Attached files
file | filename |
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EX-31.1 - Fushi Copperweld, Inc. | v165284_ex31-1.htm |
EX-99.1 - Fushi Copperweld, Inc. | v165284_ex99-1.htm |
EX-31.2 - Fushi Copperweld, Inc. | v165284_ex31-2.htm |
EX-32.1 - Fushi Copperweld, Inc. | v165284_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended September 30,
2009
or
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ____ to _____
Commission
File Number: 0-19276
FUSHI
COPPERWELD, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
13-3140715
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification
No.)
|
1
Shuang Qiang Road, Jinzhou
Dalian, People’s Republic of
China 116100
(Address
of principal executive offices) (Zip Code)
(011)-86-411-8770-3333
(Registrant’s
telephone number, including area code)
______________________________________________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No 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.
Large
accelerated filer o
Accelerated filer x Non-accelerated
filer (Do not check if a smaller reporting company) o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As of
November 6, 2009 the registrant had 29,715,294
shares of common
stock outstanding.
TABLE
OF CONTENTS
PAGE
|
|||
PART I. FINANCIAL INFORMATION | |||
Item
1. Financial Statements
|
|||
Consolidated
Balance Sheets as of September 30, 2009 (Unaudited) and December 31,
2008
|
1
|
||
Consolidated
Statements of Income and Other Comprehensive Income for the Three and Nine
Months Ended September 30, 2009 and 2008 (Unaudited)
|
2
|
||
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2009 and
2008 (Unaudited)
|
3
|
||
Consolidated
Statement of Stockholders’ Equity for the Nine Months Ended September 30,
2009 (Unaudited) and the Year Ended December 31, 2008
|
4
|
||
Notes
to Consolidated Financial Statements
|
5
|
||
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
49
|
||
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
68
|
||
Item
4. Controls and Procedures
|
69
|
||
PART
II. OTHER INFORMATION
|
|||
Item
1. Legal Proceedings
|
70
|
||
Item
1A. Risk Factors
|
71
|
||
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
71
|
||
Item
3. Defaults Upon Revolving Line of Credit
|
71
|
||
Item
4. Submission of Matters to a Vote of Security Holders
|
72
|
||
Item
5. Other Information
|
72
|
||
Item
6. Exhibits
|
72
|
||
Signatures
|
72
|
PART
I. FINANCIAL INFORMATION
Item 1.
Financial Statements
CONSOLIDATED BALANCE
SHEETS
AS OF
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Unaudited
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 60,009,611 | $ | 65,611,770 | ||||
Restricted
cash
|
- | 1,000,000 | ||||||
Accounts
receivable, trade, net of allowance of bad debt of $1,181,365 and $318,529
as of September 30, 2009 and December 31, 2008,
respectively
|
69,052,683 | 49,782,548 | ||||||
Inventories
|
10,657,786 | 6,977,852 | ||||||
Other
receivables and prepaid expenses
|
656,439 | 1,041,273 | ||||||
Advances
to suppliers
|
5,164,959 | 20,261,585 | ||||||
Deposit
in derivative hedge
|
1,000,000 | 1,000,000 | ||||||
Prepaid
taxes
|
- | 670,805 | ||||||
Total
current assets
|
146,541,478 | 146,345,833 | ||||||
PLANT
AND EQUIPMENT, net
|
115,610,582 | 119,761,027 | ||||||
OTHER
ASSETS:
|
||||||||
Advances
to suppliers, non-current
|
5,862,776 | 4,022,879 | ||||||
Notes
receivables, non-current
|
729,106 | 799,106 | ||||||
Intangible
assets, net of accumulated amortization
|
12,042,501 | 12,406,920 | ||||||
Deferred
loan expense, net
|
2,500,375 | 3,317,725 | ||||||
Deferred
tax assets
|
11,057,111 | 7,804,027 | ||||||
Total
other assets
|
32,191,869 | 28,350,657 | ||||||
Total
assets
|
$ | 294,343,929 | $ | 294,457,517 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Revolver
line of credit
|
$ | 3,988,509 | $ | 4,712,075 | ||||
Accounts
payable, trade
|
3,335,847 | 7,204,156 | ||||||
Notes
payable, current
|
10,000,000 | 5,000,000 | ||||||
Short-term
bank loans
|
- | 17,588,400 | ||||||
Other
payables and accrued liabilities
|
8,385,214 | 4,751,460 | ||||||
Extinguished
convertible note liabilities
|
6,060,000 | - | ||||||
Customer
deposits
|
297,533 | 542,540 | ||||||
Taxes
payable
|
3,314,803 | - | ||||||
Cross
currency hedge payable
|
1,071,557 | 104,324 | ||||||
Obligation
under capital lease, current
|
68,976 | - | ||||||
Loan
from shareholder
|
4,553,731 | - | ||||||
Total
current liabilities
|
41,076,170 | 39,902,955 | ||||||
LONG-TERM
LIABILITIES:
|
||||||||
Notes
payable, non-current
|
25,000,000 | 40,000,000 | ||||||
Obligation
under capital lease, non-current
|
174,046 | - | ||||||
Fair
value of derivative instrument
|
7,652,664 | 4,377,076 | ||||||
Total
long-term liabilities
|
32,826,710 | 44,377,076 | ||||||
Total
liabilities
|
73,902,880 | 84,280,031 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
7,197,794 | |||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Preferred
stock, $0.001 par value, 5,000,000 shares authorized, none issued or
outstanding as of September 30, 2009 and December 31, 2008
|
- | - | ||||||
Common
stock, $0.006 par value, 100,000,000 shares authorized,
September 30, 2009: 30,543,716 shares issued and 28,343,716 outstanding
December 31, 2008: 27,499,034 shares issued and 27,399,034
outstanding
|
170,063 | 164,395 | ||||||
Restricted
common stock in escrow
|
13,200 | 600 | ||||||
Additional
paid in capital
|
105,197,671 | 91,172,890 | ||||||
Common
stock subscription receivable
|
(5,919,597 | ) | - | |||||
Statutory
reserves
|
14,979,861 | 12,316,147 | ||||||
Retained
earnings
|
88,450,844 | 78,613,158 | ||||||
Accumulated
other comprehensive income
|
17,549,007 | 20,712,502 | ||||||
Total
shareholders' equity
|
220,441,049 | 202,979,692 | ||||||
Total
liabilities and shareholders' equity
|
$ | 294,343,929 | $ | 294,457,517 |
The
accompanying notes are an integral part of these consolidated
statements.
- 1
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
REVENUES
|
$ | 47,676,346 | $ | 63,823,927 | $ | 131,234,427 | $ | 180,369,083 | ||||||||
COST
OF GOODS SOLD
|
32,506,879 | 46,931,400 | 93,672,906 | 131,996,263 | ||||||||||||
GROSS
PROFIT
|
15,169,467 | 16,892,527 | 37,561,521 | 48,372,820 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Selling
expenses
|
1,078,158 | 1,223,087 | 3,366,719 | 3,274,048 | ||||||||||||
General
and administrative expenses
|
3,510,034 | 3,418,704 | 9,747,637 | 11,335,948 | ||||||||||||
Total
operating expenses
|
4,588,192 | 4,641,791 | 13,114,356 | 14,609,996 | ||||||||||||
INCOME
FROM OPERATIONS
|
10,581,275 | 12,250,736 | 24,447,165 | 33,762,824 | ||||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
76,094 | 176,830 | 242,717 | 529,651 | ||||||||||||
Interest
expense
|
(1,201,014 | ) | (1,800,738 | ) | (4,150,086 | ) | (7,386,274 | ) | ||||||||
(Loss)
gain on derivative instrument
|
(1,199,438 | ) | (32,482 | ) | (1,581,812 | ) | 322,708 | |||||||||
Gain
on convertible note extinguishment
|
3,842,935 | - | 3,842,935 | - | ||||||||||||
Change
in fair value of derivative liability - warrants
|
- | - | (752,114 | ) | - | |||||||||||
Change
in fair value of derivative liability - conversion option
|
(2,058,352 | ) | - | (7,181,198 | ) | - | ||||||||||
Other
income (expense)
|
53,421 | (71,653 | ) | (193,061 | ) | (179,655 | ) | |||||||||
Total
other expense, net
|
(486,354 | ) | (1,728,043 | ) | (9,772,619 | ) | (6,713,570 | ) | ||||||||
INCOME
BEFORE INCOME TAXES
|
10,094,921 | 10,522,693 | 14,674,546 | 27,049,254 | ||||||||||||
PROVISION
FOR INCOME TAXES
|
899,988 | 1,475,743 | 815,996 | 3,150,962 | ||||||||||||
NET
INCOME
|
9,194,933 | 9,046,950 | 13,858,550 | 23,898,292 | ||||||||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
Unrealized
gain on marketable securities
|
- | - | - | 22,301 | ||||||||||||
Foreign
currency translation adjustment
|
72,136 | 1,899,163 | 112,093 | 14,062,515 | ||||||||||||
Change
in fair value of derivative instrument
|
237,768 | 3,940,908 | (3,275,588 | ) | 3,209,403 | |||||||||||
COMPREHENSIVE
INCOME
|
$ | 9,504,837 | $ | 14,887,021 | $ | 10,695,055 | $ | 41,192,511 | ||||||||
EARNINGS
PER SHARE:
|
||||||||||||||||
Basic
|
$ | 0.33 | $ | 0.33 | $ | 0.50 | $ | 0.88 | ||||||||
Diluted
|
$ | 0.31 | $ | 0.31 | $ | 0.48 | $ | 0.83 | ||||||||
WEIGHTED
AVERAGE SHARES:
|
||||||||||||||||
Basic
|
28,084,416 | 27,387,302 | 27,827,152 | 27,263,638 | ||||||||||||
Diluted
|
29,206,508 | 28,446,786 | 28,676,832 | 28,601,237 |
The
accompanying notes are an integral part of these consolidated statements.
- 2
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 13,858,550 | $ | 23,898,292 | ||||
Adjustments
to reconcile net income provided by (used in) operating
activities:
|
||||||||
Bad
debt expense
|
862,302 | 355,293 | ||||||
Inventories
write-off
|
119,133 | - | ||||||
Reserve
for inventories
|
62,914 | 401,646 | ||||||
Depreciation
|
7,191,842 | 4,728,235 | ||||||
Loss
on sale of property and equipment
|
117,430 | - | ||||||
Deferred
taxes
|
(3,253,085 | ) | (1,295,286 | ) | ||||
Amortization
of intangible assets
|
357,449 | 256,722 | ||||||
Amortization
of loan commission
|
817,349 | 2,525,756 | ||||||
Interest
penalty
|
- | 710,544 | ||||||
Amortization
of stock compensation expense
|
1,108,254 | 1,437,557 | ||||||
Loss
(gain) on derivative instrument
|
1,581,812 | (322,708 | ) | |||||
Gain
on convertible note extinguishment
|
(3,842,935 | ) | - | |||||
Change
in fair value of derivative liability - conversion option
|
7,181,198 | - | ||||||
Change
in fair value of derivative liability - warrants
|
752,114 | - | ||||||
Investment
loss on marketable securities
|
- | 16,158 | ||||||
Change
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
(20,177,587 | ) | (24,965,036 | ) | ||||
Inventories
|
(3,756,514 | ) | (7,885,132 | ) | ||||
Other
receivables and prepayments
|
501,770 | 1,092,497 | ||||||
Advances
to suppliers – current
|
15,073,210 | (22,061,823 | ) | |||||
Accounts
payable
|
(3,839,555 | ) | 2,521,359 | |||||
Other
payables and accrued liabilities
|
(2,863,124 | ) | (2,737,772 | ) | ||||
Customer
deposits
|
(250,861 | ) | 528,731 | |||||
Taxes
payable
|
3,984,006 | 960,752 | ||||||
Net
cash provided by (used in) operating activities
|
15,585,672 | (19,834,215 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Proceeds
from sale of marketable securities
|
- | 2,983,842 | ||||||
Payments
on derivative instrument
|
(614,580 | ) | - | |||||
Proceeds
from derivative instrument
|
- | 973,556 | ||||||
Deposit
in derivative hedge
|
- | (1,000,000 | ) | |||||
Purchase
of land use right
|
- | (1,687,468 | ) | |||||
Proceeds
from sale of property and equipment
|
424,444 | - | ||||||
Purchases
of property and equipment
|
(3,292,007 | ) | (15,540,210 | ) | ||||
Net
of refund and (payments) on prepayment of equipment
|
(1,877,177 | ) | (3,148,802 | ) | ||||
Net
cash used in investing activities
|
(5,359,320 | ) | (17,419,082 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Release
of restricted cash
|
1,000,000 | - | ||||||
Net
(payments) borrowings on revolver line of credit
|
(723,566 | ) | 2,279,289 | |||||
Proceeds
from short-term bank loans
|
- | 16,908,000 | ||||||
Proceeds
from shareholder loan
|
4,552,000 | - | ||||||
Payments
on short-term bank loans
|
(17,553,600 | ) | (17,268,032 | ) | ||||
Payment
on capital lease obligation
|
(23,575 | ) | - | |||||
Payment
of high yield notes payable
|
(5,000,000 | ) | - | |||||
Proceeds
from exercise of stock warrants
|
- | 139,394 | ||||||
Proceeds
on issuance of common stock and warrants
|
1,920,000 | - | ||||||
Net
cash (used in) provided by financing activities
|
(15,828,741 | ) | 2,058,651 | |||||
EFFECT
OF EXCHANGE RATE ON CASH
|
230 | 5,323,298 | ||||||
DECREASE
IN CASH
|
(5,602,159 | ) | (29,871,348 | ) | ||||
CASH,
beginning of period
|
65,611,770 | 79,914,758 | ||||||
CASH,
end of period
|
$ | 60,009,611 | $ | 50,043,410 | ||||
Supplemental
cash flow disclosures:
|
||||||||
Interest
paid
|
$ | 3,650,785 | $ | 5,895,129 | ||||
Income
tax paid
|
$ | 3,609,505 | $ | 2,907,756 |
The
accompanying notes are an integral part of these consolidated
statements.
- 3
-
FUSHI
COPPERWELD, INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Common stock
|
||||||||||||||||||||||||||||||||||||||||
Shares outstanding
|
Shares In escrow
|
Additional
|
Common stock
|
Retained earnings
|
Accumulated
|
|||||||||||||||||||||||||||||||||||
Number
|
Par
|
Number
|
Par
|
paid in
|
subscription
|
Statutory
|
Unrestricted
|
comprehensive
|
||||||||||||||||||||||||||||||||
of shares
|
value
|
of shares
|
value
|
capital
|
receivable
|
reserves
|
earnings
|
income (loss)
|
Totals
|
|||||||||||||||||||||||||||||||
BALANCE,
December 31, 2007
|
25,211,304 | $ | 151,268 | 100,000 | $ | 600 | $ | 77,665,064 | $ | $ | 8,321,726 | $ | 54,133,070 | $ | 4,015,930 | $ | 144,287,658 | |||||||||||||||||||||||
CB
transfer to common stock @$7.00
|
2,142,857 | 12,857 | 14,987,143 | 15,000,000 | ||||||||||||||||||||||||||||||||||||
Adjustment
to shares outstanding
|
4,851 | 29 | (29 | ) | - | |||||||||||||||||||||||||||||||||||
Exercise
of warrants for cash @ $3.11
|
44,873 | 270 | 139,124 | 139,394 | ||||||||||||||||||||||||||||||||||||
Stock
compensation expense
|
1,437,557 | 1,437,557 | ||||||||||||||||||||||||||||||||||||||
Net
income
|
23,898,292 | 23,898,292 | ||||||||||||||||||||||||||||||||||||||
Allocation
of APIC due to Kuhn's litigation
|
(3,487,250 | ) | (3,487,250 | ) | ||||||||||||||||||||||||||||||||||||
Adjustment
to statutory reserve
|
3,254,932 | (3,254,932 | ) | - | ||||||||||||||||||||||||||||||||||||
Change
in fair value of derivative instrument
|
3,209,403 | 3,209,403 | ||||||||||||||||||||||||||||||||||||||
Foreign
currency translation gain
|
14,062,515 | 14,062,515 | ||||||||||||||||||||||||||||||||||||||
Reverse
unrealized loss on marketable securities
|
22,301 | 22,301 | ||||||||||||||||||||||||||||||||||||||
BALANCE,
September 30, 2008 (unaudited)
|
27,403,885 | 164,424 | 100,000 | 600 | 90,741,609 | - | 11,576,658 | 74,776,430 | 21,310,149 | 198,569,870 | ||||||||||||||||||||||||||||||
Adjustment
to shares outstanding
|
(4,851 | ) | (29 | ) | 29 | - | ||||||||||||||||||||||||||||||||||
Stock
compensation expense
|
431,252 | 431,252 | ||||||||||||||||||||||||||||||||||||||
Net
income
|
4,576,217 | 4,576,217 | ||||||||||||||||||||||||||||||||||||||
Adjustments
to statutory reserve
|
739,489 | (739,489 | ) | - | ||||||||||||||||||||||||||||||||||||
Change
in fair value of derivative instrument
|
928,917 | 928,917 | ||||||||||||||||||||||||||||||||||||||
Foreign
currency translation loss
|
(1,526,564 | ) | (1,526,564 | ) | ||||||||||||||||||||||||||||||||||||
BALANCE,
December 31, 2008, as previously reported
|
27,399,034 | 164,395 | 100,000 | 600 | 91,172,890 | - | 12,316,147 | 78,613,158 | 20,712,502 | 202,979,692 | ||||||||||||||||||||||||||||||
Cumulative
effect of reclassification of conversion option
|
(1,357,150 | ) | (1,357,150 | ) | ||||||||||||||||||||||||||||||||||||
BALANCE,
January 1, 2009, as adjusted (unaudited)
|
27,399,034 | 164,395 | 100,000 | 600 | 91,172,890 | - | 12,316,147 | 77,256,008 | 20,712,502 | 201,622,542 | ||||||||||||||||||||||||||||||
Shares
issued for cash @ $4.80
|
400,000 | 2,400 | 1,706,157 | 1,708,557 | ||||||||||||||||||||||||||||||||||||
Shares
issued for convertible note extinguishment @ $9.80
|
440,529 | 2,643 | 3,997,357 | 4,000,000 | ||||||||||||||||||||||||||||||||||||
Shares
placed in escrow (subscription receivable)
|
2,200,000 | 13,200 | 6,249,481 | (6,262,681 | ) | - | ||||||||||||||||||||||||||||||||||
Shares
removed from escrow as payment of liability
|
100,000 | 600 | (100,000 | ) | (600 | ) | 343,084 | 343,084 | ||||||||||||||||||||||||||||||||
Reclassification
of derivative liability-warrant to equity
|
963,557 | 963,557 | ||||||||||||||||||||||||||||||||||||||
Exercise
of stock option
|
4,153 | 25 | (25 | ) | - | |||||||||||||||||||||||||||||||||||
Stock
compensation expense
|
1,108,254 | 1,108,254 | ||||||||||||||||||||||||||||||||||||||
Net
income
|
13,858,550 | 13,858,550 | ||||||||||||||||||||||||||||||||||||||
Adjustment
to statutory reserve
|
2,663,714 | (2,663,714 | ) | - | ||||||||||||||||||||||||||||||||||||
Change
in fair value of derivative instrument
|
(3,275,588 | ) | (3,275,588 | ) | ||||||||||||||||||||||||||||||||||||
Foreign
currency translation gain
|
112,093 | 112,093 | ||||||||||||||||||||||||||||||||||||||
BALANCE,
September 30, 2009 (unaudited)
|
28,343,716 | $ | 170,063 | 2,200,000 | $ | 13,200 | $ | 105,197,671 | $ | (5,919,597 | ) | $ | 14,979,861 | $ | 88,450,844 | $ | 17,549,007 | $ | 220,441,049 |
The
accompanying notes are an integral part of these consolidated
statements.
