2)
|
|
|
7.07224
|
|
|
7.111
|
|
|
7.012
|
|
|
7.012
|
|
(1)
|
Annual
averages are calculated by averaging the rates on the last business
day of
each month during the relevant
period.
|
(2)
|
Monthly
average is calculated by averaging the daily rates during the relevant
period.
|
B.
Capitalization
and indebtedness.
Not
Applicable.
C. Reasons
for the offer and use of proceeds.
Not
Applicable.
D. Risk
factors.
The
following matters and other additional risks not presently known to us or that
we deem immaterial, may have a material adverse effect on our business,
financial condition, liquidity, results of operations or prospects, financial
or
otherwise. Reference to this cautionary statement in the context of a
forward-looking statement or statements shall be deemed to be a statement that
any one or more of the following factors may cause actual results to differ
materially from those in such forward-looking statement or
statements.
(a)
|
Risks
Associated with Our
Business
|
Risks
Related to Our Business
An
increase in the prices of raw materials will lead to increased costs and may
adversely affect our profit margins if we are unable to pass on such increases
in costs to our customers
The
total
cost of raw materials made up approximately 77.6%, 80.9% and 76.0% respectively,
of our cost of goods sold in 2005, 2006 and 2007. The main raw materials used
in
our production of BOPET film are polyethylene terephthalate (or PET) resin
and
additives, which respectively made up approximately 78.5% and 21.5% of our
total
cost of raw materials in the past three years.
The
PET
resin is currently used as a raw material in China’s textile industry, and the
market prices of PET resin may fluctuate due to changes in supply and demand
conditions in that industry. Any sudden shortage of supply, or significant
increase in demand, of PET resin and additives may result in higher market
prices and thereby increase our cost of sales. The prices of PET resin and
additives are, to a certain extent, affected by the price movement of crude
oil.
International
market prices for crude oil have been subject to wide swings in the last three
years, due in large part to the unstable situation in Middle East and pricing
increase agreed to among oil producing and consuming countries. However, the
price of our major raw materials, PET resin, which are widely used in the
textile industry in China, has not increased in line with the rising crude
oil
prices due to the dampened demand for PET resin from textile manufacturers
in
China from 2006 as a result of the anti-dumping policy exerted by the US and
European countries. There has been some increase in the cost of our raw
materials as a result of significant crude oil price spikes, and our ability
to
hedge against these fluctuations by either entering into long-term supply
contracts or otherwise offsetting our exposure to these commodity price
variations has been extremely limited. We currently have no hedging transactions
in place with respect to PET resin or any other petroleum product.
If
there
is a significant increase in the cost of our raw materials and we are unable
to
pass on such increase to our customers on a timely basis or at all, our profit
margins and results of operations will be adversely affected.
Entry
of new BOPET producers in the PRC may increase the supply of, and decrease
the
prices of, BOPET film in the industry, and hence lead to a decline in our profit
margins
We
believe that we are currently one of the few producers of BOPET film in the
PRC
with research and development capability and our past financial performance
is
attributable to our market position in the industry. Over time, there may be
new
entrants into our industry, whether as a result of increased access to the
production technology of BOPET film or otherwise. Accordingly, we may experience
increased competition and the entry of new BOPET producers will also lead to
an
increase in the industry supply of BOPET film resulting in more competitive
pricing. We believe that our major competitors in the BOPET manufacturing market
in the PRC are Dupont Hongji Films Foshan Co., Ltd, and Yihua Toray Polyester
Film Co., Ltd. We may have to price our products in response to competitive
market conditions and this may lead to a decline in our profit margins. In
the
event that we are unable to compete successfully or retain effective control
over the pricing of our products, our profit margins will decrease and, our
revenues and net income may also decrease.
In
addition, China has gradually lowered import tariffs and relaxed foreign
investment restrictions after its entry into the World Trade Organization in
December 2001. This can lead to increased competition from foreign companies
in
our industry, some of which are significantly larger and financially stronger
than us. If we fail to compete effectively with these companies in the future,
our current business and future growth potential would be adversely
affected.
A
significant portion of our revenue is derived from the flexible packaging
industry in the PRC
A
significant portion of our revenue is currently derived from the production
and
sale of BOPET film. Our BOPET film is largely used for the flexible packaging
industry, such as relating to the processed food, pharmaceutical products,
cosmetics, tobacco and alcohol. The demand for our BOPET film is therefore
indirectly affected by the demand for flexible packaging.
Any
decrease in the demand for our BOPET film will significantly affect our
financial performance. Although demand for our BOPET film for packaging of
processed food, pharmaceutical products, cosmetics, tobacco and alcohol has
gradually been increasing, any significant fall in the consumption of the
above-mentioned usages, could result in a decline in the sales of our products
and adversely impact our financial condition, business and
operation.
We
rely on key managerial and technical personnel and failure to attract or retain
such personnel may compromise our ability to develop new products and to
effectively carry on our research and development and other
efforts
Our
success to date has been largely attributable to the contributions of key
management and experienced personnel, particularly Xiaoan He, our Chairman
and
Chief Executive Officer, Bin Sun, our President, Xiaoming Wang, our Vice
President for Production, and Xiuyong Zhang, our Vice President for Finance.
We
have entered into service agreements with these individuals. The loss of the
services of Messrs. He, Sun, Wang, or Zhang, might impede the achievements
of
our development objectives and might damage the close business relationship
we
currently enjoy with some of our larger customers. Our continued success is
dependent, to a large extent, on our ability to attract or retain the services
of these key personnel. Except for Mr. He, we do not currently maintain any
other key man insurance for our directors or officers.
Dr.
Wenxun Sun, vice director of our R&D department, has been responsible for
our R&D department since 2007. Dr. Sun has experience in the BOPET film
industry for over ten years and has been working in our R&D department for
the past seven years. In January 2008, we appointed Mr. Hanyong Lee as a vice
president for Research & Development. If they didn’t effectively lead the
R&D team to research and develop new products and facilitate the marketing
process, or the Company is unable to receive their services continuously, or
the
Company is unable to recruit outstanding R&D personnel as a replacement,
this may have adverse affect on our ability and progress on new products
R&D, and may adversely affect our business results and market competitive
capability.
Marketability
of any of our new products is uncertain and low acceptance levels of any of
our
new products will adversely affect our revenue and
profitability
The
development of our products is based upon a complex technology, and requires
significant time and expertise in order to meet industry standards and
customers’ specifications. Although we have developed products that meet
customers’ requirements in the past, there is no assurance that any of our
research and development efforts will necessarily lead to any new or enhanced
products or generate sufficient market share to justify commercialization.
We
must continually improve our current products and develop and introduce new or
enhanced products that address the requirements of our customers and are
competitive in terms of functionality, performance, quality and price in order
to maintain and increase our market share. If our new products are unable to
gain market acceptance, we would be forced to write-off the related inventory
and would not be able to generate future revenue from our investment in research
and development. In such event, we would be unable to increase our market share
and achieve and sustain profitability. Our failure to further refine our
technology and develop and introduce new products attractive to the market
could
cause our products to become uncompetitive or obsolete, which could reduce
our
market share and cause our sales to decline.
The
circumstances under which we acquired ownership of our main productive assets
may jeopardize our ability to continue as an operating business
Substantially
all of our operating assets were acquired through two auction proceedings under
relevant PRC law. We acquired the Brückner production line in 2003 as a result
of a foreclosure proceeding enforcing an effective court judgment and the DMT
production in 2004 as a result of a commercial auction from a consigner who
obtained such assets through a bankruptcy proceeding. In the opinion of our
PRC
counsel, Concord & Partners, these proceedings are both valid under Chinese
auction and bankruptcy law based on certain factual assumptions. Our PRC
counsel’s opinion solely relates to the legal procedure of the auctions and is
based upon certain factual assumptions, written representations of the Company
and written reports of the auction company and other related parties. There
can
be no assurance that relevant authorities or creditors of the predecessor owner
of these assets will not challenge the effectiveness of these asset transfers
based upon the facts and circumstances of these transfers, despite the existence
of independent appraisals, and other facts and circumstances of the auctions
that cannot be verified by our PRC counsel. Taking into consideration the facts
known by our PRC counsel related to the auction of the Brückner production line
and the significant difference in the price paid for the DMT production line
at
the two bankruptcy auctions involved in our purchase of that asset and, assuming
the representations and reports received by our PRC counsel are true and correct
in all material respects, our PRC counsel is of the opinion that the auctions
of
the Brückner and DMT production lines were valid under PRC law and the
possibility of the creditors of Shandong Neo-Luck successfully exercising
recourse or claiming repayment with respect to our assets purchased in the
bankruptcy proceeding should be remote. However, should any such challenge
be
brought in China (or elsewhere) and prevail, we may incur substantial
liabilities and be required to pay substantial damages as a result of acquiring
these assets. Although we believe any such challenge is unlikely to lead to
the
forfeiture of the related assets, it could materially affect our ability to
continue operations.
On
June
25, 2007, we announced the investigation of three controlling shareholders,
Mr.
Jun Yin, Mr. Duo Wang, and Mr. Tongju Zhou, and on September 28, 2007, the
three
shareholders have been arrested, relating to the suspicion of the Crime of
Irregularities for Favoritism and to sell state-owned assets at low prices.
Mr.
Jun Yin is a 52.9% shareholder of us, and Mr. Tongju Zhou, a director of Fuwei
Films, together with Mr. Duo Wang, indirectly own 12.5% of us.
We
have, in the past, experienced and may, from time to time, experience negative
working capital and we face risks associated with debt financing (including
exposure to variation in interest rates)
Our
total
outstanding indebtedness, entirely comprising of short-term loans, as at
December 31, 2007 was RMB 188.0 million (US$25.8 million). We have pledged
property, plant and equipment and lease prepayments of RMB152.6 million as
security for RMB 152.6 million of outstanding indebtedness. Subsequently, we
renegotiated substantially all of our outstanding indebtedness resulting in
approximately RMB 148.6 million of
secured
indebtedness of the total outstanding. In the event that we default on all
or
any portion of this indebtedness, our lenders could foreclose on our assets.
In
the event that our assets are foreclosed upon, we will not be able to continue
to operate our business.
Our
obligations under our existing loans have been mainly met through the cash
flow
from our operations and our financing activities. We are subject to risks
normally associated with debt financing, including the risk of significant
increases in interest rates and the risk that our cash flow will be insufficient
to meet required payment of principal and interest. In the past, cash flow
from
operations has been sufficient to meet payment obligations and/or we have been
able to extend our borrowings. There is however, no assurance that we will
be
able to continue to do so in the future. We may also underestimate our capital
requirements and other expenditures or overestimate our future cash flows.
In
such event, we may consider additional bank loans, issuing bonds, or other
forms
of financing to satisfy our capital requirements. If any of the aforesaid events
occur and we are unable for any reason to raise additional capital, debt or
other financing to meet our working capital requirements, our business,
operating results, liquidity and financial position will be adversely
affected.
We
may lose our competitive advantage and our operations may suffer if we fail
to
prevent the loss or misappropriation of, or disputes over, our intellectual
property
We
have
applied for patents in respect of some of our processes, technologies and
systems used in our business and by the end of 2007, we have received four
patents from, and have three patent applications pending with, the PRC
authorities. We may not be able to successfully obtain the approvals of the
PRC
authorities for the pending patent applications. Furthermore, third parties
may
assert claims to our proprietary processes, technologies and systems. These
proprietary processes, technologies and systems are important to our business
as
they allow us to maintain our competitive edge over our
competitors.
Our
ability to compete in our markets and to achieve future revenue growth will
depend, in significant part, on our ability to protect our proprietary
technology and operate without infringing upon the intellectual property rights
of others. The legal regime in China for the protection of intellectual property
rights is still at its early stage of development. Intellectual property
protection became a national effort in China in 1979 when China adopted its
first statute on the protection of trademarks. Since then, China has adopted
its
Patent Law, Trademark Law and Copyright Law and promulgated related regulations
such as Regulation on Computer Software Protection, Regulation on the Protection
of Layout Designs of Integrated Circuits and Regulation on Internet Domain
Names. China has also acceded to various international treaties and conventions
in this area, such as the Paris Convention for the Protection of Industrial
Property, Patent Cooperation Treaty, Madrid Agreement and its Protocol
Concerning the International Registration of Marks. In addition, when China
became a party to the World Trade Organization in 2001, China amended many
of
its laws and regulations to comply with the Agreement on Trade-Related Aspects
of Intellectual Property Rights. Despite many laws and regulations promulgated
and other efforts made by China over the years with a view to tightening up
its
regulation and protection of intellectual property rights, private parties
may
not enjoy intellectual property rights in China to the same extent as they
would
in many Western countries, including the United States, and enforcement of
such
laws and regulations in China have not achieved the levels reached in those
countries. Both the administrative agencies and the court system in China are
not well-equipped to deal with violations or handle the nuances and complexities
between compliant technological innovation and non-compliant
infringement.
We
rely
on trade secrets and registered patents and trademarks to protect our
intellectual property. We have also entered into confidentiality agreements
with
our management and employees relating to our confidential proprietary
information. However, the protection of our intellectual properties may be
compromised as a result of:
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departure
of any of our management members or employees in possession of our
confidential proprietary
information;
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breach
by such departing management member or employee of his or her
confidentiality and non-disclosure undertaking to
us;
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expiration
of the protection period of our registered patents or
trademarks;
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infringement
by others of our proprietary technology and intellectual property
rights;
or
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refusal
by relevant regulatory authorities to approve our patent or trademark
applications.
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Any
of
these events or occurrences may reduce or eliminate any competitive advantage
we
have developed, causing us to lose sales or otherwise harm our business. There
is no assurance that the measures that we have put into place to protect our
intellectual property rights will be sufficient. As the number of patents,
trademarks, copyrights and other intellectual property rights in our industry
increases, and as the coverage of these rights and the functionality of the
products in the market further overlap, we believe that business entities in
our
industry may face more frequent infringement claims. Litigation to enforce
our
intellectual property rights could result in substantial costs and may not
be
successful. If we are not able to successfully defend our intellectual property
rights, we might lose rights to technology that we need to conduct and develop
our business. This may seriously harm our business, operating results and
financial condition, and enable our competitors to use our intellectual property
to compete against us.
Furthermore,
if third parties claim that our products infringe their patents or other
intellectual property rights, we might be required to devote substantial
resources to defending against such claims. If we are unsuccessful in defending
against such infringement claims, we may be required to pay damages, modify
our
products or suspend the production and sale of such products. We cannot
guarantee that we will be able to modify our products on commercially reasonable
terms.
We
may incur capital expenditures in the future in connection with our growth
plans
and therefore may require additional financing
To
expand
our business, we will need to increase our production capacities which will
require substantial capital expenditures. Such expenditures are likely to be
incurred in advance of any increase in sales. We cannot assure you that our
revenue will increase after such capital expenditures are incurred as this
will
depend on, among other factors, our ability to maintain or achieve high capacity
utilization rates. Any failure to increase our revenue after incurring capital
expenditures to expand production capacity will reduce our
profitability.
In
addition, we may need to obtain additional debt or equity financing to fund
our
capital expenditures. Additional equity financing may result in dilution to
our
shareholders. Additional debt financing may be required which, if obtained,
may:
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limit
our ability to pay dividends or require us to seek consents for the
payment of dividends;
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increase
our vulnerability to general adverse economic and industry
conditions;
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limit
our ability to pursue our growth
plan;
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require
us to dedicate a substantial portion of our cash flow from operations
as
payment for our debt, thereby reducing availability of our cash flow
to
fund capital expenditures, working capital and other general corporate
purposes; and/or
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limit
our flexibility in planning for, or reacting to, changes in our business
and our industry.
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We
cannot
assure you that we will be able to obtain the additional financing on terms
that
are acceptable to us, if at all.
A
disruption in the supply of utilities, fire or other calamity at our
manufacturing plant would disrupt production of our products and adversely
affect our sales
Our
BOPET
films are manufactured solely at our production facility located in Weifang
City
in the PRC. While we have not in the past experienced any calamities which
disrupted production, any disruption in the supply of utilities, in particular,
electricity or power supply or any outbreak of fire, flood or other calamity
resulting in significant damage at our facilities would severely affect our
production of BOPET film and as a result, we could incur substantial liabilities
that could reduce or eliminate the funds available for product development,
or
result in a loss of equipment and properties.
While
we
maintain insurance policies covering losses in respect of damage to our
properties, machinery and inventories of raw materials and products, we cannot
assure you that our insurance would be sufficient to cover all of our potential
losses.
We
have limited experience in operating outside mainland China, and failure to
achieve our overseas expansion strategy may have an adverse effect on our
business growth in the future
Our
future growth depends, to a considerable extent, on our ability to develop
both
the domestic and overseas markets. We are currently exploring new business
opportunities outside mainland China for our BOPET film products. We have a
limited number of customers outside China, mainly in Korea, the United States
and Europe, etc. However, we have limited experience in operating outside
mainland China, have limited experience with foreign regulatory environments
and
market practices, and cannot guarantee that we will be able to penetrate any
overseas market. In connection with our initial efforts to expand overseas,
we
have encountered many obstacles, including cultural and linguistic differences,
difficulties in keeping abreast of market, business and technical developments
in foreign jurisdictions, and political and social disturbances. Failure in
the
development of overseas markets may have an adverse effect on our business
growth in the future.
We
have encountered anti-dumping investigations in Korea and US. If we do not
get
approvals of the comparatively low anti-dumping tax rate in the final
anti-dumping arbitration judgment, our overseas expansion strategy in our future
business growth may be adversely affected.
The
Korean Trading Committee has rendered a preparatory decision on dumping
practices and their industrial injuries on March 26, 2008. The final judgment
will be issued within 75 days after the initial judgment announced. At the
end
of March, we received the initial anti-dumping judgment from Korean Trading
Committee. Fuwei has been provided with a comparatively low anti-dumping rate
of
6.13%, which is far lower than that of the other Companies that have been
investigated. US Department of Commerce has also officially initiated an
anti-dumping case on October 18, 2007 to investigate the PET film imported
from
China. During the investigation, we have put forward application for the
separate tax rate - which is the weighted-average tax rate on the companies
that
have been chosen to response to the claim compulsively, and submitted the
questionnaire.
On
December 26, 2007, US Department of Commerce has announced sample result and
Chinese enterprise - Dupont Hongji and Jiangsu Jinzhongda has elected as
enterprise forcefully defend against the case. Later, Jiangsu Jinzhongda has
withdrawal from such investigation. By now, Dupont Hongji is the only enterprise
forcefully defends against the case.
It
is
anticipated by US Department of Commerce that the initial judgment will be
announced on April 25, 2008. According to documents we submitted, we expect
that
we could succeed in getting the separate tax rate if there is no very special
condition occurred. However, if US Department of Commerce will not continue
the
sample investigation, the enterprises that ask for separate tax rate - like
Fuwei Films - will get the same tax rate as Dupont Hongji.
Our
primary source of funds of dividends and other distributions from our operating
subsidiary in China is subject to various legal and contractual restrictions
and
uncertainties, and our ability to pay dividends or make other distributions
to
our shareholders are negatively affected by those restrictions and
uncertainties
We
are a
holding company established in the Cayman Islands and conduct our core business
operations through our principal operating subsidiary, Shandong Fuwei, in China.
As a result, our profits available for distribution to our shareholders are
dependent on the profits available for distribution from Shandong Fuwei. If
Shandong Fuwei incurs debt on its own behalf, the debt instruments may restrict
its ability to pay dividends or make other distributions, which in turn would
limit our ability to pay dividends on our ordinary shares. Under the current
PRC
laws, because we are incorporated in the Cayman Islands, our PRC subsidiary,
Shandong Fuwei, is regarded as a wholly foreign-owned enterprise in China.
Although dividends paid by foreign invested enterprises, such as wholly
foreign-owned enterprises and Sino-foreign joint ventures, are not subject
to
any PRC corporate withholding tax, the PRC laws permit payment of dividends
only
out of net income as determined in accordance with PRC accounting standards
and
regulations. Determination of net income under PRC accounting standards and
regulations may differ from determination under U.S. GAAP in significant
respects, such as the use of different principles for recognition of revenues
and expenses. In addition, distribution of additional equity interests by our
PRC subsidiary, Shandong Fuwei, to us (which is credited as fully paid through
capitalizing its undistributed profits) requires additional approval of the
PRC
government due to an increase in our registered capital and total investment
in
Shandong Fuwei. Under the PRC laws, Shandong Fuwei, a wholly foreign-owned
enterprise, is required to set aside a portion of its net income each year
to
fund designated statutory reserve funds. These reserves are not distributable
as
cash dividends. As a result, our primary internal source of funds of dividend
payments from Shandong Fuwei is subject to these and other legal and contractual
restrictions and uncertainties, which in turn may limit or impair our ability
to
pay dividends to our shareholders. Moreover, any transfer of funds from us
to
Shandong Fuwei, either as a shareholder loan or as an increase in registered
capital, is subject to registration with or approval by PRC governmental
authorities. These limitations on the flow of funds between us and Shandong
Fuwei could restrict our ability to act in response to changing market
conditions.
Investor
confidence and the market price of our shares may be adversely impacted if
we or
our independent registered public accountants are unable to issue an unqualified
opinion on the adequacy of our internal controls over our financial reporting
beginning as of December 31, 2008, as required by Section 404 of the U.S.
Sarbanes-Oxley Act of 2002
As
a
public Company, we are required by section 404 of the Sarbanes-Oxley Act 2002
to
include a report of management on the Company’s internal controls over financial
reporting that contains our management’s assessment of the effectiveness of the
Company’s internal controls for the fiscal year ended December 31, 2007 and an
auditor’s attestation report on our internal control over financial reporting in
our annual report on Form 20-F for the fiscal year ending December 31, 2008.
Our
management may not conclude that our internal controls over financial reporting
are effective. Moreover, even if our management does conclude that our internal
controls over financial reporting are effective, if our independent registered
public accountants are not satisfied with our internal control structure and
procedures, the level at which our internal controls are documented, designed,
operated or reviewed, or if the independent registered public accountants
interpret the requirements, rules or regulations differently from us, they
may
not concur with our management’s assessment or may not issue a report that is
unqualified. Any of these possible outcomes could result in an adverse reaction
in the financial marketplace due to a loss of investor confidence in the
reliability of our financial statements, which could lead to a decline in the
market price of our shares.
In
2007,
we have implemented certain accounting policies and procedures relating to
financial reporting under US GAAP; we are in the process of training of our
financial personnel with US GAAP knowledge and experience as required to
implement the relevant policies and procedures; and we have implemented our
policies and procedures by the end of 2007. Furthermore, on April 25 2007,
we
have appointed Tullius Taylor Sartain & Sartain (“TTS&S”, a public
accounting firm registered with the PCAOB and based in Tulsa City, Oklahoma)
as
our consultant for purposes of Sarbanes-Oxley Act Section 404 compliance, which
we expect to improve our internal control over financial reporting. In 2007,
with TTS&S’s assistance, we have evaluated, tested and will report on the
effectiveness of our internal controls over financial reporting during the
year
ending December 31, 2007. We have documented, tested, and evaluated our internal
controls as required.
Despite
of this, some deficiencies were identified during our evaluation. During our
year end audit it is possible that our external auditor will identify
significant adjustments to our financial statements. If this happens, we will
have to re-consider the controls that failed to prevent or detect the
misstatements identified by the auditor. It is possible that we will identify
a
significant deficiency or material weakness in our internal controls over
financial reporting at that time.
Also,
there are certain controls that will not occur until close to the time of our
annual filing. We have tested these controls during our quarterly filings and
do
not anticipate any deficiencies to be identified in these processes. However,
it
is possible that significant deficiencies or material weaknesses may be
identified when we test certain financial reporting controls related to our
annual filing.
Risks
Relating to Business Operations in China
Changes
in China’s political and economic policies and conditions could cause a
substantial decline in the demand for our products and
services
Historically,
we derived substantially all of our revenues from a single market, mainland
China. We anticipate that mainland China will continue to be our primary
production and sales base in the near future and currently substantially all
of
our assets are located in China and all of our services are performed in China.
In 2005, 2006 and 2007, sales to our customers in the PRC accounted for
approximately 88%, 79% and 75.5% of our total revenue, respectively.
Accordingly, any significant slowdown in the PRC economy or decline in demand
for our products from our customers in the PRC will have an adverse effect
on
our business, financial condition and results of our operations. Furthermore,
any unfavorable changes in the social and political conditions of the PRC may
also adversely affect our business and operations.
Since
the
adoption of the “open door policy” in 1978 and the “socialist market economy” in
1993, the PRC government has been reforming and is expected to continue to
reform its economic and political systems. Any changes in the political and
economic policy of the PRC government may lead to changes in the laws and
regulations or the interpretation of the same, as well as changes in the foreign
exchange regulations, taxation and import and export restrictions, which may
in
turn adversely affect our financial performance. While the current policy of
the
PRC government seems to be one of imposing economic reform policies to encourage
foreign investments and greater economic decentralization, there is no assurance
that such a policy will continue to prevail in the future. We cannot make any
assurances that our operations would not be adversely affected should there
be
any policy changes.
Since
2007, the Chinese government has adjusted its macroeconomic-policies, and has
increased bank loan interest rates and bank deposit reserve rates, to control
the excess rapid investment growth, which results in the increase on financial
costs, and creates a decrease in loan availability from bank. Furthermore,
these
changes may slow down the growth of domestic market reliance on BOPET film,
and
increase intense market competition, and bring adverse effect on the corporate
financial result.
The
discontinuation of any preferential tax treatments or other incentives currently
available to us in the PRC could materially and adversely affect our business,
financial condition and results of operations
Our
subsidiary Shandong Fuwei was converted into a wholly foreign owned enterprise
in January 2005 and enjoys certain special or preferential tax treatments
regarding enterprise income tax in accordance with the “Income Tax Law of the
PRC for Enterprises with Foreign Investment and Foreign Enterprises.”
Accordingly, it is entitled to tax concessions whereby the profit for the first
two financial years beginning with the first profit-making year (after setting
off tax losses carried forward from prior years) is exempt from income tax
in
the PRC and the profit for each of the subsequent three financial years is
taxed
at 50% of the prevailing tax rates set by the relevant tax authorities. In
addition, as a “High Technology Enterprise,” Shandong Fuwei currently enjoys
enterprise income tax at an incentive rate of 15%. However, we cannot assure
you
that Shandong Fuwei will not lose its “High Technology Enterprise” status, and
even if Shandong Fuwei successfully maintains its “High Technology Enterprise”
status, its preferential tax treatment may be discontinued by the tax
authorities at their discretion or pursuant to any future changes in PRC tax
laws, rules and regulations. If that were to occur, Shandong Fuwei would be
subject to a 25% standard enterprise income tax rate under the current tax
laws
from January 1, 2008 under the new tax law described below, which would
significantly increase our effective tax rate and materially adversely affect
our operating results.
On
March
16, 2007, the National People’s Congress of the PRC passed the Enterprise Income
Tax Law of the People’s Republic of China, which law will take effect as of
January 1, 2008. In accordance with the new law, a unified enterprise income
tax
rate of 25% and unified tax deduction standards will be applied equally to
both
domestic-invested enterprises and foreign-invested enterprises such as Shandong
Fuwei. Enterprises established prior to March 16, 2007, eligible for
preferential tax treatment in accordance with the currently prevailing tax
laws
and administrative regulations shall, under the regulations of the State
Council, gradually become subject to the new tax rate over a five-year
transition period starting from the date of effectiveness of the new law. We
expect details of the transitional arrangement for the five-year period from
January 1, 2008 to December 31, 2012 applicable to enterprises approved for
establishment prior to March 16, 2007, such as Shandong Fuwei, to be set out
in
more detailed implementing rules to be adopted in the future. In addition,
certain qualifying “High Technology Enterprises” may still benefit from a
preferential tax rate of 15% under the new tax law if they meet the definition
of “Government Developing High Technology Enterprise” to be set forth in the
more detailed implementing rules when they are adopted. As a result, if Shandong
Fuwei qualifies as a “Government Developing High Technology Enterprise”, it will
continue to benefit from a preferential tax rate of 15%. Otherwise, Shandong
Fuwei’s applicable tax rate may increase from its existing rate of 15% to the
unified tax rate of 25% under the new tax law and in accordance with more
detailed implementing rules to be adopted in the future. Any increase in our
effective tax rate as a result of the above may adversely affect our operating
results.
We
are subject to environmental laws and regulations in the
PRC
We
are
subject to environmental laws and regulations in the PRC. Any failure by us
to
comply fully with such laws and regulations will result in us being subject
to
penalties and fines or being required to pay damages. Although we believe we
are
currently in compliance with the environmental regulations in all material
respects, any change in the regulations may require us to acquire equipment
or
incur additional capital expenditure or costs in order to comply with such
regulations. Our profits will be adversely affected if we are unable to pass
on
such additional costs to our customers.
Changes
in foreign exchange regulation in China may affect our ability to pay dividends
in foreign currencies
We
currently receive all of our operating revenues in Renminbi. Currently, Renminbi
is not a freely convertible currency and the restrictions on currency exchanges
in China may limit our ability to use revenues generated in Renminbi to fund
our
business activities outside China or to make dividends or other payments in
U.S.
dollars. The PRC government strictly regulates conversion of Renminbi into
foreign currencies. Over the years, the PRC government has significantly reduced
its control over routine foreign exchange transactions under current accounts,
including trade- and service-related foreign exchange transactions, foreign
debt
service and payment of dividends. In accordance with the existing foreign
exchange regulations in China, our PRC subsidiary, Shandong Fuwei, is able
to
pay dividends in foreign currencies, without prior approval from the PRC State
Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. The PRC government may, however, at its discretion,
restrict access in the future to foreign currencies for current account
transactions and prohibit us from converting our Renminbi-denominated earnings
into foreign currencies. If this occurs, our PRC subsidiary may not be able
to
pay us dividends in foreign currency without prior approval from SAFE. In
addition, conversion of Renminbi for most capital account items, including
direct investments, is still subject to government approval in China and
companies are required to open and maintain separate foreign exchange accounts
for capital account items. This restriction may limit our ability to invest
earnings of Shandong Fuwei.
Fluctuation
in the value of Renminbi could adversely affect the value of, and dividends
payable on, our shares in foreign currency terms
The
value
of Renminbi is subject to changes in PRC government policies and depends to
a
large extent on China’s domestic and international economic, financial and
political developments, as well as the currency’s supply and demand in the local
market. From 1994, the conversion of Renminbi into foreign currencies, including
the U.S. dollar, was based on exchange rates set and published daily by the
People’s Bank of China, the PRC central bank, based on the previous day’s
interbank foreign exchange market rates in China and exchange rates on the
world
financial markets. The official exchange rate for the conversion of Renminbi
into U.S. dollars remained stable until Renminbi was revalued in July 2005
and
allowed to fluctuate by reference to a basket of foreign currencies, including
the U.S. dollar. Under the new policy, Renminbi is permitted to fluctuate within
a band against a basket of foreign currencies. This change in policy resulted
initially in an approximately 2.0% appreciation in the value of Renminbi against
the U.S. dollar. There remains significant international pressure on the PRC
government to adopt a substantially more liberalized currency policy, which
could result in a further and more significant appreciation in the value of
Renminbi against the U.S. dollar. Further revaluations of Renminbi against
the
U.S. dollar may also occur in the future. Since our income and profits are
denominated in Renminbi, any appreciation of Renminbi would increase the value
of, and any dividends payable on, our shares in foreign currency terms.
Conversely, any depreciation of Renminbi would decrease the value of, and any
dividends payable on, our shares in foreign currency terms.
The
uncertain legal environment in China could limit the legal protections available
to you
The
PRC
legal system is a civil law system based on written statutes. Unlike the common
law system, the civil law system is a system in which decided legal cases have
little precedential value. In the late 1970s, the PRC government began to
promulgate a comprehensive system of laws and regulations to provide general
guidance on economic and business practices in China and to regulate foreign
investment. Our PRC subsidiary, Shandong Fuwei, is a wholly foreign-owned
enterprise and is subject to laws and regulations applicable to foreign
investment in China in general and laws and regulations applicable to wholly
foreign-owned enterprises in particular. China has made significant progress
in
the promulgation of laws and regulations dealing with economic matters such
as
corporate organization and governance, foreign investment, commerce, taxation
and trade. However, the promulgation of new laws, changes of existing laws
and
abrogation of local regulations by national laws may have a negative impact
on
our business and prospects. In addition, as these laws, regulations and legal
requirements are relatively recent and because of the limited volume of
published cases and their non-binding nature, the interpretation and enforcement
of these laws, regulations and legal requirements involve significant
uncertainties. These uncertainties could limit the legal protections available
to foreign investors, including you. For example, it is not clear if a PRC
court
would enforce in China a foreign court decision brought by you against us in
shareholders’ derivative actions. Moreover, the enforceability of contracts in
China, especially with the government, is relatively uncertain. If
counterparties repudiated our contracts or defaulted on their obligations,
we
might not have adequate remedies. Such uncertainties or inability to enforce
our
contracts could materially and adversely affect our revenues and
earnings.
Outbreak
of SARS, Avian Influenza or other epidemics could materially and adversely
affect our overall operations and results of
operations
From
March to July 2003, mainland China, Hong Kong, Singapore, Taiwan and some other
areas in Asia experienced an outbreak of a new and contagious form of atypical
pneumonia known as severe acute respiratory syndrome, or SARS. A recurrent
outbreak, or an outbreak of a similarly contagious disease, such as the H5N1
avian flu, could potentially disrupt our operations to the extent that any
one
of our employees is suspected of having the infection or that any of our
facilities is identified as a possible source of spreading the virus or disease.
We may be required to quarantine employees who are suspected of having an
infection. We may also be required to disinfect our facilities and therefore
suffer a suspension of production of indefinite duration. Any quarantine or
suspension of production at any of our facilities will adversely affect our
overall operations. In the recent two years, infectious disease like Avian
Influenza has occurred in high frequency worldwide, which would have adverse
effect on the consumption on fowl packaged foods, and have influence on our
products sales. In addition, any such outbreak will likely restrict the level
of
economic activities in the affected areas, which could lead to a substantial
decrease in our revenues accompanied by an increase in our costs, resulting
in
lower levels of net income.
Regulations
relating to offshore investment activities by PRC residents may limit our
ability to acquire PRC companies and adversely affect our business and
prospects
In
October 2005, SAFE issued a circular concerning foreign exchange regulations
on
investments by PRC residents in China through special purpose companies
incorporated overseas. The circular states that, if PRC residents use assets
or
equity interests in their domestic entities as capital contribution to establish
offshore companies or inject assets or equity interests of their PRC entities
into offshore companies to raise capital overseas, such PRC residents must
register with local SAFE branches with respect to their overseas investments
in
offshore companies and must also file amendments to their registrations if
their
offshore companies experience material events, such as changes in share capital,
share transfer, mergers and acquisitions, spin-off transactions or use of assets
in China to guarantee offshore obligations. Our existing shareholders have
completed the relevant SAFE registration procedures as currently
required.
As
it is
uncertain how SAFE will interpret or implement its circular, we cannot predict
how this circular and other SAFE circulars will affect our business operations
or future strategies. For example, we may be subject to a more stringent review
and approval process with respect to our foreign exchange activities, such
as
remittance of dividends and foreign currency-denominated borrowings, which
may
adversely affect our ability to provide funds to the Company to pay dividends
on
our ordinary shares.
Item
4. Information
on the Company
Overview
We
were
formed as a Cayman Island corporation in August 2004 under the name “Fuwei Films
(Holding) Co. Ltd.” Our corporate headquarters, principal place of business,
production and ancillary facilities occupy an area of approximately 74,251
square meters at No. 387 Dongming Road, Weifang Shandong, People’s Republic of
China, 261061. Our agent for service in the United States is CT Corporation
System located at 111 Eighth Avenue, NY, NY 10011.
We
develop, manufacture and distribute high quality plastic film using the biaxial
oriented stretch technique, otherwise known as BOPET film (biaxially oriented
polyethylene terephthalate). The film is light-weight, non-toxic, odorless,
transparent, glossy, temperature and moisture-resistant, and retains high
barrier resistance, making it suitable for many forms of flexible packaging,
printing, laminating, aluminum-plating and other applications. In addition,
it
retains high dielectric strength and volume resistance even at high
temperatures, which are essential qualities for electrical and electronic uses.
Our BOPET film is widely used in consumer based packaging (such as the food,
pharmaceutical, cosmetics, tobacco and alcohol industries), imaging (such as
masking film, printing plates and microfilms), electronics and electrical
industries (such as wire and cable wrap, capacitors and motor insulation),
as
well as in magnetic products (such as audio and video tapes). We market our
products under our brand name “Fuwei Films.” Our customers include some of the
world’s largest companies engaged in flexible packaging, including Alcan, Inc.
of Canada. We also export our products to packaging customers and distributors
in Korea, the US, and Europe, etc. The principal products we produce are
namely:
|
·
|
Printing
base film used in printing and
lamination;
|
|
·
|
Stamping
foil base film used for packaging of luxury items to increase the
aesthetic presentation of the item;
|
|
·
|
Metallization
film or aluminum plating base film used for vacuum aluminum plating
for
paper or flexible plastic
lamination;
|
|
·
|
Transfer
base film used for environmental friendly cigarettes and alcohol
packaging;
|
|
·
|
High-gloss
film used for aesthetically enhanced packaging
purposes;
|
|
·
|
Heat-sealable
film used for processed food packaging and other
applications;
|
|
·
|
Laser
holographic base film used as anti-counterfeit film for food, medicine,
cosmetics, cigarettes and alcohol packaging;
and
|
|
·
|
Matte
film used for printing, metallization, stamping and transfer
metallization.
|
Since
our
establishment, all of our revenues have been derived from the sales of BOPET
film, particularly our printing film, stamping film, metallization film,
transfer film and high-gloss film.
We
currently operate three production lines. The first is a Brückner 6.3 m (in
width) production line with an annual designed production capacity of 13,000
tons of BOPET film. The second is a DMT 6.7 m (in width) production line, which
began trial production of co-extruded BOPET or CBOPET in November 2003 and
has
an annual designed production capacity of 16,100 tons of BOPET/CBOPET film.
