As filed with the Securities
and Exchange Commission on October 30, 2009
Registration
No. 333-161813
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 4
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
DUOYUAN PRINTING,
INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Wyoming
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3555
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91-1922225
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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No. 3 Jinyuan
Road
Daxing Industrial Development
Zone
Beijing 102600, Peoples
Republic of China
Tel: +8610-6021-2222
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Pioneer Corporate
Services
214 W. Lincolnway
Suite 23
Cheyenne, Wyoming
82001
Tel:
(307) 635-1458
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent for
Service)
Copies to:
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Man Chiu Lee, Esq.
Hogan & Hartson LLP
Suite 2101, Two Pacific Place
88 Queensway
Hong Kong SAR, Peoples Republic of China
Tel: +852-2151-5858
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Kurt J. Berney, Esq.
OMelveny & Myers LLP
Plaza 66,
37th
Floor
1266 Nanjing Road West
Shanghai 200040, Peoples Republic of China
Tel: +8621-2307-7000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after
effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration number of the earlier effective registration
statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act of 1933, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering: o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
Accelerated
Filer o
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Accelerated
Filer o
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Non-Accelerated
Filer þ
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Smaller Reporting
Company o
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(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Title of Each Class of
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Aggregate
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Amount of
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Securities to Be
Registered
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Offering Price(1)
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Registration Fee(2)(3)
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Common shares, par value $0.001 per share
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$
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75,703,754
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$
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4,225
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(4)
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(1)
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Estimated solely for the purpose of
determining the amount of registration fee.
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(2)
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Calculated in accordance with
Rule 457(o) under the Securities Act of 1933.
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(3)
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Includes offering price of common
shares that the underwriters have the option to purchase to
cover over-allotments, if any.
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(4)
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Pursuant to Rule 457(p) under
the Securities Act of 1933, we are offsetting payment of the
registration fees against the $3,851 that has already been paid
with respect to the
Form S-1
filed with the Commission on September 4, 2009 (File
No. 333-
141507), and subsequently withdrawn pursuant to a Registration
Withdrawal Request filed on September 9, 2009.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until this Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The information in
this prospectus is not complete and may be changed. We and the
selling shareholders may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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Subject
to completion, dated October 30 2009
6,269,462 Common
Shares
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DUOYUAN PRINTING, INC.
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$
per share
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We are offering 5,500,000 common shares and the selling
shareholders are offering 769,462 common shares of Duoyuan
Printing, Inc. We will not receive any proceeds from the sale of
our common shares by the selling shareholders.
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We anticipate that the initial public offering price will be
between $8.50 and $10.50 per common share.
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This is our initial public offering and no public market
currently exists for our common shares.
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Trading symbol: New York Stock Exchange
DYP.
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This investment involves risk. See Risk Factors
beginning on page 13.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to Duoyuan Printing, Inc.
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$
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$
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Proceeds, before expenses, to selling shareholders
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$
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$
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The underwriters have a
30-day
option to purchase up to 940,419 additional common shares
from us to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Piper
Jaffray |
Roth Capital Partners |
The date of this prospectus
is ,
2009.
DUOYUAN PRINTING, INC.
Langfang facility |
DUOYUAN
PRINTING, INC.
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We and the selling shareholders have not authorized
anyone to provide you with additional or different information.
This prospectus is not an offer to sell, nor is it seeking an
offer to buy, these securities in any state where the offer or
sale is not permitted.
This prospectus includes market size, market share and industry
data that we have obtained from market research, publicly
available information and various industry publications. The
third party sources from which we have obtained information
generally state that the information contained therein has been
obtained from sources believed to be reliable. We have not
independently verified any of the data from third party sources
nor have we verified the underlying economic assumptions relied
upon by those third parties. Similarly, industry forecasts and
market research, which we believe to be reliable based upon
managements knowledge of the industry, have not been
verified by any independent sources.
Until ,
2009 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscription.
i
SUMMARY
This summary highlights selective information contained
elsewhere in this prospectus. It does not contain all of the
information that you should consider before investing in our
common shares. You should read the entire prospectus carefully,
including the sections entitled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and our consolidated
financial statements and the accompanying notes, before making a
decision to invest in our common shares.
Overview
We are a Wyoming corporation and a leading offset printing
equipment supplier in China, headquartered in Beijing. Through
our principal operating subsidiary, Duoyuan Digital Press
Technology Industries (China) Co., Ltd., or Duoyuan China, and
Duoyuan Chinas manufacturing subsidiaries, namely Langfang
Duoyuan Digital Technology Co., Ltd., or Langfang Duoyuan, and
Hunan Duoyuan Printing Machinery Co., Ltd., or Hunan Duoyuan, we
design, manufacture and sell offset printing equipment used in
the offset printing process. The offset printing process
includes the following three stages:
(1) pre-press, which is the transfer of images
to printing plates; (2) press, which is the
transfer of images from printing plates to another media, such
as paper; and (3) post-press, which is the last
step of the offset printing process that includes cutting,
folding, binding, collating and packaging. We manufacture one
product under the pre-press product category (a
computer-to-plate system, or CTP system) and fifteen products
across four product lines under the press product category
(single color small format presses, single color large format
presses, multicolor small format presses and multicolor large
format presses). We plan to begin commercial production and sale
of certain post-press products, including a cold-set corrugated
paper machine, which makes corrugated cardboard paper, by the
end of 2010. In addition, we plan to begin commercial production
and sale of two other post-press products, namely an automatic
booklet maker and an automatic paper cutter, for which we have
developed prototypes, in 2011.
To enhance our market position, we have made and continue to
make investments in research and development. Our Langfang
Duoyuan research and development and technical support center
and our Hunan Duoyuan technical support center have advanced
design test tools, which we believe enable us to develop new and
enhanced products with improved functionality. Our research and
development team and our manufacturing department work closely
together to optimize manufacturing processes and develop
commercially viable products. In addition, they incorporate
regular feedback from our sales and marketing personnel,
enabling us to timely and cost-effectively introduce products
tailored to end-user needs. Furthermore, our China-based
research and development and manufacturing operations provide us
with a distinct competitive advantage in international markets
by enabling us to leverage low-cost technical expertise, labor,
raw materials and facilities. Our investments in research and
development, technical innovation and commitment to meet the
needs of our end-user customers have allowed us to create and
introduce four new and enhanced products in the year ended
June 30, 2009.
Our nationwide distribution network in China consists of over 85
distributors located in over 65 cities and 28 provinces in
China. Our nationwide distribution network, which we believe,
based on our experience in the industry, to be one of the
largest among Chinese offset printing equipment suppliers,
enables us to be more responsive to local market demands than
many of our competitors. We support our distributors sales
efforts through coordinated marketing efforts. We regularly
attend industry trade shows and exhibitions to showcase our
products, as well as present seminars and training programs to
our potential and existing distributors, as well as potential
and existing end-user customers, to highlight the functions and
capacities of our products. To maintain good relationships with
our end-user customers, we provide certain services during the
one-year warranty period associated with our
1
products. During this period, we provide training, technical
support, warranty and repair services for complex technical
issues to our distributors who work with our end-user customers.
We believe our pricing is competitive with Chinese and
international offset printing equipment manufacturers. We
believe the relatively low operation, labor and raw material
costs in China, our ability to produce a substantial majority of
our key components in-house, our efficient production processes
and our effective inventory management give us a cost
competitive advantage. Our cost advantage allows us to offer
quality products at lower prices, thus making our products
attractive in China and certain international markets.
Our revenue grew 32.2% from $67.8 million in the year ended
June 30, 2007 to $89.6 million in the year ended
June 30, 2008 and 18.9% to $106.6 million in the year
ended June 30, 2009. Our net income grew 89.3% from
$14.0 million in fiscal 2007 to $26.5 million in
fiscal 2008 and 23.2% to $32.6 million in fiscal 2009. For
fiscal 2007, 2008 and 2009, our multicolor large format presses
and our multicolor small format presses were our best selling
products. For fiscal 2007, 2008 and 2009, we derived 72.3%,
81.4% and 83.3% of our revenue from the sale of our multicolor
presses, respectively. For the same periods, our multicolor
large format presses accounted for approximately 46.7%, 52.0%
and 51.2% of our revenue, respectively, and our multicolor small
format presses accounted for approximately 25.6%, 29.4% and
32.1% of our revenue, respectively.
Industry
Chinas
Printing Industry
Chinas printing industry has benefited from Chinas
rapid economic growth. This growth has increased demand for
publication printing needs, such as newspapers, magazines and
books, and commercial printing needs, such as corporate
brochures, product catalogues and labels, manuals and
directories, conference and advertising materials, and printed
packaging materials. Pira International reported that China was
the third largest printing market in the world behind the United
States and Japan. After taking into account the effects of the
current economic environment, Chinas printing industry is
expected to remain one of the fastest growing in Asia.
From 2002 to 2007, the total annual output of Chinas
printing industry grew from $29.5 billion to
$64.4 billion, according to the Printing and Printing
Equipment Industries Association of China, representing a
compound annual growth rate, or CAGR, of 17% per annum.
According to Pira International, Chinas printing market
grew from $51 billion in 2007 to $57 billion in 2008.
Pira International estimates Chinas printing market will
grow to $60 billion by the end of 2009, and projects the
market to grow by 28% total from 2009 to 2014, or a CAGR of 5.1%
per annum, after taking into account the effects of the current
economic environment.
In line with global trends, package printing represents the
largest segment in the Chinese printing industry. According to
the Printing and Printing Equipment Industries Association of
China, China produced $20.5 billion of package printing in
2007, accounting for 32% of the total output of Chinas
printing industry that year. Pira International projects that
package printing to become the largest segment by 2014, followed
by commercial printing.
Based on another report issued by Pira International, corrugated
paper and corrugated board accounted for the largest share of
the corrugated packaging materials in 2007. The consumption of
corrugated paper in China grew at a CAGR of 14.2% per annum from
2003 to 2007 reaching a market size of $4.4 billion by the
end of 2007. Pira International estimates the consumption of
corrugated paper to grow at a CAGR of 8.2% per annum from 2008
to 2013.
2
The demand for corrugated board is growing in response to the
increased demand from industries such as food, beverages,
electronic devices and toys. Chinas output of corrugated
board in 2007 accounted for 18.6 million tons of the global
total of 109 million tons, and this output is projected to
grow at a CAGR of 6.2% per annum from 2008 to 2013, according to
Pira International.
The printing industry in China is currently transitioning from
single color printing to multicolor printing. A few years ago,
most high quality multicolor printing was handled by large and
sophisticated printing companies in the coastal areas,
especially in the Pearl River Delta region. Presently, almost
every major city in China has printing companies that can meet a
wide spectrum of printing demands, from simple single color
works to fairly high quality multicolor printing. Multicolor
printing is becoming a mainstream capability that almost every
Chinese printing company must have to sustain its
competitiveness in the marketplace.
Chinas
Printing Equipment Industry
We operate in the Chinese printing equipment industry, which we
believe is highly correlated with the overall Chinese printing
industry.
Over the past several years, Chinas printing equipment
industry grew at a higher rate than its overall printing
industry. As noted above, the total annual output of
Chinas printing industry grew from $29.5 billion in
2002 to $64.4 billion in 2007 representing a CAGR of 17%
per annum. The total annual output of Chinas printing
equipment industry, however, grew from $0.9 billion to
$2.5 billion, representing a CAGR of 23% per annum over the
same period.
Taking into account of the effects of the current economic
environment, Pira International projects Chinas printing
equipment to grow by 34% total from 2009 to 2014, or a CAGR of
6.0% per annum.
We believe that demand for Chinese-made offset printing
equipment is strong and that the market share of domestically
made offset printing equipment has been increasing in recent
years. For example, according to the Printing and Printing
Equipment Industries Association of China, although the amount
of imported printing equipment increased annually from
$1.3 billion in 2002 to $1.7 billion in 2004, the
total amount of imported printing equipment has since declined
each year to reach $1.6 billion in 2007. We believe this
decline in imported printing equipment is a result of leading
Chinese printing equipment manufacturers increased
investments in research and development and improved engineering
standards, both of which improve Chinese printing equipment
manufacturers ability to compete against international
competitors for market share in China.
We believe two major entry barriers limit the potential
competition we face from Chinese offset printing equipment
producers. First, the offset printing equipment industry in
China is particularly capital intensive due to high production
costs, and second, we believe few manufacturers have the
technical knowledge required to compete in our industry. We
believe our position as an existing and leading offset printing
equipment supplier in China gives us market advantages over
potential competitors seeking to enter this market.
We derive all of our revenue from sales to our distributors in
China. In 2007, according to the Printing and Printing Equipment
Industries Association of China, there were an estimated 90,000
licensed printing companies in China. This estimate did not
include the possible significant number of printing companies
that operate in China without licenses. Printing companies in
China purchase prepress, press and post-press printing equipment
from foreign and Chinese equipment providers, including
companies like us through our distributors.
3
Our
Strengths, Strategy and Risks
We believe that the following competitive strengths enable us to
compete effectively in and capitalize on the growing offset
printing equipment industry in China:
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our quality product offerings at competitive prices;
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our established market position;
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our wide product offerings;
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our nationwide sales and distribution network, with over 200
sales professionals in over 65 cities and 28 provinces
throughout China; and
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our research and development team with over 200 researchers,
engineers and technicians.
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Our strategy is to capitalize on our competitive strengths to
expand our current market share and to benefit from the
anticipated growth in Chinas offset printing equipment
industry. Our strategy consists of the following key elements:
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adjust and expand production facilities to improve efficiency
and margins;
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expand our higher margin product offerings;
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improve our products functionality through research and
development efforts;
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expand our market share in China, and establish distribution
networks outside of China; and
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pursue selective strategic acquisitions.
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We expect to face risks and uncertainties related to our ability
to:
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develop and sell new products;
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establish and maintain our relationships with our distributors;
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manage our distribution network;
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expand our manufacturing capacity;
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attract and retain key management and research and development
personnel;
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build our brand and expand into international markets; and
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protect our intellectual property rights.
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See Risk Factors for a detailed discussion of these
and other risks that we face.
4
Recent
Developments
The following is a summary of our selected unaudited
consolidated financial results for the three months ended
September 30, 2009 compared to our selected unaudited
consolidated financial results for the three months ended
September 30, 2008. Our first quarter 2010 results may not
be indicative of our full year results for our fiscal year
ending June 30, 2010 or future quarterly periods. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus for information regarding trends and other
factors that may influence our results of operations and for
recent quarterly operating results.
Selected
Unaudited Consolidated Financial Information
for the Three Months Ended September 30, 2009 and
2008
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Three Months Ended
September 30,
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2008
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2009
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% of
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% of
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$
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revenue
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$
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revenue
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(dollars in thousands)
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Revenues, net
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26,179
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100.0
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%
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33,295
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100.0
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%
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Cost of revenues
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12,331
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47.1
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15,788
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47.4
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Gross profit
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13,848
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52.9
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17,507
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52.6
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Research and development expenses
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694
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2.7
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364
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1.1
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Selling expenses
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2,547
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9.7
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3,157
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9.5
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General and administrative expenses
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932
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3.6
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1,490
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4.5
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Income from operations
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9,675
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36.9
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12,496
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37.5
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Change in fair value of derivative instruments
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55
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0.2
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111
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0.3
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Other income (expense), net
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Non-operating expenses
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(1
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)
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0.0
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Interest expense
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(212
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)
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(0.8
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)
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(234
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(0.7
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Interest income and other income
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34
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0.1
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31
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0.1
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Other expense, net
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(179
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)
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(0.7
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)
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(203
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(0.6
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)
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Income before provision for income taxes and noncontrolling
interest
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9,551
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36.4
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12,404
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37.2
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Provision for income taxes
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927
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3.5
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2,409
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7.2
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Net income
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8,624
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32.9
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9,995
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30.0
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Less: Net income attributable to noncontrolling interest
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109
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0.4
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158
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0.5
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Net income attributable to Duoyuan Printing, Inc.
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8,515
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32.5
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9,837
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29.5
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Other comprehensive income
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|
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Foreign currency translation gain
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256
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1.0
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183
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|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Duoyuan Printing, Inc.
|
|
|
8,771
|
|
|
|
33.5
|
%
|
|
|
10,020
|
|
|
|
30.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenue increased by $7.1 million, or 27.2%, from
$26.2 million for the three months ended September 30,
2008 to $33.3 million for the three months ended
September 30, 2009, primarily as a result of an increase in
the volume of our products sold during this period. Revenue for
our pre-press printing equipment increased by $0.1 million,
or 12.7%, from $0.8 million for the three months ended
September 30, 2008 to $0.9 million for the three
months ended September 30, 2009. Revenue for our
5
press printing equipment for the three months ended
September 30, 2009 increased by $6.7 million, or
25.6%, when compared to the three months ended
September 30, 2008. This increase was mainly attributable
to an increase in the volume of our multicolor presses sold
during this period.
Our cost of revenue increased by $3.5 million, or 28.0%,
from $12.3 million for the three months ended
September 30, 2008 to $15.8 million for the three
months ended September 30, 2009. This increase was
primarily due to an increase in the volume of our products sold
during this period, particularly sales of our multicolor
presses. This increase in sales contributed to the increase in
consumption of raw materials and components across our pre-press
and press product categories as our revenue increased by 27.2%
from the three months ended September 30, 2009 to the three
months ended September 30, 2008. As a percentage of
revenue, our cost of revenue increased 0.3% from 47.1% for the
three months ended September 30, 2008 to 47.4% for the
three months ended September 30, 2009. This increase was
mainly due to the increase in our depreciation expense for
capital expenditures made in prior years.
Our income from operations increased by $2.8 million, or
29.1%, from $9.7 million for the three months ended
September 30, 2008 to $12.5 million for the three
months ended September 30, 2009. This increase was mainly
due to increased multicolor press sales, which generated higher
revenue for us.
Our provision for income taxes increased by $1.5 million,
or 159.9%, from $0.9 million for the three months ended
September 30, 2008 to $2.4 million for the three
months ended September 30, 2009. This increase was
primarily due to the increase in our revenue by 27.2% over the
same period and the increase in income tax rate for Duoyuan
China. The income tax rate for Duoyuan China in 2008 was 12.5%.
Beginning on January 1, 2009, the income tax rate for
Duoyuan China increased to 25.0% as a result of the expiration
of preferential tax treatments granted to Duoyuan China in prior
years. Our effective tax rates were 9.7% for the three months
ended September 30, 2008 and 19.4% for the three months
ended September 30, 2009.
As a result of the foregoing, our net income attributable to
Douyuan Printing, Inc. increased by $1.3 million, or
15.5%, from $8.5 million for the three months ended
September 30, 2008 to $9.8 million for the three
months ended September 30, 2009. As a percentage of
revenue, our net income decreased 3.0% from 32.5% for the three
months ended September 30, 2008 to 29.5% for the three
months ended September 30, 2009.
Our
Corporate Structure
We were organized under the laws of the State of Nevada on
August 10, 1998. On July 27, 2005, we merged with
Asian Financial, Inc., a Wyoming corporation, for the purpose of
changing our domicile from Nevada to Wyoming. From our inception
until the equity transfer described below, we were a shell
company without operations, revenue or employees, other than
officers and directors.
On October 6, 2006, we closed an equity transfer with
Duoyuan Investments Limited, a British Virgin Islands company
with operating subsidiaries in China. Pursuant to the equity
transfer, we issued 47,100,462 common shares to Duoyuan
Investments Limited in exchange for all of Duoyuan Investments
Limiteds equity interest in Duoyuan China, its wholly
owned subsidiary. Duoyuan China manufactured single color offset
printing presses, among other products. As a result of this
equity transfer Duoyuan China became our wholly owned
subsidiary, and Duoyuan Investments Limited, a company wholly
owned by Wenhua Guo, the chairman of our board of directors,
became our controlling shareholder. Upon the completion of the
equity transfer, we commenced our offset printing equipment
business. We conduct our business through our principal
operating subsidiary, Duoyuan China, and Duoyuan Chinas
manufacturing subsidiaries, namely Langfang Duoyuan and Hunan
Duoyuan.
6
On November 2, 2006, we closed the transactions
contemplated by a securities purchase agreement by and between
us and certain investors. Pursuant to the securities purchase
agreement, we issued an aggregate of 6,132,622 common shares to
the private placement investors for an aggregate purchase price
of $23.5 million. This private placement was made pursuant
to the exemption from the registration provisions of the
Securities Act of 1933, as amended, provided by
Section 4(2) of the Securities Act, and Rule 506 of
Regulation D promulgated thereunder, for issuances not
involving a public offering.
On October 15, 2009, we changed our name to Duoyuan
Printing, Inc.
The following chart summarizes our corporate structure,
including our subsidiaries:
|
|
* |
Represents our minority shareholders, consisting of the
pre-equity transfer investors and the investors from the private
placement in November 2006.
|
Office
Location
Our principal executive offices are located at No. 3
Jinyuan Road, Daxing Industrial Development Zone, Beijing
102600, Peoples Republic of China. Our telephone number at
this address is +8610-6021-2222. Our agent for service of
process and our registered office in Wyoming is Pioneer
Corporate Services located at 214 W. Lincolnway,
Suite 23, Cheyenne, Wyoming, 82001.
Investor inquiries should be directed to us at the address and
telephone number of our principal executive offices set forth
above. Our website is www.duoyuan.com. The information
contained on our website is not incorporated by reference into
this prospectus and is not part of this prospectus.
7
Conventions
that Apply to this Prospectus
Unless otherwise indicated and except where the context
otherwise requires, references in this prospectus to:
|
|
|
|
|
we, us, our company,
the company and our are to Duoyuan
Printing, Inc., a Wyoming corporation, its predecessor entities
and subsidiaries;
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|
|
|
single color presses are to single color small
format presses and single color large format presses,
collectively;
|
|
|
|
multicolor presses are to multicolor small format
presses and multicolor large format presses,
collectively; and
|
|
|
|
fiscal 2007, fiscal 2008 and
fiscal 2009 are to our years ended June 30,
2007, June 30, 2008 and June 30, 2009, respectively.
|
Unless otherwise indicated and except where the context
otherwise suggests, our financial information presented in this
prospectus, including the audited consolidated financial
statements and related notes, has been prepared in accordance
with U.S. GAAP.
For fiscal 2007, 2008 and 2009, our income statements were
translated at the average rates of RMB7.81 to $1.00, RMB7.26 to
$1.00 and RMB6.83 to $1.00, respectively. We make no
representation that the Renminbi or U.S. dollar amounts
referred to in this prospectus could have been or could be
converted into U.S. dollars or Renminbi, as the case may
be, at any particular rate or at all. See Risk
Factors Risks Related to Doing Business in
China Government control of currency conversion and
exchange rate fluctuations may materially and adversely affect
our business for discussions of the effects of currency
control and fluctuating exchange rates on the value of our
shares. Any discrepancies in any table between totals and sums
of the amounts listed are due to rounding.
Solely for your convenience, the foreign currency figures from
the Printing and Printing Equipment Industries Association of
China, have been translated into U.S. dollars at the rate
of RMB6.83 to $1.00.
8
THE
OFFERING
|
|
|
Common shares offered by Duoyuan Printing, Inc.
|
|
5,500,000 common shares. |
|
|
|
Common shares offered by the selling shareholders
|
|
769,462 common shares. |
|
|
|
Over-allotment option
|
|
We have granted the underwriters an option exercisable for
30 days after the date of this prospectus to purchase up to
an additional 940,419 common shares from us at the public
offering price less underwriting discounts, solely for the
purpose of covering over-allotments, if any. |
|
|
|
Total common shares offered
|
|
6,269,462 common shares. |
|
|
|
Common shares outstanding immediately after this offering
|
|
31,375,050 common shares (or 32,315,469 common shares
assuming the underwriters exercise their over-allotment option
in full). |
|
|
|
Offering price
|
|
We currently estimate that the initial public offering price
will be between $8.50 and $10.50 per common share. |
|
Use of proceeds
|
|
We estimate that we will receive net proceeds from this offering
of approximately $47.4 million, assuming an initial public
offering price of $9.50 per common share, the midpoint of the
estimated range of the initial public offering price. If the
underwriters exercise their over-allotment option in full, we
estimate that our net proceeds will be approximately
$56.0 million. We intend to use our net proceeds from this
offering as follows: |
|
|
|
to build a factory to manufacture cold-set
corrugated paper machines at our Langfang Duoyuan facility;
|
|
|
|
to improve and upgrade our existing manufacturing
facilities and production lines; and
|
|
|
|
for general corporate purposes.
|
|
Risk factors
|
|
See Risk Factors and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in our common shares. |
|
Lock-up
|
|
Of our outstanding common shares, 24,167,822 are subject to
180-day
lock-up
agreements with our underwriters,
Piper Jaffray & Co., or Piper Jaffray.
Subject to certain exceptions, neither we nor any of our
directors, executive officers, employees and existing
shareholders who are subject to these contractual
lock-ups
will, for a period of 180 days following the date of this
prospectus, offer, sell or contract to sell any of |
9
|
|
|
|
|
our common shares or securities convertible into or exchangeable
or exercisable for any of our common shares. See
Underwriting. |
|
Dividend policy
|
|
We do not anticipate paying any cash dividends in the near
future. |
|
Listing
|
|
The New York Stock Exchange has authorized the listing of our
common shares. |
|
New York Stock Exchange symbol
|
|
DYP. |
Unless otherwise indicated, all information in this prospectus:
|
|
|
|
|
assumes no exercise of the underwriters over-allotment
option;
|
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|
|
reflects the grant of 875,000 restricted common shares to
certain employees, including members of our executive management
team, but excluding our chief executive officer and chief
financial officer, pursuant to our 2009 Omnibus Incentive Plan;
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|
|
|
assumes the number of shares to be outstanding immediately after
the completion of this offering, excludes 875,000 common shares
reserved for future issuances under our 2009 Omnibus Incentive
Plan and 180,000 common shares issuable upon the exercise of
options granted concurrently with the listing of our common
shares on the New York Stock Exchange; and
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|
|
|
reflects the filing of our amended and restated articles of
incorporation and the adoption of our amended and restated
bylaws prior to the completion of this offering.
|
10
Summary
Consolidated Financial Information
You should read the summary consolidated financial information
set forth below in conjunction with our consolidated financial
statements and related notes, Selected Consolidated
Financial Information, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations. The summary consolidated statements of income
and other comprehensive income for each of the three years ended
June 30, 2007, 2008 and 2009, the summary consolidated
balance sheets as of June 30, 2008 and 2009, and the
summary consolidated statements of cash flows for each of the
three years ended June 30, 2007, 2008, and 2009 have been
derived from our audited consolidated financial statements that
are included elsewhere in this prospectus. The consolidated
financial statements are prepared and presented in accordance
with U.S. GAAP. Our historical results are not necessarily
indicative of results to be expected for future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of
Income
|
|
Year Ended
June 30,
|
|
and Other Comprehensive
Income
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except for share
and per share data)
|
|
|
Revenue, net
|
|
$
|
67,812
|
|
|
$
|
89,628
|
|
|
$
|
106,591
|
|
Cost of revenue
|
|
|
37,694
|
|
|
|
44,462
|
|
|
|
50,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,118
|
|
|
|
45,166
|
|
|
|
56,257
|
|
Research and development expenses
|
|
|
1,046
|
|
|
|
1,683
|
|
|
|
1,768
|
|
Selling expenses
|
|
|
7,827
|
|
|
|
8,705
|
|
|
|
9,726
|
|
General and administrative expenses
|
|
|
3,078
|
|
|
|
4,472
|
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18,167
|
|
|
|
30,306
|
|
|
|
40,289
|
|
Liquidated damages (expenses) income, net of settlement
|
|
|
(2,119
|
)
|
|
|
235
|
|
|
|
|
|
Change in fair value of derivative instruments
|
|
|
|
|
|
|
73
|
|
|
|
194
|
|
Other expense, net
|
|
|
(21
|
)
|
|
|
(535
|
)
|
|
|
(1,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
16,027
|
|
|
|
30,079
|
|
|
|
38,514
|
|
Minority interest
|
|
|
241
|
|
|
|
382
|
|
|
|
464
|
|
Provision for income taxes
|
|
|
1,807
|
|
|
|
3,238
|
|
|
|
5,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13,979
|
|
|
|
26,459
|
|
|
|
32,597
|
|
Foreign currency translation gain
|
|
|
1,834
|
|
|
|
8,200
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
15,813
|
|
|
$
|
34,659
|
|
|
|
32,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic and diluted
|
|
$
|
0.61
|
|
|
$
|
1.06
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic
and diluted
|
|
|
23,041,021
|
|
|
|
25,000,050
|
|
|
|
25,000,050
|
|
11
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
Consolidated Balance
Sheets
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Cash
|
|
$
|
14,200
|
|
|
$
|
31,044
|
|
Working
capital(1)
|
|
|
55,587
|
|
|
|
75,337
|
|
Total current assets
|
|
|
72,017
|
|
|
|
94,214
|
|
Total assets
|
|
|
112,905
|
|
|
|
148,551
|
|
Total current liabilities
|
|
|
16,431
|
|
|
|
18,877
|
|
Total liabilities
|
|
|
17,805
|
|
|
|
20,057
|
|
Minority interest
|
|
|
1,293
|
|
|
|
1,762
|
|
Total shareholders equity
|
|
|
93,806
|
|
|
|
126,732
|
|
|
|
(1) |
Working capital is equal to total current assets less total
current liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
Consolidated Statements of Cash
Flows
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
(4,200
|
)
|
|
$
|
16,801
|
|
|
$
|
29,842
|
|
Cash flows used in investing activities
|
|
|
(11,081
|
)
|
|
|
(10,524
|
)
|
|
|
(16,189
|
)
|
Cash flows provided by (used in) financing activities
|
|
|
19,171
|
|
|
|
(1,092
|
)
|
|
|
2,929
|
|
12
RISK
FACTORS
An investment in our common shares involves a high degree of
risk. You should carefully consider the risks and uncertainties
described below together with all other information contained in
this prospectus, including the matters discussed under
Special Note Regarding Forward-Looking Statements,
before you decide to invest in our common shares. You should pay
particular attention to the fact that we are a holding company
with substantial operations in China and are subject to legal
and regulatory environments that in many respects differ from
those of the United States. If any of the following risks, or
any other risks and uncertainties that are not presently
foreseeable to us, actually occur, our business, financial
condition, results of operations, liquidity and our future
growth prospects would be materially and adversely affected. You
should also consider all other information contained in this
prospectus before deciding to invest in our common shares.
Risks
Related to Our Business
The
market for offset printing equipment is very competitive, and if
we are unable to compete successfully, our business may be
materially and adversely affected.
The offset printing equipment industry is extremely competitive
and is characterized by rapid technological changes. Our
products compete against those offered by several
top-tier Chinese and international companies, particularly
German and Japanese companies.
|
|
|
|
|
Small Format Press Producers. Our
competitors in the small format press market in China include
Chinese companies such as Yingkou Gronhi Offset Printing
Machinery Co., Ltd., Yingkou Saxin Printing Machine Co., Ltd,
Liaoning Dazu Guanhua Printing Equipment Co. Ltd., Weifang
Huaguang Precision Printing Machinery Co., Ltd., Shandong Weihai
Hamada (JV) Printing Machinery Co., Ltd. and Shandong Weihai
Printing Machinery Co., Ltd. Our international competitors
include Heidelberger Druckmaschinen AG, a German company, and
Hamada Printing Press Co., Ltd. and Ryobi, Ltd., two major
Japanese small format press manufacturers.
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|
|
|
Large Format Press Producers. Our
competitors in the large format press market in China include
Chinese companies such as Beiren Printing Machinery Holdings
Limited, Shanghai Electric Group Printing & Packaging
Machinery Co., Ltd. and Jiangxi Zhongjing Group Co., Ltd. Our
international competitors include German manufacturers such as
Heidelberger Druckmaschinen AG, Man Roland Druckmaschinen AG,
and Koenig & Bauer Group (KBA) and Japanese
manufacturers such as Mitsubishi Heavy Industries, Ltd., Komori
Corporation, Shinohara Machinery Co. Ltd., Sakurai Graphic
Systems Corp. and Ryobi Ltd. Adast a.s., one of the largest
Eastern European manufacturers, is another international
competitor.
|
Some of our competitors, particularly our international
competitors, have significantly greater financial, technical,
manufacturing, sales, marketing and other resources than we do
and have achieved greater name recognition for their products
and technologies than we have. Because of this, we may not be
able to successfully increase our market penetration or our
overall share of the offset printing equipment market in China
or internationally. In addition, companies not currently in
direct competition with us may introduce competing products in
the future. Although we attempt to develop and introduce
innovative products to meet end-user customer demand, products
or technologies developed by other offset printing equipment
suppliers could render our products or technologies obsolete or
noncompetitive. Customers may defer or change their purchasing
decisions in anticipation of the introduction of new products or
the actual introduction of new products by us or our competitors.