- 4
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
1 - Organization and Line of Business
Fushi
Copperweld, Inc, a Nevada corporation (“Fushi”), is the holding company of Fushi
Holdings, Inc., (“Fushi Holdings”) incorporated in the state of Delaware, which
is a holding company for Dalian Fushi International Bimetallic Cable Co., Ltd
(“Fushi International”) organized under the laws of the People's Republic of
China (“PRC”). Dalian Fushi Bimetallic Manufacturing Co., Ltd
(“Dalian Fushi”) is a variable interest entity through a contractual
relationship (Note 2). Dalian Fushi is a limited liability company organized
under the laws of the PRC, which is engaged in the manufacturing and sale
of bimetallic wire products.
Fushi
acquired Copperweld Bimetallics Holdings, LLC, a North Carolina limited
liability company and the holder of the partnership interest in Copperweld
Bimetallics, LLC, (“Copperweld”) a limited liability company registered in the
state of Delaware and the parent of Copperweld Bimetallics UK, Ltd. ("Copperweld
UK"), a private company registered in the United Kingdom and Copperweld
International Holdings, LLC a North Carolina limited liability
company. Copperweld is a bimetallic sales and manufacturing
operation headquartered in Fayetteville, Tennessee. Copperweld UK is a
manufacturing, distribution and customer service facility located in Telford,
England. Copperweld International Holdings, LLC was a non-operating company that
held partnership interests in a company located in Tongling, PRC at December 31,
2007. Those interests were liquidated in an agreement entered into by
Copperweld and its subsidiaries, affiliates and International Manufacturing
Equipment Sales, Inc. on January 16, 2008. Additionally, Fushi acquired
International Manufacturing Equipment Sales, LLC, a shell company that was, at
the time of purchase, a non-affiliated but commonly owned limited liability
company.
Three of
the companies acquired on October 29, 2007 were dissolved in 2008:
1.
Copperweld Holdings, LLC, a North Carolina limited liability company. This
company had no liabilities and its only asset was the ownership of Copperweld
Bimetallics, LLC, which the ownership rights were transferred to Fushi
Copperweld, Inc. on October 29, 2007.
2.
Copperweld Bimetallics International Holdings, LLC, a Delaware limited liability
company was established to hold the partnership interest in the Tongling joint
venture which has been dissolved. This company was a shell company with no
assets or liabilities at the time the joint venture was dissolved.
3.
International Manufacturing Equipment Suppliers, LLC, a North Carolina limited
liability company. This company was not an affiliate of the Copperweld
companies. This company was formed by the prior owner of Copperweld
Bimetallics to facilitate the transfer of equipment to the Tongling joint
venture. As noted above, the Tongling joint venture has been
dissolved. This company had no assets or liabilities at the time of the
dissolution.
- 5
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Fushi,
Fushi Holdings, Fushi International, Dalian Fushi, Copperweld and Copperweld UK
are hereinafter referred to as “the Company”.
The
Company is in the business of developing, designing, manufacturing, marketing
and distributing bimetallic wire products, principally copper-clad aluminum and
copper-clad steel. The Company's products are primarily focused on serving
end-user applications in the telecommunication, electrical utility, and
transportation markets. The Company’s products are sold in North America,
Europe, North Africa, the Middle East, and the PRC.
Note
2 - Summary of Significant Accounting Policies
Management
has included all adjustments, consisting only of normal recurring adjustments,
considered necessary to give a fair presentation of operating results for the
periods presented. Interim results are not necessarily indicative of results for
a full year. The information included in this Form 10-Q should be read
in conjunction with information included in the 2008 annual report filed on Form
10-K.
Principles of
consolidation
The
accompanying consolidated financial statements include the financial statements
of Fushi and its wholly owned subsidiaries, Fushi Holdings, Fushi International,
Copperweld, Copperweld UK and its 100% variable interest entity Dalian Fushi.
All significant inter-company transactions and balances have been eliminated in
consolidation.
In
accordance with the interpretation of Generally Accepted Accounting Principles
(GAAP), variable interest entities (VIEs) are generally entities that lack
sufficient equity to finance their activities without additional financial
support from other parties or whose equity holders lack adequate decision making
ability. All VIEs with which the Company is involved must be
evaluated to determine the primary beneficiary of the risks and rewards of the
VIE. The primary beneficiary is required to consolidate the VIE for
financial reporting purposes.
Fushi
International owns 0% of Dalian Fushi; however, pursuant to the Entrusted
Management Agreement, Voting Proxy Agreement and the Share Pledge Agreement
(collectively, “Restructuring Agreements”) reached by Fushi International,
Dalian Fushi and its registered shareholders in 2005, Fushi International has
full control over Dalian Fushi’s remaining operations and financial affairs as a
result. Fushi International is the primary beneficiary of Dalian Fushi, thus
Dalian Fushi is a 100% VIE of Fushi International, which means 100% Voting
Rights and 100% Financial Obligation to Fushi International. Thus Dalian Fushi
is considered a Variable Interest Entity (“VIE”) and is consolidated within the
financial statements.
- 6
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Use of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. For
example, the Company estimates the fair value of its derivative instrument.
Actual results could differ from those estimates.
Revenue
recognition
Sales
revenue is recognized at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer
deposits.
Shipping and handling
costs
Shipping
and handling costs related to costs of goods sold are included in selling costs
which totaled $562,051 and $530,891 for the three months ended September 30,
2009 and 2008, respectively, and $1,547,274 and $1,585,406 for the nine months
ended September 30, 2009 and 2008, respectively.
Foreign currency translation
and other comprehensive income
The
reporting and functional currency of the Company is the US dollar. The
subsidiaries Fushi International, VIE Dalian Fushi and Beijing Office use the
local currency Renminbi (RMB) to conduct business. Copperweld UK conducts
business in British Pounds.
For the
subsidiaries whose functional currencies are other than the US dollar, all
assets and liabilities accounts were translated at the exchange rate on the
balance sheet date; stockholder's equity is translated at the historical rates
and items in the consolidated statements of operations and consolidated cash
flow statements are translated at the average rate in each applicable period.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders’
equity. The resulting translation gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
The
consolidated balance sheet amounts with the exception of equity at September 30,
2009, were translated at 6.826 RMB and £0.625 to $1.00, respectively. The
consolidated balance sheet amounts with the exception of equity at December 31,
2008, were translated at 6.823 RMB and £0.684 to $1.00. The average translation
rates applied to the consolidated income and cash flow statement amounts for
nine months ended September 30, 2009, were 6.832 RMB and £0.648 to $1.00,
respectively.
Cash
flows from the Company's operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities reported on
the consolidated statements of cash flows will not necessarily agree with
changes in the corresponding balances on the consolidated balance
sheets.
- 7
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Cash and concentration of
risk
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes. Cash includes cash on hand and demand deposits in
accounts maintained with state owned banks within the PRC and with banks in the
United Kingdom (“UK”) and the USA.
Certain
financial instruments, which subject the Company to concentration of credit
risk, consist of cash. The Company maintains balances at financial institutions
which, from time to time, may exceed deposit insurance limits for the banks
located in the United States and UK. Balances at financial institutions or state
owned banks within the PRC are not covered by insurance. As of September 30,
2009, the Company had deposits in excess of federally insured limits totaling
$59,368,494. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant risks on its cash in bank
accounts.
Parts of
the Company’s operations are carried out in the PRC and UK. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the two
countries, and by the general state of the two countries' economy. The Company's
operations in the two countries are subject to specific considerations and
significant risks not typically associated with companies in North America.
These include risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
Restricted
cash
Restricted
cash consists of monies placed in escrow for the Kuhns lawsuit settlement. On
May 21, 2009, the Company delivered $1,000,000 plus accrued interest (the
“Escrow Payment”) as partial payment to reduce the settlement liability owed to
Kuhns pursuant to the Settlement Agreement signed on May 19, 2009. See Note 18
for details.
Additional product sales
information
The
Company has expanded its geographic sales area from the Chinese domestic market
to the international market. The following chart shows that sales were spread
across international markets during the nine months ended September 30, 2009 and
2008 as follows:
September 30,
2009
|
September 30,
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
China
|
$ | 103,028,466 | $ | 125,585,203 | ||||
USA
|
21,692,506 | 38,650,665 | ||||||
Europe
|
3,357,305 | 8,177,409 | ||||||
Other
countries
|
3,156,150 | 7,955,806 | ||||||
Total
sales
|
$ | 131,234,427 | $ | 180,369,083 |
- 8
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
following chart shows that sales were spread across international markets during
the three months ended September 30, 2009 and 2008 as follows:
September 30,
2009
|
September 30,
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
China
|
$ | 38,817,579 | $ | 45,725,853 | ||||
USA
|
6,758,832 | 12,705,837 | ||||||
Europe
|
1,414,149 | 2,305,901 | ||||||
Other
countries
|
685,786 | 3,086,336 | ||||||
Total
sales
|
$ | 47,676,346 | $ | 63,823,927 |
Major customers and
suppliers
Ten major
customers accounted for 27% and 19% of sales for the nine months ended September
30, 2009 and 2008, respectively, and 27% and 17% of net sales for the three
months ended September 30, 2009 and 2008, respectively. Total receivable balance
due from the top ten customers at September 30, 2009 and December 31, 2008
amounted to $19,803,794 and $11,838,214, respectively.
Five
major suppliers provided approximately 72% and 63% of the Company’s raw
materials for the nine months ended September 30, 2009 and 2008, respectively,
and 52% and 63% of the Company’s raw materials for the three months ended
September 30, 2009 and 2008, respectively. At September 30, 2009, advances
to the Company’s major five suppliers were $1,261,067, all of which was current.
At December 31, 2008, advances to the Company’s major five suppliers were
$20,111,644, all of which was current.
Accounts
receivables
During
the normal course of business, the Company extends unsecured credit to its
customers. Management regularly reviews aging of receivables and changes in
payment trends by its customers, and records a reserve when they believe
collection of amounts due are at risk. Accounts considered uncollectible are
written off through a charge to the valuation allowance. As of September 30,
2009 and December 31, 2008, management concluded its allowance for bad debts was
sufficient.
Inventories
Inventories
are stated at the lower of cost or market using a weighted average method.
Inventories consist of raw materials, work in process, finished goods and
packing materials. Raw materials consist of copper, aluminum and steel used in
production. The cost of finished goods includes direct costs of raw materials as
well as direct labor used in production. Indirect production costs such as
utilities and indirect labor related to production such as assembling, shipping
and handling for raw material costs are also included in the cost of
inventories.
- 9
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
Company reviews its inventories regularly for possible obsolete goods and
establishes reserves when determined necessary.
Derivative
instrument
Effective
January 1, 2009, the Company began disclosing qualitative disclosures about
objectives and strategies for using derivatives and quantitative disclosures
about the fair value of and gains and losses on derivative instruments. The
Company uses a cross currency hedge, a derivative financial instrument, to hedge
the risk of rising interest rates on its variable interest rate debt. This type
of derivative financial instrument is known as a cash flow hedge. The Company
accounts for this interest rate swap at fair value for hedge accounting
treatment. The above derivative qualifies for hedge accounting, changes in the
fair value effective portion is reported in accumulated other comprehensive
income, net of related income tax effects. Amounts included in accumulated other
comprehensive income are reclassified into earnings when the hedged transaction
affects earnings.
At the
inception of the transaction, the Company documented the relationship between
hedging instruments and hedged items, as well as its risk management objective
and the strategy for undertaking various hedge transactions. This process
includes linking all derivatives designated to specific firm commitments of
forecast transactions. The Company also documents its assessment, both at
inception and on an ongoing basis, of whether the derivative financial
instruments that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. Any portion
deemed ineffective is recorded in earnings with the effective portion reflected
in accumulated other comprehensive. Changes in the fair values of derivative
financial instruments accounted for as cash flow hedges to the extent they
qualify for hedge accounting, are recorded in accumulated other comprehensive
income. See Note 12 for additional information related to the
instrument.
Financial
instruments
The
Company analyzes all financial instruments with features of both liabilities and
equity under GAAP requirements. The convertible note issued in 2007 did not
require bifurcation or result in liability accounting. However, with the
adoption of amended GAAP requirements in first quarter of 2009, the embedded
conversion feature was bifurcated from its host instrument and accounted for
separately as a derivative liability. Additionally, the Company analyzes
registration rights agreements associated with any equity instruments issued to
determine if penalties triggered for late filing should be
accrued.
- 10
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
Company adopted Fair Value Measurements on January 1, 2008 which defines fair
value and establishes a three-level valuation hierarchy for disclosures of fair
value measurement. Receivables, payables, notes, loans, and derivatives all meet
the definition of financial instruments. The carrying amounts reported in the
balance sheets for accounts receivable, notes receivable, accounts payable,
other payables, and short term bank loans qualify as financial instruments are a
reasonable estimate of fair value because of the short period of time between
the origination and their expected realization and, if applicable, the stated
interest rate is equivalent to interest rates currently
available. The three levels 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 assets or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value.
|
Other
than as listed below, the Company did not identify any assets or liabilities
that are required to be presented on the balance sheet at fair
value.
During
2007, the Company borrowed $40,000,000 in the form of a high yield debenture
note with a floating rate. As of September 30, 2009, the outstanding principal
of the high yield debenture note amounted to $35,000,000. The Company used Level
3 inputs for its valuation methodology for the notes payable, and their fair
values are determined using cash flows discounted at relevant market interest
rates in effect at the period close since there is no observable market
price.
As of
September 30, 2009, the Company had a derivative instrument with a carrying
value of approximately $7.7 million. The Management calculated the fair value of
the derivative instrument using Level 3 inputs since there is no observable
market price.
Carrying Value
September 30,
2009
(Unaudited)
|
Fair Value Measurements
September 30, 2009
Using Fair Value Hierarchy
(Unaudited)
|
||||||||||
Level 1
|
Level 2
|
Level 3
|
|||||||||
Derivative
instrument
|
$ | 7,652,664 | $ | 7,652,664 |
Derivative
liability
Using the
criteria under GAAP, a contract is designated as an asset or a liability
and is carried at fair value on a company’s balance sheet, with any changes in
fair value recorded in a company’s results of operations. The Company
then determines which options, warrants and embedded features require liability
accounting and records the fair value as a derivative liability. The changes in
the values of these instruments are shown in the accompanying consolidated
statements of income and other comprehensive income as “change in fair value of
derivative liability – warrants or conversion option and change in fair value of
derivative instrument.”
- 11
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Prior to
January 1, 2009, the conversion option embedded in the Company’s $5,000,000
convertible notes was not separately accounted for as a derivative instrument
liability. However, effective January 1, 2009, the conversion option
met the criteria of a derivative instrument liability because it required that
the conversion price be adjusted in certain circumstances that do not meet the
“fixed-for-fixed’ criteria in that issue. As a result, the Company
is now required to separately account for the embedded conversion option as
a derivative instrument liability, carried at fair value and marked-to-market
each period, with changes in the fair value each period charged or credited to
income.
The
cumulative effect of this change in accounting principle of $1,357,150 has been
recognized as a reduction of the opening balance of Retained Earnings as January
1, 2009. That cumulative effect adjustment is the difference between
the amounts previously recognized in the Company’s consolidated balance sheet as
of December 31, 2008 and the amounts that would have been recognized if the
Convertible Notes had been accounted for as a derivative instrument liability
from the issuance date.
For the
nine months ended September 30, 2009 and 2008, the Company recognized a loss in
the change in fair value of derivative liability – conversion option in the
amounts of $7,181,198 and $0, respectively. For the three months ended September
30, 2009 and 2008, the Company recognized a loss in the change in fair value of
derivative liability – conversion option in the amounts of $2,058,352 and $0,
respectively.
For the
nine months ended September 30, 2009 and 2008, the Company recognized a loss in
the change in fair value of derivative liability – warrants in the amounts of
$752,114 and $0, respectively. For the three months ended September 30, 2009 and
2008, the Company recognized a loss in the change in fair value of derivative
liability – warrants in the amounts of $0 and $0, respectively.
Stock-based
compensation
The
Company records and reports stock-based compensation by measuring the cost of
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost is recognized over the period
during which services are received. Stock compensation for stock granted to
non-employees is determined as the fair value of the consideration received or
the fair value of equity instruments issued, whichever is more reliably
measured.
Plant and equipment,
net
Plant and
equipment are stated at cost. When the asset property and equipment is retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the
straight-line method for substantially all assets with estimated lives as
follows:
Estimated Useful Life
|
|
Buildings
|
20-39.5 years
|
Machinery
and equipment
|
7-15 years
|
Other
equipment
|
3-5 years
|
Transportation
equipment
|
3-5 years
|
- 12
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. Costs classified
to construction in progress include all cost of obtaining the asset and bringing
it to the location and condition necessary for its intended use. No depreciation
is provided for construction in progress until such time as the assets are
completed and are placed into service. Interest incurred during construction is
capitalized into construction in progress. All other interest is expensed as
incurred. Total interest capitalized for the nine months ended
September 30, 2009 and 2008 amounted to $1,350 and $67,976, respectively. Total
interest capitalized for the three months ended September 30, 2009 and 2008 was
$0 and $5,164, respectively.
If a cost
does not extend an assets useful life, increase its productivity, improve its
operating efficiency or add additional production capacity, the cost is regarded
as repairs and maintenance and recognized as an expense as incurred; if it does,
the cost is regarded as major renewals and betterments and
capitalized. For the nine and three months ended September 30, 2009
and 2008, there were no amounts expended for major renewals and betterments that
were capitalized.
Repairs
and maintenance expense for the nine months ended September 30, 2009 and 2008,
amounted to $391,809 and $707,564, respectively, and the three months ended
September 30, 2009 and 2008 amounted to $66,696 and $192,792,
respectively.
Long-lived
assets
The
Company evaluates the carrying value of long-lived assets each reporting. When
estimated cash flows generated by those assets are less than the carrying
amounts of the asset, the Company recognizes an impairment loss. Based on its
review, the Company believes that, as of September 30, 2009 and December 31,
2008, there were no impairments of its long-lived assets.
Intangible
assets
Land use
rights – land in the People’s Republic of China is government owned. However,
the government grants “land use rights." The Company amortizes land use rights
on a straight line basis over the 50 year life.
Patents –
Patents are stated at cost, less accumulated amortization. The Company amortizes
patents on a straight line basis over 7-15 years.
The
Company evaluates intangible assets for impairment, at least annually and more
often whenever events or changes in circumstances indicate that the carrying
value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets, and goodwill is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. Based on its review, the
Company believes that, as of September 30, 2009 and December 31, 2008, there was
no impairment of intangible assets.
- 13
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Research and
development
Research
and development expenses include salaries, consultant fees, supplies and
materials, as well as costs related to other overhead such as facilities,
utilities and other departmental expenses. The costs the Company incurs with
respect to internally developed technology and engineering services are included
in research and development expenses as incurred as they do not directly relate
to any particular licensee, license agreement or license fees.