CBOPET is a type of BOPET film comprising two outer co-polymer layers made
from
materials different from materials used for the core layer. The third is a
leased production line that we leased in April 2007 with annual designed
production capacity of 8,000 tons. As of December 31, 2007, our manufacturing
operations had a total annual designed production capacity of 37,100 metric
tons
of BOPET/CBOPET film based upon 7,200 production hours per annum.
We
sell
most of our BOPET film products to customers in the flexible packaging industry
in the PRC in the eastern region of China. Our top five customers over the
three
years ended December 31, 2007 were Woo Sung Multi-film Co., Ltd., Kurz Stamping
Technology (Hefei) Co., Ltd., F&D Overseas Co., Ltd. Dare Technical Co.,
Ltd. Danyang Advance Packaging Material Subsidiary Company, Taileng Vacuum
Technology (Wuxi) Inc. Sales to Woo Sung Multi-film Co., Ltd. accounted for
0%,
0.9% and 8.5% in 2005, 2006 and 2007 respectively, while none of our other
customers accounted for more than 10% of our total revenues in any such year.
In
addition, we expect to continue to expand our product portfolio to exploit
opportunities in different market sectors, such as the production of thick
BOPET
film products to be used in electrical and electronics industries. The BOPET
products for high-end and special usage used by these industries are currently
imported and are costly. We began marketing and selling our products overseas
to
customers and distributors mainly in Korea, the United States and Europe, etc.
in the second half of 2004. In 2005, 2006 and 2007 our sales to our overseas
customers constituted approximately 12.1%, 21.0% and 24.5%, respectively, of
our
total revenue.
Competitive
Strengths
We
believe that our competitive strengths have enabled us over the years to meet
the needs of our customers and become a leading provider of BOPET film products
in China. We also believe that our strengths will continue to help us grow
in
the BOPET film industry in both China and internationally. Our principal
strengths include the following:
We
have the capability to expand our product range and markets by introducing
new
products required by customers
We
believe that our experience in the industry and personnel will enable us to
continue to provide new BOPET film products required by customers. While other
companies in our industry have also made significant advances in BOPET
technology and production, we have introduced a variety of BOPET film products
by developing and formulating our own blend of additives used in the production
of BOPET film. In August 2003, we entered into a collaboration agreement with
the Ha’rbin Institute of Technology, a leading university in the research of the
polymer material field in China, to undertake joint initiatives for BOPET and
other types of plastic films development. Under this collaboration agreement,
the rights to any new product and technological developments belong to us.
Our
research and development team was headed by Dr. Wenxun Sun before the end of
2007, and comprised a total of thirteen technicians. In the beginning of 2008,
we have recruited Mr. Hanyong Lee as Vice President of Research and Development,
who has rich experience in R&D on film products and management.
We
have an established brand name and are recognized for our product quality in
the
PRC
Although
our operating history is relatively short and our market presence is primarily
in the PRC, our products are marketed under our brand name, “Fuwei Films.” We
believe that this brand name is well known in the BOPET film market in the
PRC
and, although our selling prices sometimes exceed those of our competitors,
our
products have achieved significant market acceptance because of its high quality
and our superior customer service.
We
manufacture high quality products that can be customized for our
clients
We
implement and enforce stringent quality controls on our production process
and
products. As part of our production process, we formulate different blends
of
PET resins and additives to produce film with specific properties for our
customers based on their requirements. In the course of our business, we have
improved on our own formulations, which we believe have resulted in quality
products that meet our customers’ requirements. In the area of laser holographic
film, for example, we believe that we had the largest share of that market
in
the PRC in 2007 and 2006, based upon publicly available
information.
We
have an experienced management team with extensive industry
experience
Our
management team is led by our Chairman and Chief Executive Officer, Mr. Xiaoan
He who has more than ten years of related experience in the plastics and
packaging industries. He has been instrumental in our operations, contributing
his knowledge and experience in the industry. He has also established strong
relationships with our various customers and suppliers. He is assisted by our
executive officers, Mr. Bin Sun and, Mr. Xiaoming Wang who each has many years
of experience in industries related to the manufacturing and development of
products in the PRC.
Dr.
Wenxun Sun, vice director of our R&D department, has been responsible for
our R&D department since 2007. Dr. Sun has experience in the BOPET film
industry for over ten years and has been working in our R&D department for
the past seven years. Dr. Sun mainly focuses on R&D and experiments of new
products. In January 2008, we appointed Mr. Hanyong Lee as a vice president
for
Research & Development. Mr. Lee will analyze the BOPET specialty-film market
and develop the Company's R&D strategy to meet the demands of the market.
Our
technical expertise and production facilities are advanced in the
PRC
We
consider our technical expertise and production facilities to be highly advanced
with respect to the BOPET film industry in the PRC. Our first production line
was German made and manufactured by Brückner. It is a 6.3 m (in width)
production line with an annual designed production capacity of 13,000 tons
of
BOPET film. Our second production line was manufactured in France by DMT. It
is
a 6.7 m (in width) production line that has an annual designed production
capacity of 16,100 tons of BOPET/CBOPET film. We believe that both of our
production lines are state-of-the-art and enable us to provide high quality
products and to compete effectively with our competitors.
Awards
and Certifications
Our
subsidiary, Shandong Fuwei, has received the following awards and certificates,
each of which, we believe, is an indication of our achievements, the quality
of
our products and makes us more attractive to our potential customers and
therefore a more competitive company both in the local and international
markets:
Date
|
|
Award/Certificate
|
|
Issuing
Authority
|
November
2003(1)
|
|
High
Technology Enterprise Certificate
|
|
Shandong
Province Science and Technology Committee
|
|
|
|
|
|
September
2004(2)
|
|
ISO
9001:2000 Certificate
|
|
China
Certification Center for Quality Mark
|
|
|
|
|
|
January
2005(3)
|
|
Top
50 Industrial Enterprises in 2004
|
|
Weifang
City local government
|
|
|
|
|
|
July
2006(4)
|
|
ISO
14001
|
|
International
Organization for Standardization
|
|
|
|
|
|
December
2007
(5)
|
|
National
high-and -new tech enterprise
|
|
Ministry
of Science and Technology
|
|
|
|
|
|
January
2008 (6)
|
|
·
2007
Technology & Science
Advanced Enterprises in Weifang High and New Technology Industrial
Development Zone;
·
Advanced
Enterprise of Foreign Export;
·
Advanced
Enterprise in Promoting Foreign Investment;
·
Advanced
Enterprise for Tax Payment
·
2007
Advanced Enterprise in Safety
|
|
Management
Committee of Weifang High-and-new technological and industrial development
zone
|
(1) |
This
certificate was awarded by the local government in the Shandong Province
as recognition of our commitment to utilize new technology to provide
products to our customers and also awarded us a 15% beneficial tax
rate.
|
(2) |
ISO
9000 certification has become an international reference for quality
management requirements in business-to-business dealings. This
certification enables us to compete on many more markets around the
world
and provides our customers with assurances about our quality, safety
and
reliability.
|
(3)&
(6)
|
This
citation generates goodwill with the government officials in Weifang
city.
|
(4) |
After
strict examination and approval by China Environment United (Beijing)
Certification Center Co., Ltd (Environment Conformity Assessment
Center of
State Environment Protection Bureau), Fuwei Films (Shandong) Co.,
Ltd. has
successfully passed the ISO14001 Environmental Administration System
in
July 2006
|
(5) |
Fuwei
Films (Shandong) Co., Ltd. is originally regarded as High-and -new
Tech
Enterprise of Shandong Province and was awarded as National High-and
-new
Tech Enterprise in December 2007.
|
Business
Prospects
The
PRC’s
economy has been growing rapidly and is currently one of the world’s largest
economies. Our directors believe that the PRC economy will continue to grow
at
largely the same pace for the foreseeable future, and in line therewith, the
packaging industry in China. As BOPET film is a high-end flexible packaging
material that is relatively newer than other forms of flexible packaging
materials in the PRC, the uses, and therefore the market, for such material
will
continue to expand. As such we believe that the prospects for our industry
continue to be good.
In
addition, in line with the continued growth of the PRC economy, consumer
affluence and spending in the most populous country in the world are expected
to
increase correspondingly and lead to the expansion of the consumer goods
industry. As our products are used primarily in consumer-based industries such
as the food, pharmaceutical, cosmetics, tobacco and alcohol industries, our
directors believe the above factors will drive the growth in demand for our
products in the PRC.
We
have
identified thick BOPET film (typically with a thickness of between 50 to 200
microns), which is mainly used in the electrical and electronics industries,
as
a key market segment for potential growth. With the expansion of the electrical
and electronics industries in China, the market for thick BOPET film, used
particularly in the manufacturing of thin film transistor-liquid crystal display
(or TFT-LCD) screens, is also anticipated to increase significantly. Although
there are BOPET manufacturers in the PRC that are able to produce BOPET film
of
such thickness, they generally operate small-scale production facilities, and
we
believe that generally their product quality is not able to meet requirements
for high-end usage such as that for the manufacture of TFT-LCD screens. As
a
result, manufacturers of TFT-LCD screens requiring thick BOPET film generally
obtain their supply from overseas.
Business
Development Strategies
We
believe we have the ability to increase our sales and expand our markets. To
strengthen our market position, we intend to improve our product offerings.
As
manufacturers based in the PRC strive to reduce their costs in the face of
competition, we believe that there will be greater demand for locally-produced
BOPET film products to substitute more expensive imported products. We will
also
explore suitable opportunities to source for new customers and markets in the
PRC and overseas.
Our
future plans include:
Continue
construction of the new BOPET production line
We
have
commenced construction of a new production line capable of producing BOPET
film
that is between 50 to 200 microns thick on our current premises at Weifang
City,
PRC. The BOPET film produced using this new production line is targeted at
industrial use, for example, TFT-LCD screen films. We expect to penetrate into
the electrical and electronics industry with such new product offerings. Such
industries for high-end and special usage currently rely on expensive imports
as
PRC manufacturers do not currently possess such production capabilities. The
construction of the new BOPET production line has been postponed resulted from
the shortage of funds, we expect the construction of our new BOPET film
production line to be completed by the end of 2008. The total investment for
this new production line is expected to be approximately US$35 million.
Expansion
into overseas markets and promotion of our products in the
PRC
We
believe that the overseas markets hold significant potential for future growth.
We believe that our venture into the overseas markets which began in 2004 has
been successful. Although we are not focused on any particular overseas market,
we have identified North America as an area of potential growth. We plan to
leverage and expand our presence in overseas markets, particularly North
America, Japan and Southeast Asia through trade fairs and seminars that have
an
international and overseas focus. With our low manufacturing and labor costs
compared to overseas manufacturers, we believe that with high quality products
and competitive pricing, we can capture market share in the overseas market.
As
we believe that the domestic market for BOPET products (in particular, CBOPET
products) has significant potential for growth, we also intend to engage in
promotional activities in this area. Such activities include participating
in
relevant seminars and exhibitions, advertising and further developing customer
relationships.
Investment
in research and development
As
we
have a strong focus on research and development, we plan to continue to invest
substantially in this area. We have completed the construction of a small-scale
production line for the purpose of conducting research and development. Such
a
production line may also be utilized for commercial production as and when
the
need arises. This new production line will be primarily used for research and
development of multiple-layer BOPET films. Using a dedicated production line
of
a smaller production scale will enable us to save costs and reduce waste during
the process of development, particularly during test production. We also intend
to expand our research and development team by hiring additional research
personnel.
On
January 31, 2007, we obtained the first installment of a loan from the
industrial development fund of our local government. In 2006, the Weifang
government established the Hi & New Technology Project Industrial
Development Fund for the purpose of enhancing the independent innovation and
technical R&D ability of local enterprises, to support the development of
local Hi & New Technology enterprises. Our subsidiary, Shandong Fuwei,
previously obtained this grant, which will be used for the construction of
Fuwei
technology center trial production line project mentioned above.
Our
Products and Services
We
are
principally engaged in the manufacture and distribution of BOPET film. We
currently produce BOPET films from the three production lines, with an aggregate
annual designed production capacity of 37,100 metric tons with thicknesses
varying between 8 - 125 microns.
BOPET
is
a high quality plastic film manufactured using the biaxial oriented stretch
(transverse and machine direction) technique. Our advanced production process
improves the physical properties of the plastic film such as its tensile
strength, resistance to impact, resistance to tearing and malleability. The
high
dimensional stability of the film over a wide range of humidity and temperature
fulfills the basic requirements for flexible packaging. The film is
light-weight, non-toxic, odorless, transparent, glossy, moisture-resistant,
and
retains high barrier resistance, making it suitable for many forms of flexible
packaging, printing, laminating, aluminum-plating and other processes. In
addition, it retains high dielectric strength and volume resistance even at
high
temperatures, which are essential qualities for electrical and electronic uses.
The three-layer structure of CBOPET gives the film added properties which
enables us to develop high quality BOPET products.
BOPET
film has been widely used in the packaging, imaging (such as masking film,
printing plates and microfilms), electronics and electrical (such as wire and
cable wrap, capacitors and motor insulation) industries, as well as in magnetic
products (such as audio and video tapes). Due to its unique qualities, it is
suitable for application in the food, pharmaceutical, cosmetics, tobacco, and
alcohol industries and has become a popular choice as a flexible packaging
material in these industries in recent years.
We
market
our products under our brand name “Fuwei Films.” Our operations are based
primarily in Shandong Province, the PRC, where we manufacture our products
for
sale to customers engaged in flexible packaging businesses in the PRC, in
particular the eastern region. We also export our products to packaging
customers and distributors mainly in Korea, the US, and Europe,
etc.
Our
BOPET
film is mainly used in the flexible packaging industry for consumer products
such as those relating to processed foods, pharmaceutical products, cosmetics,
tobacco and alcohol. Our products may be sub-divided into five main categories
constituting the following percentages of our total revenue for each of the
twelve months ended 2005, 2006 and 2007.
Category
|
|
2005
|
|
2006
|
|
2007
|
|
Printing
film
|
|
|
29.9
|
%
|
|
21.8
|
%
|
|
18.6
|
%
|
Stamping
foil film
|
|
|
27.4
|
%
|
|
22.9
|
%
|
|
21.0
|
%
|
Metallization
film
|
|
|
11.5
|
%
|
|
8.0
|
%
|
|
6.8
|
%
|
Special
film
|
|
|
13.9
|
%
|
|
36.7
|
%
|
|
37.8
|
%
|
Base
film for other applications
|
|
|
17.3
|
%
|
|
10.7
|
%
|
|
15.8
|
%
|
The
above
categorizes BOPET film products by application.
Printing
film
This
is a
high transparency film that is corona treated on one side to provide excellent
adhesion to ink. This is primarily used in printing and lamination.
Stamping
foil film
This
is a
film that displays excellent thermal stability and tensile strength and is
used
in metallized film and laser stamping foil and transfer.
Metallization
film
This
is
an aluminum plating base film that displays good thermal stability and tensile
strength and provides good adhesion between film and aluminum layer. This is
mainly used for vacuum aluminum plating for paper or flexible plastic
lamination.
Special
film
We
mainly
produce the following types of special film:
|
·
|
High-gloss
film: Film with high levels of reflection approaching a mirror-like
surface, used for aesthetically-enhanced packaging
purposes.
|
|
·
|
Heat-sealable
film: Film with a three layer structure which is composed of a
heat-sealable surface and a core layer consisting of a homopolymer
of
polyester. The heat-sealable film is primarily sold for use in printing
and making heat sealable bags.
|
|
·
|
Laser
holographic base film: A directly embossable film with high transparency,
used as anti-counterfeit film and for aesthetics for food, medicine,
cosmetics, cigarette and alcoholic
packaging.
|
|
·
|
Matte
film: Film with single or double matte surface, achieved by adding
special
additive to the base polymer, used for printing, metallization, stamping
and transfer metallization.
|
Base
film for other applications
Base
films for other application are ordinary commodity polyester films with
applications other than the aforementioned usages.
Production
Our
operating subsidiary, Shandong Fuwei, currently operates three production lines.
The first is a Brückner 6.3 m (in width) production line with an annual designed
production capacity of 13,000 tons of BOPET film. The second is a DMT 6.7 m
(in
width) production line, which began trial production of CBOPET in November
2003
and has an annual designed production capacity of 16,100 tons of BOPET/CBOPET
film. In addition, we have leased a production line in April 2007 with annual
designed production capacity of 8,000 tons. As of December 31, 2007, Shandong
Fuwei has a total annual designed production capacity of 37,100 metric tons
of
BOPET/CBOPET film.
BOPET
film is manufactured from polyethylene terephthalate (PET) resin, which is
a
petrochemical product. BOPET film is produced by melting the granulated PET
resin and extruding it into a flat sheet. This sheet is stretched to 3.0 to
3.6
times its original length, and then horizontally to 3.6 times its width, before
being heat-set and finally wound into reels. The orientation process (stretching
during the application of heat) gives the film its mechanical strength, barrier
and optical properties (clarity and gloss). Our Brückner production line
comprises a single extruder which can produce single-layer BOPET film, whereas
our DMT production line comprises one main extruder and two co-extruders which
can produce CBOPET film comprising three layers, of which the core layer and
the
outer co-polymer layers are made of different materials. Depending on the
additives used, the films produced have varying physical and chemical
properties. The main steps of our manufacturing process involve:
Dosing
and Mixing
PET
resin
is dosed and mixed with relevant additives to give it its desired
characteristics. In the case of the production of our CBOPET film, the materials
are dosed and mixed separately for each of the core and outer
layers.
Extrusion/Co-extrusion
The
mixed
material is melted and plasticized to achieve the required homogenous state
with
the requisite characteristics and then it is filtered and transported to the
die
unit. Our DMT production line has one main extruder and two co-extruders to
allow us to produce CBOPET film.
Die
Casting
The
respective mixed materials are extruded from the die unit which produces a
flat
layered cast sheet and casted on the chill roll which is cooled by the pinning
system.
Machine
Direction Orientation (vertical stretching)
The
cast
sheet is then heated and stretched by machine direction before annealing the
cast sheet, which is a process of heat-setting so as to control the shrinkage
of
the sheet after the vertical stretching.
Transversal
Direction Orientation (horizontal stretching)
After
the
machine direction stretching, the cast sheet is horizontally stretched before
annealing again.
Pull
Roll Station
The
stretched sheet is trimmed and measured for thickness. For the production of
base film for printing, the surface is treated by corona treatment. Corona
treatment is the process which enables the BOPET film to become receptive to
printing. At the pull roll station, continuous feedback on the thickness of
the
BOPET film is also relayed back to the die unit which therefore ensures
consistency in the thickness of the BOPET film.
Winder
The
final
BOPET film is then wound up into metal rolls in the mill roll by the
winder.
Slitter
The
wound
BOPET film is then unwound from the metal rolls, divided to the requisite width
and length, and wound again into paper core for delivery to
customers.
Inventory
Management
Our
warehousing facilities are located in the Shandong Province, PRC. Our warehouses
are guarded by security personnel and loss of our inventory is covered under
our
insurance policies. As of December 31, 2007, our total inventories amounted
to
approximately RMB 41.7 million and our raw materials, work-in-progress, finished
goods and consumables and spare parts made up approximately 22.8%, 2.3%, 60.8%
and 14.1% of our inventories, respectively.
To
ensure
an accurate inventory record and to monitor our inventory aging, we conduct
monthly stock counts. We typically maintain sufficient raw materials for one
weeks’ production. For our finished goods, we typically manufacture such goods
upon our receipt of orders. We adopt a first-in-first-out method of inventory
control.
Our
inventory turnover periods (in days) for 2005, 2006 and 2007 were 30.2, 26.0
and
34.2, respectively. Inventory turnover is calculated as 365 days times inventory
at period/year end date divided by cost of sales in respect of the financial
period/year.
There
were no provisions for inventory obsolescence, inventory written off or
inventory written down to net realizable value in 2006 and 2007.
Manufacturing
Facilities and Utilization Rates
As
of
December 31, 2007, we have the following production lines:
Production
Line
|
|
Designed
Production Capacity
|
|
Estimated
Remaining Life Span
|
Brückner
Production Line
|
|
13,000
tons per annum
|
|
Approximately
9 years
|
DMT
Production Line
|
|
16,100
tons per annum
|
|
Approximately
16 years
|
Leased
Production Line
|
|
8,000
tons per annum
|
|
N/A
|
The
designed production capacity as given by the manufacturer is determined based
on
the assumption of the production of a specific mix of BOPET films of varying
thicknesses. Our Brückner and DMT production lines have been in use since 1996
and 2003, respectively. The production lines are depreciated on the
straight-line method over their respective estimated useful lives.
Our
approximate annual production volumes and the average annual utilization rates
for our facilities for 2005, 2006 and 2007, based on our estimated operational
production capacities were as follows.
|
|
Approximate
Annual Production Volume (tons)
|
|
Average
Annual Utilization Rate (%)
|
|
Production
Line
|
|
2005
|
|
2006
|
|
2007
|
|
2005
|
|
2006
|
|
2007
|
|
Brückner
Production Line
|
|
|
12,018
|
|
|
12,945
|
|
|
12,299
|
|
|
90.4
|
%
|
|
99.6
|
%
|
|
94.6
|
%
|
DMT
Production Line
|
|
|
11,689
|
|
|
14,669
|
|
|
12,378
|
|
|
32.9
|
%
|
|
91.1
|
%
|
|
76.9
|
%
|
Leased
Production Line
|
|
|
N/A
|
|
|
N/A
|
|
|
2,849
|
|
|
N/A
|
|
|
N/A
|
|
|
35.6
|
%
|
There
are
currently no regulatory requirements that may materially affect the utilization
rates of our property, plant and equipment. However, certain of the fixed assets
relating to our production lines have been mortgaged in respect of certain
of
our bank loans as described under “Properties” for further details.
Quality
Control
The
quality and reliability of our products are essential for our continued success.
We adopt strict measures for quality control in the entire production process
of
all our products, from the purchase and selection of raw materials, to each
stage of the manufacturing processes and to the final inspection of the end
products. Our quality control procedures were certified for ISO 9001:2000
compliance in September 2004.
As
of
December 31, 2007, our product inspection and quality control department was
comprised of 17 employees. We have one manager, one deputy manager, one
inspection supervisor, one quality control engineer, 12 end-product inspection
technicians and one raw materials inspector. Members of our quality control
departments have had relevant training in the area of quality control in
accordance with ISO 9001:2000 procedures. Our product inspection and quality
control department ensures that our production process, raw materials and end
products are of the quality to our customers’ satisfaction. Only products which
have been endorsed with our certified quality marks are delivered to our
customers.
Raw
Materials
We
adopt
and adhere to a set of quality inspection procedures and internal controls
for
the procurement, selection and quality checks of raw materials. Different types
of checks are utilized for different categories of raw materials. Our suppliers
are also required to meet our internal qualification criteria such as the
quality and pricing of their suppliers, their ability to meet our requirements
and timely delivery. We conduct batch inspections for raw materials delivered
to
us before they are accepted and stored in our warehouses. Defective materials
are returned to our suppliers for necessary corrective action to ensure that
such defects are not repeated. The raw materials are inspected again prior
to
selection for use in the production process.
Production
Process
We
have
established standard operational procedures and implementation rules for each
stage of the production process to ensure that our products comply with and
adhere to our stringent quality control standards and that our productivity
is
optimized. We only permit employees who have undergone and completed the
relevant training to work on our production lines. At each stage of the
production process, our inspectors check and ensure that our production process
complies with our quality standards, while our quality control department
monitors and ensures that our products-in-process and final products comply
with
our internal and international standards of quality control by carrying out
random sampling of the products.
End
Products
To
ensure
that our products fulfill our quality criteria established by our product
inspection and quality control department, our products undergo final quality
inspection upon production, labeling and packaging. Our product inspection
and
quality control department continues to monitor and ensure that our products
are
properly handled and stored in our warehouses. Prior to delivery to our
customers, our products are inspected one final time to ensure that they are
in
good condition and not damaged.
Maintenance
Our
maintenance engineers regularly maintain and repair our machinery and equipment
to ensure that they are in good working order and functioning properly. We
also
conduct periodic maintenance of all our machinery on a rotation basis. On an
average basis, we replace our filters every 40 days and this replacement process
takes about eight hours. We believe that because of our stringent maintenance
policies, we have not faced any major disruptions in our production processes
due to a breakdown or malfunction of our machinery and equipment. Our monthly
average downtime for 2007 (primarily for maintenance) was less than 1.5% of
our
monthly production time.
For
2007,
the rejection rates of our products were generally less than 0.66% of our total
production volume. Defective or inferior products which do not fulfill our
quality control standards are recycled. We ensure that these recycled products
meet our customers’ quality standards and requirements before selling them to
our customers.
New
Products
Through
years of R&D endeavors, we have introduced a variety of BOPET film products.
The following are some of the new products for which commercial production
has
begun:
Product
|
|
Achievement
|
Laser
holographic base film
|
|
Our
laser holographic base film is a directly embossable BOPET film,
ideal for
holographic applications. This film eliminates the need to coat and
prepare substrates for holographic embossing, thus reducing costs
for our
customers. It can be used for anti-counterfeit purposes and in packaging
to help enhance the aesthetic perception of food, medicine, cosmetics,
cigarettes and alcohol.
|
|
|
|
Single/double
surface matte film
|
|
Our
matte film is mainly used for aesthetically-enhanced packaging purposes.
Our ability to produce single-sided matte films offers significant
cost
savings for our customers as the non-matte side of the film may be
used
for other applications without further processing.
|
|
|
|
Anti-counterfeit
film
|
|
Our
anti-counterfeit film changes color under ultraviolet rays. Accordingly,
it is used for packaging branded products for anti-counterfeit
purposes.
|
|
|
|
Chemical
pretreated film
|
|
Our
film is pretreated in-line and coated, which results in a strong
adhesion
to ink and aluminum.
|
|
|
|
Heat-sealable
film
|
|
Heat-sealable
film is a three layers co-extruded biaxially oriented polyester film
with
an amorphous polyester heat seal layer. Available with corona treatment
on
the non-seal side to give improved adhesion to typical packaging
inks and
metallizing. It can not only provide permanent seals to itself for
package
bag, but also to APET, CPET, PETG, etc. Heat-sealable film can be
aluminized, printed and composite with other films. It is microwave
ovenable film for packaging refrigerated and frozen
foods.
|
|
|
|
High-gloss
film
|
|
By
using special raw chips and process, provides very high gloss, uniform
thickness, good mechanical properties, and surface smoothness, it can
be used under -70~200°C
for
packaging food, cigarettes, alcohol and laser embossing, holographic
anti-fake, metallic yarn, etc.
|
New
Product Development
We
have
also begun working on the following projects which are currently in the test
production phase:
Product
|
|
Objectives
|
|
Commercialization
Date
|
In-line
coating film for aluminized.
|
|
Give
improved adhesion to aluminized layer. Used for barrier bag packaging
tomato paste, chili sauce, etc.
|
|
October
2008
|
|
|
|
|
|
White
film
|
|
used
for print, composite, coating, etc. such as advertising
lamphouse, release film, reflector film.
|
|
December
2008
|
|
|
|
|
|
DFR
base film.
|
|
Used
for dry film photo resist.
|
|
August
2008
|
|
|
|
|
|
Soft
embossable film for holographic anti-fake
|
|
Can
be embossed before aluminized, used in holographic anti fake
area.
|
|
December.
2008
|
We
have
applied for patents in respect of some of our new processes, technologies and
systems used in our business and, as of December 31, 2007, these are pending
approvals from the relevant PRC authorities. We do not believe that the denial
of any of these applications will affect our ability to continue to manufacture
our products on a competitive basis. As our operations expand internationally,
we plan to evaluate the benefits of seeking international protection of our
intellectual property in relevant markets. In addition to our patent
applications, we seek to protect our proprietary know-how by subjecting our
employees to confidentiality, non-compete and non-solicitation obligations
via
our labor contracts with them and restricting access to our research and
development center and access to technology know-how to authorized
personnel.
Our
expenditure on research and development, excluding staff salaries and related
expenses, in 2005, 2006 and 2007 were as follows (000’s):
|
|
Year
Ended Dec.
31,
2005
|
|
Year
Ended Dec.
31, 2006
|
|
Year
Ended Dec.
31,
2007
|
|
|
|
RMB
|
|
Research
and Development Expenses
|
|
|
1,157
|
|
|
3,650
|
|
|
1,596
|
(1) |
(1)
|
In
addition to the above-mentioned Expenses in 2007 of RMB 1,596 million,
the
R&D capital expenditure is RMB 48.77 million.
|
We
view
research and development as an essential part of our business. In the face
of
increasing competition, we increased our expenditure on research and development
from 2005 to 2007, as we believe that higher investment in the equipment of
our
R&D center and in the development of new products and upgrading of existing
products will enhance our ability to compete.
Sales,
Marketing and Key Customers
As
of
December 31, 2007, our sales and marketing department comprised 18 employees
in
the domestic sales division and 5 employees in the international sales division.
Our sales and marketing department is responsible for our market penetration,
such as cultivating new customers and businesses, and market development such
as
developing existing accounts through better service support and customer
relationship. In addition, we also conduct market research of the flexible
packaging industry. Our management is actively involved in overseeing and
supervising our sales and marketing activities and often visit with our clients.
They have established and maintained close business relationship with our key
customers.
Customers
and Markets
Over
the
past years, we have established good working relationships with our customers
in
the flexible packaging industry. Our products are mainly used in the packaging
of consumer products such as those relating to processed foods, pharmaceutical
products, cosmetics, tobacco and alcohol.
The
majority of our domestic customers are located in the eastern region of the
PRC.
Our overseas customers are mostly based in Korea, the US and Europe, etc. In
2006, sales from our domestic and overseas customers constituted approximately
79% and 21%, respectively, of our annual revenue. In 2007, sales from our
overseas customers increased to approximately 24.5% of our total revenue.
Although
we are continuing to expand to international markets, as substantially all
of
our business is currently conducted in mainland China, we have not taken any
action outside mainland China to protect our intellectual property. Please
see
the section entitled “Research and development, patents and licenses” on page 43
for an explanation of the extent to which our products are dependent on
intellectual property protection.
The
following are our top five customers and their respective percentages of
contribution to our total revenue for each of the years ended December 31,
2005,
2006 and 2007:
|
|
Percentage
of Total Revenue (%)
|
|
Name
of Customer
|
|
2005
|
|
2006
|
|
2007
|
|
Woo
Sung Multi -film Co. Ltd.
|
|
|
0.004
|
|
|
0.9
|
|
|
8.5
|
|
Kurz
Stamping Technology (Hefei) Co., Ltd.
|
|
|
0.01
|
|
|
1.3
|
|
|
3.7
|
|
F&D
Overseas Co,.Ltd.
|
|
|
ó
|
|
|
2.1
|
|
|
3.2
|
|
Dare
Technical Co., Ltd. Danyang Advance Packaging Material Subsidiary
Company
|
|
|
3.6
|
|
|
2.4
|
|
|
3.1
|
|
Taileng
Vacum Technology (Wuxi) Inc.
|
|
|
0.3
|
|
|
0.6
|
|
|
3.1
|
|
Except
for Woo Sung Multi -film Co. Ltd., none of our customers accounted for more
than
5% of our total revenue in any of the previous three years.
None
of
our directors or principal shareholders or any of their affiliates has any
interest, direct or indirect, in any of our customers listed above.
Since
the
second half of 2004, we have begun the sale of specialized BOPET products.
These
products represented approximately 37.8% of our total revenue during the year
ended December 31, 2007.
Sales
Because
of our broad range of product offerings and customers, our sales and marketing
efforts are generally specific to a particular product, customer or geographic
region. Most of our products are sold by our own direct sales force. These
salespeople, including our management, maintain close relationships with
customers by paying visits to our customers from time to time to understand
their needs, and to obtain their feedback and suggestions. Our sales personnel
provide technical support to our customers when required. We also regularly
invite our existing and potential customers to our manufacturing facilities
for
visits as we believe that such visits enable our customers to better understand
our production processes and operations and also enhance our customers’
confidence in us.
We
adopt
a risk assessment model to our customer credit management system, and we offer
different credit terms to our customers based on criteria such as working
relationship, payment history, creditworthiness and their financial position.
We
offer our domestic customers credit terms of up to 30 - 45 days. Our
international sales are settled via T/T and letters of credit, which generally
have payment terms of between 30 and 60 days.
We
offer
a basic salary and commission package for our sales personnel. The scale for
the
commission payable is dependent on a number of factors such as sales completion
targets, debt collection, and credit rating of our customers, customer service
rendered, customer feedback and development of new customers.
Customer
Service
We
place
great emphasis on good, fast and effective pre-sales and after-sales customer
support services. As such, all our sales personnel have undergone stringent
training and have sufficient knowledge and understanding of our products. Our
sales personnel are responsible for coordinating and providing after-sales
services which include following through with our customers’ orders, maintaining
relationships with our customers, handling complaints effectively, ensuring
that
our customers’ needs are met and understanding the future needs of our
customers. In the second half of 2007, we have established the Japanese
Marketing office to provide better service to the Japanese
customers.
Marketing
We
have
the following marketing channels:
|
·
|
we
regularly attend trade fairs and exhibitions as we believe that they
serve
as a good platform for us to exhibit our new products and expand
our sales
network. In addition, participation in seminars, fairs and exhibitions
provides us with opportunities to network with our potential and
existing
customers and allows us to obtain up-to-date information on new products,
market trends and consumer demand;
|
|
·
|
referrals
from existing customers as well as business associates to generate
sales
opportunities; and
|
|
·
|
promotion
via our corporate website. Information on our products and services
are
also found on our corporate website www.fuweifilms.com which allows
us to
reach out to potential domestic and overseas
customers.
|
Our
sales
personnel also conduct PRC domestic and overseas market surveys and research.
The statistics, findings and information obtained from such surveys and research
are then passed on to our management and production department for their
analysis on the demand for and supply of our products, which allows them to
make
adjustments to our production and sales targets as well as our marketing
strategies.
Suppliers
and Raw Materials
Suppliers
We
purchase raw materials according to the relevant technical specifications and
production requirements. We select our suppliers based on the following
considerations and/or methods:
|
·
|
the
consistency of the quality of raw materials supplied and any relevant
certifications;
|
|
·
|
our
inspection of the supplier’s quality control
system;
|
|
·
|
positive
feedback from the supplier’s other
customers;
|
|
·
|
pricing
of raw materials;
|
|
·
|
timely
delivery of raw materials;
|
|
·
|
the
supplier’s financial position and
viability;
|
|
·
|
the
service provided by the supplier;
|
|
·
|
qualifying
suppliers by sample testing and batch purchasing of their raw materials;
and
|
|
·
|
annual
evaluation and review of our
suppliers.
|
The
following are the suppliers that supplied 5% or more of our purchases of raw
materials for each of the years ended December 31, 2005, 2006 and
2007:
|
|
|
|
Percentage
of total purchases (%)
|
|
Name
of Supplier
|
|
Supply
|
|
2005
|
|
2006
|
|
2007
|
|
Sinopec
Yizheng
|
|
|
PET
resin
|
|
|
66.6
|
|
|
58.5
|
|
|
46.4
|
|
Hyosung
Corporation
|
|
|
PET
resin
|
|
|
-
|
|
|
2.5
|
|
|
18.0
|
|
Yizheng
Tianbao Polyester Co., Ltd.
|
|
|
Additives
|
|
|
16.7
|
|
|
23.9
|
|
|
16.6
|
|
Jiangyin
Xingtai New Material Co., Ltd.
|
|
|
PET
resin
|
|
|
-
|
|
|
6.7
|
|
|
12.3
|
|
We
purchase the majority of our PET resin from Sinopec Yizheng as the quality
of
its supply of PET resin consistently meets our requirements. We currently have
an annual supply agreement with Sinopec Yizheng pursuant to which Sinopec
Yizheng has agreed to supply us fixed quantities of PET resin monthly at the
prevailing market prices, such supply agreement is renewable annually. We have
not entered into any long-term supply contracts with any other supplier. Our
purchases of raw materials are on a cash basis. While we believe that there
are
only a limited number of suppliers of PET resin that can consistently meet
our
quality and quantity requirements on a timely basis, there are numerous PET
resin suppliers in the PRC or overseas market from whom we may easily obtain
PET
resin, on a short-term basis, if necessary.
None
of
our directors or principal shareholders or any of their affiliates has any
interest, direct or indirect, in any of our major suppliers mentioned
above.
Raw
Materials
The
main
raw materials that we purchase from our suppliers are as follows:
|
|
Percentage
of Total Purchases (%)
|
|
Raw
Material
|
|
2005
|
|
2006
|
|
2007
|
|
Country
|
|
PET
resin
|
|
|
75.7
|
|
|
68.0
|
|
|
59.8
|
%
|
|
PRC
|
|
Additives
|
|
|
24.3
|
|
|
27.1
|
|
|
22.1
|
%
|
|
PRC
|
|
PET
resin
|
|
|
-
|
|
|
4.9
|
|
|
18.2
|
%
|
|
Korea
|
|
The
market prices of PET resin and additives may fluctuate due to changes in supply
and demand conditions. Any sudden shortage of supply, or significant increase
in
demand, of PET resin and additives may result in higher market prices and
thereby increase our costs of sales. The prices of PET resin and additives
are,
to a certain extent, affected by the price movement of crude oil. Even though
the price of the crude significantly increased globally in 2007, there is only
a
slight increase in prices of PET resin and additives during 2007.
As
we are
unable to predict the price movements of such raw materials and to minimize
the
impact of such price fluctuations on our cost, we generally purchase such raw
materials in quantities sufficient for our production process for approximately
one week. We may also adjust the prices of our end products, when appropriate,
and pass limited cost increases to our customers.
Competition
We
face
intense competition in the PRC plastic film industry. We believe that there
are
currently many plastic film manufacturers in the PRC and we expect further
entrants into this market in the future. Among the flexible packaging
industries, in particular those involving packaging of processed food and
pharmaceutical products, the primary types of plastic films in the packaging
products include BOPET, Biaxially oriented polyester (BOPP); and Biaxially
oriented polyamide (BOPA).
The
following table gives a general comparison of the key differences in the
technical specifications and usage of the above types of plastic
films.
