Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended: June 30,
2010
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ____________ to _____________
Commission
File No. 000-23039
CHINA
PRECISION STEEL, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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14-1623047
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification
No.)
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18th
Floor, Teda Building
87 Wing Lok Street, Sheungwan, Hong
Kong
People’s
Republic of China
(Address
of principal executive offices)
852-2543-2290
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which
registered
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Common
Stock, par value $0.001 per share
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NASDAQ
Capital Market
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Securities
registered pursuant to Section 12(g) of the Exchange Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer ¨ (Do not check if a
smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes ¨ No
x
As of
December 31, 2009 (the last business day of the registrant’s most recently
completed second fiscal quarter), the aggregate market value of the shares of
the registrant’s common stock held by non-affiliates (based upon the closing
sale price of such shares as reported on the NASDAQ Capital Market) was
approximately $63.6 million. Shares of the registrant’s common stock held
by each executive officer and director and each by each person who owns 10% or
more of the outstanding common stock have been excluded from the calculation in
that such persons may be deemed to be affiliates of the registrant. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
There
were a total of 46,562,955 shares of the registrant’s common stock outstanding
as of September 27, 2010.
None.
CHINA
PRECISION STEEL, INC.
Annual
Report on FORM 10-K
For the Fiscal
Year Ended June 30, 2010
TABLE
OF CONTENTS
PART
I
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Item
1.
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Business
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2
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Item 1A.
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Risk
Factors
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12
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Item
1B.
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Unresolved
Staff Comments
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26
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Item
2.
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Properties
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26
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Item
3.
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Legal
Proceedings
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26
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Item
4.
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(Removed
and Reserved)
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26
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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27
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Item
6.
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Selected
Financial Data
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28
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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28
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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42
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Item
8.
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Financial
Statements and Supplementary Data
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42
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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42
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Item 9A.
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Controls
and Procedures
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42
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Item
9B.
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Other
Information
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43
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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43
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Item
11.
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Executive
Compensation
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48
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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49
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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51
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Item
14.
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Principal
Accounting Fees and Services
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51
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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52
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Special
Note Regarding Forward Looking Statements
In addition to historical
information, this report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We use words such as “believe,”
“expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,”
“aim,” “will” or similar expressions which are intended to identify
forward-looking statements. Such statements include, among others, those
concerning market and industry segment growth and demand and acceptance of new
and existing products; any projections of sales, earnings, revenue, margins or
other financial items; any statements of the plans, strategies and objectives of
management for future operations; and any statements regarding future economic
conditions or performance, as well as all assumptions, expectations,
predictions, intentions or beliefs about future events. You are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, as well as assumptions, which, if they were to
ever materialize or prove incorrect, could cause the results of the Company to
differ materially from those expressed or implied by such forward-looking
statements. Potential risks and uncertainties include, among other things,
factors such as: plans to expand our exports outside of China; plans to increase
our production capacity and the anticipated dates that such facilities may
commence operations; our ability to obtain additional funding for our continuing
operations and to fund our expansion; our ability to meet our financial
projections for any financial year; our ability to retain our key executives and
to hire additional senior management; continued growth of the Chinese economy
and industries demanding our products; our ability to secure at acceptable
prices the raw materials we need to produce our products; political changes in
China that may impact our ability to produce and sell our products in our target
markets; general business conditions and competitive factors, including pricing
pressures and product development; and changes in our relationships with
customers and suppliers. Additional disclosures regarding factors that could
cause our results and performance to differ from results or anticipated
performance are discussed in Item 1A, “Risk Factors” included
herein.
Because
the factors discussed in this report could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statement made by
us or on our behalf, you should not place undue reliance on any such
forward-looking statement. Further, any forward-looking statement speaks only as
of the date on which it is made, and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events, except as required by law. New factors emerge from time to
time, and it is not possible for us to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statement.
Use
of Terms
Except as
otherwise indicated by the context, all references in this report
to:
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·
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“CPSL,”
“Company,” “Group,” “we,” “us” or “our” are to China Precision Steel,
Inc., a Delaware corporation, and its direct and indirect
subsidiaries;
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“PSHL”
are to our subsidiary Partner Success Holdings Limited, a BVI
company;
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“Blessford
International” are to our subsidiary Blessford International Limited, a
BVI company;
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“Shanghai
Blessford” are to our subsidiary Shanghai Blessford Alloy Company Limited,
a PRC company;
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“Chengtong”
are to our subsidiary Shanghai Chengtong Precision Strip Company Limited,
a PRC company;
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“Tuorong”
are to our subsidiary Shanghai Tuorong Precision Strip Company Limited, a
PRC company;
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“SEC”
are to the United States Securities and Exchange
Commission;
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“Securities
Act” are to the Securities Act of 1933, as
amended;
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“Exchange
Act” are to the Securities Exchange Act of 1934, as
amended;
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“RMB”
are to Renminbi, the legal currency of
China;
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“U.S.
dollar,” “USD,” “US$” and “$” are to the legal currency of the United
States;
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“China,”
“Chinese” and “PRC” are to the People’s Republic of China;
and
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“BVI”
are to the British Virgin
Islands.
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PART
I
Overview
We are a
niche and high value-added steel processing company principally engaged in the
manufacture and sale of high precision cold-rolled steel products and in the
provision of heat treatment and cutting of medium and high carbon hot-rolled
steel strips. We use commodity steel to create a specialty premium steel
intended to yield above-average industry gross margins. Specialty precision
steel pertains to the precision of measurements and tolerances of thickness,
shape, width, surface finish and other special quality features of
highly-engineered end-use applications.
We
produce and sell precision ultra-thin and high strength cold-rolled steel
products with thicknesses ranging from 7.5 mm to 0.03 mm. We also provide heat
treatment and cutting and slitting of cold-rolled steel strips not exceeding 7.5
mm thickness. Our process puts hot-rolled de-scaled (pickled) steel coils
through a cold-rolling mill, utilizing our patented systems and high technology
reduction processing procedures, to make steel coils and sheets in customized
thicknesses, according to customer specifications. Currently, our specialty
precision products are mainly used in the manufacture of automobile parts and
components, steel roofing, plane friction discs, appliances, food packaging
materials, saw blades, textile needles and microelectronics.
We
conduct our operations principally in China through our wholly-owned operating
subsidiaries, Chengtong and Shanghai Blessford. Our products are sold
domestically in the PRC as well as in overseas markets such as Thailand, Nigeria
and Ethiopia. We intend to further expand into additional overseas markets
in the future, subject to suitable market conditions and favorable regulatory
controls.
We
operate three cold rolling mills as of June 30, 2010. Our first rolling mill,
which has an operating capacity of approximately 100,000 tons depending on the
thickness of the steel processed, primarily manufactures low carbon precision
cold-rolled steel products. Our second cold-rolling mill, which has been
operating since October 2006 with a design capacity of 80,000 tons based on our
current product specifications, has achieved 80% of its design capacity as of
June 30, 2010. Starting January 1, 2010, we have also commenced production from
our third cold rolling mill. The new mill has a design capacity of 80,000 tons,
based on our current product specifications, and has achieved 25% of its design
capacity as of June 30, 2010. The second and third mills focus on the production
of high carbon, high strength cold-rolled steel products and the production of
more complex precision steel products that cannot be manufactured in our first
rolling mill. Each of these mills is expected to take at least three to four
years to reach its full design capacity. As of June 30, 2010, our three
production lines have a combined utilization rate of approximately
75%.
History
and Corporate Structure
We are a
Delaware company. We became a public company in May 1997 through a reverse
merger with SSI Capital Corporation. At that time, we changed our name to
OraLabs Holding Corp. and our principal business was the production and sale of
consumer products relating to oral care and lip care and the distribution of
nutritional supplements through our wholly-owned subsidiary, OraLabs, Inc. In
December 2006, we merged with PSHL, a BVI company, which owns Chengtong. In
connection with that transaction, we subsequently redeemed all of the shares of
our outstanding common stock owned by our former President, Gary Schlatter, in
exchange for all of the issued shares of OraLabs, Inc. Thereafter, we renamed
ourselves China Precision Steel, Inc. to reflect our continuing
operations.
In 2007,
we added three indirect subsidiaries to our corporate structure. On April 9,
2007, we purchased Tuorong, a PRC company, through PSHL’s indirectly owned PRC
subsidiary, Chengtong. The sole activity of Tuorong is the ownership of a land
use right with respect to facilities leased to Chengtong. On April 10, 2007,
PSHL purchased Blessford International, a BVI company, for nominal
consideration. Blessford International does not conduct any business, but it
owns a single subsidiary, Shanghai Blessford, that is a wholly-foreign owned
enterprise chartered in China.
The
following chart reflects our organizational structure as of the date of this
report:
Our
business is conducted principally through Chengtong and through Shanghai
Blessford in Shanghai, PRC. Both Chengtong and Shanghai Blessford are Wholly
Foreign Owned Enterprises, or WFOEs, under Chinese law.
Our
corporate headquarters are located at 18th Floor, Teda Building, 87 Wing Lok
Street, Sheung Wan, Hong Kong, and our telephone number is (011) 852-2543-2290.
Although we maintain a website at www.chinaprecisionsteelinc.com,
we do not intend that information available on our website be incorporated into
this filing.
Our
Growth Strategy
We aim to
maintain our position as the leading supplier of high strength and ultra-thin
cold-rolled premium specialty steel products in China, while building brand
awareness and demand for our products internationally. We have identified six
factors critical to the achievement of this goal:
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Focus on
Rapidly Growing Niche Segment. We will continue to focus on niche
markets. According to publicly available information, the demand for
precision cold-rolled steel products has been growing at an average rate
of 16% annually over the past five years in China. Export demand, coupled
with domestic Chinese demand for automobile parts and components, steel
roofing, plane friction discs, appliances, food packaging materials, saw
blades, textile needles and microelectronics, is expected to continue,
thereby increasing demand for high precision steel products. Moreover, new
applications of steel products are continually being developed. Our
research and development efforts are focused on advancing processing
techniques and production of high strength and ultra-thin, cold-rolled
precision steel products to enhance our product offerings and expand our
market share.
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·
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Leverage
Our Strengths to Compete Effectively with Imports. Specialty
precision steel is a relatively new industry in China with the majority of
precision steel imported from Japan, Korea, the European Union and the
United States. As a result, the average quality and standards of China’s
high precision steel industry lags behind the international norm. We
believe that our lower cost base allows us to sell our products at an
average of 5 to 10% below our international competitors and our
manufacturing in China gives us an advantage of shorter delivery time to
users in China. We will leverage our lower operating cost base, our
state-of-the-art patented manufacturing system and process, and our
strategic relationships with our major suppliers to produce cold-rolled
steel products with quality similar to international standards at lower
cost than international
competitors.
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Focus on
High Margin Products in a Niche Market. We will continue to focus
on products with high sustainable margins. We increased our gross margin
from 5.8% in 2004 to 9.3% in 2010. The average gross margin of our high
carbon steel products ranges between 15% and 30% while the same for our
low carbon steel products ranges between 10% and 20%. We will provide
additional services such as heat treatment and cutting and slitting to
further enhance our margins. We believe these gross margins are
sustainable despite fluctuations in steel prices because of the specialty
of the end product which allows price increases of raw material to be
substantially passed directly to our
customers.
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·
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Expand
Manufacturing Capacity. We operate three cold rolling mills as of
June 30, 2010. Our first rolling mill has an operating capacity of
approximately 100,000 tons. Our second cold-rolling mill, which has been
operating since October 2006 with a design capacity of 80,000 tons based
on our current product specifications, has achieved 80% of its design
capacity as of June 30, 2010. Starting January 1, 2010, we have also
commenced production from our third cold rolling mill. The new mill has a
design capacity of 80,000 tons, based on our current product
specifications, and has achieved 25% of its design capacity as of June 30,
2010. Each mill is expected to take approximately three to four years to
reach its full operating capacity, so we expect our total production
capacity to increase to a total of approximately 260,000 tons in three to
four years when all three mills are operating at their respective full
design capacity.
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Compete
Internationally. We intend to continue building our brand awareness
and expand our exports to compete in the international marketplace. We
believe that at present we are the only non-Japanese company able to
compete in the global marketplace with low carbon precision cold-rolled
steel products in the thickness range between less than 0.1 mm to 0.2 mm
used for steel roofing. These products provide us with a unique
opportunity to compete in the global
marketplace.
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Retain Key
Personnel. The Chinese market is highly competitive for experienced
and talented executives and we will strive to retain our key executives,
including our Chairman, Mr. Wo Hing Li, our Chief Executive Officer, Mr.
Hai Sheng Chen and our Chief Operating Officer, Mr. Zu De Jiang. Their
experience in strategic expansions and in steel manufacturing,
respectively, is critical to our continued growth and
success.
|
Overview
of the Chinese Steel Industry
The
following industry information has been obtained from various publicly available
sources. We believe it is the most current information available on this
subject, and that it is widely available and reliable.
According
to The World Steel Association, China is the largest steel producing country,
producing over one-third of the world’s steel. In calendar year 2009, China
produced 567 million tons of steel, up 13.4% from 2008. The China Iron and Steel
Institute estimates that China’s steel demand for 2010 will increase 5%
year-on-year, while The World Steel Association forecasts that global steel
demand will grow by 9.2% to 1,206 billion tons in 2010. China has increased its
steel exports from 7 million tons in 2003 to 24.6 million tons in 2009, making
it the number one ranked steel exporter globally. However, while China is a net
exporter of crude steel, it is a net importer of higher value precision cold
rolled steel products such as those produced by the Company.
Steel
products can be categorized as low-end (long products such as pipes, tubes,
wires and rods) and high end (flat products such as hot-rolled steel or
cold-rolled steel strips). Based upon information we obtained from the China
Metallurgical Industry Planning and Research Institute, or CMI, we believe that
approximately 65% of China’s steel production are low-end long products and
approximately 35% are high-end high value cold-rolled steel strips. The Company
operates in the high-end category of this market with its niche precision steel
processing and produces and sells high precision cold-rolled steel
products.
The
Chinese government has historically provided a subsidy by means of a value added
tax, or VAT, rebate to exporters of steel products. This rebate was reduced in
April 2007 in response to international pressure on China to curb its exports.
The subsidy has been eliminated for 83 products, including hot-rolled, thin
plate, steel wire, section, bar and H-beam, despite which, a 5% tax rebate
currently applies to the high value-add cold-rolled steel products the Company
produces.
We expect
that the Chinese government will continue to impose additional controls on
domestic steel producers in order to reduce pollution and further restrict
exports. For more information on Chinese regulations, see “Regulation”
below.
Our
Products
Cold-rolled
specialty precision steel is a relatively new industry in China. Manufacturers
of products that use specialty precision steel products have traditionally
imported precision steel products from Japan, Korea, the European Union and the
United States. We believe that generally, to date, the average quality and
standards of China’s high precision steel industry lag behind the international
norm. Nonetheless, during the last five years, we believe that we have begun to
develop and establish a nationally recognized brand in China. Despite having
exported 18,964 tons of precision cold-rolled steel products to Thailand,
Nigeria and Ethiopia during the year ended June 30, 2010, we are not yet an
internationally widely known brand for cold-rolled precision steel
products.
For the
year ended June 30, 2010, we sold 133,946 tons of high precision
steel products with over one hundred specifications. We currently produce high
strength and ultra-thin cold-rolled precision steel coils and sheets with
reduced thickness ranging from 7.5 mm to 0.03 mm. We also provide heat treatment
and cutting and slitting of steel strips not exceeding 7.5 mm thickness. Our
precision steel products and services can be categorized into four major
categories:
Categories
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Uses
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Thickness
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1.
Low carbon steel
(cold-rolled,
hard-rolled)
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Steel
roofing, food packaging, dry batteries, electronic devices, kitchen
tools
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0.03-6.0mm
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2.
High carbon steel
(cold-rolled,
hot-rolled)
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Automobile
parts and components, grinding pieces, saw blades, weaving
needles
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0.5-7.5mm
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3.
Steel processing
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Tailor
made cold rolled steel products according to customer
specifications
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0.03-7.5mm
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4.
Steel services
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Heat
treatment of hot-rolled steel coils; cutting and slitting
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In 2006,
we made a strategic decision to switch our product mix from a concentration in
low carbon cold-rolled steel products with comparatively lower margins to a
combination of low carbon and higher end, higher margin, high-carbon cold-rolled
steel products as a result of continuous research and development and
accumulated experience. We produce our high strength and ultra-thin cold-rolled
precision steel strips using a process that utilizes our proprietary know-how
and certain patented technology. The finished products have a reduced thickness
ranging from 7.5 mm to 0.03 mm, and a width between 1000 mm to 1450 mm. We also
provide heat treatment and cutting and slitting services for high carbon
hot-rolled steel coils with thicknesses not exceeding 7.5 mm. To the best of our
knowledge, we are not aware of any other company in China that currently
manufactures high carbon high strength cold-rolled steel with a width of or
exceeding 1400 mm.
Cold-rolled
steel products are manufactured from hot-rolled de-scaled (pickled) steel coils
which are processed by cold reduction through a cold-rolling mill to customer
specified thicknesses. The process does not involve heating and the primary
feature of cold reduction is to reduce the thickness of the steel coils.
However, because the cold reduction operation induces very high strains
(work hardening) into the steel sheet, the precision steel sheet not only
becomes thinner, but also becomes much harder, less ductile and very
difficult to form. In order to make the cold-reduced steel products soft and
formable, they are annealed, or heated to high temperatures. Cold-rolled sheet
products are used in a wide variety of end applications, such as appliances
(refrigerators, washers, dryers, and other small appliances), automobiles
(exposed as well as unexposed parts), steel roofing, food packaging materials,
electric motors, microelectronics and food packaging.
Hard-rolled
steel represents steel products manufactured from cold reduction to the desired
thinness without annealing. The product is very stiff and is intended for flat
work where deformation is very minimal. This type of hard-rolled steel is most
often applied to further processing for applications such as continuous
galvanizing.
Hard-rolled
or cold-rolled steel with low carbon has a carbon content of less than 0.1%.
It is a very versatile and useful material, easily machined and worked
into complex shapes, is low in cost and has good mechanical properties.
Hard-rolled or cold-rolled steel with medium carbon has a carbon content of
0.3%. It is a typical engineered steel product. Hard-rolled or cold-rolled steel
with high carbon has a carbon content of 0.8% or more. This precision steel
product is very hard and quite brittle and is much less ductile than low carbon
steel. High carbon steel has good wear resistance and is used for railways as
well as for cutting tools. Acid wash steel is also known as acid pickling and
refers to the process of using liquid acids, for example hydrochloric acid, to
remove rust or oxides from the surface of steel. Removing rust prepares the
surface for a protective coating.
Products
with greater width have more applications and intended uses. Width is an
important differentiating factor because certain end products, such as washers
and automobiles, require materials with a certain minimum width. Although
materials with smaller width could also be used for these applications through
jointing, this increases production costs. As a result, wider products are more
flexible and cost efficient which further reduces the end user’s overall
cost.
Production
Facilities
Cold
Rolling Mills
As of
June 30, 2010, we had an annual production capacity of approximately 185,000
tons, comprised of:
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one
1100 mm 12-high cold rolling mill, with a current operating capacity of
100,000 tons;
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one
1400 mm 12-high cold rolling mill, with a current operation capacity of
65,000 tons; and
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one
1450 mm 4-high cold rolling mill, with a current operation capacity of
20,000 tons.
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Our first
rolling mill primarily manufactures low carbon precision cold-rolled steel
products. The second and third mills focus on the production of high carbon,
high strength cold-rolled steel products and the production of more complex
precision steel products that cannot be manufactured in our first rolling
mill.
Each mill
takes approximately three to four years to reach full operating capacity due to
the break-in and tuning period required for the equipment as well as the time it
requires to train quality mill operators. Operating capacity, or actual tonnage,
may differ from design capacity due to modifications required to accommodate
different production processes, as well as product mix which influences
processing time. For example, the 1400 mm rolling mill, which began production
in October 2006, was operating at 80% of its 80,000 ton design capacity at June
30, 2010 and is expected to reach its full operating capacity in calendar year
2011. The 1450 mm rolling mill, which began production in January 2010, was
operating at 25% of its 80,000 ton design capacity at June 30, 2010 and is
expected to reach its full operating capacity in calendar year
2014.
Hydrogen
Annealing Furnace
Our
state-of-the-art annealing furnaces automatically control the complete annealing
process. The furnace uses pure hydrogen as protective gas to make the steel
surface clean and smooth with no carbon-off post-annealing. The furnace also
includes an oxygen station. In addition to the cold-rolling mills and annealing
furnaces, we also have a 1250 mm cleaning line, a 1000 mm cutting and slitting
line and a 1200 mm tension leveller.
Raw
Materials and Suppliers
We are
not dependent on any one single supplier for supply of hot-rolled coils. Several
Chinese steelmakers supply hot-rolled coils to us. Our largest supplier for the
year ended June 30, 2010 was Dachang Huizu Baosheng Steel Products Co.,
Ltd..