Research
and development costs are recorded in general and administrative expenses.
Research and development costs were $138,155 and $271,930 for the nine months
ended September 30, 2009 and 2008, respectively, and $30,454 and $116,890 for
the three months ended September 30, 2009 and 2008, respectively.
Earnings per
share
The
Company reports earnings per share and present both basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock using the treasury method. For the nine and three months ended
September 30, 2009 and 2008, the Company properly excluded options, warrants and
convertible notes with anti-dilutive effects from the diluted earnings per share
calculation.
Income
taxes
The
provision for income taxes consists of taxes currently due plus deferred taxes.
The recognition of deferred income tax liabilities and assets for the estimated
future tax effects is attributable to temporary differences and operating loss
and tax credit carryforwards. Deferred tax liability or asset attributable to
temporary differences is accounted for using the balance sheet liability method
in respect of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Deferred tax expense or benefit
is the change during the year in deferred tax liabilities and
assets. Deferred taxes are determined separately for each tax-paying
component (an individual entity or group of entities that is consolidated for
tax purposes) in each tax jurisdiction. Deferred tax liability or asset is
calculated at the tax rates that are expected to apply to the period when the
asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it is related to items
credited or charged directly to equity, in which case the deferred tax is also
dealt with in equity. Deferred tax assets and liabilities are offset when they
relate to income taxes levied by the same taxation authority and the Company
intends to settle its current tax assets and liabilities on a net basis.
Deferred tax assets are reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not (a likelihood of more
than 50 percent) that some portion or all of the deferred tax assets will not be
realized.
- 14
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met. GAAP also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition.
Value-added
tax
Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are produced and sold in the PRC are
subject to a Chinese VAT at a rate of 17% of the gross sales price. All of the
Company’s products that are manufactured and sold in the UK are subject to a UK
VAT at a rate of 15% of the gross sales price. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished product. The Company recorded VAT payable and VAT
receivable net of payments in the consolidated financial statements. The VAT tax
return is filed offsetting the payables against the receivables.
Segment
Reporting
The
Company uses a “management approach” model for segment reporting. The management
approach model is based on the way a company’s management organizes segments
within the company for making operating decisions and assessing performance. The
Company has determined that it has two reportable segments, China and U.S. (See
Note 19).
- 15
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Recently issued accounting
pronouncements
In
December 2007, the FASB issued revised business combinations guidance. The
revised guidance retains the fundamental requirements of the previous guidance
in that the acquisition method of accounting be used for all business
combinations, that an acquirer be identified for each business combination and
for goodwill to be recognized and measured as a residual. The revised guidance
expands the definition of transactions and events that qualify as business
combinations to all transactions and other events in which one entity obtains
control over one or more other businesses. The revised guidance broadens the
fair value measurement and recognition of assets acquired, liabilities assumed
and interests transferred as a result of business combinations..The guidance
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The Company has adopted the guidance and believes that
if the Company consummated a business combination transaction, the
Company’s adoption of the guidance would have a material impact on the
consolidated financial statements.
In
January 2009, the FASB issued an accounting standard which amended the
impairment model by removing its exclusive reliance on “market participant”
estimates of future cash flows used in determining fair value. Changing the cash
flows used to analyze other-than-temporary impairment from the “market
participant” view to a holder’s estimate of whether there has been a “probable”
adverse change in estimated cash flows allows companies to apply reasonable
judgment in assessing whether an other-than-temporary impairment has occurred.
The adoption of this accounting standard did not have a material impact on the
Company’s consolidated financial statements because all of the investments in
debt securities are classified as trading securities.
In April
2009, the FASB issued authoritative guidance related to the determination of
fair value when the volume and level of activity for an asset or liability has
significantly decreased, the identification of transactions that are not
orderly, the recognition and presentation of other-than-temporary impairments,
and the disclosure of the fair value of financial instruments on an interim
basis. The adoption of the guidance did not have a material impact on the
Company’s consolidated financial statements.
In April
2009, the FASB issued an accounting standard 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 standard will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This standard 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 standard 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 standard became effective
for interim and annual periods ending after June 15, 2009. The adoption of
this standard did not have a material impact on the Company’s consolidated
financial statements.
- 16
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
In April
2009, the FASB issued an accounting standard that requires 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 accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated financial
statements.
In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the
rationale for why that date was selected. The standard is effective for
interim and annual periods ending after June 15, 2009, and accordingly, the
Company adopted this Standard during the second quarter of 2009. The standard
requires that public entities evaluate subsequent events through the date
that the financial statements are issued.
In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009. The Company
has not completed the assessment of the impact this new standard will have
on the Company’s financial condition, results of operations or cash
flows.
In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within
this accounting standard. Further, this accounting standard requires a
company to perform a qualitative analysis when determining whether or not it
must consolidate a VIE. It also requires a company to continuously reassess
whether it must consolidate a VIE. Additionally, it requires enhanced
disclosures about a company’s involvement with VIEs and any significant
change in risk exposure due to that involvement, as well as how its involvement
with VIEs impacts the company’s financial statements. Finally, a company will be
required to disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This accounting standard is effective
for financial statements issued for fiscal years beginning after November 15,
2009. The Company has not completed their assessment of the
impact that this pronouncement will have on the Company’s financial condition,
results of operations or cash flows.
- 17
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards Codification™ (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company in the third quarter of 2009, and accordingly, the
Company’s Quarterly Report on Form 10-Q for the quarter ending September 30,
2009 and all current and subsequent public filings will reference
the Codification as the sole source of authoritative
literature.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.
Reclassification
Certain
reclassifications have been made to the 2008 consolidated financial statements
to conform to the 2009 consolidated financial statement presentation. These
reclassifications had no effect on net income or cash flows as previously
reported.
Note
3 - Accounts receivable
Accounts
receivable consisted of the following:
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
Trade
accounts receivable
|
$ | 70,234,048 | $ | 50,101,077 | ||||
Allowance
for bad debts
|
(1,181,365 | ) | (318,529 | ) | ||||
Trade
accounts receivable, net
|
$ | 69,052,683 | $ | 49,782,548 |
- 18
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
following table consists of allowance for doubtful accounts.
Allowance
for doubtful accounts at December 31, 2007
|
$ | 135,418 | ||
Reserve
adjustment
|
355,293 | |||
Accounts
receivable write off
|
(9,426 | ) | ||
Effect
of foreign currency translation
|
16,920 | |||
Allowance
for doubtful accounts at September 30, 2008 (Unaudited)
|
498,205 | |||
Reserve
adjustment
|
(176,826 | ) | ||
Accounts
receivable write off
|
8,333 | |||
Effect
of foreign currency translation
|
(11,183 | ) | ||
Allowance
for doubtful accounts at December 31, 2008
|
318,529 | |||
Reserve
adjustment
|
862,302 | |||
Accounts
receivable write off
|
- | |||
Effect
of foreign currency translation
|
534 | |||
Allowance
for doubtful accounts at September 30, 2009 (Unaudited)
|
$ | 1,181,365 |
Note
4 - Inventories
Inventories
consisted of the following:
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
Raw
materials
|
$ | 6,149,824 | $ | 3,929,585 | ||||
Work
in process
|
2,238,037 | 1,337,703 | ||||||
Finished
goods
|
2,493,326 | 1,832,511 | ||||||
Scrap
|
- | 38,540 | ||||||
Totals
|
10,881,187 | 7,138,339 | ||||||
Less
allowance for obsolete inventory
|
(223,401 | ) | (160,487 | ) | ||||
Totals
|
$ | 10,657,786 | $ | 6,977,852 |
The
following table consists of allowance for obsolete inventory:
Allowance
for obsolete inventory at December 31, 2007
|
$ | 63,594 | ||
Reserve
adjustment
|
401,646 | |||
Allowance
for obsolete inventory at September 30, 2008 (Unaudited)
|
465,240 | |||
Reserve
adjustment
|
(304,753 | ) | ||
Allowance
for obsolete inventory at December 31, 2008
|
160,487 | |||
Reserve
adjustment
|
62,914 | |||
Allowance
for obsolete inventory at September 30, 2009 (Unaudited)
|
$ | (223,401 | ) |
- 19
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
5 - Plant and equipment
Plant and
equipment consisted of the following:
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
Land
|
$ | 100,726 | $ | 100,726 | ||||
Buildings
and improvements
|
43,662,801 | 43,418,544 | ||||||
Transportation
equipment
|
4,177,659 | 4,138,892 | ||||||
Machinery
and equipment
|
73,131,989 | 55,147,707 | ||||||
Office
furniture
|
1,169,789 | 1,166,477 | ||||||
Construction
in progress
|
16,865,916 | 33,163,330 | ||||||
Totals
|
139,108,880 | 137,135,676 | ||||||
Less
accumulated depreciation
|
(23,498,298 | ) | (17,374,649 | ) | ||||
Totals
|
$ | 115,610,582 | $ | 119,761,027 |
Construction
in progress at September 30, 2009, consisted of the following:
September 30,
2009
|
Commencement
|
Expected
Completion
|
|||||||
No.
|
Project Description
|
(Unaudited)
|
Date
|
Date
|
|||||
1
|
Manufacturing
machinery and equipment for CCA/CCS (Multiple)
|
$ | 3,081,574 |
Dec-07
|
Mar-10
|
||||
2
|
Corporation
administration office building
|
13,143,496 |
May-03
|
Dec-10
|
|||||
3
|
Manufacture
building (Dalian)
|
630,346 |
Jan-08
|
Dec-09
|
|||||
4
|
Manufacturing
machinery and equipment for CCA
|
10,500 |
Jul-09
|
Mar-10
|
|||||
Total
|
$ | 16,865,916 | |||||||
Construction
in progress as of December 31, 2008 consisted of the following:
December 31,
|
Commencement
|
Expected
Completion
|
|||||||
No.
|
Project Description
|
2008
|
Date
|
Date
|
|||||
1
|
Manufacturing
machinery and equipment for CCA/CCS
|
$ | 14,507,534 |
Dec-07
|
Dec-09
|
||||
2
|
Corporation
administration office building
|
12,964,718 |
May-03
|
Dec-10
|
|||||
3
|
Manufacturing
machinery and equipment for CCA (Multiple)
|
3,298,681 |
Oct-07
thru Jan-08
|
Mar-09
thru Dec-09
|
|||||
4
|
Manufacturing
machinery and equipment for CCS (Multiple)
|
1,775,300 |
Mar-07 thru Sep-08
|
Mar-09 thru Dec-09
|
|||||
5
|
Manufacture building
|
617,097 |
Jan-08
|
Dec-09
|
|||||
Total
|
$ | 33,163,330 |
- 20
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
decrease in the construction in progress balance for the nine months period
ended September 30, 2009 is primarily related to $12.5 million of machinery and
equipment (Project No. 1) that was deemed completed through its installation and
testing process during the first quarter. As a result, the machinery
and equipment was then transferred from construction in progress to depreciable
fixed assets. The estimated costs to complete Project No. 1 (Manufacturing
Machinery and Equipment) as of September 30, 2009, and December 31, 2008 were
$1.99 million and $2.34 million, respectively. The estimated costs to
complete Project No. 2 (Tower B) as of September 30, 2009, and December 31, 2008
were $2.91 million and $3.09 million, respectively.
The
change in plant and equipment is as follows:
Plant and equipment
|
||||
Balance
as of December 31, 2008
|
$ | 137,135,676 | ||
Acquired
through cash payment
|
428,436 | |||
Acquired
from advanced payments
|
2,826,979 | |||
Acquired
from accounts payable
|
36,593 | |||
Acquired
from debt receivable
|
40,984 | |||
Acquired
through capital lease
|
266,598 | |||
Fixed
assets transferred from CIP
|
19,614,826 | |||
CIP
transferred to fixed assets
|
(19,614,826 | ) | ||
Disposal
|
(1,697,892 | ) | ||
FX
rate effect
|
71,506 | |||
Balance
as of September 30, 2009 (Unaudited)
|
$ | 139,108,880 |
Depreciation
expense for the nine months ended September 30, 2009 and 2008 amounted to
$7,191,842 and $4,728,235, respectively, and the three months ended September
30, 2009 and 2008 amounted to $2,579,437 and $1,701,814,
respectively.
Note
6 – Advances to suppliers
Advances
on purchases are monies deposited or advanced to outside vendors for future
inventory and equipment purchases. Most of the Company’s vendors require a
certain amount of money to be deposited with them as a guarantee that the
Company will receive their purchase on a timely basis.
Advances
to suppliers consisted of the following:
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
Advances
for inventories – current
|
$ | 5,164,959 | $ | 20,261,585 | ||||
Advances
for equipment – non current
|
5,862,776 | 4,022,879 | ||||||
Total
advances to suppliers
|
$ | 11,027,735 | $ | 24,284,464 |
- 21
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
7 – Intangible assets
Intangible
assets consist of land use rights and patents. Intangible assets consisted of
the following:
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
Patents
|
$ | 1,754,162 | $ | 1,755,025 | ||||
Land
use rights
|
12,471,280 | 12,478,090 | ||||||
Total:
|
14,225,442 | 14,233,115 | ||||||
Less:
accumulated amortization
|
(2,182,941 | ) | (1,826,195 | ) | ||||
Intangible
assets, net
|
$ | 12,042,501 | $ | 12,406,920 |
Amortization
expense for the nine months ended September 30, 2009 and 2008 amounted to
$357,449 and $256,722, and for the three months ended September 30, 2009 and
2008 amounted to $119,166 and $98,071, respectively.
Estimated
amortization expense for each of the years ended is as follows:
September 30,
|
Amount
|
|||
2010
|
$ | 476,598 | ||
2011
|
476,598 | |||
2012
|
476,598 | |||
2013
|
355,420 | |||
2014
|
332,995 |
Note
8 - Prepaid taxes, taxes payable and deferred tax asset
Prepaid
taxes and taxes payable consisted of the following:
September 30,
2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
Income
tax
|
$ | 1,456,361 | $ | 997,581 | ||||
VAT
benefit
|
1,710,899 | (1,779,973 | ) | |||||
Others
|
147,543 | 111,587 | ||||||
Total
taxes payable (prepayment)
|
$ | 3,314,803 | $ | (670,805 | ) |
- 22
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Income
tax
Under the
former Income Tax Laws of PRC, the Company is generally subject to an income tax
at an effective rate of 33% (30% state income taxes plus 3% local income taxes)
on income reported in the statutory financial statements after appropriate tax
adjustments. For an enterprise that qualifies as a new or high-technology
enterprise or a Foreign Invested Enterprise (“FIE”) located in the old town of
an inshore open city, it is subject to an income tax rate of 24%. In addition,
if the enterprise is located in a specially designated region that allows
foreign enterprises, the enterprise is entitled to a two-year income tax
exemption and a 50% income tax reduction for the following three
years.
Beginning
January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law replaced the
former income tax laws for Domestic Enterprises (“DEs”) and FIEs. The new
standard EIT rate of 25% replaced the 33% rate previously applicable to both DEs
and FIEs. The two years tax exemption, three years 50% tax reduction tax holiday
for production-oriented FIEs, was eliminated. However, the new EIT Law permits
companies to continue to enjoy their former preferential tax treatments until
such treatments expire in accordance with their current terms.
The
Company’s wholly owned subsidiary, Fushi International, is a foreign limited
liability company and is located in the old town of an inshore open city. Under
the former Income Tax Laws of PRC, the Company qualified to use 24% income tax
rate and has a full income tax exemption for the years ended December 31, 2006
and 2007 and a 50% income tax reduction for the years ending December 31, 2008,
2009 and 2010. Under the new EIT law effected in 2008, the company uses a 25%
income tax rate and continues to enjoy the former 50% income tax reduction
for the years ending December 31, 2008, 2009 and 2010. So, the applicable
corporate income tax rate in 2009 is 12.5%. The provision for income tax for the
nine months ended September 30, 2009 and 2008 was $4,069,081 and $4,446,247,
respectively. The provision for income tax for the three months ended September
30, 2009 and 2008 was $1,788,366 and $1,582,133 respectively.
Dalian
Fushi was incorporated in the PRC and is subject to PRC income tax. Dalian Fushi
located its factory in a special economic region in Dalian, PRC and qualified as
a "new or high-technology enterprise" that is allowed a two year income tax
exemption beginning in 2002, the first year after it became profitable, and a
50% income tax reduction for the following three years, 2004 through 2006.
Dalian Fushi had a loss from operations in the first nine months of 2009, so no
provision for income taxes was made during this period.
The
Company is also subject to the United States federal income tax at a tax rate of
34%. Fushi, Fushi Holdings, Copperweld Bimetallics Holdings, LLC and Copperweld
Bimetallics, LLC were incorporated in the United States and have incurred net
operating losses for income tax purposes since inception. The net operating loss
carry forwards for United States income taxes may be available to reduce future
years’ taxable income. These carryforwards will expire in varying amounts in the
years 2025 to 2029 if not utilized.
- 23
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Copperweld
UK is organized as a United Kingdom private company and subject to 20% to 28%
statutory taxes on its taxable income. Copperweld UK had a loss from
operations in the first nine months in year 2009, so no provision for income
taxes was made during this period.
The
(Benefit) Provision for income taxes consisted of the following for the nine
months ended September 30:
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Provision
for China income taxes
|
$ | 4,069,081 | $ | 4,446,247 | ||||
Deferred
income taxes
|
(3,253,085 | ) | (1,295,285 | ) | ||||
Provision
for income taxes
|
$ | 815,996 | $ | 3,150,962 |
The
(Benefit) Provision for income taxes consisted of the following for the three
months ended September 30:
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Provision
for China income taxes
|
$ | 1,788,366 | 1,582,133 | |||||
Deferred
income taxes
|
(888,378 | ) | (106,390 | ) | ||||
Provision
for income taxes
|
$ | 899,988 | 1,475,743 |
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine months ended September 30, 2009 and 2008:
September 30,
2009
|
September 30,
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
U.S.
Statutory rates on foreign income
|
34.0 | % | 34.0 | % | ||||
Foreign
income not recognized in U.S.
|
(34.0 | ) | (34.0 | ) | ||||
China
income taxes
|
25.0 | 25.0 | ||||||
China
income tax exemption
|
(12.5 | ) | (12.5 | ) | ||||
Deferred
tax recognized from NOL
|
(34.0 | ) | (34.0 | ) | ||||
Other
item (a)
|
27.1 | 33.1 | ||||||
Effective
income tax rate
|
5.6 | % | 11.6 | % |
a)
|
The
27.1% and 33.1% represents the $4,090,377 and $1,437,557 of
income and expenses incurred by the Company that are not subject to income
tax for the nine months ended September 30, 2009 and 2008,
respectively.
|
The
estimated tax savings from the tax exemptions for the nine months ended
September 30, 2009, amounted to $3,607,474. The net effect on earnings per share
had the income tax been applied would decrease basic earnings per share from
$0.50 to $0.37 and diluted earnings per share from $0.48 to
$0.36.
- 24
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
estimated tax savings from the tax exemptions for the three months ended
September 30, 2009, amounted to $1,136,700. The net effect on earnings per share
had the income tax been applied would decrease basic earnings per share from
$0.33 to $0.29 and diluted earnings per share from $0.31 to $0.28.
The
estimated tax savings from the tax exemptions for the nine months ended
September 30, 2008, amounted to $4,816,767. The net effect on earnings per share
had the income tax been applied would decrease basic earnings per share from
$0.88 to $0.70 and diluted earnings per share from $0.83 to $0.66.