Comparison
of BOPP Film, BOPET Film and BOPA Film1
Features
|
|
BOPP
|
|
BOPET
|
|
BOPA
|
Water
vapor barrier
|
|
Excellent
|
|
Fair
|
|
Poor
|
|
|
|
|
|
|
|
Gas
barrier properties
|
|
Poor
|
|
Excellent
|
|
Excellent
|
|
|
|
|
|
|
|
Break
down voltage
|
|
Poor
|
|
Excellent
|
|
Excellent
|
|
|
|
|
|
|
|
Machine-ability
|
|
Fair
|
|
Excellent
|
|
Excellent
|
|
|
|
|
|
|
|
Print-ability
|
|
Fair
|
|
Excellent
|
|
Fair
|
|
|
|
|
|
|
|
Suitability
for Metallizing
|
|
Poor
|
|
Excellent
|
|
Fair
|
|
|
|
|
|
|
|
Density
(gm/cc)
|
|
Low
(0.91)
|
|
High
(1.39)
|
|
Medium
(1.15)
|
|
|
|
|
|
|
|
Tensile
strength
|
|
Poor
|
|
Excellent
|
|
Excellent
|
The
production of BOPET film in the PRC presents high barriers to entry such as
requiring a large capital investment to acquire or manufacture a production
line
(approximately US$30 million) and to support productive research and development
of new products, and the need for the services of experienced management and
personnel with technical expertise. We believe that we are one of the few BOPET
film manufacturers in the PRC with research and development capabilities and
that these barriers to entry have enabled us to maintain our overall competitive
position in the PRC BOPET film market.
1 |
This
comparison is based on the book of Biaxially Oriented Plastics
Film,
edited by Yanping Yin and published by China Chemical Press in
August
1999.
|
We
believe that the major competitive factors in our industry include:
|
·
|
research
and development capability;
|
|
·
|
quality
and reliability of products;
|
|
·
|
technical/manufacturing
capability; and
|
We
believe that our major competitors in BOPET manufacturing are
currently:
|
·
|
Dupont
Hongji Films Foshan Co., Ltd;
|
|
·
|
Yihua
Toray Polyester Film Co., Ltd.
|
We
believe that we have established a good reputation and management track record
as a manufacturer of BOPET film and are able to offer quality
products.
C. Organizational
structure.
The
following table set forth the details of our subsidiaries as at the date of
this
Annual Report:
Name
|
|
Country
of Incorporation
|
|
Ownerships
Interests
|
|
Direct
Parent
|
Fuwei
Films (Shandong) Co., Ltd.
|
|
China
|
|
100%
wholly owned by Direct Parent
|
|
Fuwei
Films (BVI) Co. Ltd.
|
|
|
|
|
|
|
|
Fuwei
(BVI) Co., Ltd.
|
|
British
Virgin Islands
|
|
100%
wholly owned by Direct Parent
|
|
Fuwei
Films (Holdings) Co. Ltd.
|
D.
Property, plant and equipment.
Our
corporate headquarters and production and ancillary facilities occupy an area
of
approximately 74,251 square meters in Weifang City, Shandong Province. The
land
at our facilities is covered by land use rights held by us. The land use rights
for the land upon which our buildings and facilities are located have terms
of
50 years, the earliest of which expires in November 2050. All of our research
and development, manufacturing, warehousing and administrative functions are
conducted at our corporate headquarters. The total gross floor area of
production and other facilities owned by us is approximately 29,808 square
meters. We own all the buildings and facilities on the premises. Most of our
land use rights, office buildings and two facilities in operation have been
mortgaged to a bank in the PRC for loans totaling RMB 152.6 million.
Additionally, the workshop area of the leased production line is 9,310 square
meters (including warehouse).
We
are in
the process of constructing our new production line located in Weifang Hi &
New Technology Development Zone. We anticipate that this new production line
will produce BOPET film that is between 50 to 200 microns thick. The BOPET
film
produced using this new production line is targeted at industrial use, for
example, TFT-LCD screen films. We expect the construction of this new BOPET
film
production line will be completed by the end of 2008, if the fund raising for
the shortage of investment for this project will be available in first half
of
2008.
Item
4 A. Unsolved Staff Comments
None.
Item
5. Operating
and Financial Review and Prospects
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 in conjunction with our consolidated financial statements
included in this Annual Report beginning on page F-1. The consolidated financial
statements have been prepared in accordance with U.S. GAAP. The following
discussion and analysis contain forward-looking statements that involve risks
and uncertainties.
Overview
We
develop, manufacture and distribute high quality plastic film using the biaxial
oriented stretch technique, otherwise known as BOPET film. Since the
establishment of our predecessor company in 2003, all of our revenues have
been
derived from the sales of BOPET film. We sell most of our BOPET film products
to
domestic customers in the flexible packaging industry. We established an
international sales division in June 2004 and have been selling our products
into overseas markets, most notably Korea the US, and Europe, etc.
Our
Operating History and Corporate Structure
The
diagram below illustrates our corporate structure:
Shandong
Fuwei, our PRC operating subsidiary, was formed on January 28, 2003, as a
Sino-foreign equity joint venture under the name Weifang Fuwei Plastic Co.,
Ltd.
In July 2003, this company began production of BOPET film, initially renting
the
necessary fixed assets from Shandong Neo-Luck, a company involved in BOPET
film
production for which Mr. Xiaoming Wang, our current executive officer, served
as
executive officer at the time.
Shandong
Fuwei subsequently acquired these fixed assets through two auction proceedings,
the first in October of 2003 and the second in December 2004. At the first
auction proceeding in October 2003, Shandong Fuwei acquired assets related
to
the Brückner production line that it had been renting from Shandong Neo-Luck.
This line had been previously mortgaged by Shandong Neo-Luck to the Bank of
China, Weifang city branch as security for several loans extended to Shandong
Neo-Luck’s affiliates. When these loans went into default, the Bank of China
brought a series of legal actions in Weifang Municipal People’s Court that
resulted in the assets securing the loans being sold at public auction.
Following its successful bid at auction, on October 9, 2003, Shandong Fuwei
acquired the Brückner production line (with an appraised value of approximately
RMB 169 million) for RMB 156 million.
In
November 2003, Shandong Fuwei’s shares were sold to Shenghong Group Co., Ltd.
(“Shenghong Group”) and Shandong Baorui for an aggregate consideration of RMB
98.2 million. Tongju Zhou, a former director of the Company, and Duo Wang each
indirectly own 50% of Easebright Investments Limited (“Easebright”), one of our
principal shareholders, and are both officers and directors of Shandong Baorui.
Jun Yin and Duo Wang own 17.5% and 4.6%, respectively, of Shandong Baorui.
In
2004, Messrs. Zhou and Wang, along with Jun Yin established several offshore
holding in the British Virgin Islands and the Cayman Islands to acquire and
hold
these shares. In October 2004, Fuwei (BVI) entered into a sale and purchase
agreement with Shenghong Group and Shandong Baorui pursuant to which Fuwei
(BVI)
acquired the respective equity interest of Shenghong Group and Shandong Baorui
in Shandong Fuwei for an aggregate consideration of RMB 91 million. Shandong
Fuwei thereafter became a wholly-owned subsidiary of Fuwei (BVI) and was
converted into a wholly-foreign owned enterprise pursuant to PRC law.
As
a
result of its ongoing financial difficulties, Shandong Neo-Luck was declared
bankrupt by the Weifang Municipal People’s Court in the PRC on September 24,
2004. Prior to the bankruptcy, Shandong Neo-Luck’s then major operating asset,
the DMT production line, had been pledged by Shandong Neo-Luck to Weifang City
Commercial Bank. When Shandong Neo-Luck was declared bankrupt, the Shandong
Branch of the Bank of China seized the production line by order of the Qingdao
Intermediate People’s Court and the Qingdao Southern District People’s Court
while the Weifang Branch of Bank of Communications did so through Weifang
Intermediate People’s Court. As such, the effectiveness of the pledge in favor
of Weifang City Commercial Bank was under dispute. Subsequently, pursuant to
the
decision from Weifang Intermediate People’s Court, Weifang City Commercial Bank
ranked senior in terms of the right of claims.
The
pledged DMT production line was put up for public auction by the Shandong
Neo-Luck liquidation committee on October 22, 2004. In view of the above
complexities, the auction was deemed to be tremendously risky at that time,
and
therefore, our PRC operating subsidiary did not directly participate in the
first auction, which began with a bid price of approximately RMB 53 million
by
reference to an independent valuation performed on a forced sale basis. However,
due to the potential tremendous risk involved, the auction had been withdrawn
twice and the starting bid price had been further reduced to approximately
RMB
34 million and was finally purchased by Beijing Baorui, a company indirectly
controlled by Shandong Baorui. When the DMT production line was put for public
auction by Beijing Baorui three months later, our PRC operating subsidiary
purchased it for approximately RMB 119 million, which was supported by an
independent valuation performed on a going concern basis. We considered the
arrangement to have the DMT production line acquired through Beijing Baorui
through the first auction as an effective way to minimize the risk associated
with the uncertainties arising from the bankruptcy of Shandong Neo-Luck. The
price difference of approximately RMB 85 million represented a risk premium
paid
to Beijing Baorui, which bore the ultimate risks of recourse from creditors
of
Shandong Neo-Luck.
We
have
obtained an opinion of PRC counsel with respect to the validity of the auction
proceedings under PRC law, although you should read the description of the
opinion set forth under the title “Risk
Factors — The circumstances under which we acquired ownership of our main
productive assets may jeopardize our ability to continue as an operating
business.”
Key
Factors Affecting Our Results of Operations
The
following are key factors that affect our financial condition and results of
operations and we believe them to be important to the understanding of our
business:
Raw
Material Prices
During
the period from the years ended 2005, 2006 and 2007, the total cost of raw
materials made up approximately 77.6%, 80.9% and 76.0% of our cost of goods
sold, respectively. The primary raw materials used in our production of BOPET
film are polyethylene terephthalate (or PET) resin and additives, which made
up
approximately 78.5%, and 21.5% of our total cost of raw materials in 2007.
PET
resin trades as a commodity and its market price is influenced significantly
by
global energy prices, including the price of crude oil. In addition, PET resin
is also largely used in the textile industry and accordingly the demand from
that industry will also affect the price of PET resin.
Although
we try to pass on any increase in our raw material costs to our customers,
and
have generally been able to pass limited certain increases in recent years
on to
them, we are occasionally constrained in this regard by industry practice and
preexisting obligations. We obtain a significant amount of the PET resin used
at
our facilities from one supplier, who has agreed to supply us fixed quantities
of PET resin monthly at the prevailing market price. We have not engaged in
any
hedging transactions to limit our exposure to fluctuations in the market prices
of these raw materials or their components. We believe that, there are
sufficient alternative suppliers of PET resin if our existing suppliers are
unable to supply us PET resin in the amounts or in the time frame we may
require.
Prices
of Our Products
Our
BOPET
film products generally fall into two categories: commodity products and
specialty products. The price of commodity products, such as our printing,
stamping foil and metallization films, is typically driven by supply and demand
conditions in the market. Our specialty products, such as our laser holographic
based film, and our matte and high-gloss films, are slightly as affected by
market conditions and thus we have more control over setting the prices for
these products.
As
selling prices are generally higher for those types of BOPET film products
which
require higher technical expertise, our revenue will be affected, to certain
extent, by our product mix. Our product mix is dependent on, inter
alia,
our
production facilities. Presently, our Brückner production line is capable of
producing single-layer BOPET film while our DMT production line is capable
of
producing both single-layer and three-layer BOPET films.
Demand
for Our Products
Our
BOPET
film products are mostly sold to customers in the flexible packaging industry
for consumer products such as processed foods, pharmaceutical products,
cosmetics, tobacco and alcohol. In the fiscal years ended December 31, 2005,
2006 and 2007, approximately 87.9%, 79% and 75.5%, respectively, of our total
revenue was derived from the PRC. The demand for our products is therefore,
to a
large extent, affected by the general economic conditions in the PRC. A
significant improvement in the economic environment in the PRC will likely
improve consumer spending, increase the demand for our customers’ products and
consequently increase the demand for our BOPET film.
We
have
been able to expand our product range and markets by introducing new products
required by customers. We believe that our technical expertise is important
in
introducing products that are in demand.
Production
Capacity and Utilization Rates
Our
sales
volume is limited by our operational annual production capacity.
As
we
grow our business in the future, our ability to fulfill more and larger orders
will be dependent on our ability to increase our production capacity. As our
business is capital-intensive, our ability to expand our production capacity
will depend on, inter
alia,
the
availability of capital to meet our needs of expansion or upgrading of
production lines.
Competition
We
believe that we are currently one of the few producers of BOPET film in the
PRC
with research and development capability. Our past financial performance is
attributable to our market position in the industry. Over time, there may be
new
entrants into our industry. We believe that our major competitors in the BOPET
manufacturing market in the PRC are Dupont Hongji Films Foshan Co., Ltd, and
Yihua Toray Polyester Film Co., Ltd.
Our
ability to enhance existing products, introduce new products to meet customers’
demand, deliver quality products to our customers and maintain our established
industry reputation will affect our competitiveness and our market
position.
Our
ability to compete against new and existing competitors to maintain or improve
our market position and secure orders will affect our revenue and financial
performance.
Description
of Certain Statements of Income Line Items
Revenues
Revenue
from sale of our domestic BOPET film products is recognized when significant
risks and rewards of ownership have been transferred to the buyer. No revenue
is
recognized if there are significant uncertainties regarding recovery of the
consideration due, associated costs or the possible return of goods, or when
the
amount of revenue and costs incurred or to be incurred in respect of the
transaction cannot be measured reliably. In respect of our overseas sales,
we
ship directly to the destinations of our overseas customers and our revenue
is
recognized at the time when we receive customs clearance of our exports. Most
of
our overseas sales were conducted on a Cost, Insurance and Freight (or “CIF”)
basis, meaning that we pay the costs and freight necessary to get the products
to the port of destination, and the risk of loss is transferred from us to
the
buyer when the goods pass the ship’s rail at the port of destination. In
addition, we have to procure marine insurance against the buyer’s risk of loss
of damage to the goods during the carriage. Most of our sales invoices are
denominated in the Renminbi Yuan, although certain of our overseas sales are
denominated in US dollars.
Cost
of Goods Sold
Our
cost
of goods sold comprises mainly materials costs, factory overheads, packaging
materials and direct labor. The breakdown of our cost of goods sold in
percentage is as follows:
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
Dec.
31,
|
|
Dec.
31,
|
|
Dec.
31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Materials
costs
|
|
|
77.6
|
%
|
|
80.9
|
%
|
|
80.9
|
%
|
Factory
overhead
|
|
|
18.8
|
%
|
|
15.9
|
%
|
|
15.5
|
%
|
Packaging
materials
|
|
|
2.8
|
%
|
|
2.6
|
%
|
|
2.7
|
%
|
Direct
labor
|
|
|
0.8
|
%
|
|
0.6
|
%
|
|
0.9
|
%
|
Material
Costs
As
noted
above, the raw materials used in our BOPET film production are PET resin and
additives, which made up approximately 78.5% and 21.5%, respectively of our
total materials costs in 2007.
Factory
Overhead
For
periods as of December 31, 2007, factory overhead comprises primarily of
depreciation, electricity and water charges, and repair and maintenance of
our
machinery and equipment. In 2007, the repair and maintenance of our machinery
and equipment are RMB 3.77 million, accounting for 1.1% of Cost of Goods Sold.
Packaging
Materials
Our
packaging materials comprise, among others, packaging pallets and carton boxes,
used for the packaging of our BOPET film products for delivery to customers.
Generally, our unit cost of packaging materials does not fluctuate significantly
and our total costs for packaging materials typically vary in line with our
sales volume.
Direct
Labor
Direct
labor cost includes salaries, wages, bonuses and other payments to our employees
in the PRC who are involved in the production of our products. The main factors
affecting our direct labor cost are the demands and supply of semi-skilled
labor
and the implementation or changes of any new government policies or laws
relating to employment such as defined contribution plans stipulated by the
PRC
municipal government.
Operating
Expenses
Our
operating expenses are comprised of administrative expenses, distribution
expenses and other operating expense.
Our
administrative expenses are comprised mainly of allowance for doubtful trade
receivables, administrative staff salaries and related welfare costs,
entertainment expenses, depreciation charges of office equipment, furniture
and
fixtures, amortization charges relating to our trademark and land use rights,
professional fees, government duties and fees, insurance expenses, rental
expenses, travel expenses, office expenses, research and development expenses,
and other miscellaneous expenses.
Our
distribution expenses are comprised mainly of freight costs, travel expenses,
selling and promotion expenses as well as salaries, allowances and welfare
benefits paid to our sales and marketing personnel.
Our
gross
margins may not be comparable to those of other entities, since some entities
include all of the costs related to their distribution network in cost of goods
sold.
Other
operating expenses are comprised mainly of loss on disposal of property, plant
and equipment and other miscellaneous expenses.
Finance
Costs
Finance
costs are comprised mainly of interest expense relating to our loans and
interest paid on discounting outstanding accounts receivable.
Income
Tax Expense
Shandong
Fuwei has been granted preferential tax treatment by the Tax Bureau of the
PRC.
According to the PRC Income Tax Law and various approval documents issued by
the
Tax Bureau, Shandong Fuwei’s profit is taxed at a rate of 7.5%.
For
the
period from January 28, 2003 to December 31, 2004, Shandong Fuwei was granted
certain tax relief under which it was exempted from PRC income tax. As of
January 2005, Shandong Fuwei has been a wholly foreign-owned enterprise under
the laws of the PRC. Accordingly, Shandong Fuwei is entitled to tax concessions
whereby the profit for the first two financial years beginning with the first
profit-making year (after setting off tax losses carried forward from prior
years) is exempt from income tax in the PRC and the profit for each of the
subsequent three financial years is taxed at 50% of the prevailing tax rates
set
by the relevant tax authorities.
On
March
16, 2007, the National People’s Congress of the PRC passed the Enterprise Income
Tax Law of the People’s Republic of China, which law will take effect as of
January 1, 2008 (the “New Tax Law”). Under the New Tax Law, domestic enterprises
and foreign-invested enterprises will generally become subject to a unified
enterprise income tax rate of 25%, except that enterprises incorporated prior
to
March 16, 2007 may continue to enjoy existing preferential tax treatments until
January 1, 2013. According to the New Tax Law, if Shandong Fuwei continues
to
maintain its high-tech enterprise status, Shandong Fuwei will be subject to
enjoy the same preferential tax rate of 15%, otherwise, Shandong Fuwei will
be
subject to the increased 25% unified enterprise income tax rate..
Inflation
Inflation
in the PRC has not had any material impact on our business in 2005, 2006 and
2007. But since 2007, the increase in raw materials and energy in China has
resulted in the increase of our costs, e.g. raw materials costs, the freight
costs and packaging costs, meanwhile, Chinese government has required increasing
salaries of the employees to a certain level, resulting in the increase of
our
labor costs in 2007 to a certain level. According to the National Bureau of
Statistics of China, the change in the consumer price index in China was 1.8%
and 1.5%, 4.8% in 2005, 2006 and 2007, respectively.
Critical
Accounting Policies
We
prepare our financial statements in accordance with U.S. GAAP, which requires
us
to make estimates and assumptions that affect the reported amounts of our assets
and liabilities, to disclose contingent assets and liabilities on the date
of
the financial statements, and to disclose the reported amounts of revenues
and
expenses incurred during the financial reporting period. We continue to evaluate
these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that
we
believe to be reasonable under the circumstances. We rely on these evaluations
as the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Since the use
of
estimates is an integral component of the financial reporting process, actual
results could differ from those estimates. Some of our accounting policies
require higher degrees of judgment than others in their application. We consider
the policies discussed below to be critical to an understanding of our financial
statements as their application assists management in making their business
decisions.
Goodwill
Impairment.
Goodwill is tested for impairment at least annually based on a two-step
approach. The first step is conducted by comparing the fair value of each
reporting unit to its carrying amount, including goodwill. If the fair value
of
a reporting unit is less than its carrying amount, the second step requires
a
comparison of the implied fair value of goodwill to its carrying value. The
excess of the fair value of the reporting unit over the amounts assigned to
the
assets and liabilities is the implied fair value of goodwill. This allocation
process is only performed for purposes of evaluating goodwill impairment and
does not result in an entry to adjust the value of any assets or liabilities.
An
impairment loss is recognized for any excess in the carrying value of goodwill
over its implied fair value.
We
have
determined that Shandong Fuwei, our operating subsidiary in the PRC, is the
reporting unit for goodwill impairment testing. The fair value of Shandong
Fuwei
is determined based on the discounted expected cash flow method. The discount
rate was based on the subsidiary’s weighted average cost of capital. The use of
discounted cash flow methodology requires significant judgments including
estimation of future revenues and costs, industry economic factors, future
profitability, determination of Shandong Fuwei’s weighted average cost of
capital and other variables. Although we believe that the assumptions adopted
in
our discounted cash flow model are reasonable, those assumptions are inherently
unpredictable and uncertain.
We
had
goodwill of RMB 10.3 million, as of December 31, 2005, 2006 and 2007. The
estimated fair value of the reporting unit significantly exceeded its carrying
value at December 31, 2007. Consequently, no goodwill impairment has been
recognized.
Collectibility
of Accounts Receivable.
Our
management has a credit policy in place and the exposure to credit risk is
monitored on an ongoing basis. Credit evaluations are performed on all customers
requiring credit over a certain amount. Generally, we offer our customers in
the
PRC credit terms of up to 30-45 days. Our international sales are settled via
T/T and letters of credit, which generally have payment terms of between 30
and
60 days.
We
adopt
a risk assessment model to our customer credit management system, and we offer
different credit terms to our customers based on criteria such as working
relationship, payment history, creditworthiness and their financial position.
All credit terms are to be approved by our finance department, in consultation
with our sales and marketing department. For extension of larger credit limits,
approvals have to be sought from our credit committee which is made up of
members from our finance department, sales department and the General Manager.
Our finance department and sales and marketing department review our outstanding
debtor balances on a monthly basis and follow up with customers when payments
are due. We do not impose interest charges on overdue balances.
As
of
December 31, 2007, our largest trade debtor was Woo Sung Multi-film Co., Ltd,,
a
company based in Korea. The trade receivables from Woo Sung Multi-film Co.,
Ltd,
amounted to approximately RMB3.9 million as of December 31 2007, all of which
were within the credit term granted.
We
make
specific allowance for doubtful trade receivables when our management takes
the
view (taking into account the aging of trade receivables and in consultation
with our sales and marketing department) that we will not be able to collect
the
amounts due. Our customers pay by installments, creating long accounts
receivable cycles. We provide for an allowance for doubtful accounts based
on
our best estimate of the amount of losses that could result from the inability
or intention of our existing customers not to make the required payments. We
generally review the allowance by taking into account factors such as historical
experience, age of the accounts receivable balances and economic
conditions.
Specific
write-off of trade receivables is made when the outstanding trade receivables
have been due for more than two years.
The
analysis of the allowance for doubtful amounts for 2005, 2006 and 2007 is as
follows (000’s):
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Balance
at beginning of year
|
|
|
1,008
|
|
|
2,015
|
|
|
872
|
|
|
120
|
|
Bad
debt expense/(recovery)
|
|
|
1,007
|
|
|
(1,143
|
)
|
|
1,772
|
|
|
242
|
|
Write-offs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
|
2,015
|
|
|
872
|
|
|
2,644
|
|
|
363
|
|
Impairment
of Long-lived Assets.
We
review periodically the carrying amounts of long-lived assets, including
property, plant and equipment and intangible assets, to assess whether they
are
impaired. We test these assets for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable such
as a change of business plan, technical obsolescence, or a period of continuous
losses. When we determine an asset or asset group is not recoverable, we adjust
the carrying amount to fair value. We measure the recoverability of assets
by
comparing the carrying amount of an asset to the estimated undiscounted future
cash flows expected to be generated by the asset, or, for identifiable
intangibles with finite useful lives, by determining whether the amortization
of
the intangible asset balance in the remaining life can be recovered through
undiscounted future cash flows. In determining estimates of future cash flows,
significant judgment in terms of projection of future cash flows and assumptions
is required. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized for the excess of the carrying
amount of the asset over its fair value. Fair value is determined by discounting
forecasted cash flow or utilizing an observed market value if readily
determinable. There have been no impairment charges recognized for the
periods/year through December 31, 2005, December 31, 2006 and December 31,
2007.
Results
of Operations
The
following discussion of our results of operations is based upon our audited
consolidated financial statements beginning on page F-1 in this annual report.
The
table
below sets forth certain line items from our Statement of Income as a percentage
of revenues:
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
Dec.
31,
|
|
Dec.
31,
|
|
Dec.
31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
(%
of Total Revenue)
|
|
Gross
Profit
|
|
|
25.2
|
|
|
23.5
|
|
|
22.2
|
|
Operating
expenses
|
|
|
6.1
|
|
|
5.6
|
|
|
7.9
|
|
Other
income/(expense)
|
|
|
(2.6
|
)
|
|
(2.2
|
)
|
|
(2.7
|
)
|
Income
tax (expense)/benefit
|
|
|
-
|
|
|
(0.2
|
)
|
|
(1.0
|
)
|
Net
income
|
|
|
16.5
|
|
|
15.5
|
|
|
10.6
|
|
Fiscal
year ended 2007 compared to fiscal year ended 2006
Revenues
Our
revenue can be analyzed as follows:
|
|
December
31, 2006 (RMB in thousands)
|
|
%
of Total
|
|
December
31, 2007 (RMB in thousands)
|
|
%
of Total
|
|
Printing
film
|
|
|
95,315
|
|
|
21.8
|
|
|
83,453
|
|
|
18.6
|
|
Stamping
film
|
|
|
99,856
|
|
|
22.9
|
|
|
94,366
|
|
|
21.0
|
|
Metallization
film
|
|
|
34,772
|
|
|
8.0
|
|
|
30,668
|
|
|
6.8
|
|
Base
film for other applications
|
|
|
46,784
|
|
|
10.7
|
|
|
70,925
|
|
|
15.8
|
|
Special
film
|
|
|
160,157
|
|
|
36.6
|
|
|
169,961
|
|
|
37.8
|
|
|
|
|
436,884
|
|
|
100
|
|
|
449,373
|
|
|
100
|
|
During
the fiscal year ended December 31, 2007, our revenues were RMB 449.4 million,
RMB 12.5 million or 2.9% higher than the same period for last year. In 2007,
sales of special films were RMB 170.0 million and 37.8% of our total revenues
as
compared to RMB 160.2 million and 36.7% in 2006, RMB 9.8 million or 6.1% higher
than last year. The increase was largely attributable to an increase in the
sales of heat-sealable films, high-gloss films, and other special films as
more
customers shifted to use high-end special films for packaging to enhance their
product image, and continued growth in export sales to Korea, the United States
and Europe, etc. The increase was also due to increased sales from the
rental production.
Cost
of Goods Sold
Our
cost
of goods sold amounted to RMB 349.5 million for the year ended December 31,
2007, and was RMB 15.2 million or 4.5% higher than last year. The increase
was
resulted from the increase of raw material costs, packaging costs, and labor
costs. In addition, since the second half of 2007, the decrease of export tax
rebates rate from 11% to 5% has also largely increased our cost of goods sold
by
RMB 2.5 million.
Gross
Profit
Our
gross
profit during the year ended December 31, 2007 amounted to RMB 99.8 million
representing a gross margin of 22.2%. Gross margin decreased from 23.5% for
the
year ended December 31, 2006 to 22.2% in 2007 mainly due to increased raw
material consumption on the re-tal production line. Decrease in gross profit
mainly resulted from the increase of raw material costs. In addition, since
the
second half of 2007, the decrease of export tax rebates rate from 11% to 5%
has
also decreased our gross profit.
Operating
Expenses
Our
operating expenses during the year ended December 31, 2007, amounted to RMB
35.6
million, RMB 11.1 million or 45.1% higher than last year, which is mainly a
result of increases in: 1) the costs of professional service fees related to
being as a public company; and 2) administrative expenses, such as wage
increases. During the 2007 year, our operating expenses as a percentage of
revenue was 7.9% which was comparable with that in the previous comparable
period of 5.6%.
Other
Income/(Expense)
Our
other
expenses during the year ended December 31, 2007, amounted to RMB 12.3 million,
28.1% higher than previous comparable period mainly due to the decrease of
other
income by RMB 2.8 million.
Income
Tax Expense
The
effective tax rate was 8.7% in 2007, and 1.1% in 2006. The higher effective
tax
rates were primarily attributable to the fact that our operating subsidiary
Shandong Fuwei is subject to the 7.5% income tax rate in 2007 pursuant to the
prevailing PRC income Tax Law, while such rate was 0% in 2006.
Fiscal
Year Ended 2006
Revenues
Our
revenue can be analyzed as follows:
|
|
December
31, 2005
(RMB in thousands)
|
|
%
of Total
|
|
December
31, 2006 (RMB in thousands)
|
|
%
of Total
|
|
Printing
film
|
|
|
103,682
|
|
|
29.9
|
|
|
95,315
|
|
|
21.8
|
|
Stamping
film
|
|
|
94,711
|
|
|
27.4
|
|
|
99,856
|
|
|
22.9
|
|
Metallization
film
|
|
|
39,647
|
|
|
11.5
|
|
|
34,772
|
|
|
8.0
|
|
Base
film for other applications
|
|
|
59,826
|
|
|
17.3
|
|
|
46,784
|
|
|
10.7
|
|
Special
film
|
|
|
48,339
|
|
|
13.9
|
|
|
160,157
|
|
|
36.6
|
|
|
|
|
346,205
|
|
|
100.0
|
|
|
436,884
|
|
|
100
|
|
During
the fiscal year ended December 31, 2006, our revenues were RMB 436.9 million,
RMB 90.7 million or 26.2% higher than the same period for last year. In 2006,
sales of special films were RMB 160.2 million and 36.6% of our total revenues
as
compared to RMB 48.3 million and 13.9% in 2005, RMB 111.8 million or 231.3%
higher than last year. The significant increase was largely attributable to
the
increase in sales volume by over 22% and an increase in the sales of
heat-sealable films, high-gloss films, and other special films as more customers
shifted to use high-end special films for packaging to enhance their product
image, and continued growth in export sales to the United States, Canada and
Korea, which command a higher selling price as compared to other non-special
films. We expect that the sales of special film will continue to increase in
the
future.
Cost
of Goods Sold
Our
cost
of goods sold amounted to RMB 334.3 million for the year ended December 31,
2006, and was RMB 259.1 million or 29.0% higher than last year. The increase
was
generally in line with the increase in sales as a result of the increase in
export sales. In 2006, total export sales was RMB91.8 million and 21.0% of
our
total revenues as compared to RMB 41.8 million and 12.1% in 2005, RMB 50.0
million or 119.6% higher than last year.
Gross
Profit
Our
gross
profit during the year ended December 31, 2006 amounted to RMB 102.5 million
representing a gross margin of 23.5%. Gross margin decreased from 25.2% for
the
year ended December 31, 2005 to 23.5% in 2006 mainly due to the increase in
the
price of raw materials in 2006 as a result of the increase in global oil prices,
although we increased the price of our products by approximately 3.2% to offset
a portion of the 5% increase in the price of raw materials.
Operating
Expenses
Our
operating expenses during the year ended December 31, 2006, amounted to RMB
24.5
million, RMB 3.4 million or 16.1% higher than last year. During the 2006 year,
our operating expenses as a percentage of revenue was 5.6% which was comparable
with that in the previous comparable period of 6.1%.
Other
Income/(Expense)
Our
other
expenses during the year ended December 31, 2006, amounted to RMB 9.6 million,
7.4% higher than previous comparable period. The increase was mainly due to
the
decrease of interest income by RMB 0.86 million, as compared to the previous
year.
Income
Tax Expense
The
effective tax rate was 1.1% 2006 and (0.1)% in 2005. The low effective tax
rates
were primarily attributable to the fact that our operating subsidiary Shandong
Fuwei enjoyed income tax exemption during both periods pursuant to the
prevailing PRC income Tax Law.
Fiscal
Year Ended 2005
Revenues
Our
revenue can be analyzed as follows:
|
|
December
31, 2005
|
|
%
of Total
|
|
|
|
(RMB
in thousands)
|
|
|
|
Printing
film
|
|
|
103,682
|
|
|
29.9
|
|
Stamping
film
|
|
|
94,711
|
|
|
27.4
|
|
Metallization
film
|
|
|
39,647
|
|
|
11.5
|
|
Base
film for other applications
|
|
|
59,826
|
|
|
17.3
|
|
Special
film
|
|
|
48,339
|
|
|
13.9
|
|
|
|
|
346,205
|
|
|
100.0
|
|
Our
revenues were RMB 346.2 million in 2005. During 2005, we experienced a decline
in the average selling price of our products by 4.2% as a result of the entry
of
new manufacturers and increased competition in the commercial BOPET market.
The
products experiencing the most significant price declines were printing film,
stamping film and base film. We expect this pricing trend to continue as a
result of increased competition in the market.
Cost
of Goods Sold
Our
cost
of goods sold amounted to RMB 259.1 million in 2005. Our costs of goods sold
are
affected by the purchase price of our primary raw materials. While the prices
of
PET resin and additives are, to a certain extent, affected by the price
movements of crude oil which generally increased globally in 2005, the actual
demands of PET resins in China’s textile industry declined as a result of the
implementation of a new quota system for exporting textiles to the United States
and other European countries, thus resulting in a decline in prices of PET
resin
and additives by 4.8% during 2005 which led to cost of goods sold in 2005,
as a
percentage of revenue, being lower when compared to the preceding
period.
Gross
Profit
Our
gross
profit for 2005 was RMB 87.1 million, representing a gross margin of 25.2%.
This
gross margin was higher than in the preceding period mainly as a result of
increased volume which was partially offset by the decline in average selling
price in 2005. The sales of our commercial BOPET films contributed approximately
86% of our total sales in 2005. In order to maintain our competitiveness in
the
industry, we lowered the selling price of our commercial products by
approximately 4%. Based on anticipated increased levels of competition, we
expect this trend to continue until the second half of 2007.
Operating
Expenses
Our
operating expenses were RMB 21.1 million in 2005. During 2005, our operating
expenses as a percentage of revenue were slightly higher than in the preceding
period as a result of our increased distribution costs due to our increase
in
export sales to markets outside of the PRC.
Other
Income/(Expense)
Our
other
income/(expense) was RMB (8.9) million in 2005. Other income/(expenses) in
2005
included a full year of significantly higher interest costs due to our new
capital structure following the acquisition of the DMT production line. Our
total outstanding interest-bearing borrowings were approximately RMB 248.0
million at December 31, 2005.
Income
Tax Benefit
Our
income tax benefit was RMB 0.059 million in 2005. The effective tax rate was
(0.1)% in 2005, primarily attributable to the fact that our operating
subsidiary, Shandong Fuwei, enjoyed income tax exemption during 2005 pursuant
to
the prevailing PRC Income Tax Law.
Liquidity
and Capital Resources
Since
inception, our sources of cash were mainly from cash generated from our
operations and borrowings from financial institutions and capital contributed
by
our shareholders.
Our
capital expenditures in 2007 have been primarily financed through short-term
borrowings from financial institutions and IPO funds. The interest rates of
short-term borrowings from financial institutions during the three year period
from 2005 to 2007 ranged from 5.76% to 6.73%, and these borrowings may not
be
prepaid prior to maturity. We believe that our principal banker in Shandong
Province had been granting short-term loans to its customers as a result of
the
efforts of the bank branch to reduce the level of its long-term
loans.
Since
our
inception, we have utilized significant amounts of secured short-term financing
to fund our acquisition of the Brückner and DMT production lines and for our
working capital needs. At December 31, 2007, we have borrowings of RMB 188.0
million including several different loan agreements with three financial
institutions in the PRC. Subsequently, we renegotiated substantially all of
our
outstanding indebtedness resulting in approximately RMB 148.6
million
of
secured indebtedness
of the
total outstanding. During 2007, we had received an interest-free loan of RMB
20
million from the Weifang City Commercial Bank entrusted by the Weifang City
Hi
& New Technology Project Industrial Development Fund. Each of the related
loan agreements contains provisions regarding collateral, covenants prohibiting
us from engaging in certain activities (including selling, mortgaging or
otherwise disposing of or encumbering all or substantially all of our assets
or
before any merger, acquisition, spin-off, or other transaction resulting in
a
change in our corporate structure) without the lenders consent and acceleration
(and setoff) provisions in the event of default in payment or failure to comply
with such covenants. Because of appreciation of the exchange rate of RMB vs.
US
dollars, the estimated purchase price of the new thick BOPET film production
line has been adjusted to USD$ 35 million range, resulting in an available
fund
shortage of USD$15-20 million. Management is seeking sources of financing in
order to recommence this project soon.
We
are of
the opinion that, after taking into consideration our present banking
facilities, existing cash and the expected cash flows to be generated from
our
operations, we have adequate sources of liquidity to meet our short-term
obligations, and our working capital.
A
summary
of our cash flows for 2005, 2006 and 2007 is as follows:
|
|
Year
Ended
Dec.
31,
2005
|
|
Year
Ended
Dec.
31,
2006
|
|
Year
Ended
Dec.
31,
2007
|
|
|
|
(RMB
in thousands)
|
|
Net
cash generated from operating activities
|
|
|
43,587
|
|
|
58,492
|
|
|
82,856
|
|
Net
cash used in investing activities
|
|
|
(31,479
|
)
|
|
(43,479
|
)
|
|
(246,787
|
)
|
Net
cash (used in)/generated from financing activities
|
|
|
(10,583
|
)
|
|
227,499
|
|
|
(51,651
|
)
|
Effect
of foreign exchange rate change
|
|
|
(1
|
)
|
|
—
|
|
|
(3,448
|
)
|
Net
increase/(decrease) in cash and cash equivalents
|
|
|
1,524
|
|
|
242,512
|
|
|
(219,030
|
)
|
Cash
and cash equivalents as at the beginning of the year
|
|
|
5,903
|
|
|
7,427
|
|
|
249,939
|
|
Cash
and cash equivalents as at the end of the year
|
|
|
7,427
|
|
|
249,939
|
|
|
30,909
|
|
Operating
Activities
Net
cash
from operating activities was RMB 82.9 million for the year ended December
31,
2007 as compared to RMB 58.5 million for the year ended December 31, 2006.