13
Increased competition may result in price reductions, increased
sales incentive offers, lower gross margins and loss of market
share, which could require us to increase investments in
research and development, sales and marketing efforts, and other
means of market expansion. Our competitors products may be
more competitive in terms of market acceptance, price, quality
and performance. We may be adversely affected if we are unable
to maintain current product cost reductions or achieve future
product cost reductions, including warranty costs.
If we fail to address any of these competitive challenges and we
are unable to compete successfully, there could be a material
adverse effect on our business, financial condition and
operating results.
We
face risks and difficulties due to our recent growth, and may be
unable to sustain our recent profitability and growth
rates.
Our revenue grew from $67.8 million for the year ended
June 30, 2007 to $89.6 million for the year ended
June 30, 2008 and to $106.6 million for the year ended
June 30, 2009. We will continue to encounter risks and
difficulties in connection with our significant growth,
including our potential failure to:
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|
|
implement, adapt or modify our business model and strategy;
|
|
|
|
manage our investments in new businesses and facility expansion
or construction, including the cold-set corrugated paper machine
factory at Langfang Duoyuan that we intend to build;
|
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|
maintain our current and develop new relationships with
distributors;
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|
manage our expanding operations and product offerings;
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|
maintain adequate control of expenses, inventory and receivables;
|
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|
|
attract, retain and motivate qualified personnel;
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|
protect our reputation and enhance customer loyalty;
|
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|
implement additional and improve existing administrative,
financial and operations systems, procedures and
controls; and
|
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|
|
anticipate and adapt to changes in the offset printing industry,
government regulations, technology and other competitive and
market dynamics.
|
If we fail to successfully deal with these risks and
difficulties due to our recent growth, we could experience
disruptions in our business, any of which could materially
affect our business, financial condition and results of
operations.
In addition, although our sales have increased rapidly in recent
years, we expect that our operating expenses will increase as we
expand, and we may not maintain or increase our profitability.
Some of the factors which may contribute to our inability to
sustain our recent profitability and growth include:
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|
|
|
|
competitors offering comparable products at lower prices;
|
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|
|
decreases in the average selling prices of our products,
particularly our single color presses;
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|
|
superior product innovations by competitors;
|
14
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|
rising raw materials and manufacturing costs;
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|
|
changes in our management and key personnel; and
|
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|
|
increased operating expenses relating to research and
development, sales and marketing efforts and general and
administrative expenses as we seek to grow our business.
|
As a result of these and additional factors, we may experience
lower revenue and higher expenses and we may therefore fail to
maintain our recent profitability and growth rates, achieve our
revenue targets, limit our operating expenses
and/or
remain profitable in the future.
We may
be unsuccessful in developing and selling new products or in
penetrating new markets for which we have limited experience,
particularly the post-press market.
Our revenue growth has been primarily from sales of our press
products. Our future success depends, in part, on our ability to
develop and sell new press products, as well as new pre-press
and post-press products in a cost-effective and timely manner.
We continually evaluate expenditures for planned product
developments and choose among alternatives based upon our
expectations of future market trends.
We may expand into business areas for which we do not have
significant experience. One area of planned expansion is the
cold-set corrugated paper machine product line, which we expect
to begin commercial production and sale by the end of 2010. Many
factors, some of which are beyond our control, could materially
and adversely affect our ability to turn this and other products
into profitable businesses, including:
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|
our limited experience in these new businesses;
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the existence of larger more established competitors;
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our potential inability to sell new products to existing
end-user customers or to locate new end-user customers;
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the timing and completion of our introduction of new designs;
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the quality, price and performance of our products and those of
our competitors;
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our customer service capabilities and responsiveness; and
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any unexpected expenses and costs related to the expansion.
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Failure to effectively manage these factors may result in our
inability to successfully develop new products and expand into
new markets, including the post-press market, which could
materially and adversely affect our financial condition and
results of operations and result in a loss of business
opportunities.
We
depend on distributors for all of our revenue and will rely on
adding distributors for most of our revenue growth. Failure to
maintain relationships with our distributors or to otherwise
expand our distribution network could negatively affect our
ability to effectively sell our products.
We depend on distributors for all of our revenue. We do not have
long-term distribution agreements, and all our distribution
agreements have one-year terms. As our existing distribution
agreements expire, we may be unable to renew with our desired
distributors on favorable terms or at all. We compete for
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quality distributors with both our international and Chinese
competitors. In addition, we rotate our sales and marketing
personnel among our seven regional markets periodically to
reduce our reliance on any single employees relationship
with distributors in any market. This practice may make us less
attractive to some distributors. Any disruption of our
distribution network, including our failure to renew our
existing distribution agreements with our desired distributors,
could negatively affect our ability to effectively sell our
products.
We may
be unable to effectively manage our distribution network, and
our business, prospects and brand may be materially and
adversely affected by our distributors
actions.
Our ability to manage the activities of our independent
distributors is limited. Our distributors could take one or more
of the following actions, any of which may have a material
adverse effect on our business, prospects and brand:
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sell products that compete with our products, possibly including
counterfeit products with the Duoyuan name;
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sell our products outside their designated territory, possibly
in violation of the distribution rights of other distributors;
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fail to adequately promote our products;
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fail to provide proper training and service to our end-user
customers; or
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violate the anti-corruption laws of China, the United States or
other countries.
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Failure to adequately manage our distribution network or
non-compliance by distributors with our distribution agreements
could harm our corporate image among our end-user customers and
disrupt our sales, which could result in a failure to meet our
sales goals. Furthermore, we could be liable for actions taken
by our distributors, including violations of applicable law in
connection with the marketing or sales of our products, such as
the PRC anti-corruption laws and the United States Foreign
Corrupt Practices Act. In particular, we may be held liable
under U.S. law for actions taken by our distributors even
though all of our distributors are
non-U.S. companies
that are not subject to the Foreign Corrupt Practices Act. Our
distributors may violate these laws or otherwise engage in
illegal practices with respect to their sales or marketing of
our products. If our distributors violate these laws, we could
be required to pay damages or fines, which may materially and
adversely affect our business, financial condition and results
of operations. In addition, our brand, reputation, sales or the
price of our common shares could be adversely affected if we
become the target of any negative publicity as a result of
actions taken by our distributors.
If the
market for printing equipment does not grow at the rate we
expect or at all, including due to a decrease in the demand for
commercial printing services, our revenue and profitability may
be materially and adversely affected.
The development of our business depends, in large part, on
continued growth in the demand for quality printing equipment in
China, including demand driven by providers of commercial
printing services in China and on the maintenance or growth of
the general selling prices of pre-press, press and post-press
products in the market. Although the Chinese printing equipment
market has grown rapidly, the growth may not continue at the
same rate or at all.
A variety of factors, including economic, regulatory, political
and social instability, could contribute to a decrease in the
demand for quality offset printing equipment or commercial
printing services. In addition, we believe the average price
charged for regular and low-end commercial printing services has
16
been decreasing. We also believe that the average selling price
of press products, particularly the less sophisticated single
color printing equipment, has been decreasing. If there is a
decrease in the demand for or the price of offset printing
equipment, including as a result of decreased demand for
commercial printing services, our revenue and profitability may
be materially and adversely affected.
If we
fail to accurately project demand for our products, we may
encounter problems of inadequate supply or oversupply, which may
materially and adversely affect our business, financial
condition and operating results.
Our distribution agreements contain annual sales targets for
each distributor, and we take such targets into account when we
formulate our overall operation plans. We forecast demand for
our products based on rolling projections from our distributors.
The varying sales and purchasing cycles of our distributors,
however, make it difficult for us to forecast future demand
accurately.
If we overestimate demand, we may purchase more raw materials or
components than required. If we underestimate demand, our third
party suppliers may have inadequate raw material or product
component inventories, which could interrupt our manufacturing,
delay shipments and result in lost sales. In particular, we are
seeking to reduce our procurement and inventory costs by
matching our inventories closely with our projected
manufacturing needs and by deferring our purchase of raw
materials and components, from time to time, in anticipation of
supplier price reductions. If we have excess products, we may
need to lower prices to stimulate demand. We also risk new
material inventory obsolescence if we do not sell components
before the end of their shelf life. As we seek to balance
inventory cost savings and production flexibility, we may fail
to accurately forecast or meet demand. Our inability to
accurately predict and timely meet our demand could materially
and adversely affect our business, financial condition and
operating results.
If we
cannot obtain sufficient raw materials and components that meet
our production demand and standards at a reasonable cost, or at
all, our business may be materially and adversely
affected.
The key raw materials and components used in the manufacturing
of our products are steel, iron and electronic components. We
produce a substantial majority of our key components in-house at
our Hunan Duoyuan facility. We purchase all other raw materials
and components from Chinese suppliers.
For fiscal 2007, 2008 and 2009, purchases from our largest
supplier accounted for 9.5%, 8.8% and 10.7% of our total raw
materials and components purchases, respectively. For the same
periods, our ten largest suppliers combined accounted for 54.6%,
55.7% and 57.4% of our total raw materials and components
purchases, respectively. If any supplier is unwilling or unable
to provide us with raw materials and components in the required
quantities and at acceptable costs and quality, we may not be
able to find alternative sources on satisfactory terms in a
timely manner, or at all. In addition, some of our suppliers may
fail to meet qualifications and standards required by our
end-user customers, which could impact our ability to purchase
raw materials and components.
Our inability to find or develop alternative supply sources for
raw materials or components that meet our production demand and
standards could result in production delays or reductions as
well as shipment delays. The prices of our raw materials and
components could also increase, and we may not be able to pass
these price increases on to our end-user consumers. For example,
steel prices in China decreased during the year ended
June 30, 2006 but, increased significantly during fiscal
2007 and fiscal 2008. Should any of these events occur, our
business may be materially and adversely affected.
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Our
distributors have reduced or terminated their purchases in the
past, and could reduce or terminate their purchases in the
future, which could materially and adversely affect our
business.
We do not have long-term distribution agreements with our
distributors, who could reduce their purchases or cease
purchasing our products altogether. If major distributors elect
to purchase products from another manufacturer, our operating
results could be harmed through, among other things, decreased
sales volumes and write-offs of accounts receivable and
inventory related to products we have manufactured for these
distributors. In addition, any decline in demand for our
products, including any negative development affecting our major
distributors or the printing industry in general, would likely
harm our sales and operating results.
A substantial portion of our backlog is scheduled for delivery
within 90 days or less, and our distributors may cancel or
change their purchase orders or delivery times for products they
have ordered from us without penalty. In addition, a significant
portion of our operating expenses are fixed in advance based on
projected sales. Accordingly, if sales are below expectations in
any given quarter, the resulting impact on our business,
financial conditions and operating results will be more
significant given our inability to adjust spending in the short
term to compensate for this shortfall.
We may
be unable to successfully expand our manufacturing capacity,
which could result in material delays, quality issues, increased
costs and loss of business opportunities, and, if we fail to
accurately gauge demand for our products or our product and
end-user customer initiatives fail, we may have overcapacity,
which may materially and adversely affect our
business.
We intend to upgrade our existing in-house production facilities
for our key components and build a new factory at Langfang
Duoyuan to manufacture cold-set corrugated paper machines, a
post-press product. These projects may not be constructed in
time or within budget. We may also experience quality control
issues as we implement these manufacturing upgrades and ramp up
production. Any material delay in completing these projects, or
any substantial increase in costs or quality issues in
connection with these projects, could materially and adversely
affect our business, financial condition, results of operations
and business opportunities.
Our decision to upgrade our existing production facilities and
build a new cold-set corrugated paper machine factory at
Langfang Duoyuan is based on the sale of current products, our
growth strategy and market trends. However, market demand could
shift and result in lower than anticipated demand for and sales
of our existing or future products, such as our cold-set
corrugated paper machines. Our marketing initiatives to promote
our existing and new products may not result in the anticipated
level of end-user customer demand, resulting in production
overcapacity or excess inventory for us, which may have a
material adverse effect on our profitability.
We are
exposed to potential product liability claims that may be costly
to defend against, and, if successful, may materially and
adversely affect our business.
As a manufacturer of offset printing equipment, our business
exposes us to product liability risks. Claims against us may
also result from actions taken by our distributors over whom we
exercise little to no control. The malfunctioning of our
products could potentially cause financial loss, property damage
or personal injuries. If our products are not properly designed
or manufactured or if they do not perform adequately, we could
be subject to claims for damages based on legal theories,
including product liability. Product liability claims may be
expensive to defend and may potentially result in large
financial judgments being made against us, which could adversely
affect our financial performance. We do not maintain liability
insurance, so we are responsible for any expenses we might incur
in connection with such claims. Even if a product liability or
other claim is not successful, the adverse publicity, time and
expense of defending such a claim may interfere with or
negatively impact our business and materially and adversely
impact our results of operations and reputation.
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If we
fail to meet evolving end-user customer demand and requirements
for offset printing equipment, including through product
enhancements or new product introductions, or if our products do
not compete effectively, our financial conditions and operating
results may be negatively and adversely affected.
The offset printing equipment industry is characterized by
evolving technological change, frequent new product
developments, periodic product obsolescence, high industry
standards, changing information technologies and evolving
distribution channels. We must adapt quickly to new and changing
technologies and their related applications and to introduce new
products offerings with improved features and functionality. We
could incur substantial costs to keep pace with the
technological changes and may fail to adapt to these changes.
Our future success largely depends on our ability to
continuously develop new products with the quality levels our
end-user customers demand and new services to support them.
Despite our investments in research and development, we may fail
to develop new products. Our new products may not achieve market
acceptance or be manufactured at competitive costs or in
sufficient volume. Our failure to enhance our existing products
and services or to develop and introduce new products and
services that meet changing end-user customer requirements and
evolving technological standards would adversely impact our
ability to sell our products and our financial condition and
operating results may be negatively and adversely affected.
Third
party use of the Duoyuan trademark name may dilute
its value and materially and adversely affect our reputation,
goodwill and brand.
We have a license from Duoyuan Investments Limited, our majority
shareholder, wholly owned by Wenhua Guo, the chairman of our
board of directors, to use the Duoyuan trademark
name. Duoyuan Investments Limited, however, may license the
Duoyuan trademark name to others for products
unrelated to printing, which may create confusion regarding our
brand. In addition, some of our distributors use the Chinese
characters of our name, Duoyuan, in their company
names, and we may be unable to prevent such use. The use of
Duoyuan in the legal names of these distributors may
confuse our end-user customers who may associate our name with
the distributor and incorrectly believe our distributors are our
affiliates. Due to ambiguities in Chinese intellectual property
law, the cost of enforcement and our prior lack of enforcement,
we may be unable to prevent third parties from using the
Duoyuan trademark name.
We may
undertake acquisitions which may have a material adverse effect
on our ability to manage our business and may be
unsuccessful.
Our growth strategy may involve the acquisition of new
technologies, businesses, products or services or the creation
of strategic alliances in areas in which we do not currently
operate. These acquisitions could require that our management
develop expertise in new areas, manage new business
relationships and attract new types of customers. Furthermore,
acquisitions may require significant attention from our
management, and the diversion of our managements attention
and resources could have a material adverse effect on our
ability to manage our business. We may also experience
difficulties integrating acquisitions into our existing business
and operations. Future acquisitions may also expose us to
potential risks, including risks associated with:
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integration of new operations, services and personnel;
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unforeseen or hidden liabilities;
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diversion of resources from our existing businesses and
technologies;
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inability to generate sufficient revenue to offset the costs of
acquisitions; and
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potential loss of, or harm to, relationships with employees or
customers.
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Any of these risks may have a material adverse effect on our
ability to manage our business and the acquisitions may be
unsuccessful.
If our
efforts to expand into international markets are unsuccessful,
our business and financial conditions could be materially and
adversely affected.
Our long-term business strategy relies in part on establishing
an international distribution network in parts of Africa, the
Middle East and Asia. Risks affecting our international
expansion include challenges caused by geographic distance,
language, cultural differences and the burdens of complying with
a wide variety of laws and regulations which differ from those
to which we are accustomed, including:
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international import and export legislation;
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financial condition, expertise and performance of potential
international distributors;
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foreign tax consequences;
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trade and tariff restrictions;
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quotas; and
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inability to effectively enforce contractual or other legal
rights.
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These risks could result in increased and unbudgeted costs
associated with servicing international markets, which could in
turn materially and adversely affect our business and financial
condition.
Our
business is capital intensive and our growth strategy may
require additional capital which may not be available on
favorable terms or at all.
We believe that our current cash and cash flows from operations
will be sufficient to meet our present and reasonably
anticipated cash needs to maintain current operations. We may,
however, require additional cash resources due to changed
business conditions, planned expansion of our manufacturing
capacity and product offerings (for example, our plans to expand
our existing property to build a cold-set corrugated paper
machine factory at Langfang Duoyuan) or other investments or
acquisitions we may decide to pursue. If our own financial
resources are insufficient to satisfy our capital requirements,
we may seek to sell additional equity or debt securities or
obtain additional credit facilities. The sale of additional
equity securities could result in dilution of shareholders
holdings. The incurrence of indebtedness would result in
increased debt service obligations and could require us to agree
to operating and financial covenants that would restrict our
operations. Financing may not be available in amounts or on
terms acceptable to us, if at all. Any failure by us to raise
additional funds on terms favorable to us, or at all, could
limit our ability to expand our business operations and could
harm our overall business prospects.
Any
interruption in our production process could materially impair
our financial performance and adversely affect our relationships
with our distributors.
Our manufacturing operations are complicated and integrated,
involving the coordination of raw materials and components (some
purchased from third parties), internal production processes and
external distribution processes. While these operations are
modified on a regular basis in an effort to improve
manufacturing and distribution efficiency and flexibility, we
may experience difficulties in coordinating the various aspects
of our manufacturing processes, thereby causing downtime and
delay. For example, due to increased demand for our multicolor
presses, we transferred some of our employees from the single
color press production line to the multicolor press production
line. Production of
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multicolor presses involves a more complicated manufacturing
process that required additional training for these transferred
employees and ultimately resulted in some production delays. We
manufacture, assemble and store almost all of our products, as
well as conduct most of our research and development activities,
at our manufacturing facilities. We do not maintain
back-up
facilities, so we depend on our manufacturing facilities for the
continued operation of our business. A natural disaster or other
unanticipated catastrophic event, including power interruption,
water shortage, storm, fire, earthquake, terrorist attack or
war, could significantly impair our ability to manufacture our
products and operate our business and delay our research and
development activities. Our facilities and certain manufacturing
equipment would be difficult to replace and could require
substantial replacement time. Catastrophic events may also
destroy our inventory. The occurrence of such an event could
materially and adversely affect our business and operations. In
addition, any interruption in our production, even if temporary,
could delay our delivery to our distributors, who deliver to
end-user customers. Any production interruption
and/or
delivery delays could negatively affect our business and
potentially our reputation. Any interruption of our business
operations could have a material adverse effect on our business,
financial condition and operating results and may negatively
affect our relationships with our distributors.
We do
not have insurance coverage to protect us against
losses.
We do not maintain insurance coverage for our equipment or
manufacturing facilities, and we do not have any business
liability, loss of data or business interruption insurance
coverage for our operations in China. If any claims for injury
are brought against us, or if we experience any business
disruption, litigation or natural disaster, we might incur
substantial costs and diversion of resources, which would
materially and adversely affect our business, financial
condition and operating results.
Environmental
claims or failure to comply with any present or future
environmental regulations may require us to spend additional
funds and may materially and adversely affect our
business.
We are subject to environmental laws and regulations that affect
our operations, facilities and products in China. Any failure to
comply with any present or future environmental laws and
regulations could result in the assessment of damages or
imposition of fines against us, suspension of production,
cessation of our operations or even criminal sanctions. New laws
and regulations could also require us to acquire costly
equipment or to incur other significant expenses. Our failure to
control the use of, or adequately restrict the discharge of,
hazardous substances could subject us to potentially significant
monetary damages and fines or suspension of our business
operations, which may harm our results of operations.
In connection with the construction of our Langfang Duoyuan
facility, which became operational in October 2000, we obtained
the required environmental protection assessment. We were also
required to obtain a pollutant discharging permit from the
governmental authorities in connection with the discharge of
certain pollutants prior to commencing operations. We have not
received this permit yet. Pursuant to the Regulations of Hebei
Province on the Administration and Supervision of Environmental
Pollution Prevention, effective March 1, 2008, our failure
to timely obtain this permit may result in us being reprimanded
by the relevant governmental authorities, which may result in a
monetary fine in an amount equal to three times any illegal
gains, or RMB5,000 to RMB10,000, if we have no illegal gains,
subject to the discretion of the governmental authorities. If we
are deemed to have materially violated the regulation regarding
the discharge of pollutants, the governmental authorities may
order us to comply with the regulation within a time limit. If
more stringent regulations are adopted in the future, the
related compliance costs could be substantial. Any failure by us
to control the use or adequately restrict the discharge of
hazardous substances could subject us to potentially significant
monetary damages and fines or suspensions in our business
operations.
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In connection with the construction of our Hunan Duoyuan
facility, which became operational in March 2004, we didnt
obtain the required environmental protection assessment. We were
also required to obtain a pollutant discharging permit. We have
not received this permit yet. Pursuant to the Provisional
Measures of Hunan Province on the Administration and Supervision
of Pollutant Discharging Permit, effective January 1, 2004,
our failure to obtain this permit, may result in us being
prohibited the discharge of pollutants. We may not obtain a
required approval of our potential construction project.
The
loss of key personnel, failure to attract or retain specialized
technical and management personnel and recent replacements of
our chief executive officer and chief financial officer could
materially and adversely affect our business.
We rely heavily on the services of our key personnel, including
Wenhua Guo, the chairman of our board of directors, Christopher
Patrick Holbert, our chief executive officer, Xiqing Diao, our
chief operating officer, William D. Suh, our chief financial
officer, and Yubao Wei, our chief technology officer, each of
whom are a significant asset to us. Our future success will
depend on our ability to retain these key personnel and attract
and retain other skilled managerial, engineering, technical and
sales and marketing personnel. Competition for such key
personnel, particularly technical personnel, is intense in the
offset printing equipment industry, and we may fail to attract
and retain a sufficient number of technical personnel to support
our anticipated growth. Despite the incentives we provide, our
current employees may not continue to work for us. If additional
personnel are required for our operations in the future, we may
not be able to obtain the services of additional personnel
necessary for our growth.
Turnover in our senior management could significantly deplete
institutional knowledge held by our existing senior management
team and impair our operations, which could harm our business.
On June 29, 2009, Wenhua Guo resigned as our chief
executive officer. Mr. Diao served as our interim chief
executive officer from July 9, 2009 until we appointed
Christopher Patrick Holbert as our chief executive officer on
August 26, 2009. During the year ended June 30, 2008,
Gene Michael Bennett and William Milewski, who served as our
chief financial officers from July 19, 2007 to
December 20, 2007 and from March 1, 2008 to
May 21, 2008, respectively, resigned. From
December 20, 2007 to March 1, 2008 and again from
May 21, 2008 to October 1, 2008, Baiyun Sun, our
controller, served as our interim chief financial officer. We
appointed William Suh as our chief financial officer effective
as of October 1, 2008, with Ms. Sun continuing to
serve as our controller. During the transition periods when we
had only an interim chief financial officer, certain of our
projects were subject to delay or put on hold which may have a
material adverse effect on our financial condition and operating
results.
In addition, if any of our key personnel joins a competitor or
forms a competing company, we may not be able to replace them
easily and we may lose end-user customers, business partners,
key professionals and staff members as a result. All of our key
personnel have entered into employment agreements with us, which
include confidentiality and non-disclosure provisions. However,
if any disputes arise between these key personnel and us, it is
not clear, in light of uncertainties associated with the Chinese
legal system, what the court decisions will be and the extent to
which these court decisions could be enforced in China, where
all of these key personnel reside and hold some of their assets.
See Risks Related to Doing Business in
China Uncertainties with respect to the Chinese
legal system could limit the legal protections available to our
shareholders and us.
The
successful management of our printing operations and growth may
suffer because our senior management team has a limited history
of working together.
Our success depends, in large part, upon the services of our
senior management team. A significant portion of our senior
management team, namely our chief executive officer and chief
financial officer, has been in place for 12 months or less.
These executives do not have previous management experience with
us and may not fully integrate themselves into our business or
manage effectively our growth. Our
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failure to assimilate these new executives, the failure of these
new executives to perform effectively, or the loss of any of
these new executives, could adversely affect our business,
financial condition, and results of operations. We do not carry
key person life insurance on any of our executive officers.
Failure
to protect our proprietary technologies or maintain the right to
certain technologies may materially and adversely affect our
ability to compete.
We believe that the protection of our intellectual property
rights will continue to be important to the success of our
business. We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure
to protect our intellectual property rights. We have also
entered into confidentiality or license agreements with our
employees, business partners and other third parties. We have
implemented procedures to control access to and distribution of
documents and other proprietary information. These efforts may
fail to adequately protect our intellectual property rights.
Further, these agreements do not prevent others from
independently developing technologies that are equivalent or
superior to our technology. In addition, unauthorized parties
may attempt to copy or otherwise obtain and use our proprietary
technology. Monitoring unauthorized use of technology is
difficult, particularly in China, where the laws may not protect
our proprietary rights as fully as do the laws of the United
States.
Currently, we have eight patents registered in China. Patents
might not be issued for our future applications, and any issued
patents may not protect or benefit us or otherwise give us
adequate protection from competing products. For example, issued
patents may be circumvented or challenged and declared invalid
or unenforceable or provide only limited protection for our
technologies. We also cannot be certain that others will not
design around our patented technology, independently develop our
proprietary technology or develop effective competing
technologies on their own.
We may
be exposed to infringement or misappropriation claims by third
parties, which, if determined adversely against us, could
disrupt our business and subject us to significant liability to
third parties.
We rely upon certain proprietary confidential information,
trademarks, know-how, trade secrets and improvements and
continuing technological innovation to develop and maintain our
competitive position. In addition, we have eight registered
patents that we use in our business. Our product development
teams conduct patent searches of Chinese patents with guidance
and oversight from our in-house patent team. Our product
development projects are approved only if the result of the
patent search indicates that development of the proposed
products will not infringe on any third party intellectual
property rights. However, due to the complex nature of offset
printing technology patents, the uncertainty of construing the
scope of the patents, inadequate oversight or guidance from our
in-house patent team, and other limitations inherent to these
patent searches, the risk of our infringing on third party
intellectual property rights cannot be fully eliminated.
Third parties may claim that one or more of our products or our
various processes infringe upon their patents or other
intellectual property. A successful claim of patent or other
intellectual property infringement could subject us to
significant damages or an injunction preventing the manufacture,
sale or use of our affected products or otherwise limit our
freedom to operate. The legal protection of intellectual
property in China is significantly more limited than in the
United States and many other countries and may afford us little
or no effective protection.
Technologies licensed to and relied on by us may be subject to
infringement or corresponding claims by others which could
damage our ability to rely on such technologies. In addition,
although we endeavor to ensure that companies that work with us
possess appropriate intellectual property rights or licenses, we
cannot fully avoid the risks of intellectual property rights
infringement created by suppliers of components used in our
products or companies with which we collaborate on research and
development activities. Our current or potential competitors,
many of which have substantial resources and have made
substantial investments in competing technologies, may have
obtained or may obtain patents that
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will prevent, limit or interfere with our ability to make, use
or sell our products in China or other countries. The defense of
intellectual property claims, including patent infringement
suits, and related legal and administrative proceedings can be
both costly and time-consuming and may significantly divert the
efforts and resources of our technical and management personnel.
Furthermore, an adverse determination in any such litigation or
proceeding to which we may become a party could cause us to:
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pay damage awards;
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seek licenses from third parties;
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pay additional ongoing royalties, which could decrease our
profit margins;
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redesign our products; or
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be restricted by injunctions.
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These factors could effectively prevent us from pursuing some or
all of our business and result in our customers or potential
customers deferring, canceling or limiting their purchase or use
of our products, which could have a material adverse effect on
our financial condition and results of operations.
We may
be exposed to potential risks relating to our internal control
over financial reporting and our ability to have those controls
attested to by our independent auditors for the year ending
June 30, 2010, in accordance with the Sarbanes-Oxley Act of
2002.
We are required by the Securities and Exchange Commission to
include a report of management on our internal control over
financial reporting in our annual reports. In addition, the
independent registered public accounting firm auditing a
companys financial statements must attest to and report on
managements assessment of the effectiveness of our
internal control over financial reporting and the operating
effectiveness of our internal controls. Our management has
concluded that our internal control over our financial reporting
is not effective and has material weaknesses. Our independent
registered public accounting firm is not yet required to attest
to our managements assessment until the year ending
June 30, 2010, but once it is required to do so it may
issue a report that is qualified if it is not satisfied with our
controls at that time or the level at which our controls are
documented, designed, operated or reviewed. We have identified
significant deficiencies or material weaknesses in our internal
controls that we may not be able to remediate in a timely
manner, and investors and others may lose confidence in the
reliability of our financial statements. We can provide no
assurance that we will be in compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, be able to rectify the material
weaknesses we have identified or receive a positive attestation
from our independent auditors in the future. Any of these
possible outcomes could result in loss of investor confidence in
the reliability of our reporting processes, which could
adversely affect the price of our shares.
The
termination and expiration or unavailability of preferential tax
treatments once available to us may materially and adversely
affect our business.
Prior to January 1, 2008, enterprises established in China
were generally subject to 30% state and 3% local enterprise
income tax rate. However, enterprises that satisfied certain
conditions enjoyed preferential tax treatments. For example, in
accordance with the Foreign Invested Enterprise Income Tax Law,
which was effective until December 31, 2007, a
foreign-invested manufacturing enterprise scheduled to operate
for a period not less than ten years would be exempted from
paying income tax in its first and second years of generating
profit, followed by a 50% reduction in its tax rate in the
third, fourth and fifth years subject to the approval of
relevant tax authorities. Duoyuan China, which we believe
qualifies as a manufacturing enterprise scheduled to operate
more than ten years, enjoyed an income tax exemption for its
first two profitable years (2004 and 2005) and a 50% income
tax reduction for the
24
next three years (2006 through 2008). Since the definition of
manufacturing enterprise is unclear and subject to discretionary
interpretation and enforcement by the PRC authorities, if
Duoyuan China is deemed not qualified for such preferential tax
treatment in the prior periods by relevant tax authorities, it
may be required to refund prior tax benefits received.
Effective January 1, 2008, the PRC National Peoples
Congress enacted the PRC Enterprise Income Tax Law. The new
Enterprise Income Tax Law generally imposes a single uniform
income tax rate of 25% on all Chinese enterprises, including
foreign-invested enterprises, and eliminates or modifies most of
the tax exemptions, reductions and preferential treatments
available under the previous tax laws and regulations, subject
to the State Councils further regulation. According to the
new Enterprise Income Tax Law and relevant implementation rules,
the specific foreign-invested enterprises which used to enjoy a
tax holiday in accordance with the state laws, regulations or
the relevant rules will continue to enjoy it under the new tax
law until the expiration of such tax holiday. As a result,
Duoyuan China enjoyed the 50% tax reduction for the calendar
year 2008 with an applicable income tax rate of 12.5%. Beginning
on January 1, 2009, Duoyuan China became subject to the 25%
income tax rate. Our other two subsidiaries, Langfang Duoyuan
and Hunan Duoyuan, were both granted five-year income tax
exemptions beginning with their first profitable year, by the
relevant local governments. However, these preferential tax
treatments granted by the local governments were not supported
by relevant state laws and regulations, thus Langfang Duoyuan
and Hunan Duoyuan may be ordered by relevant authorities to
refund these tax benefits. Langfang Duoyuan became subject to
the 25% income tax rate beginning on January 1, 2008.
Pursuant to the preferential tax treatments granted by the local
government, Hunan Duoyuan will become subject to the 25% income
tax rate beginning on January 1, 2010. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies Taxes and Incentives.
If we are required to refund the tax benefits we received, our
financial condition and result of operation could be materially
and adversely affected.