The
estimated tax savings from the tax exemptions for the three months ended
September 30, 2008, amounted to $1,735,572. The net effect on earnings per share
had the income tax been applied would decrease basic earnings per share from
$0.33 to $0.27 and diluted earnings per share from $0.31 to $0.25.
The
Company has cumulative undistributed earnings from foreign subsidiaries of
approximately $126.1 million as of September 30, 2009, included in the
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
Deferred tax
asset
The
Company recognizes deferred income tax liabilities and assets for the estimated
future tax effects attributable to temporary differences, operating loss
carryforwards and tax credit carryforwards. Deferred tax liability or asset
attributable to temporary differences is accounted for using the balance sheet
liability method in respect of temporary differences between income tax basis
and financial reporting basis of assets and liabilities.
Fushi was
incorporated in the United States and has incurred net operating losses for
income tax purposes since inception. The pre-tax operating loss including time
differences as of September 30, 2009 and December 31, 2008 amounted to
$32,520,914 and $23,266,152, respectively. The estimated loss carryforwards for
United States income taxes as of September 30, 2009 and December 31, 2008 may be
available to reduce future years’ taxable income. These carry forwards will
expire in varying amounts in the years 2025 to 2029 if not
utilized.
- 25
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
deferred tax asset consisted of the following:
September 30,
2009
|
December 31,
2008
|
|||||||
(Unaudited)
|
||||||||
Accruals
not yet deductible
|
$ | 840,564 | $ | 696,120 | ||||
Stock
based compensation
|
1,671,146 | 1,294,340 | ||||||
Bad
debt allowance
|
(70,822 | ) | (70,822 | ) | ||||
Loss
carryforward
|
8,616,223 | 5,884,389 | ||||||
Total
deferred tax assets
|
$ | 11,057,111 | $ | 7,804,027 |
The
deferred tax activity consisted of the following:
Deferred
tax asset at December 31, 2008
|
$ | 7,804,027 | ||
Additions
to deferred tax asset
|
3,253,084 | |||
Deferred
tax asset at September 30, 2009 (Unaudited)
|
$ | 11,057,111 |
A
valuation allowance is required against deferred tax assets if, based on the
weight of available evidence, it is more-likely-than-not that some or all of the
deferred tax assets will not be realized. Management believes that the
realization of the benefits can be used by their US operating subsidiary in
future periods because expectations are that Copperweld U.S. will have taxable
income in future periods. US companies must generate a total of $32,520,914 of
taxable net income (including the recovery of time difference) by years
2025 to 2029 (the recovery of time difference is not subject to those years) in
order to recover the deferred tax asset balance. Profits of Fayetteville in each
of the first three quarters of 2008 were $1,036,996, $244,546 and $102,198
respectively. Through cost savings initiatives implemented beginning in the
fourth quarter of 2008; the Company has lowered total labor overhead by
approximately $100,000 per month. The Company is also in the process of refining
and improving their manufacturing processes that may further realize cost
savings of approximately $300,000 per month. With these cost saving measures in
place, the Company believes that it is possible to realize profit at
current sales levels at the Fayetteville facility and that Fayetteville will be
well positioned to experience increased profitability when the global economic
crisis subsides and sales begin to rebound to historical levels. The Company
projects the Fayetteville facility to start generating positive annual pre-tax
income in fiscal year 2010. Based on its review, the Company believes that, as
of September 30, 2009, it was not necessary to provide a valuation allowance for
deferred tax assets.
Value added
tax
VAT on
sales and VAT on purchases in Dalian China amounted to $17,881,148 and
$13,971,442 for the nine months ended September 30, 2009, and $21,908,398 and
$15,084,494 for the nine months ended September 30, 2008, respectively. VAT on
sales and VAT on purchases in Dalian China amounted to $6,693,229 and $4,898,754
for the three months ended September 30, 2009, and $7,902,925 and $4,650,031 for
the three months ended September 30, 2008, respectively.
- 26
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
VAT on
sales and VAT on purchases in Copperweld UK amounted to $95,958 and $189,476 for
the nine months ended September 30, 2009 and $175,543 and $288,398 for the nine
months ended September 30, 2008, respectively. VAT on sales and VAT on purchases
in Copperweld UK amounted to $45,391 and $77,649 for the three months ended
September 30, 2009 and $41,821 and $62,462 for the three months ended September
30, 2008, respectively.
Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
Note
9 - Short term bank loans and revolving credit lines
Short
term bank loans represent amounts due to various banks and are due on demand or
normally within one year. These loans generally can be renewed with the banks.
Short term bank loans consisted of the following:
Name of lender
|
September 30,
2009
|
December 31, 2008
|
||||||
(Unaudited)
|
||||||||
Guangdong
Development bank, Dalian Stadium branch, various short-term loans due
between February 25, 2009, and March 26, 2009, annual interest at 8.96%,
secured by the Company’s land use right and building.
|
$ | - | $ | 17,588,400 | ||||
Wells
Fargo Bank revolving credit line, secured by all present and future
account receivables, equipment, inventory and other goods, documents of
title, general intangibles, investment property, real estate and other
collateral of Copperweld as defined in the Financing Agreement and the
Forbearance Agreement.
|
3,988,509 | 4,712,075 | ||||||
Total
|
$ | 3,988,509 | $ | 22,300,475 |
The
Company paid off its four short-term loans with total balances of $17,588,400 on
January 5, 2009.
Revolving line of
credit
– Copperweld
U.S.
Copperweld
maintains a revolving line of credit with Wells Fargo Bank (“the Lender”) under
a Financing Agreement dated April 5, 2007, as amended (“the Financing
Agreement”)., and entered into a Forbearance Agreement (the “Forbearance
Agreement”) with the Lender on August 11, 2009.
- 27
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
availability of the credit line was the lower of $7 million (had been 12.8
million before Forbearance Agreement) or the borrowing base, which is calculated
by reference to, among other things, eligible accounts receivable, eligible
inventory and eligible other collateral less availability reserve. The borrowing
base is calculated and reported to Wells Fargo Bank each week. For the week
ended on September 27, 2009, the availability under the Revolving Credit
Facility was $4,379,236. The outstanding balance was $3,988,509 and $4,712,075
as of September 30, 2009 and December 31, 2008, respectively. The Company
deposits the cash collections from its customers against the outstanding account
balance of the line of credit on a daily basis
The
annual interest rate was equal to the daily three month LIBOR rate plus six
percent under Forbearance Agreement (had been applicable margin of 0.25% plus
the Chase Bank reference rate before Forbearance Agreement).
Before
the Forbearance Agreement, the asset-based revolving line of credit with Wells
Fargo contained various covenants under the Financing Agreement that may limit
Copperweld’s discretion in operating its business and Copperweld was required to
comply with certain financial covenants that are reported on a quarterly basis
starting from January 31, 2009.
Copperweld
reported a negative fixed charge ratio due to the loss incurred on a rolling 12
months basis, thus Copperweld was in violation of maintaining a fixed charge
ratio of at least 1.0 to 1.0. This was the sole violation of the covenant under
the terms of the Financing Agreement with Wells Fargo. As such, the lender
was entitled to demand immediate payment of the Obligations, however the Lender
did not make such demand, and instead exercised its right on May 6, 2009 to
implement the 2% additional default rate of interest effective as of April 1,
2009 for the covenant violation as of March 31, 2009.
On August
11, 2009, the Company and the Lender, entered into a Forbearance Agreement,
whereby the Lender agreed to forbear from seeking immediate payment of the full
amount of the Obligations owing pursuant to the Financing Agreement and various
other notes and documents executed by Copperweld and exercising any other rights
and remedies against any of the Obligors or the collateral securing the
Obligations through October 31, 2009 or such earlier date if an event of default
of forbearance occurs .
Subsequent
to quarter end, on October 27, 2009, the Company entered into an amendment to
the Forbearance Agreement which extends the forbearance period to January 31,
2010.
Revolving line of credit
– Copperweld
UK
Copperweld
UK maintains an invoice discounting credit facility with a limit of
approximately $1,073,000 (or ₤750,000). The facility provides cash advances of
85% of approved sales ledger and is secured by trade accounts receivable of
Copperweld UK. The facility has a life minimum of 36 month periods and shall be
automatically renewed every year thereafter based on an annual review conducted
by the financing institute. Copperweld UK is required to maintain a projected
turnover each 12 month period and a minimum net worth of ₤750,000 at all times
if the credit facility has an outstanding balance. The facility had no balance
outstanding as of September 30, 2009 and December 31, 2008.
- 28
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Total
interest expense on the revolving credit line and short term loans for the nine
months ended September 30, 2009 and 2008 amounted to $201,512 and $1,651,946,
respectively. Interest for the three months ended September 30, 2009 and 2008
was $64,574 and $529,507, respectively.
Note
10 – Notes payable
Notes
payable consisted of the following:
September 30,
2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
Senior
secured convertible notes (“Convertible Notes”), bearing interest at 3%
per annum, maturing on January 24, 2012, convertible to common stock at an
initial conversion price of $7.00 per share (ii)
|
$ | - | $ | 5,000,000 | ||||
Guaranteed
senior secured floating rate notes (“HY Notes”) maturing between July 24,
2010 to January 24, 2012 (i)
|
35,000,000 | 40,000,000 | ||||||
Subtotal
|
35,000,000 | 45,000,000 | ||||||
Less
current portion
|
10,000,000 | 5,000,000 | ||||||
Total
notes payable, noncurrent
|
$ | 25,000,000 | $ | 40,000,000 |
On
January 24, 2007, the Company and Citadel Equity Fund Ltd. ("Citadel") entered a
Notes Purchase Agreement. In this transaction, Citadel
purchased:
(i) $40 million
principal amount (less 3% Notes discount and 4% commission for proceeds of
$37,200,000) of guaranteed senior secured floating rate notes (“HY Notes”) due
between July 2009 to January 2012; and
(ii) $20 million
principal amount (less 4% commission for proceeds of $19,200,000) of the
Company’s 3% senior secured convertible notes (“Convertible Notes”) due January
2012, which are convertible into shares of the Company's common stock at an
initial conversion price of $7.00 per share. $15 million of the convertible
notes was converted in 2008.
- 29
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The HY
Notes and the Convertible Notes were issued pursuant to indentures, each dated
January 25, 2007 (the “HY Indenture” and “CB Indenture”, respectively, and
together, the "Indentures") among the Company, Fushi Holdings, as guarantor, and
the Bank of New York, as trustee for the Notes. The indenture, notes
purchase agreement and investor rights agreement related to the HY Notes and
Convertible Notes contain various covenants that may limit the Company’s
discretion in operating its business. In particular, the Company is limited in
its ability to merge, consolidate or transfer substantially all of
its assets, issue stock of its subsidiaries, incur additional debt and
create liens on assets to secure debt. In addition, the Company is required to
comply with certain financial covenants. As of September 30, 2009, the
Company was not in violation of such covenants.
The HY
notes bear interest at LIBOR (approximately 0.95% at September 30, 2009) + 7%
and changes to LIBOR + 5.6% permanently upon successful completion of Qualifying
IPO within eighteen months from January 24, 2007. See Note 12 for
discussion of swap agreement changing variable interest to 8.3% fixed. The
Convertible Notes bear interest at a fixed rate of 3.00%, payable semi-annually
in arrears, and mature in 2012. The HY Notes and the Convertible Notes are
guaranteed, jointly and severally, on a senior secured basis, by all of the
Company’s wholly-owned existing and future domestic subsidiaries.
The
Company agreed that on the dates indicated in the following table, the Company
will prepay the corresponding principal amount (or such lesser principal amount
as shall then be outstanding) in respect of the aggregate principal
amounts.
Date
|
Principal Amount
|
|||
January
24, 2010
|
$ | 5,000,000 | ||
July
24, 2010
|
$ | 5,000,000 | ||
January
24, 2011
|
$ | 5,000,000 | ||
July
24, 2011
|
$ | 10,000,000 | ||
January
24, 2012
|
$ | 10,000,000 |
The
entire remaining principal amount of the Notes shall become due and payable on
January 24, 2012.
Original CB
indenture
On
January 8, 2008, Citadel Equity Fund Ltd. exercised its rights under the CB
indenture and received 2,142,857 shares in exchange for $15 million in debt with
an exchange factor of $7.00 in debt for each share of stock.
Under the
original CB Indenture, unless previously redeemed, converted, purchased or
cancelled, at maturity, January 24, 2012, the Company must repay all of the
outstanding Convertible Notes plus a premium of 15.00% per annum on the
principal amount calculated on a semi-annual basis, plus accrued and unpaid
interest on the late payment, if any, to reflect an additional 5% per annum
interest in excess of the rate of interest then in effect. As of August 13,
2009, the Repurchase Agreement date, the carrying value of the CB indenture
including principal and such stated additional interest cost was
$5,893,170.
- 30
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Management
determined that the conversion option in the Convertible Notes under the
original CB Indenture qualified as an embedded derivative as discussed in Note
2. The Company has since then recorded the fair value of the conversion option
as “derivative liability – conversion option” in the accompanying consolidated
financial statements. As of August 13, 2009, the Repurchase Agreement date, the
derivative liability – conversion option balance was $8,409,765. The derivative
liability – conversion option $8,409,765 was completely extinguished due to the
repurchase of Convertible Notes on August 13, 2009.
The
conversion rate, which affected the valuation of the derivative liability –
conversion option during the period from CB Indenture date January 24, 2007 till
CB Repurchase date August 13, 2009, was determined as below:
Pursuant
to the CB Indenture, the Convertible Notes are convertible at the option of the
holder into the Company’s common stock at an initial conversion price of $7 per
share (approximating 14,286 shares per $100,000 principal amount of the
Convertible Notes), subject to downward adjustments of conversion price on March
1 and September 1 of each year, beginning with March 1, 2008, to equal the
simple arithmetic average of VWAP for the fifteen trading days preceding such
March 1 or September 1, with a floor of $4.5. In addition,
adjustment of the Conversion Rate will be made if and at each time, upon
completion of the quarterly reviews (for each Fiscal Quarter ended March 31,
June 30 and September 30) or annual audit (for each Fiscal Year ended December
31) of the Company’s consolidated financial statements an event defined as Financial and Operational
Trigger under the CB indenture shall have occurred in the
immediately preceding Fiscal Quarter, then within five (5) Business Days
following issuance of the review or audit report, as the case may be, for such
Fiscal Quarter, the Conversion Rate shall be adjusted pursuant to a formula
provided in the CB Indenture and not subjective to the floor of $4.50.
The Financial and Operational
Trigger means, for the Company and its subsidiaries on a consolidated
basis, that net income for a Fiscal Quarter shall be less than the US dollar
amount indicated in the table below opposite such Fiscal Quarter:
Fiscal Quarter Ending
|
Net Income
|
|||
June
30, 2007
|
$ | 5.0 million | ||
September
30, 2007
|
$ | 5.0 million | ||
December
31, 2007
|
$ | 5.0 million | ||
March
31, 2008
|
$ | 6.0 million | ||
June
30, 2008
|
$ | 6.0 million | ||
September
30, 2008
|
$ | 6.0 million | ||
December
31, 2008
|
$ | 6.0 million | ||
March
31, 2009
|
$ | 7.2 million | ||
June
30, 2009
|
$ | 7.2 million | ||
September
30, 2009
|
$ | 7.2 million | ||
December
31, 2009
|
$ | 7.2 million |
Upon
review of the consolidated financial statements before the Repurchase Agreement,
the Company determined that a
Financial and Operational Trigger as defined under the original CB
indenture occurred during the quarters ended June 30, 2009, March 31, 2009 and
December 31, 2008. The Conversion Rate was finally adjusted to $3.57 as of
August 11, 2009.
- 31
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Repurchase of Convertible
Notes
On August
13, 2009, Fushi Copperweld, Inc. (the “Company”), entered into a Notes Purchase
Agreement (the “Repurchase Agreement”) with Citadel Equity Fund Ltd.
(“Citadel”).
Under the
Repurchase Agreement, the Company repurchased and cancelled the remaining 50
Notes of the Company’s 3.0% Guaranteed Senior Secured Convertible Notes due 2012
(the “Notes”) of US $100,000 principal amount each, convertible into shares of
common stock of the Company, par value $0.006 per share (the “Common
Stock”). The purchase price for the Notes is payable by a combination of
cash and 440,529 issued shares of Common Stock (the “Shares”) as determined as
follows pursuant to the Repurchase Agreement:
(1)
On August 24, 2009 (the “First Closing Date”), 20 Notes were repurchased at 200%
of their face value, which equals US $4,000,000 being payable to Citadel through
the issuance of the Shares, which is 440,529 shares at $9.08 per
share.
(2) The
remaining outstanding debt of $3,000,000 after the First Closing Date shall be
repurchased by the Company for cash on or prior to November 9, 2009, at 202% of
their face value, which equal to $6,060,000.
In the
event any Notes remaining outstanding after the First Closing Date are not
repurchased in full by the Second Closing Date, the Company shall pay default
interest in the amount of five percent (the “Default Amount”) of the amount of
the Purchase Price outstanding, which shall be paid no later than 15 business
days from the Second Closing Date. If the Company fails to pay the Default
Amount within the 15 business day period, Citadel shall have the right to
exercise any right or remedy it may have under the Repurchase Agreement
including, without limitation, the right to sell any or all Notes failed to be
repurchased by the Company on such terms as Citadel may see fit. If the
price received by Citadel from any such sale is less than the Default Amount it
would have been entitled to receive, the Company shall upon demand by Citadel
pay the difference to Citadel in cash.
Citadel
has agreed to take all such further actions necessary to provide for the full
discharge of the indenture and the release of any and all liens by Citadel on
the equity interests of the Company upon the payment in full of the Purchase
Amount.
Pursuant
to the Repurchase Agreement, the Company completely extinguished the liability
related to the Convertible Notes under the original CB Indenture which amounted
to $14,302,935. The Company then recorded a liability of $10,460,000 related to
the repurchase of the Convertible Notes under the Repurchase Agreement and thus
recognized the difference as Gain on Convertible Notes Extinguishment of
$3,842,935.
- 32
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
8/13/2009
|
||||
Derivative
liability - conversion option
|
$ | 8,409,765 | ||
Convertible
notes carrying value (5M principal)
|
5,893,170 | |||
Total
Convertible Notes liability
|
14,302,935 | |||
Liability
per Repurchase Agreement (Principal)
|
10,060,000 | |||
Liability
per Repurchase Agreement (Additional accrual)
|
400,000 | |||
Total
Repurchase liability
|
10,460,000 | |||
Gain
on Convertible Notes extinguishment
|
$ | 3,842,935 |
Pursuant
to the Repurchase Agreement, the Company has agreed to register the Shares for
resale on a Registration Statement, and to cause such Registration
Statement to be declared effective under the U.S. Securities Act of 1933, as
amended, within thirty calendar days after the First Closing Date.
If a
Registration Statement is not filed and declared effective by the Commission on
or prior to the Effective Date or if, by the business day immediately following
the Effective Date, the Company shall pay to Citadel an amount in cash, as
partial liquidated damages and not as a penalty, equal to 1.0% of US
$4,000,000. The parties agree that the maximum aggregate liquidated
damages payable to Citadel under this Agreement shall be ten percent (10%) of US
$4,000,000. If the Company fails to pay any liquidated damages pursuant to
this section in full within seven business days after the date payable, the
Company will pay interest thereon at a rate of 15% per annum (or such lesser
maximum amount that is permitted to be paid by applicable law) to Citadel,
accruing daily from the date such liquidated damages are due until the amounts,
plus interest thereon, are paid in full.