This
increase is primarily attributable to the decrease in accounts receivable and
prepaid expenses and other current assets which is partial offset by the
increase in inventories.
During
the year ended December 31, 2007, we implemented better controls over the
collection of accounts receivable from customers and resulted in a smaller
balance of accounts receivable as of December 31,2007. We anticipated there
would be increase in sales in 2008. As such, we purchase more inventories near
the year end date of 2007.
Net
cash
from operating activities was RMB 58.5 million for the year ended December
31,
2006. During this period we experienced an increase in bills receivables of
RMB29.5million as a result of increase in new customers who are required to
pay
by bills with maturity period from one to six months.
Net
cash
from operating activities was RMB 43.6 million in 2005. During this period
we
experienced (i) an increase in trade receivables as a result of longer credit
period of 30 days granted to customers in order to maintain a long term business
relationship; and (ii) an increase in inventories as a result of increase in
finished goods level to meet anticipated sales orders in early 2006. In order
to
generate growth in sales, more inventories were accumulated towards the year
end
and a longer credit period was offered to creditworthy customers, thereby
lowering cash flows from operating activities.
Investing
Activities
Net
cash
used in investing activities was RMB (246.8 million) in 2007, and was generally
higher as a result of an increase in purchases of property, plant and equipment
in connection with the Production Line 3 and Trial Production Line.
Net
cash
used in investing activities was RMB (43.4 million) in 2006, and was generally
higher as a result of an increase in purchases of property, plant and equipment.
Net
cash
used in investing activities was RMB
31.5
million in
2005,
and was generally lower as a result of a decrease in purchases of property,
plant and equipment.
Financing
Activities
Net
cash
generated from financing activities was RMB (51.7 million) in the year ended
December 31, 2007 as compared to RMB 227.5 million used in financing activities
during the year ended December 31, 2006. In 2007, the Company repaid short-term
loans to banks.
Net
cash
generated from financing activities was RMB 227.5 million in the year ended
December 31, 2006 as compared to RMB 10.6 million used in financing activities
during the year ended December 31, 2005. In December 2006, the Company was
successfully listed on the NASDAQ Global Market and received net proceeds of
RMB235.9 million.
Net
cash
used in financing activities was RMB 10.6 million in 2005. This was attributable
to the net proceeds received from new bank loans of RMB 47.5 million in 2005
(excluding the bank loans of RMB 199.6 million assumed upon purchase of Shandong
Fuwei in October 2004), which was used to finance the capital expenditure in
relation to the new production line and was offset by the payment of a dividend
of RMB 26.3 million in 2005 and repayment of advance from related parties of
RMB
30.0 million in 2005.
Foreign
Exchange Exposure
Translations
Our
reporting currency is RMB. The functional currency of our operating subsidiary
in the PRC is RMB and our operating subsidiary also maintains its books and
records in RMB. Accordingly, we are not exposed to any material foreign currency
translation effects.
Transactions
We
are,
to a certain extent, exposed to transaction foreign currency exposure arising
from our operations in the PRC.
We
began
conducting part of our sales in foreign currency in 2004 with the commencement
of our overseas sales business. During 2005, 2006 and 2007, approximately 87.9%,
79.0% and 75.5%, respectively, of our revenue was denominated in RMB and the
remainder was in US dollars. As most of our supplies are procured within the
PRC, most of our purchases are denominated in RMB.
Our
foreign currency exchange risk arises mainly from this mismatch between the
currency of our sales, purchases and operating expenses. To the extent that
our
sales, purchases and operating expenses are not fully matched in exactly the
same currency, we may be susceptible to foreign exchange exposure.
In
addition, we also maintain US dollars accounts with financial institutions
for
our US dollars receipts and US dollars payments. We may also incur foreign
exchange gains or losses when we convert the US dollars balances into
RMB.
Currently,
we do not have a formal foreign currency hedging policy as our foreign exchange
gains and losses in 2005, 2006 or 2007 were insignificant. Our management
believes that it is more efficient for us to assess the hedging need of each
transaction on a case-by-case basis. We will continue to monitor our foreign
exchange exposure in the future and will consider hedging any material foreign
exchange exposure should such need arise.
Capital
Expenditures and Contractual Commitments
Capital
Expenditures
Our
capital expenditures in 2005, 2006 and 2007 were as follows:
|
|
Year
Ended
Dec.
31,
2005
|
|
Year
Ended
Dec.
31,
2006
|
|
Year
Ended
Dec.
31,
2007
|
|
|
|
(RMB
in thousands)
|
|
Buildings
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Plant
and equipment
|
|
|
1,412
|
|
|
37,051
|
|
|
1,685
|
|
Motor
vehicles
|
|
|
433
|
|
|
—
|
|
|
184
|
|
Assets
under construction
|
|
|
20,505
|
|
|
—
|
|
|
181,308
|
|
Others
(computer and furniture fittings)
|
|
|
61
|
|
|
422
|
|
|
114
|
|
Total
|
|
|
22,411
|
|
|
37,473
|
|
|
183,291
|
|
The
following table summarizes our contractual commitments as of December 31, 2007
and the effect those commitments are expected to have on our liquidity and cash
flow in future periods:
|
|
Payments
Due by Period
|
|
Contractual
Commitments
|
|
Total
|
|
Less
than 1 Total Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More
than 5 Years
|
|
|
|
(RMB
in thousands)
|
|
Equipment
Purchase Contract(i)
|
|
|
155,058
|
|
|
155,058
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Related
party loans
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Bank
loans(ii)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
188,027
|
|
|
188,027
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest(iii)
|
|
|
11,915
|
|
|
11,915
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating
leases(iv)
|
|
|
6,800
|
|
|
3,555
|
|
|
3,245
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
361,800
|
|
|
358,555
|
|
|
3,245
|
|
|
—
|
|
|
—
|
|
(i)
|
The
purchase of equipment has been financed by the sale of our ordinary
shares
and in the future would be financed by bank borrowings and internally
generated funds from operations.
|
(ii)
|
We
had short-term bank loans of RMB 188.0 million at December 31, 2007,
that
are due at various times in 2008 We renegotiated substantially all
of our
outstanding indebtedness resulting in approximately RMB 148.6 million
of
secured indebtedness of the total outstanding. Our obligations under
our
existing loans have been mainly met through the cash flow from our
operations and our financing activities. In the past, cash flow from
operations has been sufficient to meet payment obligations and/or
we have
been able to extend our borrowings. In the event that our cash flows
are
insufficient to satisfy these obligations, we may consider additional
bank
loans, issuing bonds, or other forms of financing to satisfy our
capital
requirements.
|
(iii)
|
The
interest expenses are estimated based on the interest rate of short-term
borrowings adopted by People Bank of China on December 31, 2007 plus
an
estimated risk premium on
borrowing.
|
(iv)
|
The
operating leases mainly relate to our rental of production line,
warehouse
and staff quarters, etc. The term of these leases typically ranges
from 1
to 5 years, and are renewable, subject to renegotiation of terms,
upon
expiration. We intend to finance these operating leases from our
cash
flows from operations.
|
Off-Balance
Sheet Arrangements and Contingent Liabilities
We
do not
have any off-balance sheet guarantees, any outstanding derivative financial
instruments, interest rate swap transactions or foreign currency forward
contracts.
Inflation
Inflation
in China has not had a material impact on our results of operations in recent
years. According to the National Bureau of Statistics of China, the change
in
the consumer price index in China was 1.8%, 1.5% and 4.8%in 2005, 2006 and
2007
respectively.
Recent
Accounting Pronouncements
FASB
Interpretation No. 48.
In July
2006, FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”), which
clarifies the accounting for uncertainty in income taxes recognized in the
Group’s financial statements in accordance with SFAS No.109, Accounting from
Income Taxes. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Company has no material unrecognized tax benefit
which would favorably affect the effective income tax rate in future periods
and
do not believe there will be any significant increases or decreases within
the
next twelve month. The Company has elected to classify interest and penalties
related to unrecognized tax benefits, if and when required, as part of interest
expenses and administrative expenses in the statements of income, respectively.
No Interest or penalties have been accrued at the date of adoption.
In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject
to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
The
new
Statement allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item's fair value in subsequent reporting
periods must be recognized in current earnings. FAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes for similar assets and
liabilities. On January 1, 2008, the Company elected not to adopt the
option statement.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”. This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling (minority) interest
in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 is effective for the Company’s fiscal year
beginning October 1, 2009. Management is currently evaluating the effect of
this
pronouncement on financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for
how
the acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquire; b) recognizes and measures the goodwill acquired in
the
business combination or a gain from a bargain purchase and c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R)
will apply prospectively to business combinations for which the acquisition
date
is on or after Company’s fiscal year beginning October 1, 2009. While the
Company has not yet evaluated this statement for the impact, if any, that SFAS
No. 141(R) will have on its consolidated financial statements, the Company
will
be required to expense costs related to any acquisitions after September 30,
2009.
On
March
19, 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 161, Disclosures about Derivative Instruments and Hedging Activities.
The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008,
with early application encouraged. "Use and complexity of derivative instruments
and hedging activities have increased significantly over the past several
years.
This has led to concerns among investors that the existing disclosure
requirements in FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, do not provide enough information about how these
instruments and activities affect the entity’s financial position and
performance," explained Kevin Stoklosa, project manager. "By requiring
additional information about how and why derivative instruments are being
used,
the new standard gives investors better information upon which to base their
decisions." The new standard also improves transparency about the location
and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB Statement
No. 161 achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format.
It
also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally,
it
requires cross-referencing within footnotes to enable financial statement
users
to locate important information about derivative instruments. Management
is
currently evaluating the effect of this pronouncement on financial
statements.
Research
and development, patents and licenses, etc
We
rely
on copyright, patent, trademark and other intellectual property law,
nondisclosure agreement and technical know-how to protect our intellectual
property and proprietary rights. We enter into confidentiality and licensing
agreements with our employees, suppliers and distributors. Our senior employees
and employees who work in our research and development department and other
technical departments are required to sign agreements acknowledging that we
own
the rights to all technology, inventions, trade secrets, works of authorship,
developments and other processes generated in connection with their employment
with us or their use of our resources or relating to our business or our
property and that they must assign any ownership rights that they may claim
in
those works to us. As most of our business is currently conducted in mainland
China, we have not taken any action outside mainland China to protect our
intellectual property.
As
of the
date of this annual report, we have received four patents from, and have three
patent applications pending with, the Patent Office of the National Intellectual
Property Office of China with respect to our BOPET film technology. Two of
these
applications are not being used in our production process as they require
expensive imported raw materials and, most importantly, they have been replaced
by the films used in LCD and electronic products in the market.
We
currently sell our products in the PRC under our brand “Fuwei Films.” We have a
pending application for the registration of the trademark “Fuwei Films” with the
Trademark Bureau of the State Administration of Industry and Commerce in the
PRC. Our ability to compete in our markets and to achieve future revenue growth
will depend, in significant part, on our ability to protect our proprietary
technology and operate without infringing upon the intellectual property rights
of others. An infringement upon these rights may reduce or eliminate any
competitive advantage we have developed, causing us to lose sales or otherwise
harm our business. We are not aware of any infringement or unauthorized use
of
our intellectual property rights. We will take appropriate legal actions to
protect our rights if there is any unauthorized use or infringement of our
rights in the future. To date, we have not been sued for infringement of
intellectual property rights by any third party.
Trend
Information
Other
than as disclosed elsewhere in this Annual Report, we are not aware of any
trends, uncertainties, demands, commitments or events that are reasonably likely
to have a material effect on our net sales, profitability, liquidity or capital
resources, or that caused the disclosed financial information to be not
necessarily indicative of future operating results or financial
conditions.
Item
6. Directors,
Senior Management and Employees
A. Directors
and senior management.
Our
directors and executive officers and their present positions with our company,
as at March 31, 2008, are as follows:
Directors
and Executive Officers
Name
|
|
Age
|
|
Position
|
Xiaoan
He
|
|
45
|
|
Chairman
and Chief Executive Officer
|
|
|
|
|
|
Cindy
Lu
(1)
|
|
37
|
|
Director
and Chief Financial Officer
|
|
|
|
|
|
Xiuyong
Zhang(2)
|
|
37
|
|
Director
|
|
|
|
|
|
Tee
Chuang Khoo
|
|
61
|
|
Independent
Director
|
|
|
|
|
|
Changrong
Ji
|
|
61
|
|
Independent
Director
|
|
|
|
|
|
Yudong
Huang
|
|
42
|
|
Independent
Director
|
|
|
|
|
|
Bo
Xu
|
|
44
|
|
Secretary
|
|
|
|
|
|
Zhibing
Qian
|
|
42
|
|
Senior
Vice President
|
|
|
|
|
|
Bin
Sun
|
|
52
|
|
President
of Shandong Fuwei
|
|
|
|
|
|
Xiaoming
Wang
|
|
47
|
|
Vice
President (Production) of Shandong Fuwei
|
|
|
|
|
|
Hanyong
Lee(3)
|
|
51
|
|
Vice
President (Research & Development) of Shandong
Fuwei
|
(1) |
Ms.
Lu resigned as a director and Chief Financial Officer of the Company,
effective March 31, 2008.
|
(2) |
Mr.
Zhang was appointed to serve as Chief Financial Officer of the Company
on
April 11, 2008.
|
(3) |
Mr.
Hanyong Lee has been the Vice President of Research and Development
of
Shandong Fuwei since January 8,
2008.
|
Information
about Directors and Officers
Set
forth
below is certain information with respect to each director and officer as of
December 31, 2007:
Xiaoan He
has
been
the Chairman of the Board of Directors and Chief Executive Officer of our
Company since 2005 and is responsible for the formulation and implementation
of
our business strategies and management of our business operations. Mr. He
has gained more than ten years of management experience in the plastics and
packaging industries in the PRC. From June 2004 to January 2005, Mr. He was
our General Manager responsible for our daily operation and management. Prior
to
joining us as the General Manager in June 2004, Mr. He was the general
manager of Suzhou Broadway Plastic Packaging Co., Ltd from 1996 to 2003. From
1990 to 1996, he was the vice general manager at Suzhou Xiangxuehai Freezer
Co.,
Ltd and from 1983 to 1990, he was the vice general manager at Suzhou Marine
Machinery Co., Ltd. Mr. He obtained his EMBA from the China Europe
International Business School in 2003 and Bachelor in Engineering from the
Shanghai Jiaotong University in 1983.
Cindy
Lu
was our
Chief Financial Officer and Director from June 1, 2007 until March 31, 2008.
Prior to joining the Company, Ms. Lu served as the Secretary of the Board of
Directors of Tiens Biotech Group (USA) from 2004 to early 2007. From 1999 to
2001, Ms. Lu worked as an associate at GE Capital Asia Pacific. Ms. Lu was
a
Financial Analyst for Sargent & Lundy LLP (Chicago) from 1997 to 1999. Ms.
Lu has expertise in equity finance, corporate finance, mergers and acquisitions,
and corporate risk management. Ms. Lu obtained her MBA in 1996 from Southeastern
University, Washington DC and her Bachelor Degree in Economics in 1993 from
Shandong University.
Xiuyong
Zhang
has been
a Director of our Company. He began serving as our Chief Financial Officer
on
April 11, 2008. He had accumulated more than 10 years of experience in
investment, accounting and financial fields. He is responsible for the
day-to-day management of our investment, financing, accounting and auditing
matters in the Company and financing, financial and taxation matters for
its
subsidiary. Prior to join us as a director of the Company since November
2007,
Mr. Zhang has also been the director of Fuwei Films (Shandong) Co., Ltd.
since
July 2004, and the Vice President since January 2005. Mr. Zhang was the
vice-head of an audit firm, Shandong Zhengyuan Hexin Auditors, Weifang branch
from 1999 to 2004. From 1991 to 1999, he was an accounting supervisor at
the
main office of the Weifang City Local Products Company. He has received the
Professional Certification in Laws from China University of Political Science
and Law and China Central Radio and TV University. Mr. Zhang was jointly
certified as a Public Valuer by the Ministry of Personnel and Ministry of
Finance in the PRC in 2004. He was certified as the Chinese Certified Public
Accountant by the Ministry of Finance of the PRC in 1997. He received the
Certification of Financial Accounting from the Shandong Television University
in
1996.
Tee
Chuang Khoo has
been a director of our company since November 2007. Mr. Khoo was a Senior
Partner in Management Consulting at DENEC Management Consulting Co. Ltd.
(“DENCE”) in Shanghai from October 2005 to October 2007. From November 2000 to
September 2005, Mr. Khoo was a Senior Partner at Improve Management Consulting
Services in Malaysia where he was responsible for reducing manufacturing costs
and process improvement. Mr. Khoo was an Executive Director at JPK (M) Sdn
Bhd,
a Malaysian-listed company, from October 1998 to September 2000, where he
assisted the Managing Director with the entire operation of the company. From
November 1996 to August 1998, he was the General Manager of Broadway Group’s (a
Singapore-listed company) product factories in Johor Baru, Malaysia, and in
China. He also held managerial positions at the Malaysian conglomerate, The
Lion
Group, and he was a Human Resources Manager at Metal Box Singapore Ltd, a
Singapore-listed company owned by the British Metal Box Group. Mr. Khoo has
a
Bachelor of Arts in Finance & Management from the University of Oregon
(USA), a Masters in Business Administration (MBA) from University of Southern
California (USA) and a diploma in Accounting from the Association of
International Accountants from the United Kingdom.
Changrong
Ji
has been
a director of our company since March 2007. Mr. Ji is currently the
Investigation Officer of the People’s Bank of China, Weifang city central
branch. Mr. Ji was the president of People’s Bank of China, Weifang City central
branch from 2001 to 2004 and was the president of People’s Bank of China, Weihai
City central branch from 1999 to 2001. From 1989 to 1997, Mr. Ji was the
vice-president of People’s Bank of China, Weifang city central branch. He joined
the State Administration of Foreign Exchange, Weifang branch as its deputy
director from 1989 to 1997 and was appointed as the director of the State
Administration of Foreign Exchange, Weihai branch from 1999 to 2001. Mr. Ji
was
the director of the State Administration of Foreign Exchange, Weifang branch
from 2001 to 2004. Mr. Ji obtained his Master’s degree in Economics in 1999 from
Shanghai Fudan University and his bachelor’s degree in international economics
in 1993 from East China Normal University.
Yudong
Huang has
been a director of our company since November 2007. Professor Huang is a
Professor and Director of the Department of Applied Chemistry of Harbin
Institute of Technology. His research coverage includes PET films. Since 1992,
Professor Huang has performed more than 20 research projects, out of which
3
projects have won science and technology awards at the provincial and
ministerial levels. He has published more than 60 papers in the national and
international levels. He was awarded the “Excellent Scientist Prize” of
Heilongjiang Province in 1998. Professor Huang graduated from Department of
Applied Chemistry of Harbin Institute of Technology with doctor
degree.
Bo
Xu
joined
the Company in October 2006 and was appointed as the Secretary of the Company
in
December 2006. From 2002 to September 2006, he was the director of finance
for
Beijing Platinum Investment Co., Ltd. where he was in charge of accounting
and
finance. Prior to that, he was a finance manager at Weifang Wanyou Enterprise
Co., Ltd. from 1993 to 2002. Mr. Xu received his bachelor in finance from
Weifang Staff and Worker’s University in 1989.
Zhibing
Qian
was
appointed as the Senior Vice President in April 2007. From 2003 to March 2007,
he was the general manager of Beijing Capital Jindian Technology Limited. From
2000 to 2003, Mr. Qian was appointed as the general manger of Beijing
Zhongguancun International Incubator Limited, comprehensively responsible for
the company’s set up and operations. Mr. Qian also worked at senior management
level at other state-owned and joint venture companies in China. Mr. Qian
received his Doctor and Master degrees from University of Idaho in 1995 and
1993.
Bin
Sun
has been
the President of Shandong Fuwei since January 2007, and is responsible for
the
general management of our business operations. Mr. Sun has gained more than
ten
years of management experience in the Mechanical & Electrical and plastics
industries before he joined us. Mr. Sun was the general manager of Jiangsu
Geliling Group from 2005 to 2006, and he was the general manager of Wuxi Dayu
Electric Group from 2002 to 2004. Mr. Sun obtained his Master degree in
Economics from the Renmin University of China in 1994 and bachelor in
Engineering from the Northwestern Polytechnical University in 1981.
Xiaoming
Wang
has been
Vice President (Production) of Shandong Fuwei since January 2005 and is
responsible for the management of our production facilities. Prior to joining
us, Mr. Wang was the vice manager of Weifang Engine Manufacturing Co. from
1986 to 1998 and the deputy general manager of Shandong Neo-Luck from 1998
to
2003. Mr. Wang was certified as a professional economist by the Shandong
Province Human Resources Committee in 2001 and obtained a certificate in
Economics Management awarded by the PRC Central Party Learning Institute and
obtained a certificate in Business Enterprises Operational Management from
the
Shandong Television University in 1986.
Hanyong
Lee
has been
Vice President of Research and Development of Shandong Fuwei since January
8,
2008. He has more than 22 years of experience in the BOPET film industry,
especially in the aspects of development and management. He worked for 18 years
at SKC Co., Ltd., a world-famous BOPET supplier. From 2002 to 2007, Mr. Lee
was
Vice President of i-components and Polystar International in Korea. From 1987
to
1997, he was mainly responsible for the management of the R&D team,
including the development of the BOPET film technology, the refinement of the
manufacturing process and the production in general at SKC in Korea. At SKC
from
1998 to 2000, he worked in the American Branch of SKC where he was responsible
for evaluating the technology, monitoring the production growth and managing
a
professional staff.
None
of
our directors or officers is related to each other; and to the best of our
knowledge and belief, there are no arrangements or understandings with any
of
our principal shareholders, customers, suppliers, or any other person, pursuant
to which any of our directors or executive officers were appointed.
The
business address of our directors and executive officers is No. 387 Dongming
Road, Weifang Shandong, People’s Republic of China, Postal Code:
261061.
Board
Committees
Our
board
of directors has appointed an Audit Committee, Compensation Committee and a
Corporate Governance and Nominating Committee, and adopted charters for each
of
these committees. We have appointed independent directors to each of our
committees.
Under
the
Nasdaq Marketplace Rule 4350(c)(5), it is provided that a Controlled Company
is
exempt from the requirements to have a majority of independent directors. A
“Controlled Company” is a company of which more than 50% of the voting power is
held by an individual, a group or another company. Currently, Apex Glory Holding
Limited holds 53% of the outstanding ordinary shares of the Company. As a
result, Fuwei can be considers itself a Controlled Company and operated under
the exemption from December 25, 2007 until March 31, 2008, when Ms. Lu resigned
from her position as the Chief Financial Officer and Director of the
Company.
Audit
Committee
Our
Audit
Committee currently consists of Tee Chuang Khoo, Changrong Ji and Yudong Huang.
On November 21, 2007, Tee Chuang Khoo was appointed as the Chairman of our
Audit
Committee. On December 16, 2007, Cindy Lu resigned as a member of the Audit
Committee. On December 16, 2007, Yudong Huang was appointed a member of the
Audit Committee . The audit committee will oversee our accounting and financial
reporting processes and the audits of our financial statements. The audit
committee is responsible for, among other things:
|
·
|
selecting
the independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by the independent
auditors;
|
|
·
|
reviewing
and approving all proposed related-party
transactions;
|
|
·
|
discussing
the annual audited financial statements with management and the
independent auditors;
|
|
·
|
annually
reviewing and reassessing the adequacy of our audit committee
charter;
|
|
·
|
meeting
separately and periodically with management and the independent
auditors;
|
|
·
|
reviewing
such other matters that are specifically delegated to our audit committee
by our board of directors from time to time;
and
|
|
·
|
reporting
regularly to the full board of
directors.
|
Compensation
Committee
Effective
November 21, 2007, Tee Chuang Khoo, Yudong Huang and Changrong Ji were appointed
as members of our Compensation Committee. The Committee is responsible for,
among other things:
|
·
|
reviewing
and determining the compensation package for our senior
executives;
|
|
·
|
reviewing
and making recommendations to our board with respect to the compensation
of our directors;
|
|
·
|
reviewing
and approving officer and director indemnification and insurance
matters;
|
|
·
|
reviewing
and approving any employee loan in an amount equal to or greater
than RMB
100,000; and
|
|
·
|
reviewing
periodically and approving any long-term incentive compensation or
equity
plans, programs or similar arrangements, annual bonuses, employee
pension
and welfare benefit plans.
|
Corporate
Governance and Nominating Committee
Our
corporate governance and nominating committee consists of Changrong Ji. The
Corporate Governance and Nominating Committee is responsible for, among other
things:
|
·
|
identifying
and recommending to the board nominees for election or re-election
to the
board;
|
|
·
|
making
appointments to fill any vacancy on our
board;
|
|
·
|
reviewing
annually with the board the current composition of the board in light
of
the characteristics of independence, age, skills, experience and
availability of service to us;
|
|
·
|
identifying
and recommending to the board any director to serve as a member of
the
board’s committees;
|
|
·
|
advising
the board periodically with respect to significant developments in
the law
and practice of corporate governance as well as our compliance with
applicable laws and regulations, and making recommendations to the
board
on all matters of corporate governance and on any corrective action
to be
taken; and
|
|
·
|
monitoring
compliance with our code of business conduct and ethics, including
reviewing the adequacy and effectiveness of our procedures to ensure
proper compliance.
|
Duties
of Directors
Under
Cayman Islands laws, our directors have a common law duty of loyalty to act
honestly in good faith with a view to our best interests. Our directors also
have a duty to exercise the skill they actually possess and such care and
diligence that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure
compliance with our memorandum of association. A shareholder has the right
to
seek damages if a duty owed by our directors is breached. You should read
“Description of Share Capital - Differences in Corporate Law” for a more
complete discussion of these matters.
B. Compensation.
Compensation
of Directors and Executive Officers
All
directors receive reimbursements from us for expenses which are necessary and
reasonably incurred by them for providing services to us or in the performance
of their duties. Our directors who are also our employees receive compensation
in the form of salaries, housing allowances, other allowances and benefits
in
kind in their capacity as our employees. Our directors do not receive any
compensation in their capacity as directors in addition to their salaries and
other remunerations as members of our management team. We pay their expenses
related to attending board meetings and participating in board
functions.
The
aggregate cash compensation and benefits that we paid to our directors and
executive officers, a group of nine persons for the year ended
December 31, 2007 was approximately RMB 2.8 million. No executive officer is
entitled to any severance benefits upon termination of his or her employment
with our company.
Employment
and Service Agreements
Directors
We
have
also entered into an additional Employment Agreement as of April 27, 2005 with
Mr. He for the position of Chief Executive Officer for a three year period
effective December 25, 2006. Under this agreement Mr. He’s annual basic salary
will be RMB 500,000 and he will be eligible for a discretionary bonus. Our
directors and officers, Cindy Lu and Xiuyong Zhang have entered into service
agreements (the “Service Agreements” and each a “Service Agreement”) with us.
The term of service for the executive officers is for an initial fixed period
of
two years in case of Cindy Lu commencing from March 26, 2007 and three years
commencing from March 1, 2006 in the case of Xiuyong Zhang. Under the terms
of
their respective Service Agreements, each of Cindy Lu and Xiuyong Zhang is
entitled to an annual basic salary of RMB 500,000 and RMB 300,000. After the
initial period, either party can terminate the Employment Agreement upon three
months prior written notice or by paying the other party a sum equal to three
months salary in lieu of such notice. The agreement may also be terminated
by
either party without prior notice or payment pursuant to the applicable
provisions of the China Labor Law. Effective March 31, 2008, Ms. Lu resigned
as
a director and Chief Financial Officer of the Company.
Executive
Officers
Each
of
our executive officers, Bo Xu, Zhibing Qian, Bin Sun, Xiaoming Wang, and Hanyong
Lee have entered into service agreements (the “Service Agreements” and each a
“Service Agreement”) with us. The term of service for the executive officers
commenced from March 1, 2006 in the case of Xiaoming Wang, December 6, 2006
in
the case of Mr. Xu, and we entered into a service agreement with Bin Sun from
January 2007, in case of Zhibing Qian commencing from April 2, 2007 and in
case
of Hanyong Lee commencing from January 8, 2008. We may only terminate the
Service Agreement prior to the expiration of the Initial Period (save by mutual
agreement and except as provided in the Service Agreement) upon the occurrence
of certain events including, without limitation, for cause, disability or
personal bankruptcy. The term of service of each of our executive officers
shall
be renewed for successive periods of one year each after the expiration of
the
Initial Period. The Service Agreement can be terminated by not less than three
months’ notice in writing served by either party to the Service Agreements. We
shall have the option to pay the executive officer salary in lieu of any
required period of notice of termination. Under the terms of their respective
Service Agreements, each of Bo Xu, Zhibing Qian, Bin Sun, Xiaoming Wang, and
Hanyong Lee are entitled to an annual basic salary of RMB 1.9 million totally.
Their annual salaries may be revised at the discretion of the Compensation
Committee. We may pay them discretionary management bonuses for any financial
year, the payment and the amount of which are subject to the approval of the
Compensation Committee. Except for the payment in lieu of notice described
above, there are no provisions for benefits for termination of employment of
our
executive officers under the Service Agreements.
Share
Option Plan
We
plan
to adopt a share option plan that is a share incentive plan, the purpose of
which is to recognize and acknowledge the contributions the eligible
participants had or may have made to our company. The share option plan will
provide the eligible participants an opportunity to have a personal stake in
our
company with the view to achieving the following objectives:
|
·
|
motivate
the eligible participants to optimize their performance efficiency
for the
benefit of our company; and
|
|
·
|
attract
and retain or otherwise maintain an on-going business relationship
with
the eligible participants whose contributions are or will be beneficial
to
our long-term growth.
|
Indemnification
Cayman
Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except
to
the extent any such provision may be held by the Cayman Islands courts to be
contrary to public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime. Pursuant to our memorandum
and
articles of association, our directors and officers, as well as any liquidator
or trustee for the time being acting in relation to our affairs, will be
indemnified and secured harmless out of our assets and profits from and against
all actions, costs, charges, losses, damages and expenses that any of them
or
any of their heirs, executors or administrators may incur or sustain by reason
of any act done, concurred in or omitted in or about the execution of their
duties in their respective offices or trusts. Accordingly, none of these
indemnified persons will be answerable for the acts, receipts, neglects or
defaults of each other; neither will they be answerable for joining in any
receipts for the sake of conformity, or for any bankers or other persons with
whom any moneys or effects belonging to us may have been lodged or deposited
for
safe custody, or for insufficiency or deficiency of any security upon which
any
moneys of or belonging to us may be placed out or invested, or for any other
loss, misfortune or damage which may happen in the execution of their respective
offices or trusts. This indemnity will not, however, extend to any fraud or
dishonesty which may attach to any of said persons.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
C. Board
practices.
Our
Articles provide that our board of directors shall consist of not less than
two
directors. Each director shall retire from office at least once every three
years, but a director who is appointed by the board shall retire at the next
annual general meeting of our Company following his appointment. A retiring
director shall be eligible for re-election.
D.
Employees.
As
of
December 31, 2007,
our
total
staff consisted of 330 employees.
We
do not
have any collective bargaining agreements with our employees. We have never
experienced any material labor disruptions and are unaware of any current
efforts or plans to organize employees. We believe we have good relationships
with our employees.
Item
7. Major
Shareholders and Related Party Transactions
A. Major
shareholders.
The
following table sets forth information with respect to the beneficial ownership,
within the meaning of Rule 13d-3 under the Exchange Act, of our ordinary shares,
as of the date of this annual report for:
|
·
|
each
person known to us to own beneficially more than 5% of our ordinary
shares; and
|
|
·
|
each
of our directors and executive officers who beneficially own our
ordinary
shares.
|
Beneficial
ownership includes voting or investment power with respect to the securities.
Except as indicated below, and subject to applicable community property laws,
the persons named in the table have or share the voting and investment power
with respect to all ordinary shares shown as beneficially owned by them. The
number of our ordinary shares used in calculating the percentage for each listed
person includes any options exercisable by such person within 60 days after
the
date of this annual report. Percentage of beneficial ownership is based on
13,062,500 ordinary shares outstanding as of December 31, 2006.
|
|
Shares
Beneficially Owned
|
|
|
|
Number
|
|
Percent
|
|
Executive
Officers and Directors:
|
|
|
|
|
|
Xiaoan
He
|
|
|
—
|
|
|
—
|
|
Cindy
Lu(1)
|
|
|
—
|
|
|
—
|
|
Xiuyong
Zhang(2)
|
|
|
—
|
|
|
—
|
|
Tee
Chuang Khoo
|
|
|
—
|
|
|
—
|
|
Changrong
Ji
|
|
|
—
|
|
|
—
|
|
Yudong
Huang
|
|
|
—
|
|
|
—
|
|
Bin
Sun
|
|
|
—
|
|
|
—
|
|
Xiaoming
Wang
|
|
|
—
|
|
|
—
|
|
Hanyong
Lee(3)
|
|
|
—
|
|
|
—
|
|
All
directors and executive officers as a group ( 9
persons)
|
|
|
—
|
|
|
—
|
|
5%
Shareholders:
|
|
|
|
|
|
|
|
Apex
Glory Holdings Limited(4)
|
|
|
6,912,503
|
|
|
52.9
|
%
|
Easebright
Investments Limited(5)
|
|
|
1,637,497
|
|
|
12.5
|
%
|
(1) |
Ms.
Lu resigned as a director and Chief Financial Officer of the Company,
effective March 31, 2008.
|
(2) |
Mr.
Zhang was appointed to serve as Chief Financial Officer of the Company
on
April 11, 2008.
|
(3) |
Mr.
Hanyong Lee has been Vice President of Research and Development of
Shandong Fuwei since January 8,
2008.
|
(4) |
Apex
Glory Holdings Limited is a wholly-owned subsidiary of Eastfaith
Holdings
Limited, a British Virgin Islands corporation. Mr. Jun Yin is the
sole
shareholder of Eastfaith Holdings
Limited.
|
(5) |
Easebright
Investments Limited is a wholly-owned subsidiary of Goodsuccess
Enterprises Ltd. Mr. Tongju Zhou and Mr. Duo Wang each indirectly
own 50%
of Goodsuccess Enterprises Ltd.
|
Except
as
disclosed below, there were no related party transactions with major
shareholders during the period commencing January 1, 2004 and ending December
31, 2007.
B.
|
Related
party transactions.
|
Our
Related-Party Transaction Policies
We
have
conducted our related-party transactions on normal commercial terms that we
believe are fair and reasonable and in the interests of our shareholders as
a
whole. We believe that the terms of our related-party transactions are
comparable to the terms we could obtain from independent third parties. Our
related-party transactions are subject to the review and approval of the audit
committee of our board of directors.
The
transactions and balances with related parties are analyzed as
follows:
(a) Transactions
with related parties
Shareholders’
Loan Agreements
For
the
purpose of financing the acquisition of Shandong Fuwei, our wholly-owned PRC
operating subsidiary, in October 2004, we borrowed from each of our principal
shareholders Apex Glory Holdings Limited (“Apex”) and Easebright Investments
Limited (“Easebright”) HK$67,830,000 and HK$18,020,000, respectively. These
borrowings did not bear any interest. We then loaned HK$85,850,000, interest
free, to our wholly-owned subsidiary Fuwei (BVI) and Fuwei (BVI) entered into
a
sale and purchase agreement with Shenghong Group Co., Ltd. and Shandong Baorui
Investment Co., Ltd (“Shandong Baorui”), pursuant to which Fuwei (BVI) acquired
the respective equity interest of Shenghong Group and Shandong Baorui in
Shandong Fuwei for an aggregate consideration of RMB 91 million. Shandong Fuwei
thereafter became a wholly-owned subsidiary of Fuwei (BVI) and was converted
into a wholly-foreign owned enterprise pursuant to PRC law. Tongju Zhou, a
director, and Duo Wang each indirectly own 50% of Easebright and are both also
officers and directors of Shandong Baorui. Jun Yin, the indirect sole
shareholder of Apex, and Duo Wang own 17.5% and 4.6%, respectively, of Shandong
Baorui. Apex and Easebright converted all outstanding shareholder loans into
an
aggregate of 8,749,229 ordinary shares on November 23, 2006.
On
October 28, 2005, Shandong Baorui guaranteed a one year loan to us by the
Agricultural Bank of China in the principal amount of RMB 6,800,000. This loan
bears interest at the rate of 7.254% per annum.
On
October 27, 2004, Weifang Neo-Luck (Group) Co., Ltd. (“Weifang Neo-Luck”), an
entity for which our director Tongju Zhou was the General Manager, collectively
with two of its subsidiaries, guaranteed two one-year loans at 5.841% interest
per annum from China Construction Bank and Agricultural Bank of China to the
Shandong Fuwei totaling RMB 23,200,000. Also on October 27, 2004, Weifang Fuwah
Hotel Co. Ltd. (“Fuwei Hotel”), an entity owned by Weifang Neo-Luck, guaranteed
a one-year loan at 5.841% interest per annum to Shandong Fuwei from China
Construction Bank totaling RMB 1,300,000.
Acquisition
of Assets
In
October of 2003, Shandong Fuwei acquired the assets relating to the Brückner
production line through a public auction as a result of a default on several
loans extended to affiliates of Shandong Neo-Luck Plastic Co., Ltd (“Shandong
Neo-Luck”) by the Bank of China, Weifang city branch. Our current executive
officers Xiamong Wang and Yongping Bai both acted as executive officers for
Shandong Neo-Luck.