The
newly enacted PRC tax law affects tax exemptions on dividends
received by us and increases the enterprise income tax rate
applicable to us.
According to the PRC enterprise income tax law applicable prior
to January 1, 2008, dividends paid to us by our Chinese
subsidiaries were exempted from the Chinese enterprise income
tax. However, such tax exemption ceased after January 1,
2008, when the new PRC Enterprise Income Tax Law and its
implementation rules became effective. Under the new Enterprise
Income Tax Law, dividends payable by a foreign invested
enterprise in the PRC to its foreign investor who is a
non-resident enterprise will be subject to a 10% withholding tax
unless such non-resident enterprises jurisdiction of
incorporation has a tax treaty with the PRC that provides for a
reduced rate of withholding tax. We are a company incorporated
in the State of Wyoming, United States. As the tax treaty
between China and the United States does not have such a
reduced rate of withholding tax on dividends, if we are
considered a non-resident enterprise, our dividend income
received from our PRC subsidiary will be subject to a 10%
withholding tax. The new Enterprise Income Tax Law also provides
that an enterprise established outside the PRC with its de
facto management body within the PRC is considered a
resident enterprise and will be subject to the enterprise income
tax at the rate of 25% on its worldwide income. According to the
Implementing Rules of PRC Enterprise Income Tax Law, de
facto management organization means organizations
implementing substantive and comprehensive management and
control over the production and business operations, staff,
accounts and property of an enterprise. On April 22, 2009,
the State Administration of Taxation promulgated a circular
which set out criteria for determining whether de facto
management bodies are located in China for overseas
incorporated, domestically controlled enterprises. However, as
this circular only applies to enterprises incorporated under
laws of foreign countries or regions that are controlled by PRC
enterprises or groups of PRC enterprises, it remains unclear how
the tax authorities will determine the location of de
facto
25
management bodies for overseas incorporated enterprises
that are controlled by individual PRC residents like us.
Although substantially all members of our management are located
in China, it is unclear whether Chinese tax authorities would
require (or permit) us to be treated as PRC resident
enterprises. If we are deemed a Chinese tax resident enterprise,
we may be subject to an enterprise income tax rate of 25% on our
worldwide income, excluding dividends received directly from
another Chinese tax resident. As a result of such changes, our
historical tax rates will not be indicative of our tax rates for
future periods and the value of our common shares may be
adversely affected.
We conduct all of our business through our Chinese subsidiaries
and almost all of income will be derived from these
subsidiaries. Currently, we have not received any dividend
payments from our Chinese subsidiaries and we, as a holding
company, do not have any revenue because all revenues are
reported by the Chinese subsidiaries.
Our
foreign shareholders may be subject to PRC withholding tax on
the dividends payable by us and upon gains realized on their
sales of our shares if we are deemed a PRC resident
enterprise.
Under the new PRC Enterprise Income Tax law, non-PRC enterprise
shareholders may be subject to a 10% withholding tax upon
dividends payable by us and gains realized on their sales or
other dispositions of our shares, if such income is deemed as
sourcing from China. Accordingly, under the new Enterprise
Income Tax Law, (1) if the enterprise that distributes
dividends is domiciled in the PRC, or (2) if gains are
realized from transferring equity interests of enterprises
domiciled in the PRC, then such dividends or capital gains are
treated as China-sourced income. It is not clear how
domicile may be interpreted under the new Enterprise
Income Tax law. It remains unclear whether the gains our non-PRC
enterprise shareholders may realize will be regarded as income
from within China if we are deemed a PRC resident enterprise
under the new Enterprise Income Tax Law. If we are deemed a PRC
resident enterprise and investors sales of our shares and
dividends payable by us are deemed as gains sourced from China,
investors sales of our shares and dividends payable by us
may be subject to withholding tax. However, if investors do not
pay the withholding tax, there is no certainty regarding whether
penalties will be imposed or the type of penalties. Any such
withholding tax or penalties imposed upon our shareholders will
reduce the returns on your investment in our shares.
We may
be unable to ensure compliance with U.S. economic sanctions
laws, especially when we sell our products to distributors over
which we have limited control.
The United States Department of the Treasurys Office of
Foreign Assets Control administers certain laws and regulations
that impose penalties on U.S. persons and, in some
instances, foreign entities owned or controlled by
U.S. persons, for conducting activities or transacting
business with certain countries, governments, entities or
individuals subject to U.S. economic sanctions. We will not
engage in or fund, directly or indirectly, any activity or
business with any country, government, entity or individual that
U.S. economic sanctions laws prohibit U.S. persons, or
foreign entities owned or controlled by U.S. persons, from
engaging in or funding. However, we sell our products through
independent
non-U.S. distributors
which are responsible for interacting with the end-user
customers of our products. Although none of these independent
non-U.S. distributors
are located in or conduct business with countries subject to
U.S. economic sanctions such as Cuba, Sudan, Iran, Syria
and Myanmar, we may not be able to ensure that such
non-U.S. distributors
comply with any applicable U.S. economic sanctions laws. As
a result of the foregoing, actions could be taken against us
that could materially and adversely affect our reputation and
have a material and adverse effect on our business, financial
condition, results of operations and prospects.
26
The
slowdown of Chinas economy caused in part by the recent
challenging global economic conditions may adversely affect our
business, results of operations and financial
condition.
Chinas economy has experienced a slowdown after the second
quarter of 2007, when the quarterly growth rate of Chinas
gross domestic product reached 11.9%. A number of factors have
contributed to this slowdown, including appreciation of the
Renminbi, which has adversely affected Chinas exports, and
tightening macroeconomic measures and monetary policies adopted
by the Chinese government aimed at preventing overheating of
Chinas economy and controlling Chinas high level of
inflation. The slowdown has been further exacerbated by the
challenging global economic conditions in the financial services
and credit markets, which in recent months has resulted in
extreme volatility and dislocation of the global capital and
credit markets.
It is uncertain how long the challenging global economic
conditions in the financial services and credit markets will
continue and how much of an adverse impact it will have on the
global economy in general and the Chinese economy specifically.
In response to the challenging global economic conditions, in
September 2008 the Chinese government began to loosen economic
measures and monetary policies by reducing interest rates and
decreasing the statutory reserve rates for banks. On
November 5, 2008, the State Council of China announced an
economic stimulus plan in the amount of $585 billion to
stimulate economic growth and bolster domestic demand. We cannot
assure you that the economic stimulus plan or various
macroeconomic measures and monetary policies adopted by the
Chinese government to guide economic growth and the allocation
of resources will be effective in sustaining the growth of the
Chinese economy. The slowdown of Chinas economy could lead
to lower demand for commercial printing services in China,
because demand for commercial printing services is dependent on
strong general economic activities and conditions. Lower demand
for commercial printing services may decrease demand for offset
printing equipment, which could decrease demand for our products
and adversely and materially affect our business, results of
operations and financial condition.
Claims
by our shareholders are subordinate to existing and future
liabilities and obligations of our Chinese
subsidiaries.
Because all of our assets are held by our Chinese subsidiaries,
the claims of our shareholders will be structurally subordinate
to all existing and future liabilities and obligations and trade
payables of our Chinese subsidiaries. In the event of our
bankruptcy, liquidation or reorganization, our assets and those
of our Chinese subsidiaries will be available to satisfy the
claims of our shareholders only after all of our
subsidiaries liabilities and obligations have been paid in
full.
Risks Related to Doing Business in China
Recent
Chinese regulations relating to the establishment of offshore
special purpose companies by Chinese residents may subject our
Chinese resident shareholders to personal liability and limit
our ability to acquire Chinese companies or inject capital into
our Chinese subsidiaries, limit our Chinese subsidiaries
ability to distribute profits to us, or otherwise materially and
adversely affect our business.
The State Administration of Foreign Exchange, or SAFE, issued
the Notice on Issues Relating to the Administration of Foreign
Exchange in Fund-Raising and Reverse Investment Activities of
Domestic Residents Conducted via Offshore Special Purpose
Companies in October 2005, which became effective in November
2005 namely Notice 75, and an implementing rule in May 2007
namely Notice 106, collectively the SAFE Rules. According to the
SAFE Rules, Chinese residents, including both legal persons and
natural persons (including Chinese citizens and foreign
citizens) who reside in China, are required to register with the
SAFE or its local branch before establishing or controlling any
company outside China, referred to in the SAFE rules as an
offshore special purpose company, for the purpose of
financing that offshore company with their ownership interests
in the assets of or their interests in
27
any Chinese enterprise. In addition, a Chinese resident that is
a shareholder of an offshore special purpose company is required
to amend its SAFE registration with the local SAFE branch with
respect to that offshore special purpose company in connection
with the injection of equity interests or assets of a Chinese
enterprise in the offshore company or overseas fund raising by
the offshore company, or any other material change in the
capital of the offshore company, including any increase or
decrease of capital, transfer or swap of share, merger,
division, long-term equity or debt investment or creation of any
security interest. The SAFE Rules apply retroactively. As a
result, Chinese residents who have established or acquired
control of offshore companies that have made onshore investments
in China in the past were required to complete the relevant
registration procedures with the competent local SAFE branch. If
any Chinese resident failed to file its SAFE registration for an
existing offshore company, any dividends remitted by the onshore
entity to its overseas parent since April 21, 2005 will be
considered to be an evasion of foreign exchange purchase rules,
and the payment of the dividend will be illegal. As a result of
any illegal action of this type, both the onshore entity and its
actual controlling person(s) can be fined. In addition, failure
to comply with the registration procedures may result in
restrictions on the relevant onshore entity, including
prohibitions on the payment of dividends and other distributions
to its offshore parent or affiliate and capital inflow from the
offshore company. Chinese resident shareholders of the offshore
company may also be subject to penalties under Chinese foreign
exchange administration regulations.
Our majority shareholder, Duoyuan Investments Limited, is wholly
owned by Wenhua Guo, who is the chairman of our board of
directors and a Chinese citizen as defined in the SAFE Rules. We
have asked Mr. Guo, and will ask our future shareholders
and beneficial owners who are Chinese residents, to make the
necessary applications and filings as required under Notice 75
and other related rules. Mr. Guo had submitted the
application in September 2006 pursuant to Notice 75. Because of
lack of implementation procedures, SAFE did not issue a
registration certificate to Mr. Guo. In May 2007, SAFE
promulgated the Notice 106 and set out the relevant procedures.
Mr. Guo resubmitted his application with SAFE at the end of
August 2009. SAFE is still reviewing his application. We cannot
provide any assurances that he can obtain such SAFE
registration. Moreover, due to uncertainty concerning the
reconciliation of Notice 75 with other approval or registration
requirements, it remains unclear how Notice 75, and any future
legislation concerning offshore or cross-border transactions,
will be interpreted, amended and implemented by the relevant
government authorities. We will attempt to comply, and attempt
to ensure that Mr. Guo and our future shareholders and
beneficial owners who are subject to these rules comply, with
the relevant requirements. However, we cannot provide any
assurances that all of our shareholders and beneficial owners
who are Chinese residents will comply with our request to make
or obtain any applicable registrations or comply with other
requirements required by Notice 75 or other related rules. The
failure or inability of our Chinese resident shareholders or
beneficial owners to register with the SAFE in a timely manner
pursuant to the SAFE Rules, or the failure or inability of any
future Chinese resident shareholders or beneficial owners to
make any required SAFE registration or comply with other
requirements under the SAFE Rules, may subject these
shareholders or beneficial owners to fines or other sanctions
and may also limit our ability to contribute additional capital
into or provide loans to our Chinese subsidiaries, limit our
Chinese subsidiaries ability to pay dividends to us, repay
shareholder loans or otherwise distribute profits or proceeds
from any reduction in capital, share transfer or liquidation to
us, or otherwise adversely affect us.
We may
not be able to enforce our legal rights in China or elsewhere,
which could materially and adversely affect our
business.
Although we are incorporated in the State of Wyoming, United
States, all of our operations are in China. Our operating
subsidiaries are formed under Chinese law, and all of our assets
are located in China. As a result, most of our material
agreements are governed by Chinese law. Since all of our revenue
is derived from our operations in China, our business, financial
condition and results of operations are subject to legal
developments in China. There is no assurance that we will be
able to
28
enforce any of our material agreements or that remedies will be
available outside of China with respect to our material
agreements. The legal system and enforcement of laws in China
may not be as transparent as those in the United States. The
Chinese judiciary is relatively inexperienced in enforcing
corporate and commercial law, leading to a high degree of
uncertainty regarding the outcome of any litigation. The
inability to enforce or obtain a remedy under any of our future
agreements could result in a significant loss of business,
business opportunities or capital.
It may
be difficult to serve us with legal process or enforce judgments
against us or members of our management.
A substantial majority of our executive officers and our
directors reside outside of the United States. Because our
operations, assets and officers and directors are located
outside of the United States, it may not be possible for
U.S. investors to enforce their legal rights, effect
service of process upon our directors or officers or enforce
civil or criminal judgments of U.S. courts against us or
our directors and executive officers under U.S. federal
securities laws. Moreover, we have been advised by our PRC
counsel, Commerce & Finance Law Offices, that
Chinas treaties do not provide for reciprocal recognition
and enforcement of judgments by U.S. courts.
We may
have difficulty establishing adequate management, legal and
financial controls in China, which could impair our planning
processes and make it difficult to provide accurate reports of
our operating results.
China has historically not followed Western-style management and
financial reporting concepts and practices, and its access to
modern banking, computer and other control systems has been
limited. We may have difficulty hiring and retaining a
sufficient number of qualified employees to work in China with
skills in these areas. As a result, we may experience difficulty
establishing management, legal and financial controls,
collecting financial data, preparing financial statements, books
of account and corporate records and instituting business
practices that meet U.S. standards. Consequently, it may be
difficult for our management to forecast our needs and present
accurate operating results.
The
Chinese government could change its policies toward private
enterprises, which could materially and adversely affect our
business.
Our business is subject to political and economic uncertainties
in China and may be adversely affected by its political,
economic and social developments. Over the past several years,
the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and
greater economic decentralization. The Chinese government may
not continue to pursue these policies or may alter them to our
detriment from time to time. Changes in policies, laws and
regulations, including their interpretation, or the imposition
of confiscatory taxation, restrictions on currency conversion,
restrictions or prohibitions on dividend payments to
shareholders, devaluations of currency or the nationalization or
other expropriation of private enterprises could have a material
adverse effect on our business. Nationalization or expropriation
could result in the total loss of our investment in China.
Economic,
political and social conditions in China could materially and
adversely affect our business.
All of our business, assets and operations are located in China.
The economy of China differs from the economies of most
developed countries in many respects, including government
involvement, level of development, growth rate, control of
foreign exchange and allocation of resources. The economy of
China has been transitioning from a planned economy to a more
market-oriented economy. Although the Chinese government has
recently implemented measures emphasizing the utilization of
market forces for economic reform, reduction of state ownership
of productive assets and establishment of sound corporate
governance in business enterprises, a substantial portion of
productive assets in China is still owned by the Chinese
government. In addition, the Chinese government continues to
play a significant
29
role in regulating industry by imposing industrial policies. It
also exercises significant control over Chinas economic
growth through the allocation of resources, controlling payment
of foreign currency-denominated obligations, setting monetary
policy and providing preferential treatment to particular
industries or companies. Therefore, the Chinese
governments involvement in the economy could adversely
affect our business, financial condition or operating results.
The Chinese government has implemented various measures from
time to time to control the rate of economic growth. Some of
these measures benefit the overall economy of China, but may
have a negative effect on our business, financial condition and
operating results.
Government
control of currency conversion and exchange rate fluctuations
may materially and adversely affect our business.
All of our revenue and expenses are denominated in Renminbi, the
currency of China. A portion of such revenue may be converted
into other currencies to meet our foreign currency obligations.
In addition, we incur approximately 1% of our expenses in
foreign currencies, mostly for professional services such as
auditors, attorneys and other intermediaries. Foreign exchange
transactions under our capital account, including principal
payments with respect to foreign currency-denominated
obligations, continue to be subject to significant foreign
exchange controls and require the approval of the SAFE in China.
These limitations could affect our ability to obtain foreign
exchange through debt or equity financing or to obtain foreign
exchange for capital expenditures.
The Renminbi is reported to be measured against a basket of
currencies determined by the Peoples Bank of China. The
Renminbi may appreciate or depreciate significantly in value
against the U.S. dollar in the long term, depending on the
fluctuation of the basket of currencies against which it is
currently valued, or it may be permitted to enter into a full
float, which may also result in a significant appreciation or
depreciation of the Renminbi against the U.S. dollar.
Because all of our earnings and cash assets are denominated in
Renminbi and our financial reporting is denominated in
U.S. dollars, fluctuations in the exchange rates between
the U.S. dollar and the Renminbi will affect our financial
results reported in U.S. dollars terms without giving
effect to any underlying change in our business, financial
condition or results of operations. Fluctuations in the exchange
rate will also affect the relative value of any dividend we
issue that will be exchanged into U.S. dollars and earnings
from, and the value of, any U.S. dollar denominated
investments we make in the future.
Historically, we have not engaged in exchange rate hedging
activities. Although we may implement hedging strategies to
mitigate exchange rate risk, these strategies may not eliminate
our exposure to foreign exchange rate fluctuations and may
involve costs and risks of their own, such as ongoing management
time and expertise, external costs to implement the strategy and
potential accounting implications.
Uncertainties
with respect to the Chinese legal system could limit the
protections available to our shareholders and us.
The Chinese legal system is based on written statutes and their
interpretation by the Supreme Peoples Court. Although the
Chinese government has introduced new laws and regulations to
modernize its business, securities and tax systems, China does
not yet possess a comprehensive body of business law. Because
Chinese laws and regulations are relatively new, interpretation,
implementation and enforcement of these laws and regulations
involve uncertainties and inconsistencies. Therefore, it may be
difficult to enforce contracts under Chinese law. These
uncertainties could materially and adversely affect our
business, financial condition and operating results. In
addition, as the Chinese legal system develops, changes in these
laws and regulations, their interpretation or their enforcement
may have a material adverse effect on our business operations.
Moreover, interpretative case law does not have the same
precedential value in China as in the United States, so legal
compliance in China may be more difficult or expensive. These
uncertainties could limit the legal protections available to us
and other foreign investors, including our shareholders.
30
We may
be unable to complete a business combination transaction
efficiently or on favorable terms due to complicated merger and
acquisition regulations which became effective on
September 8, 2006, as amended on June 22,
2009.
The new Regulation on Mergers and Acquisitions of Domestic
Companies by Foreign Investors governs the approval process by
which a Chinese company may participate in an acquisition of
assets or equity interests. Depending on the structure of the
transaction, the new M&A rules will require the Chinese
parties to make a series of applications to certain government
agencies. In some instances, the application process may require
the presentation of economic data concerning a transaction,
including appraisals of the target business and evaluations of
the acquirer, which are designed to allow the government to
assess the transaction. Government approvals will have
expiration dates by which a transaction must be completed and
reported to the government agencies. Compliance with the new
M&A rules is likely to be more time consuming and expensive
than in the past and the government can now exert more control
over the combination of two businesses. Accordingly, due to the
new M&A rules, our ability to engage in business
combination transactions has become significantly more
complicated, time consuming and expensive, and we may not be
able to negotiate a transaction that is acceptable to our
shareholders or sufficiently protect their interests in a
transaction. The new M&A rules allow Chinese government
agencies to assess the economic terms of a business combination
transaction. Parties to a business combination transaction may
have to submit to the Ministry of Commerce and other relevant
government agencies an appraisal report, an evaluation report
and the acquisition agreement, all of which form part of the
application for approval, depending on the structure of the
transaction. The new M&A rules also prohibit a transaction
at an acquisition price obviously lower than the appraised value
of the Chinese business or assets and, in certain transaction
structures, requires that consideration must be paid within
defined periods, generally not in excess of a year. The new
M&A rules also limit our ability to negotiate various terms
of the acquisition, including aspects of the initial
consideration, contingent consideration, holdback provisions,
indemnification provisions and provisions relating to the
assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are
prohibited. Therefore, the new M&A rules may impede our
ability to negotiate and complete a business combination
transaction on financial terms that satisfy our investors and
protect our investors economic interests.
The
new provisions of the PRC Employment Contract Law may
substantially increase our labor-related costs in the
future.
The PRC Employment Contract Law, which became effective as of
January 1, 2008, contains many more provisions favorable to
employees than prior labor regulations in effect in China. This
may substantially increase our labor-related costs in our future
operations. According to the new law, an employee is entitled to
terminate his or her employment relationship with his or her
employer for certain causes, such as delay in payment of wages
or social insurance contribution or dissatisfactory labor
protection, and under such circumstances the employer is liable
to pay compensation to the employee. The amount of such
compensation payment shall be one months salary for each
year that the employee has served the employer. If the monthly
wage of an employee is three times greater than the average
monthly wage in the previous year for employees as announced by
the peoples government at the municipal level directly
under the central government or at the city-with-district level
where the Employer is located, the rate for the financial
compensations paid to him shall be three times the average
monthly wage of employees and shall be for not more than
12 years of work. An employer shall also be liable to
compensate an employee when the employer decides not to renew an
existing employment contract that is about to expire, unless the
employee refuses to renew the employment contract even though
the employer offers equal or more favorable terms than those in
the existing employment contract. In addition, an employer is
obligated to conclude an open-ended employment contract with an
employee after two consecutive terms of fixed-term employment,
which means the employer will be liable to pay damages to an
employee if it terminates this employee without cause, until the
employee reaches an age at which he or she is eligible for
pension. We may have greater difficulty terminating
underperforming employees and may incur higher level of labor
costs in order to
31
comply with the provisions of the new law, which may have a
material adverse effect on our business, financial condition and
operating results.
The
contractual arrangements entered into between our Chinese
subsidiaries may be subject to audit or challenge by the Chinese
tax authorities. Any finding that our Chinese subsidiaries owe
additional taxes could substantially reduce our net earnings and
the value of our shareholders investments.
Under Chinese laws and regulations, arrangements and
transactions among affiliated parties may be subject to audit or
challenge by the Chinese tax authorities. We could face material
and adverse tax consequences if the Chinese tax authorities
determine that the contractual arrangements between our Chinese
subsidiaries do not represent arms-length prices and, as a
result, apply a transfer pricing adjustment to any of our
income. A transfer pricing adjustment could, among other things,
result in a reduction of the expense deductions recorded by our
Chinese subsidiaries for PRC tax purposes or an increase in
taxable income, any of which could increase our tax liabilities.
In addition, the Chinese tax authorities may impose late payment
fees and other penalties on our Chinese subsidiaries for
under-paid taxes.
We
rely principally on dividends and other distributions paid by
our Chinese subsidiaries. Limitations on the ability of our
Chinese subsidiaries to pay dividends to us could have a
material adverse effect on our business.
We are a holding company and we rely principally on dividends
and other distributions paid by our Chinese subsidiaries for our
cash and financing requirements, including the funds necessary
to pay dividends and other cash distributions to our
shareholders, service any debt we may incur and pay our
operating expenses. If our Chinese subsidiaries incur debt on
their own behalf, the instruments governing the debt may
restrict their ability to pay dividends or make other
distributions to us. Furthermore, relevant Chinese laws and
regulations permit payments of dividends by our Chinese
subsidiaries only out of their respective retained earnings
after tax, if any, determined in accordance with Chinese
accounting standards and regulations.
Under Chinese laws and regulations, each of our operating
subsidiaries is required to set aside a portion of its net
income each year to fund certain statutory reserves. These
reserves, together with the registered equity, are not
distributable as cash dividends. As of June 30, 2009, we
had statutory reserves of $9.4 million and total
shareholders equity of $126.7 million. As a result of
these Chinese laws and regulations, each of our Chinese
subsidiaries is restricted in its ability to transfer a portion
of its net assets to us, including in the form of dividends,
loans or advances. Limitations on the ability of our Chinese
subsidiaries to pay dividends to us could adversely limit our
ability to grow, make investments or acquisitions that could be
beneficial to our businesses, pay dividends or otherwise fund
and conduct our business.
If the China Securities Regulation Commission, or
CSRC, or another PRC regulatory agency, determines that CSRC
approval is required for this offering, it could adversely
affect our business and reputation and the resale price of our
shares, and may also create uncertainties for this
offering.
On August 8, 2006, six Chinese regulatory agencies,
including the Ministry of Commerce, the State Assets Supervision
and Administration Commission, the State Administration for
Taxation, the State Administration for Industry and Commerce,
the CSRC, and the State Administration of Foreign Exchange, or
SAFE, jointly issued the Regulations on Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, which became
effective on September 8, 2006. This regulation, among
other things, includes provisions that require that an offshore
special purpose vehicle formed for purposes of overseas listing
of equity interests in Chinese companies and controlled directly
or indirectly by Chinese companies or individuals obtain the
approval of the CSRC prior to the listing and trading of such
special purpose vehicles securities on an overseas stock
exchange.
32
On September 21, 2006, CSRC published on its website
procedures regarding its approval of overseas listings by
special purpose vehicles. The CSRC approval procedures require
the filing of a number of documents with CSRC, and it would take
several months to complete the approval process.
The application of this new regulation remains unclear with no
consensus currently existing among leading Chinese law firms
regarding the scope or the applicability of the CSRC approval
requirement. Commerce & Finance Law Offices, which we
have engaged in relation to these CSRC rules, has advised us
that, based on their understanding of current Chinese laws,
regulations and rules, including the New Merger Regulation, and
the CSRC procedures announced on September 21, 2006, this
regulation does not require us to submit an application to the
CSRC for its approval of this offering of our shares and their
listing and trading on the New York Stock Exchange unless we are
clearly required to do so by possible later rules of the CSRC.
If the CSRC requires that we obtain its approval prior to the
completion of this offering, this offering will be delayed until
we obtain CSRC approval, which may take several months or may be
unattainable. If prior CSRC approval is required but not
obtained, we may face regulatory actions or other sanctions from
the CSRC or other Chinese regulatory agencies. These regulatory
agencies may impose fines and penalties on our operations in
China, limit our operating privileges in China or take other
actions that could have a material adverse effect on our
business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our shares. The
CSRC or other Chinese regulatory agencies may also take actions
requiring us, or making it advisable for us, to halt this
offering before settlement and delivery of the shares offered
hereby. Consequently, if you engage in market trading or other
activities in anticipation of and prior to settlement and
delivery, you do so at the risk that settlement and delivery may
not occur.
Also, if the CSRC subsequently requires that we obtain its
approval, we may be unable to obtain a waiver of the CSRC
approval requirement, if and when procedures are established to
obtain such a waiver. Any uncertainties
and/or
negative publicity regarding this CSRC approval requirement
could have a material adverse effect on the trading price of our
shares.
Compliance with the new regulations is likely to be more time
consuming and expensive than in the past and the government can
now exert more control over the combination of two businesses.
Accordingly, due to this regulation, our ability to engage in
business combination transactions has become significantly more
complicated, time consuming and expensive, and we may not be
able to negotiate a transaction that is acceptable to our
shareholders or sufficiently protect their interests in a
transaction. The new regulation allows Chinese government
agencies to assess the economic terms of a business combination
transaction. Parties to a business combination transaction may
have to submit to the Ministry of Commerce and other relevant
government agencies an appraisal report, an evaluation report
and the acquisition agreement, all of which form part of the
application for approval, depending on the structure of the
transaction. The regulations also prohibit a transaction at an
acquisition price obviously lower than the appraised value of
the Chinese business or assets and in certain transaction
structures, require that consideration must be paid within
defined periods, generally not in excess of a year. The
regulation also limits our ability to negotiate various terms of
the acquisition, including aspects of the initial consideration,
contingent consideration, holdback provisions, indemnification
provisions and provisions relating to the assumption and
allocation of assets and liabilities. Transaction structures
involving trusts, nominees and similar entities are prohibited.
Therefore, such regulation may impede our ability to negotiate
and complete a business combination transaction on financial
terms that satisfy our investors and protect our investors
economic interests.
33
We
face risks related to health epidemics and other outbreaks that
may disrupt our operations and have a material adverse effect on
our business and results of operations.
Our business could be materially and adversely affected by the
effects of H1N1 flu (swine flu), avian flu, severe acute
respiratory syndrome or other epidemics or outbreaks. In April
2009, an outbreak of H1N1 flu (swine flu) first occurred in
Mexico and quickly spread to other countries, including the
U.S. and China. In the last decade, China has suffered
health epidemics related to the outbreak of avian influenza and
severe acute respiratory syndrome. Any prolonged occurrence or
recurrence of H1N1 flu (swine flu), avian flu, severe acute
respiratory syndrome or other adverse public health developments
in China may have a material adverse effect on our business and
operations. These health epidemics could result in severe travel
restrictions and closures that would restrict our ability to
ship our products. Potential outbreaks could also lead to
temporary closure of our manufacturing facilities, our
suppliers facilities
and/or our
end-user customers facilities, leading to reduced
production, delayed or cancelled orders, and decrease in demand
for our products. Any future health epidemic or outbreaks that
could disrupt our operations
and/or
restrict our shipping abilities may have a material adverse
effect on our business and results of operations.
We may
be exposed to monetary fines by the local housing authority and
claims from our employees in connection with Hunan
Duoyuans non-compliance with regulations with respect to
contribution of housing provident funds for
employees.
According to the relevant PRC regulations on housing provident
funds, PRC enterprises are required to contribute housing
provident funds for their employees. The monthly contributions
must be at least 5% of each employees average monthly
income in the previous year. Our subsidiaries in the PRC, other
than Hunan Duoyuan, have complied with the housing provident
funds regulations. Hunan Duoyuan has not paid such funds for its
employees since its establishment and the accumulated unpaid
amount is approximately RMB 2.2 million. Under local
regulations on collection of housing provident funds in Shaoyang
City where Hunan Duoyuan is located, the local housing authority
may require Hunan Duoyuan to rectify its non-compliance by
setting up bank accounts and making payment and relevant filings
for the unpaid housing funds for its employees within a
specified time period. If Hunan Duoyuan fails to do so within
the specified time period, the local housing authority may
impose a monetary fine of RMB 10,000 to RMB 50,000 on it and may
also apply to the local peoples court for enforcement.
Hunan Duoyuan employees may also be entitled to claim payment of
such funds individually. So far, we have not received any notice
from the local housing authority or any claim from our current
and former employees regarding Hunan Duoyuans
non-compliance with the regulations. If any of the foregoing
happens, our reputation, financial condition and results of
operations could be materially and adversely affected.
Risks
Associated with this Offering and our Common Shares
We do
not know whether a market will develop for our common shares or
what the market price of our common shares will
be.
Before this offering, there was no public trading market for our
common shares. If a market does not develop or is not sustained,
it may be difficult for you to sell your shares at an attractive
price or at all. It is possible that in one or more future
periods our operating results may be below the expectations of
public market analysts and investors and, as a result of these
and other factors, the price of our common shares may decline.
The
price of our common shares may be volatile.
The trading price of our common shares following this offering
may fluctuate substantially. The price of our common shares that
will prevail in the market after this offering may be lower than
the price you
34
pay, depending on many factors, some of which are beyond our
control and may not be related to our operating performance. The
price of our common shares may fluctuate as a result of:
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price and volume fluctuations in the overall stock market from
time to time;
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significant volatility in the market price and trading volume of
comparable companies;
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actual or anticipated changes in our earnings or fluctuations in
our operating results or in the expectations of securities
analysts;
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announcements of technological innovations, new products,
strategic alliances or significant agreements by us or by our
competitors;
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significant developments relating to our relationships with our
customers or suppliers;
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end-user customer demand for our products;
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general economic conditions and trends;
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catastrophic events;
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sales of large blocks of our shares; and
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recruitment or departure of key personnel.
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In the past, following periods of volatility in the market price
of a companys securities, securities class action
litigation has often been brought against that company. Because
of the potential volatility of our share price, we may become
the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert
managements attention and resources from our business.
Future
sales of our common shares in the public market, or the
perception that such sales could occur, could lower our share
price and impair our ability to raise funds in new equity
offerings.
Future sales of a substantial number of our common shares in the
public market, or the perception that such sales could occur,
could adversely affect the prevailing market price of our common
shares and could make it more difficult for us to raise funds
through future public offerings of our equity securities.