The
Registration Statement had not been declared effective as of the date of the
filing of the Company’s Quarterly Report on Form 10-Q for the third quarter of
2009, thus $400,000 liability was accrued as part of the CB extinguishment
liability during third quarter of 2009.
Deferred
commissions on long term notes amounted to $2,400,851 (of which $1,012,500 was
due to Kuhns’ verdict as explained in Note 18) as of September 30, 2009 and
$3,188,344 as of December 31, 2008. Amortized commission for the nine
months ended September 30, 2009 and 2008 amounted to $787,492 (of which $337,500
was due to Kuhns’ verdict as explained in Note 18) and $2,495,898, respectively.
Amortized commission for the three months ended September 30, 2009 and 2008
amounted to $262,497 and $262,497, respectively.
- 33
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Interest
on long term notes for the nine months ended September 30, 2009 and 2008
amounted to $2,978,223 and $2,504,659, respectively. Interest for the three
months ended September 30, 2009 and 2008 was $792,681 and $995,071,
respectively. Both amortized commission and interest on long term notes are
recorded as interest expense.
Note
11 – Capital lease
In July
2009, the Company entered into a noncancelable capital lease agreement for
lighting equipment installed in one of its plant facilities. The lease has a
three year term and contains a bargain purchase option of $1.00 at the end of
the term. The lease requires monthly payments of $8,414.
The
following is an analysis of the leased property which is combined into Plant and
Equipment, net, on the consolidated balance sheet.
September 30, 2009
|
December 31,2008
|
|||||||
Plant
facility
|
$ | 266,598 | - | |||||
Less:
Accumulated Depreciation
|
(2,222 | ) | - | |||||
Net
|
$ | 264,376 | - |
The
following is a schedule of future minimum lease payments under the capital lease
together with the present value of the net minimum lease payment as of September
30, 2009.
Year ending September 30,
|
Minimum lease payment
|
||||
$ | |||||
2010
|
92,561 | ||||
2011
|
100,976 | ||||
2012
|
92,561 | ||||
|
Total
minimum lease payments
|
286,098 | |||
|
Less:
Interest *1
|
(43,076 | ) | ||
|
Present
value of net minimum lease payments *2
|
$ | 243,022 |
*1.
Amount necessary to reduce minimum lease payments to present value calculated at
the rate implicit in the lease at the inception of the leases.
*2. The
present value of the minimum lease payments is reflected in the balance sheet as
current and non-current obligations under capital lease of $68,976 and $174,046,
respectively.
Interest
expense related to capital leases amounted to $16,593 for the three and nine
months ended September 30, 2009.
- 34
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
12 – Derivative instrument
The
Company's operations are exposed to a variety of global market risks, including
the effect of changing interest rates and foreign currency exchange rates. This
exposure is managed, in part, with the use of financial derivatives. The Company
uses financial derivatives only to hedge exposures in the ordinary course of
business and does not invest in derivative instruments for speculative
purposes.
On April
10, 2007, effective January 24, 2007, the Company entered into a cross currency
swap transaction (the Swap) with Merrill Lynch Capital Services, Inc. (“MLCS”)
on the $40 million HY notes which converts the USD based variable interest
rate of initially LIBOR + 7% per annum and LIBOR + 5.4% per annum after
qualified step-down to an 8.3% per annum RMB fixed interest rate. The Swap
requires semi-annual payment in arrears on July 24 and January 24 and matures on
the earlier of (1) cash settlement defined as early termination; or (2) January
24, 2012, at which point the Swap requires an exchange of RMB and USD based
principals. Under the terms of the cross currency swap, the Company receives
variable interest rate payments in USD and makes fixed interest rate payments in
RMB with settlement netted in USD, thereby creating the equivalent of fixed-rate
debt. MLCS requires the Company to deposit $1,000,000 with them to secure the
agreement. The deposit may be increased to $3,000,000 if the exchange rate for
RMB to USD falls below 6.5 and to $5,000,000 if the exchange rate falls below
5.5. This swap is designated and qualified as a cash flow hedge. In July, 2008,
the Company placed the $1,000,000 deposit with MLCS to secure the agreement. As
of September 30, 2009, the deposit has remained the same.
Since its
effective date, the fair value of this Swap Agreement changed to a payable of
$7,652,664 and $4,377,076 as of September 30, 2009, and December 31, 2008,
respectively. For the nine months ended September 30, 2009 and 2008, changes in
fair value of the Swap resulted in an increase in the liability and a loss to
other comprehensive income of $3,275,588 and a decrease in the liability and a
gain to other comprehensive income of $3,209,403, respectively, net of taxes.
For the three months ended September 30, 2009 and 2008, changes in fair value of
the Swap resulted in a decrease in the liability and a gain to other
comprehensive income of $237,768 and $3,940,908, respectively, net of
taxes.
The
Company had cross currency hedge payable amounting to $1,071,557 and $104,324 as
of September 30, 2009 and December 31, 2008, respectively. The total loss from
derivative transactions for the nine months ended September 30, 2009 was
$1,581,812 and the total gain from derivative transactions for the nine months
ended at September 30, 2008 was $322,708, respectively. The total loss
from derivative transactions for the three months ended September 30, 2009 and
2008 was $1,199,438 and $32,482, respectively. For the three and nine months
ended September 30, 2009, there were no amounts recorded in the consolidated
statements of income in relation to this swap related to ineffectiveness of the
swap transaction.
- 35
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
13 - Earnings per share
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
Net
income for basic earnings per share
|
$ | 9,194,933 | $ | 9,046,950 | $ | 13,858,550 | $ | 23,898,292 | ||||||||
Add:
Interest expense for convertible note
|
- | 24,750 | - | 77,399 | ||||||||||||
Deduct:
Loan issuance cost
|
- | (194,742 | ) | - | (194,742 | ) | ||||||||||
Net
income for diluted earnings per share
|
$ | 9,194,933 | $ | 8,876,958 | $ | 13,858,550 | $ | 23,780,949 | ||||||||
Weighted
average shares used in basic computation
|
28,084,416 | 27,387,302 | 27,827,152 | 27,263,638 | ||||||||||||
Diluted
shares
|
1,122,092 | 1,059,484 | 849,680 | 1,337,599 | ||||||||||||
Weighted
average shares used in diluted computation
|
29,206,508 | 28,446,786 | 28,676,832 | 28,601,237 | ||||||||||||
Earnings
per share
|
||||||||||||||||
Basic
|
$ | 0.33 | $ | 0.33 | $ | 0.50 | $ | 0.88 | ||||||||
Diluted
|
$ | 0.31 | $ | 0.31 | $ | 0.48 | $ | 0.83 |
Shares
excluded from the calculation of diluted earnings per share:
Date
issued/
granted
|
Nature
|
Excise price
|
Shares excluded
for year diluted
EPS calculation
|
Reason for
exclusion
|
||||||||
11/31/2007
|
Warrants
|
$ | 16.80 | 100,000 |
Anti-dilutive
|
|||||||
02/23/2009
|
Warrants
|
$ | 5.25-6.00 | 300,000 |
Anti-dilutive
for 9 months only
|
|||||||
05/21/2007
to
11/13/2007
|
Options
|
$ | 11.75-20.94 | 923,333 |
Anti-dilutive
|
|||||||
04/10/2008
to
6/25/2008
|
Options
|
$ | 15.04-23.25 | 144,000 |
Anti-dilutive
|
|||||||
9/1/2009
|
Options
|
$ | 7.52 | 100,000 |
Anti-dilutive
for 9 months only
|
- 36
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
14 - Stockholders' Equity
During
the first three quarters of 2009, the following activities were
recorded:
On
February 23, 2009, the Company sold in a private placement 400,000 shares of its
common stock, par value $0.006 per share (the “Common Stock”) for an average
price of $4.80 per share, and warrants to purchase 300,000 shares of Common
Stock, for a total purchase price of $1,920,000.
The
warrants consisted of Series A Warrants to purchase 100,000 shares of Common
Stock at an exercise price of $5.25 per share, Series B Warrants to purchase
100,000 shares of Common Stock at an exercise price of $5.50 per share, and
Series C Warrants to purchase 100,000 shares of Common Stock at an exercise
price of $6.00 per share.
The
Series A and B Warrants are exercisable starting from the date of issuance
through the later of (i) February 22, 2010 and (ii) the date which is six (6)
months following the effective date of a registration statement filed by the
Company under which the resale of all of the shares of Common Stock underlying
the warrants have been registered under the Securities Act of 1933, as amended
(the “Securities Act”). The Series C Warrants are exercisable starting from the
date of issuance through the later of (i) August 22, 2010 and (ii) the date
which is twelve (12) months following the effective date of a registration
statement filed by the Company under which the resale of all of the shares of
Common Stock underlying the warrant have been registered under the Securities
Act.
Because
of certain cash redemption clauses related to these warrants, the Company at
issuance recorded the fair value of these warrants as “derivative liability –
warrants” in the accompanying consolidated financial statements. On June
30, 2009, the Company amended and the holders amended the original warrant
agreements to remove the certain cash redemption clauses as mentioned
above. As of June 30, 2009, the Company had re-classified the
derivative liability – warrants to additional paid in capital. The changes
in the values of these warrants are shown in the accompanying consolidated
statements of income and other comprehensive income. On June 30, 2009, the
value of the warrants were calculated using the Cox-Ross-Rubinstein binomial
model with the following assumptions: exercise price of $5.25 for Series A,
$5.50 for Series B and $6.00 for Series C Warrants; share price of $8.27 for all
warrants; risk free interest rate of 0.42% for Series A and B Warrants, and
0.83% for Series C Warrants; expected remaining life of 0.65 year for Series A
and B Warrants, and 1.15 years for Series C Warrants; and volatility of 60% for
all warrants.
The value
of the warrants at issuance were calculated using the Cox-Ross-Rubinstein
binomial model with the following assumptions: exercise price of $5.25 for
Series A, $5.50 for Series B and $6.00 for Series C Warrants; share price of
$4.27 for all warrants; risk free interest rate of 0.57% for Series A and B
Warrants, and 0.69% for Series C Warrants; expected life of 1 year for Series A
and B Warrants, and 1.5 years for Series C Warrants; and volatility of 60% for
all warrants.
- 37
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
On June
5, 2009, as partial payment to reduce the judgment pursuant to the Settlement
Agreement signed with Kuhns on May 19, 2009, the Company issued and deposited a
stock certificate for 2.2 million shares of Common Stock in escrow (the “Escrow
Shares”) with the Escrow Agent along with an executed stock power in blank, to
be held pursuant to the Escrow Agreement. The Company agreed to deposit a total
of 2.2 million shares of Common Stock; however, Kuhns will only receive proceeds
from the sale of such number of Escrow Shares necessary to satisfy the Judgment,
after reducing the Judgment by the Escrow Assets. Once the Judgment has been
satisfied Kuhns shall instruct the Escrow Agent to return any remaining Escrow
Shares to the Company and such Escrow Shares shall be cancelled. See Note 18 for
more detail.
Also, as
detailed in Note 18, as part of the settlement liability to Kuhns, the Company
during May 2009, delivered to Kuhns 100,000 shares of Escrow Shares of common
stock as partial payment to Kuhns, which reduced the judgment by $343,084 per
the valuation determined by the Settlement Agreement.
On August
24, 2009, under the Repurchase Agreement explained in note 10, the Company
issued 440,529 shares of common stock, par value $0.006 per share for the
repurchase of $2,000,000 aggregate principal face amount of 3.0% Guaranteed
Senior Secured Convertible Notes, at a repurchase price of $4,000,000,
which was equal to 200% of the principal amount of the Notes. The
repurchase price was $9.08 per share.
The
Company also issued 4,153 shares of common stock during the first three quarters
of 2009 per exercise of stock options.
The
following is a summary of the outstanding and exercisable warrant
balance:
Exercise
Price
|
Number
|
Average
Remaining Life
(years)
|
|||||||
$
|
3.11
|
332,124 | 2.25 | ||||||
$
|
16.80
|
100,000 | 2.15 | ||||||
$
|
5.25
|
100,000 | 0.40 | ||||||
$
|
5.50
|
100,000 | 0.40 | ||||||
$
|
6.00
|
100,000 | 0.89 | ||||||
732,124 | 1.54 |
- 38
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
following is a summary of the warrant activity:
Number of
Warrants
Outstanding
|
Weighted
-Average
Exercise
Price
|
Average
Remaining
Contractual
Life
|
||||||||
Balance,
at December 31, 2007
|
477,052 | $ | 5.98 |
4.00
years
|
||||||
Granted
|
(55 | ) | ||||||||
Forfeited
|
- | |||||||||
Exercised
|
(44,873 | ) | $ | 3.11 | ||||||
Balance,
at September 30, 2008 (Unaudited)
|
432,124 | $ | 6.28 |
3.25
years
|
||||||
Granted
|
- | |||||||||
Forfeited
|
- | |||||||||
Exercised
|
- | - | ||||||||
Balance,
at December 31, 2008
|
432,124 | $ | 6.28 |
2.92
years
|
||||||
Granted
|
300,000 | $ | 5.58 | |||||||
Forfeited
|
- | |||||||||
Exercised
|
- | |||||||||
Balance,
at September 30, 2009 (Unaudited)
|
732,124 | $ | 5.99 |
1.54
years
|
Note
15 – Stock based compensation
2007 Incentive
Plan
On
October 24, 2007, the Board of Directors approved the adoption of the Fushi
Copperweld, Inc. 2007 Stock Incentive Plan (the “2007 Plan”). The
majority of the options awarded under the 2007 Plan vest in two years from the
grant date and the majority of the options granted expire in 3 years.
Under the 2007 Plan, the Company granted share options to all executives,
directors and employees as summarized below:
Grant Year
|
Granted Shares
|
Forfeited
Shares
|
Net of
Granted and
Forfeited
shares as of
9/30/09
|
Exercise Price
Range
|
|||||||||||
2007
|
335,000 | 95,000 | 240,000 |
$16.44-$20.94
|
|||||||||||
2008
|
151,000 | 7,000 | 144,000 |
$15.04-$23.25
|
|||||||||||
2009
|
488,000 | 40,050 | 447,950 |
$4.95-$7.52
|
|||||||||||
Total
|
974,000 | 142,050 | 831,950 |
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes model using the following weighted-average
assumptions:
- 39
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Nine months
ended
September 30,
2009
|
Year ended
2008
|
2007
|
||||||||||
Risk-free
interest rate(1)
|
0.78%-1.44%
|
1.84%-2.82%
|
3.54%-4.57%
|
|||||||||
Expected
dividend yield(2)
|
-
|
-
|
-
|
|||||||||
Expected
option life(3)
|
2-3
Years
|
0.5-2
Years
|
|
2
Years
|
||||||||
Expected
stock price volatility(4)
|
|
60%
|
50%
|
50%
|
||||||||
Weighted
average fair value of options granted
|
$ | 2.10 | $ | 4.57 | $ | 4.06 |
(1)
|
Risk-free
interest rate –
Risk-free interest rate is based on US Treasury zero-coupon issues with
maturity terms similar to the expected term on the expected life of the
option. An increase in the risk-free interest rate will increase
compensation expense.
|
(2)
|
Expected
dividend yield – The
dividend yield was estimated by the Company based on its expected dividend
policy over the expected term of the options. The Company has no plans to
pay any dividend in the foreseeable future. Therefore, the Company
considers the dividend yield to be
zero.
|
(3)
|
Expected
option life –
Because the Company has no historical share option exercise experience to
estimate future exercise patterns, the expected life was determined using
the simplified method as these awards meet the definition of
“plain-vanilla” options under the rules prescribed by Staff Accounting
Bulletin No. 107. An increase in expected life will increase compensation
expense.
|
(4)
|
Expected
stock price volatility – This is a measure of the amount
by which a price has fluctuated or is expected to fluctuate. As a
forward-looking measure, the Company uses implied volatility of Company’s
225 days call options with strike price of $5.00 on March 7, 2009 (source:
Morningstar.com), adjusted by the 2-year historical volatility of the
Company’s stock as well as 2-year historical volatilities of the Company’s
comparable public companies, to calculate the expected stock price
volatility. An increase in the expected volatility will increase
compensation expense.
|
Stock
compensation expense is recognized based on awards expected to vest. The
forfeitures is estimated at the time of grant and revised in subsequent periods
pursuant to actual forfeitures, if it is differ from those
estimates.
The
Company recognized $1,108,254 and $1,437,557 share-based compensation expense in
general and administrative expenses for the nine months ended September 30, 2009
and 2008, respectively. For the three months ended September 30, 2009 and 2008,
the Company recognized share-based compensation expense of $179,527 and
$523,474, respectively. As of September 30, 2009, the total compensation cost
related to stock options not yet recognized was $539,296 and will be recognized
over the weighted average life of 0.27 years.
- 40
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
As of
September 30, 2009, the 992,333 executive options, 240,000 director options and
272,700 employee options outstanding had fair values of approximately
$3,781,197, $912,761 and $730,457, respectively.
The
following is a summary of the stock option activity:
Number of
Options
Outstanding
|
Weighted
-Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
||||||||||
Balance,
December 31, 2007
|
1,110,000 | $ | 14.30 | $ | 12,075,850 | |||||||
Granted
|
151,000 | $ | 21.30 | - | ||||||||
Forfeited
|
(186,667 | ) | $ | 16.30 | - | |||||||
Exercised
|
- | - | - | |||||||||
Balance,
September 30, 2008 (Unaudited)
|
1,074,333 | $ | 15.10 | $ | - | |||||||
Granted
|
- | - | ||||||||||
Forfeited
|
(7,000 | ) | $ | 23.25 | - | |||||||
Exercised
|
- | - | - | |||||||||
Balance,
December 31, 2008
|
1,067,333 | $ | 14.90 | $ | - | |||||||
Granted
|
488,000 | $ | 5.48 | - | ||||||||
Forfeited
|
(40,050 | ) | $ | 4.95 | - | |||||||
Exercised
|
(10,250 | ) | $ | 4.95 | - | |||||||
Balance,
September 30, 2009 (Unaudited)
|
1,505,033 | $ | 12.15 | $ | - |
Following
is a summary of the status of options outstanding at September 30,
2009:
Outstanding Options
|
Exercisable Options
|
|||||||||||||||||
Exercise
Price
|
Number
|
Average
Remaining
Contractual
Life
|
Average
Exercise
Price
|
Number
|
Weighted
Average
Exercise Price
|
|||||||||||||
$12.30
|
408,333 |
2.64
years
|
$ | 12.30 | 408,333 | $ | 12.30 | |||||||||||
$11.75
|
150,000 |
2.76
years
|
$ | 11.75 | 150,000 | $ | 11.75 | |||||||||||
$13.70
|
125,000 |
1.99
years
|
$ | 13.70 | 125,000 | $ | 13.70 | |||||||||||
$16.44
|
81,250 |
1.17
years
|
$ | 16.44 | 81,250 | $ | 16.44 | |||||||||||
$17.94
|
81,250 |
1.17
years
|
$ | 17.94 | 81,250 | $ | 17.94 | |||||||||||
$19.44
|
33,750 |
2.37
years
|
$ | 19.44 | 33,750 | $ | 19.44 | |||||||||||
$20.94
|
33,750 |
2.37
years
|
$ | 20.94 | 33,750 | $ | 20.94 | |||||||||||
$16.36
|
10,000 |
2.12
years
|
$ | 16.36 | 10,000 | $ | 16.36 | |||||||||||
$23.25
|
77,000 |
2.25
years
|
$ | 23.25 | 77,000 | $ | 23.25 | |||||||||||
$15.04
|
17,000 |
2.53
years
|
$ | 15.04 | 17,000 | $ | 15.04 | |||||||||||
$20.04
|
50,000 |
3.64
years
|
$ | 20.04 | 35,935 | $ | 20.04 | |||||||||||
$4.95
|
337,700 |
3.25
years
|
$ | 4.95 | 250,700 | $ | 4.95 | |||||||||||
$7.52
|
100,000 |
5.91
years
|
$ | 7.52 | - | $ | 7.52 | |||||||||||
Total
|
1,505,033 | 1,303,968 |
- 41
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
16 - Statutory reserves
The laws
and regulations of the People’s Republic of China require that before a
Sino-foreign cooperative joint venture enterprise distributes profits to its
partners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations in proportions determined at the discretion
of the board of directors, after the statutory reserve.