Due
to
ongoing financial difficulties, Shandong Neo-Luck was declared bankrupt by
the
Weifang Municipal People’s Court in the PRC in September 2004. The assets of
Shandong Neo-Luck, consisting primarily of assets related to the DMT production
line, were put up for public auction in accordance with the insolvency laws
of
the PRC on September 27, 2004. Beijing Baorui Guarantee Co., Ltd. (“Beijing
Baorui”), purchased these assets for approximately RMB 34 million. Three months
later, Beijing Baorui put these assets up for sale at public auction and
Shandong Fuwei acquired them for approximately RMB 119 million. At the time
of
the acquisition by Beijing Baorui, Shandong Baorui held a 10% ownership in
Shandong Fuwei and owned 80% of Beijing Baorui and at the time of the sale
to
Shandong Fuwei, Mr. Zhou and Mr. Wang indirectly controlled Shandong Fuwei
through Easebright.
Other
Related Party Transactions
During
the periods/years ended 2005, 2006 and 2007, we respectively paid approximately
RMB 201,000, RMB 151,000 and RMB 143,047 (USD$ 18,807) to Fuhua Industrial
Material Management Co., Ltd. as rental payments in connection with living
quarters for our staff. Fuhua Industrial Material Management Co., Ltd. is an
entity that is owned and controlled by Weifang Neo-Luck.
In
2004,
we paid RMB 400,000 as a deposit for expenses relating to a conference we hosted
at the facilities of Fuwah Hotel. Weifang Neo-Luck is the owner of Fuhua
Hotel.
Prior
to
the acquisition of the DMT production line through auction as described above,
Shandong Fuwei paid Shandong Neo-Luck a sub-contracting fee at a rate of RMB
871.46 per ton for the use of the DMT production line.
C. Interests
of experts and counsel.
Not
Applicable.
Item
8. Financial Information
A.
Consolidated Statements and Other Financial Information.
Our
consolidated financial statements are included herein under Item
18.
We
have
not paid any dividends on our ordinary shares. The payment of dividends in
the
future, if any, is within the discretion of our Board of Directors and will
depend upon our earnings, its capital requirements and financial condition
and
other relevant factors. We do not anticipate declaring or paying any dividends
in the foreseeable future.
Legal
Proceedings
DMT
Arbitration
In
April
2006, we received a request for arbitration and related papers in an arbitration
proceeding between DMT S. A. (“DMT”) and Shandong Neoluck Plastics Co. Ltd.
(“Neoluck”). The arbitration was filed in the ICC International Court of
Arbitration and seeks monetary damages against Neoluck of approximately
$1,250,000, plus interest. The claim relates to Neoluck’s purchase of certain
equipment from DMT pursuant to a November 20, 2001 Contract, and seeks to
recover the remaining purchase price due under the Contract and payment for
certain spare parts. (The subject equipment is the DMT production line we
acquired from Beijing Baroui in 2005 in Neoluck’s bankruptcy).
At
the
invitation of Weifang Neoluck (Group) Co., Ltd (“Neoluck Group”), the original
majority shareholder of Neoluck, the Neoluck Group and DMT engaged in efforts
to
achieve a settlement of the pending arbitration on January 18, 2008. Fuwei
joined these discussions later as an interested party and in order to support
a
resolution of the pending dispute and to achieve resolution of certain
outstanding service and spare part issues.
After
several weeks of negotiations among the parties, we entered into a Service
and
Technical Assistance Agreement (the “Service Agreement”), dated March 5, 2008,
providing for the payment of $180,000 in two installments in order to commence
receiving service and spare parts with respect to the equipment that had been
originally sold by DMT. On March 12, 2008, the Neoluck Group entered into a
Settlement Agreement (the “Settlement Agreement”) with DMT, pursuant to which
Neoluck Group will make a payment of $900,000 through an irrevocable bank draft
delivered to DMT to be drawn upon within sixty days. In accordance with the
provisions of the Settlement Agreement, upon DMT’s collection of moneys to be
paid under the Settlement Agreement and the Service Agreement, the pending
dispute in arbitration will be withdrawn and DMT will release the Neoluck Group
and Fuwei from any claims relating to the original sale of the
equipment.
In
accordance with the Settlement Agreement, a letter, signed by counsel to DMT
and
Fuwei, has been transmitted to the ICC International Court of Arbitration
requesting a suspension of any further proceeding pending the performance of
the
payment obligations under the Settlement Agreement and the Service Agreement.
Once such payment obligations are performed, the arbitration proceeding will
be
withdrawn as settled between the parties.
HKG
Arbitration
At
December 31, 2007, this matter was a threatened arbitration by Hampden Kent
Group LLC. for the amount of USD 3,800,000, relating to a claim for a penalty
fee in connection with services allegedly performed by HKG in connection
with
attempting to provide financing to Fuwei pursuant to a service agreement
between
the parties.
As
regarding by the service agreement, any dispute between the parties would
be
arbitrated by the American Arbitration Association (“AAA”) in accordance with
its rules. Pursuant to these rules, a demand for arbitration must be filed
with
the AAA regional office together with a filing fee by the claiming party,
in
this case, HKG.
In
December 2007, HKG filed a demand for arbitration with the International
Dispute
Center of the AAA, but without paying the requisite filing fee. As a result,
the
AAA advised us that it did not view the demand as being filed since the
requisite fee was not paid. We confirmed that status as of December 31,
2007.
On
January 28, 2008, the AAA informed us that HKG’s filing fee had been paid and
that an arbitration process would commence in accordance with its rules.
On
February 18, 2008, HKG submitted an Amended Demand for Arbitration and Statement
of Claim, correcting certain clerical errors in its original
demand.
On
March
14, 2008, the Company submitted its answering statement and counterclaim in
response to HKG's Amended Demand for Arbitration and Statement of Claim.
The Company denied HKG's claims for breach of contract and breach of the
covenant of good faith and fair dealing as legally and factually without merit
and asserted various defenses. The Company also asserted a counterclaim
against HKG for breach of the August 19, 2006 Letter Agreement, seeking to
recover the over $300,000 in fees and costs paid to HKG and other
consequential damages.
On
March
27, 2008, HKG submitted a letter in reply to the Company's counterclaim,
generally denying the allegations and claims made by the
Company.
At
the
request of HKG, the Company has agreed to attempt to resolve this dispute
through mediation. A neutral mediator has been appointed by the AAA's
International Centre for Dispute Resolution; however, the mediation has not
yet
been scheduled.
Class
Action
On
October 19, 2007, the Company became aware that a class action lawsuit had
been
filed on behalf of all purchasers of the Company’s stock (collectively, the
“Plaintiffs”) from the date of the Company’s Initial Public Offering on December
19,2006 through October 16, 2007. The case is pending in the United States
District Court for the Southern District of New York. The Complaint alleges
that
the Company and certain of its present and former officers, directors and
control persons (collectively, the “Defendants”) violated the Securities Act of
1933.
On
November 21, 2007, the Company was given notice that a class action lawsuit
had
been filed on behalf of all purchasers of the Company’s stock (collectively, the
“Plaintiffs”) pursuant or traceable to the Registration Statement and Prospectus
issued in connection with the Company’s Initial Public Offering on December
19,2006 through November 12,2007. The case is pending in the United States
District Court for the Southern District of New York. The Complaint alleges
that
the Company, its underwriters and certain of its executives (collectively,
the
“Defendants”) violated Sections 11,12(2) and 15 of the Securities Act of 1933.
They also complaint alleges that the Defendants misrepresented or omitted
material information regarding the Company and its business
operations.
On
January 24, 2008, the Court consolidated into a single action the putative
securities class actions pending against the Company and certain of its
officers, directors, and shareholders. The Court also appointed
Ninyat Tonyaz as lead plaintiff, appointed the Rosen Law Firm, P.A. as lead
counsel, and granted plaintiffs leave to file a consolidated amended class
action complaint. The consolidated action is styled In re Fuwei
Films Securities Litigation, Case No. 07-CV-9416
(RJS).
On
March
14, 2008, plaintiffs filed a consolidated amended class action complaint naming
as defendants the Company, Xianoan He, Mark Stulga, Jun Yin, Tongju Zhou, Duo
Wang, and the Company's IPO underwriters — Maxim Group LLC, WR
Hambrecht + Co. and Chardan Capital Markets, LLC. The consolidated amended
class action complaint asserts claims for violation of Sections 11, 12(a)(2),
and 15 of the Securities Act of 1933. At this point, we believe that only
the Company, Mr. Stulga, and the Underwriter Defendants have been properly
served with the consolidated amended class action complaint.
Pursuant
to a scheduling order entered by the Court on February 19, 2008, the parties
named as defendants in the consolidated class action are required to answer
or
otherwise respond to the consolidated complaint on or before April 30,
2008.
B. Significant
Changes.
Not
Applicable
Item
9. The
Offer and Listing.
A.
Offer
and listing details.
We
have
authorized capital of 20,000,000 ordinary shares, par value US$0.129752 each.
As
of March 28, 2008, 13,062,500 ordinary shares were issued and
outstanding.
The
annual high and low market prices of our ordinary shares for the five most
recent full financial years and subsequent period are as set forth
below:
|
|
Ordinary
Shares
|
|
(Year
Ending)
|
|
High
|
|
Low
|
|
December
31, 2006 (commencing December 19)
|
|
$
|
18.43
|
|
$
|
8.30
|
|
December
31, 2007
|
|
$
|
17.14
|
|
$
|
2.12
|
|
The
high
and low market prices of our ordinary shares for each financial quarter over
the
two most recent full financial years and subsequent period are as set forth
below:
|
|
Ordinary
Shares
|
|
(Quarter
Ending)
|
|
High
|
|
Low
|
|
December
31, 2006 (commencing December 19)
|
|
$
|
18.43
|
|
$
|
8.30
|
|
March
29, 2007
|
|
$
|
17.14
|
|
$
|
8.00
|
|
June
31, 2007
|
|
$
|
6.37
|
|
$
|
6.20
|
|
September
28, 2007
|
|
$
|
9.00
|
|
$
|
8.32
|
|
December
31, 2007
|
|
$
|
6.34
|
|
$
|
5.81
|
|
For
the
most recent six months, the high and low market prices of our ordinary shares
are as set forth below:
|
|
Ordinary
Shares
|
|
(Month
Ending)
|
|
High
|
|
Low
|
|
July
2007
|
|
$
|
9.09
|
|
$
|
6.16
|
|
August
2007
|
|
$
|
7.80
|
|
$
|
5.63
|
|
September
2007
|
|
$
|
10.38
|
|
$
|
6.50
|
|
October
2007
|
|
$
|
10.75
|
|
$
|
6.20
|
|
November
2007
|
|
$
|
7.14
|
|
$
|
2.12
|
|
December
2007
|
|
$
|
7.78
|
|
$
|
3.54
|
|
B. Plan
of Distribution.
Not
Applicable.
C. Markets.
Our
ordinary shares were included for quotation on the Nasdaq Global Market on
December 18, 2006 under the symbol “FFHL”.
D. Selling
Shareholders.
Not
applicable.
E. Dilution.
Not
applicable.
F. Expenses
of the issue.
Not
Applicable.
Item
10. Additional
Information.
A. Share
capital.
Not
Applicable.
B.
Memorandum
and articles of association.
We
are a
Cayman Islands company and our affairs are governed by our memorandum and
articles of association and the Companies Law (2004 revision) of the Cayman
Islands, or the Companies Law. We have filed copies of our complete Memorandum
and Articles of Association as exhibits to our Annual Report on Form 20-F for
the year ended 2006 filed with the SEC on April 2, 2007.
As
of the
date of this Annual Report, our authorized share capital consisted of 20,000,000
ordinary shares, par value US$0.129752 per share. As of the date of this Annual
Report, 13,062,500 ordinary shares were issued and outstanding, and no
preference shares were issued and outstanding.
Ordinary
Shares
We
were
incorporated under the laws of the Cayman Islands as an exempted company. A
Cayman Islands exempted company:
|
·
|
is
a company that conducts its business outside the Cayman
Islands;
|
|
·
|
is
exempted from certain requirements of the Companies Law, including
the
filing of any annual return of its shareholders with the Registrar
of
Companies or the Immigration Board;
|
|
·
|
does
not have to make its register of shareholders open to inspection;
and
|
|
·
|
may
obtain an undertaking against the imposition of any future
taxation.
|
The
following summarizes the terms and provisions of our share capital, as well
as
the material applicable laws of the Cayman Islands. This summary is not
complete, and you should read our amended and restated memorandum and articles
of association, filed as exhibits to this Annual Report.
The
following discussion primarily concerns ordinary shares and the rights of
holders of ordinary shares.
Protection
of Minority Shareholders
The
Grand
Court of the Cayman Islands may, on the application of shareholders holding
not
less than one fifth of our shares in issue, appoint an inspector to examine
our
affairs and report thereon in a manner as the Grand Court shall
direct.
Any
shareholder may petition the Grand Court of the Cayman Islands which may make
a
winding up order, if the court is of the opinion that it is just and equitable
that we should be wound up.
Claims
against us by our shareholders must, as a general rule, be based on the general
laws of contract or tort applicable in the Cayman Islands or their individual
rights as shareholders as established by our amended and restated memorandum
and
articles of association.
The
Cayman Islands courts ordinarily would be expected to follow English case law
precedents which permit a minority shareholder to commence a representative
action against, or derivative actions in our name to challenge
|
·
|
an
act which is ultra vires or
illegal;
|
|
·
|
an
act which constitutes a fraud against the minority shareholder and
the
wrongdoers are themselves in control of us;
and
|
|
·
|
an
irregularity in the passing of a resolution which requires a qualified
(or
special) majority.
|
Pre-emption
Rights
There
are
no pre-emption rights applicable to the issue of new shares under either Cayman
Islands law or our amended and restated memorandum and articles of
association.
Modification
of Rights
Except
with respect to share capital (as described below) alterations to our amended
and restated memorandum and articles of association may only be made by special
resolution of no less than two-thirds of votes cast at a meeting of the
shareholders.
Subject
to the Companies Law, all or any of the special rights attached to shares of
any
class (unless otherwise provided for by the terms of issue of the shares of
that
class) may be varied, modified or abrogated with the sanction of a special
resolution passed at a separate general meeting of the holders of the shares
of
that class.
The
provisions of our amended and restated articles of association relating to
general meetings shall apply similarly to every such separate general meeting,
but so that the quorum for the purposes of any such separate general meeting
or
at its adjourned meeting shall be a person or persons together holding (or
represented by proxy) not less than one third in nominal value of the issued
shares of that class, every holder of shares of the class shall be entitled
on a
poll to one vote for every such share held by such holder and that any holder
of
shares of that class present in person or by proxy may demand a
poll.
The
special rights conferred upon the holders of any class of shares shall not,
unless otherwise expressly provided in the rights attaching to or the terms
of
issue of such shares, be deemed to be varied by the creation or issue of further
shares ranking pari passu therewith.
Alteration
of Capital
We
may
from time to time by ordinary resolution:
|
·
|
increase
our capital by such sum, to be divided into shares of such amounts,
as the
resolution shall prescribe;
|
|
·
|
consolidate
and divide all or any of our share capital into shares of larger
amount
than our existing shares;
|
|
·
|
cancel
any shares which at the date of the passing of the resolution have
not
been taken or agreed to be taken by any person, and diminish the
amount of
our share capital by the amount of the shares so cancelled subject
to the
provisions of the Companies Law;
|
|
·
|
sub-divide
our shares or any of them into shares of smaller amount than is fixed
by
our amended and restated memorandum and articles of association,
subject
nevertheless to the Companies Law, and so that the resolution whereby
any
share is subdivided may determine that, as between the holders of
the
share resulting from such subdivision, one or more of the shares
may have
any such preference or other special rights, over, or may have such
deferred rights or be subject to any such restrictions as compared
with,
the others as we have power to attach to unissued or new shares;
and
|
|
·
|
divide
shares into several classes and without prejudice to any special
rights
previously conferred on the holders of existing shares, attach to
the
shares respectively as preferential, deferred, qualified or special
rights, privileges, conditions or such restrictions which, in the
absence
of any such determination in a general meeting, may be determined
by our
directors.
|
We
may,
by special resolution, subject to any confirmation or consent required by the
Companies Law, reduce our share capital or any capital redemption reserve in
any
manner authorized by law.
Transfer
of Shares
Subject
to any applicable restrictions set forth in our amended and restated memorandum
and articles of association, any of our shareholders may transfer all or any
of
his or her shares by an instrument of transfer in the usual or common form
or in
any form prescribed by the NASDAQ Global Market or in any other form which
our
directors may approve. You should note that, under Cayman Islands law, a person
whose name is entered on the register of members will be deemed to be a member
or shareholder of our company. We have designated Continental Stock Transfer
and
Trust Company as our share registrar. Under Cayman Islands law, a share
certificate constitutes admissible evidence as proof of title of its holder
to
the shares specified on such certificate.
Our
directors may decline to register any transfer of any share which is not paid
up
or on which we have a lien. Our directors may also decline to register any
transfer of any share unless:
|
·
|
the
instrument of transfer is lodged with us accompanied by the certificate
for the shares to which it relates and such other evidence as our
directors may reasonably require to show the right of the transferor
to
make the transfer;
|
|
·
|
the
instrument of transfer is in respect of only one class of
shares;
|
|
·
|
the
instrument of transfer is properly stamped (in circumstances where
stamping is required);
|
|
·
|
in
the case of a transfer to joint holders, the number of joint holders
to
whom the share is to be transferred does not exceed four;
and
|
|
·
|
a
fee of such maximum sum as the NASDAQ Global Market may at any time
determine to be payable or such lesser sum as our directors may from
time
to time require is paid to us in respect
thereof.
|
If
our
directors refuse to register a transfer, they shall, within two months after
the
date on which the instrument of transfer was lodged, send to each of the
transferor and the transferee notice of such refusal.
The
registration of transfers may, on notice being given by advertisement in such
one or more newspapers or by any other means in accordance with any requirements
of the NASDAQ Global Market, be suspended and the register closed at such times
and for such periods as our directors may from time to time determine; provided,
however, that the registration of transfers shall not be suspended nor the
register closed for more than 30 days in any year as our directors may
determine.
Share
Repurchase
We
are
empowered by the Companies Law and our amended and restated memorandum and
articles of association to purchase our own shares, subject to certain
restrictions. Our directors may only exercise this power on our behalf, subject
to the Companies Law, our amended and restated memorandum and articles of
association and to any applicable requirements imposed from time to time by
the
U.S. Securities and Exchange Commission, the NASDAQ Global Market, or by any
recognized stock exchange on which our securities are listed.
Dividends
Subject
to the Companies Law, we may declare dividends in any currency to be paid to
our
shareholders. Dividends may be declared and paid out of our profits, realized
or
unrealized, or from any reserve set aside from profits which our directors
determine is no longer needed. Our board of directors may also declare and
pay
dividends out of the share premium account or any other fund or account which
can be authorized for this purpose in accordance with the Companies
Law.
Except
in
so far as the rights attaching to, or the terms of issue of, any share otherwise
provides (1) all dividends shall be declared and paid according to the amounts
paid up on the shares in respect of which the dividend is paid, but no amount
paid up on a share in advance of calls shall be treated for this purpose as
paid
up on that share and (2) all dividends shall be apportioned and paid pro rata
according to the amounts paid upon the shares during any portion or portions
of
the period in respect of which the dividend is paid.
Our
directors may also pay any dividend that is payable on any shares semi-annually
or on any other dates, whenever our financial position, in the opinion of our
directors, justifies such payment.
Our
directors may deduct from any dividend or other moneys payable to any
shareholder all sums of money (if any) presently payable by such shareholder
to
us on account of calls or otherwise.
No
dividend or other money payable by us on or in respect of any share shall bear
interest against us.
In
respect of any dividend proposed to be paid or declared on our share capital,
our directors may resolve and direct that (1) such dividend be satisfied wholly
or in part in the form of an allotment of shares credited as fully paid up,
provided that our shareholders entitled thereto will be entitled to elect to
receive such dividend (or part thereof if our directors so determine) in cash
in
lieu of such allotment or (2) the shareholders entitled to such dividend will
be
entitled to elect to receive an allotment of shares credited as fully paid
up in
lieu of the whole or such part of the dividend as our directors may think fit.
We may also, on the recommendation of our directors, resolve in respect of
any
particular dividend that, notwithstanding the foregoing, it may be satisfied
wholly in the form of an allotment of shares credited as fully paid up without
offering any right of shareholders to elect to receive such dividend in cash
in
lieu of such allotment.
Any
dividend, interest or other sum payable in cash to any shareholder may be paid
by check or warrant sent by mail addressed to the shareholder at his registered
address, or addressed to such person and at such addresses as the shareholder
may direct. Every check or warrant shall, unless the shareholder or joint
shareholders otherwise direct, be made payable to the order of the shareholder
or, in the case of joint shareholders, to the order of the shareholder whose
name stands first on the register in respect of such shares, and shall be sent
at their risk and payment of the check or warrant by the bank on which it is
drawn shall constitute a good discharge to us.
All
dividends unclaimed by shareholders for one year after having been declared
may
be invested or otherwise made use of by our board of directors for the benefit
of our company until claimed. Any dividend unclaimed by shareholders after
a
period of six years from the date of declaration of such dividend may be
forfeited and, if so forfeited, shall revert to us.
Whenever
our directors have resolved that a dividend be paid or declared, our directors
may further resolve that such dividend be satisfied wholly or in part by the
distribution of specific assets of any kind, and in particular of paid up
shares, debentures or warrants to subscribe for our securities or securities
of
any other company. Where any difficulty arises with regard to such distribution,
our directors may settle it as they think expedient. In particular, our
directors may issue fractional certificates, ignore fractions altogether or
round the same up or down, fix the value for distribution purposes of any such
specific assets, determine that cash payments shall be made to any of our
shareholders upon the footing of the value so fixed in order to adjust the
rights of the parties, vest any such specific assets in trustees as may seem
expedient to our directors, and appoint any person to sign any requisite
instruments of transfer and other documents on behalf of a person entitled
to
the dividend, which appointment shall be effective and binding on our
shareholders.
Untraceable
Shareholders
We
are
entitled to sell any shares of a shareholder who is untraceable, provided
that:
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all
checks or warrants in respect of dividends of such shares, not being
less
than three in number, for any sums payable in cash to the holder
of such
shares have remained uncashed for a period of twelve years prior
to the
publication of the advertisement and during the three months referred
to
in the third bullet point below;
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we
have not during that time received any indication of the whereabouts
or
existence of the shareholder or person entitled to such shares by
death,
bankruptcy or operation of law; and
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we
have caused an advertisement to be published in newspapers in the
manner
stipulated by our amended and restated memorandum and articles of
association, giving notice of our intention to sell these shares,
and a
period of three months has elapsed since such advertisement and the
NASDAQ
Global Market has been notified of such
intention.
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The
net
proceeds of any such sale shall belong to us, and when we receive these net
proceeds we shall become indebted to the former shareholder for an amount equal
to such net proceeds.
Issuance
of Additional Ordinary Shares or Preference Shares
Subject
to the Companies Law and the rules of the NASDAQ Global Market and without
prejudice to any special rights or restrictions for the time being attached
to
any shares or any class of shares, our board of directors may issue additional
ordinary shares from time to time as our board of directors determines, to
the
extent of available authorized but unissued shares and establish from time
to
time one or more series of preference shares and to determine, with respect
to
any series of preference shares, the terms and rights of that series,
including:
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the
designation of the series;
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the
number of shares of the series;
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the
dividend rights, conversion rights, voting rights;
and
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the
rights and terms of redemption and liquidation
preferences.
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Subject
to the foregoing, our board of directors may issue series of preference shares
without action by our shareholders to the extent authorized but unissued.
Accordingly, the issuance of preference shares may adversely affect the rights
of the holders of the ordinary shares. In addition, the issuance of preference
shares may be used as an anti-takeover device without further action on the
part
of the shareholders. Issuance of preference shares may dilute the voting power
of holders of ordinary shares.
Subject
to applicable regulatory requirements, our board of directors may issue
additional ordinary shares without action by our shareholders to the extent
of
available authorized but unissued shares. The issuance of additional ordinary
shares may be used as an anti-takeover device without further action on the
part
of the shareholders. Such issuance may dilute the voting power of existing
holders of ordinary shares.
We
have
applied to NASDAQ to have our ordinary shares listed on the NASDAQ Global
Market. Although we believe that, upon completion of this offering, our ordinary
shares will trade on NASDAQ Global Market, we cannot guaranty that we will
be
able to satisfy the NASDAQ criteria for listing or that we will be able to
satisfy the listing maintenance requirements, in which case our ordinary shares
could be subject to delisting.
Committees
of Board of Directors
Pursuant
to our amended and restated articles of association, our board of directors,
we
have established an audit committee, a compensation committee and a corporate
governance and nominating committee.
Differences
in Corporate Law
The
Companies Law is modeled after similar laws in the United Kingdom but does
not
follow recent changes in United Kingdom laws. In addition, the Companies Law
differs from laws applicable to United States corporations and their
shareholders. Set forth below is a summary of the significant differences
between the provisions of the Companies Law applicable to us and the laws
applicable to companies incorporated in the United States, such as in the State
of Delaware.
Duties
and Directors
Under
Cayman Islands law, at common law, members of a board of directors owe a
fiduciary duty to the company to act in good faith in their dealings with or
on
behalf of the company and exercise their powers and fulfill the duties of their
office honestly. This duty has four essential elements:
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a
duty to act in good faith in the best interests of the
company;
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a
duty not to personally profit from opportunities that arise from
the
office of director;
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a
duty to avoid conflicts of interest;
and
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a
duty to exercise powers for the purpose for which such powers were
intended.
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In
general, the Companies Law imposes various duties on officers of a company
with
respect to certain matters of management and administration of the company.
The
Companies Law contains provisions, which impose default fines on persons who
fail to satisfy those requirements. However, in many circumstances, an
individual is only liable if he knowingly is guilty of the default or knowingly
and willfully authorizes or permits the default.
In
comparison, under Delaware law, the business and affairs of a corporation are
managed by or under the direction of its board of directors. In exercising
their
powers, directors are charged with a fiduciary duty of care to protect the
interests of the corporation and a fiduciary duty of loyalty to act in the
best
interests of its shareholders. The duty of care requires that directors act
in
an informed and deliberative manner and inform themselves, prior to making
a
business decision, of all material information reasonably available to them.
The
duty of care also requires that directors exercise care in overseeing and
investigating the conduct of the corporation’s employees. The duty of loyalty
may be summarized as the duty to act in good faith, not out of self-interest,
and in a manner which the director reasonably believes to be in the best
interests of the shareholders.
Under
Delaware law, a party challenging the propriety of a decision of a board of
directors bears the burden of rebutting the applicability of the presumptions
afforded to directors by the “business judgment rule.” If the presumption is not
rebutted, the business judgment rule protects the directors and their decisions,
and their business judgments will not be second guessed. Where, however, the
presumption is rebutted, the directors bear the burden of demonstrating the
entire fairness of the relevant transaction. Notwithstanding the foregoing,
Delaware courts subject directors’ conduct to enhanced scrutiny in respect of
defensive actions taken in response to a threat to corporate control and
approval of a transaction resulting in a sale of control of the
corporation.
Interested
Directors
There
are
no provisions under the Companies Law that require a director who is interested
in a transaction entered into by a Cayman Islands company to disclose his
interest. However, under our amended and restated memorandum and articles of
association, our directors are required to do so, and in the event that they
do
not do so it may render such director liable to such company for any profit
realized pursuant to such transaction.
In
comparison, under Delaware law, such a transaction would not be voidable if
(a)
the material facts as to such interested director’s relationship or interests
are disclosed or are known to the board of directors and the board in good
faith
authorizes the transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors are less than
a
quorum, (b) such material facts are disclosed or are known to the shareholders
entitled to vote on such transaction and the transaction is specifically
approved in good faith by vote of the shareholders, or (c) the transaction
is
fair as to the corporation as of the time it is authorized, approved or
ratified. Under Delaware law, a director could be held liable for any
transaction in which such director derived an improper personal
benefit.
Voting
Rights and Quorum Requirements
Under
Cayman Islands law, the voting rights of shareholders are regulated by the
company’s articles of association and, in certain circumstances, the Companies
Law. The articles of association will govern matters such as quorum for the
transaction of business, rights of shares, and majority votes required to
approve any action or resolution at a meeting of the shareholders or board
of
directors. Under Cayman Islands law, certain matters must be approved by a
special resolution which is defined as two-thirds of the votes cast by
shareholders present at a meeting and entitled to vote or such higher majority
as is specified in the articles of association; otherwise, unless the articles
of association otherwise provide, the majority is usually a simple majority
of
votes cast.
In
comparison, under Delaware law, unless otherwise provided in the corporation’s
certificate of incorporation, each shareholder is entitled to one vote for
each
share of stock held by the shareholder. Unless otherwise provided in the
corporation’s certificate of incorporation or bylaws, a majority of the shares
entitled to vote, present in person or represented by proxy, constitutes a
quorum at a meeting of shareholders. In matters other than the election of
directors, with the exception of special voting requirements related to
extraordinary transactions, the affirmative vote of a majority of shares present
in person or represented by proxy at the meeting and entitled to vote is
required for shareholder action, and the affirmative vote of a plurality of
shares is required for the election of directors.
Mergers
and Similar Arrangements
Cayman
Islands law does not provide for mergers as that expression is understood under
United States corporate law. However, there are statutory provisions that
facilitate the reconstruction and amalgamation of companies, provided that
the
arrangement in question is approved by a majority in number of each class of
shareholders and creditors with whom the arrangement is to be made, and who
must
in addition represent three fourths in value of each such class of shareholders
or creditors, as the case may be, that are present and voting either in person
or by proxy at a meeting, or meetings convened for that purpose.
The
convening of the meetings and subsequently the arrangement must be sanctioned
by
the Grand Court of the Cayman Islands. While a dissenting shareholder would
have
the right to express to the court the view that the transaction should not
be
approved, the court can be expected to approve the arrangement if it satisfies
itself that:
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the
company is not proposing to act illegally or ultra vires and the
statutory
provisions as to majority vote have been complied
with;
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the
shareholders have been fairly represented at the meeting in
question;
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the
arrangement is such as a businessman would reasonably approve;
and
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the
arrangement is not one that would more properly be sanctioned under
some
other provision of the Companies Law or that would amount to a “fraud on
the minority.”
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When
a
takeover offer is made and accepted by holders of 90% of the shares within
four
months, the offerer may, within a two-month period, require the holders of
the
remaining shares to transfer such shares on the terms of the offer. An objection
may be made to the Grand Court of the Cayman Islands but is unlikely to succeed
unless there is evidence of fraud, bad faith or collusion.
Cayman
Islands laws do not require that shareholders approve sales of all or
substantially all of a company’s assets as is commonly adopted by U.S.
corporations.
If
the
arrangement and reconstruction are thus approved, any dissenting shareholders
would have no rights comparable to appraisal rights, which would otherwise
ordinarily be available to dissenting shareholders of United States
corporations, providing rights to receive payment in cash for the judicially
determined value of the shares.
Shareholders’
Suits
Derivative
actions have been brought under Cayman Islands law but were unsuccessful for
technical reasons. In principle, we will normally be the proper plaintiff and
a
derivative action may not be brought by a minority shareholder. However, based
on English authorities, which would in all likelihood be of persuasive authority
in the Cayman Islands, exceptions to the foregoing principle apply in
circumstances in which:
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a
company is acting or proposing to act illegally or beyond the scope
of its
authority;
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the
act complained of, although not beyond the scope of its authority,
could
be effected duly if authorized by more than a simple majority vote
which
has not been obtained; and
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those
who control the company are perpetrating a “fraud on the
minority.”
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Class
actions and derivative actions generally are available to shareholders under
Delaware law for, among other things, breach of fiduciary duty, corporate waste
and actions not taken in accordance with applicable law. In such actions, the
court generally has discretion to permit the winning party to recover attorneys’
fees incurred in connection with such action.
Corporate
Governance
Cayman
Islands laws do not restrict transactions with directors, requiring only that
directors exercise a duty of care and owe a fiduciary duty to the companies
for
which they serve. Under our amended and restated memorandum and articles of
association, subject to any separate requirement for audit committee approval
under the applicable rules of The Nasdaq Stock Market, Inc. or unless
disqualified by the chairman of the relevant board meeting, so long as a
director discloses the nature of his interest in any contract or arrangement
which he is interested in, such a director may vote in respect of any contract
or proposed contract or arrangement in which such director is interested and
may
be counted in the quorum at such meeting.
Cayman
Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except
to
the extent any such provision may be held by the Cayman Islands courts to be
contrary to public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime. Our amended and restated
memorandum and articles of association provide for the indemnification of our
directors, auditors and officers against all losses or liabilities incurred
or
sustained by him or her as a director, auditor or officer of our company in
defending any proceedings, whether civil or criminal, in which judgment is
given
in his or her favor, or in which he or she is acquitted provided that this
indemnity may not extend to any matter in respect of any fraud or dishonesty
which may attach to any of these persons.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act
and
therefore is unenforceable.
We
are
managed by our board of directors. Our amended and restated memorandum and
articles of association provide that the number of our directors shall not
be
less than two and there shall be no maximum number of our directors unless
our
shareholders in general meeting otherwise determine a maximum number. Initially
we have set our board of directors to have 4 directors. Any director on our
board may be removed by way of an ordinary resolution of shareholders. At each
annual general meeting, one-third of our directors for the time being (or,
if
their number is not a multiple of three, the number nearest to but not less
than
one-third) shall retire from office by rotation provided that every director
shall be subject to retirement at least once every three years. Any vacancies
on
our board of directors or additions to the existing board of directors can
be
filled by an ordinary resolution of our shareholders or the affirmative vote
of
a majority of the remaining directors, although this may be less than a quorum
where the number of remaining directors falls below the minimum number fixed
by
our board of directors. Our directors are not required to hold any of our shares
to be qualified to serve on our board of directors.
Meetings
of our board of directors may be convened at any time deemed necessary by any
one of our directors. Advance notice of a meeting is not required if each
director entitled to attend consents to the holding of such
meeting.
A
meeting
of our board of directors shall be competent to make lawful and binding
decisions if a majority of the members of our board of directors are present
or
represented. At any meeting of our directors, each director is entitled to
one
vote.
Questions
arising at a meeting of our board of directors are required to be decided by
simple majority votes of the members of our board of directors present or
represented at the meeting. In the case of a tie vote, the chairman of the
meeting shall have a second or deciding vote. Our board of directors may also
pass resolutions without a meeting by unanimous written consent.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act
and
therefore is unenforceable.
Inspection
of Corporate Records
Shareholders
of a Cayman Islands company have no general right under Cayman Islands law
to
inspect or obtain copies of a list of shareholders or other corporate records
of
the company. However, these rights may be provided in the articles of
association.
In
comparison, under Delaware law, shareholders of a Delaware corporation have
the
right during normal business hours to inspect for any proper purpose, and to
obtain copies of list(s) of shareholders and other books and records of the
corporation and its subsidiaries, if any, to the extent the books and records
of
such subsidiaries are available to the corporation.
Shareholder
Proposals
The
Companies Law does not provide shareholders any right to bring business before
a
meeting or requisition a general meeting. However, these rights may be provided
in the articles of association.
Unless
provided in the corporation’s certificate of incorporation or bylaws, Delaware
law does not include a provision restricting the manner in which shareholders
may bring business before a meeting.
Approval
of Corporate Matters by Written Consent
The
Companies Law allows a special resolution to be passed in writing if signed
by
all the shareholders and authorized by the articles of association.
In
comparison, Delaware law permits shareholders to take action by written consent
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at
a
meeting of shareholders.
Calling
of Special Shareholders Meetings
The
Companies Law does not have provisions governing the proceedings of shareholders
meetings which are usually provided in the articles of association.
In
comparison, Delaware law permits the board of directors or any person who is
authorized under a corporation’s certificate of incorporation or bylaws to call
a special meeting of shareholders.
Staggered
Board of Directors
The
Companies Law does not contain statutory provisions that require staggered
board
arrangements for a Cayman Islands company. Such provisions, however, may validly
be provided for in the articles of association.
In
comparison, Delaware law permits corporations to have a staggered board of
directors.
Anti-takeover
Provisions
Neither
Cayman Islands nor Delaware law prevents companies from adopting a wide range
of
defensive measures, such as staggered boards, blank check preferred, removal
of
directors only for cause and provisions that restrict the rights of shareholders
to call meetings, act by written consent and submit shareholder
proposals.
D. Exchange
controls.
China’s
government imposes control over the convertibility of Rmb into foreign
currencies. Under the current unified floating exchange rate system, the
People’s Bank of China publishes a daily exchange rate for Rmb, or the PBOC
Exchange Rate, based on the previous day’s dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC Exchange Rate according to market
conditions.
Pursuant
to the Foreign Exchange Control Regulations issued by the State Council on
January 29, 1996 and effective as of April 1, 1996 (and amended on January
14,
1997) and the Administration of Settlement, Sale and Payment of Foreign Exchange
Regulations which came into effect on July 1, 1996 regarding foreign exchange
control, or the Regulations, conversion of Renminbi into foreign exchange by
foreign investment enterprises for current account items, including the
distribution of dividends and profits to foreign investors of joint ventures,
is
permissible upon the proper production of qualified commercial vouchers or
legal
documents as required by the Regulations. Foreign investment enterprises are
permitted to remit foreign exchange from their foreign exchange bank account
in
China upon the proper production of, inter alia, the board resolutions declaring
the distribution of the dividend and payment of profits. Conversion of Rmb
into
foreign currencies and remittance of foreign currencies for capital account
items, including direct investment, loans, security investment, is still subject
to the approval of the State Administration of Foreign Exchange, or SAFE, in
each such transaction. On January 14, 1997, the State Council amended the
Foreign Exchange Control Regulations and added, among other things, an important
provision, as Article 5 provides that the State shall not impose restrictions
on
recurring international payments and transfers.
Under
the
Regulations, foreign investment enterprises are required to open and maintain
separate foreign exchange accounts for capital account items (but not for other
items). In addition, foreign investment enterprises may only buy, sell and/or
remit foreign currencies at those banks authorized to conduct foreign exchange
business upon the production of valid commercial documents and, in the case
of
capital account item transactions, document approval from SAFE.