After this offering, approximately 31,375,050 common shares will
be outstanding. Of these shares, approximately
7,207,228 common shares, including the
6,269,462 common shares sold in this offering, will be
freely tradable, without restriction, in the public market. Of
our outstanding common shares, 24,167,822 are subject to
180-day
contractual
lock-up
agreements with our underwriters. Piper Jaffray may, in its
discretion, permit our directors, executive officers, employees
and existing shareholders who are subject to these contractual
lockups to sell shares prior to the expiration of the
lock-up
agreements. See Underwriting. The common shares
subject to these
lock-up
agreements will become eligible for sale in the public market
upon expiration of these
lock-up
agreements, subject to limitations imposed by Rule 144
under the Securities Act of 1933, as amended, or Securities Act.
See Shares Eligible for Future Sales. If the holders
of our common shares were to attempt to sell a substantial
amount of their holdings at once, the market price of our common
shares could decline. Moreover, the perceived risk of this
potential dilution could cause shareholders to attempt to sell
their common shares and investors to short our common shares, a
practice in which an investor sells shares that he or she does
not own at prevailing market prices, hoping to purchase shares
later at a lower price to cover the sale. As each of
35
these events would cause the number of common shares being
offered for sale to increase, our common shares market
price would likely further decline. All of these events could
combine to make it very difficult for us to sell equity or
equity-related securities in the future at a time and price that
we deem appropriate.
We do
not intend to pay dividends in the foreseeable
future.
To date, we have paid no dividends. Our board of directors does
not intend to pay any dividends in the foreseeable future. The
holders of our common shares are entitled to receive dividends
when, as and if declared by our board of directors out of
legally available funds. As a result, a return on an investment
in our common shares may be realized only through a sale of such
shares, if at all.
We
have not held any annual shareholder meetings since we acquired
Duoyuan China in 2006, and as a result, our shareholders have
limited ability to exercise their voting rights.
We have not held an annual meeting of shareholders since we
acquired Duoyuan China in 2006. Under Wyoming law, the district
court of the county in which a corporations principal
office is located may summarily order a meeting be held upon
application of any member or other person entitled to
participate in an annual or regular meeting, if an annual
meeting was not held within fifteen months after the
corporations last annual meeting. Because we have not held
regular shareholders meetings, our shareholders
ability to exercise their voting rights may be limited.
Wenhua
Guo, the chairman of our board of directors and beneficial owner
of 70.25% of our common shares, has substantial influence over
us, and his interests may not be aligned with the interests of
our other shareholders.
Wenhua Guo, the chairman of our board of directors, beneficially
owns 70.25% of our outstanding common shares prior to this
offering, and he will beneficially own approximately 55.98% of
our common shares following this offering, assuming no exercise
of the underwriters over-allotment option. As a result, he
has significant influence over our business, including decisions
regarding mergers, consolidations, the sale of all or
substantially all of our assets, election of directors, and
other significant corporate actions, which may at times conflict
with the interests of our other shareholders. This concentration
of ownership may also have the effect of discouraging, delaying
or preventing a future change of control, which in turn could
prevent our shareholders from recognizing a gain in the event
that a favorable offer is extended.
We
have the right to issue additional common shares and preferred
shares without the consent of our shareholders. This would have
the effect of diluting our shareholders ownership in us
and could decrease the value of our shares.
As of the date of this prospectus, we have
100,000,000 shares authorized for issuance, of which
25,000,050 common shares are issued and outstanding, with
74,999,950 authorized common shares available for issuance for
any purpose without shareholder approval. In addition, on or
prior to completion of this offering, we will grant 875,000
restricted common shares and unvested options to purchase
180,000 common shares. The issuance of additional shares would
dilute shareholders percentage ownership of us. We have
outstanding warrants to acquire 1,226,972 common shares.
In addition, our articles of incorporation authorize the
issuance of preferred shares, the rights, preferences,
designations and limitations of which may be set by our board of
directors. While no preferred shares are currently outstanding,
our articles of incorporation authorize the issuance of up
to 1,000,000 preferred shares at the discretion of our
board of directors. Preferred shares may be issued upon the
filing of amended articles of incorporation and the payment of
required fees, requiring no further shareholder action. If
issued, the rights, preferences, designations and limitations of
the preferred shares would be set by our board of directors and
could operate to the disadvantage of our outstanding
36
common shares. These terms could include, among others,
preferences as to dividends and distributions on liquidation.
You
will experience immediate and substantial dilution in your
investment.
The offering price of the common shares is substantially higher
than the net tangible book value per share of our common shares,
which was $5.03 as of June 30, 2009. Therefore, when you
purchase our common shares in this offering at an assumed
initial public offering price of $9.50, which is the mid-point
of the price range set forth on the cover of this prospectus,
you will incur immediate dilution of $3.98 per common share.
Holders of the common shares will experience further dilution if
options, warrants or other rights to purchase our common shares
that are outstanding or that we may issue in the future are
exercised or converted, or if we issue additional shares of our
common shares, at prices lower than our net tangible book value
at such time.
The
conversion of outstanding derivative securities could cause our
shareholders ownership to be diluted and may decrease the
value of our shareholders investments.
Outstanding derivative securities and current and future
obligations to issue our securities to various parties may
dilute the value of our shareholders investments. On
October 9, 2006, as part of our compensation to them, we
issued to CCG Investor Relations Partners, LLC warrants to
acquire 37,287 shares at a strike price of $4.61 per share.
On November 2, 2006, we issued warrants to Roth Capital
Partners, LLC to purchase 613,260 shares at a strike price
of $4.21 per share for a term of five years. These warrants are
exercisable at any time after June 30, 2008 on a cashless
or net exercise basis. In addition, in December 2007 we issued
to 25 of our November 2006 private placement investors warrants
to purchase 576,425 shares at a strike price of $5.76 per
share for a term of five years starting on June 30, 2008,
which are exercisable at any time after June 30, 2008 on a
cashless basis. For as long as these warrants are outstanding
and exercisable, the warrant holder will have an opportunity to
profit from a rise in the market price of our common shares
without assuming the risks of ownership. The outstanding
warrants may have an adverse effect on the terms upon which we
can obtain additional capital. We expect that the warrant
holders will exercise the warrants at a time when we are able to
obtain equity capital on terms more favorable than the exercise
prices provided by the warrants. Holders of our common shares do
not have pre-emptive rights.
We
will retain broad discretion in using the net proceeds from this
offering and may spend a substantial portion in ways with which
you do not agree.
Our management will retain broad discretion to allocate the net
proceeds we receive from this offering. The net proceeds may be
applied in ways with which you and other investors in the
offering may not agree, or which do not increase the value of
your investment. Our management might not be able to achieve a
significant return, if any, on any investment of these net
proceeds.
37
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, principally
in the sections entitled Summary, Risk
Factors, Use of Proceeds,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business. Generally, the words expect,
estimate, anticipate,
predict, believe, plan,
will, may, should,
intend, continue, and similar
expressions or the negative thereof or comparable terminology
are intended to identify forward-looking statements which
include, but are not limited to, statements concerning our
expectations and those of our directors and officers regarding
our working capital requirements, financing requirements,
business prospects, and other statements of expectations,
beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not
historical facts. Such statements are not guarantees of future
performance and subject to certain risks and uncertainties,
including the matters set forth in this prospectus, which could
cause actual results or outcomes to differ materially from those
projected. Although we do not make forward-looking statements
unless we believe we have a reasonable basis for doing so, we
cannot guarantee their accuracy, and actual results may differ
materially from those we anticipated due to a number of
uncertainties, many of which cannot be foreseen. Undue reliance
should not be placed on these forward-looking statements which
speak only as of the date hereof. Our actual results could
differ materially from those anticipated in these
forward-looking statements for many reasons, including, among
others, the risks we face that are described in the section
entitled Risk Factors and elsewhere in this
prospectus. We do not ordinarily make projections of our future
operating results and undertake no obligation (and expressly
disclaim any obligation) to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.
We believe it is important to communicate our expectations to
our investors. There may be events in the future, however, that
we are unable to predict accurately or over which we have no
control. The risk factors listed on the previous pages, as well
as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe
in our forward-looking statements. Before you invest in our
common shares, you should be aware that the occurrence of the
events described in the previous risk factors and elsewhere in
this prospectus could negatively impact our business, operating
results, financial condition and the price of our common shares.
We have based these forward-looking statements largely on our
current expectations and projections about future events and
financial trends that we believe may affect our financial
condition, results of operations, business strategy and
financial needs. These forward-looking statements include,
without limitation, statements relating to:
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our goals and strategies;
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our future business development, results of operations and
financial condition;
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our ability to maintain a strong relationship with distributors
or end-user customers or to expand our distribution network;
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our ability to control our operating costs and expenses;
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our ability to generate revenue in new post-press products;
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changes in our management team and other key personnel;
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introduction by our competitors of new or enhanced products;
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38
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the effect of competition on demand for and prices of our
products;
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fluctuations in general economic conditions;
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Chinese tax policies and regulations; and
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expected growth and change in the Chinese printing equipment
market.
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This prospectus also contains data related to the Chinese
printing industry, the Chinese printing equipment industry and
broad macroeconomic factors that we believe drive the growth of
the Chinese printing equipment market. These market data and
industry statistics, based on independent industry publications
and other publicly available information, include projections
that are based on a number of assumptions. The Chinese printing
equipment market may not expand at the rates projected by the
market data, or at all. The failure of the market to grow at the
projected rates may have a material adverse effect on our
business and the market price of our common shares. In addition,
the complex and changing nature of the Chinese printing
industry, the Chinese printing equipment industry and the broad
macroeconomic factors discussed in this prospectus subject any
projections or estimates relating to the growth prospects or
future conditions of the Chinese printing equipment market to
significant uncertainties. If any one or more of the assumptions
underlying the market data proves to be incorrect, actual
results may differ from the projections based on these
assumptions. You should not place undue reliance on these
forward-looking statements.
The forward-looking statements contained in this prospectus
speak only as of the date of this prospectus or, if obtained
from third party studies or reports, the date of the
corresponding study or report, and are expressly qualified in
their entirety by the cautionary statements in this prospectus.
Since we operate in an emerging and evolving environment and new
risk factors emerge from time to time, you should not rely upon
forward-looking statements as predictions of future events.
Except as otherwise required by the securities laws of the
United States, we undertake no obligation to update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise, to reflect events or
circumstances after the date of this prospectus or to reflect
the occurrence of unanticipated events.
39
USE OF
PROCEEDS
We estimate that we will receive $47.4 million in net
proceeds from our sale of 5,500,000 common shares sold by us in
this offering. Our net proceeds from this offering represent the
amount we expect to receive after paying the underwriting
discounts and commissions and other expenses of the offering
payable by us. For purposes of estimating our net proceeds, we
have assumed that the initial public offering price of our
common shares will be $9.50 per common share, which is the
midpoint of the price range set forth on the cover page of this
prospectus. A $1.00 increase, or decrease, in the assumed
initial public offering price would increase, or decrease, net
proceeds to us from this offering by approximately
$5.1 million after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
Our management will have significant flexibility in applying the
net proceeds of this offering. We intend to use our net proceeds
from this offering as follows:
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approximately $30.0 million to build a factory to
manufacture cold-set corrugated paper machines at our Langfang
Duoyuan facility;
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approximately $10.0 million to improve and upgrade our
existing manufacturing facilities and production lines; and
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the balance for general corporate purposes.
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We pursue acquisitions of other businesses as part of our
business strategy and may use a portion of the net proceeds to
fund acquisitions. We have no agreement with respect to any
future acquisition, although we assess opportunities on an
ongoing basis and from time to time have discussions with other
companies about potential transactions.
Pending their use, we will invest the net proceeds of this
offering in a variety of capital preservation investments,
including short-term or long-term interest-bearing, marketable
securities.
We will not receive any of the proceeds from the sale by the
selling shareholders of our common shares in this offering,
including any common shares sold by the selling shareholders
upon exercise of the underwriters over-allotment option.
40
DIVIDEND
POLICY
We have not declared or paid any dividends on our common shares
and we do not anticipate paying any cash dividends in the near
future. The timing, amount and form of future dividends, if any,
will depend, among other things, on our future results of
operations and cash flows, our general financial condition and
future prospects, our capital requirements and surplus,
contractual restrictions, the amount of distributions, if any,
received by us from our Chinese subsidiaries, and other factors
deemed relevant by our board of directors. Any future dividends
on our common shares would be declared by and subject to the
discretion of our board of directors.
41
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2009:
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on an actual basis;
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on an as adjusted basis to reflect the sale by us of
5,500,000 shares of common shares in this offering by us at
an assumed initial public offering price of $9.50 per share,
which is the midpoint of the price range set forth on the cover
page of this prospectus, after deducting estimated underwriting
discounts and commissions and other offering expenses, assuming
the underwriters do not exercise their over-allotment option.
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You should read this table together with the sections of this
prospectus entitled Use of Proceeds and
Managements Discussion and Analysis of Financial
Condition and Results of Operations as well as our
financial statements and related notes and the other financial
information appearing elsewhere in this prospectus.
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As of June 30,
2009
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Actual
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As Adjusted
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(in thousands)
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Lines of credit
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$
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14,357
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$
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14,357
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Shareholders equity:
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Common shares, $0.001 par value per share,
100,000,000 shares authorized, 25,000,050 issued and
outstanding, actual and shares issued and outstanding as adjusted
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25
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31
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Preferred shares, $0.001 par value per share,
1,000,000 shares authorized, no shares issued and
outstanding, actual and no shares issued and outstanding as
adjusted
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Additional paid-in capital
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27,263
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74,649
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Statutory reserves
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9,429
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9,429
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Retained earnings
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79,226
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79,226
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Accumulated other comprehensive income
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10,789
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10,789
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Total shareholders equity
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126,732
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174,124
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Total capitalization
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$
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141,089
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$
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188,481
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A $1.00 increase or decrease in the assumed initial public
offering price per share would increase or decrease each of
total shareholders equity and total capitalization by
approximately $5.1 million, after deducting the estimated
underwriting discounts and estimated offering expenses payable
by us and assuming no exercise by the underwriters of their
over-allotment option.
On or prior to the completion of this offering, we will grant
875,000 restricted common shares without payment of
consideration to certain employees, including members of our
executive management team, but excluding our chief executive
officer and chief financial officer, pursuant to our 2009
Omnibus Incentive Plan. The grant of 875,000 restricted common
shares will be a one-time bonus stock award to approximately 50
employees and will be contingent upon the closing of our public
offering. The common shares under the grant will be restricted
and subject to a six month cliff vesting period. An additional
875,000 shares are reserved for issuance under our 2009 Omnibus
Incentive Plan.
The outstanding share information as of June 30, 2009 shown
in the table above excludes 1,226,972 shares of common
shares issuable upon the exercise of warrants outstanding as of
June 30, 2009.
The outstanding share information as of June 30, 2009 shown
in the table above does not include options to purchase 180,000
common shares to be granted concurrently with the listing of our
common shares on the New York Stock Exchange to certain of our
officers. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsEmployee
Share-Based Compensation Expenses.
42
DILUTION
Purchasers of our common shares in the offering will suffer an
immediate and substantial dilution in net tangible book value
per share. Dilution is the amount by which the initial public
offering price paid by purchasers of our common shares exceeds
the net tangible book value per common share after the offering.
Net tangible book value represents the amount of our total
tangible assets reduced by our total liabilities. Tangible
assets equal our total assets less goodwill and intangible
assets. Net tangible book value per share represents our net
tangible book value divided by the number of shares of common
shares outstanding. As of June 30, 2009, our net tangible
book value was $125.7 million and our net tangible book
value per share was $5.03.
After giving effect to (1) the grant of
875,000 restricted common shares to certain employees,
including members of our executive management team, but
excluding our chief executive officer and chief financial
officer, pursuant to our 2009 Omnibus Incentive Plan,
(2) the sale of 5,500,000 common shares in the offering by
us at an initial public offering price of $9.50 per share,
which is the midpoint of the price range set forth on the cover
page of this prospectus, and (3) after deduction of
underwriting discounts and commissions and estimated offering
expenses, our adjusted net tangible book value as of
June 30, 2009 would have been $173.1 million, or $5.52
per share. This represents an immediate increase in net tangible
book value of $0.49 per share to existing shareholders and an
immediate dilution of $3.98 per share to new investors
purchasing shares in the offering. The following table
illustrates this per share dilution:
|
|
|
|
|
Assumed public offering price per share
|
|
$
|
9.50
|
|
Net tangible book value per share as of June 30, 2009
|
|
|
5.03
|
|
Increase in net tangible book value per share attributable to
new investors
|
|
|
0.49
|
|
Adjusted net tangible book value per share after the offering
|
|
|
5.52
|
|
Dilution per share to new investors
|
|
|
3.98
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price per share would increase or decrease our net
tangible book value per share after the offering by
approximately $0.16, and dilution per share to new investors by
approximately $0.84, after deducting the estimated underwriting
discounts and estimated offering expenses payable by us.
The following table illustrates, on the as adjusted basis
described above as of June 30, 2009, the total number of
shares held, total consideration paid and average price per
share paid by existing shareholders and by new investors for
common shares purchased from us, assuming the sale of our common
shares in the offering at an initial public offering price of
$9.50 per share, which is the midpoint of the price range
set forth on the cover page of this prospectus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming Exercise of
Over-Allotment Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price Per
|
|
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Existing shareholders
|
|
|
25,875,050(1
|
)
|
|
|
80
|
%
|
|
$
|
27,288,040
|
|
|
|
31
|
%
|
|
$
|
1.05
|
|
|
|
|
|
New investors
|
|
|
6,440,419
|
|
|
|
20
|
|
|
|
61,183,980
|
|
|
|
69
|
|
|
|
9.50
|
|
|
|
|
|
Total
|
|
|
32,315,469
|
|
|
|
100
|
%
|
|
$
|
88,472,020
|
|
|
|
100
|
%
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming No Exercise of
Over-Allotment Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price Per
|
|
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Existing shareholders
|
|
|
25,875,050
|
(1)
|
|
|
82
|
%
|
|
$
|
27,288,040
|
|
|
|
34
|
%
|
|
$
|
1.05
|
|
|
|
|
|
New investors
|
|
|
5,500,000
|
|
|
|
18
|
|
|
|
52,250,000
|
|
|
|
66
|
|
|
|
9.50
|
|
|
|
|
|
Total
|
|
|
31,375,050
|
|
|
|
100
|
%
|
|
$
|
79,538,040
|
|
|
|
100
|
%
|
|
$
|
2.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reflects the issuance of 875,000 restricted common shares which
will be granted to certain employees, including members of our
executive management team, but excluding our chief executive
officer and chief financial officer, without payment of
consideration on or prior to the completion of this offering.
|
As of the date of this prospectus, 1,750,000 common shares have
been reserved for future issuances under our 2009 Omnibus
Incentive Plan, of which 875,000 restricted common shares will
be granted to certain employees, including members of our
executive management team, but excluding our chief executive
officer and chief financial officer, on or prior to the
completion of this offering. As of the date of this prospectus,
we have not granted any options to purchase our common shares.
The data in the table above does not include options to purchase
180,000 common shares to be granted concurrently with the
listing of our common shares on the New York Stock Exchange to
certain of our officers. If we issue additional shares or
options that are exercised under our 2009 Omnibus Incentive
Plan, new investors will experience further dilution.
The data in the tables above assume that outstanding options and
warrants to purchase common shares are not exercised. As of
June 30, 2009, warrants to purchase 1,226,972 common shares
at a weighted average exercise price of $4.95 per common share
were outstanding. If all those options and warrants had been
exercised, and assuming the exercise of the options to purchase
180,000 common shares that are to be issued at the time of the
listing of our common shares on the New York Stock Exchange, the
dilution to new investors purchasing shares in the offering as
of June 30, 2009 would have increased by $0.24 per
share to $4.22 per share. To the extent we issue additional
warrants that are exercised, new investors will experience
further dilution.
44
RECENT
DEVELOPMENTS
The following is a summary of our selected unaudited
consolidated financial results for the three months ended
September 30, 2009 compared to our selected unaudited
consolidated financial results for the three months ended
September 30, 2008. Our first quarter 2010 results may not
be indicative of our full year results for our fiscal year
ending June 30, 2010 or future quarterly periods. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus for information regarding trends and other
factors that may influence our results of operations and for
recent quarterly operating results.
Selected
Unaudited Consolidated Financial Information
for the Three Months Ended September 30, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
$
|
|
|
revenue
|
|
|
$
|
|
|
revenue
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Revenues, net
|
|
|
26,179
|
|
|
|
100.0
|
%
|
|
|
33,295
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
12,331
|
|
|
|
47.1
|
|
|
|
15,788
|
|
|
|
47.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,848
|
|
|
|
52.9
|
|
|
|
17,507
|
|
|
|
52.6
|
|
Research and development expenses
|
|
|
694
|
|
|
|
2.7
|
|
|
|
364
|
|
|
|
1.1
|
|
Selling expenses
|
|
|
2,547
|
|
|
|
9.7
|
|
|
|
3,157
|
|
|
|
9.5
|
|
General and administrative expenses
|
|
|
932
|
|
|
|
3.6
|
|
|
|
1,490
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,675
|
|
|
|
36.9
|
|
|
|
12,496
|
|
|
|
37.5
|
|
Change in fair value of derivative instruments
|
|
|
55
|
|
|
|
0.2
|
|
|
|
111
|
|
|
|
0.3
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expenses
|
|
|
(1
|
)
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(212
|
)
|
|
|
(0.8
|
)
|
|
|
(234
|
)
|
|
|
(0.7
|
)
|
Interest income and other income
|
|
|
34
|
|
|
|
0.1
|
|
|
|
31
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(179
|
)
|
|
|
(0.7
|
)
|
|
|
(203
|
)
|
|
|
(0.6
|
)
|
Income before provision for income taxes and noncontrolling
interest
|
|
|
9,551
|
|
|
|
36.4
|
|
|
|
12,404
|
|
|
|
37.2
|
|
Provision for income taxes
|
|
|
927
|
|
|
|
3.5
|
|
|
|
2,409
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
8,624
|
|
|
|
32.9
|
|
|
|
9,995
|
|
|
|
30.0
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
109
|
|
|
|
0.4
|
|
|
|
158
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Duoyuan Printing, Inc.
|
|
|
8,515
|
|
|
|
32.5
|
|
|
|
9,837
|
|
|
|
29.5
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
256
|
|
|
|
1.0
|
|
|
|
183
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Duoyuan Printing, Inc.
|
|
|
8,771
|
|
|
|
33.5
|
%
|
|
|
10,020
|
|
|
|
30.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenue increased by $7.1 million, or 27.2%, from
$26.2 million for the three months ended September 30,
2008 to $33.3 million for the three months ended
September 30, 2009, primarily as a result of an increase in
the volume of our products sold during this period. Revenue for
our pre-press printing equipment increased by $0.1 million,
or 12.7%, from $0.8 million for the three months ended
45
September 30, 2008 to $0.9 million for the three
months ended September 30, 2009. Revenue for our press
printing equipment for the three months ended September 30,
2009 increased by $6.7 million, or 25.6%, when compared to
the three months ended September 30, 2008. This increase
was mainly attributable to an increase in the volume of our
multicolor presses sold during this period.
Our cost of revenue increased by $3.5 million, or 28.0%,
from $12.3 million for the three months ended
September 30, 2008 to $15.8 million for the three
months ended September 30, 2009. This increase was
primarily due to an increase in the volume of our products sold
during this period, particularly sales of our multicolor
presses. This increase in sales contributed to the increase in
consumption of raw materials and components across our pre-press
and press product categories as our revenue increased by 27.2%
from the three months ended September 30, 2009 to the three
months ended September 30, 2008. As a percentage of
revenue, our cost of revenue increased 0.3% from 47.1% for the
three months ended September 30, 2008 to 47.4% for the
three months ended September 30, 2009. This increase was
mainly due to the increase in our depreciation expense for
capital expenditures made in prior years.
Our income from operations increased by $2.8 million, or
29.1%, from $9.7 million for the three months ended
September 30, 2008 to $12.5 million for the three
months ended September 30, 2009. This increase was mainly
due to increased multicolor press sales, which generated higher
revenue for us.
Our provision for income taxes increased by $1.5 million,
or 159.9%, from $0.9 million for the three months ended
September 30, 2008 to $2.4 million for the three
months ended September 30, 2009. This increase was
primarily due to the increase in our revenue by 27.2% over the
same period and the increase in income tax rate for Duoyuan
China. The income tax rate for Duoyuan China in 2008 was 12.5%.
Beginning on January 1, 2009, the income tax rate for
Duoyuan China increased to 25.0% as a result of the expiration
of preferential tax treatments granted to Duoyuan China in prior
years. Our effective tax rates were 9.7% for the three months
ended September 30, 2008 and 19.4% for the three months
ended September 30, 2009.
As a result of the foregoing, our net income attributable to
Duoyuan Printing Inc. increased by $1.3 million, or 15.5%,
from $8.5 million for the three months ended
September 30, 2008 to $9.8 million for the three
months ended September 30, 2009. As a percentage of
revenue, our net income decreased 3.0% from 32.5% for the three
months ended September 30, 2008 to 29.5% for the three
months ended September 30, 2009.
46
CORPORATE
HISTORY AND STRUCTURE
We were organized under the laws of the State of Nevada on
August 10, 1998. On July 27, 2005, we merged with
Asian Financial, Inc., a Wyoming corporation, for the purpose of
changing our domicile from Nevada to Wyoming. From our inception
until October 6, 2006, we were a shell company without
operations, revenue or employees, other than officers and
directors.
On October 6, 2006, we completed an equity transfer with
Duoyuan Investments Limited and issued 47,100,462 common shares
to Duoyuan Investments Limited in exchange for all of Duoyuan
Investments Limiteds equity interest in Duoyuan China, its
wholly owned subsidiary. Duoyuan China manufactured single color
offset printing presses, among other products. As a result of
this equity transfer, Duoyuan China became our wholly owned and
principal operating subsidiary, and Duoyuan Investments Limited,
a company wholly owned by Wenhua Guo, the chairman of our board
of directors, became our controlling shareholder. Upon the
completion of the equity transfer, we commenced our offset
printing equipment business. We conduct our business through our
principal operating subsidiary, Duoyuan China, and Duoyuan
Chinas manufacturing subsidiaries, namely Langfang Duoyuan
and Hunan Duoyuan.
On November 2, 2006, we closed the transactions
contemplated by a securities purchase agreement dated
October 24, 2006 by and between us and certain investors.
Pursuant to the securities purchase agreement, we issued an
aggregate of 6,132,622 common shares to the investors for an
aggregate purchase price of $23.5 million. This private
placement was made pursuant to the exemption from the
registration provisions of the Securities Act provided by
Section 4(2) of the Securities Act, and Rule 506 of
Regulation D promulgated thereunder, for issuances not
involving a public offering.
On October 15, 2009, we changed our name to Duoyuan
Printing, Inc.
Through our principal operating subsidiary, Duoyuan China, and
Duoyuan Chinas manufacturing subsidiaries, namely Langfang
Duoyuan and Hunan Duoyuan, we design, manufacture and sell
offset printing equipment used in the offset printing process.
Our
Subsidiaries
Our
Principal Operating Subsidiary
Duoyuan China, our principal operating subsidiary, was
incorporated on June 21, 2001 under the laws of the PRC by
Duoyuan Industries (Holding), Inc., or Duoyuan Industries, a
British Virgin Islands company, wholly owned by Wenhua Guo. In
2001, Duoyuan China purchased certain offset printing equipment
manufacturing related assets from Beijing Duoyuan Electric Co.
Ltd., or Duoyuan Electric, a PRC company, which since 1994 was
in the business of manufacturing single color small format
presses, among other products. Duoyuan Electric sold certain raw
materials and semi-finished products to Duoyuan China. Duoyuan
Electric also transferred a trademark to Duoyuan China without
charge. On October 29, 2002, Duoyuan Investments Limited
purchased all of Duoyuan Industries interests in Duoyuan
China. Upon the completion of the equity transfer with Duoyuan
Investments Limited on October 6, 2006, Duoyuan China
became our wholly owned subsidiary and we commenced our offset
printing equipment business.
Duoyuan Chinas principal business activities include
marketing and sale of our offset printing equipment, technical
support to our distributors and overall strategic planning and
management of our business.
Our
Manufacturing Subsidiaries
Langfang Duoyuan was incorporated on October 27, 2000 under
the laws of the PRC by Beijing Yinhang Yinlu Advertisement Co.
Ltd., or Beijing Advertisement, and Beijing Huiyuan Duoyuan
Digital Printing Technology Research Institute, or Huiyuan
Institute, each an entity controlled by Wenhua Guo. At the time
of Langfang Duoyuans incorporation, Beijing Advertisement
and Huiyuan Institute held an equity interest in Langfang
Duoyuan of 5% and 95%, respectively. Pursuant to an equity
transfer agreement dated as of March 25, 2002, Duoyuan
China acquired all of Beijing Advertisements 5% interest
in Langfang Duoyuan for RMB1.5 million. Pursuant to an
equity transfer agreement dated as of October 16, 2005,
Duoyuan
47
China acquired an additional 90% equity interest in Langfang
Duoyuan from Huiyuan Institute for RMB36 million. Huiyuan
Institute remains the holder of a 5% equity interest in Langfang
Duoyuan.
Langfang Duoyuans principal business activities include
manufacturing our CTP system and two of our press products,
namely our single color small format presses and multicolor
small format presses.
Hunan Duoyuan was incorporated on March 10, 2004. In
December 2003, Duoyuan China participated in a public auction
and entered into an agreement, as further supplemented in May
2004, to purchase certain assets (including real property,
manufacturing facilities and intellectual property) from Hunan
Printing Machinery Co., Ltd., which was a bankrupt state owned
PRC enterprise. Duoyuan China paid RMB38 million for those
assets. Hunan Printing Machinery Co., Ltd. was then one of the
major large format press manufacturers in China approved by the
Chinese government to produce multicolor printing equipment.
Duoyuan China acquired certain assets from Hunan Printing
Machinery Co., Ltd. for its multicolor printing equipment and
large format printing equipment production capacity. After the
acquisition of the assets of Hunan Printing Machinery Co., Ltd.
in December 2003, Duoyuan China and Langfang Duoyuan
incorporated Hunan Duoyuan on March 10, 2004, with each
holding an 88% and 12% equity interest in Hunan Duoyuan,
respectively.
Hunan Duoyuans principal business activities include
manufacturing two of our press products, namely our single color
large format presses and multicolor large format presses.
The entities formed or controlled by Wenhua Guo that were
involved in the foregoing transactions do not operate in the
same industry as Duoyuan China. These entities do not compete
with Duoyuan China.