Below is
a list of our principal suppliers during the fiscal years ended June 30, 2010
and 2009:
Suppliers
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2010
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%
to
consumption
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2009
|
|
|
%
to
consumption
|
|
Dachang
Huizu Baosheng Steel Products Co., Ltd.
|
|
|
23,880,395 |
|
|
|
33 |
|
|
|
-* |
|
|
|
-* |
|
Guangzhou
Zhujiang Steel Co., Ltd.
|
|
|
14,740,899 |
|
|
|
20 |
|
|
|
-* |
|
|
|
-* |
|
Wuxi
Hangda Trading Co., Ltd.
|
|
|
17,957,973 |
|
|
|
24 |
|
|
|
-* |
|
|
|
-* |
|
Jiangsu
Sumeida International Technology Trading Co., Ltd.
|
|
|
7,332,111 |
|
|
|
10 |
|
|
|
-* |
|
|
|
-* |
|
BaoSteel
Steel Products Trading Co. Ltd
|
|
|
-* |
|
|
|
-* |
|
|
|
15,805,702 |
|
|
|
21 |
|
Shanghai
Pinyun Steel Co., Limited
|
|
|
-* |
|
|
|
-* |
|
|
|
9,349,480 |
|
|
|
18 |
|
Hangzhou
Relian Company Limited
|
|
|
-* |
|
|
|
-* |
|
|
|
-* |
|
|
|
-* |
|
*
Not major suppliers for the relevant years
Based
upon information obtained by us from the CMI, during our financial year ended
June 30, 2010 the price of steel generally decreased from the prior year.
However, the cost of imported iron-ore increased substantially. This apparent
anomaly was due to excess capacities in the low end steel production and ongoing
consolidation of the Chinese steel industry and, as a result, steel prices have
generally decreased within the relevant year. The CMI website may be viewed in
English and the website URL is www.metal.net.cn.
Although average selling prices generally decreased from the prior year, as of
June 30, 2010, there is a Chinese export tax rebate of 5% on exports of certain
steel products, including the precision cold-rolled steel products that we
produce. This has increased the competitiveness of our products in the
international marketplace. We are also seeing gradual improvement in steel
prices towards the end of the current financial year.
The
prices of steel coils are very competitive, very volatile and dependent on
supply and demand. We have made bulk purchases in the past after taking into
account customers’ orders on hand at the time when steel supply was tight and
prices were high, in order to secure sufficient supply of raw material for
necessary production. As steel rolls have an extremely long shelf-life,
obsolescence is not a major concern. However, due to the decreases in steel
prices during the year ended June 30, 2010 and therefore selling prices of our
products, the raw materials we had built up some time ago in the high demand
season consequentially has an adverse impact on our margins.
Customers
All of
our production is based on confirmed sales orders. Generally, for new customers,
an initial deposit (approximately 30% of the aggregate contracted sales amount)
is pre-paid when the contract is signed. We have approximately 360 customers
with domestic customers primarily located in East China and overseas sales
reaching Thailand, Nigeria and Ethiopia. Our location in Shanghai with a well
developed transport network is particularly advantageous for meeting with
customers from inside and outside of China for product design discussions and
customer service. In addition, the delivery time is shorter and our products
have lower associated cost than international competitors. We intend to increase
our customer base by further expanding into North China, where the automotive
industries are concentrated, and globally.
Below is
a list of our principal customers during the fiscal years ended June 30, 2010
and 2009:
|
|
2010
|
|
|
2009
|
|
Customer
|
|
$
|
|
|
% of Sales
|
|
|
$
|
|
|
% of Sales
|
|
Shanghai
Changshuo Steel Co., Ltd.
|
|
|
22,508,805 |
|
|
|
21 |
|
|
|
10,999,692 |
|
|
|
14 |
|
Shanghai
Shengdejia Metal Co., Ltd
|
|
|
18,019,397 |
|
|
|
16 |
|
|
|
4,827,675 |
|
|
|
6 |
|
Hangzhou
Cogeneration Co., Ltd.
|
|
|
10,099,005 |
|
|
|
9 |
|
|
|
* |
|
|
|
* |
|
Zhangjiagang
Gangxing Innovative Construction Material Co., Ltd.
|
|
|
4,946,838 |
|
|
|
5 |
|
|
|
4,413,512 |
|
|
|
6 |
|
Unimax
and Far Corporation
|
|
|
4,629,266 |
|
|
|
4 |
|
|
|
3,777,196 |
|
|
|
5 |
|
Salzgitter
Mannesmann International GMBH
|
|
|
* |
|
|
|
* |
|
|
|
14,275,799 |
|
|
|
19 |
|
|
|
|
60,203,311 |
|
|
|
55 |
|
|
|
38,293,874 |
|
|
|
50 |
|
Others
|
|
|
50,250,636 |
|
|
|
45 |
|
|
|
37,987,747 |
|
|
|
50 |
|
Total
|
|
|
110,453,947 |
|
|
|
100 |
|
|
|
76,281,621 |
|
|
|
100 |
|
*
Not major customers for the relevant years
Sales
and Marketing
Our high
precision steel products are sold both to components manufactures and directly
to the end-users in various parts of China and international marketplace such as
Thailand, Nigeria and Ethiopia. Due to the nature of the industry and our
ability to process quality high end cold-rolled steel, we do very little formal
marketing. The majority of new orders come from current customers reducing
imports and new customers who contact us directly or through trading agents or
current customers.
Competition
Our
business is concentrated in the niche low carbon ultra-thin cold-rolled
precision steel and high-carbon, high strength cold-rolled steel processing and
is not in direct competition with large Chinese steelmakers such as Baosteel
Group Corporation and Magang Group. China’s large steelmakers concentrate on the
production of crude steel and hot-rolled steel from iron ore imported from
Brazil and Australia. Hot-rolled steel coils produced by these steelmakers are
then supplied as raw materials to high precision steel manufacturers, such as
us, for cold reduction processing to the desired thickness and applications.
Cold-rolled steel products are then sold to manufacturers and other customers in
industries such as automobile and food packaging.
Our
business is becoming increasingly competitive and capital intensive, and
competition comes primarily from importers. Some of our competitors have
financial resources, staff and facilities substantially greater than ours and we
may be at a competitive disadvantage compared with larger steel companies. Our
domestic competition in China’s ultra-thin cold-rolled precision steel segment
mainly comes from Qinghuangdao Longteng Precision Strip Co., Limited, or
Longteng. However, we understand that Longteng’s production capabilities are for
cold-rolled steel with widths of approximately 400 mm, whereas our cold-rolled
steel mills have a width of 1000 mm to 1450 mm. Consequently, Longteng’s
products are sold in a different market segment than ours and are not considered
to be direct competition. In the high carbon cold-rolled steel products segment,
we mainly compete with imports from Shinwha Steel Co., Ltd. in Korea. Further,
there are potential competitors who are currently constructing mills that are
expected to produce precision and specialty steel products both in China and
internationally.
Although
there is intense competition in China’s steel industry, this affects mostly
low-end or long steel products. We are currently the only supplier of high
carbon, high strength cold-rolled steel products with a thickness up to 6.0 mm
in China. We are not aware of any other Chinese manufacturer processing high
carbon cold-rolled steel products with this specification. In addition, the low
carbon precision cold-rolled steel products in the thickness range between 0.1
to 0.2 mm are traditionally dominated by Japanese manufacturers with higher
production costs. We started exporting low carbon products in this range during
fiscal 2007. We are not aware of any other manufacturer currently competing in
this specific low carbon segment in the global market that is from a
non-Japanese background.
Research
and Development
As of
June 30, 2010, we had three experienced engineers and technicians in the
Research and Development Department. The Research and Development Department
focuses on new product development, and the advancement and improvement in
quality and manufacturing technique of ultra-thin and high-strength cold-rolled
steel strip. In addition to the traditional research and development activities,
our engineers frequently interact with customers to detect changes in “patterns”
and customers’ specifications arising from constantly changing industry
needs.
Further,
we are working on research and development projects involving coiled springs for
automotive seat belts and steel for igniters in automotive air bag inflation
devices. The amount spent on research and development activities each year is
approximately 1% of our revenue for such year. We have budgeted 1% of revenues
to be spent for research and development activities for fiscal
2011.
Quality
Control
Following
the accreditation of the International Organization for Standardization, or ISO,
on October 8, 2004, we implemented the Quality Handbook in October 2004. This
Quality Handbook was prepared on the basis and standards of the ISO/TS16949
specifications, which ISO Technical Specifications are compatible with existing
American (QS-9000), German (VDA6.1), French (EAQF) and Italian (AVSQ) automotive
quality systems standards within the global automotive industry. Together with
ISO 9001:2000, ISO/TS 16949 specifies the quality system requirements for the
design, development, production, installation and servicing of automotive
related products.
Intellectual
Property
On
December 8, 2004, the State Intellectual Property Office in China granted a
ten-year patent right to the “Environment-Conscious Mill Bearing with Inner
Circulation Lubricant” to Chengtong and Shanghai Te’an-Yikai Bearing Co.,
Limited, or Te’an-Yikai. The patented bearing is installed in our existing
cold-roll mill and, together with our internal know-how complementary to the
patented bearing, we believe we address a number of issues associated with the
bearing lubrication in cold-rolling and ensure smooth and effective operation of
the cold-roll mill. There is no direct or indirect affiliation between us and
Te’an-Yikai. We and Te’an-Yikai jointly developed the environment-conscious mill
bearing with inner circular lubrication Te’an-Yikai retains the proprietary
right to the technology while we have the exclusive right to the application of
the technology.
We have
elected not to register any other patents and internally developed know-how
because of the uncertainty over the ability to enforce intellectual property
rights in China. We also protect our internally developed know-how and
production process (such as system pressure, cleanliness of the lubrication,
temperature control, appropriate allocation of oil supply and retrieving which
are vital in providing a radical solution to the difficulties associated with
lubricating rolling mills’ backing bearing) by requiring all key personnel
(production engineers and management staff members) to sign non-disclosure and
confidentiality contracts.
There can
be no assurance that third parties will not assert infringement or other claims
against us with respect to any of our existing or future products or processes.
There can be no assurance that licenses would be available if any of our
technology was successfully challenged by a third party, or if it became
desirable to use any third-party technology to enhance our products. Litigation
to protect our proprietary information or to determine the validity of any
third-party claims could result in a significant expense and divert the efforts
of our technical and management personnel, whether or not such litigation is
determined in our favor.
While we
have no knowledge that we are infringing upon the proprietary rights of any
third party, there can be no assurance that such claims will not be asserted in
the future with respect to existing or future products or processes. Any such
assertion by a third party could require us to pay royalties, to participate in
costly litigation and defend licensees in any such suit pursuant to
indemnification agreements, or to refrain from selling an alleged infringing
product.
Employees
As of
June 30, 2010, we employed a total of 350 full-time employees. The following
table sets forth the number of our employees by function.
Function
|
|
Number of Employees
|
|
Senior
Management
|
|
|
12 |
|
Equipment
& Maintenance
|
|
|
42 |
|
Production
|
|
|
199 |
|
Sales
and Marketing
|
|
|
12 |
|
Logistics
|
|
|
40 |
|
Quality
Control
|
|
|
9 |
|
Research
& Development
|
|
|
2 |
|
Human
Resource & Administration
|
|
|
28 |
|
Accounting
|
|
|
6 |
|
Total
|
|
|
350 |
|
Each
employee must enter into multiple employment contracts, including a
non-competition agreement, which are then filed with the municipal government.
All employees receive a base monthly salary. Management are entitled to a
year-end bonus up to 100% of their annual salary based upon our overall
performance results, seniority and individual performance and contribution to
the Company. Production employees are entitled to a monthly bonus calculated on
the basis of the quality of the products produced, and their respective
contribution to volume, safe production, correct use of equipment and energy
saving. Our production employees are not subject to collective bargaining
agreements.
Our
employees in China participate in a state pension plan mandated by Chinese
municipal and provincial governments. Benefits include social security, pension
benefits, and medical insurance. These benefits are paid in full by us and
equate to approximately 40% of our annual salary expenditures. We believe that
we are in material compliance with the relevant PRC laws.
We
maintain a satisfactory working relationship with our employees, and we have not
experienced any significant labor disputes or any difficulty in recruiting staff
for our operations.
Regulation
General
Regulation of Business
The
Chinese legal system is based upon a civil law system of written statutes.
Unlike the common law system in the United States, prior court decisions may be
cited for reference but are not binding on subsequent cases and have limited
value as precedent. Since 1979, the PRC legislative bodies have promulgated laws
and regulations dealing with economic matters such as foreign investment,
corporate organization and governance, commerce, taxation and trade. We are
subject to numerous Chinese provincial and local laws and regulations, which may
be changed from time to time in response to economic or political conditions and
have a significant impact upon overall operations. Changes in these regulations
could require us to expend significant resources to comply with new laws or
regulations or changes to current requirements and could have a material adverse
effect on our operations and financial results.
The China
Central Government has promulgated a series of ongoing macro-control policies
which focus on the improvement of the country’s investment structure, with the
goal to secure a fast and sound development of the national economy. Excessive
investment in certain sectors is placed under stringent control while incentives
are given to other sectors.
Environmental
Laws
We are
currently subject to numerous Chinese provincial and local laws and regulations
relating to the protection of the environment. These laws continue to evolve and
are becoming increasingly stringent. The ultimate impact of complying with such
laws and regulations is not always clearly known or determinable because
regulations under some of these laws have not yet been promulgated or are
undergoing revision.
The State
Environmental Protection Administration Bureau is responsible for the
supervision of environmental protection, the implementation of national
standards for environmental quality and discharge of pollutants, and supervision
of the environmental management system in China. Environmental protection
bureaus at the county level or above are responsible for environmental
protection within their jurisdictions. The laws and regulations on environmental
protection require each company to prepare environmental impact statements for a
construction project to the environmental protection bureaus at the county
level. These must be prepared prior to when the construction, expansion or
modification commences.
The
Environmental Protection Law requires production facilities that may cause
pollution or produce other toxic materials to take steps to protect the
environment and establish an environmental protection and management system. The
system includes the adoption of effective measures to prevent and control
exhaust gas, sewage, waste residues, dust and other waste materials. Entities
discharging pollutants must register with the relevant environmental protection
authorities.
Penalties
for breaching the Environmental Protection Law include a warning, payment of a
penalty calculated on the damage incurred, or payment of a fine. When an entity
has failed to adopt preventive measures or control facilities that meet the
requirements of environmental protection standards, it may be required to
suspend its production or operations and pay a fine. Material violations of
environmental laws and regulations causing property damage or casualties may
also be subject to criminal liabilities.
We
believe that our current production and operating activities are in compliance
with the environmental protection requirements. We are not subject to any
admonition, penalty, investigations or inquiries imposed by the environmental
regulators, nor are we subject to any claims or legal proceedings to which we
are named as defendant for violation of any environmental laws and regulations.
To the best of our knowledge, our cold-rolled mills produce no impermissible
emissions. Our pickling process is outsourced to a local company which is
wholly-responsible for any failure to comply with applicable law. In addition,
our production facilities in Shanghai are on land formerly used for rice
farming. We have no reason to believe that such land has been subjected to any
prior contamination.
Patent
Protection
The PRC’s
intellectual property protection regime is consistent with those of other modern
industrialized countries, although enforcement of rights may prove difficult and
complex. China has domestic laws for the protection of rights in copyrights,
patents, trademarks and trade secrets. The PRC is also a signatory to most of
the world’s major intellectual property conventions, including:
|
·
|
Convention
establishing the World Intellectual Property Organization (WIPO
Convention) (June 4, 1980);
|
|
·
|
Paris
Convention for the Protection of Industrial Property (March 19,
1985);
|
|
·
|
Patent
Cooperation Treaty (January 1, 1994);
and
|
|
·
|
The
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
(November 11, 2001).
|
Patents
are governed by the China Patent Law and its Implementing Regulations, each of
which went into effect in 1985 and have been amended subsequently. China is a
signatory to the Paris Convention for the Protection of Industrial Property, in
accordance with which any person who has duly filed an application for a patent
in one signatory country shall enjoy, for the purposes of filing in the other
countries, a right of priority during the period fixed in the convention (12
months for inventions and utility models, and 6 months for industrial
designs).
The
Patent Law covers three kinds of patents, i.e. patents for inventions, utility
models and designs. The Chinese patent system adopts the principle of first to
file. This means that, where more than one person files a patent application for
the same invention, a patent can only be granted to the person who first filed
the application. Consistent with international practice, the PRC only allows the
patenting of inventions or utility models that possess the characteristics of
novelty, inventiveness and practical applicability. For a design to be
patentable, it should not be identical with or similar to any design which,
before the date of filing, has been publicly disclosed in publications in the
country or abroad or has been publicly used in the country and should not be in
conflict with any prior right of another.
PRC law
provides that anyone wishing to exploit the patent of another must conclude a
written licensing contract with the patent holder and pay the patent holder a
fee. One rather broad exception to this, however, is that where a party
possesses the means to exploit a patent but cannot obtain a license from the
patent holder on reasonable terms and in a reasonable period of time, the PRC
State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
license. A compulsory license can also be granted where a national emergency or
any extraordinary state of affairs occurs or where the public interest so
requires. SIPO, however, has not granted any compulsory license up to now. The
patent holder may appeal such decision within three months from receiving
notification by filing a suit in the People’s Court.
PRC law
defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. A patent holder who believes his patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. A preliminary injunction may be issued by the People’s
Court upon the patentee’s or the interested parties’ request before instituting
any legal proceedings or during the proceedings. Evidence preservation and
property preservation measures are also available both before and during the
litigation. Damages in the case of patent infringement is calculated as either
the loss suffered by the patent holder arising from the infringement or the
benefit gained by the infringer from the infringement. If it is difficult to
ascertain damages in this manner, damages may be reasonably determined in an
amount in excess of the license fee under a contractual license. The infringing
party may be also fined by Administration of Patent Management in an amount of
up to three times the unlawful income earned by such infringing party. If there
is no unlawful income so earned, the infringing party may be fined in an amount
of up to RMB500,000, or approximately $74,000.
Labor
Laws
The new
Labor Contract Law took effect January 1, 2008 and governs standard terms and
conditions for employment, including termination and lay-off rights, contract
requirements, compensation levels and consultation with labor unions, among
other topics. In addition, the law limits non-competition agreements with senior
management and other employees with knowledge of trade secrets to two years and
imposes restrictions or geographical limits
Taxation
On March
16, 2007, the National People’s Congress of China passed the Enterprise Income
Tax Law, or the EIT Law, and on November 28, 2007, the State Council of China
passed its implementing rules, both of which took effect on January 1, 2008. The
EIT Law and its implementing rules impose a unified earned income tax, or EIT,
rate of 25.0% on all domestic-invested enterprises and foreign invested
enterprises, or FIEs, unless they qualify under certain limited exceptions. As a
result, our PRC operating subsidiaries and VIEs are subject to an earned income
tax of 25.0%. Before the implementation of the EIT Law, FIEs established in the
PRC, unless granted preferential tax treatments by the PRC government, were
generally subject to an EIT rate of 33.0%, which included a 30.0% state income
tax and a 3.0% local income tax.
In
addition to the changes to the current tax structure, under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25% on its global income. The implementing rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of 25%. For
detailed discussion of PRC tax issues related to resident enterprise status, see
Item 1A, “Risk Factors – Risks Related to Doing Business in China – Under the
New Enterprise Income Tax Law, we may be classified as a “resident enterprise”
of China. Such classification will likely result in unfavorable tax consequences
to us and our non-PRC stockholders.”
Foreign
Currency Exchange
All of
our sales revenue and expenses are denominated in RMB. Under the PRC foreign
currency exchange regulations applicable to us, RMB is convertible for current
account items, including the distribution of dividends, interest payments, trade
and service-related foreign exchange transactions. Currently, our PRC operating
subsidiaries may purchase foreign currencies for settlement of current account
transactions, including payments of dividends to us, without the approval of the
PRC State Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. Conversion of RMB for capital account items, such as
direct investment, loan, security investment and repatriation of investment,
however, is still subject to the approval of SAFE. In particular, if our PRC
operating subsidiaries borrow foreign currency through loans from us or other
foreign lenders, these loans must be registered with SAFE, and if we finance the
subsidiaries by means of additional capital contributions, these capital
contributions must be approved by certain government authorities, including the
PRC Ministry of Commerce, or MOFCOM, or their respective local branches. These
limitations could affect our PRC operating subsidiaries’ ability to obtain
foreign exchange through debt or equity financing.
Dividend
Distributions
Our
revenues are earned by our PRC subsidiaries. However, PRC regulations restrict
the ability of our PRC subsidiaries to make dividends and other payments to
their offshore parent company. PRC legal restrictions permit payments of
dividend by our PRC subsidiaries only out of their accumulated after-tax
profits, if any, determined in accordance with PRC accounting standards and
regulations. Each of our PRC subsidiaries is also required under PRC laws and
regulations to allocate at least 10% of our annual after-tax profits determined
in accordance with PRC GAAP to a statutory general reserve fund until the
amounts in such fund reaches 50% of its registered capital. These reserves are
not distributable as cash dividends. Our PRC subsidiaries have the discretion to
allocate a portion of their after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
In
addition, under the EIT Law, the Notice of the State Administration
of Taxation on Negotiated Reduction of Dividends and Interest Rates,
which was issued on January 29, 2008, and the Notice of the State Administration
of Taxation Regarding Interpretation and Recognition of Beneficial Owners under
Tax Treaties, which became effective on October 27, 2009, dividends from
our PRC operating subsidiaries paid to us through our subsidiaries may be
subject to a withholding tax at a rate of 10%. Furthermore, the ultimate tax
rate will be determined by treaty between the PRC and the tax residence of the
holder of the PRC subsidiary. Dividends declared and paid from before January 1,
2008 on distributable profits are grandfathered under the EIT Law and are not
subject to withholding tax.