Currently,
foreign investment enterprises are required to apply to SAFE for “foreign
exchange registration certificates for foreign investment enterprises.” With
such foreign exchange registration certificates (which are granted to foreign
investment enterprises, upon fulfilling specified conditions and which are
subject to review and renewal by SAFE on an annual basis) or with the foreign
exchange sales notices from the SAFE (which are obtained on a
transaction-by-transaction basis), foreign-invested enterprises may enter into
foreign exchange transactions at banks authorized to conduct foreign exchange
business to obtain foreign exchange for their needs.
E. Taxation.
United
States Federal Income Taxation
The
following is a summary of the material U.S. federal income tax consequences
of
the acquisition, ownership, and disposition of our ordinary shares. The
discussion below of the U.S. federal income tax consequences to “U.S. Holders”
will apply if you are a beneficial owner of ordinary shares and you are for
U.S.
federal income tax purposes:
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an
individual citizen or resident of the United
States;
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a
corporation (or other entity treated as a corporation for U.S. federal
income tax purposes) created or organized in or under the laws of
the
United States, any state thereof or the District of
Columbia;
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an
estate whose income is subject to U.S. federal income tax regardless
of
its source; or
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a
trust if (i) a U.S. court can exercise primary supervision over the
trust’s administration and one or more U.S. persons are authorized to
control all substantial decisions of the trust, or (ii) it has a
valid
election in effect under applicable U.S. Treasury regulations to
be
treated as a U.S. person.
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If
you
are not described as a U.S. Holder and are not an entity treated as a
partnership or other pass-through entity for U.S. federal income tax purposes,
you will be considered a “Non-U.S. Holder.” The U.S. federal income tax
consequences applicable to Non-U.S. Holders is described below under the heading
“Non-U.S. Holders.”
This
summary is based on the Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed Treasury regulations promulgated
thereunder, published rulings and court decisions, all as currently in effect.
These authorities are subject to change, possibly on a retroactive
basis.
This
summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to each person’s decision to purchase
ordinary shares. This discussion does not address all aspects of U.S. federal
income taxation that may be relevant to any particular holder based on such
holder’s individual circumstances. In particular, this discussion considers only
holders that will own ordinary shares as capital assets and does not address
the
potential application of the alternative minimum tax or the U.S. federal income
tax consequences to holders that are subject to special rules,
including:
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financial
institutions or “financial services
entities”;
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taxpayers
who have elected mark-to-market
accounting;
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persons
that actually or constructively own 10% or more of our voting
shares;
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certain
expatriates or former long-term residents of the United
States;
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persons
that hold our ordinary shares as part of a straddle, constructive
sale,
hedging, conversion or other integrated transaction;
or
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persons
whose functional currency is not the U.S.
dollar
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This
discussion does not address any aspect of U.S. federal gift or estate tax,
or
state, local or non-U.S. tax laws. Additionally, the discussion does not
consider the tax treatment of partnerships or other pass-through entities or
persons who hold our ordinary shares through such entities. If a partnership
(or
other entity classified as a partnership for U.S. federal income tax purposes)
is the beneficial owner of our ordinary shares, the U.S. federal income tax
treatment of a partner in the partnership will generally depend on the status
of
the partner and the activities of the partnership.
We
have
not sought a ruling from the Internal Revenue Service (“IRS”) or an opinion of
counsel as to any U.S. federal income tax consequence described herein. The
IRS
may disagree with the description herein, and its determination may be upheld
by
a court.
BECAUSE
OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY
PARTICULAR INVESTOR MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, EACH
PROSPECTIVE INVESTOR IS URGED TO CONSULT WITH ITS TAX ADVISOR WITH RESPECT
TO
THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION
OF
ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND
NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS.
U.S.
Holders
Taxation
of Distributions Paid on Ordinary Shares
Subject
to the passive foreign investment company (“PFIC”) rules discussed below, a U.S.
Holder will be required to include in gross income as ordinary income the amount
of any distribution paid on our ordinary shares, to the extent the distribution
is paid out of our current or accumulated earnings and profits (as determined
for U.S. federal income tax purposes). Such dividend generally will constitute
foreign source passive income for foreign tax credit purposes. Such dividend
also will not be eligible for the dividends-received deduction generally allowed
to U.S. corporations in respect of dividends received from other U.S.
corporations. Distributions in excess of such earnings and profits will be
applied against and reduce the U.S. Holder’s basis in its ordinary shares and,
to the extent in excess of such basis, will be treated as gain from the sale
or
exchange of such ordinary shares. We do not expect, however, to maintain
calculations of earnings and profits in accordance with U.S. federal income
tax
principles. As a result, the entire amount of any distribution paid by us to
a
U.S. Holder generally will be treated as a dividend.
With
respect to noncorporate U.S. Holders for taxable years beginning before January
1, 2011, dividends (to the extent paid out of our earnings and profits) may
be
taxed at the lower applicable long-term capital gains rate (see “Taxation of
Disposition of Ordinary Shares” below) provided that (1) the ordinary shares are
readily tradable on an established securities market in the United States,
(2)
we are not a PFIC, as discussed below, for either the taxable year in which
the
dividend was paid or the preceding taxable year, and (3) certain holding period
requirements are met. Under recently published IRS authority, ordinary shares
are considered for purposes of clause (1) above to be readily tradable on an
established securities market in the United States if they are listed on, among
others, the NASDAQ Global Market. While we expect that our shares will be listed
on the NASDAQ Global Market, U.S. Holders should consult their own tax advisors
regarding the availability of the lower rate for any dividends paid with respect
to our ordinary shares.
Distributions
of current or accumulated earnings and profits paid in foreign currency to
a
U.S. Holder generally will be includible in the income of a U.S. Holder in
a
U.S. dollar amount calculated by reference to the exchange rate on the date
the
distribution is included in income. A U.S. Holder that receives a foreign
currency distribution and converts the foreign currency into U.S. dollars on
such date generally will recognize no foreign currency exchange gain or loss.
If
the U.S. Holder converts the foreign currency to U.S. dollars on a date
subsequent to such date, such U.S. Holder may have foreign currency exchange
gain or loss based on any appreciation or depreciation in the value of the
foreign currency against the U.S. dollar from the date of inclusion to the
date
of conversion, which will generally be U.S. source ordinary income or
loss.
Taxation
upon Disposition of Ordinary Shares
Upon
a
sale or other taxable disposition of our ordinary shares, and subject to the
PFIC rules discussed below, a U.S. Holder generally will recognize capital
gain
or loss in an amount equal to the difference between the amount realized and
the
U.S. Holder’s adjusted tax basis in the shares.
Under
current law, capital gains realized by U.S. Holders generally are subject to
U.S. federal income tax at the same rate as ordinary income, except that
long-term capital gains realized by non-corporate U.S. Holders are subject
to
U.S. federal income tax at a maximum rate of 15% for taxable years beginning
before January 1, 2011 (and 20% thereafter). Capital gain or loss will
constitute long-term capital gain or loss if the U.S. Holder’s holding period
for the shares exceeds one year. The deductibility of capital losses is subject
to limitations. Capital gain or loss realized by a U.S. Holder upon a
disposition of shares generally will constitute income or loss from sources
within the United States for foreign tax credit limitation
purposes.
Passive
Foreign Investment Company Rules
A
foreign
company is a passive foreign investment company, or PFIC, if at least 75% of
its
gross income in a taxable year, including its pro rata share of the gross income
of any company in which it is considered to own at least 25% of the shares
by
value, is passive income. Alternatively, a foreign company will be a PFIC if
at
least 50% of its assets in a taxable year, ordinarily determined based on fair
market value and averaged quarterly over the year, including its pro rata share
of the assets of any company in which it is considered to own at least 25%
of
the shares by value, are held for the production of, or produce, passive income.
Passive income generally includes dividends, interest, rents, royalties, and
gains from the disposition of passive assets.
We
do not
expect to be treated as a PFIC for U.S. federal income tax purposes, but this
conclusion is a factual determination that is made annually and thus may be
subject to change. Our actual PFIC status for any taxable year will not be
determinable until after the end of the taxable year, and accordingly there
can
be no assurance that we will not be considered a PFIC for our current or any
future taxable year.
If
we are
a PFIC for any taxable year during which a U.S. Holder held our ordinary shares,
the U.S. Holder that did not make a timely qualified electing fund (“QEF”)
election or a mark-to-market election, as described below, such holder will
be
subject to special rules with respect to:
|
·
|
any
gain recognized by the U.S. Holder you realize on the sale or other
disposition of its ordinary shares,
and
|
|
·
|
any
excess distribution made to the U.S. Holder (generally, any distributions
to such holder during a taxable year that are greater than 125% of
the
average annual distributions received by such holder in respect of
the
ordinary shares during the three preceding taxable years or, if shorter,
such holder’s holding period for the ordinary
shares).
|
Under
these rules,
|
·
|
the
U.S. Holder’s gain or excess distribution will be allocated ratably over
its holding period for the ordinary
shares,
|
|
·
|
the
amount allocated to the taxable year in which the U.S. Holder recognized
the gain or excess distribution will be taxed as ordinary
income,
|
|
·
|
the
amount allocated to each prior year, with certain exceptions, will
be
taxed at the highest tax rate in effect for that year,
and
|
|
·
|
the
interest charge generally applicable to underpayments of tax will
be
imposed in respect of the tax attributable to each such
year.
|
In
general, a U.S. Holder may avoid the PFIC tax consequences described above
in
respect to our ordinary shares by making a QEF election to include in income
its
pro rata share of our net capital gain (as long-term capital gain) and other
earnings and profits (as ordinary income), on a current basis, in each case
whether or not distributed. However, a U.S. Holder may make a QEF election
only
if we agree to provide certain tax information to such holder annually. At
this
time, we do not intend to provide U.S. Holders with such information as may
be
required to make a QEF election effective.
Alternatively,
if a U.S. Holder owns ordinary shares in a PFIC that are treated as marketable
stock, the U.S. Holder may make a mark-to-market election. If a U.S. Holder
makes a mark-to-market election, such holder generally will not be subject
to
the PFIC rules described above. Instead, in general, such holder will include
as
ordinary income each year the excess, if any, of the fair market value of its
ordinary shares at the end of its taxable year over the adjusted basis in its
ordinary shares. The U.S. Holder also will be allowed to take an ordinary loss
in respect of the excess, if any, of the adjusted basis of its ordinary shares
over the fair market value of such shares at the end of its taxable year (but
only to the extent of the net amount of previously included income as a result
of the mark-to-market election). The U.S. Holder’s basis in its ordinary shares
will be adjusted to reflect any such income or loss amounts, and any further
gain recognized on a sale or other taxable disposition of the ordinary shares
will be treated as ordinary income.
The
mark-to-market election is available only for stock that is regularly traded
on
a national securities exchange that is registered with the Securities and
Exchange Commission or on NASDAQ, or on a foreign exchange or market that the
IRS determines has rules sufficient to ensure that the market price represents
a
legitimate and sound fair market value. While we expect that our ordinary shares
will be listed on the NASDAQ Global Market, U.S. Holders nonetheless should
consult their own tax advisors regarding the availability and tax consequences
of a mark-to-market election in respect to our shares under their particular
circumstances.
If
a U.S.
Holder owns (or is deemed to own) shares during any year in a PFIC, such holder
may have to file an IRS Form 8621.
The
rules
dealing with PFICs and with the QEF and mark-to-market elections are very
complex and are affected by various factors in addition to those described
above. Accordingly, U.S. Holders should consult their own tax advisors
concerning the application of the PFIC rules to our ordinary shares under their
particular circumstances.
Non-U.S.
Holders
Dividends
paid to a Non-U.S. Holder in respect to its ordinary shares generally will
not
be subject to U.S. federal income tax, unless the dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the
United States (and, if an income tax treaty applies, are attributable to a
permanent establishment or fixed base that such holder maintains in the United
States).
In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain attributable to a sale or other disposition of our ordinary
shares unless such gain is effectively connected with its conduct of a trade
or
business in the United States (and, if an income tax treaty applies, is
attributable to a permanent establishment or fixed base that such holder
maintains in the United States) or the Non-U.S. Holder is an individual who
is
present in the United States for 183 days or more in the taxable year of sale
or
other disposition and certain other conditions are met (in which case such
gain
may be subject to tax at a 30% rate or a lower applicable tax treaty
rate).
Dividends
and gains that are effectively connected with the Non-U.S. Holder’s conduct of a
trade or business in the United States (and, if applicable, attributable to
a
permanent establishment or fixed base in the United States) generally will
be
subject to tax in the same manner as for a U.S. Holder. Effectively connected
dividends and gains received by a corporate Non-U.S. Holder may also be subject
to an additional branch profits tax at a 30% rate or a lower applicable tax
treaty rate.
Backup
Withholding and Information Reporting
In
general, information reporting for United States federal income tax purposes
will apply to distributions made on the shares within the United States to
a
non-corporate U.S. Holder and to the proceeds from sales or other dispositions
of our ordinary shares to or through a U.S. office of a broker by a
non-corporate U.S. Holder. Payments made (and sales and other dispositions
effected at an office) outside the United States will be subject to information
reporting in limited circumstances.
In
addition, backup withholding of U.S. federal income tax, currently at a rate
of
28%, generally will apply to such distributions made on our ordinary shares
to a
non-corporate U.S. Holder and the proceeds from such sales and other
dispositions of shares by a non-corporate U.S. Holder who:
|
·
|
fails
to provide an accurate taxpayer identification
number,
|
|
·
|
is
notified by the IRS that backup withholding will be required,
or
|
|
·
|
in
certain circumstances, fails to comply with applicable certification
requirements.
|
A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status to the payor, under penalties of perjury, on a duly executed applicable
IRS Form W-8 or by otherwise establishing an exemption.
Back-up
withholding is not an additional tax. Rather, the amount of any back-up
withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS.
Other
Non-United States Taxation Treatment
The
following discussion is a summary of certain anticipated Cayman Islands and
PRC
tax consequences of an investment in our ordinary shares. The discussion does
not deal with all possible tax consequences relating to an investment in our
ordinary shares and does not purport to deal with the tax consequences
applicable to all categories of investors, some of which (such as dealers in
securities, insurance companies and tax-exempt entities) may be subject to
special rules. In particular, the discussion does not address the tax
consequences under state, local and other national tax laws. Accordingly, each
prospective investor should consult its own tax advisor regarding the particular
tax consequences to it of an investment in the our ordinary shares. The
following discussion is based upon laws and relevant interpretations there
of in
effect as of the date of this Annual Report, all of which are subject to
change.
China
Taxation
There
are
no material China tax consequences to holders of ordinary shares solely as
a
result of the purchase, ownership and disposition of such ordinary shares.
There
is an income tax treaty in effect between the United States and
China.
Cayman
Island Taxation
The
Cayman Islands currently has no exchange control restrictions and no income,
corporate or capital gains tax, estate duty, inheritance tax, gift tax or
withholding tax applicable to the Company or any holder of our ordinary shares.
Accordingly, payment of dividends on, and any transfer of, the shares will
not
be subject to taxation in the Cayman Islands, no Cayman Islands withholding
tax
will be required on such payments to any holder of a share and gains derived
from the sale of shares will not be subject to Cayman Islands income or
corporation tax. The Cayman Islands is not party to any double taxation
treaties.
F. Dividends
and paying agents.
Not
Applicable
G. Statement
by experts.
Not
Applicable
H. Documents
on display
We
are
subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the
Exchange Act, we are required to file reports and other information with the
Securities and Exchange Commission. Specially, we are required to file annually
a Form 20-F no later than six month after the close of each fiscal year, which
is December 31. Copies of reports and other information, when so filed, may
be
inspected without charge and may be obtained at prescribed rates at the public
reference facilities maintained by the Securities and Exchange Commission at
Judiciary Plaza, 100 F. Street, N.E., Washington, D.C. 20549. The public may
obtain information regarding the Washington, D.C. Public Reference Room by
calling the Commission at 1-800-SEC-0330. The SEC also maintains a Web site
at
www.sec.gov
that
contains reports, proxy and information statements, and other information
regarding registrants that make electronic filings with the SEC using its EDGAR
system.
As
a
foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from
the reporting requirements pursuant to Section 16 of the Exchange
Act.
Documents
concerning the Company that are referred to in this document may also be
inspected at our office, which is at No. 387 Dongming Road, Weifang Shandong,
People’s Republic of China, 261061.
Subsidiary
Information.
Not
applicable.
Item
11. Quantitative
and Qualitative Disclosures About Market Risk.
Foreign
exchange risk
We
are
exposed to the risk of foreign currency exchange rate fluctuation. We have
never
used derivative instruments to hedge our exchange rate risks, do not plan to
do
so, and may not be successful should we attempt to do so in the future.
Nevertheless, we believe such risk is low as no foreign currency liabilities
are
incurred and the principal operations are limited mainly to the China
market.
Renminbi
is our operating subsidiary, Shandong Fuwei’s functional currency while our
functional currency is Hong Kong Dollars. Transactions in other currencies
are
recorded in Renminbi at the rates of exchange prevailing when the transactions
occur. Monetary assets and liabilities denominated in other currencies are
converted into Renminbi at rates of exchange in effect at the balance sheet
dates. Exchange gains and losses are recorded in our statements of operations
as
a component of current period earnings.
The
China
State Administration for Foreign Exchange, under the authority of the People’s
Bank of China, controls the conversion of Renminbi into foreign currencies.
The
principal regulation governing foreign currency exchange in China is the Foreign
Currency Administration Rules (1996), as amended. Under the Rules, once various
procedural requirements are met, Renminbi is convertible for current account
transactions, including trade and services, but not for capital account
transactions, including direct investment, loan or investment in securities
outside China, unless the prior approval of the State Administration of Foreign
Exchange of China is obtained. Although the Chinese government regulations
now
allow greater convertibility of Renminbi for current account transactions,
significant restrictions still remain. Currently, we are not involved in foreign
exchange transactions as all transactions are conducted in China are in Renminbi
and all exporting business is completed in U.S. dollars.
The
value
of the Renminbi is subject to changes in China’s central government policies and
to international economic and political developments affecting supply and demand
in the China Foreign Exchange Trading System market. Since 1994, the conversion
of Renminbi into foreign currencies, including U.S. dollars, has been based
on
rates set by the People’s Bank of China, which are set daily based on the
previous day’s interbank foreign exchange market rates and current exchange
rates on the world financial markets. Since 1994, the official exchange rate
generally has been stable. The official exchange rate for the conversion of
Renminbi into U.S. dollars remained stable until Renminbi was revalued in July
2005 and allowed to fluctuate by reference to a basket of foreign currencies,
including the U.S. dollar. Under the new policy, Renminbi is permitted to
fluctuate within a band against a basket of foreign currencies.
We
conduct substantially all of our operations through Shandong Fuwei, and its
financial performance and position are measured in terms of Renminbi. Any
appreciation of the Rmb against the United States dollar would consequently
have
an adverse effect on our financial performance and asset values when measured
in
terms of United States dollar. Our solutions are primarily procured, sold and
delivered in China for Renminbi. The majority of our revenues are denominated
in
Renminbi. Should the Renminbi appreciate against United States dollar, such
appreciation could have a material adverse effect on our profits and the foreign
currency equivalent of such profits repatriated by the Chinese entities to
us.
Interest
rate risk
We
are
exposed to interest rate risk arising from having short-term variable rate
borrowings from time to time. Our future interest expense would fluctuate in
line with any change in our borrowing rates. We do not have any derivative
financial instruments and believe our exposure to interest rate risk and other
relevant market risks is not material.
Inflation
In
recent
years, China has not experienced significant inflation, and thus inflation
has
not had a material impact on our results of operations in recent years.
According to the National Bureau of Statistics of China, the change in Consumer
Price Index in China was1.8% and 1.5% and 4.8% in 2005, 2006 and 2007
respectively.
Credit
and liquidity risks
We
adopt
a risk assessment model to our customer credit management system, and we offer
different credit terms to our customers based on criteria such as working
relationship, payment history, creditworthiness and their financial position.
All credit terms are to be approved by our finance department, in consultation
with our sales and marketing department. For extension of larger credit limits,
approvals have to be sought from our credit committee which is made up of
members from our finance department, sales department and the General Manager.
Our finance department and sales and marketing department review our outstanding
debtor balances on a monthly basis and follow up with customers when payments
are due. We believe that there would not material impact risk to the Company’s
operation in our credit and liquidity risk from sales and customers and other
relevant market risks.
Item
12. Description
of Securities Other than Equity Securities
Not
Applicable.
PART
II
Item
13. Default,
Dividend Arrearages and Delinquencies
None.
Item
14. Material
Modifications to the Rights of Security Holders and Use of
Proceeds
We
completed our initial public offering of 4,312,500 ordinary shares on December
22, 2006. The shares sold in the initial public offering were registered on
a
Registration Statement on Form F-1 (file number: 333-138948) declared effective
on December 18, 2006. Maxim Group LLC was the sole book running manager for
the
offering of our ordinary shares. After the payment of underwriting fees,
proceeds from the initial public offering were $33,207,975, of which $3,269,846
were used to pay legal, accounting and professional fees and other related
printing and filing fees.
The
use
of the net proceeds during the year ended of December 31, 2007 and estimated
remaining net proceeds as of December 31, 2007 from the offering are as
follows:
|
|
Approximate
Allocation of Net Proceeds
|
|
Approximate
Percentage of Net Proceeds
|
|
Net
proceeds from IPO
|
|
$
|
29,938,129
|
|
|
100.00
|
%
|
Investment
in new production line equipment
|
|
|
15,502,482
|
|
|
51.78
|
|
Buildings
and property for new production line
|
|
|
8,997,711
|
|
|
30.05
|
|
Sales
and marketing
|
|
|
300,000
|
|
|
1.00
|
|
General
corporate purpose, including working capital
|
|
|
4,500,000
|
|
|
15.03
|
|
Net
proceeds remaining
|
|
$
|
637,935
|
|
|
2.13
|
%
|
None
of
the proceeds were paid, directly or indirectly, to our directors, officers
or
their associates or to any person owning ten percent or more of our ordinary
shares or to our affiliates.
Item
15. Controls
and Procedures
Under
the
supervision and with the participation of our management, including the
principal executive officer and the principal accounting officer, we conducted
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the
Securities Exchange Act of 1934, as of the end of the period covered by this
report (the “Evaluation Date”). Based on this evaluation, our principal
executive officer and principal accounting officer concluded as of the
Evaluation Date that our disclosure controls and procedures were effective
such
that the material information required to be included in our Securities and
Exchange Commission (“SEC”) reports is accumulated and communicated to
management (including such officers) as appropriate to allow timely decisions
regarding required disclosure and recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to the
Company, including our consolidated subsidiaries. Additionally, there were
no
changes in our internal control over financial reporting that during the period
covered by this Annual Report on Form 20-F has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our principal executive officer
and
principal financial officer, we conducted an evaluation of the effectiveness
of
our internal control over financial reporting. Based on our evaluation, our
principal executive officer and principal financial officer have concluded
that
during the period covered by this report, our internal controls over financial
reporting were effective.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can only
provide reasonable assurances with respect to financial statement preparation
and presentation. In addition, any evaluation of effectiveness for future
periods is subject to the risk that controls may become inadequate because
of
changes in conditions in the future.
Item
16A. Audit
Committee Financial Expert
The
Board
has nominated Tee Chuang Khoo, Changrong Ji, and Yudong Huang as members of
the
Audit Committee, and Tee Chuang Khoo as the financial expert as defined under
the applicable rules of the SEC issued pursuant to Section 407 of the
Sarbanes-Oxley Act of 2002.
Item
16B. Code
of Ethics
The
Code
of Ethics for the members of the Company’s Board of Directors and Officers was
approved by the Board of Directors on March 27, 2007 and is filed as Exhibit
14.1 hereto.
Item
16C. Principal
Accountant Fees and Services
Audit
Fees
The
audit
fees paid to KPMG in 2007, our prior independent registered public accounting
firm, in connection with our 2006 annual audit is HK$ 2 million. The audit
fees
paid to MHM, our prior independent registered public accounting firm, in
connection with quarterly review in 2007 was USD$30,000. The audit fees of
Kabani, our independent registered public accounting firm, in connection with
2007 Q3 review and our audit of annual financial statements for the fiscal
years
ended December 31, 2007, amounted to
USD$
27,500 and USD$ 115,000 respectively.
Audit-Related
Fees
The
audit-related fee of MHM, amounted to USD$ 7,683.75 for the fiscal year ended
December 31, 2007. The
audit-related fee of Kabani amounted to USD$
847.84
for the fiscal year ended December 31, 2007.
All
Other Fees
Not
Applicable
Policy
on Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors
The
policy of our directors who perform the functions customarily performed by
an
audit committee is to pre-approve all audit and permissible non-audit services
provided by the independent auditors. These services may include audit services
and other services.
Audit
of Financial Statements
KPMG
was
our principal independent registered public accounting firm for annual audit
financial statements of the years ended December 31, 2006 and 2005. MHM was
our
independent auditor from April 1, 2007 till November 1, 2007, responsible for
quarterly review of 2007 Q1 and Q2. Kabani is our independent auditor since
Oct
22, 2007, responsible for Q3 review and annual audit financial statements of
the
fiscal year of 2007.
Item
16D. Exemptions
from the Listing Standards for Audit Committee
Not
applicable.
Item
16E. Purchase
of Equity Securities by the Issuer and Affiliated
Purchasers
None.
Item
17. Financial
Statements
The
Company has elected to provide Financial Statements pursuant to Item 18 (see
below).
Item
18. Financial
Statements
The
following documents are filed as Attachment A hereto and are included as part
of
this Annual report on Form 20-F.
Audited
Consolidated Financial Statements of Fuwei Films (Holdings) Co., Ltd and
Subsidiaries
Report
of
Independent Registered Public Accounting Firm.
Consolidated
Statements of Income and Comprehensive Income for the year ended December 31,
2005, 2006 and 2007.
Consolidated
Balance Sheets as of December 31, 2006 and 2007
Consolidated
Statements of Cash Flows for the year ended December 31, 2005, 2006
and 2007
Consolidated
Statements of Shareholders’ Equity for the year ended December 31,
2005, 2006 and 2007
Notes
to
Consolidated Financial Statements.
Item
19. Exhibits.
The
following exhibits are filed as part of this Annual Report:
No.
|
|
Description
|
|
|
|
1.1
|
|
Form
of Underwriting Agreement. *
|
|
|
|
3.1
|
|
Form
of Amended Memorandum of Association of Fuwei Films (Holdings) Co.,
Ltd.
**
|
|
|
|
3.2
|
|
Articles
of Association Fuwei Films (Holdings) Co., Ltd. ***
|
|
|
|
10.1
|
|
Loan
Agreement between Communication Bank of China of Fuwei Films (Shandong)
Co., Ltd. dated January 15, 2007***
|
|
|
|
10.2
|
|
Loan
Agreement between Communication Bank of China of Fuwei Films (Shandong)
Co., Ltd. dated January 15, 2007***
|
|
|
|
10.3
|
|
Asset
Purchase Agreement between Fuwei Plastics and Shandong Weifang Auction
Firm dated October 9, 2003 **
|
|
|
|
10.4
|
|
Purchase
Agreement between Beijing Baorui and Weifang Jing Cheng Auction Co.,
Ltd.
dated December 17, 2004 **
|
|
|
|
10.5
|
|
Service
Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoan
He**
|
|
|
|
10.6
|
|
Employment
Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoan He
**
|
|
|
|
10.7
|
|
Employment
Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoming Wang
**
|
|
|
|
10.8
|
|
Employment
Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiuyong Zhang
**
|
10.9
|
|
Equipment
Contract between Fuwei Films (Holdings) Co., Ltd. and Brükner dated as of
June 2005 **
|
|
|
|
10.10
|
|
Credit
Letter from Communication Bank of China dated May 8, 2006
**
|
|
|
|
14.1
|
|
Code
of Ethics for CEO and Senior Financial Officers. ***
|
|
|
|
21.1
|
|
List
of the company’s significant subsidiaries, their jurisdiction of
incorporation and the names under which they operate business, if
different from their name. ***
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002. ****
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002. ****
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer required by
Section
906 of the Sarbanes-Oxley Act of 2002.
****
|
* Filed
with the Company’s amendment to Registration Statement on Form F-1/A filed with
the SEC on December 12, 2006.
** Filed
with the Company’s Registration Statement on Form F-1 filed with the SEC on
November 24, 2006.
*** Filed
with the Company’s Annual Report on Form 20-F for the year ended December 31,
2006 filed with the SEC on April 2, 2007.
****
Filed herewith.
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing
Form 20-F and has duly caused and authorized the undersigned to sign this
Annual Report on its behalf.
|
|
|
|
Fuwei
Films (Holdings) Co., Ltd
|
|
|
|
|
By:
|
/s/
Xiaoan He
Name:
Xiaoan He
|
|
Title:
Chairman, Chief Executive Officer
|
|
|
|
|
|
|
By:
|
/s/
Xiuyong Zhang
Name:
Xiuyong Zhang
|
|
Title:
Chief Financial Officer
|
Dated:
April 14, 2008
INDEX
TO FINANCIAL STATEMENTS
Audited
Consolidated Financial Statements of Fuwei Films (Holdings) Co.,
Ltd. and
subsidiaries
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm —
Kabani
& Company, Inc.
|
|
|
F-2
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm — KPMG |
|
|
F-3 |
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2006 and 2007
|
|
|
F-4
|
|
|
|
|
|
|
Consolidated
Statements of Income and Comprehensive Income for the years ended
December
31, 2005, 2006 and 2007
|
|
|
F-5
|
|
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2005,
2006 and 2007
|
|
|
F-6
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2005, 2006
and
2007
|
|
|
F-7
- F-8
|
|
|
|
|
|
|
Notes
to the Consolidated Financial Statements for the years ended December
31, 2005, 2006 and 2007
|
|
|
F-9
- F-38
|
|
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders of
Fuwei
Films (Holdings) Co., Ltd. and Subsidiaries
We
have
audited the accompanying consolidated balance sheet of Fuwei Films (Holdings)
Co., Ltd. and Subsidiaries as of December 31, 2007, and the related consolidated
statement of income and comprehensive income, stockholders' equity, and cash
flow for the year ended December 31, 2007. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fuwei
Films (Holdings) Co., Ltd. and Subsidiaries
as of
December 31, 2007, and the consolidated income statement and their consolidated
cash flow for the year ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.
Kabani
& Company, Inc.
March
20,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders of
Fuwei
Films (Holdings) Co., Ltd:
We
have
audited the accompanying consolidated balance sheet of Fuwei Films (Holdings)
Co., Ltd (the “Company”) and its subsidiaries (collectively, the “Group”) as of
December 31, 2006, and the related consolidated statements of income and
comprehensive income, shareholders’ equity and cash flows for the years ended
December 31, 2006 and 2005. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Fuwei Films (Holdings)
Co.,
Ltd and its subsidiaries as of December 31, 2006, and the results of their
operations and their cash flows for the years ended December 31, 2006 and
2005,
in conformity with U.S. generally accepted accounting principles.
/s/
KPMG
Hong
Kong, China
April
2,
2007
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
As
of
December 31, 2006 and 2007
(amounts
in thousands, except share and per share data)
|
|
Note
|
|
2006
|
|
2007
|
|
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
249,939
|
|
|
30,909
|
|
|
4,237
|
|
Restricted
cash
|
|
|
|
|
|
3,311
|
|
|
64,909
|
|
|
8,898
|
|
Accounts
receivable, net
|
|
|
5
|
|
|
75,530
|
|
|
58,195
|
|
|
7,978
|
|
Inventories
|
|
|
6
|
|
|
23,783
|
|
|
41,670
|
|
|
5,712
|
|
Prepayments
and other receivables
|
|
|
7
|
|
|
19,438
|
|
|
16,160
|
|
|
2,215
|
|
Total
current assets
|
|
|
|
|
|
372,001
|
|
|
211,842
|
|
|
29,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
8
|
|
|
317,690
|
|
|
493,562
|
|
|
67,661
|
|
Lease
prepayments
|
|
|
9
|
|
|
23,059
|
|
|
22,290
|
|
|
3,056
|
|
Deposits
for purchase of property,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plant
and equipment
|
|
|
|
|
|
13,900
|
|
|
-
|
|
|
-
|
|
Intangible
asset, net
|
|
|
10
|
|
|
109
|
|
|
36
|
|
|
5
|
|
Goodwill
|
|
|
11
|
|
|
10,276
|
|
|
10,276
|
|
|
1,409
|
|
Deferred
income tax assets
|
|
|
19
|
|
|
1,047
|
|
|
969
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
738,082
|
|
|
738,975
|
|
|
101,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
bank loans
|
|
|
12
|
|
|
239,678
|
|
|
188,027
|
|
|
25,776
|
|
Accounts
payable
|
|
|
|
|
|
12,809
|
|
|
19,609
|
|
|
2,688
|
|
Accrued
expenses and other payables
|
|
|
13
|
|
|
19,497
|
|
|
18,544
|
|
|
2,542
|
|
Deferred
income tax liabilities
|
|
|
19
|
|
|
191
|
|
|
265
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
|
|
|
272,175
|
|
|
226,445
|
|
|
31,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
shares of US$0.129752 par value; 20,000,000 shares authorized; and
13,062,500 issued and outstanding as of December 31, 2006 and 2007,
respectively
|
|
|
|
|
|
13,323
|
|
|
13,323
|
|
|
1,826
|
|
Additional
paid-in capital
|
|
|
|
|
|
311,907
|
|
|
311,907
|
|
|
42,759
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
1,785
|
|
|
1,148
|
|
|
157
|
|
Retained
earnings
|
|
|
|
|
|
138,892
|
|
|
186,152
|
|
|
25,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
|
|
|
465,907
|
|
|
512,530
|
|
|
70,262
|
|
Total
liabilities and shareholders’ equity
|
|
|
|
|
|
738,082
|
|
|
739,975
|
|
|
101,304
|
|
See
accompanying notes to the consolidated financial statements.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
|
|
Note
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Revenues,
net
|
|
|
15
|
|
|
346,205
|
|
|
436,884
|
|
|
449,373
|
|
|
59,083
|
|
Cost
of goods sold
|
|
|
16,17
|
|
|
(259,090
|
)
|
|
(334,341
|
)
|
|
(349,531
|
)
|
|
(45,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
|
87,115
|
|
|
102,543
|
|
|
99,842
|
|
|
13,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Distribution expenses
|
|
|
16,17
|
|
|
(10,517
|
)
|
|
(16,483
|
)
|
|
(15,061
|
)
|
|
(1,980
|
)
|
-
Administrative expenses
|
|
|
16
|
|
|
(10,599
|
)
|
|
(8,043
|
)
|
|
(20,515
|
)
|
|
(2,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
|
|
|
(21,116
|
)
|
|
(24,526
|
)
|
|
(35,576
|
)
|
|
(4,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
65,999
|
|
|
78,017
|
|
|
64,266
|
|
|
8,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Interest income
|
|
|
|
|
|
863
|
|
|
43
|
|
|
589
|
|
|
77
|
|
-
Interest expense
|
|
|
18
|
|
|
(13,747
|
)
|
|
(12,884
|
)
|
|
(13,233
|
)
|
|
(1,739
|
)
|
-
Sales of scrap materials
|
|
|
|
|
|
3,596
|
|
|
3,639
|
|
|
|
|
|
|
|
-
Others, net
|
|
|
|
|
|
358
|
|
|
(393
|
)
|
|
319
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income/(expense)
|
|
|
|
|
|
(8,930
|
)
|
|
(9,595
|
)
|
|
(12,325
|
)
|
|
(1,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax benefit/(expense)
|
|
|
|
|
|
57,069
|
|
|
68,422
|
|
|
51,941
|
|
|
6,829
|
|
Income
tax benefit/(expense)
|
|
|
19
|
|
|
59
|
|
|
(757
|
)
|
|
(4,681
|
)
|
|
(615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
57,128
|
|
|
67,665
|
|
|
47,260
|
|
|
6,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Foreign currency translation adjustments
|
|
|
|
|
|
1,732
|
|
|
53
|
|
|
(637
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
58,860
|
|
|
67,718
|
|
|
46,623
|
|
|
6,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
|
|
|
74,096
|
|
|
61.46
|
|
|
3.62
|
|
|
0.48
|
|
-
Diluted
|
|
|
|
|
|
74,096
|
|
|
61.37
|
|
|
3.62
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
|
|
|
771
|
|
|
1,101,031
|
|
|
13,062,500
|
|
|
13,062,500
|
|
-
Diluted
|
|
|
|
|
|
771
|
|
|
1,102,488
|
|
|
13,062,500
|
|
|
13,062,500
|
|
See
accompanying notes to the consolidated financial
statements.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share data)
|
|
|
|
Ordinary
shares
|
|
Additional
|
|
Accumulated
other
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Balance
as of January 1, 2005
|
|
|
|
|
|
771
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
14,099
|
|
|
14,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,732
|
|
|
-
|
|
|
1,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
57,128
|
|
|
57,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2005
|
|
|
|
|
|
771
|
|
|
1
|
|
|
-
|
|
|
1,732
|
|
|
71,227
|
|
|
72,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of shareholders’ loans
|
|
|
14(a
|
)
|
|
8,749,229
|
|
|
8,936
|
|
|
80,426
|
|
|
-
|
|
|
-
|
|
|
89,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue
of ordinary shares, net of expenses
|
|
|
1
|
|
|
4,312,500
|
|
|
4,386
|
|
|
225,838
|
|
|
-
|
|
|
-
|
|
|
230,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
payment transactions
|
|
|
3(p
|
)
|
|
-
|
|
|
-
|
|
|
5,643
|
|
|
-
|
|
|
-
|
|
|
5,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
53
|
|
|
-
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
67,665
|
|
|
67,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2006
|
|
|
|
|
|
13,062,500
|
|
|
13,323
|
|
|
311,907
|
|
|
1,785
|
|
|
138,892
|
|
|
465,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
47,260 |
|
|
47,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
|
|
|
|
- |
|
|
- |
|
|
- |
|
|
(637 |
) |
|
- |
|
|
(637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007 |
|
|
|
|
|
13,062,500 |
|
|
13,323 |
|
|
311,907 |
|
|
1,148 |
|
|
186,152 |
|
|
512,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
|
|
|
13,062,500 |
|
|
1,826 |
|
|
42,759 |
|
|
157 |
|
|
25,519 |
|
|
70,262 |
|
See
accompanying notes to the consolidated financial statements.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands)
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Cash
flow from operating activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
57,128
|
|
|
67,665
|
|
|
47,260
|
|
|
6,214
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(used
in)/provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Gain on disposal of property, plant and equipment
|
|
|
(32
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
-
Depreciation of property, plant and equipment
|
|
|
23,337
|
|
|
23,425
|
|
|
23,217
|
|
|
3,053
|
|
-
Amortization of intangible assets
|
|
|
73
|
|
|
72
|
|
|
73
|
|
|
10
|
|
-
Lease prepayments charged to expense
|
|
|
392
|
|
|
724
|
|
|
741
|
|
|
97
|
|
-
Deferred income taxes
|
|
|
(59
|
)
|
|
757
|
|
|
152
|
|
|
20
|
|
-
Bad debt expense/(recovery)
|
|
|
1,007
|
|
|
(1,143
|
)
|
|
1,772
|
|
|
233
|
|
-
Foreign currency exchange loss
|
|
|
1
|
|
|
53
|
|
|
-
|
|
|
-
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Accounts receivable
|
|
|
(21,676
|
)
|
|
(28,258
|
)
|
|
17,335
|
|
|
2,279
|
|
-
Inventories
|
|
|
(6,855
|
)
|
|
1,104
|
|
|
(19,659
|
)
|
|
(2,585
|
)
|
-
Prepaid expenses and other current assets
|
|
|
4,780
|
|
|
(8,220
|
)
|
|
6,698
|
|
|
881
|
|
-
Accounts payable
|
|
|
(1,044
|
)
|
|
2,196
|
|
|
6,824
|
|
|
897
|
|
-
Accrued expenses and other payables
|
|
|
(13,880
|
)
|
|
117
|
|
|
(1,557
|
)
|
|
(205
|
)
|
-
Amounts due from related parties
|
|
|
415
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
43,587
|
|
|
58,492
|
|
|
82,856
|
|
|
10,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(22,411
|
)
|
|
(37,526
|
)
|
|
(590
|
)
|
|
(78
|
)
|
Restricted
cash related to trade finance
|
|
|
-
|
|
|
(3,311
|
)
|
|
(61,598
|
)
|
|
(8,099
|
)
|
Payment
of land use rights
|
|
|
-
|
|
|
(2,649
|
)
|
|
-
|
|
|
-
|
|
Deposits
paid for purchase of property, plant and equipment
|
|
|
(13,900
|
)
|
|
-
|
|
|
(184,600
|
)
|
|
(24,271
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
111
|
|
|
7
|
|
|
-
|
|
|
-
|
|
Collection
of amounts due from related parties
|
|
|
4,721
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(31,479
|
)
|
|
(43,479
|
)
|
|
(246,787
|
)
|
|
(32,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of share capital
|
|
|
-
|
|
|
235,867
|
|
|
-
|
|
|
-
|
|
Principal
payments of short-term bank loans
|
|
|
(252,600
|
)
|
|
(18,368
|
)
|
|
(51,650
|
)
|
|
(6,791
|
)
|
Proceeds
from short-term bank loans
|
|
|
300,056
|
|
|
10,000
|
|
|
-
|
|
|
-
|
|
Repayments
of loans payable to related parties
|
|
|
(29,989
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Payments
of expenses relating to the proposed offering
|
|
|
(1,785
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Dividends
paid
|
|
|
(26,265
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in)/provided by financing activities
|
|
|
(10,583
|
)
|
|
227,499
|
|
|
(51,650
|
)
|
|
(6,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes
|
|
|
(1
|
)
|
|
-
|
|
|
(3,448
|
)
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase/ (decrease) in cash
|
|
|
1,524
|
|
|
242,512
|
|
|
(219,029
|
)
|
|
(27,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
beginning of the year
|
|
|
5,903
|
|
|
7,427
|
|
|
249,939
|
|
|
32,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
end of the year
|
|
|
7,427
|
|
|
249,939
|
|
|
30,909
|
|
|
4,237
|
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands)
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for interest expense
|
|
|
14,899
|
|
|
15,739
|
|
|
12,921
|
|
|
1,699
|
|
Supplemental
disclosure of non-cash investing and financing activities:
(a) On
November 23, 2006, the outstanding loans from Apex Glory Holdings Limited of
RMB70,596 and Easebright Investments Limited of RMB18,766 were converted into
6,911,895 and 1,837,334 ordinary shares of the Company,
respectively.