Surplus reserve
fund
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital. As of September 30, 2009, the Company has total registered capital of
approximately $120,311,668 (RMB 821.3 million). The Company is required to
contribute an additional $43,794,459 from future earnings if the company’s China
facility has net income for future years. The transfer to this reserve must be
made before distribution of any dividend to shareholders. The Company will
transfer at year end 10% of the year’s net income determined in accordance with
PRC accounting rules and regulations.
The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 50% of the registered
capital.
Note
17 – Employee pension
The
Company’s employee pension for China employees generally includes two parts: the
first to be paid by the Company is 20% of the employee’s actual salary in the
prior year. The other part, paid by the employee, is 8% of the actual salary.
The Company made $100,919 and $111,087 in contributions of employment benefits
for China employees in the nine months ended September 30, 2009 and 2008,
respectively. For the three months ended September 30, 2009 and 2008, the
Company made contributions of employee benefits for China employees of $23,316
and $44,381 respectively.
US
employees are provided a 401(k) plan. US employees are eligible for the
defined contribution plan after three-months of full-time employment.
Employee deferrals and company matching are 100% vested immediately upon
eligibility. The Company made $47,933 and $105,286 in contributions of
employment benefits for US employees in the nine months ended September 30, 2009
and 2008, respectively. For the three months ended September 30, 2009 and 2008,
the Company made contributions of employment benefits for US employees of $204
and $34,718, respectively. As of June 1, 2009, the Company no longer matches
employee contributions for US employees.
- 42
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Copperweld
UK operates a defined contribution pension scheme for employees. All UK
employees are eligible to join the pension on satisfactory completion of their
trial period, which is typically three months. UK employees can contribute as
much as they like subject to current UK laws, but the company will match only
the first 2.5% of gross pay in the current year. The assets of the scheme are
held separately from those of the company. The annual contributions payable are
charged to expense. The Company made $8,187 and $24,941 in contributions of
employment benefits for UK employees in the nine months ended September 30, 2009
and 2008. For the three months ended September 30, 2009 and 2008, the Company
made contributions of employment benefits for UK employees of $2,787 and $5,285,
respectively.
Note 18 - Commitments and
contingencies
Swap
agreement
As
discussed in Note 11, the Company entered into a swap agreement that required a
$1,000,000 deposit to secure the transaction. If the exchange rate for RMB to US
Dollars drops below certain levels, the Company will be required to deposit up
to $5,000,000. In July 2008, the Company deposited the $1,000,000 with MLCS to
secure the agreement.
Kuhns Brothers litigation
settlement
On
December 11, 2007, the Company received service of an action filed by Kuhns
Brothers, Inc., Kuhns Brothers Securities Corp., and Kuhns Brothers & Co.,
Inc. (collectively “Kuhns”) against the Company in the United States District
Court, District of Connecticut on November 27, 2006. On August 5, 2008,
the Company received verdict from the United States District Court that Kuhns is
entitled to recover a total of $7,197,794. During the fourth quarter of 2008,
the Company appealed to the court on the verdict and settlement.
On May
19, 2009, the Company entered into a Settlement and Forbearance Agreement and
Release with Kuhns, in which Kuhns agreed to reduce the judgment to $7,000,000
(the “Judgment”) and the Company then agreed to withdraw the appeal. The Company
had initially accrued $7.2 million for this litigation settlement as a
contingent liability in the second quarter of 2008 and allocated the amount into
deferred commissions, additional paid in capital and current expenses based on
the nature of each charge due to Kuhns as below:
Description
|
Amount
|
Accounting Treatment
|
|||
Placement
agent fees associated to the Copperweld acquisition and Common stock
issuance and to be deducted from the proceeds and debited to additional
paid-in capital
|
$ | 3,487,250 |
Allocated
to additional paid-in capital in 2008
|
||
Deferred
placement agent fee related to $60 million Citadel Notes
issuance
|
3,000,000 |
Being
amortized over the Notes' life and $1,987,500 has been amortized
as of September 30, 2009.
|
|||
Interests
of all due placement agent fees
|
710,544 |
Expensed
in 2008
|
|||
Total
|
$ | 7,197,794 |
- 43
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Pursuant
to the Settlement Agreement, the Judgment shall be satisfied in full no later
than January 15, 2010 through a combination of cash and shares. As partial
payment to reduce the Judgment, the Company delivered to Kuhns on May 21, 2009,
$1,000,000 plus accrued interest, which was held in an escrow account in the
U.S. that was governed by an Escrow Agreement between the Company and Kuhns,
dated October 3, 2007. At the closing date on June 5, 2009, the Company also
delivered to Kuhns a stock certificate for 100,000 shares of Common Stock,
which were also in an escrow account, and (ii) deposited a stock certificate for
2,200,000 shares of Common Stock in escrow (the “Escrow Shares”) with the Escrow
Agent along with an executed stock power in blank, to be held pursuant to the
Escrow Agreement. Pursuant to the settlement agreement, Kuhns will only receive
proceeds from the sale of such number of Escrow Shares necessary to satisfy the
Judgment, after reducing the Judgment by the Escrow Assets. The Company may pay
the balance of the Judgment to Kuhns at any time without any pre-payment
penalty.
On or
prior to the thirtieth day after the Closing Date, the Company shall file a
registration statement on Form S-3 with the U.S. Securities and Exchange
Commission under the Securities Act of 1933, as amended to register the Initial
Shares and Escrow Shares for resale.
In the
event that (i) the Company’s Registration Statement is not declared effective by
the Registration Deadline and (ii) for so long as the Registration Statement is
not effective subsequent to the Registration Deadline, the current Judgment as
defined in the Settlement Agreement shall accrue interest at the rate of 18% per
annum. In addition, upon such events, Kuhns shall be entitled to receive Escrow
Shares from the Escrow Agent (the “Restricted Shares”) to satisfy the Judgment.
The current Judgment shall be reduced by the Restricted Share Value, which shall
mean an amount equal to fifty percent (50%) of the daily volume weighted average
price of the Common Stock on the NASDAQ Global Select Market as reported by
Bloomberg (“VWAP”) for the ten trading days before the date of delivery of the
Restricted Shares to Kuhns.
As of
October 3, 2009, the Registration Deadline, the Registration Statement had not
been declared effective. Accordingly, Kuhns became entitled to receive
Restricted Shares up to such amount to satisfy the Judgment, calculated as set
forth above. Kuhns elected to receive 1,370,352 Restricted Shares from the
Escrow Shares and requested the release of such Restricted Shares in full
satisfaction of the Judgment, which, as of such date, the Restricted Share Value
was $5,626,993 (principal) with accrued interest of $184,997 calculated at the
rate of 10% per annum since June 5, 2009 Pursuant to the Settlement Agreement,
the Company is entitled to have the remaining Escrow Shares in the amount of
829,648 shares returned for cancellation.
- 44
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
19 - Segment Information
Pursuant
to the “Disclosures about Segments of an Enterprise and Related Information”
from GAAP, which establishes standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
assess performance. The Company’s chief operating decision makers have been
identified as the Chief Executive Officer and Chief Financial Officer. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
As of
September 30, 2009, the Company has two reportable segments: China and US. We
analyze our worldwide operations based on two geographic reportable segments: 1)
“P.R.C.” which consists of our facility Located in Dalian, Liaoning, the
People’s Republic of China (PRC) and 2) ”US” which consists of our Fayetteville,
Tennessee, (USA), and Telford, England, (UK) facilities. The China segment,
through the Dalian manufacturing facility, is engaged in developing,
designing, manufacturing, marketing and distributing copper cladded
bi-metallic engineered conductor products, principally copper-clad aluminum
(CCA) and primarily services the Asia-Pacific region, and specifically
the PRC market.
The US
segment, consisting of two manufacturing facilities, one in Fayetteville,
Tennessee, USA and a second in Telford, England, are engaged in developing,
designing, manufacturing, marketing and distributing copper-cladded bimetallic
engineered conductor products, principally CCA and copper-clad steel (CCS)
and primarily services the North and South American, European, Middle Eastern
and North African markets. Due to the size of the UK operations, the
Company combined it with the US operation as one segment.
The below
table illustrates the composition of the UK operations:
For nine months ended
September 30, 2009
|
For nine months ended
September 30, 2008
|
|||||||
Revenue
|
$ | 2,253,213 | $ | 3,641,498 | ||||
Net
loss
|
210,290 | 4,951 | ||||||
For three months ended
September 30, 2009
|
For three months ended
September 30, 2008
|
|||||||
Revenue
|
$ | 855,283 | $ | 989,654 | ||||
Net
loss
|
24,058 | 84,834 | ||||||
September 30, 2009
|
December 31, 2008
|
|||||||
Assets
|
$ | 2,817,730 | $ | 2,452,972 |
- 45
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
Company evaluates segment performance and allocates resources based on segment
gross profit and segment operating income. Segment operating income represents
income from continuing operations before interest income, interest expense,
other income (expense), other financial costs and income tax.
Corporate
operating expenses are primarily stock-based compensation, professional fees and
outside service expenses.
Analysis
of reportable segments (management information):
For the Three Months Ended September 30, 2009
|
||||||||||||||||||||
China
|
US
|
Corporate
|
Eliminations
|
Total
|
||||||||||||||||
Revenues
|
$ | 39,408,804 | $ | 8,857,027 | $ | (589,485 | ) | $ | 47,646,346 | |||||||||||
Gross
Profit
|
13,472,985 | 1,696,482 | 15,169,467 | |||||||||||||||||
Selling,
general and administrative expenses
|
2,667,761 | 1,319,654 | 600,777 | 4,558,192 | ||||||||||||||||
Operating
income (loss)
|
10,805,224 | 376,828 | (600,777 | ) | 10,581,275 | |||||||||||||||
Capital
expenditures
|
416,220 | 5,622 | 421,842 | |||||||||||||||||
Depreciation
expense (Included in Cost of goods sold and Operating
expense)
|
$ | 2,073,116 | 506,321 | $ | 2,579,437 |
For the Nine Months Ended September 30, 2009
|
||||||||||||||||||||
China
|
US
|
Corporate
|
Eliminations
|
Total
|
||||||||||||||||
Revenues
|
$ | 105,226,285 | $ | 26,506,874 | $ | (498,732 | ) | $ | 131,234,427 | |||||||||||
Gross
Profit
|
34,361,859 | 3,199,662 | 37,561,521 | |||||||||||||||||
Selling,
general and administrative expenses
|
6,161,221 | 4,251,538 | 2,701,597 | 13,114,356 | ||||||||||||||||
Operating
income (loss)
|
28,200,637 | (1,051,875 | ) | (2,701,597 | ) | 24,447,165 | ||||||||||||||
Capital
expenditures
|
5,770,109 | 261,267 | 6,031,376 | |||||||||||||||||
Depreciation
expense (Included in Cost of goods sold and Operating
expense)
|
$ | 5,853,457 | 1,338,385 | $ | 7,191,842 |
- 46
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
For the Three Months Ended September 30, 2008
|
||||||||||||||||||||
China
|
US
|
Corporate
|
Eliminations
|
Total
|
||||||||||||||||
Revenues
|
$ | 46,487,792 | $ | 17,337,182 | $ | (1,047 | ) | $ | 63,823,927 | |||||||||||
Gross
Profit
|
15,006,214 | 1,886,313 | 16,892,527 | |||||||||||||||||
Selling,
general and administrative expenses
|
2,112,622 | 1,763,403 | 765,766 | 4,641,791 | ||||||||||||||||
Operating
income (loss)
|
12,893,592 | 122,910 | (765,766 | ) | 12,250,736 | |||||||||||||||
Capital
expenditures
|
484,822 | 1,454,389 | 1,939,211 | |||||||||||||||||
Depreciation
expense (Included in Cost of goods sold and Operating
expense)
|
$ | 1,296,406 | 405,408 | $ | 1,701,814 |
For the Nine Months Ended September 30, 2008
|
||||||||||||||||||||
China
|
US
|
Corporate
|
Eliminations
|
Total
|
||||||||||||||||
Revenues
|
$ | 128,832,106 | $ | 52,366,161 | $ | (829,184 | ) | $ | 180,369,083 | |||||||||||
Gross
Profit
|
41,848,741 | 6,524,079 | 48,372,820 | |||||||||||||||||
Selling,
general and administrative expenses
|
6,470,691 | 4,709,443 | 3,429,862 | 14,609,996 | ||||||||||||||||
Operating
income (loss)
|
35,378,050 | 1,814,636 | (3,429,862 | ) | 33,762,824 | |||||||||||||||
Capital
expenditures
|
16,228,071 | 3,181,049 | 19,409,120 | |||||||||||||||||
Depreciation
expense (Included in Cost of goods sold and Operating
expense)
|
$ | 3,322,050 | 1,406,185 | $ | 4,728,235 |
As of
December 31,
2008
|
China
|
US
|
Corporate
|
Total
|
||||||||||||
Property,
plant and equipment, net
|
$ | 103,473,792 | $ | 16,287,235 | $ | 119,761,027 | ||||||||||
Total
assets
|
$ | 252,707,535 | $ | 28,727,197 | $ | 13,022,785 | $ | 294,457,517 |
- 47
-
FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
As of
September 30,
2009
|
China
|
US
|
Corporate
|
Total
|
||||||||||||
Property, plant
and equipment,
net
|
$ | 101,230,416 | $ | 14,380,166 | $ | 115,610,582 | ||||||||||
Total
assets
|
$ | 252,419,749 | $ | 27,460,696 | $ | 14,463,484 | $ | 294,343,929 |
Note
20 - Related Party Transaction
In July
2009, the Company received a loan from the Company’s Chief Executive Officer in
the amount of $4,553,731 as payment for the High Yield note. The loan is
non-interest bearing and due on demand.
Note
21 – Subsequent Events
The
Company has evaluated subsequent events through the time of filing these
consolidated financial statements with the SEC on November 09,
2009.
As
explained in Note 18, as of October 3, 2009, the Registration Deadline, the
Registration Statement had not been declared effective. Accordingly, Kuhns
became entitled to receive Restricted Shares up to such amount to satisfy the
Judgment, calculated as set forth above. Kuhns elected to receive 1,370,352
Restricted Shares from the Escrow Shares and requested the release of such
Restricted Shares in full satisfaction of the Judgment, which, as of such date,
the Restricted Share Value was $5,626,993 (principal) with accrued interest of
$184,997 calculated at the rate of 10% per annum since June 5,
2009. Pursuant to the Settlement Agreement, the Company is entitled
to have the remaining Escrow Shares in the amount of 829,648 shares returned for
cancellation.
As
explained in Note 9, subsequent to quarter end, on October 27, 2009, the Company
entered into an amendment to the Forbearance Agreement which extends the
forbearance period to January 31, 2010.
As of
November 9, 2009 and as described in Note 10, “Repurchase of Convertible Notes”,
the Company has communicated to the note holders and prepared all wire transfers
to be made related to the repurchase of the remaining outstanding debt owed to
Citadel in the amount of $6,060,000.
- 48
-
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form
10-Q.
Certain
statements in this Report constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements include statements, which involve risks
and uncertainties, regarding, among other things, (a) our projected sales,
profitability, and cash flows, (b) our growth strategies, (c) anticipated trends
in our industries, (d) our future financing plans, and (e) our anticipated needs
for, and use of, working capital. They are generally identifiable by use of the
words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,”
“project,” “continuing,” “ongoing,” “expects,” “management believes,” “we
believe,” “we intend,” or the negative of these words or other variations on
these words or comparable terminology. Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including, without limitation, the risks outlined under “Risk
Factors” in our Annual Report on Form 10-K and matters described in this report
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this filing will in fact occur.
You should not place undue reliance on these forward-looking
statements.
The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.
The
"Company", "we," "us," "our," and the "Registrant" refer to (i) Fushi
Copperweld, Inc., (ii) Fushi Holdings, Inc., (iii) Fushi International (Dalian)
Bimetallic Cable Co., Ltd. (formerly Dalian Diversified Product Inspections
Bimetallic Cable, Co., Ltd.) (“Fushi International (Dalian)”), (iv) Dalian Fushi
Bimetallic Wire Manufacturing, Co., Ltd. (“Dalian Fushi”), (v) Copperweld
Holdings, LLC, (vi) Copperweld Bimetallic, LLC (“Copperweld”) and (vii)
Copperweld Bimetallics UK, LLC. Unless the context otherwise requires, all
references to (i) “PRC” and “China” are to the People’s Republic
of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iii)
“RMB” are to Yuan Renminbi of China; (iv) “Securities Act” are to the Securities
Act of 1933, as amended; and (v) “Exchange Act” are to the Securities Exchange
Act of 1934, as amended.
Overview
We
believe we are one of the world’s largest producer, based on manufacturing
capacity, and a leading innovator of bimetallic wire products, principally
copper-clad aluminum (CCA) and copper-clad steel (CCS) products. Our products
are primarily used within the telecommunications, electrical utility, and
transportation industries, and are sold as conductor components within the
broadband wire and cable market, and finished products in the electrical utility
and transportation markets. Our products significantly reduce the
amount of copper required to manufacture a conductor, and since copper is
expensive; we significantly reduce conductor cost through the addition of an
aluminum or steel core. CCA and CCS conductors are generally used in
substitution of solid copper conductors where either cost savings or specific
electrical and/or physical attributes are either required or
desired. In the third fiscal quarter of 2009, our products were sold
to over 300 customers in 41 countries. We market our products under the
trademarked names of “Copperweld®” and “Fushi™,” and sell either directly to
cable manufacturers or through distributors or sales agents to
end-users.
Although
we are engaged in one line of business, as a result of the differing markets
primarily served by each of our manufacturing facilities and significant
differences in the operating results among each of our facilities, starting with
the second fiscal quarter of 2009, we began to analyze our worldwide operations
based on two geographic reportable segments: 1) “P.R.C.” which consists of our
facility located in Dalian, Liaoning, the People’s Republic of China (PRC) and
2) “US” which consists of our Fayetteville, Tennessee, (USA), and Telford,
England, (UK) facilities. We have combined our U.S. and U.K. operations as one
segment since the UK is a subsidiary of the US operating company and is under
the direction of our U.S. segment manager. Further, the nature of our
products, services and production processes at our U.S. and U.K. facilities,
along with the customer base, methods to distribute products and services are
nearly identical.