The following chart summarizes our corporate structure,
including our subsidiaries, as of the date of this prospectus:
|
|
* |
Represents our minority shareholders, consisting of the
pre-equity transfer investors and the investors from the private
placement in November 2006.
|
48
SELECTED
CONSOLIDATED FINANCIAL INFORMATION
You should read the selected consolidated financial information
set forth below in conjunction with our consolidated financial
statements and related notes, Summary Consolidated
Financial Information, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations. The selected consolidated statements of income
and other comprehensive income for the years ended June 30,
2005, 2006, 2007, 2008 and 2009, the selected consolidated
balance sheets as of June 30, 2005, 2006, 2007, 2008 and
2009, and the selected consolidated statements of cash flows for
the years ended June 30, 2005, 2006, 2007, 2008, and 2009
have been derived from our audited consolidated financial
statements that are included elsewhere in this prospectus. The
consolidated financial statements are prepared and presented in
accordance with U.S. GAAP. Our historical results are not
necessarily indicative of results to be expected for future
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of
Income
|
|
Year Ended
June 30,
|
|
and Other Comprehensive
Income
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except for share
and per share data)
|
|
|
Revenue, net
|
|
$
|
26,469
|
|
|
$
|
43,747
|
|
|
$
|
67,812
|
|
|
$
|
89,628
|
|
|
$
|
106,591
|
|
Cost of revenue
|
|
|
16,887
|
|
|
|
22,478
|
|
|
|
37,694
|
|
|
|
44,462
|
|
|
|
50,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,582
|
|
|
|
21,269
|
|
|
|
30,118
|
|
|
|
45,166
|
|
|
|
56,257
|
|
Research and development expenses
|
|
|
680
|
|
|
|
1,037
|
|
|
|
1,046
|
|
|
|
1,683
|
|
|
|
1,768
|
|
Selling expenses
|
|
|
3,025
|
|
|
|
3,753
|
|
|
|
7,827
|
|
|
|
8,705
|
|
|
|
9,726
|
|
General and administrative expenses
|
|
|
2,406
|
|
|
|
2,896
|
|
|
|
3,079
|
|
|
|
4,472
|
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,471
|
|
|
|
13,583
|
|
|
|
18,167
|
|
|
|
30,306
|
|
|
|
40,289
|
|
Liquidated damages (expenses) income, net of settlement
|
|
|
|
|
|
|
|
|
|
|
(2,119
|
)
|
|
|
235
|
|
|
|
|
|
Change in fair value of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(957
|
)
|
Interest expense
|
|
|
(505
|
)
|
|
|
(742
|
)
|
|
|
(742
|
)
|
|
|
(730
|
)
|
|
|
(1,188
|
)
|
Interest and other income
|
|
|
997
|
|
|
|
503
|
|
|
|
721
|
|
|
|
195
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
492
|
|
|
|
(239
|
)
|
|
|
(21
|
)
|
|
|
(535
|
)
|
|
|
(1,969
|
)
|
Income before minority interest and provision for income taxes
|
|
|
3,963
|
|
|
|
13,344
|
|
|
|
16,027
|
|
|
|
30,077
|
|
|
|
38,514
|
|
Minority interest
|
|
|
86
|
|
|
|
187
|
|
|
|
241
|
|
|
|
381
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
3,877
|
|
|
|
13,157
|
|
|
|
15,786
|
|
|
|
29,697
|
|
|
|
38,051
|
|
Provision for income taxes
|
|
|
|
|
|
|
261
|
|
|
|
1,807
|
|
|
|
3,238
|
|
|
|
5,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,877
|
|
|
$
|
12,896
|
|
|
|
13,979
|
|
|
|
26,460
|
|
|
|
32,597
|
|
Other comprehensive income Foreign currency translation gain
|
|
|
|
|
|
|
426
|
|
|
|
1,834
|
|
|
|
8,200
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,877
|
|
|
$
|
13,322
|
|
|
$
|
15,813
|
|
|
$
|
34,660
|
|
|
$
|
32,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of shares
|
|
|
18,867,436
|
|
|
|
18,867,436
|
|
|
|
23,041,021
|
|
|
|
25,000,050
|
|
|
|
25,000,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earning per share
|
|
$
|
0.21
|
|
|
$
|
0.68
|
|
|
$
|
0.61
|
|
|
$
|
1.06
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
Consolidated Balance
Sheets
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Cash
|
|
$
|
294
|
|
|
$
|
3,740
|
|
|
$
|
7,816
|
|
|
$
|
14,200
|
|
|
$
|
31,044
|
|
Working
capital(1)
|
|
|
(6,405
|
)
|
|
|
6,945
|
|
|
|
30,935
|
|
|
|
55,587
|
|
|
|
75,337
|
|
Total current assets
|
|
|
22,002
|
|
|
|
34,906
|
|
|
|
51,267
|
|
|
|
72,017
|
|
|
|
94,214
|
|
Total assets
|
|
|
37,467
|
|
|
|
50,544
|
|
|
|
80,280
|
|
|
|
112,905
|
|
|
|
148,551
|
|
Total current liabilities
|
|
|
28,406
|
|
|
|
27,962
|
|
|
|
20,332
|
|
|
|
16,431
|
|
|
|
18,877
|
|
Total liabilities
|
|
|
28,406
|
|
|
|
27,962
|
|
|
|
20,332
|
|
|
|
17,805
|
|
|
|
20,057
|
|
Minority interest
|
|
|
327
|
|
|
|
527
|
|
|
|
801
|
|
|
|
1,293
|
|
|
|
1,762
|
|
Total shareholders equity
|
|
|
8,734
|
|
|
|
22,055
|
|
|
|
59,147
|
|
|
|
93,806
|
|
|
|
126,732
|
|
|
|
(1) |
Working capital is equal to total current assets less total
current liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
Consolidated Statements of Cash
Flows
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
(9,883
|
)
|
|
$
|
4,933
|
|
|
$
|
(4,200
|
)
|
|
$
|
16,801
|
|
|
$
|
29,842
|
|
Cash flows used in investing activities
|
|
|
(2,609
|
)
|
|
|
(1,563
|
)
|
|
|
(11,081
|
)
|
|
|
(10,524
|
)
|
|
|
(16,189
|
)
|
Cash flows provided by (used in) financing activities
|
|
|
11,858
|
|
|
|
|
|
|
|
19,171
|
|
|
|
(1,092
|
)
|
|
|
2,929
|
|
50
MANAGEMENTS
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with the
financial statements and related notes appearing elsewhere in
this prospectus. This discussion includes forward-looking
statements that involve risks and uncertainties. You should
review the section titled Risk Factors of this
prospectus for a discussion of important factors that could
cause our actual results and the timing of selected events to
differ materially from those described in or implied by these
forward-looking statements.
Overview
We are a Wyoming corporation and a leading offset printing
equipment supplier in China, headquartered in Beijing. Through
our principal operating subsidiary, Duoyuan China, and Duoyuan
Chinas manufacturing subsidiaries, namely Langfang Duoyuan
and Hunan Duoyuan, we design, manufacture and sell offset
printing equipment used in the offset printing process. We
manufacture one product under the pre-press product category (a
CTP system) and fifteen products across four product lines under
the press product category (single color small format presses,
single color large format presses, multicolor small format
presses and multicolor large format presses). We plan to begin
commercial production and sale of certain post-press products,
including a cold-set corrugated paper machine, which makes
corrugated cardboard paper, by the end of 2010. In addition, we
plan to begin commercial production and sale of two other
post-press products, namely an automatic booklet maker and an
automatic paper cutter, for which we have developed prototypes,
in 2011.
Our revenue grew 32.2% from $67.8 million in the year ended
June 30, 2007 to $89.6 million in the year ended
June 30, 2008 and 18.9% to $106.6 million in the year
ended June 30, 2009. Our net income grew 89.3% from
$14.0 million in fiscal 2007 to $26.5 million in
fiscal 2008 and 23.2% to $32.6 million in fiscal 2009. For
fiscal 2007, 2008 and 2009, our income from operations was
$18.2 million, $30.3 million and $40.3 million,
respectively. Our operating results reflect our continuous
growth in sales of our multicolor presses, which are generally
more expensive and more profitable. For fiscal 2007, 2008 and
2009, our multicolor large format presses and our multicolor
small format presses were our best selling products. For fiscal
2007, 2008 and 2009, we derived 72.3%, 81.4% and 83.3% of our
revenue from the sale of our multicolor presses, respectively.
For the same periods, our multicolor large format presses
accounted for approximately 46.7%, 52.0% and 51.2% of our
revenue, respectively, and our multicolor small format presses
accounted for approximately 25.6%, 29.4% and 32.1% of our
revenue, respectively.
Outlook
We derive all of our revenue from sales of our pre-press and
press equipment to our distributors in China. Chinas
printing equipment industry grew from approximately
$908 million in 2002 to approximately $2.5 billion in
2007, according to the Printing and Printing Equipment
Industries Association of China, representing a CAGR of 23% per
annum. Taking into account of the effects of the current
economic environment, Pira International projects Chinas
printing equipment market to grow by 34% total from 2009 to
2014, or a CAGR of 6.0% per annum.
Our business expansion plans focus on developing and
manufacturing higher quality and more efficient multicolor
presses, post-press products and machines servicing the
packaging market. Package printing represents the largest
segment in Chinas printing industry. According to the
Printing and Printing Equipment Industries Association of China,
Chinas overall printing industry reached
$64.4 billion in 2007, of which approximately
$20.5 billion was related to package printing, accounted
for 32% of the Chinas printing industry that year. Pira
International projects that package printing to become the
largest segment by 2014, followed by commercial printing.
51
We dedicate a large portion of our research and development
expenses to creating and improving our press products,
particularly our multicolor presses. In addition, we plan to
begin commercial production and sale of a new product targeting
the packaging market, namely a cold-set corrugated paper
machine, a machine that makes corrugated cardboard paper, by the
end of 2010. We also plan to begin commercial production and
sale of two post-press products, namely an automatic booklet
maker and an automatic paper cutter, for which we have developed
prototypes, in 2011.
Principal
Factors Affecting Our Results of Operations
The following factors have had, and we expect that they will
continue to have, a significant effect on the development of our
business, financial condition and results of operations:
Growth
of the Overall Printing Industry, Printing Equipment Market and
Packaging Equipment Market in China
We believe the growing market for print products and printing
equipment in China has affected and will continue to affect our
financial condition by increasing market demand for our
products. According to Pira International, the total annual
output of Chinas printing industry grew from
$29.5 billion to $64.4 billion from 2002 to 2007.
Similarly, Chinas printing equipment market grew from
approximately $0.9 billion in 2002 to approximately
$2.5 billion in 2007, according to the Printing and
Printing Equipment Industries Association of China, representing
a CAGR of 23% per annum. Pira International projects that the
market for printing equipment in China will grow at a CAGR of
6.0% per annum between 2009 and 2014. Package printing is an
important segment within Chinas printing industry. In
2007, package printing accounted for 32% of Chinas
printing industry. Pira International projects that package
printing to become the largest segment by 2014, followed by
commercial printing. However, any adverse changes in
Chinas economic conditions may adversely affect demand for
print and printed packaging materials, and consequently our
products. See Risk Factors Risks Related to
Our Business If the market for printing equipment
does not grow at the rate we expect or at all, including due to
a decrease in the demand for commercial printing services, our
business may be materially and adversely affected.
Expansion
of Our Production Capacity and Acquisitions
In connection with our launch into the post-press business, we
plan to use approximately $30.0 million of the proceeds
from this offering to build a new factory to manufacture
cold-set corrugated paper machines at our Langfang Duoyuan
facility. To meet the potential increase in demand for our
products and to improve our overall product quality and
manufacturing efficiency, we plan to use approximately
$10.0 million of the proceeds from this offering to improve
and upgrade our existing manufacturing facilities and
productions lines at Langfang Duoyuan and Hunan Duoyuan. We
expect these projects will be completed by the end of 2010. We
will also consider strategic acquisitions to increase our
production capacity and obtain new technology for additional
products. As our production capacity increases, we also plan to
expand our distribution network and end-user customer base.
Fluctuations
in Raw Material Costs
Price fluctuations in raw materials and components impact our
gross profits and results of operations. Our operations require
substantial quantities of various raw materials, particularly
steel and iron, and electronic components. These materials and
components have been and continue to be susceptible to
significant price fluctuations. For example, steel prices in
China decreased during fiscal 2006, but increased significantly
during fiscal 2007 and 2008, increasing our raw material costs
as a percentage of revenue. For fiscal 2008 and 2009, raw
material costs accounted for approximately 90% and 88%,
respectively, of our production costs. We attempt to minimize
the effect of price fluctuations in raw materials and components
by:
|
|
|
|
|
producing a substantial majority of our key components in-house,
as measured by the cost of revenue, and purchasing other
off-the-shelf components from third party suppliers;
|
52
|
|
|
|
|
buying in large quantities to increase our purchasing leverage;
|
|
|
|
entering into year-long supply contracts for raw materials and
components on favorable terms; and
|
|
|
|
reducing raw material and component consumption through research
and development and increased automation of our manufacturing
process.
|
Ultimately, we may need to raise our product prices sufficiently
in order to recover higher raw material and component costs and
maintain our profit margin.
Product
Mix
Our revenue and, as described in greater detail below, gross
margins in any given period will be directly impacted by our
product mix. Due to the technological complexity and high
capital requirements of multicolor presses, the number of
companies selling multicolor presses in China is significantly
smaller than those selling single color presses. As a result,
our multicolor presses have a higher average unit sales price,
which can be substantially greater than that of single color
presses, and generate better gross profits. Also, sales prices
and margins for our single color presses have faced consistent
downward pressure because of increased competition.
Changes
in PRC Tax Regulations
Our Chinese subsidiaries have enjoyed significant tax
preferential treatments. These preferential tax treatments were
applicable to foreign-invested manufacturing enterprises
scheduled to operate for a period of not less than ten years in
accordance with the Foreign Invested Enterprise Income Tax Law,
which was effective until December 31, 2007. The additional
tax that would otherwise be payable without such preferential
tax treatments totaled $4.5 million for fiscal 2007,
$7.9 million for fiscal 2008 and $4.3 million for
fiscal 2009. See Risk Factors Risks Related to
Our Business The termination and expiration or
unavailability of preferential tax treatments once available to
us may materially and adversely affect our business.
As a result of recent changes in the Chinese enterprise income
tax laws, we expect that our tax expenses will be increase
significantly. In addition, as explained below, some of the tax
preferences we previously received were granted by local
governments and not supported by relevant state laws and
regulations. As a result, our Chinese subsidiaries may be
ordered by relevant authorities to refund these tax benefits. In
addition, as a result of the changes in Chinese tax laws, our
historical operating results will not be indicative of our
operating results for future periods. See
Critical Accounting Policies Taxes
and Incentives below.
Impact
of Recent Currency Exchange Rate Increase
We use the U.S. dollar as the reporting currency for our
financial statements. Our operations are conducted through our
Chinese subsidiaries. On July 21, 2005, the Chinese
government changed its policy of benchmarking the value of the
Renminbi to the U.S. dollar and, as a result, the Renminbi
has appreciated by approximately 17.5% from RMB8.28 to $1.00 on
July 21, 2005 to RMB6.83 to $1.00 on June 30, 2009. In
converting our Renminbi income statement amount into
U.S. dollars, the average translation rates used for fiscal
2007, 2008 and 2009 were RMB7.81 to $1.00, RMB7.26 to $1.00 and
RMB6.83 to $1.00, respectively. Our U.S. dollar denominated
operating results for these periods have benefited as a result
of the appreciation of the Renminbi against the U.S. dollar.
53
Internal
Control Over Financial Reporting
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
periodic reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commissions rules and forms and that such information is
accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, our management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and our management necessarily is required
to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of June 30, 2009, we carried out an evaluation, under
the supervision and with the participation of our management,
including our then chief executive officer and our chief
financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on
the foregoing, our then chief executive officer and chief
financial officer concluded that because of the material
weakness in internal control over financial reporting described
below, our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) were not
effective as of June 30, 2009.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, which is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. GAAP. Our internal control over financial reporting
includes those policies and procedures that: (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of our assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. GAAP and that our
receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.
Any system of internal control, no matter how well designed, has
inherent limitations, including the possibility that a control
can be circumvented or overridden and misstatements due to error
or fraud may occur and not be detected in a timely manner. Also,
because of changes in conditions, internal control effectiveness
may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with
respect to financial statement preparation.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. A significant
deficiency is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit
attention by those responsible for oversight of our financial
reporting.
Our management assessed the effectiveness of our internal
control over financial reporting as of June 30, 2009. In
making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated
Framework.
54
During its assessment of the effectiveness of internal control
over financial reporting as of June 30, 2009, our
management identified a material weakness related to the
following:
Lack of Internal Audit Function Although we
maintain an internal audit department, the scope and
effectiveness goal of internal audit function have not been
identified. Due to this weakness, we may be ineffective in the
timely prevention or detection of errors in the recording of
accounting transactions, which may have a material impact on our
financial statements.
In light of the foregoing, our management has concluded that our
internal control over financial reporting was not effective as
of June 30, 2009. Our ineffective internal control over
financial reporting could result in material misstatements in
our annual or interim financial statements that would not be
prevented or detected. However, nothing has come to the
attention of our management that causes them to believe that any
material inaccuracies or errors exist in our financial
statements as of June 30, 2009. The reportable conditions
and other areas of our internal control over financial reporting
identified by us as needing improvement have not resulted in a
material restatement of our financial statements. We are not
aware of any instance where such reportable conditions or other
identified areas of weakness have resulted in a material
misstatement or omission in any report we have filed with or
submitted to the Securities and Exchange Commission.
Our management has identified the steps necessary to address the
material weakness described above as follows:
Our internal auditors are responsible for auditing our key
financial areas, including sales (including rebates), cost of
sales, accounts receivable, payables and expenses, inventory and
other material accounts. They are also responsible for detecting
any internal control deficiencies. We are still in process of
identifying various internal audit requirements and also in
process of implementing the necessary audit procedures to
fulfill those requirements. In addition, we have engaged an
outside consultant to assist us in setting up internal audit
processes to identify internal control weaknesses, testing our
internal controls and remedying any deficiencies. The outside
consultant will also advise us in becoming compliant with
Sarbanes Oxley Act Section 404 requirements.
We believe that the foregoing step will help to remediate the
material weaknesses identified above, and we will continue to
monitor the effectiveness of these steps and make any changes
that our management deems appropriate.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of
compliance with the policies and procedures may deteriorate.
There were no changes in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended) during
fiscal 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
Components
of Revenue and Expenses
Revenue,
net
Our revenue is reported net of value-added taxes, or VAT, that
are levied on our products. As of June 30, 2009, all of our
products were subject to VAT at a rate of 17% of the gross sales
price. We also offer
55
sales rebates as an incentive for large purchase orders. These
sales rebates are recorded as a reduction of our revenue.
We derive all of our revenue from the sale of our offset
printing equipment to distributors in China. We sell products in
the pre-press and press product categories of printing equipment
with substantially all our revenue being derived from the sale
of our press printing equipment. Pre-press printing equipment
comprised approximately 5.6%, 3.6% and 3.8% of our revenue for
fiscal 2007, 2008 and 2009, respectively. Press printing
equipment comprised approximately 94.4%, 96.4% and 96.2% of our
revenue for fiscal 2007, 2008 and 2009. For fiscal 2007, 2008
and 2009, within the press category of our printing equipment,
we derived 72.3%, 81.4% and 83.3% of our revenue from the sale
of our multicolor presses, respectively. For fiscal 2007, 2008
and 2009, we derived 23.2%, 16.7% and 14.4% of our revenue from
the sale of our single color presses, respectively.
For fiscal 2007, 2008 and 2009, our multicolor large format
presses and our multicolor small format presses were our best
selling products. For fiscal 2007, 2008 and 2009, our multicolor
large format presses accounted for approximately 46.7%, 52.0%
and 51.2% of our revenue, respectively, and our multicolor small
format presses accounted for approximately 25.6%, 29.4% and
32.1% of our revenue, respectively.
Because of the increasing market demand for multicolor presses
in China, which typically have higher profit margins than single
color presses, we plan to continue to expand our multicolor
press production capacities, product offerings and sales
network. Our multicolor presses incorporate our advanced
technologies, making them highly automated and efficient, and
help reduce potential human errors. Our multicolor small format
presses offer a relatively low-cost solution for end-user
customers with high quality multicolor printing needs, such as
corporate brochures, product catalogues, labels and small
packages. Our multicolor large format presses, which require
relatively large investments compared to our other press
products, are suitable for end-user customers with high-quality
multicolor printing needs, such as posters, large packages, and
banners. Our multicolor large format presses are also capable of
printing at a faster speed than our other press products, making
them ideal for time sensitive printing needs.
Although we expect that our multicolor presses will continue to
be our best selling products in the near future, we expect that
sales of our pre-press product and single color presses will
continue growing as the printing industry in China continues
expanding. Our CTP system is more technologically advanced than
products using the traditional pre-press processing method. Our
CTP system improves printing plate quality and eliminates the
labor and chemical intensive multiple step processes associated
with traditional pre-press processing methods. Although
computer-to-plate technology is relatively new in China, we
believe that there is revenue growth potential for our CTP
system with increased market acceptance. We also expect to see
revenue growth with our single color presses, which are
typically suited for end-user customers who are entering offset
printing from type-set printing or need to print works that are
mostly single colored, such as books. Our single color presses
require low initial investments and minimal operating skills
compared to our multicolor presses. We also expect to generate
revenue from our post-press line of business, particularly from
the manufacture and sale of our cold-set corrugated paper
machines, which we expect to launch by the end of 2010.
56
The following table provides a breakdown of our revenue, by
product category, for the periods indicated:
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Year Ended
June 30
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2007
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2008
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2009
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|
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% of
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|
|
|
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% of
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% of
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$
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Revenue
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$
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Revenue
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$
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Revenue
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(dollars in thousands)
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Pre-press
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CTP system
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$
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3,769
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5.6
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%
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$
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3,184
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3.6
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%
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$
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4,004
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3.8
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%
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Press
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Single color small-format presses
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6,021
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8.9
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4,328
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4.8
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4,436
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4.2
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Single color large-format presses
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9,730
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14.3
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10,700
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11.9
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10,903
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10.2
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Multicolor small-format presses
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17,350
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25.6
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26,366
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29.4
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34,207
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32.1
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Multicolor large-format presses
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31,671
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46.7
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46,597
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52.0
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54,593
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51.2
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Adjustments
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(729
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)
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(1.1
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)
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(1,547
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)
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(1.7
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)
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(1,552
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)
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(1.5
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)
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Revenue, net
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$
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67,812
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100.0
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%
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$
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89,628
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100.0
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%
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$
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106,591
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100.0
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%
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In fiscal 2007, 2008 and 2009, sales to distributors in China
accounted for all of our revenue. We use an extensive
distribution network to reach a broad end-user customer base. We
generally make sales on a purchase order and short-term
agreement basis. We do not have long-term purchase orders with
any of our distributors. No single distributor accounted for
more than 5.0% of our revenue for fiscal 2007, 2008 and 2009.
Adjustments to revenue accounted for 1.1%, 1.7% and 1.5% for
fiscal 2007, 2008 and 2009, respectively, for sales rebates paid
to distributors as part of our incentive program that rewards
those distributors who meet or exceed their sales targets in the
prior year. We provide sales rebates, or discounts of 2% to 5%,
to distributors who place large purchase orders with us. The
greater the dollar amount of the purchase order, the higher the
percentage rebate we offer. We pay sales rebates at the end of
each calendar year. We intend to continue this incentive program.
Cost
of Revenue
Our cost of revenue consists primarily of direct costs to
manufacture our products, including component and raw material
costs, salaries and related manufacturing personnel expenses,
production plant and equipment depreciation and repair and
maintenance costs. Our costs of revenue were $37.7 million,
$44.5 million and $50.3 million for fiscal 2007, 2008
and 2009, respectively.
The direct costs of manufacturing a new product are generally
highest when a new product is first introduced due to
(1) start-up
costs associated with manufacturing a new product and
(2) generally higher raw material and component costs due
to lower initial production volumes. As production volumes
increase, we typically improve our manufacturing efficiencies
and are able to strengthen our purchasing power by buying raw
materials and components in greater quantities, which decreases
raw material and component costs. In addition, we are able to
lower or help offset rising raw material and component costs by
identifying lower-cost raw materials and components. Also, when
production volumes become sufficiently large, we often gain
further cost efficiencies by producing our key components
in-house at our Hunan Duoyuan facility.
Our principal raw materials are steel, iron and electronic
components. We purchase our raw materials and components from
Chinese suppliers, manufacturing a substantial majority of our
key components in-house. As a result, we believe we currently
have a relatively low cost base compared to other printing
equipment manufacturers, especially when compared to
international printing equipment manufacturers.
57
The relatively low operation, labor and raw material costs in
China have historically allowed us to achieve lower costs as we
increase purchase volumes and make improvements in manufacturing
processes.
Primarily due to a drop in commodity prices as a result of the
global economic slowdown, the overall cost of our raw materials
in fiscal 2009 decreased by 3% compared to fiscal 2008. We
expect raw material costs to remain relatively unchanged for the
remaining calendar 2009, because of existing supply agreements.
However, we believe that raw materials, components and wages in
China will increase as a result of Chinas further economic
development. Once global economic conditions improve and our
existing supply agreements expire, we expect our raw material
costs will increase.
As we focus on manufacturing more advanced products and new
product lines, we may find it necessary to use more expensive
raw materials and components. We plan to mitigate future
increases in raw material and component costs by using more
common resources across our product lines, increasing in-house
manufacturing of our key components and adopting more uniform
manufacturing and assembly practices. In addition, to minimize
and control raw material waste and increase production
efficiency, we continue to make investments to improve and
further automate our manufacturing process.
Gross
Margins
Our gross profit margins for fiscal 2007, 2008 and 2009 were
44.4%, 50.4% and 52.8%, respectively. Our gross profit margins
are impacted by changes in the average selling prices of our
products, product sales mix and cost of revenue. The average
selling prices for our products may decline if competitors lower
their prices and we respond by reducing prices for some of our
products to compete more effectively or if we choose to lower
our prices to gain market share. For example, in fiscal 2008 and
fiscal 2009, we lowered the prices of our entry level single
color small format presses to gain market share. Alternatively,
we are able to increase our average selling prices in certain
circumstances, such as when we introduce new or enhanced
products. For example, in fiscal 2008 we introduced a new model
of our multicolor large format presses, Model DY4104, that has
all of the existing features of our other multicolor large
format presses, but is also capable of printing on packaging
materials directly. Currently, this is the most expensive
product we sell. Also, in fiscal 2009, we introduced a new model
of our multicolor large format presses, Model PZ-4660AL, which
is an enhanced version or our existing Model PZ-4660. This new
model produces printed materials in brighter colors and is more
automated than our existing model.
Since the average selling prices and gross profit margins of our
products vary by product line, changes in our product sales mix
will also impact our overall gross profit margins. Our more
sophisticated and technologically advanced products, such as our
CTP system and multicolor presses, generally have higher gross
profit margins than our less sophisticated and low technology
products, such as our single color presses. Therefore, product
mix impacts our overall gross profit margins. For fiscal 2007,
2008 and 2009, the overall gross profit margins for our CTP
system were 42.6%, 47.1% and 47.2%, respectively, and the
overall gross profit margins for our multicolor presses were
49.7%, 51.2% and 53.3% for the same periods. For fiscal 2007,
2008 and 2009, the overall gross profit margins for our single
color presses were 28.5%, 46.5% and 46.1%, respectively.
Given recent market trends and to better offset raw material
costs and maintain our gross profit, we have been adjusting our
product mix by increasing our production and sale of multicolor
presses while decreasing our production and sale of single color
presses. As a result, our gross profit margins increased by 2.4%
from 50.4% in fiscal 2008 to 52.8% in fiscal 2009, primarily due
to the increase in the proportion of revenue from sales of our
multicolor presses.
Lastly, our gross profit margins are also affected by changes in
our cost of revenue and our ability to manage such cost as
described in further detail Cost of
Revenue above.
58
Research
and Development Expenses
Our research and development expenses consist primarily of costs
associated with designing, developing and testing our products.
Among other things, these costs include employee compensation
and benefits for our research and development team, expenditures
on purchases of supplies and raw materials, depreciation
expenses related to equipment used for research and development
and other related costs. Our research and development team
focuses its efforts on upgrading and enhancing our existing
products and designing new products, discovering new ways to
improve our press printing equipment, particularly our
multicolor presses, and developing new post-press printing
equipment. Our research and development expenses for fiscal
2007, 2008 and 2009 were $1.0 million, $1.7 million
and $1.8 million, respectively.
Our research and development expenses as a percentage of revenue
were 1.5%, 1.9% and 1.7% for fiscal 2007, 2008 and 2009,
respectively. From fiscal 2007 to fiscal 2008, our research and
development expenses as a percentage of revenue increased mainly
due to increased costs from the purchase of raw materials and an
increase in salary expenses as we hired additional engineers.
We plan to upgrade our existing products and design new
products, particularly multicolor presses as well as certain
post-press equipment like our cold-set corrugated paper machine.
We plan to continue investing in research and development to
maintain and enhance our market competitiveness.
Selling
Expenses
Our selling expenses consist primarily of employee subsidies and
benefits for our sales and marketing staff, transportation costs
and marketing, sales, advertising, travel and entertainment
activities expenses. Our selling expenses were
$7.8 million, $8.7 million and $9.7 million for
fiscal 2007, 2008 and 2009, respectively.
From fiscal 2007 to fiscal 2009, our selling expenses increased
primarily as a result of increased sales and marketing
activities, the hiring of additional sales representatives and
increased transportation costs. In fiscal 2009, our selling
expenses as a percentage of revenue decreased by 0.6% to 9.1%
from 9.7% in fiscal 2008 mainly due to increased sales volume,
which created economies of scale, reducing our per unit selling
expenses. In fiscal 2008, our selling expenses as a percentage
of revenue decreased by 1.8% to 9.7% from 11.5% in fiscal 2007,
as our transportation costs remained steady and we improved our
selling and marketing efficiencies.
Because we sell all of our products to distributors, our selling
expenses as a percentage of revenue are significantly lower than
manufacturers that primarily sell directly to end-user
customers. While we intend to continue to sell our products
exclusively to distributors, we plan to build our brand
recognition through increased marketing activities both inside
and outside of China, which may increase our sales and marketing
expenses in terms of actual amounts, as well as a percentage of
revenue. In the near term, we expect that certain components of
our selling expenses will increase as we continue to build brand
recognition through increased marketing activities both inside
and outside of China. Specifically, we expect that advertising
expenses will increase as we increase our advertising in
magazines and trade journals and expand into new forms of media,
including online advertising. In addition, we anticipate that
exhibition expenses will increase as we plan to participate in
more trade shows and exhibitions all across China to develop and
enhance our reputation in the printing and packaging industries.
We also expect salary expenses to increase as we continue to
hire additional sales representatives to help broaden our
end-user customer base. This anticipated increase in selling
expenses will be a direct result of our plan to grow, strengthen
and support our nationwide distribution network.
59
General
and Administrative Expenses
Our general and administrative expenses consist primarily of
employee compensation and benefits for our general management,
finance and administrative staff, depreciation and amortization
with respect to equipment used for general corporate purposes,
consultant fees and other expenses incurred for general
corporate purposes. Our general and administrative expenses were
$3.1 million, $4.5 million and $4.5 million for
fiscal 2007, 2008 and 2009, respectively.
We anticipate we will incur more expenses as we seek more
guidance and services from attorneys, investors relationship
consultants and auditors as our business expands. Our general
and administrative expenses as a percentage of revenue were
4.5%, 5.0% and 4.2% for fiscal 2007, 2008 and 2009,
respectively. In general, as a percentage of revenue, we expect
that general and administrative expenses will decrease as we
increase our staffing level at a slower rate than we increase
our revenue.
Employee
Share-Based Compensation Expenses
We account for employee share-based compensation expenses based
on the fair value of share option grants at the date of the
grant, and we record employee share-based compensation expenses
to the extent that the fair value of those grants are determined
to be greater than the price paid by the employee. We did not
incur any employee share-based compensation expenses in fiscal
2007, 2008 or 2009.
On or prior to the completion of this offering, we will grant
875,000 restricted common shares to certain employees, including
members of our executive management team, but excluding our
chief executive officer and chief financial officer, pursuant to
our 2009 Omnibus Incentive Plan. The grant of
875,000 restricted common shares will be a one-time bonus
stock award to approximately 50 employees and will be
contingent upon the closing of our public offering. The common
shares under the grant will be restricted and subject to a six
month cliff vesting period. As a result of this common share
grant, we will incur employee share-based compensation charges
of $8.3 million beginning in this fiscal quarter ending
December 31, 2009, assuming an initial public offering
price of $9.50 per common share, the midpoint of the
estimated range of the initial public offering price.
In addition, concurrent with the listing of our common shares on
the New York Stock Exchange, we will grant to certain officers
options to purchase up to 180,000 common shares at or above
the initial public offering price. These options will vest over
a period of four years. The grant of options to these officers
will result in additional stock-based compensation expense.
Liquidated
Damages Expense
Liquidated damages expense relates to our failure to timely
register for resale certain private placement shares and
terminate related party transactions. We recorded liquidated
damages expenses of $2.1 million for fiscal 2007. We
settled the claims for liquidated damages in the third quarter
of fiscal 2008, and we reversed the accrual and recognized a net
liquidated damages gain of $0.2 million for fiscal 2008.
See Critical Accounting Policies
Liquidated Damages Expense.
Other
Income (Expense)
Other expense is comprised primarily of interest expense from
five short-term loans we have with the Bank of Agriculture,
Chongwen branch in the aggregate amount of $14.4 million as
of June 30, 2009. Other expense is net of interest income
from our interest bearing checking accounts.
60
Minority
Interests
Minority interests refer to the 5% equity interest in Langfang
Duoyuan and 0.6% equity interest in Hunan Duoyuan held by
Huiyuan Institute. For a summary of Huiyuan Institutes
equity ownership, see Business Our
Subsidiaries Our Manufacturing Subsidiaries.
Income allocated to the minority interests was
$0.2 million, $0.4 million and $0.5 million for
fiscal 2007, 2008 and 2009, respectively.
Provision
for Income Taxes
Our provision for income taxes was $1.8 million,
$3.2 million and $5.5 million for fiscal 2007, 2008
and 2009, respectively. Our effective tax rate was 11.4%, 10.9%
and 14.3% for the same periods.