(b) In
connection with the initial public offering (“IPO”) of the Company, there were
non-cash expenses of RMB5,643, representing the fair value of stock options
granted to Maxim Group LLC on December 18, 2006, deducted from the IPO proceeds
and recorded in additional paid-in capital.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
Fuwei
Films (Holdings) Co., Ltd (the “Company”) and its subsidiaries (the “Group”) are
principally engaged in the production and distribution of BOPET film, a high
quality plastic film widely used in packaging, imaging, electronics, electrical
and magnetic products in the People’s Republic of China (the “PRC”). The Company
is a holding company incorporated in the Cayman Islands, established on August
9, 2004 under the Cayman Islands Companies Law as an exempted company with
limited liability. The Company was established for the purpose of acquiring
shares in Fuwei (BVI) Co., Ltd (“Fuwei (BVI)”), an intermediate holding company
established for the purpose of acquiring all of the ownership interest in
Shandong Fuwei.
On
August
20, 2004, the Company was allotted and issued one ordinary share of US$1.00
in
Fuwei (BVI) (being the entire issued share capital of Fuwei (BVI)), thereby
establishing Fuwei (BVI) as the intermediate investment holding company of
the
Group.
The
Group
was established by certain members of the former management team and employees
(the “Group Founders”) of Shandong Neo-Luck Plastics Co., Ltd (“Shandong
Neo-Luck”), a company owned 59% by a PRC state-owned enterprise. Prior to filing
for bankruptcy protection on September 24, 2004, Shandong Neo-Luck was engaged
in the business of BOPET film production. Certain production-related assets
of
Shandong Neo-Luck which had previously been mortgaged to the Bank of China,
Weifang City branch (the “Mortgagee Bank”) as security for several loans
extended to Shandong Neo-Luck’s affiliates were acquired through public auction
by Fuwei Films (Shandong) Co., Ltd (“Shandong Fuwei”) on October 9, 2003 for
RMB156,000 as a result of the borrowers default on various bank loans. Shandong
Fuwei, established in the PRC on January 28, 2003 as a limited liability
company, commenced its operations in July 2003. The principal activities of
Shandong Fuwei are those relating to the design, production and distribution
of
plastic flexible packaging materials. Shandong Neo-Luck was subsequently
declared bankrupt by the Weifang Municipal People’s Court in the PRC on
September 24, 2004.
Through
its intermediate holding company, Fuwei (BVI), the Company acquired a 100%
ownership interest in Shandong Fuwei on October 27, 2004 for a purchase price
of
RMB91,093. Shandong Fuwei thereafter became a wholly-owned subsidiary of Fuwei
(BVI) effective October 27, 2004. On December 25, 2004, Shandong Fuwei acquired
additional production-related assets through public auction that were formerly
owned by Shandong Neo-Luck for RMB119,280. Shandong Fuwei was converted into
a
wholly-foreign owned enterprise in the PRC on January 5, 2005, with a registered
capital of US$11,000.
On
December 18, 2006, the Company was successfully listed on the Nasdaq Global
Market and offered 3,750,000 ordinary shares, at an IPO price of US$8.28 per
ordinary share. On December 18, 2006, an additional 562,500 ordinary shares
were
sold at the IPO price of US$8.28 per ordinary share pursuant to the
underwriter’s exercise of its over-allotment option.
In
connection with the IPO of the Company, net proceeds, after deduction of the
related expenses, with aggregate amount of RMB235,867 were
received.
(2)
Basis of Presentation
The
Group’s consolidated financial statements are presented in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”).
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(2)
Basis of Presentation (continued)
This
basis of accounting differs in certain material respects from that used in
the
preparation of the books of account of Shandong Fuwei, the Company’s principal
subsidiary, which are prepared in accordance with the accounting principles
and
the relevant financial regulations applicable to enterprises limited by shares
as established by the Ministry of Finance of the PRC (“PRC GAAP”), the
accounting standards used in the country of its domicile. The accompanying
consolidated financial statements reflect necessary adjustments not recorded
in
the books of account of the Company’s subsidiaries to present them in conformity
with US GAAP.
(3)
Summary of Significant Accounting Policies and Practices
(a)
Principles of Consolidation
The
consolidated financial statements include the financial statements of the
Company and its two subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b)
Foreign Currency Transactions
The
Group’s reporting currency is the Renminbi (“RMB”).
The
Company and Fuwei (BVI) operate in Hong Kong as investment holding companies
and
their financial records are maintained in Hong Kong dollars, being the
functional currency of these two entities. Assets and liabilities are translated
into RMB at the exchange rates at the balance sheet date, equity accounts are
translated at historical exchange rates and income, expenses, and cash flow
items are translated using the average rate for the period. The translation
adjustments are recorded in accumulated other comprehensive income in the
statements of shareholders’ equity and comprehensive income.
Transactions
denominated in currencies other than RMB are translated into RMB at the exchange
rates quoted by the People’s Bank of China (the “PBOC”) prevailing at the dates
of transactions. Monetary assets and liabilities denominated in foreign
currencies are translated into RMB using the applicable exchange rates quoted
by
the PBOC at the balance sheet dates. The resulting exchange differences are
recorded in the statements of income.
Commencing
from July 21, 2005, the PRC government moved the RMB into a managed floating
exchange rate regime based on market supply and demand with reference to a
basket of currencies. The exchange rate of the U.S. dollar against the RMB
was
adjusted from approximately RMB 8.28 per U.S. dollar on July 20, 2005 to RMB
8.11 per U.S. dollar on July 21, 2005.
For
the
convenience of the readers, the 2007 RMB amounts included in the accompanying
consolidated balance sheet has been translated into U.S. dollars at the
rate of
US$1.00 = RMB 7.2946, being the noon buy rate for U.S. dollars in effect
on
December 31, 2007 in the City of New York for cable transfer in RMB per
U.S.
dollar as certified for custom purposes by the Federal Reserve Bank. No
representation is made that the RMB amounts could have been, or could be,
converted into U.S. dollar at that rate or at any other certain rate on
December
31, 2007, or at any other date. The Company used average exchange rate
of
US$1=RMB 7.6058
to
translate the consolidated statement of operations and statement of cash
flow
for the year ended December 31, 2007 and historical rate for the statement
of
stockholders’ equity for the year ended December 31, 2007.
RMB
is
not fully convertible into foreign currencies. All foreign exchange transactions
involving RMB must take place either through the PBOC or other institutions
authorized to buy and sell foreign currency. The exchange rate adopted for
the
foreign exchange transactions are the rates of exchange quoted by the PBOC
which
are determined largely by supply and demand.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(3)
Summary of Significant Accounting Policies and Practices
(continued)
(c)
Cash and Restricted Cash
As
of
December 31, 2006 , there was restricted cash of RMB3,311 for trade financing
purposes. As of December 31, 2007, there was restricted cash of RMB64,909
(US$8,898) which includes RMB26,000(US$3,418) cash payments reserved to invest
in a hotel and paid in January 2008.
(d)
Trade Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount after deduction of
trade
discounts, value added taxes and allowances, if any, and do not bear interest.
The allowance for doubtful accounts is the Group’s best estimate of the amount
of probable credit losses in the Group’s existing accounts receivable. The Group
determines the allowance based on historical write-off experience, customer
specific facts and economic conditions.
The
Group
reviews its allowance for doubtful accounts monthly. Past due balances over
90
days and over a specified amount are reviewed individually for collectibility.
All other balances are reviewed on a pooled basis by aging of such balances.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The Group does not have any off-balance-sheet credit exposure related
to
its customers.
(e)
Inventories
Inventories
are stated at the lower of cost or market value. Cost is determined using
first-in, first-out basis method. Cost of work in progress and finished goods
comprises direct material, direct production cost and an allocated portion
of
production overheads based on normal operating capacity.
(f)
Property, Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment.
Depreciation
on property, plant and equipment is calculated on the straight-line method
(after taking into account their respective estimated residual values) over
the
estimated useful lives of the assets as follows:
|
|
Years
|
Buildings
and improvements
|
|
25
- 30
|
Plant
and equipment
|
|
10
- 15
|
Computer
equipment
|
|
5
|
Furniture
and fixtures
|
|
5
|
Motor
vehicles
|
|
5
|
Depreciation
of property, plant and equipment attributable to manufacturing activities is
capitalized as part of inventory, and expensed to cost of goods sold when
inventory is sold. Depreciation related to abnormal amounts from idle capacity
is charged to cost of goods sold for the period incurred. Total depreciation
for
the year ended December 31, 2005, 2006, and 2007 was RMB23,337, RMB23,425,
and
RMB23,217 (US$3,053) respectively, of which 98%, 97% and 93% were recorded
in
cost of goods sold and 2%, 3% and 7% was recorded in administrative expenses,
respectively.
Construction
in progress represented capital expenditure in respect of the BOPET productions
line. No depreciation is provided in respect of construction in
progress.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(3)
Summary of Significant Accounting Policies and Practices
(continued)
(g)
Lease Prepayments
Lease
prepayments represent the costs of land use rights in the PRC. Land use rights
are carried at cost and charged to expense on a straight-line basis over the
respective periods of rights of 30 years. The current portion of lease
prepayments has been included in prepayments and other receivables in the
balance sheet.
(h)
Intangible Assets
The
Group
acquired a trademark for use in the production and distribution of plastic
flexible packaging materials. The trademark is carried at cost less accumulated
amortization. Amortization expense is recognized on the straight-line basis
over
the estimated useful life of 5 years of the trademark.
Given
the
environment in which the Group currently operates, it is reasonably possible
that the estimated economic useful life of the asset or the Group’s estimate
that it will recover its carrying amount from future operations could change
in
the future.
(i)
Goodwill
Goodwill
represents the excess of purchased cost over fair value of net assets of the
Shandong Fuwei business acquired. Goodwill is evaluated for impairment at least
annually. Management has determined that Shandong Fuwei is the reporting unit
for testing goodwill impairment. The first step of the test for impairment
compares the book value of Shandong Fuwei to its estimated fair value. The
second step of the goodwill impairment test, which is only required when the
net
book value of the reporting unit exceeds the fair value, compares the implied
fair value of goodwill to its book value to determine if an impairment is
required.
The
fair
value of Shandong Fuwei was determined based on the expected discounted future
cash flows methodology. The use of discounted cash flow methodology requires
significant judgments including estimation of future revenues and costs,
industry economic factors, future profitability, determination of Shandong
Fuwei’s weighted average cost of capital and other variables. Although the
Company based its fair value estimate on assumptions it believes to be
reasonable, those assumptions are inherently unpredictable and
uncertain.
Management
performed step one of its annual goodwill impairment test in the fourth quarter
of 2007 and determined that the fair value of Shandong Fuwei exceeded its net
book value as of December 31, 2007. Therefore, step two was not
required.
(j)
Impairment of Long-lived Assets
Long-lived
assets, other than goodwill, including property, plant, and equipment and
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset to the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount in which
the
carrying amount of the asset exceeds the fair value of the asset.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(3)
Summary of Significant Accounting Policies and Practices
(continued)
(k)
Revenue Recognition
Sales
of
plastic flexible packaging materials are reported, net of value added taxes
(“VAT”), sales returns, trade discounts and allowances. The standard terms and
conditions under which the Group generally delivers allow a customer the right
to return product for refund only if the product does not conform to product
specifications; the non-conforming product is identified by the customer; and
the customer rejects the non-conforming product and notifies the Group within
7
days and 30 days of receipt for sales to customers in the PRC and overseas
respectively. The Group recognizes revenue when products are delivered and
the
customer takes ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the
sales price is fixed or determinable.
In
the
PRC, VAT of 17% on invoice amount is collected in respect of the sales of goods
on behalf of tax authorities. The VAT collected is not revenue of the Group;
instead, the amount is recorded as a liability on the consolidated balance
sheet
until such VAT is paid to the authorities.
(l)
Government Grants
Government
grants are recognized in the consolidated balance sheet initially as deferred
income when they have been received. Grants that compensate the Group for
expenses incurred are recognized as a reduction of expenses in the consolidated
statement of income in the same period in which the related expenses are
incurred.
For
the
year ended December 31, 2005, government grants of RMB160 were recognized to
compensate research and development expenses incurred and RMB98 were received
as
incentive of high VAT payer and were recorded in administrative expenses. For
the year ended December 31, 2006, government grants of RMB900 were recognized
to
compensate research and development expenses incurred and were recorded in
administrative expenses. For the year ended December 31, 2007, government grants
of RMB20,000 (US$2,762) were recognized to compensate research and
development expenses incurred and were recorded in administrative
expenses.
(m)
Research and Development Costs
Research
and development costs are expensed as incurred. Research and development costs
amounted to, RMB1,157, RMB3,650 and RMB 420 (US$55) for the year ended December
31, 2005, 2006 and 2007 and such costs were recorded in administrative
expenses.
(n)
Retirement and Other Postretirement Benefits
Contributions
to retirement schemes (which are defined contribution plans) are charged to
expense as and when the related employee service is provided.
(o)
Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
In
July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 seeks to reduce
the diversity in practice associated with certain aspects of measuring and
recognition in accounting for income taxes. The
Company adopted FIN 48 begining on January 1, 2007. The initial adoption of
FIN
48 had no impact on the Company’s financial statements. The Company has
elected to classify interest and penalties related to unrecognized tax benefits,
if and when required, as part of interest expenses and administrative expenses
in the statements of income, respectively. The additional disclosures required
under FIN 48 are included in Note 19.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(3)
Summary of Significant Accounting Policies and Practices
(continued)
(p)
Stock Option Plan
The
fair
value of stock options granted to Maxim Group LLC under the stock option plans
is recognized as listing expenses deducted from IPO proceeds and recorded in
additional paid-in capital.
On
December 18, 2006, the Company granted 187,500 stock options to Maxim Group
LLC
as part of the compensation for the provision of services relating to the IPO
of
the Company. The stock option is exercisable at an exercises price equal to
US$10.35 per ordinary share commencing six months from December 18, 2006 and
expiring five years from December 18, 2006. The stock option and ordinary shares
underlying the stock option may not be sold, transferred, assigned, pledged
or
hypothecated, or be the subject of any hedging, short sale, derivative, put or
call transaction that would result in the effective disposition thereof by
any
person for a period of six months.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes pricing model based on the following assumptions:
Fair
value of shares on measurement date
|
|
US$
8.28 per share
|
|
Expected
volatility
|
|
|
57.26
|
%
|
Expected
dividends
|
|
|
0.00
|
%
|
Expected
term (in years)
|
|
|
5
|
|
Risk-free
rate
|
|
|
4.56
|
%
|
The
fair
value of the Company’s shares was estimated based on the IPO price of US$8.28
per share. The expected volatility is estimated by reference to the historical
volatility of comparable companies listed on the NASDAQ Global Market. The
risk-free rate for periods within the contractual life of the options is based
on the U.S. government bond in effect at the time of grant. Expected dividend
yields are based on historical dividends. Changes in these subjective input
assumptions could materially affect the fair value estimates.
All
the
stock options granted during the year ended December 31, 2006, were outstanding
as of December 31, 2006, with a weighted-average remaining contractual term
of 5
years. The grant-date fair value of options granted during the year ended
December 31, 2006 is RMB5,643.
The
Company recognized share-based compensation expenses of RMB5,643 for the year
ended December 31, 2006, as listing expense deducted from IPO proceeds and
recorded in additional paid-in capital. As of December 31, 2007, there was
no
unrecognized compensation costs related to unvested stock options.
(q)
Earnings per Share
Basic
earnings per share is computed by dividing net earnings by the weighted average
number of ordinary shares outstanding during the year. Diluted earnings per
share is calculated by dividing net earnings by the weighted average number
of
ordinary and dilutive potential ordinary shares outstanding during the year.
Diluted potential ordinary shares consist of shares issuable pursuant to stock
option plan.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(3)
Summary of Significant Accounting Policies and Practices
(continued)
(r)
Use of Estimates
The
preparation of the consolidated financial statements in accordance with US
GAAP
requires management of the Group to make a number of estimates and assumptions
relating to the reported amounts of assets and liabilities and the disclosure
of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. On an ongoing basis,
management reviews its estimates and assumptions including those related to
the
recoverability of the carrying amount and the estimated useful lives of
long-lived assets, valuation allowances for accounts receivable and realizable
values for inventories. Changes in facts and circumstances may result in revised
estimates.
(s)
Segment Reporting
The
Group
uses the “management approach” in determining reportable operating segments. The
management approach considers the internal organization and reporting used
by
the Group’s chief operating decision maker for making operating decisions and
assessing performance as the source for determining the Group’s reportable
segments. Management, including the chief operating decision maker, reviews
operating results solely by monthly revenue of BOPET film (but not by
sub-product type or geographic area) and operating results of Shandong Fuwei,
the operating subsidiary in the PRC. As such, the Group has determined that
the
Group has a single operating segment as defined by Statement of Financial
Accounting Standard No. 131, Disclosures about Segments of an Enterprise and
Related Information.
(t)
Contingencies
In
the
normal course of business, the Group is subject to contingencies, including
legal proceedings and claims arising out of the business that relate to a wide
range of matters, including among others, product liability. The Group
recognizes a liability for such contingency if it determines it is probable
that
a loss has occurred and a reasonable estimate of the loss can be made. The
Group
may consider many factors in making these assessments including past history
and
the specifics of each matter. As the Group has not become aware of any product
liability claim since operations commenced, the Group has not recognized a
liability for any product liability claims.
(u)
Recently Issued Accounting Standards
In
September 2006, FASB issued SFAS No. 158 “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R)”. This Statement improves financial reporting by
requiring an employer to recognize the over funded or under funded status of
a
defined benefit postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets
of a not-for-profit organization. This Statement also improves financial
reporting by requiring an employer to measure the funded status of a plan as
of
the date of its year-end statement of financial position, with limited
exceptions. An employer with publicly traded equity securities is required
to
initially recognize the funded status of a defined benefit postretirement plan
and to provide the required disclosures as of the end of the fiscal year ending
after December 15, 2006. An employer without publicly traded equity securities
is required to recognize the funded status of a defined benefit postretirement
plan and to provide the required disclosures as of the end of the fiscal year
ending after June 15, 2007. However, an employer without publicly traded equity
securities is
required to disclose the following information in the notes to financial
statements for a fiscal year ending after December 15, 2006, but before June
16,
2007, unless it has applied the recognition provisions of this Statement in
preparing those financial statements:
|
· |
A
brief description of the provisions of this Statement
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(3)
Summary of Significant Accounting Policies and Practices
(continued)
(u)
Recently Issued Accounting Standards
(continued)
|
· |
The
date that adoption is required
|
|
· |
The
date the employer plans to adopt the recognition provisions of this
Statement, if earlier.
|
The
requirement to measure plan assets and benefit obligations as of the date of
the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. Management is currently evaluating
the effect of this pronouncement on financial statements.
In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject
to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
The
new
Statement allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item's fair value in subsequent reporting
periods must be recognized in current earnings. FAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes for similar assets and
liabilities. On January 1, 2008, the Company elected not to adopt the option
Statement.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”. This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling (minority) interest
in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 is effective for the Company’s fiscal year
beginning October 1, 2009. Management is currently evaluating the effect of
this
pronouncement on financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for
how
the acquire: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; b) recognizes and measures the goodwill acquired
in
the business combination or a gain from a bargain purchase and c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS
No.
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after Company’s fiscal year beginning October 1, 2009.
While the Company has not yet evaluated this statement for the impact, if any,
that SFAS No. 141(R) will have on its consolidated financial statements, the
Company will be required to expense costs related to any acquisitions after
September 30, 2009.
On
March
19, 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 161, Disclosures about Derivative Instruments and Hedging Activities. The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. "Use and complexity of derivative instruments
and hedging activities have increased significantly over the past several years.
This has led to concerns among investors that the existing disclosure
requirements in FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, do not provide enough information about how these
instruments and activities affect the entity’s financial position and
performance," explained Kevin Stoklosa, project manager. "By requiring
additional information about how and why derivative instruments are being used,
the new standard gives investors better information upon which to base their
decisions." The new standard also improves transparency about the location
and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for
under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB Statement
No. 161 achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. It
also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. Management is
currently evaluating the effect of this pronouncement on financial
statements.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(4)
Unaudited Quarterly Data
Quarter
Ended
|
|
|
|
Jun.
30
|
|
Sept.
30
|
|
Dec.
31
|
|
Total
|
|
Fiscal
year 2007
|
|
RMB
|
|
US$
|
|
RMB
|
|
US$
|
|
RMB
|
|
US$
|
|
RMB
|
|
US$
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
99,265
|
|
|
12,853
|
|
|
120,929
|
|
|
15,750
|
|
|
107,652
|
|
|
14,261
|
|
|
121,526
|
|
|
16,293
|
|
|
449,373
|
|
|
59,083
|
|
Gross
profit
|
|
|
23,556
|
|
|
3,050
|
|
|
32,665
|
|
|
4,254
|
|
|
23,585
|
|
|
3,125
|
|
|
19,318
|
|
|
2,600
|
|
|
99,842
|
|
|
13,127
|
|
Net
income
|
|
|
13,263
|
|
|
1,717
|
|
|
20,086
|
|
|
2,616
|
|
|
12,911
|
|
|
1,712
|
|
|
999
|
|
|
163
|
|
|
47,260
|
|
|
6,214
|
|
Basic
earnings per share
|
|
|
1.02
|
|
|
0.13
|
|
|
1.54
|
|
|
0.20
|
|
|
0.99
|
|
|
0.13
|
|
|
0.08
|
|
|
0.01
|
|
|
3.62
|
|
|
0.48
|
|
Diluted
earnings per share
|
|
|
1.02
|
|
|
0.13
|
|
|
1.54
|
|
|
0.20
|
|
|
0.99
|
|
|
0.13
|
|
|
0.08
|
|
|
0.01
|
|
|
3.62
|
|
|
0.48
|
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(5)
Accounts Receivable, net
Accounts
receivable at December 31, 2006 and 2007 consist of the following:
|
|
2006
|
|
2007
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Accounts
receivable
|
|
|
39,053
|
|
|
35,893
|
|
|
4,920
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Allowance for doubtful accounts
|
|
|
(872
|
)
|
|
(2,644
|
)
|
|
(362
|
)
|
|
|
|
38,181
|
|
|
33,249
|
|
|
4,558
|
|
Bills
receivable
|
|
|
37,349
|
|
|
24,946
|
|
|
3,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,530
|
|
|
58,195
|
|
|
7,978
|
|
An
analysis of the allowance for doubtful accounts for 2005, 2006 and 2007 is
as
follows:
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Balance
at beginning of year
|
|
|
1,008
|
|
|
2,015
|
|
|
872
|
|
|
120
|
|
Bad
debt expense/(recovery)
|
|
|
1,007
|
|
|
(1,143
|
)
|
|
1,772
|
|
|
242
|
|
Write-offs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
|
2,015
|
|
|
872
|
|
|
2,644
|
|
|
363
|
|
The
Group
has a credit policy in place and the exposure to credit risk is monitored on
an
ongoing basis. Credit evaluations are performed on all customers requiring
credit over a certain amount. These receivables are due within 7 to 90 days
from
the date of billing. Normally, the Group does not obtain collateral from
customers.
Inventories
at December 31, 2006 and 2007 consist of the following:
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Raw
materials
|
|
|
10,526
|
|
|
14,944
|
|
|
2,049
|
|
Work-in-progress
|
|
|
2,029
|
|
|
956
|
|
|
131
|
|
Finished
goods
|
|
|
10,874
|
|
|
25,321
|
|
|
3,471
|
|
Consumables
and spare parts
|
|
|
354
|
|
|
449
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,783
|
|
|
41,670
|
|
|
5,712
|
|
(7)
Prepayments and Other Receivables
Prepayments
and other receivables at December 31, 2006 and 2007 consist of the
following:
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(7)
Prepayments and Other Receivables (continued)
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Purchase
deposits of raw materials
|
|
|
5,724
|
|
|
13,538
|
|
|
1,854
|
|
Prepayments
(Note)
|
|
|
3,354
|
|
|
774
|
|
|
106
|
|
Other
receivables
|
|
|
10,360
|
|
|
1,848
|
|
|
253
|
|
|
|
|
19,438
|
|
|
16,160
|
|
|
2,215
|
|
Note:
Prepayments at December 31, 2006 and 2007 include an amount of RMB767 and RMB741
(US$102), respectively, representing the current portion of lease prepayments
of
the Group (see Note 9).
(8)
Property, Plant and Equipment
Property,
plant and equipment consist of the following:
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Buildings
|
|
|
33,699
|
|
|
33,699
|
|
|
4,620
|
|
Plant
and equipment
|
|
|
276,328
|
|
|
276,943
|
|
|
37,966
|
|
Computer
equipment
|
|
|
955
|
|
|
1,007
|
|
|
138
|
|
Furniture
and fixtures
|
|
|
1,798
|
|
|
1,844
|
|
|
253
|
|
Motor
vehicles
|
|
|
1,390
|
|
|
1,273
|
|
|
174
|
|
Construction-in-progress
|
|
|
66,753
|
|
|
265,253
|
|
|
36,362
|
|
|
|
|
380,923
|
|
|
580,019
|
|
|
79,513
|
|
Less:
accumulated depreciation
|
|
|
(63,233
|
)
|
|
(86,456
|
)
|
|
(11,852
|
)
|
|
|
|
317,690
|
|
|
493,563
|
|
|
67,661
|
|
All
of
the Group’s buildings are located in the PRC. As of December 31, 2006 and 2007,
property, plant and equipment with carrying value totaling RMB242,242 and
RMB360,003 (US$49,352) respectively were pledged to banks as collateral for
short-term bank loans of RMB178,270 and RMB152,590 (US$20,918) respectively
(see
Note 12).
Construction-in-progress
represents capital expenditure in respect of the BOPET production line. Interest
expense capitalized during the year ended December 31, 2005, 2006 and 2007
was
RMB1,152 , RMB2,855 and RMB 12,805 (US$1,684), respectively (see Note 18).
(9)
Lease Prepayments
The
balance represents the land use rights of the Group as follows:
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(9)
Lease Prepayments (continued)
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Non-current
portion
|
|
|
23,059
|
|
|
22,290
|
|
|
3,056
|
|
Current
portion - amount charged to expense next year
|
|
|
767
|
|
|
741
|
|
|
102
|
|
|
|
|
23,826
|
|
|
23,031
|
|
|
3,157
|
|
As
of
December 31, 2006 and 2007, prepaid land use rights were pledged to banks as
collateral for short-term bank loans of RMB52,600 and RMB0 (US$0) respectively
(Note 12).
Charges
for the year ended December 31, 2005, 2006 and 2007 was RMB392, RMB724, and
RMB741(US$102) respectively.
As
of
December 31, 2007, prepaid land use rights of the Group included certain parcels
of land located in Weifang City, Shandong Province, the PRC, with a net book
value of RMB23,031. The land use rights for land with area of approximately
43,878 square meters, 5,279 square meters and 25,094 square meters will expire
in November 2050, May 2053 and February 2055, respectively.
(10)
Intangible Asset, net
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Trademark
|
|
|
362
|
|
|
362
|
|
|
48
|
|
Less:
accumulated amortization
|
|
|
(253
|
)
|
|
(326
|
)
|
|
(43
|
)
|
|
|
|
109
|
|
|
36
|
|
|
5
|
|
Intangible
asset represents the trademark of “Neo-luck” acquired by Shandong Fuwei from
Shandong Neo-Luck on July 20, 2003. Amortization expense is recognized
on a straight-line basis over the estimated useful life of 5 years. Amortization
of intangible asset was RMB73, RMB72 and RMB73 (US$10) for the year ended
December 31, 2005, 2006 and 2007, respectively.
The
estimated amortization expense of intangible assets is as follows:
(11)
Goodwill
Goodwill
of RMB10,276 (US$1,409) at December 31, 2006 and 2007, which is not deductible
for tax purposes, pertains solely to the Company’s acquisition of Shandong Fuwei
in October 2004. The goodwill is attributable to the development potential
of
business acquired.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(12)
Short-term Bank Loans
|
|
Interest rate per
|
|
2006
|
|
2007
|
|
|
|
annum
|
|
RMB
|
|
RMB
|
|
US$
|
|
Bank
of Communications Co.,Ltd.
|
|
|
|
|
|
|
|
|
|
-
December 30, 2005 to November 25, 2006
|
|
|
6.70
|
%
|
|
52,600
|
|
|
-
|
|
|
-
|
|
-
December 20, 2005 to December 13, 2006
|
|
|
6.70
|
%
|
|
52,546
|
|
|
-
|
|
|
-
|
|
-
April 27, 2005 to September 20, 2006
|
|
|
5.76
|
%
|
|
100,000
|
|
|
-
|
|
|
-
|
|
-
January 15, 2007 to January 15, 2008
|
|
|
6.73
|
%
|
|
-
|
|
|
100,000
|
|
|
13,709
|
|
-
February 6, 2007 to January 15, 2008
|
|
|
6.73
|
%
|
|
-
|
|
|
52,590
|
|
|
7,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weifang
Commercial Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
January 31, 2007 to January 30, 2008
|
|
|
3.06
|
%
|
|
-
|
|
|
16,500
|
|
|
2,262
|
|
-
October 30, 2007 to January 24, 2008
|
|
|
0.00
|
%
|
|
-
|
|
|
3,500
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
Construction Bank Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
March 31, 2006 to January 20, 2007
|
|
|
5.84
|
%
|
|
8,934
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
Bank of China Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
September 30, 2005 to September 9, 2006
|
|
|
7.25
|
%
|
|
8,790
|
|
|
-
|
|
|
-
|
|
-
October 17, 2005 to October 16, 2006
|
|
|
7.25
|
%
|
|
8,000
|
|
|
-
|
|
|
-
|
|
-
October 28, 2005 to October 27, 2006
|
|
|
7.25
|
%
|
|
6,800
|
|
|
-
|
|
|
-
|
|
Discounted
bills (Note 24(c))
|
|
|
6.86%-7.00
|
%
|
|
2,008
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
August 25, 2007 to August 24, 2008
|
|
|
6.02
|
%
|
|
-
|
|
|
4,826
|
|
|
661
|
|
-
August 13, 2007 to August 12, 2008
|
|
|
6.03
|
%
|
|
-
|
|
|
3,399
|
|
|
466
|
|
-
August 31, 2007 to August 30, 2008
|
|
|
6.01
|
%
|
|
-
|
|
|
2,252
|
|
|
309
|
|
-
August 31, 2007 to August 30, 2008
|
|
|
6.01
|
%
|
|
-
|
|
|
3,100
|
|
|
425
|
|
-
November 14, 2007 to November 14, 2008
|
|
|
5.66
|
%
|
|
-
|
|
|
1,860
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239,678
|
|
|
188,027
|
|
|
25,776
|
|
Notes:
During
the years ended December 31, 2006 and 2007, the Company entered into various
loan agreements with commercial banks with terms ranging from three months
to
one year to finance its working capital, construction, and foreign trade. None
of the loan agreements requires the Company to comply with financial covenants.
The weighted average interest rate of short-term bank loans outstanding as
of
December 31, 2006 and 2007 were 6.32% and 6.22% per annum,
respectively.
The
principal amounts of the above short-term loans are repayable at the end of
the
loan period.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(12)
Short-term Bank Loans (continued)
Following
the maturity of the short-term loans of RMB52,546 and RMB100,000 from Bank
of
Communications Co., Ltd on December 13, 2006 and September 20, 2006,
respectively, the Company obtained from Bank of Communications Co., Ltd. new
short terms loans of RMB52,590 and RMB100,000 on January 15, 2007, with the
maturity date on January 15, 2008, and interest charged at 6.73% per
annum.
The
Company obtained from Weifang Commercial Bank new short term loan of RMB16,500
(US$2,262) on January 15, 2007, with the maturity date on January 30, 2008,
and
interest charged at 3.060% per annum. The Company obtained from Weifang
Commercial Bank new short term loan of RMB3,500(US$480) on January 31, 2007,
with the maturity date on January 24, 2008 and , and interest charged at 0.00%
per annum. the loan is a low interest rate loan from the government to
enterprises and the interest rate applied in the Fund is 50% lower than the
prevailing interest rate published by People’s Bank of China. The loan is a kind
of industrial development fund loan administered by the local government in
Shandong with the purpose of enhancing the independent innovation and technical
research and development ability of local enterprises and supporting the
development of local high and new technology companies. RMB 20,000 (US$2,742)
proceeds from this loan have been invested in the construction of the Fuwei
technology center testing production line project.
All
of
the short-term loans from Agricultural Bank of China Co., Ltd., totaling
RMB23,590 (US$3,234), and a short-term loan from Bank of Communications Co.,
Ltd. of RMB 52,600 (US$7,211), were fully repaid in January 2007 and February
2007, respectively.
On
August
and September 2007, Shandong Fuwei recommended a foreign currency portfolio
from
Bank of China Weifang branch, expect it will be reduce the cost of foreign
exchange for Shandong Fuwei import raw material. The portfolio transactions
are
guaranteed by RMB 64,909 (US$1,879) security deposit. Loan contract is signed
between two parties when L/C is opened and contract stated that term is one
year
and lending interest rates base on low fix benchmark interest rate of the
People’s Bank of China (the “PBOC”), and dollar is purchased at lower exchange
rate. The Company obtained from Bank of China new short term loans totaling
RMB15,981 from August 2007 to November 2007, with maturity terms of one year
from the borrowing dates. All of the loans are due before December 31, 2008.
The
interest rates are between 5.66% to 6.03% per annum.