The
Company intends on reinvesting profits, if any, and does not intend on making
cash distributions of dividends in the near future.
We
operate in a highly competitive environment in which there are numerous factors
which can influence our business, financial position or results of operations
and which can also cause the market value of our common stock to decline. Many
of these factors are beyond our control and therefore, are difficult to predict.
The following section sets forth what we believe to be the principal risks that
could affect us, our business or our industry, and which could result in a
material adverse impact on our financial results or cause the market price of
our common stock to fluctuate or decline.
RISKS
RELATED TO OUR BUSINESS
Steel
consumption is cyclical and worldwide overcapacity in the steel industry and the
availability of alternative products has resulted in intense competition, which
may have an adverse effect on our profitability and cash flow.
Steel
consumption is highly cyclical and generally follows general economic and
industrial conditions both worldwide and in various smaller geographic areas.
The steel industry has historically been characterized by excess world supply.
This has led to substantial price decreases during periods of economic weakness,
which have not been offset by commensurate price increases during periods of
economic strength. Substitute materials are increasingly available for many
steel products, which may further reduce demand for steel. Additional
overcapacity or the use of alternative products could have a material adverse
effect upon our results of operations.
The
risk that we could suffer unrecoverable losses on our accounts receivable may be
increased by our practice of offering extended customer credit and payment terms
to our customers, together with the current negative global economic conditions.
Any such unrecoverable losses could adversely affect our financial
results.
We
operate our business in China. Credit periods vary substantially in China across
industries, segments, types and size of companies. We operate in a niche of the
China steel industry, specifically in the manufacture and sale of high precision
cold-rolled steel products and in the provision of heat treatment and cutting of
medium and high carbon hot-rolled steel strips. Our customers are also niche
operators, including manufacturers of automobile parts and components, steel
roofing, plane friction discs, appliances, food packaging materials, saw blades,
textile needles and microelectronics. Because of the nature of our business, our
business cycle and that of our customers is relatively long. As a result, the
credit and payment terms that we extend to our customers in the normal course of
business are also relatively long. We offer credit to our customers for periods
of 60 days, 90 days, 120 days and 180 days, with the longer credit terms
generally offered to longstanding recurring customers with good payment
histories and sizable operations. The Company maintains an allowance for
doubtful accounts based on its assessment of the collectability of the accounts
receivable. Our management determines the collectability of outstanding accounts
by maintaining quarterly communication with such customers and obtaining
confirmation of their intent and ability to fulfill their obligations to the
Company. In making this determination, our management also considers past
collection experience, our relationship with customers and the impact of current
economic conditions on our industry and market and the financial condition of
the customer, to the extend discoverable.
The
following table reflects the aging of our accounts receivable as of June 30,
2010 and 2009, after taking into consideration credit periods offered to our
customers. As of June 30, 2010, apart from one major customer who accounted for
64% of accounts receivable which were past due over 180 days, the remaining 36%
of our accounts receivable over 180 days is spread among approximately 10
different customers.
June 30,
2010
US$
|
|
Total
|
|
|
Current
|
|
|
1
to 30 days
|
|
|
31
to
90
days
|
|
|
91
to 180 days
|
|
|
181
to 360 days
|
|
|
over
1
year
|
|
TOTAL
|
|
|
40,612,589 |
|
|
|
16,750,361 |
|
|
|
1,521,900 |
|
|
|
5,485,380 |
|
|
|
15,398,743 |
|
|
|
1,177,748 |
|
|
|
278,457 |
|
%
|
|
|
100 |
|
|
|
41 |
|
|
|
4 |
|
|
|
14 |
|
|
|
38 |
|
|
|
3 |
|
|
<1
|
|
June 30,
2009
|
|
Total
|
|
|
Current
|
|
|
1 to 30 days
|
|
|
31 to 90 days
|
|
|
91 to 180 days
|
|
|
181 to 360 days
|
|
|
Over 1 year
|
|
TOTAL
|
|
$ |
25,970,961 |
|
|
$ |
14,497,258 |
|
|
$ |
405,769 |
|
|
$ |
1,639,027 |
|
|
$ |
7,061,774 |
|
|
$ |
2,168,481 |
|
|
$ |
198,652 |
|
%
|
|
|
100 |
|
|
|
56 |
|
|
|
2 |
|
|
|
6 |
|
|
|
27 |
|
|
|
8 |
|
|
|
1 |
|
As of
June 30, 2010, all our customers confirmed that they were committed to
fulfilling their obligations to the Company and we were aware of no basis for
reclassifying any such accounts as uncollectable. As a result, we determined
that an allowance for doubtful accounts of $1,013,744 as of June 30, 2010,
was appropriate, as compared to $830,127 at June 30, 2009. To date, we have
collected approximately $0.4 million, or 36% of our accounts that were over 180
days old at June 30, 2010. We believe there was no material deterioration of the
accounts receivable at June 30, 2010.
We have
seen improvements in collection of accounts receivable during the fiscal year
ended June 30, 2010. Approximately 3% of our accounts receivable as of June 30,
2010 was over 180 days past due, compared to 9% of our accounts receivable being
over 180 days past due as of June 30, 2009. The Chinese government has been
implementing measures and macro-economic policies aimed to stimulate the Chinese
economy since the start of 2009 after the global crisis, and both the Company
and our customers have been seeing increased orders and collection as the
stimulus package is implemented. We note the continuation or intensification of
the recent worldwide economic crisis may have negative consequences on the
business operations of our customers despite the efforts of the Chinese
government and may adversely impact their ability to meet these financial
obligations to us, resulting in unrecoverable losses on such accounts
receivable. To reserve for potentially uncollectible accounts receivable,
management has made a 50% provision for all accounts receivable that are over
180 days past due and 100% provision for all accounts receivable over 1 year
past due for the year ended June 30, 2010. The Company had $1,013,744 and
$830,127 of allowances for doubtful accounts, respectively; and provision for
bad debts of $218,235 and $3,831,478, respectively, for the year ended June 30,
2010 and 2009.
From time
to time we will review credit periods offered, along with our collection
experience and the other factors discussed above, to evaluate the adequacy of
our allowance for doubtful accounts, and to make changes to the allowance, if
necessary, including reducing such allowances if uncollectable accounts do not
actually increase and the other factors we consider in determining the
collectability of accounts do not deteriorate. However, if our actual collection
experience with our customers or other conditions change, or the other factors
that we consider indicate that it is appropriate, a further provision for
doubtful accounts may be required, which could adversely affect our financial
results.
We
provide advances to suppliers when placing purchase orders in the ordinary
course of our business. If we must write-off a material amount of these advances
for any reason, or if we are unable to obtain delivery of raw material from
suppliers to whom we have paid advances for any reason, our financial results
will be negatively impacted.
In order
to insure a steady supply of raw materials, the Company is required from time to
time to make cash advances to its suppliers when placing purchase orders, for a
guaranteed minimum delivery quantity at future times when raw materials are
required. The advance is seen as a deposit to suppliers and guarantees our
access to raw materials during periods of shortages and market volatility, and
is therefore considered an important component of our operations. Contracted raw
materials are priced at prevailing market rates agreed by us with the suppliers
prior to each delivery date and the balance of our advances decrease when we
take down contracted material at a future date. Balances decrease at a slower
rate during periods when raw material prices are decreasing or when we take
fewer deliveries from our suppliers.
Advances
to suppliers are shown net of an allowance which represents potentially
unrecoverable cash advances at each balance sheet date. Our allowances for
advances to suppliers are subjective critical estimates that have a direct
impact on reported net earnings, and are reviewed quarterly at a minimum to
ensure the appropriateness of the allowance in light of the circumstances
present at the time of the review. Such allowances are based on an analysis of
past raw materials receipt experience and the credibility of each supplier
according to its size and background. For example, we do not generally provide
allowances against advances paid to state owned companies as we believe that
there is minimal risk of default. It is reasonably possible that the Company’s
estimate of the allowance will change, such as in the case when the Company
becomes aware of a supplier’s inability to deliver the contracted raw materials
or meet its financial obligations. At June 30, 2010 and 2009, the Company had
allowances of advances to suppliers of $$1,643,419 and $1,631,557, respectively.
Approximately 41.8% of our advance to suppliers was greater than 180 days as of
June 30, 2010, the majority, or 75% of which, is attributable to our advances to
a single long term supplier of the Company. We believe that these advances are
ultimately collectible and do not provide allowances against such
advances.
Allowances
for advances to suppliers are written off when all efforts to collect the
materials or recover the cash advances have been unsuccessful, or when it has
become known to the management that there is no intention for the suppliers to
deliver the contracted raw materials or refund the cash advances. To date we
have not written off any advances to suppliers. If any material advances to
suppliers must be written-off, or if we can not secure delivery of raw materials
that have pre-paid with such advances, then our financial results will be
negatively impacted.
Rapidly
growing demand and supply in China and other developing economies may result in
additional excess worldwide capacity and falling steel prices, which could
adversely impact our results.
Over the
last several years steel consumption in China and other developing economies
such as India has increased at a rapid pace. Steel companies have responded by
developing plans to rapidly increase steel production capability in these
countries and entered into long-term contracts with iron ore suppliers in
Australia and Brazil. Steel production, especially in China, has been expanding
rapidly and could be in excess of Chinese demand depending on continuing growth
rates. Because China is now the largest worldwide steel producer, any
significant excess in Chinese capacity could have a major impact on domestic and
international steel trade and prices.
Environmental
compliance and remediation could result in substantially increased capital
requirements and operating costs.
Our
operating subsidiaries, Chengtong and Shanghai Blessford, are subject to
numerous Chinese provincial and local laws and regulations relating to the
protection of the environment. These laws continue to evolve and are becoming
increasingly stringent. The ultimate impact of complying with such laws and
regulations is not always clearly known or determinable because regulations
under some of these laws have not yet been promulgated or are undergoing
revision. Our consolidated business and operating results could be materially
and adversely affected if our operating subsidiaries were required to increase
expenditures to comply with any new environmental regulations affecting its
operations.
We
may require additional capital in the future and we cannot assure that capital
will be available on reasonable terms, if at all, or on terms that would not
cause substantial dilution to stockholdings.
The
development of high quality specialty precision steel requires substantial
funds. Sourcing external capital funds for product development and requisite
capital expenditures are key factors that have and may in the future constrain
our growth, production capability and profitability. To achieve the next phase
of our corporate growth, increased production capacity, successful product
development and additional external capital will be necessary. There can be no
assurance that such capital will be available in sufficient amounts or on terms
acceptable to us, if at all. Any sale of a substantial number of additional
shares of common stock or securities convertible into common stock will cause
dilution to the holders of our common stock and could also cause the market
price of our common stock to decline.
We
face significant competition from competitors who have greater resources than we
do, and we may not have the resources necessary to successfully compete with
them.
We are
one of a few manufacturers of specialty precision steel products in China.
Differences in the type and nature of the specialty precision steel products in
China’s steel industry are relatively small, and, coupled with intense
competition from international and local suppliers, to a limited extent,
consumers’ demand can be price sensitive. Competitors may increase their market
share through pricing strategies that adversely impact our business. Our
business is in an industry that is becoming increasingly competitive and capital
intensive, and competition comes from manufacturers located in China as well as
from international competition. Our competitors may have financial resources,
staff and facilities substantially greater than ours and we may be at a
competitive disadvantage compared with larger companies.
We
produce a limited number of products and may not be able to respond quickly to
significant changes in the market or new market entrants.
Cold-rolled
specialty precision steel is a relatively new industry in China; Chinese
manufacturers of durable goods previously relied solely on imports from Japan,
Korea, the European Union and the United States. We believe the average quality
and standards of products of China’s high precision steel industry lags behind
the international norm. During the last four years, we have developed a
nationally recognizable brand, however, we are not yet an internationally
recognizable brand for our specialty steel products. Although we offer high
precision cold rolled steel products in over 100 specifications, there are many
other specialty precision steel products of similar nature in the market, even
though none currently compete directly with our products. If there are
significant changes in market demands and/or competitive forces, we may not be
able to change our product mix or adapt our production equipment quickly enough
to meet customers’ needs. Under such circumstances, our narrow band of precision
steel products and/or new market entrants may negatively impact our financial
performance.
Increased
imports of steel products into China could negatively affect domestic steel
prices and demand levels and reduce profitability of domestic
producers.
Based on
our understanding, China’s total production capacity of precision cold-rolled
steel coils was over two million tons as of June 30, 2010. However, domestic
production continues to be insufficient to meet demand. As a result, China
continues to import a significant portion of its steel products. Foreign
competitors may have lower labor costs, and are often owned, controlled or
subsidized by their governments, which allows their production and pricing
decisions to be influenced by political and economic policy considerations as
well as prevailing market conditions. Import levels may also be impacted by
decisions of government agencies, under trade laws. Increases in future levels
of imported steel could negatively impact future market prices and demand levels
for our precision steel products.
We
are dependent on our Chinese manufacturing operations to generate the majority
of our income and profits, and the deterioration of any current favorable local
conditions may make it difficult or prohibitive to continue to operate or expand
in China.
Our
current manufacturing operations are located in China, our administrative
offices are in Hong Kong and we have additional establishments in the British
Virgin Islands. The geographical distances between these facilities create a
number of logistical and communications challenges, including time differences
and differences in the cultures in each location, which makes communication and
effective cooperation more difficult. In addition, because of the location
of the manufacturing facilities in China, our operations in China could be
affected by, among other things:
|
·
|
economic
and political instability in China, including problems related to labor
unrest;
|
|
·
|
lack
of developed infrastructure;
|
|
·
|
variances
in payment cycles;
|
|
·
|
overlapping
taxes and multiple taxation issues;
|
|
·
|
employment
and severance taxes;
|
|
·
|
compliance
with local laws and regulatory
requirements;
|
|
·
|
greater
difficulty in collecting accounts receivable;
and
|
|
·
|
the
burdens of cost and compliance with a variety of foreign
laws.
|
Moreover,
inadequate development or maintenance of infrastructure in China, including
adequate power and water supplies, transportation, raw materials availability or
the deterioration in the general political, economic or social environment could
make it difficult, more expensive and possibly prohibitive to continue to
operate or expand our facilities in China.
Our
operations are international and we are subject to significant worldwide
political, economic, legal and other uncertainties that may make it difficult or
costly to collect amounts owed to us or to conduct operations should materials
needed from certain places be unavailable for an indefinite or extended period
of time.
We have
subsidiaries in the British Virgin Islands and China. We manufacture all of our
products in China and substantially all of the net book value of our total fixed
assets is located there. However, we sell our products to customers outside of
China as well as domestically. As a result, we have receivables from and goods
in transit to locations outside of China. Protectionist trade legislation in the
United States or other countries, such as a change in export or import
legislation, tariff or duty structures, or other trade policies, could adversely
affect our ability to sell products in these markets, or even to purchase raw
materials or equipment from foreign suppliers. Moreover, we are subject to a
variety of United States laws and regulations, changes to which may affect our
ability to transact business with certain customers or in certain product
categories.
In China,
our operating subsidiaries Chengtong and Shanghai Blessford are subject to
numerous national, provincial and local governmental regulations, all of which
can limit our ability to react to market pressures in a timely or effective way,
thus causing us to lose business or miss opportunities to expand our business.
These include, among others, regulations governing:
|
·
|
environmental
and waste management;
|
|
·
|
our
relationship with our employees, including: wage and hour requirements,
working and safety conditions, citizenship requirements, work permits and
travel restrictions;
|
|
·
|
property
ownership and use in connection with our leased facilities in China;
and
|
|
·
|
import
restrictions, currency restrictions and restrictions on the volume of
domestic sales.
|
The
end-use markets for certain of our products are highly competitive and customers
are willing to accept substitutes for our products which could reduce our
results of operations.
Buyers of
certain cold-rolled steel products are in highly competitive markets.
Cold-rolled precision steel competes with other materials, such as aluminum,
plastics, composite materials and glass, among others, for industrial and
commercial applications. Customers have demonstrated a willingness to substitute
other materials for cold-rolled steel. The willingness of our customers to
accept substitutes for cold-rolled steel products could have a material adverse
effect on our financial results.
We may not be
able to pass on to customers the increases in the costs of our raw materials,
particularly crude steel.
We
require substantial amounts of raw materials in our business, consisting
principally of steel slabs and strip steel. Any substantial increases in the
cost of crude steel could adversely affect our financial condition and results
of operations. The availability and price of crude steel depends on a number of
factors outside our control, including general economic conditions, domestic and
international supply and tariffs. Increased domestic and worldwide demand for
crude steel has had and will continue to have the effect of increasing the
prices that we pay for these raw materials, thereby increasing our cost of goods
sold. Generally, there is a potential time lag between changes in prices under
our purchase contracts and the point when we can implement a corresponding
change under our sales contracts with our customers. As a result, we can be
exposed to fluctuations in the price of raw materials, since, during the time
lag period, we may have to temporarily bear the additional cost of the change
under our purchase contracts, which could have a material adverse effect on our
profitability. If raw material prices were to increase significantly without a
commensurate increase in the market value of our products, our financial
condition and results of operations would be adversely affected.
Although
we are dependent on a steady flow of raw materials for our operations, we do not
have in place long-term supply agreements for all of our material
requirements.
Although
a substantial portion of our raw material requirements is met by Dachang Huizu
Baosheng Steel Products Co., Ltd. for the year ended June 30, 2010, we are not
dependent on any one single supplier for supply of hot-rolled coils as these
coils are generally available in the market. However, we do not currently have
long-term supply contracts with any particular supplier, including Dachang Huizu
Baosheng Steel Products Co., Ltd., to assure a continued supply of the raw
materials we need in our operations. While we maintain good relationships with
these suppliers, the supply of raw materials may nevertheless be interrupted on
account of events outside our control, which will negatively impact our
operations.
We
have substantial indebtedness with floating interest rates and the cost of our
borrowings may increase.
We are
subject to interest rate risk on our non-derivative financial instruments. We do
not hedge our interest rate risk. At June 30, 2010, our total bank debt
outstanding was $44,041,335, all of which was interest-bearing. Substantially
all of the bank debt was floating-rate debt with interest rates which vary with
changes in the standard rate set by the People’s Bank of China for RMB loans,
and SIBOR and LIBOR for USD loans. A change in the interest rate or yield of
fixed rate debt will only impact the fair value of such debt, while a change in
the interest rate of floating rate, or variable rate, debt will impact interest
expense as well as the amount of cash required to service such debt. To the
extent interest rates increase, we will be liable for higher interest payments
to its lenders. We anticipate that annual interest on loans for the fiscal year
ending June 30, 2011, will be approximately $2.4 million. The impact of a 1%
increase in interest rates will increase interest expense by approximately
$441,000. As our short-term loans mature in 2011, we will be required to either
repay or refinance these loans. An increase in short-term interest rates at the
time that we seek to refinance short-term borrowings may increase the cost of
borrowings, which may adversely affect our earnings and cash
available.
At June
30, 2010, we do not have any other financial instruments other than the loans
discussed above.
The
loss of any key executive or our failure to attract and retain key personnel
could adversely affect our future performance, strategic plans and other
objectives.
The loss
or failure to attract and retain key personnel could significantly impede our
future performance, including product development, strategic plans, marketing
and other objectives. Our success depends to a substantial extent not only on
the ability and experience of our senior management, but particularly upon our
Chairman, Mr. Wo Hing Li, our Chief Executive Officer, Mr. Hai Sheng Chen, our
Chief Operating Officer, Mr. Zu De Jiang and our Chief Financial Officer, Ms.
Leada Tak Tai Li. We do not currently have in place key man life insurance for
these executive officers. To the extent that the services of these officers
would be unavailable to us, we would be required to recruit other persons to
perform the duties performed by them. We may be unable to employ other qualified
persons with the appropriate background and expertise to replace these officers
and directors on terms suitable to us.
We
may not be able to retain, recruit and train adequate management and production
personnel. We rely heavily on those personnel to help develop and execute our
business plans and strategies, and if we lose such personnel, it would reduce
our ability to operate effectively.
Our
continued operations are dependent upon our ability to identify and recruit
adequate management and production personnel in China. We require trained
graduates of varying levels and experience and a flexible work force of
semi-skilled operators. Many of our current employees come from the more remote
regions of China as they are attracted by the wage differential and prospects
afforded by Shanghai and our operations. With the economic growth currently
being experienced in China, competition for qualified personnel is substantial,
and there can be no guarantee that a favorable employment climate will continue
and that wage rates we must offer to attract qualified personnel will enable us
to remain competitive internationally. The inability to attract such personnel
or the increased cost of doing so could reduce our competitive advantage
relative to other precision steel producers, reducing or eliminating our growth
in revenues and profits.
We
may not be able to protect adequately our intellectual property from
infringement or unauthorized use by third parties.