We
believe we have a strong market position in all markets in which we compete due
to the quality of our products, geographic and customer diversity and our
ability to deliver superior products while operating as a low cost
provider. As a result, we believe we are now one of the leading
producers of bimetallic wire products in the world and are one of the market
leaders in North America, Europe, North Africa, the Middle East and the People’s
Republic of China. We continue to expand within current and
developing markets and create shareholder value by:
- 49
-
·
|
Investing
in organic and inorganic growth in both infrastructure-based and
fast-growing markets;
|
·
|
Focusing
on new, higher-margin products, applications and markets through
investment into new machinery and research and
development;
|
·
|
Improving
business processes throughout the Company by focusing on key performance
indicators and operational
excellence;
|
·
|
Strategically
hiring and developing talent, to improve the effectiveness of
our performance management processes;
and
|
·
|
Protecting
and enhancing the Fushi Copperweld
brand.
|
To
accomplish these goals, we are focused on continuously improving operational
efficiency in areas we view to be vital: quality, delivery, cost and innovation.
We also take an opportunistic approach to achieving our goals, and thus, we seek
acquisitions of businesses which facilitate overall growth and cash flows of the
Company.
We
manufacture, market and distribute bimetallic conductors (two-metal
conductors). These bimetallic conductors are primarily CCA and
CCS. Both CCA and CCS are either aluminum or steel cores, surrounded
by an outer layer of pure copper, resulting in a composite bimetallic conductor.
The copper sheath, through our processing methods, is metallurgically “bonded”
to the core metal. The amount of copper-metal used in cladding the
core-metal varies widely, and is based on customers’ needs. However,
bimetallic conductors, compared to solid copper conductors, can reduce the
amount of copper used by as much as 90% by volume, or 73% by weight which
is a considerable cost savings to the company and our customers. For
many applications, bimetallic conductors offer significant advantages over
copper wire. End-user manufacturers in the industry have increasingly
pursued and considered alternative technologies such as bimetallics due to
performance and economic considerations. Relative to traditional copper
conductors, bimetallic conductors offer greater value to a variety of customers.
Because of the benefits of bimetallic conductors, we believe there are
substantial opportunities to capture increased market share in applications that
have historically been dominated by solid copper wire.
We
believe our engineered bimetallic conductor products offer end-users greater
value-performance than “solid” copper conductors. Our bimetallic
conductors combine the efficiency of copper with the lightweight qualities of
aluminum (CCA), or the ruggedness and strength of steel
(CCS). Bimetallic conductors offer favorable cost
characteristics, weight savings (CCA), increased flexibility and
end-product ease-of-handling (CCA), increased tensile strength (CCS), improved
corrosion characteristics and decreased theft risk. Conductivity can
be customized, by changing the percentage of copper, to fit many applications.
The physical and electrical attributes of our bimetallic products provide our
customers cost savings beyond their intrinsic pricing advantages.
We
believe our proprietary manufacturing technology allows us to produce superior
products compared to other manufacturers and creates a significant barrier to
entry. Manufacturing copper-clad products involves bonding copper tape to
an aluminum or steel core rod, drawing the clad product to a finished diameter
and heat treating (annealing) as necessary depending on customer specifications.
Our proprietary cladding process differentiates us in terms of manufacturing
capabilities, offering superior product quality. Our developmental
capabilities support the ongoing evolution of our current
products. We are continuously working toward new technologies and
products that we expect will improve the performance and capabilities of our
bimetallic products thereby allowing us to enter new markets.
While the
pricing volatility of our raw materials, especially copper, is a primary cause
of cost variations in our products, changes in raw material costs do not
materially affect our dollar earnings on a per pound basis. Although an increase
in the price of raw materials may serve to reduce our gross margins as a
percentage of net sales, likewise, a decline in raw material prices may increase
our gross margin as a percentage of net sales. We generally pass the cost of
price changes in our raw materials to our customers rather than the percentage
changes. We establish prices for our products based on market factors and our
cost to produce our products. Typically, we set a base price for our products
for our customers with an understanding that as prices of raw materials change,
primarily for copper but also for aluminum and steel, we will pass the change
through to our customers. Therefore, when prices of raw material increase, our
prices to our customers increase and the amount of our total net sales increases
while the dollar amount of our gross margin remains relatively
stable. As a result, the impact on earnings per share from volatile
raw material prices is minimal, although there are timing delays of varying
lengths depending upon volatility of metals prices, the type of product,
competitive conditions and particular customer arrangements.
Factors
driving and affecting operating results include raw material prices, product and
price competition, economic conditions in various geographic regions, foreign
currency exchange rates, interest rates, changes in technology, fluctuations in
customer demand, variations in the mix of products, production capacity and
utilization, working capital sufficiency, availability of credit and general
market liquidity, patent and intellectual property issues, litigation results
and legal and regulatory developments, and our ability to accurately forecast
sales demand and calibrate manufacturing to such demand, manage volatile raw
material costs, develop, manufacture and successfully market new and enhanced
products and product lines, control operating costs, and attract, motivate
and retain key personnel to manage our operational, financial and management
information systems.
- 50
-
Highlights for the Quarter
include:
|
-
|
Basic
EPS of $0.33 for the three months ended September 30,
2009;
|
|
-
|
Metric
tons of volume shipped at Dalian increased 9.5% compared to the third
quarter 2008;
|
|
-
|
Gross
margin increased 530 basis points from 26.5% of revenues to 31.8% of
revenues;
|
|
-
|
Operating
income margin increased 300 basis points from 19.2% to 22.2% of
revenues;
|
|
-
|
Returned
to profitability at Fayetteville facility; generated approximately $0.2
million of net income; and
|
|
-
|
Generated
$11.1 million of cash flow from operations in the quarter; $15.6 million
year-to-date.
|
Current
Business Environment and Outlook for the remainder of 2009
With
respect to the overall business trends for the remainder of 2009 and forward,
management is increasingly encouraged by recent trends that show positive
metrics in the economy and our markets around the world. We believe the
following macro-level trends will positively impact our business and offer us
opportunities to capture new business despite global economic conditions and
preserved profitability:
·
|
Steady
incremental demand for CCA-based telecommunication products in China,
primarily due to 3G related capital
investment;
|
·
|
Chinese
government stimulus packages focused on infrastructure, high-speed
railways, transmission and distribution and power grid build
out;
|
·
|
Continued
strength of the grounding wire
market;
|
·
|
Worldwide
long-term growth trends in electric utility and infrastructure markets;
and
|
·
|
Continued
demand for cost effective and energy saving
alternatives.
|
Furthermore,
we have focused on driving profitability by streamlining our organizational
structure and business procedures, increasing operational efficiency and
optimizing operating processes, while managing production costs and operating
expenses.
In order
to enhance our productivity and expand our sales of higher margin products, we
are continuing to develop applications in high-potential utility and electrical
appliance markets. Meanwhile, we are also working to strengthen sales management
and customer relations. We will seek to consolidate our relationships with
our best customers, stop or suspend selling to customers that pose significant
credit risk, and develop new customers cautiously. In addition, as part of
our ongoing efforts to reduce total operating costs, we will continuously
improve our ability to efficiently utilize existing and new manufacturing
capacity to manage expansion and growth. We believe that investments to increase
capacity will pay off by increased product sales in the future. We believe that
effectively utilizing manufacturing assets, and generating economies of scale,
will help offset high raw material prices and dilute overhead over time. Moving
forward, as we are optimistic about the demand growth for our various products,
we expect our combined utilization rates to improve.
We
actively seek to identify and promptly respond to key economic and industry
trends in order to capitalize on expanding niche markets for our products, and
to potentially enter new markets both vertically and horizontally, in order to
achieve better returns. We believe that we have the resources, technology,
working capital and capacity to meet growing market demands. Over the
long-term, we believe that we are well positioned to benefit from the growth
opportunities in China and throughout the world.
- 51
-
Results
of Operations
The
following table sets forth, for the periods indicated, statement of operations
data in millions of dollars and as percentage of net sales. Percentages may not
add due to rounding:
Three Months Ended
|
%
|
Nine Months Ended
|
%
|
|||||||||||||||||||||
September 30,
|
September 30,
|
Change
|
September 30,
|
September 30,
|
Change
|
|||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||
(in
millions, except percentages)
|
||||||||||||||||||||||||
Revenues
|
$ | 47.7 | $ | 63.8 | -25.2 | % | 131.2 | 180.4 | -27.3 | % | ||||||||||||||
Gross
Profit
|
$ | 15.2 | $ | 16.9 | -10.1 | % | 37.6 | 48.4 | -22.3 | % | ||||||||||||||
Selling,
general and administrative expenses
|
$ | 4.6 | $ | 4.6 | 0 | % | 13.1 | 14.6 | -10.3 | % | ||||||||||||||
Operating
Income
|
$ | 10.6 | $ | 12.3 | -13.8 | % | 24.5 | 33.8 | -27.5 | % | ||||||||||||||
Income
Before Taxes
|
$ | 10.1 | $ | 10.5 | -3.8 | % | 14.7 | 27.1 | -45.8 | % | ||||||||||||||
Net
Income Tax Provision
|
$ | 0.9 | $ | 1.5 | -40.0 | % | 0.8 | 3.2 | -75.0 | % | ||||||||||||||
Net
Income
|
$ | 9.2 | $ | 9.0 | 2.2 | % | 13.9 | 23.9 | -41.8 | % |
Comparison
of the Three Months Ended September 30, 2009 and September 30,
2008:
Net
Sales
The
following tables set forth net sales in millions by each of our reporting
segments and metric tons (MT) sold on a combined basis:
Net Sales
|
||||||||||||||||||||||||
Three Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Amount
|
% of
Net
Sales
|
Amount
|
% of Net
Sales
|
Dollar
Change
|
% Change
|
|||||||||||||||||||
P.R.C.
|
$ | 38.9 | 81.6 | % | $ | 46.5 | 72.9 | % | $ | (7.6 | ) | -16.3 | % | |||||||||||
US
|
$ | 8.8 | 18.4 | % | $ | 17.3 | 27.1 | % | $ | (8.5 | ) | -49.1 | % | |||||||||||
Total
net sales
|
$ | 47.7 | 100.0 | % | $ | 63.8 | 100.0 | % | $ | (16.1 | ) | -25.2 | % |
Metric Tons Sold
|
||||||||||||||||||||||||
Three Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
MT
|
% of MT
Sales
|
MT
|
% of MT
Sales
|
Tonnage
Change
|
% Change
|
|||||||||||||||||||
P.R.C.
|
8,017 | 82 | % | 7,321 | 72 | % | 696 | 9.5 | % | |||||||||||||||
US
|
1,812 | 18 | % | 2,881 | 28 | % | (1,069 | ) | -37.1 | % | ||||||||||||||
Total
sales volume
|
9,829 | 100 | % | 10,202 | 100 | % | (373 | ) | -3.7 | % |
Net sales
decreased 25.2% over the third quarter of 2008 primarily due to a 21.6% decline
in average selling prices as a result of a decline in the costs of our raw
materials. We generally pass the cost of price changes in raw materials to
customers when we set the base price for our products. As raw material prices
change we pass that change through, whether it results in an increase or
decrease in the base price for our products. Also contributing to lower net
sales was a 3.7% decrease in metric tons sold over the same period.
The
P.R.C. segment experienced a decline of 16.3% in net sales for the three months
ended September 30, 2009 relative to the comparable 2008 period. The majority of
the decrease in P.R.C. net sales is due to a 23.6% decline in the average
selling price as a result of lower metal prices relative to the comparable 2008
periods. This decline was partially offset by a 9.5% increase in metric tons
sold. We expect long-term demand for our P.R.C. products to be positively
affected by the build-out of the homegrown 3G network in the P.R.C., continued
traction of the government stimulus package announced in November 2008, and our
impending installation of CCS cladding capacity.
The US
segment experienced a significant decline in net sales of 49.1% in all major
geographic regions with particular weakness in European and North American
markets, for the three months ended September 30, 2009 relative to the
comparable 2008 period. The decline in the US segment net sales is primarily the
result of a 37.1% decline in metric tons shipped and a 14.9% decline in the
average selling price. We continue to remain optimistic that the electrical
utility industries provide strong growth opportunities for our CCS products
within the markets served by our US segment operations. However,
delays in disbursement of government stimulus packages and uncertainty in the
global economy may continue to depress capital spending by telecommunication and
electrical utility providers, and negatively impact markets and consequently our
net sales within in the markets of the US segment.
- 52
-
Net
Sales by Industry
The
following table presents the breakdown of combined net sales in
millions by industry:
Net Sales
|
||||||||||||||||||||||||
Three Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Amount
|
% of Net
Sales
|
Amount
|
% of Net
Sales
|
Dollar
Change
|
% Change
|
|||||||||||||||||||
Telecommunication
|
$ | 24.5 | 51.4 | % | $ | 28.1 | 44.0 | % | (3.6 | ) | -12.8 | % | ||||||||||||
Utility
|
20.3 | 42.6 | % | 30.5 | 47.8 | % | (10.2 | ) | -33.4 | % | ||||||||||||||
Transportation
|
0.5 | 1.0 | % | 1.5 | 2.4 | % | (1.0 | ) | -66.7 | % | ||||||||||||||
Other
|
2.4 | 5.0 | % | 3.7 | 5.8 | % | (1.3 | ) | -35.1 | % | ||||||||||||||
Total
net sales
|
$ | 47.7 | 100.0 | % | $ | 63.8 | 100.0 | % | (16.1 | ) | -25.2 | % |
The
following table presents the breakdown of metric tons (MT) shipped to customers
by industry:
Three Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
MT
|
% of MT
Sold
|
MT
|
% of MT
Sold
|
Tonnage
Change
|
% Change
|
|||||||||||||||||||
Telecommunication
|
4,999 | 50.8 | % | 4,515 | 44.2 | % | 484 | 10.7 | % | |||||||||||||||
Utility
|
3,988 | 40.6 | % | 4,792 | 47.0 | % | (804 | ) | -16.8 | % | ||||||||||||||
Transportation
|
67 | 0.7 | % | 199 | 2.0 | % | (132 | ) | -66.3 | % | ||||||||||||||
Other
|
775 | 7.9 | % | 696 | 6.8 | % | 79 | 11.4 | % | |||||||||||||||
Total
sales volume
|
9,829 | 100 | % | 10,202 | 100 | % | (373 | ) | -3.7 | % |
In our
PRC segment we have increased sales volume in the telecommunication market,
which has been our largest market, and we are focused on increasing market share
in the underdeveloped utility market. During the three month period ended
September 30, 2009, our sales to the telecommunication markets increased by 484
metric tons compared to the similar period in 2008, primarily due to strong
demand for CCA products in the P.R.C. and partially offset by decreased demand
from the North American and European markets. Utility sales decreased by 804
metric tons for the three month period ended September 30, 2009 compared to the
similar period in 2008, primarily due to decreased demand from the North
American and European markets.
Capacity
and Output
The
following table summarizes installed cladding capacities and output by for the
three month period ended September 30, 2009:
Three Months Ended September 30, 2009
|
||||||||||||||||
P.R.C.
|
US
|
|||||||||||||||
Capacity
|
Output
|
Capacity
|
Output
|
|||||||||||||
CCA
|
10,000 | 7,631 | 3,100 | 524 | ||||||||||||
CCS
|
200 | 16 | 4,075 | 1,256 | ||||||||||||
Other*
|
- | 370 | - | 32 | ||||||||||||
Total
|
10,200 | 8,017 | 7,175 | 1,812 |
*We have
no cladding capacity outside of our Dalian and Fayetteville facilities. The
“Other” capacity and output under US segment primarily refers to brass plated
steel (“BPS”) products, extruded cables and other finished CCA and CCS
products from our Telford, England facility, as well as scrap sales from all
facilities worldwide.
As
of September 30, 2009, we had combined CCA annual production capacity of
52,400 metric tons and CCS cladding capacity of 17,100 metric tons on an
annualized basis based on our product mix. Installed capacity can increase or
decrease based on the size of the rod used in the cladding operation for CCA and
on the conductivity engineered into the CCS production. The above capacity
figures reflect a further 6,000 metric tons of annualized CCA capacity which was
successfully installed and commissioned at our Dalian facility during the second
quarter of 2009. We also have plans to install a further
8,200 metric tons of annualized CCS cladding capacity online at our Dalian
facility by the end of the first quarter of 2010. We expect the
first 4,100 metric tons of annualized CCS cladding capacity to be fully
operational at our Dalian facility by the end of the fiscal year 2009 and an
additional 4,100 metric to be operational during the course of first quarter of
2010.
- 53
-
Product
Mix
Metric Tons Sold
|
||||||||||||||||||||||||
Three Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Tonnage
|
% of Net
Sales
|
Tonnage
|
% of Net
Sales
|
Tonnage
Change
|
% Change
|
|||||||||||||||||||
CCA
|
8,155 | 83.0 | % | 7,711 | 75.6 | % | 444 | 5.8 | % | |||||||||||||||
CCS
|
1,272 | 12.9 | % | 2,295 | 22.5 | % | (1,023 | ) | -44.6 | % | ||||||||||||||
Others
|
402 | 4.1 | % | 196 | 1.9 | % | 206 | 105.1 | % | |||||||||||||||
Total
net sales
|
9,829 | 100.0 | % | 10,202 | 100.0 | % | (373 | ) | -3.7 | % |
The chart
above illustrates the growth of CCA as a percentage of tons sold comparing the
three month period ended September 30, 2009 to September 30, 2008, for the
combined reporting segments. The demand for our CCA products in the PRC
strengthened during the third quarter 2009 compared to the same period in 2008
due to increased traction of domestic infrastructure projects related to the
stimulus package and 3G network build-out. Furthermore, we experienced a
significant tapering of demand of approximately 37.1% for CCA and CCS based
products served by facilities in our US reporting segment due to economic
conditions in the North American and European markets.
Gross
Margin
Three Months Ended September 30,
|
Change
|
|||||||||||||||
(in millions)
|
2009
|
2008
|
Dollar
|
%
|
||||||||||||
Gross
Margin
|
$ | 15.2 | $ | 16.9 | $ | (1.7 | ) | -10.1 | % | |||||||
as
a percentage of net sales
|
31.8 | % | 26.5 | % | 5.3 | % |
Gross
margin decreased $1.7 million or 10.1% quarter over quarter. The decline in
gross margin was primarily due to lower average selling prices, which resulted
in lower revenues. Despite the decline in absolute gross margin, the gross
margin for the three months ended September 30, 2009, as a percentage of net
sales increased from 26.5% to 31.8% when compared to the same period in 2008 due
primarily to higher margins contributed by our Fayetteville facility, as well as
a slight increase in margins at our Dalian facility. The gross margin at the
Company’s Fayetteville facility increased from 11.3% to 20.1% year over year as
a result of cost savings initiatives implemented by management, and to a lesser
extent, improved product mix. This gross margin represented the highest
quarterly gross margin level achieved at the Fayetteville facility since the
October 2007 acquisition of Copperweld Bimetallics. Gross margins at our Dalian
facility also improved for the three month period ended September 30, 2009,
increasing from 32.3% to 34.6% compared to the same period in 2008 as we cycled
through lower cost inventory.