Foreign
Currency Translation Adjustments
Although all of our revenue and expenses are denominated in
Renminbi, we use the U.S. dollar for financial reporting
purposes. Our results of operations and cash flows are
calculated based on the average exchange rate during the
relevant periods. Our assets and liabilities are calculated
based on the uniform exchange rate announced by the
Peoples Bank of China at the end of the relevant periods.
Our share capital is calculated based on historical exchange
rates. This practice is in compliance with U.S. GAAP.
Critical
Accounting Policies
We prepare our financial statements in accordance with
U.S. GAAP, which requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosure of
contingent assets and liabilities. We evaluate our estimates and
judgments, including those related to sales, returns, pricing
concessions, bad debts, inventories, investments, fixed assets,
intangible assets, income taxes and other contingencies, based
on our historical experience and various other assumptions that
we believe are reasonable under the circumstances. Actual
results may differ from these estimates under different
assumptions or circumstances.
We believe the following accounting policies are critical to the
portrayal of our financial condition and results of operations
and require difficult, subjective or complex management
judgments, often as a result of the need to estimate the effects
of matters that are inherently uncertain.
Revenue
Recognition
We recognize revenue in accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition, which
specifies that revenue is realized or realizable and earned when
four criteria are met:
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persuasive evidence of an arrangement exists, such as sales
contracts;
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|
product is shipped or services have been rendered;
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the price to the buyer is fixed or determinable; and
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collectability of payment is reasonably assured.
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In accordance with Statement of Financial Accounting Standards,
or SFAS, No. 48, Revenue Recognition when Right of
Return Exists, revenue is recorded net of an estimate of
markdowns, price concessions and warranty costs. Markdowns
represent price adjustments on sale of units whose model is
nearing the end of its cycle and the model is planned to be
discontinued; price concessions represent price adjustments on
contractual agreements for the sale of units; and warranty costs
represent costs to
61
repair previously sold units still under warranty for
manufacturers defects. Such amounts are based on
managements evaluation of historical experience, current
industry trends and estimated costs.
We sell our products solely to distributors. Master distribution
agreements are signed with each distributor. The agreements list
all terms and conditions with the exception of delivery, price
and quantity terms, which are evidenced separately in purchase
orders. Title transfers when products are shipped. There are no
instances where receivables from distributors are not due and
payable until goods purchased from us are sold by the
distributors. We do not sell products to distributors on a
consignment basis. Our distributors have a right of return on
our products within one month after shipping only if our
products exhibit any manufacturing defects and it cannot be
repaired. We did not have any returns during fiscal 2007, 2008
or 2009 and did not provide for any allowance for sales returns.
We recognize revenue when the goods are shipped and title has
passed. Sales revenue represents the invoiced value of goods,
net of VAT. All of our products that are sold in China are
subject to a Chinese VAT at a rate of 17% of the gross sales
price or at a rate approved by the Chinese local government.
This VAT may be offset by the VAT paid by us on raw materials
and other materials included in the cost of producing their
finished products. The VAT on sales may also be offset by the
VAT paid on equipment purchases. Our distributors are all
equipped to install our products and we are not contractually
obligated to perform any installation services. As a result,
there is no substantial performance required on our part and
there is no impact on our recognition of revenues.
Purchase prices of products are fixed and customers are not
allowed to renegotiate pricing after the contracts are signed.
The agreements with our distributors do not include cancellation
or termination clauses.
Credit limits are assigned to each distributor. As a distributor
builds a sales and credit history with us, the credit limit can
be increased. Credit limits are periodically reviewed by
management and reductions to credit limits are made if deemed
necessary.
We estimate sales rebates to distributors based on the projected
annual sales and corresponding cash receipts. These rebates are
paid at the end of each calendar year. We account for the sales
rebates in accordance with Emerging Issues Task Force Issue
01-09,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors
Products). Sales rebates are included as a reduction of
revenue and accounts receivable to be received by us.
For fiscal 2007, 2008, and 2009, the aggregate amounts
referenced above of the markdowns, price concessions, warranty
costs, and sales rebates were immaterial to the consolidated
financial statements taken as a whole for each of those years.
Accounts
Receivable, Trade and Allowance for Doubtful
Accounts
During the normal course of business, we extend unsecured
preferred credit terms to some of our distributors, specifically
those distributing our multicolor presses. We assign credit
limits to each distributor. As a distributor builds a sales
history with us, we may adjust its credit limits. Our management
reviews these credit limits from time to time and makes
adjustments as it deems advisable.
For single color presses, distributors must pay the entire
purchase price before shipment. For multicolor presses,
distributors are required to pay between 50% and 70% of the
purchase price before shipment. Our sales representatives
evaluate the creditworthiness of these distributors in order to
determine their installment payment schedules for the remaining
30% to 50% of the multicolor press purchase prices. These
installment payment schedules, entered into at the time a
distributor signs a purchase order, generally last for six to
nine months.
62
We review accounts receivable on a quarterly basis to determine
if the allowance for doubtful accounts is adequate. We record a
reserve for doubtful accounts when collection of the full amount
is no longer probable. Our reserves of $1.2 million and
$1.4 million as of June 30, 2008 and 2009,
respectively, were consistent with our historical experience and
we consider them adequate.
Inventories
We record inventories at the lower of cost or market, using the
weighted-average method. We review our inventory on a regular
basis for possible obsolete goods by examining our
products shelf life and distributor demand to determine if
any reserve is necessary for potential obsolescence. However,
most of our products are manufactured on a purchase order basis.
We determined that no reserves were necessary as of
June 30, 2008 and 2009.
Valuation
of Share-Based Compensation
We account for share-based compensation to our employees in
accordance with SFAS No. 123(R) and will record
compensation expense over the requisite service periods to the
extent of the fair value of the options.
Liquidated
Damages Expense
Liquidated damages expense relates to our failure to timely
register for resale certain private placement shares and
terminate related party transactions. We recorded liquidated
damages expenses of $2.1 million for fiscal 2007. We
settled the claims for liquidated damages in the third quarter
of fiscal 2008, and we reversed the accrual and recognized a net
liquidated damages gain of $0.2 million for fiscal 2008.
The registration liquidated damages meet the definition of a
registration payment arrangement as defined in Financial
Accounting Standards Boards, or FASB, Staff Position
No. EITF 00-19-2,
Accounting for Registration Payment Arrangements, or
EITF 00-19-2.
In accordance with
EITF 00-19-2,
paragraph 7, the contingent obligation to make future
payments or otherwise transfer consideration under a
registration payment and related party arrangement is recognized
and measured separately. In accordance with
FASB Interpretation No. 14, Reasonable
Estimation of the Amount of Loss, we have recorded an
expense and a liability equal to the minimum estimated loss. In
November 2007, we reached a settlement with our private
placement investors, who agreed to waive the liquidated damages
due in exchange for warrants or cash payments. Therefore, we
reversed the accrual and recognized a gain, which is included in
liquidated damages as a credit balance in our financial
statements.
Impairment
of Long-Lived Assets, Including Intangible Assets and Fixed
Assets
We review our long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset may no longer be recoverable.
When these events occur, we measure impairment by comparing the
carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to result from the use
of the assets and their eventual disposition. If the sum of the
expected undiscounted cash flows is less than the carrying
amount of the assets, we recognize an impairment loss based on
the fair value of the assets. We have determined that there was
no impairment of long-lived assets.
As of June 30, 2009, we expect the long-lived intangible
assets on our consolidated balance sheet, primarily related to
the land use rights for Langfang Duoyuan and Hunan Duoyuan, to
be fully recoverable.
63
Income
Taxes
We recognize deferred income taxes for temporary differences
between the tax basis of assets and liabilities and their
reported amounts in the financial statements, net operating loss
carry-forwards and credits by applying enacted statutory tax
rates applicable to future years.
We reduce deferred tax assets by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
We provide for current income taxes in accordance with the laws
of the relevant tax authorities.
Taxes
and Incentives
Prior to January 1, 2008, our subsidiaries were governed by
the FIE Income Tax Law and various local income tax laws, or
collectively the Old Income Tax Laws.
Beginning on January 1, 2008, the New EIT Law replaced the
Old Income Tax Laws for domestic Chinese enterprises and foreign
invested enterprises, or FIEs. Generally, the income tax rate of
25% in accordance with the New EIT Law replaced the 33% rate
applicable to domestic Chinese enterprises and foreign invested
enterprises, or FIEs. The New EIT Law, however, permits
companies, whether foreign-invested or domestic, to continue to
enjoy their preferential tax treatment granted in accordance
with the ten prevailing tax laws and regulations, adjusted by
certain transitional phase-out rules.
According to the Old Income Tax Laws, upon approval by the PRC
tax authorities, FIEs scheduled to operate for ten years or more
and engaged in manufacturing and production may be exempt from
income taxes for two years, commencing with their first
profitable year of operations, after taking into account any
losses brought forward from prior years, and thereafter with a
50% reduction for the next three years. For tax filing purposes
in China, all yearly periods refer to calendar years.
As a foreign-invested manufacturing enterprise scheduled to
operate for a period of not less than ten years in accordance
with the FIE Income Tax Law, Duoyuan China enjoyed a two-year
tax exemption followed by a three-year 50% tax reduction.
Duoyuan China began to generate net profit in the calendar year
ended December 31, 2004. Therefore, Duoyuan China had an
income tax exemption for the calendar years ended
December 31, 2004 and 2005, and enjoyed a 50% tax reduction
for the calendar years ended December 31, 2006, 2007 and
2008. Under the phase-out rules, enterprises established before
the promulgation date of the New EIT Law and which were granted
tax holidays under the then effective tax laws or regulations
may continue to enjoy their tax holidays until their expiration.
Duoyuan China, an enterprise established before the promulgation
date of the New EIT Law, continued to enjoy its two-year 50%
reduction of the enterprise income tax until the end of 2008,
and therefore was subject to a 12.5% tax rate for the calendar
year ended December 31, 2008. Beginning on January 1,
2009, Duoyuan China became subject to the 25% income tax rate
under the New EIT Law. See Risk Factors Risks
Related to Our Business The termination and
expiration or unavailability of preferential tax treatments once
available to us may have a material adverse effect on our
business, financial condition and operating results.
Our Langfang Duoyuan facility is located in a Special Economic
and High Technology Zone, and the Administration Committee of
such zone has granted Langfang Duoyuan a special income tax rate
for doing business in the special zone. With this approval from
the local government, Langfang Duoyuan is exempted from income
taxes for five years, commencing with its first year of
profitable operations. Langfang Duoyuan began to generate net
profit in the calendar year ended December 31, 2003.
Therefore, Langfang Duoyuan enjoyed an income tax exemption for
the calendar years 2003 through 2007. Langfang Duoyuan became
subject to the 25% income tax rate starting January 1,
2008, under the New EIT Law. Because this tax preferential
treatment was granted by the local government and was not
supported by the state laws and regulations, we face a risk of
being ordered to refund these prior tax benefits. See Risk
Factors Risks
64
Related to Our Business The termination and
expiration or unavailability of preferential tax treatments once
available to us may materially and adversely affect our
business.
Prior to the incorporation of Hunan Duoyuan, we negotiated with
Hunan Shaoyang Treasury Department for an income tax exemption.
The Hunan Shaoyang Treasury Department granted Hunan Duoyuan a
five year income tax exemption commencing with its first year of
profitable operations. Hunan Duoyuan began to generate net
profit in the calendar year ended December 31, 2005.
Therefore, Hunan Duoyuan enjoys an income tax exemption for the
calendar years 2005 through 2009. Pursuant to the tax
preferential treatment granted by the local government, Hunan
Duoyuan will become subject to the 25% income tax rate starting
January 1, 2010, under the New EIT Law. Because this tax
preferential treatment was granted by the local government and
was not supported by the state laws and regulations, we face a
risk of being ordered to refund these prior tax benefits. See
Risk Factors Risks Related to Our
Business The termination and expiration or
unavailability of preferential tax treatments once available to
us may have a material adverse effect on our business, financial
condition and operating results.
The following table reconciles the U.S. statutory rates to
our effective tax rates for fiscal 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
U.S. statutory rates
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
(34
|
)
|
China income taxes
|
|
|
33
|
|
|
|
33
|
|
|
|
25
|
|
China income tax exemption
|
|
|
(23.2
|
)
|
|
|
(22.3
|
)
|
|
|
(11.2
|
)
|
Other(a)
|
|
|
1.6
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rates
|
|
|
11.4
|
%
|
|
|
10.9
|
%
|
|
|
14.3
|
%
|
|
|
(a) |
The 1.6%, 0.2% and 0.5% represent $2,720,474, $423,888 and
$1,399,143 of expenses incurred by us that are not subject to
China income tax for fiscal 2007, 2008 and 2009, respectively.
|
VAT
Enterprises or individuals who sell commodities, engage in
repair and maintenance, or import and export goods in China are
subject to a VAT in accordance with Chinese laws. The VAT
standard rate is 17% of the gross sales price. A credit is
available whereby VAT paid on the purchases of equipment,
semi-finished products or raw materials used in finished
products can be used to offset the VAT due on sales of the
finished products.
The VAT on sales amounted to $19.8 million,
$28.9 million, and $32.4 million for fiscal 2007, 2008
and 2009, respectively. The VAT on purchases amounted to
$7.3 million, $20.1 million and $23.9 million for
fiscal 2007, 2008 and 2009, respectively. Our sales and
purchases are recorded net of VAT, which is not impacted by the
tax preferential treatments.
Fair
Value of Financial Instruments
On July 1, 2008, we adopted SFAS No. 157,
Fair Value Measurements, or SFAS 157.
SFAS 157 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement
and enhances disclosures requirements for fair value measures.
The carrying amounts reported in the consolidated balance sheets
for receivables and current liabilities each qualify as
financial instruments and are a reasonable estimate of fair
value because of the short period of time between the
origination
65
of such instruments and their expected realization and their
current market rate of interest. The three levels of valuation
hierarchy are defined as follows:
|
|
|
|
|
Level 1 inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in
active markets.
|
|
|
|
Level 2 inputs to the valuation methodology include quoted
prices for similar assets and liabilities in active markets and
inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the
financial instrument.
|
|
|
|
Level 3 inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
|
We analyze all financial instruments with features of both
liabilities and equity under SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, or
SFAS 150, SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, or
SFAS 133, and
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock, or
EITF 00-19.
Under
EITF 00-19,
our warrants were required to be recorded as a liability at fair
value and marked to market each reporting period.
As of June 30, 2009, the outstanding principal on our
short-term loans was $14.4 million. We concluded that the
carrying value of the short term loan is a reasonable estimate
of fair value because the amounts are due within one year and
the stated interest rate approximates current rates available.
As of June 30, 2009, we determined that certain inputs to
the fair value measurement of the warrant liability falls under
level 3 of the valuation hierarchy, since there was no
observable market price for certain inputs significant to the
valuation model used to determine the fair value of the warrant
liability, and also rendered the fair value calculation under
the same classification. We carry warrant liability at fair
value totaling $1.2 million as of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Fair Value Measurements at
June 30, 2009
|
|
|
|
as of
|
|
|
Using Fair Value
Hierarchy
|
|
Liabilities
|
|
June 30, 2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Warrant liability
|
|
$
|
1,180,477
|
|
|
|
|
|
|
|
|
|
|
$
|
1,180,477
|
|
Except for the derivative liabilities and the short term loan,
we did not identify any other non-recurring assets and
liabilities that are required to be presented on the
consolidated balance sheet at fair value in accordance with
SFAS 157.
SFAS 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of
FASB Statement No. 115, became applicable and
effective for us on July 1, 2008. SFAS 159 provides us
with the irrevocable option to elect fair value for the initial
and subsequent measurement for certain financial assets and
liabilities on a
contract-by-contract
basis with the difference between the carrying value before
election of the fair value option and the fair value recorded
upon election as an adjustment to beginning retained earnings.
We chose not to elect the fair value option.
Selected
Quarterly Results of Operations
The following table presents our selected unaudited consolidated
quarterly results of operations for the nine quarters in the
period from April 1, 2007 to June 30, 2009. You should
read the following information in conjunction with our audited
consolidated financial statements and related notes included
elsewhere in this prospectus. We have prepared the unaudited
consolidated quarterly financial information on the same basis
as our audited consolidated financial statements. The unaudited
consolidated quarterly financial information includes all
adjustments, consisting only of normal and
66
recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for
the quarters presented. Our quarterly operating results have
fluctuated and will continue to fluctuate from period to period.
The operating results for any quarter are not necessarily
indicative of the operating results for any future period or for
a full year. Factors that may cause our revenue and results of
operations to vary or fluctuate include those discussed in the
Risk Factors section of this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Revenue, net
|
|
$
|
19,207
|
|
|
$
|
22,645
|
|
|
$
|
25,444
|
|
|
$
|
16,022
|
|
|
$
|
25,516
|
|
|
$
|
26,179
|
|
|
$
|
36,837
|
|
|
$
|
17,412
|
|
|
$
|
26,163
|
|
Cost of revenue
|
|
|
10,629
|
|
|
|
11,210
|
|
|
|
12,191
|
|
|
|
7,835
|
|
|
|
13,226
|
|
|
|
12,331
|
|
|
|
16,609
|
|
|
|
8,354
|
|
|
|
13,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,578
|
|
|
|
11,435
|
|
|
|
13,253
|
|
|
|
8,187
|
|
|
|
12,290
|
|
|
|
13,848
|
|
|
|
20,228
|
|
|
|
9,058
|
|
|
|
13,123
|
|
Research and development expenses
|
|
|
169
|
|
|
|
163
|
|
|
|
170
|
|
|
|
225
|
|
|
|
1,125
|
|
|
|
694
|
|
|
|
490
|
|
|
|
286
|
|
|
|
298
|
|
Selling expenses
|
|
|
2,623
|
|
|
|
2,189
|
|
|
|
2,366
|
|
|
|
1,411
|
|
|
|
2,738
|
|
|
|
2,547
|
|
|
|
2,952
|
|
|
|
1,476
|
|
|
|
2,751
|
|
General and administrative expenses
|
|
|
1,492
|
|
|
|
784
|
|
|
|
1,269
|
|
|
|
1,272
|
|
|
|
1,147
|
|
|
|
932
|
|
|
|
1,345
|
|
|
|
1,056
|
|
|
|
1,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,294
|
|
|
|
8,299
|
|
|
|
9,448
|
|
|
|
5,279
|
|
|
|
7,280
|
|
|
|
9,675
|
|
|
|
15,441
|
|
|
|
6,240
|
|
|
|
8,933
|
|
Liquidated damage (expenses) income, net of settlement
|
|
|
(942
|
)
|
|
|
(707
|
)
|
|
|
|
|
|
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
(15
|
)
|
|
|
55
|
|
|
|
109
|
|
|
|
30
|
|
|
|
|
|
Other income (expense), net
|
|
|
457
|
|
|
|
(128
|
)
|
|
|
(264
|
)
|
|
|
(206
|
)
|
|
|
64
|
|
|
|
(179
|
)
|
|
|
(1,135
|
)
|
|
|
(106
|
)
|
|
|
(549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
3,809
|
|
|
|
7,464
|
|
|
|
9,184
|
|
|
|
6,103
|
|
|
|
7,329
|
|
|
|
9,551
|
|
|
|
14,415
|
|
|
|
6,164
|
|
|
|
8,384
|
|
Minority interest
|
|
|
40
|
|
|
|
93
|
|
|
|
152
|
|
|
|
50
|
|
|
|
85
|
|
|
|
109
|
|
|
|
169
|
|
|
|
72
|
|
|
|
113
|
|
Provision for income taxes
|
|
|
728
|
|
|
|
616
|
|
|
|
588
|
|
|
|
821
|
|
|
|
1,213
|
|
|
|
927
|
|
|
|
1,604
|
|
|
|
1,181
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,041
|
|
|
|
6,755
|
|
|
|
8,444
|
|
|
|
5,232
|
|
|
|
6,031
|
|
|
|
8,515
|
|
|
|
12,642
|
|
|
|
4,911
|
|
|
|
6,529
|
|
Foreign currency translation gain
|
|
|
910
|
|
|
|
908
|
|
|
|
2,079
|
|
|
|
3,266
|
|
|
|
1,946
|
|
|
|
256
|
|
|
|
308
|
|
|
|
(227
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,951
|
|
|
$
|
7,663
|
|
|
$
|
10,523
|
|
|
$
|
8,498
|
|
|
$
|
7,977
|
|
|
$
|
8,771
|
|
|
$
|
12,950
|
|
|
$
|
4,684
|
|
|
$
|
6,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
|
(unaudited)
|
|
|
Revenue, net
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
55.3
|
|
|
|
49.5
|
|
|
|
47.9
|
|
|
|
48.9
|
|
|
|
51.8
|
|
|
|
47.1
|
|
|
|
45.1
|
|
|
|
48.0
|
|
|
|
49.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
44.7
|
|
|
|
50.5
|
|
|
|
52.1
|
|
|
|
51.1
|
|
|
|
48.2
|
|
|
|
52.9
|
|
|
|
54.9
|
|
|
|
52.0
|
|
|
|
50.2
|
|
Research and development expenses
|
|
|
0.9
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
1.4
|
|
|
|
4.4
|
|
|
|
2.7
|
|
|
|
1.3
|
|
|
|
1.6
|
|
|
|
1.1
|
|
Selling expenses
|
|
|
13.7
|
|
|
|
9.7
|
|
|
|
9.3
|
|
|
|
8.8
|
|
|
|
10.7
|
|
|
|
9.7
|
|
|
|
8.0
|
|
|
|
8.5
|
|
|
|
10.5
|
|
General and administrative expenses
|
|
|
7.7
|
|
|
|
3.4
|
|
|
|
5.0
|
|
|
|
7.9
|
|
|
|
4.5
|
|
|
|
3.6
|
|
|
|
3.7
|
|
|
|
6.0
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
22.4
|
|
|
|
36.7
|
|
|
|
37.1
|
|
|
|
33.0
|
|
|
|
28.6
|
|
|
|
36.9
|
|
|
|
41.9
|
|
|
|
35.9
|
|
|
|
34.2
|
|
Liquidated damage (expenses) income, net of settlement
|
|
|
(4.9
|
)
|
|
|
(3.1
|
)
|
|
|
0.0
|
|
|
|
5.9
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Change in fair value of derivative instruments
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.5
|
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Other income (expense), net
|
|
|
2.4
|
|
|
|
(0.6
|
)
|
|
|
(1.0
|
)
|
|
|
(1.3
|
)
|
|
|
0.3
|
|
|
|
(0.7
|
)
|
|
|
(3.1
|
)
|
|
|
(0.6
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
19.9
|
|
|
|
33.0
|
|
|
|
36.1
|
|
|
|
38.1
|
|
|
|
28.8
|
|
|
|
36.4
|
|
|
|
39.1
|
|
|
|
35.5
|
|
|
|
32.1
|
|
Minority interest
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Provision for income taxes
|
|
|
3.8
|
|
|
|
2.7
|
|
|
|
2.3
|
|
|
|
5.1
|
|
|
|
4.8
|
|
|
|
3.5
|
|
|
|
4.4
|
|
|
|
6.8
|
|
|
|
6.7
|
|
Net income
|
|
|
15.9
|
|
|
|
29.9
|
|
|
|
33.2
|
|
|
|
32.7
|
|
|
|
23.7
|
|
|
|
32.5
|
|
|
|
34.2
|
|
|
|
28.3
|
|
|
|
25.0
|
|
Foreign currency translation gain
|
|
|
4.7
|
|
|
|
4.0
|
|
|
|
8.2
|
|
|
|
20.4
|
|
|
|
7.6
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
(1.3
|
)
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
20.6
|
%
|
|
|
33.9
|
%
|
|
|
41.4
|
%
|
|
|
53.0
|
%
|
|
|
31.3
|
%
|
|
|
33.5
|
%
|
|
|
35.2
|
%
|
|
|
27.0
|
%
|
|
|
25.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Our net income has fluctuated significantly during the nine
quarters in the period from April 1, 2007 to June 30,
2009. Historically, quarterly fluctuation has been primarily due
to lower sales during the third and fourth quarters of each
fiscal year and higher sales during the first and second
quarters of each fiscal year.
Our first and second quarter revenues in fiscal 2007 and fiscal
2008 were sequentially higher compared to third and fourth
quarter revenues in fiscal 2007 and fiscal 2008. We typically
recognize more revenue during the first and second quarter of
each fiscal year due to the following reasons:
|
|
|
|
|
Most businesses operate on a calendar year basis. These
businesses tend to make capital expenditures conservatively in
the beginning of the calendar year and spend more aggressively
towards the end of the calendar year to meet their annual
budgets.
|
|
|
|
Our distributors sell more products to our end-user customers
during the fourth quarter to take advantage of our sales rebate
program, which ends in December of each year.
|
Similarly our sequential revenues in the third and fourth
quarter of each fiscal year are lower than the immediately prior
quarter because of seasonality, namely the holiday season in
China during those quarters. Many businesses in China operate on
reduced hours, if at all, during the time surrounding the
Chinese Lunar New Year Holiday.
We introduced two new or enhanced models (one single color large
format press and one multicolor large format press) in the
second quarter of fiscal 2009. We also introduced one enhanced
model (multicolor large format press) in the third quarter of
fiscal 2009 and one new model (single color small format press)
in the fourth quarter of fiscal 2009. New product introductions
contributed to revenues in each period being higher than the
corresponding periods in the prior years.
Our cost of revenue can vary significantly from quarter to
quarter, but generally it is in proportion to the number of
products we sell in any given quarter. We typically incur higher
costs in the first and second quarters of each fiscal year
primarily due to the increase in the volume of our products sold.
For the nine quarters in the period from April 1, 2007 to
June 30, 2009, our gross profit margins ranged from 44.7%
to 54.9%. The gross profit margin of 44.7% in the quarter ended
June 30, 2007 was primarily due to the sale of old
inventory from Hunan Duoyuan at 20% below their costs. The gross
profit margin of 48.2% in the quarter ended June 30, 2008
was primarily due to sale of sample products at 50% below their
costs. Higher gross profit margins in other quarters were due to
an increase in sales of higher margin products, namely our
multicolor presses. However, due to the challenging global
economic conditions and competitive pressures, we reduced the
selling prices of three single color press models and one
multicolor small format press model between 2% to 4% during
fiscal 2009. Our gross profit margins, however, remained
relatively unchanged by increased sale of our higher priced
multicolor presses as well as by introducing new products at
higher selling prices.
Our selling expenses as a percentage of revenue ranged from 8.0%
to 13.7% during the nine quarters beginning from April 1,
2007 to June 30, 2009. Our selling expenses for the quarter
ended June 30, 2007 was 13.7% of revenues. During this
quarter, we decided to focus on selling more technologically
advanced products like our multicolor presses and incurred
significant
start-up
costs. In order to promote our brand and increase awareness for
our multicolor presses, we began attending exhibitions and trade
shows across China.
In general, our research and development expenses comprise of
salaries and raw materials and supply costs for the development,
improvement and testing of new and existing products. During the
quarters ended June 30, 2008 and September 30, 2008,
our research and development expenses increased as we
68
hired additional engineers and specialists. Our research and
development costs also increased during these periods as we
increased our purchases of raw materials in connection with
product development. As a result of this investment in research
and development, we introduced new products during the quarters
ended December 31, 2008, March 31, 2009 and
June 30, 2009.
Liquidated damages expense relates to our failure to timely
register for resale certain private placement shares and
terminate related party transactions. We recorded liquidated
damages expenses during the quarters ended June 30, 2007
and September 30, 2007. We settled the claims for
liquidated damages in the quarter ended March 31, 2008, and
we reversed the accrual and recognized a net liquidated damages
gain.
Langfang Duoyuan leased part of its manufacturing plant during
the quarter ended June 30, 2007. Thus, we had other income
during this quarter. This lease was terminated in May 2007 and
we did not recognize rental income in subsequent quarters. Our
other expenses increased during the quarter ended
December 31, 2008 because we expensed the amounts incurred
in connection with our proposed initial public offering due to
market uncertainty.
The significant increase in our provision for income taxes since
the quarter ended March 31, 2008 is primarily due to an
increase in the applicable tax rate of Langfang Duoyuan from 0%
to 25%. This new tax rate for Langfang Duoyuan went into effect
on January 1, 2008. Also, an increase in our provision for
income taxes during the quarter ended March 31, 2009 is
primarily due to an increase in the applicable tax rate of
Duoyuan China from 12.5% to 25%. This new tax rate for Duoyuan
China went into effect on January 1, 2009. We expect that
our provision for income taxes will increase with any increase
in our income from operations.
Foreign currency translation reflects the appreciation of the
Renminbi against the U.S. dollar. The Renminbi against the
U.S. dollar at April 1, 2007 was RMB 7.72 to $1.00 USD
and it appreciated to RMB6.83 to $1.00 USD at June 30, 2009.
For the remaining quarters of 2009, we expect that our
multicolor presses, as a percentage of revenue, will continue to
increase as end-user customers in China are increasingly
demanding sophisticated offset printing equipment, such as our
multicolor presses, to produce high quality printing materials
more efficiently.
69
Results
of Operations
The following table sets forth selected data from our
consolidated statements of income and other comprehensive income
for the periods indicated as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
|
(dollars in thousands)
|
|
|
Revenue, net
|
|
|
67,812
|
|
|
|
100.0
|
%
|
|
|
89,628
|
|
|
|
100.0
|
%
|
|
|
106,591
|
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
37,694
|
|
|
|
55.6
|
|
|
|
44,462
|
|
|
|
49.6
|
|
|
|
50,334
|
|
|
|
47.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,118
|
|
|
|
44.4
|
|
|
|
45,166
|
|
|
|
50.4
|
|
|
|
56,257
|
|
|
|
52.8
|
|
Selling expenses
|
|
|
7,827
|
|
|
|
11.5
|
|
|
|
8,705
|
|
|
|
9.7
|
|
|
|
9,726
|
|
|
|
9.1
|
|
General and administrative expenses
|
|
|
3,078
|
|
|
|
4.6
|
|
|
|
4,472
|
|
|
|
5.0
|
|
|
|
4,474
|
|
|
|
4.2
|
|
Research and development
|
|
|
1,046
|
|
|
|
1.5
|
|
|
|
1,683
|
|
|
|
1.9
|
|
|
|
1,768
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18,167
|
|
|
|
26.8
|
|
|
|
30,306
|
|
|
|
33.8
|
|
|
|
40,289
|
|
|
|
37.8
|
|
Liquidated damage, net of settlement
|
|
|
(2,119
|
)
|
|
|
(3.1
|
)
|
|
|
235
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Change of the fair value of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
0.1
|
|
|
|
194
|
|
|
|
0.2
|
|
Other income (expense), net
|
|
|
(21
|
)
|
|
|
(0.1
|
)
|
|
|
(535
|
)
|
|
|
(0.6
|
)
|
|
|
(1,969
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
16,027
|
|
|
|
23.7
|
|
|
|
30,079
|
|
|
|
33.6
|
|
|
|
38,514
|
|
|
|
36.2
|
|
Minority interest
|
|
|
241
|
|
|
|
0.4
|
|
|
|
382
|
|
|
|
0.4
|
|
|
|
464
|
|
|
|
0.4
|
|
Provision for income taxes
|
|
|
1,807
|
|
|
|
2.7
|
|
|
|
3,238
|
|
|
|
3.6
|
|
|
|
5,454
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13,979
|
|
|
|
20.6
|
|
|
|
26,459
|
|
|
|
29.5
|
|
|
|
32,596
|
|
|
|
30.7
|
|
Foreign currency translation gain
|
|
|
1,834
|
|
|
|
2.7
|
|
|
|
8,200
|
|
|
|
9.1
|
|
|
|
329
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
15,813
|
|
|
|
23.3
|
%
|
|
$
|
34,659
|
|
|
|
38.7
|
%
|
|
$
|
32,925
|
|
|
|
31.0
|
%
|
Comparison
of Fiscal 2008 and Fiscal 2009
Revenue,
net
Our revenue increased by $17.0 million, or 18.9%, from
$89.6 million for fiscal 2008 to $106.6 million for
fiscal 2009, primarily as a result of an increase in revenue
from all our products. Specifically, revenue for our pre-press
printing equipment increased by $0.8 million, or 25.7%,
from $3.2 million for fiscal 2008 to $4.0 million for
fiscal 2009. In addition, revenue for our press printing
equipment for fiscal 2009 increased by $16.1 million, or
18.4%, when compared to fiscal 2008. Specifically, the increase
in revenue of our press printing equipment was primarily due to
increased sales for our presses. We sold more units of our
multicolor presses, which generally have higher prices than our
single color presses, during fiscal 2009 than in fiscal 2008. We
sold 19 more multicolor large format presses, generally our most
expensive products, in fiscal 2009 compared to fiscal 2008 and
generated $8.0 million of additional revenue in fiscal 2009
compared to fiscal 2008. We also sold 51 more multicolor small
format presses, generally our second most expensive products, in
fiscal 2009 compared to fiscal 2008 and generated
$7.8 million of additional revenue in fiscal 2009 compared
to fiscal 2008. This increase in revenue was not a result of any
price increases as we did not increase the prices of our
multicolor presses during fiscal 2009. Our top five selling
models, which accounted for more than 72% of our total revenue
in fiscal 2009, were all multicolor presses.