Except
for a patent on the Environment-Conscious Mill Bearing with Inner Circular
Lubrication, we have no patents or licenses that protect our intellectual
property. Unauthorized parties may attempt to copy aspects of our processes and
know-how or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our processes and know-how is difficult. Our
experienced key engineers and management staff are extensively involved in
all facets of research, design, craftwork, styling and development of the
specialty precision products. Potential risks on the divulgence of skills and
the development of new products increase should these employees resign, as we
rely heavily on them. We have elected to protect internally developed know-how
and production processes (such as system pressure, cleanliness of the
lubrication, temperature control, appropriate allocation of oil supply and
retrieving, which are vital in providing a radical solution to the difficulties
associated with lubricating rolling mills’ backing bearing) by requiring all key
personnel (production engineers and management staff) to sign non-disclosure and
confidentiality contracts. However, this means of protecting our proprietary
rights may not be adequate. In addition, the laws of some foreign countries do
not protect our proprietary rights as extensively as do U.S. laws. Our failure
to protect adequately our proprietary rights may allow third parties to
duplicate our products, production processes or develop functionally equivalent
or superior technology. In addition, our competitors may independently develop
similar technologies or design around our proprietary intellectual
property.
We
are subject to risks associated with changing technology and manufacturing
techniques, which could place us at a competitive disadvantage.
The
successful implementation of our business strategy requires us to continuously
evolve our existing products and services and introduce new products and
services to meet customers’ needs. Our designs and products are characterized by
stringent performance and specification requirements that mandate a high degree
of manufacturing and engineering expertise. We believe that our customers
rigorously evaluate our services and products on the basis of a number of
factors, including, but not limited to:
|
·
|
technical
expertise and development
capability;
|
|
·
|
reliability
and timeliness of delivery;
|
|
·
|
product
design capability;
|
|
·
|
operational
flexibility;
|
Our
success depends on our ability to continue to meet our customers’ changing
requirements and specifications with respect to these and other criteria. There
can be no assurance that we will be able to address technological advances or
introduce new designs or products that may be necessary to remain competitive
within the precision steel industry.
We
depend upon our largest customers for a significant portion of our sales
revenue, and we cannot be certain that sales to these customers will continue.
If sales to these customers do not continue, then our sales may decline and our
business may be negatively impacted.
We
currently supply high precision steel products to five major customers in the
Chinese domestic market. For the years ended June 30, 2010 and 2009, sales
revenues generated from the top five major customers amounted to 55% and 50% of
total sales revenues, respectively; sales to the largest single customer
for the same years amounted to 20% and 19% of total sales revenues,
respectively. We do not enter into long-term contracts with our customers and
therefore cannot be certain that sales to these customers will continue. The
loss of any of our largest customers would likely have a material negative
impact on our sales revenues and business.
Defects
in our products could impair our ability to sell products or could result in
litigation and other significant costs.
Detection
of any significant defects in our precision steel products may result in, among
other things, delay in time-to-market, loss of market acceptance and sales of
its products, diversion of development resources, injury to our reputation,
litigation or fines, or increased costs to correct such defects. Defects could
harm our reputation, which could result in significant costs and could impair
our ability to sell our products. The costs we may incur in correcting any
product defects may be substantial and could decrease our profit margins.
Failure to
optimize our manufacturing potential and cost structure could materially
increase our overhead, causing a decline in our margins and profitability.
We strive
to utilize the manufacturing capacity of our facilities fully but may not do so
on a consistent basis. Our factory utilization is dependent on our success in,
among other things:
|
·
|
accurately
forecasting demand;
|
|
·
|
timing
volume sales to our customers;
|
|
·
|
balancing
our productive resources with product mix;
and
|
|
·
|
planning
manufacturing services for new or other products that we intend to
produce.
|
Demand
for contract manufacturing of these products may not be as high as we expect,
and we may fail to realize the expected benefit from our investment in our
manufacturing facilities. Our profitability and operating results are also
dependent upon a variety of other factors, including, but not limited
to:
|
·
|
utilization
rates of manufacturing lines;
|
|
·
|
downtime
due to product changeover;
|
|
·
|
impurities
in raw materials causing shutdowns;
and
|
|
·
|
maintenance
of contaminant-free operations.
|
Failure
to optimize our manufacturing potential and cost structure could materially and
adversely affect our business and operating results.
Moreover,
our cost structure is subject to fluctuations from inflationary pressures in
China and other geographic regions where we conduct business. China is currently
experiencing dramatic growth in its economy. This growth may lead to continued
pressure on wages and salaries that may exceed our budget and adversely affect
our operating results.
Our
production facilities are subject to risks of power shortages which may
adversely affect our ability to meet our customers’ needs and reduce our
revenues.
Many
cities and provinces in China have suffered serious power shortages since 2004.
Many of the regional grids do not have sufficient power generating capacity to
fully satisfy the increased demand for electricity driven by continual economic
growth and persistent hot weather. Local governments have occasionally required
local factories to temporarily shut down their operations or reduce their daily
operational hours in order to reduce local power consumption levels. To date,
our operations have not been affected by those administrative measures. However,
there is a risk that our operations may be affected by those administrative
measures in the future, thereby causing material production disruption and delay
in delivery schedule. In such event, our business, results of operation and
financial conditions could be materially adversely affected. We do not have any
back-up power generation system. Although we have not experienced any power
outages in the past, we may be adversely affected by power outages in the
future.
Unexpected
equipment failures may lead to production curtailments or
shutdowns.
Interruptions
in our production capabilities will adversely affect our production costs,
products available for sales and earnings for the affected period. In addition
to equipment failures, our facilities are also subject to the risk of
catastrophic loss due to unanticipated events such as fires, explosions or
violent weather conditions. Our manufacturing processes are dependent upon
critical pieces of equipment, such as our various cold-rolling mills, as well as
electrical equipment, such as transformers, and this equipment may, on occasion,
be out of service as a result of unanticipated failures. We have experienced and
may in the future experience material plant shutdowns or periods of reduced
production as a result of such equipment failures.
Our
insurance may not be adequate if our production facilities were destroyed or
significantly damaged as a result of fire or some other natural
disaster.
All of
our products are currently manufactured at our existing facilities located in
the Jiading District in Shanghai, China. Fire fighting and disaster relief or
assistance in China may not be as developed as in Western countries. While we
maintain property damage insurance aggregating approximately $83.7 million
covering our inventories, equipment, plant and buildings and another $35.1
million insurance against equipment damage, we do not maintain business
interruption insurance. Material damage to, or the loss of, our production
facilities due to fire, severe weather, flood or other act of God or cause, even
if insured, could have a material adverse effect on our financial condition,
results of operations, business and prospects.
Our holding company structure may
limit the payment of dividends.
We have
no direct business operations, other than our ownership of our subsidiaries.
While we have no current intention of paying dividends, should we decide
in the future to do so, as a holding company, our ability to pay dividends and
meet other obligations depends upon the receipt of dividends or other payments
from our operating subsidiaries and other holdings and investments. In
addition, our operating subsidiaries, from time to time, may be subject to
restrictions on their ability to make distributions to us, including as a result
of restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory
restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars
may reduce the amount received by U.S. stockholders upon conversion of the
dividend payment into U.S. dollars.
Chinese
regulations currently permit the payment of dividends only out of accumulated
profits as determined in accordance with Chinese accounting standards and
regulations. Our subsidiaries in China are also required to set aside a
portion of their after tax profits according to Chinese accounting standards and
regulations to fund certain reserve funds. Currently, our subsidiaries in
China are the only sources of revenues or investment holdings for the payment of
dividends. If they do not accumulate sufficient profits under Chinese
accounting standards and regulations to first fund certain reserve funds as
required by Chinese accounting standards, we will be unable to pay any
dividends.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any
determination that we violated the Foreign Corrupt Practices Act could have a
material adverse effect on our business.
We are
subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by
the statute for the purpose of obtaining or retaining business. We have
operations, agreements with third parties and make sales in China, which may
experience corruption. Our activities in China create the risk of unauthorized
payments or offers of payments by one of the employees, consultants, sales
agents or distributors of our company, because these parties are not always
subject to our control. It is our policy to implement safeguards to discourage
these practices by our employees. Also, our existing safeguards and any future
improvements may prove to be less than effective, and the employees,
consultants, sales agents or distributors of our Company may engage in conduct
for which we might be held responsible. Violations of the FCPA may result in
severe criminal or civil sanctions, and we may be subject to other liabilities,
which could negatively affect our business, operating results and financial
condition. In addition, the government may seek to hold our Company liable for
successor liability FCPA violations committed by companies in which we invest or
that we acquire.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Adverse
changes in political and economic policies of the PRC government could impede
the overall economic growth of China, which could reduce the demand for our
products and damage our business.
We
conduct substantially all of our operations and generate most of our revenue in
China. Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The PRC economy differs from the economies of most
developed countries in many respects, including:
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·
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a
higher level of government
involvement;
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a
early stage of development of the market-oriented sector of the
economy;
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·
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a
higher level of control over foreign exchange;
and
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the
allocation of resources.
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As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us.
Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the
allocation of resources, controlling the payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.
Any
adverse change in economic conditions or government policies in China could have
a material adverse effect on the overall economic growth in China, which in turn
could lead to a reduction in demand for our services and consequently have a
material adverse effect on our business and prospects.
Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
We
conduct substantially all of our business through our operating subsidiaries in
the PRC. Our operating subsidiaries are generally subject to laws and
regulations applicable to foreign investments in China and, in particular, laws
applicable to foreign-invested enterprises. The PRC legal system is based on
written statutes, and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, a series of new PRC laws and regulations
have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In addition, all of
our executive officers and all of our directors are residents of China and not
of the United States, and substantially all the assets of these persons are
located outside the United States. As a result, it could be difficult for
investors to affect service of process in the United States or to enforce a
judgment obtained in the United States against our Chinese operations and
subsidiaries.
If
we are found to have failed to comply with applicable laws, we may incur
additional expenditures or be subject to significant fines and
penalties.
Our
operations are subject to PRC laws and regulations applicable to us. However,
many PRC laws and regulations are uncertain in their scope, and the
implementation of such laws and regulations in different localities could have
significant differences. In certain instances, local implementation rules and/or
the actual implementation are not necessarily consistent with the regulations at
the national level. Although we strive to comply with all the applicable PRC
laws and regulations, we cannot assure you that the relevant PRC government
authorities will not later determine that we have not been in compliance with
certain laws or regulations.
In
addition, our facilities and products are subject to many laws and regulations.
Our failure to comply with these and other applicable laws and regulations in
China could subject us to administrative penalties and injunctive relief, as
well as civil remedies, including fines, injunctions and recalls of our
products. It is possible that changes to such laws or more rigorous enforcement
of such laws or with respect to our current or past practices could have a
material adverse effect on our business, operating results and financial
condition. Further, additional environmental, health or safety issues relating
to matters that are not currently known to management may result in
unanticipated liabilities and expenditures.
The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.
The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Restrictions
on currency exchange may limit our ability to receive and use our sales
effectively.
The
majority of our revenues will be settled in RMB and U.S. dollars, and any future
restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell
or remit foreign currencies after providing valid commercial documents, at those
banks in China authorized to conduct foreign exchange business. In addition,
conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in China, and companies are required
to open and maintain separate foreign exchange accounts for capital account
items. We cannot be certain that the Chinese regulatory authorities will not
impose more stringent restrictions on the convertibility of the
RMB.
Fluctuations in
exchange rates could adversely affect our business and the value of our
securities.
The value
of our common stock will be indirectly affected by the foreign exchange rate
between the U.S. dollar and RMB and between those currencies and other
currencies in which our revenues may be denominated. Appreciation or
depreciation in the value of the RMB relative to the U.S. dollar would affect
our financial results reported in U.S. dollar terms without giving effect to any
underlying change in our business or results of operations. Fluctuations in the
exchange rate will also affect the relative value of any dividend we issue that
will be exchanged into U.S. dollars, as well as earnings from, and the value of,
any U.S. dollar-denominated investments we make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the
People’s Bank of China regularly intervenes in the foreign exchange market to
prevent significant short-term fluctuations in the exchange rate, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar in the
medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen
intervention in the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
Currently,
some of our raw materials and major equipment are imported. In the event that
the U.S. dollars appreciate against RMB, our costs will increase. If we cannot
pass the resulting cost increases on to our customers, our profitability and
operating results will suffer. In addition, since our sales to international
customers are growing rapidly, we are increasingly subject to the risk of
foreign currency depreciation.
Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our business.
Substantially
all of our revenues are earned by our PRC subsidiaries. However, PRC regulations
restrict the ability of our PRC subsidiaries to make dividends and other
payments to its offshore parent company. PRC legal restrictions permit payments
of dividends by our PRC subsidiaries only out of their accumulated after-tax
profits, if any, determined in accordance with PRC accounting standards and
regulations. Our PRC subsidiaries are also required under PRC laws and
regulations to allocate at least 10% of their annual after-tax profits
determined in accordance with PRC generally accepted accounting principles to a
statutory general reserve fund until the amounts in said fund reaches 50% of our
registered capital. Allocations to these statutory reserve funds can only be
used for specific purposes and are not transferable to us in the form of loans,
advances, or cash dividends. Any limitations on the ability of our PRC
subsidiary to transfer funds to us could materially and adversely limit our
ability to grow, make investments or acquisitions that could be beneficial to
our business, pay dividends and otherwise fund and conduct our
business.
You may have
difficulty enforcing judgments against us.
We are a
Nevada holding company and most of our assets are located outside of the United
States. Almost all of our operations are conducted in the PRC. In addition, most
of our directors and officers are nationals and residents of countries other
than the United States. A substantial portion of the assets of these persons is
located outside the United States. As a result, it may be difficult for you to
effect service of process within the United States upon these persons. It may
also be difficult for you to enforce in U.S. courts judgments on the civil
liability provisions of the U.S. federal securities laws against us and our
officers and directors, most of whom are not residents in the United States and
the substantial majority of whose assets are located outside of the United
States. In addition, there is uncertainty as to whether the courts of the PRC
would recognize or enforce judgments of U.S. courts. Although the recognition
and enforcement of foreign judgments are generally provided for under the PRC
Civil Procedures Law. Courts in China may recognize and enforce foreign
judgments in accordance with the requirements of the PRC Civil Procedures Law
based on treaties between China and the country where the judgment is made or on
reciprocity between jurisdictions. China does not have any treaties or other
arrangements that provide for the reciprocal recognition and enforcement of
foreign judgments with the United States. In addition, according to the PRC
Civil Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment
violates basic principles of PRC law or national sovereignty, security or the
public interest. So it is uncertain whether a PRC court would enforce a judgment
rendered by a court in the United States.
Failure to comply
with PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident stockholders to personal
liability, limit our ability to acquire PRC companies or to inject capital into
PRC subsidiaries, limit our PRC subsidiary's ability to distribute profits to us
or otherwise materially adversely affect us.
In
October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire “control” over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC resident’s funds used to establish or acquire the offshore entity; (3)
covering the use of existing offshore entities for offshore financings; (4)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (5) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under Circular 75 are
required in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations, and
Notice 106 makes the offshore SPV jointly responsible for these filings. In the
case of an SPV which was established, and which acquired a related domestic
company or assets, before the implementation date of Circular 75, a retroactive
SAFE registration was required to have been completed before March 31, 2006.
This date was subsequently extended indefinitely by Notice 106, which also
required that the registrant establish that all foreign exchange transactions
undertaken by the SPV and its affiliates were in compliance with applicable laws
and regulations. Failure to comply with the requirements of Circular 75, as
applied by SAFE in accordance with Notice 106, may result in fines and other
penalties under PRC laws for evasion of applicable foreign exchange
restrictions. Any such failure could also result in the SPV’s affiliates being
impeded or prevented from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.
We have
asked our stockholders, who are PRC residents as defined in Circular 75, to
register with the relevant branch of SAFE as currently required in connection
with their equity interests in us and our acquisitions of equity interests in
our PRC subsidiary. However, we cannot provide any assurances that they can
obtain the above SAFE registrations required by Circular 75 and Notice 106.
Moreover, because of uncertainty over how Circular 75 will be interpreted and
implemented, and how or whether SAFE will apply it to us, we cannot predict how
it will affect our business operations or future strategies. For example, our
present and prospective PRC subsidiaries' ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with Circular 75 and Notice 106 by our
PRC resident beneficial holders.
In
addition, such PRC residents may not always be able to complete the necessary
registration procedures required by Circular 75 and Notice 106. We also have
little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident stockholders to comply
with Circular 75 and Notice 106, if SAFE requires it, could subject these PRC
resident beneficial holders to fines or legal sanctions, restrict our overseas
or cross-border investment activities, limit our subsidiaries' ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.
Under
the New Enterprise Income Tax Law, we may be classified as a “resident
enterprise” of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC stockholders.
On March
16, 2007, the National People’s Congress of China passed the EIT Law and on
November 28, 2007, the State Council of China passed its implementing rules,
both of which took effect on January 1, 2008. Under the EIT Law, an enterprise
established outside of China with “de facto management bodies” within China is
considered a “resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese enterprise for enterprise income tax purposes. The
implementing rules of the EIT Law define de facto management as “substantial and
overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the EIT Law and its implementation against non-Chinese enterprise
or group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a “domestically incorporated resident enterprise”
if (i) its senior management in charge of daily operations reside or perform
their duties mainly in China; (ii) its financial or personnel decisions are made
or approved by bodies or persons in China; (iii) its substantial assets and
properties, accounting books, corporate chops, board and shareholder minutes are
kept in China; and (iv) at least half of its directors with voting rights or
senior management often resident in China. A resident enterprise would be
subject to an enterprise income tax rate of 25% on its worldwide income and its
non-PRC stockholders would be subject to a withholding tax at a rate of 10% when
dividends are paid to such non-PRC stockholders. However, it remains unclear as
to whether the Notice is applicable to an offshore enterprise incorporated by a
Chinese natural person. Nor are detailed measures on enforcement of PRC tax
against non-domestically incorporated resident enterprises are available.
Therefore, it is unclear how tax authorities will determine tax residency based
on the facts of each case.
We may be
deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax
authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow.
First, we may be subject to the enterprise income tax at a rate of 25% on our
worldwide taxable income as well as PRC enterprise income tax reporting
obligations. In our case, this would mean that income such as interest on
financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the EIT Law and
its implementing rules dividends paid to us from our PRC subsidiary would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax purposes. Finally,
it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC stockholders and
with respect to gains derived by our non-PRC stockholders from transferring our
shares. We are actively monitoring the possibility of “resident enterprise”
treatment for the 2010 tax year and are evaluating appropriate organizational
changes to avoid this treatment, to the extent possible.
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
We
face uncertainty from China’s Circular on Strengthening the Administration of
Enterprise Income Tax on NonResident Enterprises' Share Transfer, or Circular
698, that was released in December 2009 with retroactive effect from January 1,
2008.
The
Chinese State Administration of Taxation released a circular on December 15,
2009 that addresses the transfer of shares by nonresident companies, generally
referred to as Circular 698. Circular 698, which is effective retroactively to
January 1, 2008, may have a significant impact on many companies that use
offshore holding companies to invest in China. Circular 698, which provides
parties with a short period of time to comply with its requirements, indirectly
taxes foreign companies on gains derived from the indirect sale of a Chinese
company. Where a foreign investor indirectly transfers equity interests in a
Chinese resident enterprise by selling the shares in an offshore holding
company, and the latter is located in a country or jurisdiction where the
effective tax burden is less than 12.5% or where the offshore income of his,
her, or its residents is not taxable, the foreign investor is required to
provide the tax authority in charge of that Chinese resident enterprise with the
relevant information within 30 days of the transfers. Moreover, where a foreign
investor indirectly transfers equity interests in a Chinese resident enterprise
through an abuse of form of organization and there are no reasonable commercial
purposes such that the corporate income tax liability is avoided, the PRC tax
authority will have the power to re-assess the nature of the equity transfer in
accordance with PRC’s “substance-over-form” principle and deny the existence of
the offshore holding company that is used for tax planning purposes. There is
uncertainty as to the application of Circular 698. For example, while the term
"indirectly transfer" is not defined, it is understood that the relevant PRC tax
authorities have jurisdiction regarding requests for information over a wide
range of foreign entities having no direct contact with China. It is also
unclear, in the event that an offshore holding company is treated as a
domestically incorporated resident enterprise, whether Circular 698 would still
be applicable to transfer of shares in such offshore holding company. Moreover,
the relevant authority has not yet promulgated any formal provisions or formally
declared or stated how to calculate the effective tax in the country or
jurisdiction and to what extent and the process of the disclosure to the tax
authority in charge of that Chinese resident enterprise. In addition, there are
not any formal declarations with regard to how to decide “abuse of form of
organization” and “reasonable commercial purpose,” which can be utilized by us
to balance if our Company complies with the Circular 698. If Circular 698 is
determined to be applicable to us based on the facts and circumstances around
such share transfers, we may become at risk of being taxed under Circular 698
and we may be required to expend valuable resources to comply with Circular 698
or to establish that we should not be taxed under Circular 698, which could have
a material adverse effect on our financial condition and results of
operations.
RISKS
RELATED TO THE MARKET FOR OUR STOCK
The
market price for shares of our common stock could be volatile and could
decline.
The
market price for the shares of our common stock may fluctuate in response to a
number of factors, many of which are beyond our control. In some cases, these
fluctuations may be unrelated to our operating performance. Many companies with
Chinese operations have experienced dramatic volatility in the market prices of
their common stock. We believe that a number of factors, both within and outside
of our control, could cause the price of our common stock to fluctuate, perhaps
substantially. Factors such as the following could have a significant adverse
impact on the market price of our common stock:
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our
ability to obtain additional financing and, if available, the terms and
conditions of the financing;
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our
financial position and results of
operations;
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period-to-period
fluctuations in our operating
results;
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changes
in estimates of our performance by any securities
analysts;
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substantial
sales of our common stock pursuant to Rule 144 or
otherwise;
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new
regulatory requirements and changes in the existing regulatory
environment;
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the
issuance of new equity securities in a future
offering;
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changes
in interest rates; and
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general
economic, monetary and other national conditions, particularly in the U.S.
and China.