Short-term
loans outstanding, which are all denominated in Renminbi, are secured and
guaranteed as follows:
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Secured
by:
|
|
|
|
|
|
|
|
-
property, plant and equipment
|
|
|
178,270
|
|
|
152,590
|
|
|
20,288
|
|
-
lease prepayments
|
|
|
52,600
|
|
|
-
|
|
|
-
|
|
-
bills receivable
|
|
|
2,008
|
|
|
-
|
|
|
-
|
|
Guaranteed
by related parties (Note 20(a))
|
|
|
6,800
|
|
|
20,000
|
|
|
2,742
|
|
Restricted
cash
|
|
|
-
|
|
|
15,437
|
|
|
2,116
|
|
|
|
|
239,678
|
|
|
188,027
|
|
|
25,776
|
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(13)
Accrued Expenses and Other Payables
Accrued
expenses and other payables at December 31, 2006 and 2007 consist of the
following:
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Payables
to contractors
|
|
|
8,677
|
|
|
-
|
|
|
-
|
|
Receipts
in advance from customers
|
|
|
3,929
|
|
|
11,020
|
|
|
1,511
|
|
VAT
payable and other taxes payable
|
|
|
893
|
|
|
3,709
|
|
|
508
|
|
Audit
fee
|
|
|
1,990
|
|
|
84
|
|
|
12
|
|
IPO
expenses
|
|
|
1,923
|
|
|
-
|
|
|
-
|
|
Others
|
|
|
2,085
|
|
|
3,731
|
|
|
511
|
|
|
|
|
19,497
|
|
|
18,544
|
|
|
2,542
|
|
(14)
Shareholders’ Equity
(a)
On
the date of incorporation on August 9, 2004, the authorized share capital was
US$50 comprising 50,000 ordinary shares of US$1.00 each. On October 6, 2004,
the
Company issued 100 ordinary shares of US$1 each.
On
November 23, 2006, the Company:
(i)
Increased the authorized share capital from US$50 comprised of 50,000 ordinary
shares of US$1.00 per share to US$2,595 comprised of 2,595,040 shares of US$1.00
per share.
(ii)
Declared a 7.707-for-one ordinary share split. Further to the share split,
the
authorized share capital is divided into 20,000,000 ordinary shares of a par
value of US$0.129752 each. All share and per share amounts presented in the
consolidated financial statements and related notes have been revised to reflect
the share split retroactively.
On
November 23, 2006, further to the resolutions adopted on May 8, 2006, the
outstanding shareholders’ loans from Apex Glory Holdings and Easebright
Investments of RMB70,596 and RMB18,766 respectively, were converted into
6,911,895 and 1,837,334 ordinary shares of the Company
respectively.
During
the year ended December 31, 2006, the Company issued 4,312,500 new ordinary
shares through an IPO. See Note 1 to the consolidated financial statements
for
details of the IPO.
(b)
Transfers from retained earnings to statutory reserves were made in accordance
with the relevant PRC rules and regulations and the articles of association
of
the Shandong Fuwei and were approved by the board of directors of Shandong
Fuwei.
(15)
Revenues
The
Group’s revenue is primarily derived from the manufacture and sale of plastic
flexible packaging materials.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(15)
Revenues (continued)
The
following table shows the distribution of the Group’s revenue by the
geographical location of customers, whereas all the Group’s assets are located
in the PRC:
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
The
PRC
|
|
|
304,421
|
|
|
345,122
|
|
|
335,213
|
|
|
44,073
|
|
Overseas
countries (principally Korea, United States of America and
Europe)
|
|
|
41,784
|
|
|
91,762
|
|
|
114,160
|
|
|
15,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
346,205
|
|
|
436,884
|
|
|
449,373
|
|
|
59,083
|
|
The
Group’s revenue by significant types of films for 2005, 2006 and 2007 is as
follows:
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Printing
film
|
|
|
103,682
|
|
|
95,315
|
|
|
83,453
|
|
|
10,972
|
|
Stamping
film
|
|
|
94,711
|
|
|
99,856
|
|
|
94,366
|
|
|
12,407
|
|
Metallization
film
|
|
|
39,647
|
|
|
34,772
|
|
|
30,668
|
|
|
4,032
|
|
Base
film for other application
|
|
|
59,826
|
|
|
46,784
|
|
|
70,925
|
|
|
9,325
|
|
Special
film
|
|
|
48,339
|
|
|
160,157
|
|
|
169,961
|
|
|
22,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
346,205
|
|
|
436,884
|
|
|
449,373
|
|
|
59,083
|
|
The
Group
operates and manages its business in one single operating segment - Shandong
Fuwei, the operating subsidiary in the PRC. The results of Shandong Fuwei used
by management to evaluate business performance are prepared based on PRC GAAP.
Segment information is set out below:
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
|
|
|
|
|
|
|
|
(Note
(a))
|
|
|
342,085
|
|
|
429,354
|
|
|
450,946
|
|
|
59,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
income
|
|
|
58,240
|
|
|
65,620
|
|
|
54,823
|
|
|
7,208
|
|
Reconciling
items (Note (b))
|
|
|
(1,171
|
)
|
|
2,802
|
|
|
2,788
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
57,069
|
|
|
68,422
|
|
|
51,941
|
|
|
6,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
23,802
|
|
|
24,221
|
|
|
23,290
|
|
|
3,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets (Note (c))
|
|
|
|
|
|
496,334
|
|
|
753,863
|
|
|
103,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for long-lived assets
|
|
|
|
|
|
40,175
|
|
|
185,190
|
|
|
24,349
|
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(15)
Revenues (continued)
(a)
|
Reconciliation
of total segment revenue to consolidated
revenue
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Total
segment revenues under
|
|
|
|
|
|
|
|
|
|
PRC
GAAP
|
|
|
342,085
|
|
|
429,354
|
|
|
450,946
|
|
|
59,290
|
|
Reconciliation
from PRC GAAP to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Freight and other operating expenses
|
|
|
4,120
|
|
|
7,530
|
|
|
1,573
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
revenues under US GAAP
|
|
|
346,205
|
|
|
436,884
|
|
|
449,373
|
|
|
59,083
|
|
(b)
Reconciliation of total segment income to consolidated operating
income
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Total
segment income under PRC GAAP
|
|
|
58,240
|
|
|
65,620
|
|
|
54,823
|
|
|
7,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Depreciation on property, plant and equipment
|
|
|
871
|
|
|
871
|
|
|
907
|
|
|
119
|
|
-
Capitalization of interest expense
|
|
|
1,152
|
|
|
2,855
|
|
|
1,170
|
|
|
122
|
|
-
Other adjustments
|
|
|
(806
|
)
|
|
1,214
|
|
|
1,963
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,217
|
|
|
4,940
|
|
|
3,040
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment income under US GAAP
|
|
|
59,457
|
|
|
70,560
|
|
|
57,863
|
|
|
7,608
|
|
Interest
income of holding companies
|
|
|
-
|
|
|
14
|
|
|
91
|
|
|
12
|
|
Administrative
expenses of holding companies
|
|
|
(2,388
|
)
|
|
(2,152
|
)
|
|
(5,929
|
)
|
|
(756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
income before income taxes
|
|
|
57,069
|
|
|
68,422
|
|
|
52,025
|
|
|
6,840
|
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(15)
Revenues (continued)
(c)
Reconciliation of total segment assets to
consolidated total assets
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Total
assets for reportable segment under PRC GAAP
|
|
|
496,334
|
|
|
753,863
|
|
|
103,345
|
|
Reconciliation
from PRC GAAP to US GAAP:
|
|
|
|
|
|
|
|
|
|
|
-
Property, plant and equipment
|
|
|
(25,201
|
)
|
|
(15,453
|
)
|
|
(2,118
|
)
|
-
Lease prepayments
|
|
|
2,754
|
|
|
|
|
|
|
|
-
Deferred tax assets
|
|
|
1,047
|
|
|
1,047
|
|
|
144
|
|
-
Goodwill
|
|
|
10,276
|
|
|
10,276
|
|
|
1,409
|
|
-
Accounts receivable, net
|
|
|
3,088
|
|
|
(2,946
|
)
|
|
(404
|
)
|
-
Prepayments and other receivables
|
|
|
(1,171
|
)
|
|
(7,796
|
)
|
|
(1,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment assets under US GAAP
|
|
|
487,127
|
|
|
738,991
|
|
|
101,302
|
|
Cash
held by the Company
|
|
|
240,978
|
|
|
131
|
|
|
18
|
|
Others
(Note)
|
|
|
9,977
|
|
|
(147
|
)
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
total assets
|
|
|
738,082
|
|
|
738,975
|
|
|
101,304
|
|
Note:
The
2006 balance primarily includes other receivables of the Company. The 2007
balance primarily includes other payables of third parties.
(16)
Depreciation and Amortization
Depreciation
of property, plant and equipment and amortization of intangible asset is
included in the following captions:
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Cost
of goods sold
|
|
|
22,737
|
|
|
22,721
|
|
|
22,557
|
|
|
2,966
|
|
Distribution
expenses
|
|
|
12
|
|
|
10
|
|
|
14
|
|
|
2
|
|
Administrative
expenses
|
|
|
661
|
|
|
766
|
|
|
719
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,410
|
|
|
23,497
|
|
|
23,290
|
|
|
3,062
|
|
(17)
Freight Costs
The
Group
records freight costs related to the transporting of the raw materials to the
Group’s warehouse in cost of goods sold and all other outbound freight costs in
distribution expenses. For the year ended December 31, 2005, 2006 and 2007,
freight costs included in cost of goods sold were RMB186, RMB177 and RMB3,030
(US$398), respectively, and RMB7,913, RMB13,170 and RMB10,843 (US$1,426),
respectively, were included in distribution expenses.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(18)
Interest Expense
The
Group
capitalizes interest expense as a component of the cost of construction in
progress. The following is a summary of interest cost incurred during the year
ended December 31, 2005, 2006 and 2007:
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Interest
cost capitalized
|
|
|
1,152
|
|
|
2,855
|
|
|
170
|
|
|
22
|
|
Interest
cost charged to expense
|
|
|
13,747
|
|
|
12,884
|
|
|
13,233
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,899
|
|
|
15,739
|
|
|
12,975
|
|
|
1,706
|
|
(19)
Income Taxes
Cayman
Islands Tax
Under
the
current Cayman Island laws, the Company is not subject to tax on income or
capital gain. In addition, upon payments of dividends by the Company to its
shareholders, no Cayman Islands withholding tax is imposed.
PRC
Tax
Shandong
Fuwei, being a Hi-Tech Enterprise in the Weifang Hi-Tech Industrial Zone in
Shandong, the PRC, has been granted preferential tax treatments by the Tax
Bureau of the PRC. According to the PRC Income Tax Law and various approval
documents issued by the Tax Bureau, Shandong Fuwei’s profit was taxed at a rate
of 15%.
In
addition, Shandong Fuwei has been granted certain tax relief under which it
is
exempted from PRC income tax for the period from January 28, 2003 to December
31, 2006,
and 50%
reduction in tax rate for the year ended December 31, 2007.
If
Shandong Fuwei was not entitled to a reduced enterprise income tax, or EIT,
rate
of 0% for the year ended December 31, 2005 and 2006,
and
rate of 7.5% for the year ended December 31, 2007, it would have had an
EIT rate of 15%. Net income and basic and diluted earnings per share would
be
reduced by the following amounts.
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Net
income
|
|
|
(8,736
|
)
|
|
(10,453
|
)
|
|
(4,340
|
)
|
|
(571
|
)
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
(11,331
|
)
|
|
(9.50
|
)
|
|
(0.33
|
)
|
|
(0.04
|
)
|
-
Diluted
|
|
|
(11,331
|
)
|
|
(9.48
|
)
|
|
(0.33
|
)
|
|
(0.04
|
)
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(19)
Income Taxes (continued)
The
Group
had minimal operations in jurisdictions other than the PRC. (Loss)/income
before
income taxes consists of:
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Cayman
Islands
|
|
|
(60
|
)
|
|
(2,117
|
)
|
|
(5,893
|
)
|
|
(775
|
)
|
British
Virgin Islands
|
|
|
(2,328
|
)
|
|
(21
|
)
|
|
55
|
|
|
7
|
|
PRC
|
|
|
59,457
|
|
|
70,560
|
|
|
57,863
|
|
|
7,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,069
|
|
|
68,422
|
|
|
52,025
|
|
|
6,840
|
|
The
Company has no material unrecognized tax benefit which would favorably affect
the income taxes in future periods and do not believe there will be any
significant increases or decreases within the next twelve month. No Interest
or
penalties have been accrued at the date of adoption.
Pursuant
to the acquisition by Fuwei (BVI), Shandong Fuwei became a wholly foreign-owned
enterprise under the laws of the PRC on January 5, 2005. Accordingly, Shandong
Fuwei is entitled to a new 2-year-exemption-3-year-50%-reduction Foreign
Enterprise Income Tax holiday whereby the profit for the first two financial
years beginning with the first profit-making year (after setting off tax losses
carried forward from prior years) is exempted from income tax in the PRC and
the
profit for each of the subsequent three financial years is taxed at 50% of
the
prevailing tax rates set by the relevant tax authorities. The tax holiday of
Shandong Fuwei commenced in 2005.
On
December 29, 2006, the Standing Committee of the Tenth National People’s
Congress (“NPC”) passed a resolution to submit the draft Enterprises Income Tax
Law (“New Tax Law”) to the Tenth NPC plenary session for voting. On March 16,
2007, the National People’s Congress of the PRC passed the Enterprise Income Tax
Law of the People’s Republic of China, which law will take effect as of January
1, 2008. Further, on December 6, 2007, the State Council Released the
Implementation Rules to the Corporate Income Tax Law (“the Implementation
Rules”).
According
to the New Tax Law, from January 1, 2008, the standard corporate income tax
rates for enterprises in the PRC will be reduced from 33% to 25%. However,
an
“encouraged hi-tech enterprise” will continue to be entitled a reduced corporate
income tax rate of 15%.
Under
the
New Tax Law being effective from January 1, 2008, and in accordance with
“Notification of the State Council on carrying out the Transitional Preferential
Policies concerning Enterprise Income Tax”(Guo Fa [2007] No.39) promulgated by
the State Council on December 26, 2007, an entity established before March
16,
2007 that was entitled to preferential tax treatment prior to the New Tax Law
will be subject to transitional tax rate beginning in period 2008 (“
Transitional Tax rate”) before the new corporate income tax rate of 25% applies.
For company currently enjoying a reduced tax rate of 15%, the Transitional
Tax
Rate is 18%, 20%, 22%, 24% and 25% in 2008, 2009, 2010, 2011and 2012 on wards
respectively. The tax rate will transit to the standard tax rate of 25% for
entities with current rate of 24% effective from January 1, 2008.
The
Company believes that Shandong Fuwei will continue qualifying as an “encouraged
hi-tech enterprise” under the New Tax Law. Accordingly, the deferred taxes
as of December 31, 2007, have been
calculated employing the statutory rate of the Shandong Fuwei of
15%.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(19)
Income Taxes (continued)
Income
tax benefit/ (expense) consists of:
|
|
Current
|
|
Deferred
|
|
Total
|
|
PRC
income tax
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Year
ended December 31, 2005
|
|
|
-
|
|
|
59
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
-
|
|
|
(757
|
)
|
|
(757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
|
(4,529
|
) |
|
(152
|
)
|
|
(4,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007 (US$)
|
|
|
(595
|
) |
|
(20
|
)
|
|
(615
|
)
|
Income
tax benefit reported in the consolidated statements of income differs from
the
income tax expense amount computed by applying the PRC income tax rate of 15%
(the statutory tax rate of the Company’s principal subsidiary) for the year
ended December 31, 2005, 2006 and 2007 for the following reasons:
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Income
before income taxes
|
|
|
57,069
|
|
|
68,422
|
|
|
51,941
|
|
|
6,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed
“expected” tax expense
|
|
|
(8,560
|
)
|
|
(10,263
|
)
|
|
(7,791
|
)
|
|
(1,024
|
)
|
Non-deductible
expenses
|
|
|
(419
|
)
|
|
(377
|
)
|
|
(900
|
)
|
|
(118
|
)
|
Non-taxable
income
|
|
|
-
|
|
|
2
|
|
|
24
|
|
|
3
|
|
Tax
holiday
|
|
|
8,978
|
|
|
9,827
|
|
|
3,986
|
|
|
524
|
|
Tax
rate differential of other tax jurisdictions
|
|
|
60
|
|
|
54
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
income tax benefit/(expenses)
|
|
|
59
|
|
|
(757
|
)
|
|
(4,681
|
)
|
|
(615
|
)
|
Tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets/(liabilities) as of December 31, 2006 and 2007, are
presented below.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(19)
Income Taxes (continued)
Deferred
income tax assets/(liabilities):
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Current
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(162
|
)
|
|
(265
|
)
|
|
(36
|
)
|
Other
receivables
|
|
|
(29
|
)
|
|
–
|
|
|
–
|
|
|
|
|
(191
|
)
|
|
(265
|
)
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, principally due to differences in depreciation
and
capitalized interest
|
|
|
2,205
|
|
|
2,666
|
|
|
365
|
|
Construction
in progress, principally due to capitalized interest
|
|
|
(722
|
)
|
|
(1,150
|
)
|
|
(158
|
)
|
Lease
prepayments, principally due to differences in charges
|
|
|
(436
|
)
|
|
(547
|
)
|
|
(74
|
)
|
|
|
|
1,047
|
|
|
969
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred income tax assets
|
|
|
856
|
|
|
704
|
|
|
97
|
|
In
assessing the realizability
of deferred tax assets, management considers whether it is more likely than
not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation
of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred
tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset,
Shandong Fuwei will need to generate future taxable income of approximately
RMB12,544 prior to 2031. Shandong Fuwei was under tax concession period for
the
period from January 28, 2003 to December 31, 2007. The profit before taxation
for Shandong Fuwei for the year ended December 31, 2005, 2006 and 2007 was
RMB58,586 and RMB69,933 and RMB 51,941 (US$7,120) respectively. Based upon
the
level of historical performance of Shandong Fuwei, management believes the
deferred tax assets are realizable.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(20)
Related Party Transactions
Name
of party
|
|
Relationship
|
Shandong
Baorui Investment Co., Ltd (“Shandong Baorui”)
|
|
Former
shareholder (10%) of Shandong Fuwei. Shandong Baorui is 22.1% owned
by the
Group Founders.
|
|
|
|
Shenghong
Group Co., Ltd (“Shenghong Group”)
|
|
Former
shareholder (90%) of Shandong Fuwei.
|
|
|
|
Shandong
Neo-Luck Plastic Co., Ltd (“Shandong Neo-Luck”)
|
|
The
Group Founders’ former employer, previously engaged in the business of
BOPET film production.
|
|
|
|
Weifang
Neo-Luck (Group) Co., Ltd (“Weifang Neo-Luck Group”)
|
|
Major
shareholder (59%) of Shandong Neo-Luck. One of the directors of the
Company was the general manager of Weifang Neo-Luck Group prior to
joining
the Company in April 2005.
|
|
|
|
Easebright
Investments Limited (“Easebright Investments”)
|
|
Shareholder
(21%) of the Company
|
|
|
|
Apex
Glory Holdings Limited (“Apex Glory Holdings”)
|
|
Shareholder
(79%) of the Company
|
|
|
|
Fuhua
Industrial Material Management Co., Ltd. (“Fuhua
Management”)
|
|
Investment
owned by Weifang Neo-Luck Group.
|
|
|
|
Weifang
Fuwah Hotel Co. Ltd (“Fuwah Hotel”)
|
|
Investment
owned by Weifang Neo-Luck Group.
|
(a)
The
principal related party transactions during the year ended December 31, 2005,
2006 and 2007 are as follows:
|
|
Note
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Guarantee
of bank loans
|
|
|
(i
|
)
|
|
6,800
|
|
|
6,800
|
|
|
-
|
|
|
-
|
|
Rentals
for staff quarters
|
|
|
(ii
|
)
|
|
201
|
|
|
151
|
|
|
160
|
|
|
21
|
|
Interest
income
|
|
|
(iii
|
)
|
|
838
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Notes:
(i)
During the year ended December 31, 2005 and 2006, a bank loan of
RMB6,800 was guaranteed by Shandong Baorui.
(ii)
During the year ended December 31, 2005, 2006 and 2007, the Group paid the
rental expenses to Fuhua Management for renting an apartment for the purpose
of
staff quarters.
(iii)
During the year ended December 31, 2005, interest income of RMB838 was
received from Weifang Neo-Luck Group in respect of a loan receivable carried
at
an interest rate of 5.49% per annum.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(21)
Pension and Other Postretirement Benefits
Pursuant
to the relevant PRC regulations, the Group is required to make contributions
at
a rate of 20% of employees’ salaries and wages to a defined contribution
retirement scheme organized by the local Social Bureau in respect of the
retirement benefits for the Group’s employees in the PRC. The total amount of
contributions of RMB527, RMB456 and RMB433 (US$57) for the year ended December
31, 2005, 2006 and 2007, respectively, was charged to administrative expenses
in
the accompanying consolidated statements of income. The Group has no other
obligation to make payments in respect of retirement benefits of the employees.
(22)
Fair Value of Financial Instruments
The
carrying amount of cash and cash equivalents, trade accounts receivable,
prepayments and other receivables, amounts due from related parties, amounts
due
to related parties, and accrued liabilities and other payables, approximate
their fair values because of the short maturity of these instruments.
The
carrying amount of bank loans approximate the fair value based on the borrowing
rates currently available for bank loans with similar terms and
maturity.
(23)
Business and Credit Concentrations
(a)
Almost all of the Group’s customers are located in the PRC. There is no
individual customer with gross revenue more than 10% of total gross revenue
during the year ended December 31, 2005, 2006 and 2007.
There
were no amounts due from customers representing more than 10% of the outstanding
accounts receivable at December 31, 2006 and 2007.
(b)
The
Group purchased a significant portion of PET resin required for the production
of BOPET film from Sinopec Yizheng Chemical Fibre Company Limited (“Sinopec
Yizheng”) during the year ended December 31, 2005 , 2006 and 2007. The Group
believes that there are a limited number of suppliers in the PRC with the
ability to consistently supply PET resin that meets the Group’s quality
standards and requirements. Currently, the Group has an annual supply agreement
with Sinopec Yizheng pursuant to which Sinopec Yizheng has agreed to supply
fixed quantities of PET resin to the Group on a monthly basis at the prevailing
market prices. The terms of such supply agreement are reviewed annually.
Although the Group believes that it maintains a good relationship with its
major
suppliers, there can be no assurance that Sinopec Yizheng will continue to
sell
to the Group under normal commercial terms as and when needed. In the event
that
these major suppliers ceased to sell to the Group and the Group could not secure
other sources of supply, the Group’s turnover and profitability might be
adversely affected.
The
following are the vendors that supplied 5% or more of our raw materials for
each
of the year ended December 31, 2005, 2006 and 2007:
|
|
|
|
Percentage
of total purchases (%)
|
|
Name
of
Vender
|
|
Supply
|
|
2005
|
|
2006
|
|
2007
|
|
Sinopec
Yizheng
|
|
|
PET
resin
|
|
|
66.6
|
|
|
58.5
|
|
|
46.4
|
|
Hyosung
Corporation
|
|
|
PET
resin
|
|
|
-
|
|
|
2.1
|
|
|
18.0
|
|
Yizheng
Tianbao Polyester Co., Ltd.
|
|
|
Additives
|
|
|
16.7
|
|
|
23.9
|
|
|
16.6
|
|
Jiangyin
Xingtai New Material Co., Ltd.
|
|
|
PET
resin
|
|
|
-
|
|
|
6.7
|
|
|
12.3
|
|
Zhuhai
Yubua Polyester Co., Ltd.
|
|
|
PET
resin and additives
|
|
|
5.3
|
|
|
2.1
|
|
|
-
|
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(24)
Commitments and Contingencies
(a)
Operating lease commitments
Future
minimum lease payments under non-cancelable operating leases as of December
31,
2007 are as follows:
The
Company leases warehouses and staff quarters under operating leases. The leases
typically run for an initial period of between one and five years, with an
option to renew the lease after that date at which time all terms are
renegotiated. None of the leases includes contingent rentals.
For
the
year ended December 31, 2005, 2006 and 2007, total rental expenses for
non-cancelable operating leases were RMB321, RMB309 and RMB2,792 (US$367),
respectively.
(b)
Capital commitments
Capital
commitments for purchase of property, plant and equipment as of December 31,
2007 were RMB155,058 (US$21,257).
(c)
Outstanding bills receivable discounted
As
of
December 31, 2006, the Company had retained a recourse obligation of RMB2,008
in
respect of bills receivable discounted with and sold to banks. The recourse
obligation represents the amount the Company will be obligated to repay to
the
extent that the issuing banks who have guaranteed payment do not honor the
bills
receivable upon maturity. For the year presented, the Company did not experience
any losses on bills receivable discounted. The discounted bills at 2006 was
RMB2,008 and was disclosed as secured short-term loans (see Note
12).
As
of
December 31, 2007, the Company had not retained any recourse obligation in
respect of bills receivable discounted with and sold to banks.
(d)
Legal proceedings
In
2006,
Shandong Fuwei received a correspondence relating to an arbitration proceeding
initiated by DMT S. A. (“DMT”) against Shandong Neo-Luck in the ICC
International Court of Arbitration and DMT is seeking monetary damages against
Shandong Neo-Luck of approximately US$1,250 plus interest relating to a claim
of
partial non-payment for the DMT production line Shandong Fuwei acquired from
Beijing Baroui in 2005. Based on an external legal opinion, the Company believes
that no liability with respect to such proceeding should arise with regard
to
Shandong Fuwei, due to the lack of any contract or direct obligation between
Shandong Fuwei and DMT. Shandong Fuwei intends to vigorously contest any claims
in respect of obligations of Shandong Neo-Luck.
At
the
invitation of Weifang Neoluck (Group) Co., Ltd (“Neoluck Group”), the original
majority shareholder of Shandong Neoluck, the Neoluck Group and DMT engaged
in
efforts to achieve a settlement of the pending arbitration on January 18, 2008.
The Company joined those discussions as an interested party and in order to
support a resolution of the pending dispute and to achieve resolution of certain
outstanding service and spare part issues.
The
arbitration proceeding between DMT and Shandong Neoluck, after several weeks
of
negotiations among the parties, the parties entered into two agreements, a
Service and Technical Assistance Agreement (the “Service Agreement”) was signed
between DMT and Shandong Fuwei on March 5, 2008 under the Service Agreement,
Shandong Fuwei will pay an amount of US$180 in two installments for receiving
service and spare parts.
In
connection with this agreement a third party is
required to compensate the plantiff if the third party does not perform under
the terms of settlement the Company’s liability in regard to this matter
may increase.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(24)
Commitments and Contingencies
(d)
Legal proceedings (continued)
At
December 31, 2007, Hampden Kent Group LLC (“HKG”) commenced arbitration for the
amount of US$3,800 relating to a claim for a penalty fee in connection with
services allegedly performed by HKG in connection with attempting to provide
financing to Fuwei pursuant to a service agreement between the parties. As
regarding the service agreement, any dispute between the parties would be
arbitrated by the American Arbitration Association (“AAA”) in accordance with
its rules. Pursuant to these rules, a demand for arbitration must be filed
with
the AAA regional office together with a filing fee by the claiming party, in
this case, HKG. In December 2007, HKG filed a demand for arbitration with the
International Dispute Center of the AAA. The Company believes the allegations
are without merit and that it intends to defend itself vigorously against the
claims. Management estimated the exposure to the claim ranges from US$0 to
US$3,800 as of December 31, 2007.
On
October 19, 2007, the Company became aware that a class action lawsuit had
been
filed on behalf of all purchasers of the Company’s stock (collectively, the
“Plaintiffs”) from the date of the Company’s Initial Public Offering on December
19, 2006 through October 16, 2007. The case is pending in the United States
District Court for the Southern District of New York. The complaint alleges
that
the Company and certain of its present and former officers, directors and
control persons (collectively, the “defendants”) violated the Securities Act of
1933. On
November 21, 2007, the Company was given notice that a class action lawsuit
had
been commenced on behalf of all purchasers of the Company’s stock (collectively,
the “plaintiffs”) pursuant or traceable to the Registration Statement and
Prospectus issued in connection with the Company’s Initial Public Offering on
December 19, 2006 through November 12, 2007. The case is pending in the United
States District Court for the Southern Disctrict of New York. The complaint
alleges that the Company, its underwriters and certain of its executives
(collectively, the “Defendants”) violated Section 11, 12(2) and 15 of the
Securities Act of 1933. The complaint also alleges that the Defendants
misrepresented or omitted material information regarding the Company and its
business operation. The
Company’s management believes that the allegation are without merit, and the
Company intends to defend itself vigorously against the claims, and has engaged
a law firm in this regard. However, it is currently unable to reasonably
estimate the amount or range of possible losses that will result from the
ultimate resolution of this matter.
(25)
Earnings per Share
Basic
and
diluted earnings per share for the period/year ended December 31, 2005,
2006 and 2007 have been calculated as follows:
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
Net
income available to ordinary shareholders
|
|
|
57,128
|
|
|
67,665
|
|
|
47,260
|
|
|
6,214
|
|
Denominator
for basic net income available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ordinary
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
771
|
|
|
1,101,031
|
|
|
13,062,500
|
|
|
13,062,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
74,096
|
|
|
61.46
|
|
|
3.62
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to ordinary shareholders
|
|
|
57,128
|
|
|
67,665
|
|
|
47,260
|
|
|
6,214
|
|
Denominator
for diluted net income available to ordinary shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
771
|
|
|
1,101,031
|
|
|
13,062,500
|
|
|
13,062,500
|
|
Weighted
average number of share options
|
|
|
-
|
|
|
1,457
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
771
|
|
|
1,102,488
|
|
|
13,062,500
|
|
|
13,062,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
74,096
|
|
|
61.37
|
|
|
3.62
|
|
|
0.48
|
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(26)
Fuwei Films (Holdings) Co., Ltd (Parent Company)
Under
PRC
regulations, the Company’s operating subsidiary, Shandong Fuwei may pay
dividends only out of its accumulated profits, if any, determined in accordance
with the accounting standards and regulations prevailing in the PRC (“PRC
GAAP”). In addition, Shandong Fuwei is required to set aside at least 10% of its
accumulated profits each year, if any, to fund the statutory general reserve
until the balance of the reserve reaches 50% of its registered capital. The
statutory general reserve is not distributable in the form of cash dividends
to
the Company and can be used to make up cumulative prior year losses, if any,
and
may be converted into share capital by the issue of new shares to shareholders
in proportion to their existing shareholdings, or by increasing the par value
of
the shares currently held by them, provided that the reserve balance after
such
issue is not less than 25% of the registered capital. As of December 31, 2007,
additional transfers of RMB4,741 (US$623) are required before the statutory
general reserve reaches 50% of the registered capital of Shandong Fuwei.
Further, Shandong Fuwei is also required to allocate 5% of the profit after
tax,
determined in accordance with PRC GAAP, to the statutory public welfare fund
which is restricted to be used for capital expenditures for staff welfare
facilities owned by the Company. The statutory public welfare fund is not
available for distribution to equity owners (except in liquidation) and may
not
be transferred in the form of loans, advances, or cash dividends. As of December
31, 2007, an aggregate amount of RMB36,312 (US$4,978) has been
appropriated from retained earnings and set aside for statutory general
reserve and public welfare fund, by Shandong Fuwei.
As
of
December 31, 2007, the amount of restricted net assets of Shandong Fuwei, which
may not be transferred to the Company in the form of loans, advances or cash
dividends by the subsidiaries without the consent of a third party, was
approximately 70% of the Company’s consolidated net assets as discussed above.
In addition, the current foreign exchange control policies applicable in the
PRC
also restrict the transfer of assets or dividends outside the PRC.
The
following presents condensed unconsolidated financial information of the Parent
Company only.
Condensed
Balance Sheet as of December 31, 2006 and 2007
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
240,978
|
|
|
74
|
|
|
10
|
|
Other
current assets
|
|
|
96,045
|
|
|
311,835
|
|
|
42,749
|
|
Investments
in subsidiaries
|
|
|
147,762
|
|
|
147,762
|
|
|
20,256
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
484,785
|
|
|
459,671
|
|
|
63,015
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
18,878
|
|
|
21,194
|
|
|
2,905
|
|
Total
shareholders’ equity
|
|
|
465,907
|
|
|
438,477
|
|
|
60,110
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
|
484,785
|
|
|
459,671
|
|
|
63,015
|
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(26)
Fuwei Films (Holdings) Co., Ltd (Parent Company)
(continued)
Condensed
Statements of Operations (For the year ended December 31, 2005, 2006 and
2007)
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
-
|
|
|
14
|
|
|
91
|
|
|
12
|
|
General
and administrative expenses
|
|
|
(60
|
)
|
|
(2,131
|
)
|
|
(5,984
|
)
|
|
(787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before equity in undistributed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
of subsidiaries
|
|
|
(60
|
)
|
|
(2,117
|
)
|
|
-
|
|
|
-
|
|
Equity
in earnings of subsidiaries
|
|
|
57,188
|
|
|
69,782
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
57,128
|
|
|
67,665
|
|
|
(5,983
|
)
|
|
(787
|
)
|
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(26)
Fuwei Films (Holdings) Co., Ltd (Parent Company)
(continued)
Condensed
Statement of Cash Flows (For the year ended December 31, 2005, 2006 and
2007)
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
57,128
|
|
|
67,665
|
|
|
(5,893
|
)
|
|
(775
|
)
|
Adjustment
to reconcile net income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Equity in earnings of subsidiaries
|
|
|
(57,188
|
)
|
|
(69,782
|
)
|
|
-
|
|
|
-
|
|
-
Foreign exchange gain
|
|
|
-
|
|
|
(1,473
|
)
|
|
-
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Other current assets
|
|
|
(89,323
|
)
|
|
(9,974
|
)
|
|
9,631
|
|
|
1,266
|
|
-
Other current liabilities
|
|
|
89,396
|
|
|
18,659
|
|
|
(3,713
|
)
|
|
(488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
13
|
|
|
5,095
|
|
|
25
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
to related parties
|
|
|
-
|
|
|
-
|
|
|
(232,656
|
)
|
|
(30,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of share capital
|
|
|
-
|
|
|
235,867
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange
|
|
|
-
|
|
|
-
|
|
|
(8,273
|
)
|
|
(1,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by/(used in) financing activities
|
|
|
-
|
|
|
235,867
|
|
|
(240,929
|
) |
|
(31,677
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in cash
|
|
|
13
|
|
|
240,962
|
|
|
(240,904
|
)
|
|
(31,674
|
)
|
Cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
beginning of year
|
|
|
3
|
|
|
16
|
|
|
240,978
|
|
|
30,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
end of year
|
|
|
16
|
|
|
240,978
|
|
|
74
|
|
|
10
|
|
(27)
Subsequent Events
The
arbitration proceeding between DMT S. A. (“DMT”) and Shandong Neoluck Plastics
Co. Ltd. (“Neoluck”), after several weeks of negotiations among the parties, the
parties entered into two Agreements, one is a Service and Technical Assistance
Agreement (the “Service Agreement”) between DMT and Shandong Fuwei, dated March
5, 2008, providing for the payment of $180 in two installments in order to
commence receiving service and spare parts with respect to the equipment that
had been originally sold by DMT. On March 12, 2008, the Neoluck Group entered
into a Settlement Agreement (the “Settlement Agreement”) with DMT, pursuant to
which Neoluck Group will make a payment of $900 through an irrevocable bank
draft delivered to DMT to be drawn upon within sixty days. In accordance with
the provisions of the Settlement Agreement, upon DMT’s collection of moneys to
be paid under the Settlement Agreement and the Service Agreement, the pending
dispute in arbitration will be withdrawn and DMT will release the Neoluck Group
and Fuwei from any claims relating to the original sale of the
equipment.
FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For
the
years ended December 31, 2005, 2006 and 2007
(amounts
in thousands, except share and per share data)
(27)
Subsequent Events (continued)
In
accordance with the Settlement Agreement, a letter, signed by counsel to DMT
and
Fuwei, has been transmitted to the ICC International Court of Arbitration
requesting a suspension of any further proceeding pending the performance of
the
payment obligations under the Settlement Agreement and the Service Agreement.
Once such payment obligations are performed, the arbitration proceeding will
be
withdrawn as settled between the parties.
On
January 24, 2008, the Court consolidated into a single action the putative
securities class actions pending against the Company and certain of its
officers, directors, and shareholders. The Court also appointed
Ninyat Tonyaz as lead plaintiff, appointed the Rosen Law Firm, P.A. as lead
counsel, and granted plaintiffs leave to file a consolidated amended class
action complaint. The consolidated action is styled In re Fuwei
Films Securities Litigation, Case No. 07-CV-9416 (RJS). On
March 14, 2008, plaintiffs filed a consolidated amended class action complaint
naming as defendants the Company, Xiaoan He, Mark Stulga, Jun Yin, Tongju Zhou,
Duo Wang, and the Company's IPO underwriters — Maxim Group LLC,
WR Hambrecht + Co. and Chardan Capital Markets, LLC. The consolidated
amended class action complaint asserts claims for violation of Sections 11,
12(a)(2), and 15 of the Securities Act of 1933. At this point, we believe
that only the Company, Mr. Stulga, and the Underwriter Defendants have been
properly served with the consolidated amended class action complaint.
Pursuant to a scheduling order entered by the Court on February 19, 2008,
the parties named as defendants in the consolidated class action are required
to
answer or otherwise respond to the consolidated complaint on or before April
30,
2008.
On
February 18, 2008, HKG submitted an Amended Demand for Arbitration and Statement
of Claim, correcting certain clerical errors in its original
demand. On March 14, 2008, the Company submitted its answering
statement and counterclaim in response to HKG's Amended Demand for Arbitration
and Statement of Claim. The Company denied HKG's claims for breach of
contract and breach of the covenant of good faith and fair dealing as legally
and factually without merit and asserted various defenses. The Company
also asserted a counterclaim against HKG for breach of the August 19, 2006
Letter Agreement, seeking to recover the over $300 in fees and costs paid
to HKG and other consequential damages. On March 27, 2008, HKG
submitted a letter in reply to the Company's counterclaim, generally
denying the allegations and claims made by the Company. At the
request of HKG, the Company has agreed to attempt to resolve this dispute
through mediation. A neutral mediator has been appointed by the AAA's
International Centre for Dispute Resolution; however, the mediation has not
yet
been scheduled.