70
Pre-press
Printing Equipment
CTP System. Revenue for our CTP system
increased by $0.8 million, or 25.7%, from $3.2 million
for fiscal 2008 to $4.0 million for fiscal 2009. We believe
that the increase in revenue for our CTP system was a result of
increased market acceptance and our increased marketing
activities. During fiscal 2009, we promoted our CTP system at
more exhibitions and trade shows when compared to the prior year.
Press
Printing Equipment
Revenue from the sale of our press printing equipment increased
by $16.1 million, or 18.4%, from $88.0 million for
fiscal 2008 to $104.1 million for fiscal 2009. This
increase was primarily due to an increase in demand for our
multicolor presses. We sold more units of our multicolor presses
when compared to the prior year.
Single Color Small Format
Press. Revenue for our single color small
format presses increased by $0.1 million, or 2.5%, from
$4.3 million for fiscal 2008 to $4.4 million for
fiscal 2009. Due to increased competition, demand for our single
color small format presses decreased and we sold fewer single
color small format presses for fiscal 2009 when compared to the
prior year. The slight increase in revenue was mainly due to the
appreciation of the Renminbi against the U.S. dollar.
Single Color Large Format
Press. Revenue for our single color large
format presses increased by $0.2 million, or 1.9%, from
$10.7 million for fiscal 2008 to $10.9 million for
fiscal 2009. This increase was primarily due to the increased
demand for a new single color large format press, Model DY66T,
which we introduced in October 2008. We promoted Model DY66T to
our distributors as a complementary product to our multicolor
presses at trade shows and exhibitions we attended during fiscal
2009. This model offers similar functionality to one of our
existing single color large format presses, Model J4109, but
costs less than Model J4109. This increase in revenue from Model
DY66T was offset by a decrease in revenue from J4109 of
$1.2 million for fiscal 2009 when compared to the prior
year.
Multicolor Small Format Press. Revenue
for our multicolor small format presses increased by
$7.8 million, or 29.7%, from $26.4 million for fiscal
2008 to $34.2 million for fiscal 2009. We believe the
increased demand for our multicolor small format press was
partially a result of increased marketing activities, which
resulted in increased sales volume. The increase in the number
of units sold was a result of increased purchases by our
existing and new end-user customers seeking upgrades to
multicolor presses from single color presses. We promoted our
multicolor small format presses at more exhibitions and trade
shows during fiscal 2009 when compared to the prior year.
Specifically, for fiscal 2009 due to our increased marketing
efforts, we recognized an increase in revenue by
$3.3 million when compared to fiscal 2008 due to the sale
of Model DY456, a printing machine that prints colorful
books, magazines, corporate brochures, product catalogues,
labels and small packages. We also increased the promotion of
Model DY452, a highly automated multicolor small format press
mainly used for shorter print runs such as corporate brochures,
conference documents, labels and small packages. This increase
in promotion of Model DY452 attributed to an increase in our
revenue from the sale of this product by $3.5 million over
the prior year.
Multicolor Large Format Press. Revenue
for our multicolor large format presses increased by
$8.0 million, or 17.2%, from $46.6 million for fiscal
2008 to $54.6 million for fiscal 2009. We believe the
increased demand for our multicolor large format presses was
partially a result of increased marketing activities, which
resulted in an increase in sales volume for our existing
products, and new demand for two products we introduced in
fiscal 2009. The increase in the number of units sold was a
result of increased purchases by our existing and new end-user
customers seeking upgrades to multicolor presses from single
color presses. Specifically, we introduced into the market a new
multicolor large format press, Model DY474II, in November 2008.
This highly automated and energy efficient machine, which is an
enhanced version of an
71
existing product, Model DY474, has been well received since its
introduction. It has new features such as plate cocking and a
color pilotless control function. It generated $3.8 million
in revenue for fiscal 2009. We also introduced into the market
another new multicolor large format press, PZ-4660AL, in
February 2009. This is an enhanced version of an existing
product produces printed materials in brighter colors and is
more automated. It generated $3.1 million in revenue for
fiscal 2009.
Cost
of Revenue
As a percentage of revenue, the cost of revenue decreased by
2.4% from 49.6% for fiscal 2008 to 47.2% for fiscal 2009. This
decrease was mainly due to the increase in sales of our
multicolor presses, which overall have lower costs and higher
gross profit margins than our single color presses.
Our cost of revenue increased by $5.8 million, or 13.2%,
from $44.5 million for fiscal 2008 to $50.3 million
for fiscal 2009. This increase was primarily due to an increase
in the volume of our products sold during this period,
particularly the sale of our multicolor presses. This increase
in sales contributed to the increase in consumption of raw
materials and components across our two product categories as
our revenue increased by 18.9% from fiscal 2008 to fiscal 2009.
Gross
Profit
Our gross profit margin increased by 2.4% from 50.4% for fiscal
2008 to 52.8% for fiscal 2009. The increase in gross profit and
gross profit margin during this period was due to the increased
production and sale of our multicolor presses, which have higher
gross profits and gross profit margins than our single color
presses.
Our gross profit increased by $11.1 million, or 24.6%, from
$45.2 million for fiscal 2008 to $56.3 million for
fiscal 2009.
Selling
Expenses
As a percentage of revenue, selling expenses decreased by 0.6%
from 9.7% for fiscal 2008 to 9.1% for fiscal 2009. This decrease
was mainly due to our increased sales volume, which created
economies of scale, reducing our per unit selling expenses.
Selling expenses increased by $1.0 million, or 11.7%, from
$8.7 million for fiscal 2008 to $9.7 million for
fiscal 2009. This increase was primarily due to an increase in
salary expense to our sales professionals and an increase in
shipping and handling costs.
General
and Administrative Expenses
As a percentage of revenue, general and administrative expenses
decreased from 5.0% for fiscal 2008 to 4.2% for fiscal 2009.
This decrease was mainly a function of our revenue increasing
faster than our administrative expenses.
General and administrative expenses remained constant at
$4.5 million for fiscal 2008 and 2009.
Research
and Development Expenses
As a percentage of revenue, research and development expenses
decreased from 1.9% for fiscal 2008 to 1.7% for fiscal 2009.
This decrease was mainly because of the increase in our revenue
increasing faster than our research and development expenses.
Research and development expenses increased by
$0.1 million, or 5.0%, from $1.7 million for fiscal
2008 to $1.8 million for fiscal 2009. This increase was
primarily due to an increase in salary expenses
72
of our research and development team. Specifically, we hired an
additional six engineers in fiscal 2009, increasing our research
and development team to 208 employees and salary expenses
increased by $0.2 million, or 27.2%, from $0.8 million
in fiscal 2008 to $1.0 million in fiscal 2009.
Income
from Operations
Income from operations increased by $10.0 million, or
32.9%, from $30.3 million for fiscal 2008 to
$40.3 million for fiscal 2009. The increase was due to the
increased sale of our multicolor presses, which generated higher
revenue for us.
Liquidated
Damage Expenses
Liquidated damages expense relates to our failure to timely
register for resale certain private placement shares and
terminate related party transactions. We recorded liquidated
damages and expenses of $2.1 million for fiscal 2007. We
settled the claims for liquidated damages in the third quarter
of fiscal 2008, and we reversed the accrual and recognized a net
liquidated damages gain of $0.2 million for fiscal 2008.
See Critical Accounting Policies
Liquidated Damages Expense. There was no such expense for
fiscal 2009.
Other
Income (Expenses)
Other expenses increased by $1.5 million, or 268.0%, from
$0.5 million for fiscal 2008 to $2.0 million for
fiscal 2009.
Our interest expense increased by $0.5 million from
$0.7 million for fiscal 2008 to $1.2 million for
fiscal 2009 as our borrowing increased by $3.0 million from
$11.4 million for fiscal 2008 to $14.4 million for
fiscal 2009. Interest expense was offset by $0.2 million of
interest income for fiscal 2008 and fiscal 2009.
In addition, in accordance with SEC Staff Accounting Bulletin,
Topic 5A, in the second quarter of fiscal 2009, we expensed
$1.0 million incurred in connection with our proposed
initial public offering due to market uncertainty.
Minority
Interest
Minority interest increased by $0.1 million, or 21.5%, from
$0.4 million for fiscal 2008 to $0.5 million for
fiscal 2009. The increase in minority interest is mainly due to
the increase of net income in Langfang Duoyuan and Hunan Duoyuan.
Provision
for Income Taxes
Provision for income taxes increased $2.3 million, or
68.5%, from $3.2 million for fiscal 2008 to
$5.5 million for fiscal 2009. Our effective tax rates for
fiscal 2008 and 2009 were 10.9% and 14.3%, respectively. The
increase in the provision for income taxes was attributable to
the increase in net income by 18.9% over the same period and the
increase in income tax rates of Duoyuan China and Langfang
Duoyuan.
Duoyuan China began paying income taxes on January 1, 2006.
The income tax rate for Duoyuan China in the first half of
fiscal 2008 was 16.5%, and the income tax rate for Duoyuan China
in the second half of fiscal 2008 was 12.5%. Beginning on
January 1, 2009, the income tax rate for Duoyuan China
increased to 25%.
Pursuant to the tax preferential treatment granted by the local
government, Langfang Duoyuan was exempt from paying taxes prior
to calendar year 2008. Langfang Duoyuan began paying income
taxes
73
on January 1, 2008. The income tax rate for Langfang
Duoyuan was 0% in the first half of fiscal 2008 and 25% in the
second half of fiscal 2008.
Pursuant to the tax preferential treatment granted by the local
government, Hunan Duoyuan is tax exempted through calendar year
2009.
Net
Income
As a result of the foregoing, net income increased by
$6.1 million, or 23.2%, from $26.5 million for fiscal
2008 to $32.6 million for fiscal 2009.
As a percentage of revenue, net income increased 1.2% from 29.5%
for fiscal 2008 to 30.7% for fiscal 2009.
Foreign
Currency Translation Adjustment
The foreign currency translation adjustment decreased by
$7.9 million, or 96.0%, from $8.2 million for fiscal
2008 to $0.3 million for fiscal 2009. The foreign currency
translation adjustment reflects the appreciation of the Renminbi
against the U.S. dollar. Our assets and liabilities are
translated at a rate of RMB6.85 to $1.00 at June 30, 2008
and RMB6.83 to $1.00 at June 30, 2009. Our results of
operations are translated at an average rate of RMB7.26 for
fiscal 2008 and RMB6.83 to $1.00 for fiscal 2009. Our equity
accounts are translated at historical rates.
Comparison
of Fiscal 2007 and Fiscal 2008
Revenue,
net
Our revenue increased $21.8 million, or 32.2%, from
$67.8 million for fiscal 2007 to $89.6 million for
fiscal 2008. This increase was primarily due to increased demand
for our multicolor presses. Our top five selling models, which
represented more than 75% of our total revenue in fiscal 2008,
were all multicolor presses. This increase in revenue from our
multicolor presses was offset by a decrease in revenue from our
CTP system and single color small format presses.
Pre-press
Printing Equipment
CTP System. Revenue for our CTP system
decreased by $0.6 million, or 15.5%, from $3.8 million
for fiscal 2007 to $3.2 million for fiscal 2008. This
decrease was primarily due to increased competition from Chinese
competitors. For most of fiscal 2007, we believe we were the
dominant manufacturer of computer-to-plate pre-press products in
China. By the end of the third quarter of fiscal 2007, we became
aware of a number of Chinese competitors that entered the
computer-to-plate pre-press market, decreasing our market share
and demand for our CTP system.
Press
Printing Equipment
Revenue for our press printing equipment increased by
$23.2 million, or 35.8%, from $64.8 million for fiscal
2007 to $88.0 million for fiscal 2008. This increase was
primarily due to an increase in demand for our multicolor
presses.
Single Color Small Format
Press. Revenue for our single color small
format presses decreased by $1.7 million, or 28.1%, from
$6.0 million for fiscal 2007 to $4.3 million for
fiscal 2008. This decrease was primarily due to increased
competition from Chinese competitors, decrease in our single
color small format product offerings and decreased marketing
efforts. Demand for our single color small format presses, a
less sophisticated and low technology product, decreased as more
Chinese manufacturers entered the single color small format
press business, increasing competition. The low barrier to entry
74
allows manufacturers to enter this market with relative low
cost. As part of our plan to focus on selling more
technologically advanced products like our multicolor presses,
we discontinued the manufacture of five different models of our
single color small format presses in fiscal 2008. For these same
reasons, we also decreased marketing efforts for our single
color small format presses, instead increasing our marketing
efforts for our multicolor presses.
Single Color Large Format
Press. Revenue for our single color large
format presses increased by $1.0 million, or 10.0%, from
$9.7 million for fiscal 2007 to $10.7 million for
fiscal 2008. This increase was primarily due to the increased
demand for a new single color large format press, Model J4109,
which we introduced in fiscal 2007. Model J4109, which is an
enhanced version of Models DY166 and J4105, gained market
acceptance during fiscal 2008 and we recognized revenue of
$4.9 million from the sale of this product. This increase
in revenue for Model J4109 was offset by a decrease in revenue
for Models DY166 and J4105 of $4.3 million for fiscal 2008
when compared to fiscal 2007.
Multicolor Small Format Press. Revenue
for our multicolor small format presses increased by
$9.0 million, or 52.0%, from $17.4 million for fiscal
2007 to $26.4 million for fiscal 2008. This increase was
primarily due to increased demand. We believe the increase in
demand for our multicolor small format presses was partially a
result of increased marketing activities. During fiscal 2008, we
increased our marketing efforts by advertising our products in a
greater number of magazines and trade journals more frequently
than in fiscal 2007. In addition, we performed more
demonstrations of our multicolor small format presses to our
end-user customers to showcase the quality of the printed
materials as well as the speed and ease of use in fiscal 2008
when compared to fiscal 2007.
Multicolor Large Format Press. Revenue
for our multicolor large format presses increased by
$14.9 million, or 47.1%, from $31.7 million for fiscal
2007 to $46.6 million for fiscal 2008. This increase was
primarily due to increased demand. We believe the increase in
demand for our multicolor large format presses was partially a
result of increased marketing activities. During fiscal 2008, we
increased our marketing efforts by advertising our products in a
greater number of magazines and trade journals more frequently
than in fiscal 2007. In addition, we performed more
demonstrations of our multicolor large format presses to our
end-user customers to showcase the quality of the printed
materials as well as the speed and ease of use in fiscal 2008
when compared to fiscal 2007. The increase in revenue is also a
result of the revenue recognized from the sale of Model DY4104,
a new multicolor large format press that we introduced to the
market in fiscal 2008. Model DY4104, a highly automated and
energy efficient machine, has been well received since its
introduction to the market. It is capable of printing on larger
sheets of paper than our existing multicolor large format press
models and it is capable of printing on packaging materials
directly. We recognized revenue from the sale of this new
product in the amount of $8.1 million during fiscal 2008.
Cost
of Revenue
As a percentage of revenue, the cost of revenue decreased by
6.0% from 55.6% for fiscal 2007 to 49.6% for fiscal 2008. This
decrease was mainly due to the increase in sales of our
multicolor presses, which overall have lower costs and higher
gross profit margins than our single color presses. In addition,
we began manufacturing our key components in-house in fiscal
2007 at Hunan Duoyuan, reducing the per unit cost of our
products.
Our cost of revenue increased by $6.8 million, or 18.0%,
from $37.7 million for fiscal 2007 to $44.5 million
for fiscal 2008. This increase was primarily due to an increase
in the volume of our products sold during this period,
particularly the sale of our multicolor presses. Most of our
increases were from the purchase of additional raw materials,
such as steel and iron, as more materials were needed to
manufacture our multicolor presses. Our raw material costs
increased by $5.7 million, or 16.7%, from
$34.2 million in fiscal 2007 to $39.9 million in
fiscal 2008. Also, our labor costs increased
75
by $0.4 million, or 16.7%, from $2.3 million in fiscal
2007 to $2.7 million in fiscal 2008 primarily due to
employees working additional hours to produce a greater volume
of products. Lastly, our depreciation expense had increased by
$0.9 million, or 164.6%, from $0.6 million in fiscal
2007 to $1.5 million in fiscal 2008 mainly due to the
purchase of new manufacturing equipment to be used at Hunan
Duoyuan. This increase in cost of revenue was partially offset
by a reduction of $0.2 million in our parts costs for
repairs of our manufacturing equipment.
Gross
Profit
Our gross profit margin increased from 44.4% in fiscal 2007 to
50.4% for fiscal 2008. The increase in gross profit and gross
profit margin during this period was due to the increased
production and sale of our multicolor presses, which have higher
gross profits and gross profit margins than our single color
presses.
As a result of the factors above, our gross profit increased by
$15.1 million, or 50.0%, from $30.1 million for fiscal
2007 to $45.2 million for fiscal 2008.
Selling
Expenses
As a percentage of revenue, selling expenses decreased by 1.8%
from 11.5% in fiscal 2007 to 9.7% in fiscal 2008. This decrease
was mainly due to our increased sales volume, which created
economies of scale, reducing our per unit selling expenses.
Selling expenses increased by $0.9 million, or 11.2%, from
$7.8 million for fiscal 2007 to $8.7 million for
fiscal 2008. This increase was primarily due to an increase in
the salaries and commissions of our sales staff, our advertising
expenses and participation in industry trade conferences.
The salaries and commissions paid to our sales staff increased
by $1.3 million, or 49.3%, from $2.6 million in fiscal
2007 to $3.9 million in fiscal 2008. The increase in
salaries and commissions was primarily due to the hiring of 14
new sales employees during the year and bonuses awarded to our
sales personnel for meeting or exceeding their sales and
performance targets.
Our advertising expenses increased by $0.3 million, or
21.4%, from $1.1 million in fiscal 2007 to
$1.4 million in fiscal 2008. This increase was primarily
due to an increase in print advertising for our products in
magazine and trade journals, and the costs of preparing
exhibition and promotional materials.
General
and Administrative Expenses
As a percentage of revenue, general and administrative expenses
increased from 4.5% in fiscal 2007 to 5.0% in fiscal 2008. This
increase was mainly because of the reasons described below.
General and administrative expenses increased by
$1.4 million, or 45.3%, from $3.1 million for fiscal
2007 to $4.5 million for fiscal 2008. This increase was
primarily due to an increase in professional fees paid to our
auditors and attorneys and an increase in reserve for doubtful
accounts.
Our professional fees increased by $0.4 million from $3,903
in fiscal 2007 to $0.4 million in fiscal 2008 as we paid
the outstanding balance due to our auditors and attorneys. In
addition, we increased our reserve for doubtful accounts by
$0.7 million, or 136.3%, from $0.5 million in fiscal
2007 to $1.2 million in fiscal 2008. We increased our
reserve for doubtful accounts as we increased sales of our
multicolor presses. For multicolor presses, distributors are not
required to pay for the entire purchase price before shipment
unlike for our single color presses. Instead distributors for
our multicolor presses are required to pay 50% to 70% of the
purchase price before shipment, based on their preferred credit
76
terms. Because of the increase in sales of multicolor presses
and the greater risk of non-payment and incomplete or partial
payment from our distributors, we increased our reserve for
doubtful accounts.
Research
and Development Expenses
As a percentage of revenue, research and development expenses
increased from 1.5% in fiscal 2007 to 1.9% in fiscal 2008. This
increase was mainly because of increase in salary expenses as a
result of the six new engineers we hired and the increased costs
from the purchase of raw materials in connection with our sample
product development, as described below.
Research and development expenses increased by
$0.7 million, or 61.0%, from $1.0 million for fiscal
2007 to $1.7 million for fiscal 2008. This increase was
primarily due to an increase in salary expenses of our research
and development team and increased costs from the purchase of
raw materials in connection with our sample product development.
Specifically, we hired an additional six engineers in fiscal
2008, increasing our research and development team to
202 employees and salary expenses increased by
$0.2 million, or 21.7%, from $1.0 million in fiscal
2007 to $1.2 million in fiscal 2008.
Income
from Operations
Income from operations increased by $12.1 million, or
66.8%, from $18.2 million for fiscal 2007 to
$30.3 million for fiscal 2008.
The increase was due to the increased sale of our multicolor
presses, which generated higher revenue for us.
Liquidated
Damages Expense
Liquidated damages expense relates to our failure to timely
register for resale certain private placement shares and
terminate related party transactions. We recorded liquidated
damages expenses of $2.1 million for fiscal 2007. We
settled the claims for liquidated damages in the third quarter
of fiscal 2008, and we reversed the accrual and recognized a net
liquidated damages gain of $0.2 million for fiscal 2008.
See Critical Accounting Policies
Liquidated Damages Expense.
Other
Income (Expenses)
Other expenses increased by $0.5 million from $20,734 for
fiscal 2007 to $0.5 million for fiscal 2008.
We had interest expense of $0.7 million from our short-term
borrowing in each of fiscal 2007 and fiscal 2008. In fiscal
2007, our interest expense was offset by non-operating rental
income of $0.4 million. In fiscal 2008, we did not
recognize any rental income.
Minority
Interest
Minority interest increased by $0.2 million, or 58.6%, from
$0.2 million for fiscal 2007 to $0.4 million for
fiscal 2008. The increase in minority interest is mainly due to
the increase of net income in Langfang Duoyuan and Hunan Duoyuan.
Provision
for Income Taxes
Provision for income taxes increased $1.4 million, or
79.2%, from $1.8 million for fiscal 2007 to
$3.2 million for fiscal 2008. This increase in the
provision for income taxes was attributable to the increase in
net income by 32.2% over the same period and the increase in
income tax rates of Duoyuan China and Langfang Duoyuan. Our
effective tax rates for fiscal 2007 and fiscal 2008 were 11.4%
and 10.9%, respectively.
77
Duoyuan China began paying income tax on January 1, 2006.
The income tax rate for Duoyuan China in the first half of
fiscal 2008 was 16.5%, and the income tax rate for Duoyuan China
in the second half of fiscal 2008 was 12.5%. Beginning on
January 1, 2009, the income tax rate for Duoyuan China
increased to 25%. Pursuant to the tax preferential treatment
granted by the local government, Langfang Duoyuan was exempt
from paying taxes prior to calendar year 2008. Langfang Duoyuan
began paying income tax on January 1, 2008. The income tax
rate for Langfang Duoyuan was 0% in the first half of fiscal
2008 and 25% in the second half of fiscal 2008. Pursuant to the
tax preferential treatment granted by the local government,
Hunan Duoyuan is tax exempted through calendar year 2009.
Due to various special tax rates, preferential tax treatments
and incentives that have been granted to us in China, our taxes
in recent years have been relatively low. The additional amounts
of tax that we would have otherwise been required to pay had we
not enjoyed the various preferential tax treatments would have
been $4.5 million in fiscal 2007 and $7.9 million in
fiscal 2008.
Net
Income
As a result of the foregoing, net income increased by
$12.5 million, or 89.3%, from $14.0 million for fiscal
2007 to $26.5 million for fiscal 2008.
As a percentage of revenue, net income increased 8.9% from 20.6%
for fiscal 2007 to 29.5% for fiscal 2008.
Foreign
Currency Translation Adjustment
The foreign currency translation adjustment increased by
$6.4 million, or 347.0%, from $1.8 million for fiscal
2007 to $8.2 million for fiscal 2008. The increase in the
foreign currency translation adjustment is due to the
appreciation of the Renminbi against the U.S. dollar. Our
assets and liabilities are translated at a rate of RMB7.60 to
$1.00 at June 30, 2007 and RMB6.85 to $1.00 at
June 30, 2008. Our results of operations are translated at
an average rate of RMB7.81 for fiscal 2007 and RMB7.26 to $1.00
for fiscal 2008. Our equity accounts are translated at
historical rates.
Liquidity
and Capital Resources
We relied primarily on cash flows from operating activities and
our bank loans for our capital requirements for fiscal 2007,
2008 and 2009. We expect that our future capital expenditures
primarily will be to build a factory to manufacture cold-set
corrugated paper machines at our Langfang Duoyuan facility and
improve and upgrade our existing manufacturing facilities and
production lines. We expect that approximately
$40.0 million of our cash resources will be required for
these projects, of which, approximately $30.0 million will
be incurred to build a factory to manufacture cold-set
corrugated paper machines at our Langfang Duoyuan facility and
approximately $10.0 million will be incurred to improve and
upgrade our existing manufacturing facilities and production
lines. Since we have not encountered any difficulties in meeting
our cash obligations to date, we believe that cash flows from
operating activities and our bank loans will be sufficient to
meet our presently anticipated cash needs for at least the next
12 months.
Our long-term liquidity needs will relate primarily to working
capital to pay our suppliers, as well as any increases in
manufacturing capacity or acquisitions of third party businesses
or licenses that we may seek. We expect to meet these
requirements primarily through revolving short-term bank
borrowings, as well as our cash flows from operations, which we
expect will increase with the planned increase in our
manufacturing capacity. We believe our working capital is
sufficient for these current requirements, though we may require
additional cash due to changing business conditions or other
future developments, including any investments or acquisitions
we may decide to pursue. If our existing cash is insufficient to
meet our requirements, we may seek to sell additional equity
securities or increase our
78
borrowing level. The actual amount and timing of our future
capital requirements may differ materially from our estimate
depending on our actual results of operations.
The actual amount and timing of our future capital requirements
may differ materially from our estimate depending on our actual
results of operations. As of June 30, 2007, 2008 and 2009,
we had cash of $7.8 million, $14.2 million and
$31.0 million, respectively. For a discussion of our
current level of borrowing, see Sources and Uses of
Cash below. There is no seasonal fluctuation to our
borrowing requirements.
Sources
and Uses of Cash
The following table sets forth cash flow data for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(4,200
|
)
|
|
$
|
16,801
|
|
|
$
|
29,842
|
|
Net cash used in investing activities
|
|
|
(11,081
|
)
|
|
|
(10,524
|
)
|
|
|
(16,189
|
)
|
Net cash (used in) provided by financing activities
|
|
|
19,171
|
|
|
|
(1,092
|
)
|
|
|
2,929
|
|
Effect of exchange rate changes on cash
|
|
|
186
|
|
|
|
1,199
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in cash
|
|
|
4,076
|
|
|
|
6,384
|
|
|
|
16,844
|
|
Cash at beginning of period
|
|
|
3,740
|
|
|
|
7,816
|
|
|
|
14,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
7,816
|
|
|
$
|
14,200
|
|
|
$
|
31,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, the maturities for our bank loans were
as follows:
|
|
|
|
|
Description of Bank
Loan
|
|
Amount
|
|
|
Loan from Bank of Agriculture, Chongwen branch due
March 12, 2010. Quarterly interest only payment at 5.841%
per annum, secured by land use rights and buildings
|
|
$
|
1,465,000
|
|
Loan from Bank of Agriculture, Chongwen branch due July 3,
2009. Quarterly interest only payment at 8.217% per annum,
secured by land use rights and buildings
|
|
|
2,930,000
|
|
Loan from Bank of Agriculture, Chongwen branch due July 10,
2009. Quarterly interest only payment at 8.217% per annum,
secured by land use rights and buildings
|
|
|
2,930,000
|
|
Loan from Bank of Agriculture, Chongwen branch due July 17,
2009. Quarterly interest only payment at 8.217% per annum,
secured by land use rights and buildings
|
|
|
4,102,000
|
|
Loan from Bank of Agriculture, Chongwen branch due July 24,
2009. Quarterly interest only payment at 8.217% per annum,
secured by land use rights and buildings
|
|
|
2,930,000
|
|
|
|
|
|
|
Total
|
|
$
|
14,357,000
|
|
|
|
|
|
|
As of the date of this prospectus, we have five short-term loans
in the aggregate amount of $14.4 million pursuant to our
line of credit with Bank of Agriculture, Chongwen branch, in
China. On July 3, 2009, we refinanced our loan due
July 3, 2009 with a short-term loan due July 2, 2010.
On July 10, 2009, we
79
refinanced our loan due July 10, 2009 with a short-term
loan due July 9, 2010. On July 17, 2009, we refinanced
our loan due July 17, 2009 with a short-term loan due
July 16, 2010. On July 24, 2009, we refinanced our
loan due July 24, 2009 with a short-term loan due
July 23, 2010. No consideration was issued for renewal of
the loans. Each of our short-term loans has an expiration date
of no longer than one year and each loan has an interest rate of
5.841%. Interest on our loans is accrued quarterly. These
outstanding loans are secured by land use rights and buildings
for our Hunan Duoyuan facility. We plan to either repay the debt
as it matures or refinance the debt. These loans were made under
our RMB100.0 million ($14.6 million) revolving credit
line. We are allowed to refinance these loans by entering into
new short-term loan agreements.
Banks in China are subject to national banking regulations and
may withdraw our credit line if regulations change. If the Bank
of Agriculture were to withdraw our credit line, we would use
cash on hand or external financing to repay amounts outstanding.
We provide our financial information as well as other
documentation required by the bank on a quarterly basis. We have
not had any indication from the bank that it intends to not
renew the short-term loan agreements. We are continually
monitoring our relationship with the Bank of Agriculture in
light of the challenging global economic conditions.
Operating
Activities
Net cash provided by operating activities for fiscal 2007, 2008
and 2009 was generated from our net income of
$14.0 million, $26.5 million and $32.6 million,
respectively, as adjusted in each year for non-cash items such
as depreciation and amortization, and for changes in various
assets and liabilities such as accounts receivable, accounts
payable and inventories.
Net cash provided by operating activities increased by
$13.0 million, or 77.6%, from $16.8 million for fiscal
2008 to $29.8 million for fiscal 2009. The increase in
operating cash flows was mainly due to $32.6 million in net
income during this period. This increase was offset by a
$4.2 million increase in accounts receivable,
$2.0 million increase in inventory and $0.7 million
decrease in accounts payable. The increase in accounts
receivable was primarily due to an increase in sales of our
multicolor presses. In general, for sale of our multicolor
presses, distributors pay 50% to 70% of purchase price before
shipment. The remaining 30% to 50% are paid in installments over
six to nine months. The increase in inventory was primarily due
to an increase in production of multicolor presses. We had more
work in progress inventory to meet the future demand of our
multicolor presses. The decrease in accounts payable was
primarily because we paid our suppliers more promptly during
fiscal 2009 than during fiscal 2008.
Net cash provided by operating activities increased from net
operating cash used of $4.2 million for fiscal 2007 to net
operating cash provided by $16.8 million for fiscal 2008.
This increase was primarily due to an increase in net income
from $14.0 million to $26.5 million over the same
period. This increase in operating cash flows was offset by
(1) an increase in accounts receivable of
$9.7 million, (2) an increase in inventory of
$1.6 million and (3) a decrease in accounts payable of
$1.3 million. The increase in accounts receivable was
primarily due to a marked increase in sales of our multicolor
presses. In addition, we selectively granted preferred credit
terms to distributors who distributed our multicolor presses,
reducing the amount of advanced payments due to us as a reward
for meeting or exceeding their sales targets in the prior year.
The increase in inventory was primarily due to an increase in
production of multicolor presses. More raw materials are needed
to produce multicolor presses than single color presses.
Accounts payable decreased because we shortened the payment
periods for several key suppliers. We agreed to a shorter
payment schedule with these suppliers in order to obtain
favorable pricing on raw materials.
80
Investing
Activities
Net cash used in investing activities for fiscal 2007, 2008 and
2009 was $11.1 million, $10.5 million and
$16.2 million, respectively.