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Securities
class action litigation is often instituted against companies following periods
of volatility in their stock price. This type of litigation could result in
substantial costs to us and divert our management’s attention and resources.
Moreover, securities markets may from time to time experience significant price
and volume fluctuations for reasons unrelated to operating performance of
particular companies. For example, in July 2008, the securities markets in the
United States, China and other jurisdictions experienced the largest decline in
share prices since September 2001. These market fluctuations may adversely
affect the price of our common stock and other interests in our company at a
time when you want to sell your interest in us.
Although
publicly traded, the trading market in our common stock has been substantially
less liquid than the average trading market for a stock quoted on the Nasdaq
Stock Market and this low trading volume may adversely affect the price of our
common stock.
Our
common stock is listed on The NASDAQ Capital Market under the symbol “CPSL.” The
trading volume of our common stock has been comparatively low to other companies
listed on Nasdaq. Limited trading volume will subject our shares of common stock
to greater price volatility and may make it difficult for you to sell your
shares of common stock at a price that is attractive to you.
One
stockholder, who is our Chairman, exercises significant control over matters
requiring shareholder approval.
Mr. Wo
Hing Li, our Chairman, had voting power as of June 30, 2010 equal to
approximately 33% of our voting securities. As a result, Mr. Li, through such
stock ownership, exercises significant control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership in Mr. Li
may also have the effect of delaying or preventing a change in control or other
transactions that may otherwise be viewed as beneficial by stockholders
other than Mr. Li.
We
may be required to raise additional financing by issuing new securities with
terms or rights superior to those of our shares of common stock, which could
adversely affect the market price of our shares of common stock.
We may
require additional financing to fund future operations, develop and exploit
existing and new products and to expand into new markets. We may not be able to
obtain financing on favorable terms, if at all. If we raise additional funds by
issuing equity securities, the percentage ownership of our current shareholders
will be reduced, and the holders of the new equity securities may have rights
superior to those of the holders of shares of common stock, which could
adversely affect the market price and the voting power of shares of our common
stock. If we raise additional funds by issuing debt securities, the holders of
these debt securities would similarly have some rights senior to those of the
holders of shares of common stock, and the terms of these debt securities could
impose restrictions on operations and create a significant interest expense for
us.
We
do not intend to pay dividends for the foreseeable future.
For the
foreseeable future, we intend to retain any earnings to finance the development
and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Accordingly, investors must be prepared to rely
on sales of their common stock after price appreciation to earn an investment
return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will
be made at the discretion of our board of directors and will depend on our
results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.
ITEM
1B.
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UNRESOLVED
STAFF COMMENTS.
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Not
Applicable.
All land
in China is owned by the State. Individuals and companies are permitted to
acquire rights to use land or land use rights for specific purposes. In the case
of land used for industrial purposes, the land use rights are granted for a
period of 50 years. This period may be renewed at the expiration of the
initial and any subsequent terms. Granted land use rights are transferable and
may be used as security for borrowings and other obligations.
We
currently have land use rights to approximately 48.38 acres consisting
of manufacturing facilities, warehouse and office buildings in Shanghai, China.
The chart below lists all facilities owned by us.
Location
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Type
of Facility
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Size of Land
(acre)
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Jiading
District, Shanghai
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Manufacturing
facilities, warehouse and office buildings
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21.34
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Jiading
District, Shanghai
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Manufacturing
facilities
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27.04
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In
October 2004, Tuorong agreed to purchase a land use right from the Shanghai
Labor and Economic Development Council with respect to a 20-acre parcel for a
lease period of 50 years at a cost of $472,441. Additionally in November 2005,
Chengtong agreed to purchase a land use right from the Shanghai Xuhang
Industrial Development Co., Ltd. with respect to a 27.04-acre parcel for a lease
period of 50 years at a cost of $497,795. In November 2006, Chengtong entered
into an agreement with the Shanghai Labor and Economic Development Council which
supersedes the aforementioned Tuorong agreement to purchase a total of
21.34-acre parcel for a lease period of 50 years at an aggregate amount of
$672,126. In December 2006, Tuorong entered into a Compensation Agreement with
the Shanghai Jiading Housing, Land and Resource Management Bureau to pay an
aggregate amount of $637,294 in connection to the two aforementioned
parcels.
ITEM
3.
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LEGAL
PROCEEDINGS.
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From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have a material
adverse affect on our business, financial condition or operating results.
ITEM
4.
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(REMOVED
AND RESERVED).
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PART
II
ITEM
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
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Market
Information
Our
Common Stock has been trading on the NASDAQ Capital Market under the symbol
“CPSL” since December 29, 2006 and was previously trading on that market under
the symbol “OLAB.” The CUSIP number for our common stock is
16941J106.
The
following table sets forth, for the periods indicated, the high and low closing
prices of our common stock. These prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
|
|
Closing Bid Prices(1)
|
|
|
|
High
|
|
|
Low
|
|
Year
Ended June 30, 2010
|
|
|
|
|
|
|
1st
Quarter
|
|
$ |
3.24 |
|
|
$ |
2.31 |
|
2nd
Quarter
|
|
|
2.87 |
|
|
|
2.05 |
|
3rd
Quarter
|
|
|
2.61 |
|
|
|
1.81 |
|
4th
Quarter
|
|
|
2.25 |
|
|
|
1.39 |
|
|
|
|
|
|
|
|
|
|
Year
Ended June 30, 2009
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$ |
5.49 |
|
|
$ |
0.86 |
|
2nd
Quarter
|
|
|
3.14 |
|
|
|
0.95 |
|
3rd
Quarter
|
|
|
1.80 |
|
|
|
0.86 |
|
4th
Quarter
|
|
|
3.24 |
|
|
|
1.20 |
|
(1) The
above table sets forth the range of high and low closing prices per share of our
common stock as reported by www.quotemedia.com
for the periods indicated.
Approximate
Number of Holders of Our Common Stock
As of
September 20, 2010, there were approximately 857 holders of record of our common
stock. This number excludes the shares of our common stock owned by stockholders
holding stock under nominee security position listings.
Dividend
Policy
We have
never declared or paid a cash dividend. Any future decisions
regarding dividends will be made by our board of directors. We currently
intend to retain and use any future earnings for the development and expansion
of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has complete discretion on
whether to pay dividends, subject to the approval of our stockholders.
Even if our board of directors decides to pay dividends, the form,
frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem
relevant.
Securities
Authorized for Issuance Under Equity Compensation Plans
See Item
12, “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters — Securities Authorized for Issuance Under Equity
Compensation Plans.”
Recent
Sales of Unregistered Securities
We have
not sold any equity securities during the fiscal year ended June 30, 2010 that
were not previously disclosed in a quarterly report on Form 10-Q or a current
report on Form 8-K that was filed during the 2010 fiscal year.
Purchases
of Equity Securities
No
repurchases of our common stock were made during the fourth quarter of
2010.
ITEM
6.
|
SELECTED
FINANCIAL DATA.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The
following management’s discussion and analysis should be read in conjunction
with our financial statements and the notes thereto and the other financial
information appearing elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
information. See “Special Note Regarding Forward Looking Statements” above for
certain information concerning those forward looking statements. Our financial
statements are prepared in U.S. dollars and in accordance with U.S.
GAAP.
Introduction
Management’s
discussion and analysis of financial condition and results of operations is
intended to help provide an understanding of China Precision Steel, Inc. and our
subsidiaries’ (together, the “Group”) financial condition, changes in financial
condition and results of operations. This discussion is organized as
follows.
|
·
|
Overview
of the Company’s Business - This section provides a
general description of the Group’s business, as well as recent
developments that have either occurred during the fiscal year ended June
30, 2010 and are important in understanding the results of operations and
financial condition or disclose known
trends.
|
|
·
|
Results
of Operations - This
section provides an analysis of our results of operations for the fiscal
year ended June 30, 2010. This discussion includes a brief description of
significant transactions and events that have an impact on the
comparability of the results being
analyzed.
|
|
·
|
Liquidity
and Capital Resources - This section provides an
analysis of the Group’s cash flows for the fiscal year ended June 30,
2010. Included in this section is a discussion of the Group’s outstanding
debt and the financial capacity available to fund the Group’s future
commitments and obligations.
|
Overview
of the Company’s Business
We are a
niche and high value-added steel processing company principally engaged in the
manufacture and sale of high precision cold-rolled steel products, in the
provision of heat treatment and in the cutting and slitting of medium and
high-carbon hot-rolled steel strips. We use commodity steel to create a high
value-added specialty premium steel. Specialty precision steel pertains to the
precision of measurements and tolerances of thickness, shape, width, surface
finish and other special quality features of highly-engineered end-use
applications.
We
produce and sell precision ultra-thin and high strength cold-rolled steel
products ranging from 7.5 mm to 0.03 mm. We also provide heat treatment and
cutting and slitting of medium and high-carbon hot-rolled steel strips not
exceeding 7.5 mm thickness. Our process puts hot-rolled de-scaled (pickled)
steel coils through a cold-rolling mill, utilizing our patented systems and high
technology reduction processing procedures, to make steel coils and sheets in
customized thicknesses according to customer specifications. Currently, our
specialty precision products are mainly used in the manufacture of automobile
parts and components, steel roofing, plane friction discs, appliances, food
packaging materials, saw blades, textile needles, and
microelectronics.
We
conduct our operations principally in China through our wholly-owned operating
subsidiaries, Chengtong and Shanghai Blessford, which are wholly owned
subsidiaries of our direct subsidiary, PSHL. Most of our sales are made
domestically in China; however, we began exporting during fiscal 2007
and our overseas market currently covers Indonesia, Thailand, the Philippines,
Nigeria and Ethiopia. We intend to further expand into additional
overseas markets in the future, subject to suitable market conditions and
favorable regulatory controls.
Fiscal
2010 Financial Performance Highlights
During
the year ended June 30, 2010, we saw robust growth in demand for our cold rolled
steel products as market sentiment continued to improve. We have seen gradually
increasing demand and orders from both our long term and new customers,
especially in the low-carbon cold-rolled steel segment and the high-carbon
cold-rolled steel segment, due to favorable policies and PRC government
subsidies for the home appliance industry and the auto industry, where our
products in these two segments are used in the manufacturing of certain
components. However, despite the positive growth we have seen during the current
year, general industry problems such as excess capacity, low industrial
concentration and a lack of access to natural resources that have long plagued
China’s steel sector still remain. Starting January 1, 2010, we have
commenced production from our 3rd cold
rolling mill and we are operating a total of three cold rolling mills at our
facilities now, at a combined utilization rate of approximately 75% as of June
30, 2010.
During
the year ended June 30, 2010, we sold a total of 133,946 tons of products, an
increase of 49,945 tons from 84,001 tons a year ago, due to an increase in
demand in a gradually improving market as well as the addition of our 3rd mill
which will increase our total annual production capacity ultimately to 260,000
tons when it reaches its full design capacity in the next three to four years.
We believe that such increase was mainly caused by increases in demand from the
auto and home appliance products due to PRC government subsidies to encourage
consumer spending in these segments during the year ended June 30, 2010.
Increased volume and sales have led to a gross profit of $10,307,023 and a net
income of $5,593,537 for the year ended June 30, 2010. Total company backlog as
of June 30, 2010 was $15,900,570.
We
continue to take appropriate actions to perform business and credit reviews of
customers and suppliers and reduce exposure by avoiding entry into contracts in
countries or with customers with high credit risks. We strive to optimize our
product mix, prioritize higher margin products, and strengthen collection of
accounts receivable in the existing business environment with the goal to
maintain overall healthy sales volume, margins and cash positions. We believe
that there are high barriers to entry in the Chinese domestic precision
cold-rolled steel industry because of the level of technology expertise required
for operation. Although we expect a continuation of volatility in demand in both
domestic and international markets, and in steel prices which could have adverse
impacts on our gross margins in the foreseeable future, the medium to long term
prospects of our niche remain highly optimistic. We believe that our unique
capabilities and know-how give us a competitive advantage to grow sales and
build a globally recognized brand as we continue to carry out research and
development (“R&D”) and expand to new segments, customers and
markets.
The
following are some financial highlights for the year:
|
●
|
Revenues: Our revenues were approximately
$110.5 million for the year, an increase of 44.8% from last
year.
|
|
●
|
Gross
Margin: Gross margin
was 9.3% for the year, compared to 10.1% last
year.
|
|
●
|
Income/(loss)
from operations before tax: Income from operations before
tax was approximately $6.1 million for the year, as compared to loss from
operations before tax of less than $0.1 million last
year.
|
|
●
|
Net
Income/(loss): Net
income was approximately $5.6 million for the year, as compared to a net
loss of approximately $0.4 million last
year.
|
|
●
|
Fully
diluted Income/(loss) per share: Fully diluted income per share
was $0.12 for the year compared to a fully diluted loss per share of $0.01
last year.
|
Results
of Operations
The
following table sets forth key components of our results of operations for the
fiscal years ended June 30, 2010 and 2009 and as a percentage of
revenues.
(All
amounts in U.S. dollars)
|
|
2010
|
|
|
2009
|
|
|
|
Amount
|
|
|
% of
Revenues
|
|
|
Amount
|
|
|
% of
Revenues
|
|
Revenues
|
|
|
110,453,947 |
|
|
|
100.0 |
|
|
|
76,281,621 |
|
|
|
100.0 |
|
Cost
of sales (including depreciation and amortization)
|
|
$ |
100,146,924 |
|
|
|
90.7 |
|
|
|
68,549,426 |
|
|
|
89.9 |
|
Gross
profit
|
|
|
10,307,023 |
|
|
|
9.3 |
|
|
|
7,732,195 |
|
|
|
10.1 |
|
Selling
and marketing
|
|
|
400,808 |
|
|
|
0.4 |
|
|
|
1,679,283 |
|
|
|
2.2 |
|
Administrative
expenses
|
|
|
2,708,564 |
|
|
|
2.5 |
|
|
|
2,238,088 |
|
|
|
2.9 |
|
Allowance
for bad and doubtful debts
|
|
|
218,235 |
|
|
|
0.2 |
|
|
|
3,831,478 |
|
|
|
5.0 |
|
Depreciation
and amortization
|
|
|
169,081 |
|
|
|
0.2 |
|
|
|
196,793 |
|
|
|
0.3 |
|
Income/(loss)
from operations
|
|
|
6,810,335 |
|
|
|
6.2 |
|
|
|
(213,447 |
) |
|
|
(0.3 |
) |
Other
income
|
|
|
195,795 |
|
|
|
0.2 |
|
|
|
1,397,258 |
|
|
|
1.8 |
|
Interest
and finance costs
|
|
|
(920,617 |
) |
|
|
(0.8 |
) |
|
|
(1,228,665 |
) |
|
|
(1.6 |
) |
Income/(loss)
from operations before income tax
|
|
|
6,085,513 |
|
|
|
5.5 |
|
|
|
(44,854 |
) |
|
|
(0.1 |
) |
Income
tax expense
|
|
|
491,976 |
|
|
|
0.4 |
|
|
|
363,484 |
|
|
|
0.5 |
|
Net
income/(loss)
|
|
|
5,593,537 |
|
|
|
5.1 |
|
|
|
(408,338 |
) |
|
|
(0.5 |
) |
Basic
earnings/(loss) per share
|
|
$ |
0.12 |
|
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
Diluted
earnings/(loss) per share
|
|
$ |
0.12 |
|
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
Sales
Revenues
Sales
volume increased by 49,945 tons, or 59.5%, year-on-year, to 133,946 tons for the
year ended June 30, 2010 from 84,001 tons for the year ended June 30, 2009 and
as a result, sales revenues increased by $34,172,326, or 44.8%, year-on-year, to
$110,453,947 for the year ended June 30, 2010 from $76,281,621 for the year
ended June 30, 2009. The increase in sales revenues year-on-year is mainly
attributable to an increase in demand for high-carbon cold-rolled products used
in automobile components production as well as increase in demand for low-carbon
cold-rolled products used in home appliances production both due to favorable
government policies and subsidies to encourage consumer
spending.
Sales by Product
Line
A
break-down of our sales by product line for the years ended June 30, 2010 and
2009 is as follows:
|
|
2010
|
|
|
2009
|
|
|
Year-on-Year
|
|
Product Category
|
|
Quantity
(tons)
|
|
|
$ Amount
|
|
|
% of
Sales
|
|
|
Quantity
(tons)
|
|
|
$ Amount
|
|
|
% of
Sales
|
|
|
Qty.
Variance
|
|
Low
carbon hard rolled
|
|
|
18,964 |
|
|
|
14,065,345 |
|
|
|
13 |
|
|
|
21,009 |
|
|
|
21,051,186 |
|
|
|
28 |
|
|
|
(2,045 |
) |
Low
carbon cold-rolled
|
|
|
69,630 |
|
|
|
50,579,501 |
|
|
|
46 |
|
|
|
38,526 |
|
|
|
29,774,589 |
|
|
|
39 |
|
|
|
31,104 |
|
High-carbon
hot-rolled
|
|
|
7,481 |
|
|
|
6,663,049 |
|
|
|
6 |
|
|
|
5,499 |
|
|
|
5,487,958 |
|
|
|
7 |
|
|
|
1,982 |
|
High-carbon
cold-rolled
|
|
|
24,701 |
|
|
|
29,096,886 |
|
|
|
26 |
|
|
|
7,755 |
|
|
|
11,305,674 |
|
|
|
15 |
|
|
|
16,946 |
|
Subcontracting
income
|
|
|
13,170 |
|
|
|
8,821,151 |
|
|
|
8 |
|
|
|
11,212 |
|
|
|
6,392,815 |
|
|
|
8 |
|
|
|
1,958 |
|
Sales
of scrap metal
|
|
|
- |
|
|
|
1,228,015 |
|
|
|
1 |
|
|
|
- |
|
|
|
2,269,399 |
|
|
|
3 |
|
|
|
- |
|
Total
|
|
|
133,946 |
|
|
|
110,453,947 |
|
|
|
100 |
|
|
|
84,001 |
|
|
|
76,281,621 |
|
|
|
100 |
|
|
|
49,945 |
|
There
were different trends of demand across various product categories during the
year ended June 30, 2010. High-carbon cold-rolled steel products accounted for
26% of the current sales mix at an average selling price of $1,178 per ton for
the year ended June 30, 2010, compared to 15% of the sales mix at an average
selling price per ton of $1,458 for the year ended June 30, 2009. The products
in this category are mainly used in the automobile industry and the increase in
sales volume year-on-year was a result of the Chinese government’s automobile
stimulus policies, which increased demand. Low-carbon cold-rolled steel products
accounted for 46% of the current sales mix at an average selling price of $726
per ton for the year ended June 30, 2010, compared to 39% of the sales mix at an
average selling price per ton of $773 for the year ended June 30, 2009. The
increase in demand in this category during the year was a result of increased
orders of steel used in the production of home appliances due to subsidies
granted by the Chinese government to encourage consumer spending. Low-carbon
hard-rolled steel products accounted for 13% of the current sales mix at an
average selling price of $742 per ton for the year ended June 30, 2010, compared
to 28% of the sales mix at an average selling price per ton of $1,002 for the
year ended June 30, 2009, due to a decrease in demand and volatilities in
pricing in the international market year-on-year and stronger demand from the
customers within China, and therefore a higher percentage of products sold
domestically during the current year. Subcontracting income revenues
accounted for $8,821,151, or 8% of the sales mix for the year ended June 30,
2010, as compared to $6,392,815, or 8%, of the sales mix for the year ended June
30, 2009.
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
Average Selling Prices
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
Low-carbon
hard rolled
|
|
|
742
|
|
|
|
1,002
|
|
|
|
(260
|
)
|
|
|
(26
|
)
|
Low-carbon
cold-rolled
|
|
|
726
|
|
|
|
773
|
|
|
|
(47
|
)
|
|
|
(6
|
)
|
High-carbon
hot-rolled
|
|
|
891
|
|
|
|
998
|
|
|
|
(107
|
)
|
|
|
(11
|
)
|
High-carbon
cold-rolled
|
|
|
1,178
|
|
|
|
1,458
|
|
|
|
(280
|
)
|
|
|
(19
|
)
|
Subcontracting
income
|
|
|
670
|
|
|
|
570
|
|
|
|
100
|
|
|
|
18
|
|
The
average selling price per ton decreased to $825 for the year ended June 30,
2010, compared to the $908 in 2009, representing a decrease of $83, or
9.2%, year-on-year. This decrease was mainly due to decreases in general steel
prices and therefore our selling prices due to volatilities in the industry
during the year. There were decreases in average selling prices across all
product categories except subcontracting work during the year.
Sales Breakdown by Major
Customer
|
|
2010
|
|
|
2009
|
|
Customers
|
|
$
|
|
|
% of Sales
|
|
|
$
|
|
|
% of Sales
|
|
Shanghai
Changshuo Steel Co., Ltd.
|
|
|
22,508,805 |
|
|
|
21 |
|
|
|
10,999,692 |
|
|
|
14 |
|
Shanghai
Shengdejia Metal Co., Ltd
|
|
|
18,019,397 |
|
|
|
16 |
|
|
|
4,827,675 |
|
|
|
6 |
|
Hangzhou
Cogeneration Co., Ltd.
|
|
|
10,099,005 |
|
|
|
9 |
|
|
|
* |
|
|
|
* |
|
Zhangjiagang
Gangxing Innovative Construction Material Co., Ltd.
|
|
|
4,946,838 |
|
|
|
5 |
|
|
|
4,413,512 |
|
|
|
6 |
|
Unimax
and Far Corporation
|
|
|
4,629,266 |
|
|
|
4 |
|
|
|
3,777,196 |
|
|
|
5 |
|
Salzgitter
Mannesmann International GMBH
|
|
|
* |
|
|
|
* |
|
|
|
14,275,799 |
|
|
|
19 |
|
|
|
|
60,203,311 |
|
|
|
55 |
|
|
|
38,293,874 |
|
|
|
50 |
|
Others
|
|
|
50,250,636 |
|
|
|
45 |
|
|
|
37,987,747 |
|
|
|
50 |
|
Total
|
|
|
110,453,947 |
|
|
|
100 |
|
|
|
76,281,621 |
|
|
|
100 |
|
*
Not major customers for the relevant years
Sales
revenues generated from our top five major customers as a percentage of total
sales increased to 55% for the year ended June 30, 2010, compared to 50% for the
year ended June 30, 2009. Sales to Hangzhou Cogeneration Co., Ltd., a new major
customer for the current year, accounted for 9% of our sales revenues. The
change in customer mix reflects management’s continuous efforts in expanding our
customer base and geographical coverage during the course of the
year.
Cost of Goods
Sold
Cost of
sales increased by $31,597,498, or 46.1%, year-on-year, to $100,146,924 for the
year ended June 30, 2010, from $68,549,426 for the year ended June 30, 2009.
Cost of sales represented 90.7% of sales revenues for the year ended June 30,
2010, compared to 89.9% for the year ended June 30, 2009. Average cost per unit
sold decreased to $748 for the year ended June 30, 2010, compared to $816
for the year ended June 30, 2009, representing a decrease of $68 per ton ,
or 8.3%, year-on-year.
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Raw materials
|
|
|
89,907,501 |
|
|
|
57,401,094 |
|
|
|
32,506,407 |
|
|
|
57 |
|
-
Direct labor
|
|
|
650,302 |
|
|
|
1,205,070 |
|
|
|
(554,768 |
) |
|
|
(46 |
) |
-
Manufacturing overhead
|
|
|
9,589,121 |
|
|
|
9,943,262 |
|
|
|
(354,141 |
) |
|
|
(4 |
) |
|
|
|
100,146,924 |
|
|
|
68,549,426 |
|
|
|
31,597,498 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
per unit sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
units sold (tons)
|
|
|
133,946 |
|
|
|
84,001 |
|
|
|
49,945 |
|
|
|
59 |
|
Average
cost per unit sold ($/ton)
|
|
|
748 |
|
|
|
816 |
|
|
|
(68 |
) |
|
|
(8 |
) |
The
decrease in average per unit cost of sales is represented by the combined effect
of:
|
●
|
a decrease in cost of raw
materials per unit sold of $12, or 1.8%, from $683 for the year ended June
30, 2009, compared to $671 for the year ended June 30,
2010;
|
|
●
|
a
decrease in direct labor per unit sold of $9, or 64.3%, from $14 for the
year ended June 30, 2009 compared to $5 for the year ended June 30,
2010;
|
|
●
|
a
decrease in factory overhead per unit sold of $46, or 39.0%, from $118 for
the year ended June 30, 2009 compared to $72 for the year ended June 30,
2010.
|
The cost
of raw materials consumed increased by $32,506,407, or 56.6%, year-on-year, to
$89,907,501 for the year ended June 30, 2010 from $57,401,094 for the year ended
June 30, 2009. This increase was mainly due to increase in total units sold
offset by decrease in average raw material cost per unit sold.
Direct
labor costs decreased by $554,768 or 46.0%, year-on-year, to $650,302 for the
year ended June 30, 2010, from $1,205,070 for the year ended June 30, 2009.
Manufacturing overhead costs decreased by $354,141, or 3.6%, year-on-year, to
$9,589,121 for the year ended June 30, 2010, from $9,943,262 for the year ended
June 30, 2009. The decrease was mainly attributable to the combined effect of a
decrease in low consumables of $862,254, or 30.6%, year-on-year, to $1,954,182
for the year ended June 30, 2010, from $2,816,436 for the year ended June 30,
2009 and a decrease in utilities of $182,310, or 6.1%, year-on-year, to
$2,823,056 for the year ended June 30, 2010, from $3,005,366 for the year ended
June 30, 2009 offset by an increase in depreciation charged to
manufacturing overhead of $747,345, or 21.1%, year-on-year, to $4,294,798 for
the year ended June 30, 2010, from $3,547,453 for the year ended June 30, 2009.
The substantially increased units manufactured and sold, year-on-year, have led
to a decrease in average direct labor and manufacturing overhead cost per unit
sold of 64.3% and 39.0%, respectively, due to economies of scale, as well as
decreases in total direct labor and manufacturing overhead costs as a result of
the substantially lower average costs.
Gross
Profit
Gross
profit in absolute terms increased by $2,574,828, or 33.3%, year-on-year, to
$10,307,023 for the year ended June 30, 2010, from $7,732,195 for the year ended
June 30, 2009, while gross profit margin slightly decreased to 9.3% for the year
ended June 30, 2010, from 10.1% for the year ended June 30, 2009. The decrease
in gross profit margin is mainly attributable to a 9.2% year-on-year decrease in
average selling prices offset by a decrease in average cost per unit sold of
8.3% year-on-year.
Selling
Expenses
Selling
expenses decreased by $1,278,475, or 76.1%, year-on-year, to $400,808 for the
year ended June 30, 2010 from $1,679,283 in 2009. The decrease was mainly
attributable to less selling commission costs associated with largely reduced
export sales year-on-year.
Administrative Expenses
Administrative
expenses increased by $470,476, or 21.0%, year-on-year, to $2,708,564 for the
year ended June 30, 2010, compared to $2,238,088 for the year ended June 30,
2009. This was chiefly due to an increase in salaries and wages in the amount of
$112,685, or 20.8%, year-on-year, due to the increased average number of staff
at our operating subsidiaries due to expanded production and increased
wages following lifting of the minimum monthly wage in Shanghai during the year,
as well as increases in travelling expenses in the amount of $54,272, or 37.7%,
year-on-year, and insurance expenses in the amount of $93,856, or 42.9% due to
the coverage of additional property, plant and equipment, year-on-year, during
the year ended June 30, 2010.
Allowance
for Bad and Doubtful Debts
Allowance
for bad and doubtful debts decreased substantially by $3,613,243, or 94.3%,
year-on-year. The prior year charge reflects a provision for uncollectible
accounts receivable amounting to $3,831,478 due to a dispute regarding a special
stainless steel product as disclosed in our Form 10-K filed for the financial
year ended June 30, 2009. Allowance recognized for the current year in the
amount of $218,235 was in accordance with our policy for allowance for bad and
doubtful debts set forth under the “Critical Accounting Policies and
Estimates” heading in this report.
Income
from Operations
Income
from operations increased by $7,023,782, or 3,290.6%, year-on-year, to
$6,810,335 for the year ended June 30, 2010 from a loss of $213,447 for the year
ended June 30, 2009, as a result of all the factors discussed
above.
Other
Income
Our other
income decreased $1,201,463, or 86.0%, to $195,795 for the year ended June 31,
2010 from $1,397,258 for the year ended June 30, 2009. As a percentage of
revenues, other income decreased to 0.2% for the year ended June 30, 2010 from
1.8% for the year ended June 30, 2009. Such percentage decrease in other income
was primarily due to a reversal of provision for bad and doubtful debts and
advances to suppliers in accordance with our accounting policies in the amount
of $1,105,866 for the year ended June 30, 2009 as well as lower interest rates
year-on-year.
Interest
Expense
Total
interest expense decreased $308,048, or 25.1%, to $920,617 for the year ended
June 30, 2010, from $1,228,665 for the year ended June 30, 2009 due to an
increase in capitalized interest of $497,821 offset by an increase in loan
balances year-on-year.
Income
Tax
For the
year ended June 30, 2010, we recognized an income tax expense of $491,976,
compared to $363,484 for the year ended June 30, 2009. The income tax expense in
the amount of $491,976 is taxes on profits for the current year after
considering tax losses carried forward. The increase of $128,492, or 35.4%,
year-on-year, was a result of the increased income and increased enterprise
income tax rate for Shanghai Blessford starting January 1, 2010 offset by
carried forward tax losses deduction.
Net
Income
Net
income increased by $6,001,875, or 1,469.8%, year-on-year, to net income of
$5,593,537 for the year ended June 30, 2010 compared to net loss of $408,338 for
the year ended June 30, 2009. The increase in net income is attributable to a
combination of factors discussed above, including increase in tons sold due to
strengthening demand and decrease in the average cost per unit sold.
Liquidity
and Capital Resources
General
Our
business is capital intensive and requires substantial expenditures for, among
other things, the purchase and maintenance of equipment used in our operations.
Our short-term and long-term liquidity needs arise primarily from capital
expenditures, working capital requirements and principal and interest payments
related to our outstanding indebtedness. We have met these liquidity
requirements with cash provided by operations, equity financing, and bank
debt. As of June 30, 2010, we had cash and cash equivalents of
approximately $29.0 million.
The
following table provides detailed information about our net cash flow for all
financial statement periods presented in this report:
CASH
FLOW
|
|
Year Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Net
cash (used in)/provided by operating activities
|
|
$ |
(2,460,998 |
) |
|
$ |
15,105,012 |
|
Net
cash used in investing activities
|
|
|
(3,682,070 |
) |
|
|
(25,330,600 |
) |
Net
cash provided by financing activities
|
|
|
21,388,810 |
|
|
|
5,232,873 |
|
Net
cash flow
|
|
|
15,387,119 |
|
|
|
(4,919,255 |
) |
Operating
Activities
Net cash
flows used in operating activities for the year ended June 30, 2010 was
$2,460,998 as compared with $15,105,012 provided by operating activities for the
year ended June 30, 2009, for a net decrease of $17,566,010. This decrease was
mainly due to increase in cash outflow for inventories of $13,773,211, increase
in cash outflow for other taxes payable of $3,985,339 resulting from the payment
of VAT, and decrease in cash inflow from accounts receivable of $16,576,160
offset by decrease in cash outflow for advances to suppliers of $4,085,531 and
increase in cash inflow from advances from customers of $6,788,991 during the
year ended June 30, 2010. The cash outflow for inventories was in line with our
additional production line, substantially strengthened demand and revenue growth
during the year ended June 30, 2010.
For the
year ended June 30, 2010, sales revenues generated from the top five major
customers as a percentage of total sales increased to 55% as compared to 50% for
the year ended June 30, 2009. The loss of all or portion of the sales volume
from a significant customer would have an adverse effect on our operating cash
flows. We note that the continuation or intensification of the worldwide
economic crisis may have negative consequences on the business operations of our
customers and adversely impact their ability to meet their financial obligations
to us, resulting in unrecoverable losses on our accounts receivable. We have
been strengthening our collection activities and will continue to closely
monitor any changes in collection experience and the credit ratings of our
customers. From time to time we will review credit periods offered, along
with our collection experience and the other relevant factors, to evaluate the
adequacy of our allowance for doubtful accounts, and to make changes to the
allowance, if necessary. Delays or non-payment of accounts receivable would have
an adverse effect on our operating cash flows.
Investing
Activities
Our main
uses of cash for investing activities during the year ended June30, 2010 were
for the purchase of property, plant and equipment related to the addition of a
new cold rolling mill and annealing furnaces at our Shanghai Blessford
facilities. We believe these capital investments increase our capacity,
expand product line, improve product qualities and create synergies with our
existing production facilities, thereby creating opportunities to grow sales,
enter new markets and further strengthen our leading position in the niche cold
rolling segment that we operate in.
Net cash
flows used in investing activities for the year ended June 30, 2010 was
$3,682,070 as compared with $25,330,600 for the year ended June 30, 2009. Cash
flows used in investing activities decreased as we completed the construction of
our new 1450mm cold rolling mill as of December 31, 2009 and there was no
additional material construction project during the year.
As of
June 30, 2010, the Company had $4,556,039 in commitments for interest relating
to its short-term and long-term loans and share capital injection commitment
related to Shanghai Blessford. Management believes that we currently have
sufficient capital resources to meet these contractual commitments. We also
forecast lower capital expenditures in the coming years as the Company has
already completed most of its major expansion plans and all the construction
costs relating to our third cold rolling mill have been paid for as at June 30,
2010.
Financing
Activities
Net cash
flows provided by financing activities for the year ended June 30, 2010 was
$21,388,810 as compared to $5,232,873 for the year ended June 30, 2009. During
the year ended June 30, 2010, the Company received short-term loan proceeds of
$3,760,285 and long-term loan proceeds of $18,075,914, which were partially
offset by a repayment of short-term loans in the amount of
$447,389.
On
December 30, 2008, we filed a universal shelf registration statement with the
SEC, which was declared effective on December 10, 2009. The shelf registration
will permit us to issue securities valued at up to an aggregate of $40 million.
Now that the registration statement is effective, we will have the flexibility
to issue registered securities, from time to time, in one or more separate
offerings or other transactions with the size, price and terms to be determined
at the time of issuance. Although we do not have any commitments or
current intentions to sell securities under the registration statement, we
believe that it is prudent to have a shelf registration statement in place to
ensure financing flexibility should the need arise.
While we
currently generate sufficient operating cash flows to support our working
capital requirements, our working capital requirements and the cash flow
provided by future operating activities will vary from quarter to quarter, and
are dependent on factors such as volume of business and payment terms with our
customers. As such, we may need to rely on access to the financial markets to
provide us with significant discretionary funding capacity. However, the current
uncertainty arising out of domestic and global economic conditions, including
the recent disruption in credit markets, poses a risk to the economies in which
we operate and may adversely impact our potential sources of capital financing.
The general unavailability of credit could make capital financing more expensive
for us or impossible altogether. Even if we are able to obtain credit, the
incurrence of indebtedness could result in increased debt service obligations.
Our inability to renew our current bank debt that is due in July 2010, and the
unavailability of additional debt financing as a result of economic pressures on
the credit and equity markets could have a material adverse effect on our
business operations.
Current
Assets
Current
assets increased by $33,750,121, or 40.2%, year-on-year, to $117,781,872 as of
June30, 2010, from $84,031,751 as of June 30, 2009, principally as a result of
an increase in inventories of $12,247,128, or 75.3%, and accounts receivable of
$14,458,011, or 57.5%, year-on-year, offset by a decrease in bills receivable of
$1,370,327, or 22.4%, year-on-year, and advances to suppliers of $7,918,841, or
36.2%, year-on-year.
Accounts
receivable, representing 33.6% of total current assets as of June 30, 2010, is a
significant asset of the Company. We offer credit to our customers in the normal
course of our business and accounts receivable is stated net of allowance for
doubtful accounts. Credit periods vary substantially across industries,
segments, types and size of companies in China where we operate our business.
Because of the niche products that we process, our customers are usually also
niche players in their own respective segment, who then sell their products to
the end product manufacturers. The business cycle is relatively long, as well as
the credit periods. The Company offers credit to its customers for periods of 60
days, 90 days, 120 days and 180 days. We generally offer longer credit terms to
long-standing recurring customers with good payment histories and sizable
operations. From time to time we review these credit periods, along with our
collection experience and the other factors discussed above, to evaluate the
adequacy of our allowance for doubtful accounts, and to make changes to the
allowance, if necessary. If our actual collection experience or other
conditions change, revisions to our allowances may be required, including a
further provision which could adversely affect our operating income, or write
back of provision when estimated uncollectible accounts are actually
collected.
Our
management determines the collectability of outstanding accounts by maintaining
quarterly communication with such customers and obtaining confirmation of their
intent to fulfill their obligations to the Company. In making this
determination, our management also considers past collection experience, our
relationship with customers and the impact of current economic conditions on our
industry and market. We note that the continuation or intensification of the
current global economic crisis may have negative consequences on the business
operations of our customers and adversely impact their ability to meet their
financial obligations. To reserve for potentially uncollectible accounts
receivable, for the year ended June 30, 2010, our management has made a 50%
provision for all accounts receivable that are over 180 days past due and full
provision for all accounts receivable over one year past due. From time to
time, we will review these credit periods, along with our collection experience
and the other factors discussed above, to evaluate the adequacy of our allowance
for doubtful accounts, and to make changes to the allowance, if necessary. If
our actual collection experience or other conditions change, revisions to our
allowances may be required, including a further provision which could adversely
affect our operating income, or write back of provision when estimated
uncollectible accounts are actually collected.
The
following table reflects the aging of our accounts receivable based on due date
as of June 30, 2010 and 2009:
June 30,
2010
US$
|
|
Total
|
|
|
Current
|
|
|
1 to 30 days
|
|
|
31 to
90 days
|
|
|
91 to 180 days
|
|
|
181 to 360 days
|
|
|
over
1 year
|
|
TOTAL
|
|
|
40,612,589 |
|
|
|
16,750,361 |
|
|
|
1,521,900 |
|
|
|
5,485,380 |
|
|
|
15,398,743 |
|
|
|
1,177,748 |
|
|
|
278,457 |
|
%
|
|
|
100 |
|
|
|
41 |
|
|
|
4 |
|
|
|
14 |
|
|
|
38 |
|
|
|
3 |
|
|
<1
|
|
June 30,
2009
US$
|
|
Total
|
|
|
Current
|
|
|
1 to 30 days
|
|
|
31 to
90 days
|
|
|
91 to 180 days
|
|
|
181 to 360 days
|
|
|
over
1 year
|
|
TOTAL
|
|
|
25,970,961 |
|
|
|
14,497,258 |
|
|
|
405,769 |
|
|
|
1,639,027 |
|
|
|
7,061,774 |
|
|
|
2,168,481 |
|
|
|
198,652 |
|
%
|
|
|
100 |
|
|
|
56 |
|
|
|
2 |
|
|
|
6 |
|
|
|
27 |
|
|
|
8 |
|
|
|
1 |
|
Management
continues to take appropriate actions to perform business and credit reviews of
any prospective customers (whether new or returning) to protect the Company from
any who might pose a high credit risk to our business based on their commercial
credit reports, our past collection history with them, and our perception of the
risk posed by their geographic location. For example, we have halted since the
year ended June 30, 2009 all our sales transactions directly with customers in
the Philippines as we consider the associated credit risk to be relatively high.
Based on publicly available reports, such as that issued by A.M. Best, there is
a high risk that financial volatility may erupt in that country due to
inadequate reporting standards, a weak banking system or asset markets and/or
poor regulatory structure. We expect to resume such exports when conditions
improve. Management is also of the opinion that we do not currently have any
high risk receivables on our accounts.
Current
Liabilities
Current
liabilities increased by $5,639,475, or 13.2%, year-on-year, to $48,445,127 as
of June 30, 2010, from $42,805,652 as of June 30, 2009. The increase was mainly
attributable to an increase in short-term loans of $3,476,390, or 15.5%,
year-on-year, as well as an increase in accounts payable and accrued liabilities
of $2,807,867, or 39.3%, year-on-year, offset by a decrease in other taxes
payable of $2,782,448, or 41.8%, year-on-year.
As of
June 30, 2010, we had $25,965,421 in short-term loans. These short-term loans
have been renewed in July 2010 for one year and will be due on July
31, 2011. We expect to refinance such debt at its maturity, but we
cannot assure you that we will be able to do so on terms favorable to the
Company or at all.
Capital
Expenditures
During
the year ended June 30, 2010, we invested $3,684,282 in purchases of property,
plant and equipment, and construction projects in relation to the new
cold-rolling mill and annealing furnaces.
Loan
Facilities. The following table illustrates our credit facilities
as of June 30, 2010, providing the name of the lender, the amount of the
facility, the date of issuance and the maturity date:
All
amounts in U.S. dollars
Lender
|
|
Date of Loan
|
|
Maturity
Date
|
|
Duration
|
|
Interest Rate
|
|
Principal
Amount
|
|
Raiffeisen
Zentralbank
Österreich AG
|
|
July
23, 2009
|
|
July
31, 2010
|
|
1
year
|
|
USD:
SIBOR + 3%;
RMB:
1.15 times of
the
PBOC rate
|
|
$
$
RMB
|
5,300,000;
2,527,573
(17,000,000)
|
|
Raiffeisen
Zentralbank
Österreich AG
|
|
July
20, 2009
|
|
July
31, 2010
|
|
1
year
|
|
1.15
times of the
PBOC
rate
|
|
$
RMB
|
18,137,848
(123,000,000)
|
|
DEG
– Deutsche Investitions – und Entwicklungsgesellschaft mbH
|
|
June
29, 2010
|
|
June
15, 2016
|
|
6
years
|
|
6
month USD LIBOR + 4.5%
|
|
$
|
18,075,914
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
44,041,335
|
|
As of
June 30, 2010, we had $25,965,421 in short-term loans secured by inventories,
land use rights, buildings, plant and machinery, and $18,075,914 in long-term
loans secured by plant and machinery, as illustrated in the above table.