Net cash used in investing activities increased by
$5.7 million, or 53.8%, from $10.5 million for fiscal
2008 to $16.2 million for fiscal 2009. The main uses of our
cash in investing activities included equipment acquisition,
purchase prepayments and expenses related to the launching of
our new post-press products, namely our cold-set corrugated
paper machine. We expended $3.9 million to purchase
manufacturing equipment to produce certain key components
in-house. We also expended $1.4 million to purchase new
manufacturing equipment for the future production of our
cold-set corrugated paper machine, which we anticipate to
commercially produce and sell by the end of 2010. In addition,
we spent $6.3 million to purchase electroplating and
non-crystal plating equipment that will treat and protect the
external surfaces of our press and post-press products. This
equipment also features a temperature-controlling precision
meter which monitors and cools the internal temperature while
the external surface is treated. We also made a prepayment of
$4.5 million to purchase new manufacturing equipment for
the future production of our cold-set corrugated paper machine.
Net cash used in investing activities decreased by
$0.6 million, or 5.0%, from $11.1 million for fiscal
2007 to $10.5 million for fiscal 2008. For fiscal 2008, our
investing activities included improving and upgrading our
production lines and manufacturing facilities at Langfang
Duoyuan
and/or Hunan
Duoyuan, and purchasing machinery and equipment to use at these
facilities. Net cash used in investing activities also included
expenses related to the launching of a new post-press product,
namely our cold-set corrugated paper machine. Specifically, we
expended (1) $2.1 million to improve and upgrade our
production lines and manufacturing facilities at Langfang
Duoyuan and Hunan Duoyuan, (2) $1.5 million to
purchase machinery and equipment, including a JY sand mixer,
which is used for heating and shaping parts for our press
products, and a double-post low temperature wax injector to
improve the casting manufacturing of our press parts,
(3) $4.3 million for land clearing and site
preparation services for building our cold-set corrugated paper
machine factory at Langfang Duoyuan and
(4) $2.6 million as prepayment for new manufacturing
equipment to produce our cold-set corrugated paper machine.
Currently, our main uses of cash for investing activities are
payments for equipment, building and structural improvements and
prepayments to purchase new manufacturing equipment for the
future production of our cold-set corrugated paper machine. In
connection with our entry into the cold-set corrugated paper
machine business and efforts to upgrade our existing
facilities,we expect to increase net cash used in investing
activities. We expect that approximately $40.0 million of
our cash resources will be required for these projects, of
which, approximately $30.0 million, will be incurred to
build a factory to manufacture cold-set corrugated paper
machines at our Langfang Duoyuan facility and approximately
$10.0 million will be incurred to improve and upgrade our
existing manufacturing facilities and production lines.
Financing
Activities
Cash provided by and used in our financing activities consists
of borrowings from and repayments to our short-term loans.
Net cash provided by financing activities increased by
$4.0 million, or 368.1%, from net cash used in financing
activities of $1.1 million for fiscal 2008 to net cash
provided by financing activities of $2.9 million for fiscal
2009. We borrowed an additional $2.9 million, net, during
this period to pay for our operating expenses.
Net cash used in financing activities was $1.1 million for
fiscal 2008, which was the result of our payment for lines of
credit exceeding proceeds by approximately $2.75 million
offsetting with a
81
decrease in restricted cash of $2.1 million, compared to
net cash provided by financing activities of $19.2 million
for fiscal 2007, which was the result of a private placement we
completed in November 2006. We did not engage in any private
placement fundraising activities in fiscal 2008.
Contractual
Obligations
The following table sets forth our contractual obligations as of
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(in thousands)
|
|
|
Long Term Debt Obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
234
|
|
|
|
200
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
Purchase Obligations
|
|
|
383
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment Obligations under Line of Credit
|
|
|
14,357
|
|
|
|
14,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,974
|
|
|
$
|
14,940
|
|
|
$
|
34
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have an office lease agreement with Duoyuan Information
Terminal Manufacture (Langfang) Co., Ltd., a related party. The
lease commenced on July 1, 2008 and will expire on
December 31, 2009. As of June 30, 2009, the remaining
rent commitment was $0.1 million. In addition, we lease
sales offices in 16 Chinese provinces, with the latest lease to
expire on December 2010. The remaining rent commitment was
$0.1 million as of June 30, 2009.
In August 2008, Langfang Duoyuan entered into a packing material
equipment purchase agreement with Beijing Jingneng
Mechanical & Electrical Equipments Ltd. As of
June 30, 2009, $0.4 million, or approximately 5% of
the total commitment, remained on this agreement. As of
June 30, 2009, total remaining minimum purchase payment
pursuant to these agreements was $0.4 million.
Other than the contractual obligations set forth and described
above, we do not have any other operating lease obligations or
repayment obligations under lines of credit.
Capital
Expenditures
Our capital expenditures for fiscal 2007, 2008 and 2009 were
$11.1 million, $10.5 million and $16.2 million,
respectively.
Our capital expenditures for fiscal 2009 were used primarily for
purchasing surface treatment equipment at our Hunan Duoyuan
facility. Specifically, we expended $6.3 million for the
surface treatment equipment. We also had capital expenditure of
$3.9 million for purchasing various manufacturing equipment
for our production of key components as well as
$1.4 million for the future production of our cold-set
corrugated press at our Langfang Duoyuan facility. Furthermore,
we made $4.5 million purchase prepayments and expenses
related to the launching of our new post-press products, namely
our cold-set corrugated paper machine.
For fiscal 2008, our capital expenditures were primarily for
improving and upgrading our production lines and manufacturing
facilities at Langfang Duoyuan
and/or Hunan
Duoyuan, and purchase machinery and equipment to use at these
facilities. Our capital expenditures in fiscal 2008 also
included expenses related to the launching of a new post-press
product, namely our cold-set corrugated paper machine.
Specifically, we expended (1) $2.1 million to improve
and upgrade our production lines and
82
manufacturing facilities at Langfang Duoyuan and Hunan Duoyuan,
(2) $1.5 million to purchase machinery and equipment,
including a JY sand mixer, which is used for heating and shaping
parts for our press products, and a double-post low temperature
wax injector to improve the casting manufacturing of our press
parts, (3) $4.3 million for land clearing and site
preparation services for building our cold-set corrugated paper
machine factory at Langfang Duoyuan and
(4) $2.6 million as prepayment for new manufacturing
equipment to produce our cold-set corrugated paper machines.
Our capital expenditures for fiscal 2007 was primarily for
improving and upgrading our production lines and manufacturing
facilities at Langfang Duoyuan
and/or Hunan
Duoyuan, and purchasing machinery and equipment to use at these
facilities.
In connection with our entry into the cold-set corrugated paper
machine business and efforts to upgrade our existing facilities,
we expect our capital expenditures to increase. We expect that
approximately $40.0 million of our cash resources will be
required for these projects, of which, approximately
$30.0 million will be incurred to build a factory to
manufacture cold-set corrugated paper machines at our Langfang
Duoyuan facility and approximately $10.0 million will be
incurred to improve and upgrade our existing manufacturing
facilities and production lines.
Our future capital requirements will depend on many factors
including our rate of revenue growth, the timing and extent of
spending to support research and development efforts, the
expansion of manufacturing and sales activities and the
introduction of new products. In connection with the anticipated
launch of our cold-set corrugated paper machine product line, we
may enter into agreements or letters of intent with respect to
potential investments in, or acquisitions of, complementary
businesses, products or technologies, which may require us to
seek additional equity or debt financing. The sale of additional
equity securities or convertible debt securities would result in
additional dilution to our shareholders. Additional debt would
result in increased interest expense and could result in
covenants that would restrict our operations. We have not made
arrangements to obtain additional financing and additional
financing, if required, may be unavailable in amounts or on
terms acceptable to us, if at all.
Off-Balance
Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Recently
Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS 141R, Business
Combinations, which replaces SFAS 141. SFAS 141R
retains the purchase method of accounting for acquisitions, but
requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting
as well as requiring the expensing of acquisition-related costs
as incurred. Furthermore, SFAS 141R provides guidance for
recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature
and financial effects of the business combination.
SFAS 141R is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. We
are evaluating the impact, if any, that the adoption of this
statement will have on its consolidated results of operations or
consolidated financial position.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51.
SFAS 160 amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It is
intended to eliminate the diversity in practice regarding the
accounting for transactions between equity and noncontrolling
interests by requiring that they be treated as equity
transactions. Further, it requires consolidated net income to be
reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest. SFAS 160
also establishes a single
83
method of accounting for changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation,
requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated, requires expanded
disclosures in the consolidated financial statements that
clearly identify and distinguish between the interests of the
parents owners and the interests of the noncontrolling
owners of a subsidiary, among others. SFAS 160 is effective
for fiscal years beginning on or after December 15, 2008,
with early adoption permitted, and it is to be applied
prospectively. SFAS 160 is to be applied prospectively as
of the beginning of the fiscal year in which it is initially
applied, except for the presentation and disclosure
requirements, which must be applied retrospectively for all
periods presented. We are evaluating the impact that
SFAS 160 will have on its consolidated financial position
or consolidated results of operations.
In February 2008, the FASB issued FSP
FAS 157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13. FSP
FAS 157-1
indicates that it does not apply under SFAS 13,
Accounting for Leases, and other accounting
pronouncements that address fair value measurements for purposes
of lease classification or measurement under SFAS 13. This
scope exception does not apply to assets acquired and
liabilities assumed in a business combination that are required
to be measured at fair value under SFAS 141 or
SFAS 141R, regardless of whether those assets and
liabilities are related to leases.
Also in February 2008, the FASB issued FSP
FAS 157-2,
Effective Date of FASB Statement No. 157. With
the issuance of FSP
FAS 157-2,
the FASB agreed to: (a) defer the effective date in
SFAS 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually), and (b) remove certain
leasing transactions from the scope of SFAS 157. The
deferral is intended to provide the FASB time to consider the
effect of certain implementation issues that have arisen from
the application of SFAS 157 to these assets and liabilities.
In March 2008, the FASB issued SFAS 161, Disclosures
about Derivative Instruments and Hedging Activities
An Amendment of SFAS No. 133. SFAS 161 is
intended to improve financial reporting of derivative
instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better
understand the effects of derivatives and hedging on an
entitys financial position, financial performance and cash
flows. To achieve this increased transparency, SFAS 161 requires
(1) the disclosure of the fair value of derivative
instruments and gains and losses in a tabular format;
(2) the disclosure of derivative features that are credit
risk-related; and (3) cross-referencing within the
footnotes. SFAS 161 is effective on January 1, 2009.
We have adopted SFAS 161.
In June 2008, the FASB issued
EITF 07-5,
Determining whether an Instrument (or Embedded Feature) is
indexed to an Entitys Own Stock.
EITF 07-5
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS 133 specifies that a contract that
would otherwise meet the definition of a derivative but is both
(a) indexed to our own stock and (b) classified in
stockholders equity in the statement of financial position
would not be considered a derivative financial instrument.
EITF 07-5
provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed
to an issuers own stock and thus able to qualify for the
SFAS 133 paragraph 11(a) scope exception. This
standard triggers liability accounting on all options and
warrants exercisable at strike prices denominated in any
currency other than the functional currency in China (Renminbi).
We have adopted
EITF 07-5
effective July 1, 2009. See Note 14 to our Notes to
Consolidated Financial Statements for fiscal 2007, 2008 and 2009
included elsewhere in this prospectus.
84
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities, to
address the question of whether instruments granted in
share-based payment transactions are participating securities
prior to vesting. FSP
EITF 03-6-1
indicates that unvested share-based payment awards that contain
rights to dividend payments should be included in earnings per
share calculations. The guidance will be effective for fiscal
years beginning after December 15, 2008. We are currently
evaluating the requirements of FSP
EITF 03-6-1
and the impact that its adoption will have on the consolidated
results of operations or consolidated financial position.
In October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset in a
Market That Is Not Active, which clarifies the application
of SFAS 157 when the market for a financial asset is
inactive. Specifically, FSP
FAS 157-3
clarifies how (1) managements internal assumptions
should be considered in measuring fair value when observable
data are not present, (2) observable market information
from an inactive market should be taken into account, and
(3) the use of broker quotes or pricing services should be
considered in assessing the relevance of observable and
unobservable data to measure fair value. We are currently
evaluating the impact of adoption of FSP FAS
157-3 on our
consolidated financial statements.
In April 2009, the FASB issued FSP
FAS 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. FSP
FAS 157-4
amends SFAS 157 and provides additional guidance for
estimating fair value in accordance with SFAS 157 when the
volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on
identifying circumstances that indicate a transaction is not
orderly for fair value measurements. FSP
FAS 157-4
shall be applied prospectively with retrospective application
not permitted. FSP
FAS 157-4
shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. An entity early adopting FSP
FAS 157-4
must also early adopt FSP
FAS 115-2
and 124-2,
Recognition and Presentation of Other-Than-Temporary
Impairments. Additionally, if an entity elects to early
adopt either FSP
FAS 107-1
and 28-1,
Interim Disclosures about Fair Value of Financial
Instruments or FSP
FAS 115-2
and 124-2,
it must also elect to early adopt this FSP. We have determined
that this new FSP did not have a material impact on the
consolidated financial statements.
In April 2009, the FASB issued FSP
FAS 115-2
and 124-2.
FSP FAS
115-2 amends
SFAS 115, Accounting for Certain Investments in Debt
and Equity Securities, SFAS 124, Accounting for
Certain Investments Held by Not-for-Profit Organizations,
and
EITF 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets,
to make the other-than-temporary impairments guidance more
operational and to improve the presentation of
other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the
entitys management assert it has both the intent and
ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent
to sell the security, and it is more likely than not it will not
have to sell the security before recovery of its cost basis.
This FSP provides increased disclosure about the credit and
noncredit components of impaired debt securities that are not
expected to be sold and also requires increased and more
frequent disclosures regarding expected cash flows, credit
losses, and an aging of securities with unrealized losses.
Although this FSP does not result in a change in the carrying
amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss
for a held-to-maturity security be recognized in a new category
of other comprehensive income and be amortized over the
remaining life of the debt security as an increase in the
carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP
FAS 157-4.
Also, if an entity elects to early adopt either FSP
FAS 157-4
or FSP FAS
107-1 and
28-1, the
entity also is required to
85
early adopt this FSP. We have determined that this new FSP did
not have a material impact on the consolidated financial
statements.
In April 2009, the FASB issued FSP
FAS 107-1
and 28-1.
This FSP amends SFAS 107, to require disclosures about fair
value of financial instruments not measured on the balance sheet
at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for
these assets and liabilities were only disclosed annually. This
FSP applies to all financial instruments within the scope of
SFAS 107 and requires all entities to disclose the
method(s) and significant assumptions used to estimate the fair
value of financial instruments. This FSP shall be effective for
interim periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009.
An entity may early adopt this FSP only if it also elects to
early adopt FSP
FAS 157-4
and 115-2
and 124-2.
This FSP does not require disclosures for earlier periods
presented for comparative purposes at initial adoption. In
periods after initial adoption, this FSP requires comparative
disclosures only for periods ending after initial adoption. We
are currently evaluating the disclosure requirements of this new
FSP.
In June 2009, the FASB issued SFAS 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles A Replacement of FASB
Statement No. 162. This standard establishes the FASB
Accounting Standards Codification as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with U.S. GAAP. The codification
does not change current U.S. GAAP, but is intended to
simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a
particular topic in one place. The codification is effective for
interim and annual periods ending after September 15, 2009,
and as of the effective date, all existing accounting standard
documents will be superseded. The codification is effective in
the third quarter of 2009, and accordingly, our quarterly report
on
Form 10-Q
for the quarter ending September 30, 2009 and all
subsequent public filings will reference the codification as the
sole source of authoritative literature.
Seasonality
Typically, we recognize lower revenue during our third fiscal
quarter from January to March each year due to the Chinese Lunar
New Year holiday, when our factories close for one week. Our
distributors, who are all in China, are also on holiday during
this time of the year. Typically, our second fiscal quarter,
from October to December each year, is our strongest quarter
because most Chinese businesses complete planned purchases of
capital goods during this period.
Inflation
Inflationary factors, such as increases in the cost of our
products and overhead costs, could impair our operating results.
Although we do not believe that inflation has had a material
impact on our financial position or results of operations to
date, a high rate of inflation may have an adverse effect on our
ability to maintain current levels of gross profit and selling,
general and administrative expenses as a percentage of revenue
if the selling prices of our products do not increase with these
increased costs.
Other
Events
Reverse
Stock Split
Effective as of July 17, 2007, our Board of Directors
approved and we effected a 1 for 2.68189924 reverse split of our
then issued and outstanding shares. All share and per share
prices used in our financial statements and notes thereto have
been retroactively restated to reflect this reverse stock split.
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We had 67,047,481 pre-split shares issued and outstanding prior
to the reverse stock split and 25,000,050 shares issued and
outstanding after the reverse stock split.
Changes
in Officers
William D. Suh was appointed as our chief financial officer by
our board of directors effective as of October 1, 2008.
Effective upon the appointment of Mr. Suh as our chief
financial officer, Baiyun Sun no longer served as our interim
chief financial officer. Ms. Sun continues to serve as our
controller.
Wenhua Guo resigned as our chief executive officer effective as
of June 29, 2009. He continues to serve as our chairman of
the board.
Xiqing Diao, our chief operating officer, also acted as our
interim chief executive officer from July 9, 2009 until
Christopher Patrick Holbert was appointed as our chief executive
officer by our board of directors effective as of
August 26, 2009.
Quantitative
and Qualitative Information about Market Risk
Exchange
Rate Sensitivity
Although we maintain our books and records in Renminbi, the
functional currency of China, we use the U.S. dollar as the
reporting currency of our financial statements. The exchange
rate between the U.S. dollar and the Renminbi is subject to
the foreign exchange quotation publicized by the Peoples
Bank of China daily. Results of operations and cash flows are
translated at average exchange rates during the period, assets
and liabilities are translated at the unified exchange rate as
quoted by the Peoples Bank of China at the end of the
period and equity is translated at historical exchange rates.
Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other
than Renminbi are included in the results of operations as
incurred. Gains and losses from foreign currency transactions
are included in the results of operations. There were no
material transaction gains or losses for fiscal 2009.
Although the conversion of the Renminbi is highly regulated in
China, the value of the Renminbi against the value of the
U.S. dollar (or any other currency) may fluctuate and be
affected by, among other things, changes in Chinas
political and economic conditions. Under the currency policy in
effect in China today, the Renminbi is permitted to fluctuate in
value within a narrow band against a basket of certain foreign
currencies. China is currently under significant international
pressures to liberalize this currency policy, and if such
liberalization occur, the value of the Renminbi could appreciate
or depreciate against the U.S. dollar. The exchange rate of
the Renminbi as of June 30, 2009 was RMB6.83 to $1.00. This
floating exchange rate, and any appreciation of the Renminbi
that may result from such rate, could have various adverse
effects on our business, as described in Risk
Factors Risks Related to Doing Business in
China Government control of currency conversion and
exchange rate fluctuations may materially and adversely affect
our business.
Our exposure to foreign exchange risk primarily relates to cash
and cash equivalents denominated in U.S. dollars as a
result of our past issuance of common shares through private
placements. For example, to the extent that we need to convert
U.S. dollars received in the private placements into
Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the
Renminbi amount that we receive from the conversion. Conversely,
if we decide to convert our Renminbi into U.S. dollars for
the purpose of making dividend payments on our common shares or
for other business purposes, appreciation of the
U.S. dollar against the Renminbi would have a negative
effect on the U.S. dollar amount available to us. In
addition, fluctuations in the exchange rate would
87
affect our financial results reported in U.S. dollar terms
without giving effect to any underlying change in our business
or results of operations.
At June 30, 2009, our outstanding financial instruments
with foreign currency exchange rate risk exposure had an
aggregate fair value of approximately $23.5 million
(including our
non-U.S. dollar-denominated
fixed rate debt). The potential increase in the fair values of
these instruments resulting from a 10% adverse change in quoted
foreign currency exchange rates would be approximately
$2.4 million at June 30, 2009. We have not entered
into any foreign currency instruments for trading purposes at
June 30, 2009.
We currently do not hedge our exposure to fluctuations in the
Renminbi to U.S. dollar exchange rate. We may choose to
reduce our exposures through financial instruments (hedges) that
provide offsets or limits to our exposures when considered
appropriate.
Exchange
Controls
Chinese law allows enterprises owned by foreign investors to
remit their profits, dividends and bonuses earned in China to
other countries, and the remittance does not require prior
approval by the SAFE regulations formerly required extensive
documentation and reporting, some of which was burdensome and
delayed payments. If there is a return to payment restrictions
and reporting, the ability of a Chinese company to attract
investors will be reduced. Also, current investors may not be
able to obtain the profits of the business which they own as a
result of other restrictions that the Chinese government may
impose. Relevant Chinese law and regulation permit payment of
dividends only from retained earnings, if any, determined in
accordance with Chinese accounting standards and regulations. It
is possible that the Chinese tax authorities may require changes
in our reported income that would limit our ability to pay
dividends and other distributions. Chinese law requires
companies to set aside a portion of net income to fund certain
reserves which amounts are not distributable as dividends. These
rules and possible changes could restrict a company in China
from repatriating funds to us and our shareholders as dividends.
Interest
Rate Risk
We are exposed to interest rate risk due primarily to our
short-term loans. As of June 30, 2009, we had
RMB98.0 million ($14.4 million) outstanding on our
bank lines of credit which are subject to interest rate change
risk. Although the interest rates on our short-term loans are
fixed during their respective terms, the terms are typically
12 months or less and interest rates are subject to change
upon renewal. The interest rates on our short-term loans are
determined by reference to the benchmark interest rates set by
the Peoples Bank of China. Since April 28, 2006, the
Peoples Bank of China has increased the benchmark interest
rate of Renminbi bank loans with a term of 6 to 12 months
12 times, seven consecutive increases followed by five
consecutive decreases, by 0.27% on most occasions. As a result,
from 2006 to the three months ended March 31, 2009, the
benchmark interest rate for these Renminbi bank loans increased
from 5.85% to 7.47% then decreased to 5.31% and the interest
rate applicable to us increased from 6.696% to 8.217% then
decreased to 5.841% over the same period. Any future increase in
the Peoples Bank of Chinas benchmark interest rate
will result in an increase in our interest expenses.
As of June 30, 2009, our short term loans with exposure to
interest rate risk had an aggregate fair value of approximately
$14.4 million. The potential change in fair market value
for these short term loans from an adverse 10% change in quoted
interest rates across all maturities, often referred to as a
parallel shift in the yield curve, would be approximately
$1.4 million as of June 30, 2009. We have not hedged
our exposure to interest rate risk and have not entered into any
interest rate sensitive instruments for trading purposes as of
June 30, 2009. We monitor interest rates in conjunction
with our cash requirements to determine the appropriate level of
debt balances relative to other sources of funds.
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INDUSTRY
Overview
We are a leading offset printing equipment supplier in China.
Our products are primarily used by printing companies and
businesses in China to meet their various printing needs,
including publication printing needs, such as newspapers,
magazines and books, and commercial printing needs, such as
corporate brochures, product catalogues and labels, manuals and
directories, conference and advertising materials, and printed
packaging materials. We believe that Chinas printing
industry is highly correlated with Chinas printing
equipment industry, and may serve as a guide to Chinas
overall equipment industry dynamics and expenditures on printing
equipment.
Chinas
Printing Industry
Chinas printing industry has benefited from Chinas
rapid economic growth. This growth has increased demand for
publication printing needs, such as newspapers, magazines and
books, and commercial printing needs, such as corporate
brochures, product catalogues and labels, manuals and
directories, conference and advertising materials, and printed
packaging materials. Pira International reported that China was
the third largest printing market in the world behind the United
States and Japan. After taking into account the effects of the
current economic environment, Chinas printing industry is
expected to remain one of the fastest growing in Asia.
From 2002 to 2007, the total annual output of Chinas
printing industry grew from $29.5 billion to
$64.4 billion, according to the Printing and Printing
Equipment Industries Association of China, representing a CAGR
of 17% per annum.
Source: the Printing and Printing Equipment Industries
Association of China
According to Pira International, Chinas printing market
grew from $51 billion in 2007 to $57 billion in 2008.
Pira International estimates Chinas printing market will
grow to $60 billion by the end of 2009, and projects the
market to grow by 28% total from 2009 to 2014, or a CAGR of 5.1%
per annum, after taking into account the effects of the current
economic environment.
In line with global trends, package printing represents the
largest segment in the Chinese printing industry. According to
the Printing and Printing Equipment Industries Association of
China, China produced $20.5 billion of package printing in
2007, accounting for 32% of the total output of Chinas
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printing industry that year. Pira International projects that
package printing to become the largest segment by 2014, followed
by commercial printing.
Based on another report issued by Pira International, corrugated
paper and corrugated board accounted for the largest share of
the corrugated packaging materials in 2007. The consumption of
corrugated paper in China grew at a CAGR of 14.2% per annum from
2003 to 2007 reaching a market size of $4.4 billion by the
end of 2007. Pira International estimates the consumption of
corrugated paper to grow at a CAGR of 8.2% per annum from 2008
to 2013.
The demand for corrugated board is growing in response to the
increased demand from industries such as food, beverages,
electronic devices and toys. Chinas output of corrugated
board in 2007 accounted for 18.6 million tons of the global
total of 109 million tons, and this output is projected to
grow at a CAGR of 6.2% per annum from 2008 to 2013, according to
Pira International.
The printing industry in China is currently transitioning from
single color printing to multicolor printing. A few years ago,
most high quality multicolor printing was handled by large and
sophisticated printing companies in the coastal areas,
especially in the Pearl River Delta region. Presently, almost
every major city in China has printing companies that can meet a
wide spectrum of printing demands, from simple single color
works to fairly high quality multicolor printing. Multicolor
printing is becoming a mainstream capability that almost every
Chinese printing company must have to sustain its
competitiveness in the marketplace.
Chinas
Printing Equipment Industry
We operate in the Chinese printing equipment industry, which we
believe is highly correlated with the overall Chinese printing
industry.
Over the past several years, Chinas printing equipment
industry grew at a higher rate than its overall printing
industry. As noted above, the total annual output of
Chinas printing industry grew from $29.5 billion in
2002 to $64.4 billion in 2007, representing a CAGR of 17%
per annum. The total annual output of Chinas printing
equipment industry, however, grew from $0.9 billion to
$2.5 billion, representing a CAGR of 23% per annum for the
same periods.
Source: the Printing and Printing Equipment Industries
Association of China
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Taking into account of the effects of the current economic
environment, Pira International projects Chinas printing
equipment to grow by 34% total from 2009 to 2014, or a CAGR of
6.0% per annum.
We believe that demand for Chinese made offset printing
equipment is strong and that the market share of domestically
made offset printing equipment has been increasing in recent
years. For example, according to the Printing and Printing
Equipment Industries Association of China, although the amount
of imported printing equipment increased annually from
$1.3 billion in 2002 to $1.7 billion in 2004, the
total amount of imported printing equipment has since declined
each year to reach $1.6 billion in 2007. We believe this
decline in imported printing equipment is a result of leading
Chinese printing equipment manufacturers increased
investments in research and development and improved engineering
standards, both of which improve Chinese printing equipment
manufacturers ability to compete against international
competitors for market share in China.
We believe two major entry barriers limit the potential
competition we face from Chinese offset printing equipment
producers. First, the offset printing equipment industry in
China is particularly capital intensive due to high production
costs, and second, we believe few manufacturers have the
technical knowledge required to compete in our industry. We
believe our position as an existing and leading offset printing
equipment supplier in China gives us market advantages over
potential competitors seeking to enter this market.
We derive all of our revenue from sales to our distributors in
China. In 2007, according to the Printing and Printing Equipment
Industries Association of China, there were an estimated 90,000
licensed printing companies in China. This estimate did not
include the possible significant number of printing companies
that operate in China without licenses. Printing companies in
China purchase pre-press, press and post-press printing
equipment from foreign and Chinese equipment providers,
including companies like us through our distributors.
91
BUSINESS
Overview
We are a Wyoming corporation and a leading offset printing
equipment supplier in China, headquartered in Beijing. Through
our principal operating subsidiary, Duoyuan China, and Duoyuan
Chinas manufacturing subsidiaries, namely Langfang Duoyuan
and Hunan Duoyuan, we design, manufacture and sell offset
printing equipment used in the offset printing process. The
offset printing process includes the following three stages:
(1) pre-press, which is the transfer of images
to printing plates; (2) press, which is the
transfer of images from printing plates to another media, such
as paper; and (3) post-press, which is the
last step of the offset printing process that includes cutting,
folding, binding, collating and packaging. We manufacture one
product under the pre-press product category (a CTP system) and
fifteen products across four product lines under the press
product category (single color small format presses, single
color large format presses, multicolor small format presses and
multicolor large format presses). We plan to begin commercial
production and sale of certain post-press products, including a
cold-set corrugated paper machine, a machine which makes
corrugated cardboard paper, by the end of 2010. In addition, we
plan to begin commercial production and sale of two other
post-press products, namely an automatic booklet maker and an
automatic paper cutter, for which we have developed prototypes,
in 2011.
To enhance our market position, we have made and continue to
make investments in research and development. Our Langfang
Duoyuan research and development and technical support center
and our Hunan Duoyuan technical support center have advanced
design test tools, which we believe enable us to develop new and
enhanced products with improved functionality. Our research and
development team and our manufacturing department work closely
together to optimize manufacturing processes and develop
commercially viable products. In addition, they incorporate
regular feedback from our sales and marketing personnel,
enabling us to timely and cost-effectively introduce products
tailored to end-user needs. Furthermore, our China-based
research and development and manufacturing operations provide us
with a distinct competitive advantage in international markets
by enabling us to leverage low-cost technical expertise, labor,
raw materials and facilities. Our investment in research and
development, technical innovation and commitment to meet the
needs of our end-user customers have allowed us to create and
introduce four new and enhanced products in the year ended
June 30, 2009.
Our nationwide distribution network in China consists of over 85
distributors located in over 65 cities and 28 provinces in
China. Our nationwide distribution network, which we believe,
based on our experience in the industry, to be one of the
largest among Chinese offset printing equipment suppliers,
enable us to be more responsive to local market demands than
many of our competitors. We support our distributors sales
efforts through coordinated marketing efforts. We regularly
attend industry trade shows and exhibitions to showcase our
products, as well as present seminars and training programs to
our potential and existing distributors, as well as potential
and existing end-user customers, to highlight the functions and
capacities of our products. To maintain good relationships with
our end-user customers, we provide certain services during the
one-year warranty period associated with our products. During
this period, we provide training, technical support, warranty
and repair services for complex technical issues to our
distributors who work with our end-user customers.
We believe our pricing is competitive with Chinese and
international offset printing equipment manufacturers. We
believe the relatively low operation, labor and raw material
costs in China, our ability to produce a substantial majority of
our key components in-house, our efficient production processes
and our effective inventory management gives us a cost
competitive advantage. Our cost advantage allows us to offer
quality products at lower prices, thus making our products
attractive in China and certain international markets.
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Our revenue grew 32.2% from $67.8 million in the year ended
30, 2007 to $89.6 million in the year ended June 30,
2008 and 18.9%% to $106.6 million in the year ended
June 30, 2009. Our net income grew 89.3% from
$14.0 million in fiscal 2007 to $26.5 million in
fiscal 2008 and 23.2% to $32.6 million in fiscal 2009. For
fiscal 2007, 2008 and 2009, our multicolor large format presses
and our multicolor small format presses were our best selling
products. For fiscal 2007, 2008 and 2009, we derived 72.3%,
81.4% and 83.3% of our revenue from the sale of our multicolor
presses, respectively. For the same periods, our multicolor
large format presses accounted for approximately 46.7%, 52.0%
and 51.2% of our revenue, respectively, and our multicolor small
format presses accounted for approximately 25.6%, 29.4% and
32.1% of our revenue, respectively.
Our
Strengths
We believe that the following competitive strengths enable us to
compete effectively in and capitalize on the growing offset
printing equipment industry in China:
Quality
Products at Competitive Prices
We are able to offer high quality products at prices that are
competitive with both foreign and domestic companies. We
attribute our cost advantage to our ability to control material
and labor costs in China, our ability to produce a substantial
majority of our key components in-house, our efficient
production processes and effective inventory management.
Established
Market Position
Based on the revenue of our press products, the Printing and
Printing Equipment Industries Association of China ranked us as
one of the top three Chinese offset printing equipment providers
in 2006. Our current market position is primarily contributable
to the manufacturing and sale of our multicolor presses.
Wide
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