The
short-term loans have been renewed for one year and will be due and renewable on
July 31, 2011. We are not aware of any existing issues that may lead to a
withdrawal of such loan at its maturity. Our inability to renew, and the
unavailability of additional debt financing as a result of economic pressures on
the credit and equity markets could have a material adverse effect on our
business operations.
We
believe that our currently available working capital and the credit facilities
referred to above should be adequate to sustain our operations at our current
levels and support our contractual commitments through the next twelve months.
However, our working capital requirements and the cash flow provided by future
operating activities vary from quarter to quarter, depending on the volume of
business during the period and payment terms with our customers. As we expect a
continuation of volatility in demand and steel prices in both domestic and
international markets in the foreseeable future, our operating cash flows might
be significantly negatively impacted by reduced sales and margins. Management
has strengthened its sales and marketing activities, and continues to be in
talks with potential customers whose past orders we had been unable to fill due
to full capacity, which if successful, could result in additional sales and
mitigate the impact of the weakened demand and margins on our operating cash
flow. As of June 30, 2010, the Company also had $4,556,039 in contractual
commitments for interest relating to its short-term and long-term loans and
share capital injection commitment related to Shanghai Blessford. As such, we
may need to rely on access to the financial markets to provide us with
significant discretionary funding capacity. However, continued uncertainty
arising out of domestic and global economic conditions, including the recent
disruption in credit markets, poses a risk to the economies in which we operate
and may adversely impact our potential sources of capital financing. The general
unavailability of credit could make capital financing more expensive for us or
impossible altogether. Even if we are able to obtain credit, the incurrence of
indebtedness could result in increased debt service obligations and could result
in operating and financing covenants that could restrict our present and future
operations.
Obligations
under Material Contracts
Below is
a table setting forth our material contractual obligations as of June 30, 2010,
debt obligations include principal repayments and interest
payments:
|
|
Payments Due By Year
|
|
|
|
Total
|
|
|
Fiscal Year
2011
|
|
|
Fiscal
Year
2012-2013
|
|
|
Fiscal
Year
2014-2015
|
|
|
Fiscal Years
2016 and
Beyond
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
Debt Obligations
|
|
$ |
28,865,975 |
|
|
$ |
1,450,277 |
|
|
$ |
27,415,698 |
|
|
$ |
— |
|
|
$ |
— |
|
Long-Term
Debt Obligations
|
|
$ |
21,641,579 |
|
|
$ |
954,712 |
|
|
$ |
8,844,409 |
|
|
$ |
8,084,059 |
|
|
$ |
3,757,599 |
|
Share
Capital Injection Commitments
|
|
$ |
2,151,050 |
|
|
|
2,151,050 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
52,658,604 |
|
|
$ |
4,556,039 |
|
|
$ |
36,260,107 |
|
|
$ |
8,084,859 |
|
|
$ |
3,757,599 |
|
Recent
Accounting Pronouncements
In
December 2007, the FASB issued guidance now codified as FASB ASC 805, “Business
Combinations” (“ASC 805”). ASC 805 will change the accounting for business
combinations. Under ASC 805, an acquiring entity will be required to recognize
all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. ASC 805 will change the
accounting treatment and disclosure for certain specific items in a business
combination. ASC 805 applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. ASC 805 will impact the Company
in the event of any future acquisition.
In
December 2007, the FASB issued guidance now codified as ASC 810,
“Non-controlling Interests in Consolidated Financial Statements - an amendment
of Accounting Research Bulletin No. 51”. ASC 810 establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. ASC 810 is effective for fiscal years beginning
on or after December 15, 2008. The adoption of ASC 810 did not impact our
consolidated financial statements in any material respect.
In April
2008, the FASB issued guidance now codified as ASC 350-30, “Determination of the
Useful Life of Intangible Assets” (“ASC 350-30”), which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under ASC 350,
“Goodwill and Other Intangible Assets” (“ASC 350”). The intent of this
guidance is to improve the consistency between the useful life of a recognized
intangible asset under ASC 350 and the period of expected cash flows used to
measure the fair value of the asset under ASC 805, “Business Combinations,” and
other U.S. generally accepted accounting principles. This guidance is
effective for fiscal years beginning after December 15, 2008 (the Company’s
fiscal year 2010), and interim periods within those fiscal years. The
adoption of ASC 350-30 did not impact our consolidated financial statements in
any material respect.
In May
2008, the FASB issued guidance now codified as ASC 944-20, “Accounting for
Financial Guarantee Insurance Contracts” (“ASC 944-20”). The new standard
clarifies how FASB Statement No. 60, now codified as ASC 944-20, “Accounting and
Reporting by Insurance Enterprises”, applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts. ASC 944-20 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years, except for
disclosures about the insurance enterprise’s risk-management activities, which
are effective the first period (including interim periods) beginning after May
23, 2008. Except for the required disclosures, earlier application is not
permitted. The standard is not applicable to this Company.
In
December 2008, the FASB issued guidance now codified as ASC 715-20-65,
“Employers’ Disclosures about Postretirement Benefit Plan Assets, an amendment
of FASB Statement No. 132” (revised 2003), now codified as ASC 715-20-65. It
provides guidance on an employer’s disclosures about plan assets, including: how
investment allocation decisions are made and factors that are pertinent to an
understanding of investment policies and strategies; the major categories of
plan assets; the inputs and valuation techniques used to measure the fair value
of plan assets; the effect of fair value measurements using significant
unobservable inputs (level 3) on changes in plan assets for the period, and
significant concentrations of risks within plan assets. ASC 715-20-65 is
effective for fiscal years ending after December 15, 2009. The adoption of ASC
715-20-65 did not impact our consolidated financial statements in any material
respect.
In April
2009, the FASB issued guidance now codified as ASC 825, “Interim Disclosures
about Fair Value of Financial Instruments”. It requires the fair value for all
financial instruments within the scope of SFAS No. 107, now codified as ASC 825,
“Disclosures about Fair Value of Financial Instruments”, to be disclosed in the
interim periods as well as in annual financial statements. This standard
is effective for the quarter ending after June 15, 2009. The adoption of ASC 825
did not impact our consolidated financial statements in any material
respect.
In April
2009, the FASB issued guidance now codified as ASC 820-10, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly”. It
clarifies the objective and method of fair value measurement even when there has
been a significant decrease in market activity for the asset being measured.
This standard is effective for the quarter ending after June 15, 2009. The
adoption of ASC 825 did not impact our consolidated financial statements in any
material respect.
In April
2009, the FASB issued guidance now codified as ASC 320, “Recognition and
Presentation of Other-Than-Temporary Impairments”. The objective of an
other-than-temporary impairment analysis under existing U.S. GAAP is to
determine whether the holder of an investment in a debt or equity security for
which changes in fair value are not regularly recognized in earnings (such as
securities classified as held-to-maturity or available-for-sale) should
recognize a loss in earnings when the investment is impaired. An investment is
impaired if the fair value of the investment is less than its amortized cost
basis. This guidance amends the other-than-temporary impairment guidance in U.S.
GAAP for debt securities to make the guidance more operational and to improve
the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This guidance does not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. This standard is effective for interim periods
ending after June 15, 2009. The adoption of ASC 320 did not impact our
consolidated financial statements in any material respect.
In June
2009, the FASB issued guidance now codified as ASC 810, “Amendments to FASB
Interpretation No. 46(R)” (“ASC 810”), which amends FASB Interpretation No. 46
(revised December 2003), now codified as ASC 810-10, to address the elimination
of the concept of a qualifying special purpose entity. ASC 810 also replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. Additionally,
ASC 810 provides more timely and useful information about an enterprise’s
involvement with a variable interest entity. ASC 810 will become effective in
July 2010. We do not expect that the adoption of ASC 810 will have a material
impact on our financial statements.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring
Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 amends ASC 820, “Fair
Value Measurements” (“ASC 820”). Specifically, ASU 2009-05 provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following methods: 1) a valuation
technique that uses a) the quoted price of the identical liability when traded
as an asset or b) quoted prices for similar liabilities or similar liabilities
when traded as assets and/or 2) a valuation technique that is consistent with
the principles of ASC 820 (e.g. an income approach or market approach). ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to adjust to include inputs relating to the
existence of transfer restrictions on that liability. The adoption of this
standard did not have an impact on the Company’s financial position or results
of operations.
In
October 2009, the FASB issued ASU No. 2009-13 on ASC 605, “Revenue
Recognition” (“ASU 2009-13”), regarding multiple-deliverable revenue
arrangements. This ASU provides amendments to the existing criteria for
separating consideration in multiple-deliverable arrangements. The
amendments establish a selling price hierarchy for determining the selling price
of a deliverable, eliminate the residual method of allocation of arrangement
consideration to all deliverables and require the use of the relative selling
price method in allocation of arrangement consideration to all deliverables,
require the determination of the best estimate of a selling price in a
consistent manner, and significantly expand the disclosures related to the
multiple-deliverable revenue arrangements. The amendments will be effective in
fiscal years beginning on or after June 15, 2010, and early adoption is
permitted. We do not expect that the adoption of ASU 2009-13 will have a
material impact on our financial statements.
In
October 2009, the FASB issued ASU No. 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”
(“ASU 2009-15”). ASU 2009-15 amends ASC 470, “Debt with Conversion and
Other Options” (“ASC 470”), and ASC 260, “Earnings Per Share” (“ASC 260”).
Specifically, ASU 2009-15 requires companies to mark stock loan agreements at
fair value and recognize the cost of the agreements by reducing the amount of
additional paid-in capital on their financial statements. The amendments
will be effective for fiscal years beginning on or after December 15,
2009. We do not expect that the adoption of ASU 2009-15 will have a
material impact on our financial statements.
In
December 2009, the FASB issued ASU 2009-17, “Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”).
ASU 2009-17 details the amendments to ASC 810, “Consolidation”, which are the
result of FASB Statement No. 167, “Amendments to FASB Interpretation No.
46(R)”. That statement was issued by the FASB in June 2009. ASU
2009-17 amends the variable-interest entity guidance in ASC 810 to clarify the
accounting treatment for legal entities in which equity investors do not have
sufficient equity at risk for the entity to finance its activities without
financial support. ASU 2009-17 is effective at the start of the first
fiscal year beginning after November 15, 2009. We do not expect that the
adoption of ASU 2009-17 will have a material impact on our financial
statements.
In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements”
(“ASU 2010-06”). ASU 2010-06 requires reporting entities to provide
information about movements of assets among Levels 1 and 2 of the three-tier
fair value hierarchy established by ASC 820. The guidance is effective for
any fiscal year that begins after December 15, 2010 and should be used for
quarterly and annual filings. We are currently evaluating the impact on
our financial statements of adopting the amendments in ASU 2010-06 and cannot
estimate the impact of adoption at this time.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
Functional
Currency and Translating Financial Statements
The
Company’s principal country of operations is the PRC. Our functional currency is
Chinese Renminbi; however, the accompanying consolidated financial statements
have been expressed in USD. The consolidated balance sheets have been translated
into USD at the exchange rates prevailing at each balance sheet date. The
consolidated statements of operations and cash flows have been translated using
the weighted-average exchange rates prevailing during the periods of each
statement. The registered equity capital denominated in the functional currency
is translated at the historical rate of exchange at the time of capital
contribution. All translation adjustments resulting from the translation of the
financial statements into the reporting currency are dealt with as other
comprehensive income in stockholders’ equity.
Revenue
Recognition
Revenue
from the sale of goods and services is recognized on the transfer of risks and
rewards of ownership, which generally coincides with the time when the goods are
delivered to customers and the title has passed and services have been rendered.
Revenue is reported net of all VAT taxes. Other income is recognized when it is
earned.
Accounts
Receivable
Credit
periods vary substantially across industries, segments, types and size of
companies in China where we operate our business. Because of the niche products
that we process, our customers are usually also niche players in their own
respective segment, who then sell their products to end product manufacturers.
The business cycle is relatively long, as well as credit periods. The Company
offers credit to its customers for periods of 60 days, 90 days, 120 days and 180
days. We generally offer longer credit terms to long-standing recurring
customers with good payment histories and sizable operations.
Accounts
receivable is recorded at the time revenue is recognized and is stated net of
allowance for doubtful accounts. The Company maintains an allowance for doubtful
accounts based on its assessment of the collectability of the accounts
receivable. Management determines the collectability of outstanding accounts by
maintaining regular communication with such customers and obtaining confirmation
of their intent to fulfill their obligations to the Company. Management also
considers past collection experience, our relationship with customers and the
impact of current economic conditions on our industry and market. However, we
note that the continuation or intensification of the current global economic
crisis may have negative consequences on the business operations of our
customers and adversely impact their ability to meet their financial
obligations. At June 30, 2010, approximately 4% of our accounts receivable were
past due over 180 days. To reserve for potentially uncollectible accounts
receivable, for the year ended June 30, 2010, our management has made a 50%
provision for all accounts receivable that are over 180 days past due and full
provision for all accounts receivable over one year past due. From time to time,
we will review these credit periods, along with our collection experience and
the other factors discussed above, to evaluate the adequacy of our allowance for
doubtful accounts, and to make changes to the allowance, if necessary. If our
actual collection experience or other conditions change, revisions to our
allowances may be required, including a further provision which could adversely
affect our operating income, or write back of provision when estimated
uncollectible accounts are actually collected. At June 30, 2010 and June 30,
2009, the Company had $1,013,744 and $830,127 of allowances for doubtful
accounts, respectively.
Bad debts
are written off for past due balances over two years or when it becomes known to
management that such amount is uncollectible. Provision for bad debts recognized
for the years ended June 30, 2010 and 2009 were $218,235 and $3,831,478,
respectively. The current year charge reflects a provision for doubtful accounts
based on our policy described above. Our management is continually working to
ensure that any known uncollectible amounts are immediately written off as bad
debt against outstanding balances.
Advances
to Suppliers
In order
to insure a steady supply of raw materials, the Company is required from time to
time to make cash advances to its suppliers when placing purchase orders, for a
guaranteed minimum delivery quantity at future times when raw materials are
required. The advance is seen as a deposit to suppliers and guarantees our
access to raw materials during periods of shortages and market volatility, and
is therefore considered an important component of our operations. Contracted raw
materials are priced at prevailing market rates agreed by us with the suppliers
prior to each delivery date. Advances to suppliers are shown net of an allowance
which represents potentially unrecoverable cash advances at each balance sheet
date. Such allowances are based on an analysis of past raw materials receipt
experience and the credibility of each supplier according to its size and
background. In general, we do not provide allowances against advances paid
to state owned companies as there is minimal risk of default. Our allowances for
advances to suppliers are subjective critical estimates that have a direct
impact on reported net earnings, and are reviewed quarterly at a minimum to
reflect changes from our historic raw material receipt experience and to ensure
the appropriateness of the allowance in light of the circumstances present at
the time of the review. It is reasonably possible that the Company’s estimate of
the allowance will change, such as in the case when the Company becomes aware of
a supplier’s inability to deliver the contracted raw materials or meet its
financial obligations. At June 30, 2010 and 2009, the Company had allowances for
advances to suppliers of $1,643,419 and $1,631,557, respectively.
The
majority of our advances to suppliers of over 180 days is attributable to our
advances to a subsidiary of a state-owned company in China, whose risk of
default is minimal. At June 30, 2010, this supplier has confirmed to our
management that it is committed to delivering the contracted raw materials as
and when those are needed by the Company.
Allowances
for advances to suppliers are written off when all efforts to collect the
materials or recover the cash advances have been unsuccessful, or when it has
become known to the management that there is no intention for the suppliers to
deliver the contracted raw materials or refund the cash advances. To date, we
have not written off any advances to suppliers.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the
weighted-average method. Market value represents the estimated selling price in
the ordinary course of business less the estimated costs necessary to complete
the sale.
Intangible
Assets
Intangible
assets represent land use rights in China acquired by the Company and are stated
at cost less amortization. Amortization of land-use rights is calculated on the
straight-line method, based on the period over which the right is granted by the
relevant authorities in China. The Company acquired land use rights in August
2004 and December 2006 that both expire in December 2056. The land use rights
are amortized over a fifty-year term. Intangible assets of the Company are
reviewed for impairment if there are triggering events, to determine whether
their carrying value has become impaired, in conformity with ASC 360. The
Company also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
An impairment test was performed as of June 30, 2010 and no impairment charges
were recognized for the relevant periods. As of June 30, 2010, the Company
expects these assets to be fully recoverable.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation. The cost
of an asset comprises its purchase price and any directly attributable costs of
bringing the asset to its present working condition and location for its
intended use. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets for financial reporting purposes.
The estimated useful lives for significant property and equipment are as
follows:
Buildings
|
|
10
years
|
Plant
and machinery
|
|
10
years
|
Motor
vehicles
|
|
5
years
|
Office
equipment
|
|
5
to 10 years
|
Repairs
and maintenance costs are normally charged to the statement of operations in the
year in which they are incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an increase in the future
economic benefits expected to be obtained from the use of the asset, the
expenditure is capitalized as an additional cost of the asset.
The
Company accounts for impairment of property, plant and equipment and amortizable
intangible assets in accordance with ASC 360, which requires the Company to
evaluate a long-lived asset for recoverability when there is an event or
circumstance that indicates the carrying value of the asset may not be
recoverable. We determine such impairment by measuring the estimated
undiscounted future cash flow generated by the assets, comparing the result to
the asset carrying value and adjusting the asset to the lower of its carrying
value or fair value and charging current operations for the measured impairment.
As of June 30, 2010, the Company’s market capitalization was significantly
lower than its total stockholders’ equity. Management considered this to be
an indicator of impairment, and accordingly, performed an impairment
test, using a normal and a worse-case scenario, and assessed fair value based on
average tons sold, selling price per ton, gross margin, and other cash inflows
and outflows for the next ten years where our mills are expected to remain in
operation. No impairment charges were recognized for the current year.
Assumptions and estimates used in our impairment test provide the general
direction of major factors expected to affect our business and cash flows, and
are subject to risks and uncertainties such as changes in interest rates,
industry cyclicality, and factors surrounding the general Chinese and global
economies. Those estimates will be reassessed for their reasonableness at each
impairment test.
Other
Policies
Other
accounting policies used by the Company are set forth in the notes accompanying
our financial statements.
Seasonality
Our
operating results and operating cash flows historically have been subject to
seasonal variations. Our revenues are usually higher in the second half of the
year than in the first half of the year and the first quarter is usually the
slowest quarter because fewer projects are undertaken during and around the
Chinese New Year holidays.
Off-Balance
Sheet Arrangements
For the
year ended June30, 2010, we did not have any off-balance sheet
arrangements.
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Not
Applicable.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
The full
text of our audited consolidated financial statements as of June 30, 2010 and
2009 begins on page F-1 of this report.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
None.
ITEM
9A.
|
CONTROLS
AND PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) that are designed to ensure that information that would be
required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As
required by Rule 13a-15 under the Exchange Act, our management, including our
Chief Executive Officer, Mr. Hai Sheng Chen, and Chief Financial Officer, Ms.
Leada Tak Tai Li, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of June 30, 2010. Based on our
assessment, Mr. Chen and Ms. Li determined that, as of June 30, 2010, and as of
the date that the evaluation of the effectiveness of our disclosure controls and
procedures was completed, our disclosure controls and procedures were effective
to satisfy the objectives for which they are intended.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting refers to the process designed by, or under the supervision
of, our Chief Executive Officer and Chief Financial Officer, and effected by our
Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. GAAP, and includes those policies and procedures that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. GAAP, and that
our receipts and expenditures are being made only in accordance with the
authorization of our management and directors;
and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Our
management assessed the effectiveness of our internal control over financial
reporting as of June 30, 2010. In making this assessment, management used the
framework set forth in the report entitled Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, our management concluded that our internal
control over financial reporting is effective, as of June 30,
2010.
Because
the Company is a smaller reporting company, this annual report does not include
an attestation report of our registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by our registered public accounting firm.
Changes
in Internal Controls over Financial Reporting
There
were no changes in our internal controls over financial reporting during the
fourth quarter of our fiscal year ended June 30, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM
9B.
|
OTHER
INFORMATION.
|
We have
no information to disclose that was required to be disclosed in a report on Form
8-K during fourth quarter of fiscal year 2010, but was not
reported.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
|
Directors
and Executive Officers
The
following sets forth the name and position of each of our current executive
officers and directors.
NAME
|
|
AGE
|
|
POSITION
|
Wo
Hing Li
|
|
64
|
|
Director
(Chairman)
|
Hai
Sheng Chen
|
|
47
|
|
Chief
Executive Officer and Director
|
Leada
Tak Tai Li
|
|
30
|
|
Chief
Financial Officer
|
Zu
De Jiang
|
|
64
|
|
Chief
Operating Officer
|
Tung
Kuen Tsui
|
|
66
|
|
Director
|
David
Peter Wong
|
|
54
|
|
Director
|
Che
Kin Lui
|
|
47
|
|
Director
|
Daniel
Carlson
|
|
43
|
|
Non-Executive
and Non-Voting Director
|
Wo Hing Li. Mr. Wo Hing
Li has been the Chairman of our Board of Directors since December 28, 2006, and
served as our President and Chief Executive Officer from December 2006 through
May 2010. In addition, he has been the Chairman and Executive Director of PSHL
since May 2002 and the Executive Director of Chengtong since June 2004. From
April 2004 until March 2006, Mr. Li served as a Non-Executive Director of China
Petrotech Holdings Limited, an oil software and exploration company listed on
the Singapore Stock Exchange. From October 2001 to June 2008, Mr. Li served as a
director of Medical China Limited, a company listed on the GEM Board of the Hong
Kong Stock Exchange. From 1997 to 2001, Mr. Li served as a director of Teda (HK)
Holdings Limited. Mr. Li served in various positions within the Grand Finance
Group between 1984 and 1997, serving the last seven years as the General Manager
of its subsidiary, Grand International (China) Investment Holding Co., Limited.
Mr. Li has a Master’s Degree in Business Administration from the Murdoch
University of Australia, and a PhD in Management through a program co-organized
by the University of International Business & Economics of China and the
European University of Ireland.
Hai Sheng Chen. Mr. Hai Sheng
Chen is a co-founder of the Company and has been our Chief Executive Officer
since May 1, 2010. He also served as an Executive Director and General
Manager of the Company and its operating subsidiary, Chengtong, since July
2002. Prior to joining us, Mr. Chen served from July 2001 to July 2002, as
the Managing Director of Shanghai Krupp Stainless Steel Co. Limited, a steel
processing company, and from August 1999 to May 2001, as the Deputy General
Manager of Pudong Steel Co. Limited, a subsidiary of the Baosteel Group, a steel
processing company. Mr. Chen has an Executive MBA Degree from China Europe
International Business School and a Bachelors Degree in Metallic Pressure
Processing from the Beijing University of Science and Technologies.
Leada Tak Tai Li. Leada
Tak Tai Li has been our Chief Financial Officer since December 28, 2006. From
October 2005 until December 28, 2006, Ms. Li was the Chief Financial Officer of
PSHL. Ms. Li has been a Non-Executive Director of STAR Pharmaceutical Limited
since August 2009, and was an assistant to the Chairman for the same company
between June 2004 and October 2005, where she was assisting with group
activities and financial reporting. From November 2003 until May 2004, Ms. Li
was an accountant with KPMG Hong Kong, a company engaged in audit, assurances
and consulting services, conducting commercial due diligence on businesses in
China. From January 2002 until September 2002, Ms. Li was an investment advisor
conducting research and analysis with the private equity firm Suez Asia Holdings
(Hong Kong) Ltd. In 2003, Ms. Li received her Master’s Degree in Accounting and
Finance from Napier University in the U.K., and a Bachelors Degree in Commerce
from the University of Melbourne in 2001.
Zu De Jiang. Zu De
Jiang has been our Chief Operating Officer since May 1, 2010, and has been with
us since our founding in 2002. He served as our Assistant General Manager
from February 2002 to February 2007, and has served as Assistant CEO since March
2007. Prior to joining us, Mr. Jiang served from September 1996 to June
2001, as the Deputy General Manager of Shanghai Pudong Stainless Steel Thin
Plate Co., Ltd. and from April 1984 to September 1996, as the Deputy Head
of Operations of the Cold Rolling Plant at Shanghai Pudong Steel (Group) Co.,
Ltd. Prior to that, Mr. Jiang held various positions between September
1967 and April 1984 at Shanghai No. 3 Steel Factory, including Division Chief of
the Cold Rolling Division. Mr. Jiang graduated from Shanghai Metallurgical
Academy in September 1967 and holds a diploma in Steel Rolling.
Tung Kuen Tsui. Tung
Kuen Tsui has been a member of our Board of Directors since December 28,
2006. Mr. Tsui has been retired since 1998. From 1995 to 1998, Mr. Tsui
served as a Senior Credit Controller for PricewaterhouseCoopers. Prior to
working as the Senior Credit Controller, Mr. Tsui held a variety of positions
with PricewaterhouseCoopers since 1971, including Senior Manager, Information
Systems. Mr. Tsui has a Master of Business Administration from the University of
Macau. Mr. Tsui graduated as an Associate Member of Chartered Institute of
Secretaries and Administrators in the United Kingdom.
David Peter Wong. David
Peter Wong has been a member of our Board of Directors since December 28, 2006.
Mr. Wong is the Chief Financial Officer of Private Wealth Partners, LLC, an
SEC-registered investment adviser based in California, and has been since
November 2005. Mr. Wong served as the Corporate Controller for H&Q Asia
Pacific, an Asian private equity firm from November 2002 to October 2005. Mr.
Wong was the Corporate Controller of Hellman & Friedman, a private equity
firm from January 2002 to September 2002. Mr. Wong is a U.K. Chartered
Accountant with six years of public accounting experience with Ernst & Young
in London and PriceWaterhouseCoopers in Hong Kong. Mr. Wong has a Bachelor of
Arts degree in Economics and Geography from the University of Leeds in the
United Kingdom.
Che Kin Lui. Che Kin Lui
has been a member of our Board of Directors since December 28, 2006. Mr. Lui has
been the Chief Financial Officer of Mirach Energy Limited, an oil exploration
and production company listed on the Singapore Stock Exchange, since April 2007.
Mr. Lui served as a consultant for Synthesis Consultancy Limited from July 2002
until March 2007. From June 1999 to July 2002, Mr. Lui served as a manager for
MVP (HK) Industries Limited, a company engaged in manufacturing household tools.
Mr. Lui has a Master’s Degree in Business Administration from the University of
Ballarat, Australia, and a diploma in Business Administration from Hong Kong
Shue Yan College.
Daniel Carlson. Mr. Carlson is
Chief Financial Officer for Colombia Clean Power & Fuels, Inc. (“CCPF”), an
OTCBB publicly traded company focused on developing coal resources in Colombia,
using advanced coal processing techniques. Additionally, Dan is CFO of CCPF’s
parent company, LIFE Power & Fuels. LIFE, which stands for Low Impact Fossil
Energy, is engaged in technologically advanced production of fossil fuels, such
as Underground Coal Gasification and Coal to Liquid facilities. Prior to
transitioning to his roles with CCPF and LIFE, Dan was a series 7 licensed
investment banker with European American Equities, the merchant bank founder of
both companies. During his career in finance, he has assisted multiple companies
through the reverse merger process and has worked on numerous financings. Mr.
Carlson has been involved in the money management industry for over 20 years,
having also spent time at Husic Capital, Azure Capital and RCM Capital
Management. Mr. Carlson graduated in 1989 from Tufts University with a
degree in Economics.
There are
no agreements or understandings for any of our executive officers or director to
resign at the request of another person and no officer or director is acting on
behalf of nor will any of them act at the direction of any other
person.
Directors
are elected until their successors are duly elected and qualified.
Qualifications,
Attributes, Skills and Experience Represented on the Board
The Board
has identified particular qualifications, attributes, skills and experience that
are important to be represented on the Board as a whole, in light of the
Company’s current needs and business priorities. The Company is a NASDAQ
listed company that offers products in the steel industry in China.
Therefore, the Board believes that a diversity of professional experiences in
the steel industry, specific knowledge of key geographic growth areas, and
knowledge of U.S. capital markets and of U.S. accounting and financial
reporting standards should be represented on the Board. Set forth below is
a tabular disclosure summarizing some of the specific qualifications,
attributes, skills and experiences of our directors.
Director
|
|
Titles
|
|
Material Qualifications |
Wo
Hing Li
|
|
Director
and Chairman
|
|
·
·
·
·
|
Co-founder
of the Company
Chief
Executive Officer of our oldest subsidiary since its
inception
PhD
in Management and Masters in Business Administration
Contributes
invaluable strategic vision to our long-term growth with in-depth
knowledge of operations in China
|
|
|
|
|
|
|
Hai
Sheng Chen
|
|
Director
and Chief Executive Officer
|
|
·
·
·
|
Co-founder
of the Company and its oldest subsidiary
EMBA
in Business Administration
Expertise
in cold rolling and general knowledge of the steel industry with over 20
years of experience
|
|
|
|
|
·
|
Contributes
invaluable long-term knowledge of our business and operations and of the
steel industry and the cold rolling niche markets in
China
|
|
|
|
|
|
|
Tung
Kuen Tsui
|
|
Director
|
|
·
·
·
|
Masters
in Business Administration
Served
with PricewaterhouseCoopers for 27 years prior to his retirement in
1998
Knowledge
of U.S. accounting and financial reporting standards.
|
|
|
|
|
|
|
David
Peter Wong
|
|
Director
|
|
·
·
|
Chief
Financial Officer of a registered California-based investment
adviser
U.K.
Chartered Accountant with six years of public accounting experience with
Ernst & Young in London and PriceWaterhouseCoopers in Hong
Kong
|
|
|
|
|
·
|
Up-to-date
knowledge of U.S. accounting and financial reporting standards and
knowledge of SEC rules and regulation
|
|
|
|
|
|
|
Che
Kin Lui
|
|
Director
|
|
·
·
·
|
Masters
in Business Administration
Chief
Financial Officer of a company listed on the Singapore Stock
Exchange
Experience
in accounting and corporate governance as CFO of a listed
company.
|
|
|
|
|
|
|
Daniel
Carlson
|
|
Non-Executive
Director
|
|
·
·
·
|
Bachelor’s
Degree in Economics
Over
20 years of experience in asset and money management industry
Experience
in the US finance industry and knowledge of U.S. capital
markets
|
Family
Relationships
Mr. Wo
Hing Li, our Chairman, is the father of Leada Tak Tai Li, our Chief Financial
Officer. There are no other family relationships among any of our officers and
directors.
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, none of our directors or executive officers has, during
the past ten years:
|
·
|
been
convicted in a criminal proceeding or been subject to a pending criminal
proceeding (excluding traffic violations and other minor
offences);
|
|
·
|
had
any bankruptcy petition filed by or against the business or property of
the person, or of any partnership, corporation or business association of
which he was a general partner or executive officer, either at the time of
the bankruptcy filing or within two years prior to that
time;
|
|
·
|
been
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction or federal or
state authority, permanently or temporarily enjoining, barring, suspending
or otherwise limiting, his involvement in any type of business,
securities, futures, commodities, investment, banking, savings and loan,
or insurance activities, or to be associated with persons engaged in any
such activity;
|
|
·
|
been
found by a court of competent jurisdiction in a civil action or by the
Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or
vacated;
|
|
·
|
been
the subject of, or a party to, any federal or state judicial or
administrative order, judgment, decree, or finding, not subsequently
reversed, suspended or vacated (not including any settlement of a civil
proceeding among private litigants), relating to an alleged violation of
any federal or state securities or commodities law or regulation, any law
or regulation respecting financial institutions or insurance companies
including, but not limited to, a temporary or permanent injunction, order
of disgorgement or restitution, civil money penalty or temporary or
permanent cease-and-desist order, or removal or prohibition order, or any
law or regulation prohibiting mail or wire fraud or fraud in connection
with any business entity; or
|
|
·
|
been
the subject of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))),
any registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange,
association, entity or organization that has disciplinary authority over
its members or persons associated with a
member.
|
Except as
set forth in our discussion below in Item 13, “Certain Relationships and Related
Transactions, and Director Independence – Transactions with Related Persons,”
none of our directors, director nominees or executive officers has been involved
in any transactions with us or any of our directors, executive officers,
affiliates or associates which are required to be disclosed pursuant to the
rules and regulations of the SEC.
Board
Composition and Committees
Our board
of directors currently consists of six members: Wo Hing Li, Hai Sheng Chen, Tung
Kuen Tsui, Che Kin Lui, David Peter Wong and Daniel Carlson. Mr. Carlson serves
as a non-executive, non-voting member of the board of directors. Tung Kuen
Tsui, Che Kin Lui, David Peter Wong each serves on our board of directors as an
“independent director” as defined by as defined by Rule 5605(a)(2) of the NASDAQ
Listing Rules. Our board of directors has determined that David Peter Wong
possesses the accounting or related financial management experience that
qualifies him as financially sophisticated within the meaning of Rule
5605(c)(2)(A) of the NASDAQ Listing Rules and that he is an “audit committee
financial expert” as defined by the rules and regulations of the
SEC.
Our board
of directors has established three committees: an audit committee, a
compensation committee, and a corporate governance and nominating committee.
Each committee is comprised entirely of independent directors. From time to
time, our board of directors may establish other committees. Our board of
directors has adopted a written charter for each of the committees, which is
available on our website www.chinaprecisionsteelinc.com.
Printed copies of these charters may be obtained, without charge, by contacting
the Corporate Secretary, China Precision Steel, Inc., 18th Floor, Teda Building,
87 Wing Lok Street, Sheung Wan, Hong Kong, People’s Republic of
China.
Audit
Committee
Our
independent directors, Tung Kuen Tsui, Che Kin Lui and David Peter Wong, serve
as members of our audit committee. Mr. Wong serves as chair of the audit
committee.
The
purpose of the audit committee is to oversee our accounting and financial
reporting processes and the audits of our financial statements. The primary
function of the audit committee is to oversee the Board by reviewing the
financial information that will be provided to the stockholders and others, the
preparation of our internal financial statements, and our audit and financial
reporting process, including internal control over financial reporting. In
addition, our audit committee is responsible for maintaining free and open lines
of communication among the committee, the independent auditors and management.
Our audit committee consults with our management and independent auditors before
the presentation of financial statements to stockholders and, as appropriate,
initiates inquiries into various aspects of our financial affairs. The committee
is also responsible for considering, appointing, and establishing fee
arrangements with our independent auditors and, if necessary, dismissing them.
It is not responsible for preparing our financial statements or for planning or
conducting the audits.
Compensation
Committee
Our
independent directors, Tung Kuen Tsui, Che Kin Lui and David Peter Wong, serve
as members of our compensation committee. Mr. Che Kin Lui serves as Chair
of the compensation committee.
Our
compensation committee assists the Board in reviewing and approving the
compensation structure of our directors and executive officers, including all
forms of compensation to be provided to our directors and executive officers.
Our chief executive officer may not be present at any committee meeting during
which his compensation is deliberated. The compensation committee is
responsible for, among other things:
|
·
|
approving
and overseeing the compensation package for our executive
officers;
|
|
·
|
reviewing
and making recommendations to the Board with respect to the compensation
of our directors;
|
|
·
|
reviewing
and approving corporate goals and objectives relevant to the compensation
of our chief executive officer, evaluating the performance of our chief
executive officer in light of those goals and objectives, and setting the
compensation level of our chief executive officer based on this
evaluation; and
|
|
·
|
reviewing
periodically and making recommendations to the Board regarding 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
independent directors, Tung Kuen Tsui, Che Kin Lui and David Peter Wong, serve
as members of our corporate governance and nominating committee. Mr. Tung
Kuen Tsui serves as Chair of the corporate governance and nominating
committee.
The
corporate governance and nominating committee assists the Board of Directors in
identifying individuals qualified to become our directors and in determining the
composition of the Board and its committees. It is responsible for, among
other things:
|
·
|
identifying
and recommending to the Board nominees for election or re-election to the
board, or for appointment to fill any
vacancy;
|
|
·
|
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 the directors to serve as members of the
Board’s committees; and
|
|
·
|
monitoring
compliance with our code of business conduct and
ethics.
|
In
identifying and recommending nominees for election or re-election to the board,
or for appointment to fill any vacancy, the corporate governance and nominating
committee is also committed to engendering Board strength and effectiveness by
seeking candidates with a diverse set of business, academic and life experiences
and backgrounds who also possess knowledge and skills in areas of importance to
the Company. The Committee does not use quotas but considers diversity when
evaluating potential new directors.
The
Committee identifies director candidates primarily through recommendations made
by the non-employee directors. These recommendations are developed based on the
directors’ own knowledge and experience in a variety of fields. Additionally the
Committee considers recommendations made by the employee directors,
stockholders, and others. All recommendations, regardless of the source, are
evaluated on the same basis.
Stockholders
may send recommendations for director candidates to the Corporate Secretary,
China Precision Steel, Inc., 18th Floor, Teda Building, 87 Wing Lok Street,
Sheung Wan, Hong Kong, People’s Republic of China. A submission
recommending a candidate should include sufficient biographical information to
allow the Committee to evaluate the candidate, information concerning any
relationship between the candidate and the stockholder recommending the
candidate and material indicating the willingness of the candidate to serve if
nominated and elected.
Section
16(A) Beneficial Ownership Reporting Compliance
Under
U.S. securities laws, directors, certain executive officers and persons holding
more than 10% of our common stock must report their initial ownership of the
common stock, and any changes in that ownership, to the SEC. The SEC has
designated specific due dates for these reports. In fiscal year 2010, the Form 3
for Daniel Carlson was filed late due to administrative oversight.
Code
of Ethics
Our Board
of Directors has adopted a Code of Business Conduct and Ethics applies to all of
our directors, officers and employees, including our principal executive
officer, principal financial officer and principal accounting officer.
During the fiscal year ended June 30, 2010, there were no waivers of our Code of
Business Conduct and Ethics.
ITEM
11.
|
EXECUTIVE
COMPENSATION.
|
Summary Compensation Table – Fiscal
Years Ended June 30, 2010 and 2009
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the named persons for services
rendered in all capacities during the noted periods. No other executive officer
received total annual salary and bonus compensation in excess of
$100,000.
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Hai
Sheng Chen, Chief Executive
Officer(1)
|
|
2010
|
|
|
20,576 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
20,576 |
|
|
2009
|
|
|
9,653 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,653 |
|
Wo
Hing Li, Chairman and Former Chief
Executive Officer (1)
|
|
2010
|
|
|
140,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
140,000 |
|
|
2009
|
|
|
140,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
140,000 |
|
(1)
|
On
May 1, 2010, Dr. Wo Hing Li resigned from his position as Chief
Executive Officer, effective immediately, and our Board of Directors
appointed Mr. Hai Sheng Chen, our General Manager, as Chief Executive
Officer. Mr. Li remains in his position as
Chairman of our Board of Directors. The compensation reported for Mr.
Chen does not reflect the additional compensation that he received as the
Chief Executive Officer for the full year as his appointment only took
effect on May 1, 2010.
|
Employment
Agreements
We have
entered into executive employment agreements with each of Hai Sheng Chen, our
Chief Executive Officer, Leada Tak Tai Li, our Chief Financial Officer, Zu De
Jiang, our Chief Operating Officer, and Wo Hing Li, our Board Chairman and
former Chief Executive Officer. All executive employment agreements were
entered into as of January 1, 2007, except Mr. Jiang’s employment agreement
which was entered into on May 1, 2010, and will continue indefinitely until
terminated in accordance with the terms of agreement. The base salary shown in
the Summary Compensation Table above is described in each of the executive
officer’s respective employment agreement, and each of them has the right to
participate in our employee benefit plans. The executives are also entitled to
reimbursement, to the fullest extent authorized by Delaware law, of all expenses
incurred or suffered by them in connection with any claim brought against them
because of or in connection with their positions with us or any of our
affiliates, except to the extent that, such expenses arise as a result of the
bad faith, willful misconduct or gross negligence of the executive, or as a
result of his or her conviction for a felony.
Each of
the executive employment agreements permits us to terminate the executive’s
employment at any time by giving a written notice to the executive officer,
provided that, if we terminate the executive’s employment without cause, the
executive will be entitled to a termination payment equal to six months of his
or her then current base salary, payable in six equal installments over the
six-month period immediate following the date of termination. We may also
terminate for cause, at any time, without notice or remuneration, for certain
acts of the executive, including but not limited to a conviction or plea of
guilty to a felony, negligence or dishonesty to our detriment and failure to
perform agreed duties after a reasonable opportunity to cure the failure. An
executive may terminate his or her employment upon thirty days’ written notice
if there is a material reduction in his authority, duties and responsibilities
or if there is a material breach by the us of the terms or conditions of the
agreement after a reasonable opportunity to cure the breach. The agreements also
provide that, if within 12 months following a change of control, any of the
executives are terminated without cause or any of them terminate for good
reason, then the vesting and exercisability of 50% of his or her stock options
that are unvested at the time of the termination (if any) will accelerate and
immediately become vested and exercisable as of the termination date, and will
remain exercisable for 12 months following the termination
date.
Each of
the executive employment agreements contains customary non-competition,
confidentiality, and non-disclosure covenants. Specifically, each executive
officer has agreed, both during and after he or she is no longer employed by us,
to hold in strict confidence and not to use, except as required in the
performance of his duties in connection with the employment, any confidential
information, technical data, trade secrets and know-how of our company or the
confidential information of any third party, including our affiliated entities
and our subsidiaries, received by us. The executive officers have also agreed to
disclose in confidence to us all inventions, designs and trade secrets which
they conceive, develop or reduce to practice and to assign all right, title and
interest in them to us. In addition, each of the executive officers has agreed
not to, while employed by us and for a period of 3 years following the
termination or expiration of the agreement: approach our clients, customers or
contacts or other persons or entities, and not to interfere with the business
relationship between us and such persons and/or entities; assume employment with
or provide services as a director for any of our competitors, or engage in any
business which is in direct or indirect competition with our business; or
solicit the services of any of our employees.
Outstanding
Equity Awards at Fiscal Year End
No
unexercised options or warrants were held by any of the named executive officers
at year end. No equity awards were made during the year ended June 30,
2010.
Compensation
of Directors
The table
below sets forth the compensation of our directors for serving as our directors
for the fiscal year ended June 30, 2010:
Name
|
|
Fees Earned
or Paid in Cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Che
Kin Lui
|
|
|
31,500 |
|
|
|
- |
|
|
|
- |
|
|
|