Selling
Expenses
Three Months Ended September 30,
|
Change
|
|||||||||||||||
(in millions)
|
2009
|
2008
|
Dollar
|
%
|
||||||||||||
Selling
Expenses
|
$ | 1.1 | $ | 1.2 | $ | (0.1 | ) | -8.3 | % | |||||||
as
a percentage of net sales
|
2.3 | % | 1.9 | % | 0.4 | % |
Selling
expense decreased by $0.1 million or 8.3% for the three months ended September
30, 2009, compared to the same quarter of 2008. Selling expenses decreased
primarily because of the cost saving initiatives implemented by management and
decreased sales volume from our US segment. As a percentage of net sales,
selling expenses experienced a slight increase from 1.9% of net sales for the
2008 quarter to 2.3% of net sales due to decreased revenue.
General
and Administrative Expenses
Three Months Ended September 30,
|
Change
|
|||||||||||||||
(in millions)
|
2009
|
2008
|
Dollar
|
%
|
||||||||||||
General
and Administrative Costs
|
$ | 3.5 | $ | 3.4 | $ | 0.1 | 2.9 | % | ||||||||
as
a percentage of net sales
|
7.4 | % | 5.4 | % | 2.0 | % |
General
and administrative expenses remained relatively flat during the three month
period ended September 30, 2009, compared to the same period in 2008. As a
percentage of net sales, general and administrative expenses increased slightly
by 2.0% to 7.4% from 5.4% for the third quarter of 2008 compared to the same
period in 2009 as a result of decreased revenue in the third quarter of
2009. During the third quarter of 2009, included in general and
administrative expenses were non-factory depreciation and amortization of
$442,959 and amortization of intangible assets of $119,166, compared to $440,548
and $98,071, respectively in the third quarter of 2008.
- 54
-
Operating
Income
The
following table sets forth operating income by segment, in millions of
dollars:
Three Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Amount
|
% of
Operating
income
|
Amount
|
% of
Operating
income
|
Dollar
Change
|
% Change
|
|||||||||||||||||||
P.R.C.
|
$ | 10.8 | 102 | % | $ | 12.9 | 105 | % | $ | (2.1 | ) | -16.3 | % | |||||||||||
US
|
$ | 0.4 | 4 | % | $ | 0.1 | 1 | % | $ | 0.3 | 300.0 | % | ||||||||||||
Corporate
|
$ | (0.6 | ) | -6 | % | $ | (0.7 | ) | -6 | % | $ | 0.1 | -14.3 | % | ||||||||||
Total
operating income
|
$ | 10.6 | 100 | % | $ | 12.3 | 100 | % | $ | (1.7 | ) | -13.8 | % |
Operating
income in the three months ended September 30, 2009, declined approximately $1.7
million, or 13.8%, compared to the same period in 2008, which was primarily due
to lower net sales and partially offset by higher gross margins and cost savings
initiatives implemented by management.
Operating
income in the P.R.C. segment decreased approximately $2.1 million, or 16.3%, in
the period ended September 30, 2009 when compared to the same period in 2008,
primarily due to a decline in total net sales and partially offset by higher
gross margins.
Operating
income in the US segment increased approximately $0.3 million, or 300.0%, in the
period ended September 30, 2009 when compared to the same period in 2008,
primarily as a result of higher gross margins and cost savings initiatives
implemented by management, partially offset by a decline in total net
sales.
Other
Income (Expense)
Interest
Income (Expense)
Three Months Ended September 30,
|
Change
|
|||||||||||||||
(in millions)
|
2009
|
2008
|
Dollar
|
%
|
||||||||||||
Interest
Income
|
$ | 0.1 | $ | 0.2 | $ | (0.1 | ) | -50.0 | % | |||||||
Interest
Expense
|
$ | (1.2 | ) | $ | (1.8 | ) | $ | 0.6 | -33.3 | % | ||||||
Net
Interest Expense
|
$ | (1.1 | ) | $ | (1.6 | ) | $ | 0.5 | -31.3 | % | ||||||
as
a percentage of net sales
|
-2.3 | % | -2.5 | % | 0.2 | % |
Net
interest expense in the period ended September 30, 2009 decreased by
approximately $0.5 million versus the same period in 2008, which was primarily
the result of the repayment of Dalian’s short term bank loans. As a percentage
of net sales, net interest expense decreased from 2.5% for the period ended
September 30, 2008 to 2.3% for the period ended September 30, 2009.
Gain on convertible note
extinguishment
On August
13, 2009, the Company entered into a Notes Purchase Agreement (the “Repurchase
Agreement”) with Citadel Equity Fund Ltd. Pursuant to the Repurchase Agreement,
the Company repurchased $2.0 million principal amount of the convertible notes
in exchange for the issuance 440,529 shares of our common stock, valued at $4.0
million. The remaining $3.0 million principal amount will be
repurchased for cash in the amount of $6,060,000. The early
repurchase of the notes prior to the maturity date will result in a recognized
gain of $3.8 million.
Change in fair value of
derivative instruments and liabilities
The
Company analyzes all financial instruments with features of both liabilities and
equity under FAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” FAS 133 and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Before the adoption of EITF 07-5
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity's Own Stock", the convertible note issued in 2007 did not require
bifurcation or result in liability accounting. However, with the recent adoption
of EITF 07-5, the embedded conversion feature must be bifurcated from its host
instrument and accounted for separately as a derivative liability.
- 55
-
The fair
market values of our warrant and conversion option derivatives are determined by
the market price of our stock, strike price, volatility, risk free interest
rate, expected life and dividend yield. An increase in our stock price can
generate material losses on our warrant and conversion option
derivatives.
For the
three months ended September 30, 2009 and 2008, the Company recognized a loss in
the change in fair value of derivative liability – conversion option in the
amounts of $2,058,352 and $0, respectively.
The fair
market value of our derivative hedge is mainly determined based upon changes in
the forward market six month USD LIBOR rates and changes in the forward market
exchange rate between USD and Chinese RMB. A decline in forward market LIBOR
rates and accelerated depreciation in Chinese RMB against USD can generate
material losses on our derivative hedge. Since its effective date, the fair
value of this Swap Agreement changed to a payable of $7,652,664 and $4,377,076
as of September 30, 2009, and December 31, 2008, respectively.
Tax
Three
Months Ended September 30, 2009
|
||||||||||||||||
Dalian
|
Fayetteville &
Telford
|
Parent Company
|
Consolidated
|
|||||||||||||
Profit
(Loss) before income tax
|
11.0 | 0.2 | (1.1 | ) | 10.1 | |||||||||||
Income
tax expense (credit)
|
1.8 | - | (0.9 | ) | 0.9 | |||||||||||
Profit
(loss) after income tax
|
9.2 | 0.2 | (0.2 | ) | 9.2 |
Profit
before tax for Dalian was $11.0 million in the period ended September 30,
2009 with profits from the US segment before tax of $0.2 million. Loss at the
Fushi Copperweld parent company level was $1.1 million primarily due to interest
expenses on the high yield notes, non-cash stock-based compensation, non-cash
charges related to changes in fair value of derivative liabilities related to
the convertible notes conversion options, as well as professional fees and
outside service expenses and partially offset by gain from the repurchase of the
convertible notes.. On a consolidated basis, profit before tax was $10.1 million
and we recognized a tax expense of $0.9 million.
Net
Income
Three Months Ended September 30,
|
Change
|
|||||||||||||||
(in millions)
|
2009
|
2008
|
Dollar
|
%
|
||||||||||||
Net
Income Before Taxes
|
$ | 10.1 | $ | 10.5 | $ | (0.4 | ) | -3.8 | % | |||||||
Provision
for Income Taxes
|
$ | 0.9 | $ | 1.5 | $ | (0.6 | ) | 40.0 | % | |||||||
Net
Income After Taxes
|
$ | 9.2 | $ | 9.0 | $ | 0.2 | 2.2 | % | ||||||||
as
a percentage of net sales
|
19.3 | % | 14.2 | % | 5.1 | % |
Net
income for the three months period ended September 30, 2009, was $9.2 million
compared to $9.0 million for the comparable period in 2008, an increase of
approximately $0.2 million. Net income as a percentage of net sales increased
from 14.2% for the prior period to 19.3% primarily due to increased gross
margins.
Earnings
Per Share
Three Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Unaudited
|
Unaudited
|
|||||||
Net
Income for Basic Earnings Per Share
|
$ | 9,194,933 | $ | 9,046,950 | ||||
Basic
Weighted Average Number of Shares
|
28,084,416 | 27,387,302 | ||||||
Net
Income per Share – Basic
|
$ | 0.33 | $ | 0.33 | ||||
Net
Income for Diluted Earnings Per Share
|
$ | 9,194,933 | $ | 8,876,958 | ||||
Diluted
Weighted Average Number of Shares
|
29,206,508 | 28,446,786 | ||||||
Net
Income per Share – Diluted
|
$ | 0.31 | $ | 0.31 |
Basic and
diluted earnings per share (EPS) for the quarter ended September 30, 2009, were
$0.33 and $0.31, respectively, compared to $0.33 and $0.31, respectively, for
the comparable period in 2008.
- 56
-
Comparison
of the Nine Months Ended September 30, 2009 and September
30, 2008:
Net
Sales
Net Sales
|
||||||||||||||||||||||||
Nine Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Amount
|
% of Net
Sales
|
Amount
|
% of Net
Sales
|
Dollar
Change
|
% Change
|
|||||||||||||||||||
P.R.C.
|
$ | 104.7 | 79.8 | % | $ | 128.8 | 71.4 | % | (24.1 | ) | -18.7 | % | ||||||||||||
US
|
26.5 | 20.2 | % | 51.6 | 28.6 | % | (25.1 | ) | -48.6 | % | ||||||||||||||
Total
net sales
|
$ | 131.2 | 100.0 | % | $ | 180.4 | 100.0 | % | (49.2 | ) | -27.3 | % |
Nine Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Tonnage
|
% of Net
Sales
|
Tonnage
|
% of Net
Sales
|
Tonnage
Change
|
% Change
|
|||||||||||||||||||
P.R.C.
|
22,964 | 80 | % | 20,486 | 70 | % | 2,478 | 12.1 | % | |||||||||||||||
US
|
5,868 | 20 | % | 8,875 | 30 | % | (3,007 | ) | -33.9 | % | ||||||||||||||
Total
sales volume
|
28,832 | 100 | % | 29,361 | 100 | % | (529 | ) | -1.8 | % |
Net sales
decreased 27.3% over the nine month period ended September 30, 2008 primarily
due to a 24.6% decline in average selling prices as a result of a decline in the
costs of our raw materials and partially offset by an increase of 12.1% in tons
sold from our P.R.C. segment over the same period.
The
P.R.C. segment experienced a decline of 18.7% in net sales for the nine months
ended September 30, 2009 relative to the comparable 2008 period. The majority of
the decrease in P.R.C. net sales for the nine months ended September 30, 2009,
is due to a 27.5% decline in the average selling price as a result of lower
metal prices relative to the comparable 2008 periods and was partially offset by
a 12.1% increase in metric tons sold. We generally pass the cost of price
changes in raw materials to customers when we set the base price for
our products. As raw material prices change we pass that change through, whether
it results in an increase or decrease in the base price for our products. We
expect long-term demand for our P.R.C. products to be positively affected by the
build-out of the homegrown 3G network in the P.R.C., continued traction of the
government stimulus package announced in November 2008, and our impending
installation of CCS cladding capacity.
The US
segment experienced a significant decline in net sales in all major geographic
regions with particular weakness in Europe and North America, experiencing a
decline of 48.6% for the nine months ended September 30, 2009 relative to the
comparable 2008 period. The decline in US segment net sales for the nine months
period ended September 30, 2009 as relative to comparable 2008 period is
primarily the result of a 33.9% decline in metric tons shipped and a 16.7%
decline in average selling price. We continue to remain optimistic that the
electrical utility industries provide strong growth opportunities for our CCS
products within the markets served by our US segment operations. However, delays
in disbursement of government stimulus packages and uncertainty in the global
economy may continue to depress capital spending by telecommunication and
electrical utility providers negatively impacting markets and consequently our
net sales within the markets of the US segment.
Net
Sales by Industry
Net Sales
|
||||||||||||||||||||||||
Nine Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Amount
|
% of Net
Sales
|
Amount
|
% of Net
Sales
|
Dollar
Change
|
% Change
|
|||||||||||||||||||
Telecommunication
|
$ | 62.2 | 47.4 | % | $ | 90.3 | 50.0 | % | (28.1 | ) | -31.1 | % | ||||||||||||
Utility
|
61.3 | 46.7 | % | 78.7 | 43.6 | % | (17.4 | ) | -22.1 | % | ||||||||||||||
Transportation
|
1.3 | 1.0 | % | 3.0 | 1.7 | % | (1.7 | ) | -56.7 | % | ||||||||||||||
Other
|
6.4 | 4.9 | % | 8.4 | 4.7 | % | (2.0 | ) | -23.8 | % | ||||||||||||||
Total
net sales
|
$ | 131.2 | 100.0 | % | $ | 180.4 | 100.0 | % | (49.2 | ) | -27.3 | % |
- 57
-
The
following table presents the breakdown of metric tons shipped to customers by
industry:
Net Sales
|
||||||||||||||||||||||||
Nine Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Tonnage
|
% of Net
Sales
|
Tonnage
|
% of Net
Sales
|
Tonnage
Change
|
% Change
|
|||||||||||||||||||
Telecommunication
|
13,761 | 47.7 | % | 14,320 | 48.8 | % | (559 | ) | -3.9 | % | ||||||||||||||
Utility
|
12,903 | 44.7 | % | 13,000 | 44.2 | % | -97 | -0.7 | % | |||||||||||||||
Transportation
|
192 | 0.7 | % | 439 | 1.5 | % | (247 | ) | -56.3 | % | ||||||||||||||
Other
|
1,976 | 6.9 | % | 1,602 | 5.4 | % | 374 | 23.3 | % | |||||||||||||||
Total
sales volume
|
28,832 | 100.0 | % | 29,361 | 100.0 | % | (529 | ) | -1.8 | % |
During
the nine month period ended September 30, 2009, our sales to the
telecommunication markets decreased by 559 metric tons, primarily due to
decreased demand from markets served by our US segment. In our PRC segment
operations, we have increased sales volume in the telecommunication market,
which has been our largest market, and we are focused on increasing market share
in the underdeveloped utility market. Utility sales decreased by 97 metric ton
for the three month period ended September 30, 2009 compared to the similar
period in 2008, primarily due to decreased demand from the North American and
European markets and partially offset by increased demand from our PRC
segment.
Capacity
and Output
The
following table summarizes installed cladding capacities and output for the nine
months ended September 30, 2009:
Nine Fiscal Months Ended September 30, 2009
|
||||||||||||||||
P.R.C.
|
US
|
|||||||||||||||
Capacity
|
Output
|
Capacity
|
Output
|
|||||||||||||
CCA
|
28,500 | 22,288 | 9,300 | 1,499 | ||||||||||||
CCS
|
600 | 38 | 12,225 | 4,299 | ||||||||||||
Other*
|
- | 638 | 70 | |||||||||||||
Total
|
29,100 | 22,964 | 21,525 | 5,868 |
*We have
no cladding capacity outside of our Dalian and Fayetteville facilities. The
“Other” capacity and output under US segment primarily refers to brass plated
steel (“BPS”) products, extruded cables and other finished CCA and CCS
products from our Telford, England facility, as well as scrap sales from all
facilities worldwide.
As
of September 30, 2009, we had combined CCA annual production capacity of
52,400, metric tons and CCS cladding capacity of 17,100 metric tons on an
annualized basis based on our product mix. Installed capacity can increase or
decrease based on the size of the rod used in the cladding operation for CCA and
on the conductivity engineered into the CCS production. The above capacity
figures reflect a further 6,000 metric tons of annualized CCA capacity which was
successfully installed and commissioned at our Dalian facility during the second
quarter of 2009. We also have plans to install a further
8,200 metric tons of annualized CCS cladding capacity online at our Dalian
facility by the end of the first quarter of 2010. We expect the
first 4,100 metric tons of annualized CCS cladding capacity to be fully
operational at our Dalian facility by the end of the fiscal year 2009 and an
additional 4,100 metric to be operational during the course of the first quarter
of 2010.
Product
Mix
Metric Tons Sold
|
||||||||||||||||||||||||
Nine Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Tonnage
|
% of Net
Sales
|
Tonnage
|
% of Net
Sales
|
Tonnage
Change
|
% Change
|
|||||||||||||||||||
CCA
|
23,787 | 82.5 | % | 22,331 | 76.1 | % | 1,456 | 6.5 | % | |||||||||||||||
CCS
|
4,337 | 15.0 | % | 6,591 | 22.4 | % | (2,254 | ) | -34.2 | % | ||||||||||||||
Others
|
708 | 2.5 | % | 439 | 1.5 | % | 269 | 61.3 | % | |||||||||||||||
Total
sales volume
|
28,832 | 100 | % | 29,361 | 100 | % | (529 | ) | -1.8% |
The chart
above illustrates the growth of CCA as a percentage of tons sold comparing the
nine months period ended September 30, 2009 to September 30, 2008, for the
combined reporting segments. The demand for our CCA products in the
PRC strengthened for the first nine months of the fiscal year 2009 compared
to the same period in 2008 due to increased traction of domestic infrastructure
projects related to the stimulus package and 3G network build-out. Furthermore,
we experienced a significant tapering of demand of 33.9% for CCA and CCS based
products served by facilities in our US reporting segment due to economic
conditions in the North American and European markets.
- 58
-
Gross
Margin
Nine Months Ended September 30,
|
Change
|
|||||||||||||||
(in millions)
|
2009
|
2008
|
Dollar
|
%
|
||||||||||||
Gross
Margin
|
$ | 37.6 | $ | 48.4 | $ | (10.8 | ) | -22.3 | % | |||||||
As
a percentage of net sales
|
28.6 | % | 26.8 | % | 1.8 | % |
Gross
margin profit decreased $10.8 million or 22.3% for the nine months ended
September 30, 2009 compared to the comparable period in 2008. Despite the
decline, the gross margin as a percentage of net sales for nine months ended
September 30, 2009 increased over the same period in 2008 by 180 basis points to
28.6%.
Selling
Expenses
Nine Months Ended September 30,
|
Change
|
|||||||||||||||
(in millions)
|
2009
|
2008
|
Dollar
|
%
|
||||||||||||
Selling
Expenses
|
$ | 3.4 | $ | 3.3 | $ | 0.1 | 3.0 | % | ||||||||
As
a percentage of net sales
|
2.6 | % | 1.8 | % | 0.8 | % |
Selling
expense increased slightly to $3.4 million for the nine months ended September
30, 2009, compared to the same period of 2008, an increase of $0.1 million or
3.0%. Selling expenses increased primarily because of increased efforts in sales
to penetrate the electrical utility market partially offset by cost savings
initiatives. As a percentage of net sales, selling expenses increased from 1.8%
of net sales for the nine months ended September 30, 2008 period to 2.6% of net
sales during the same period in 2009 primarily due to lower net
sales.
General
and Administrative Expenses
Nine Months Ended September 30,
|
Change
|
|||||||||||||||
(in millions)
|
2009
|
2008
|
Dollar
|
%
|
||||||||||||
General
and Administrative Costs
|
$ | 9.8 | $ | 11.3 | $ | (1.5 | ) | -13.3 | % | |||||||
as
a percentage of net sales
|
7.4 | % | 6.3 | % | 1.1 | % |
General
and administrative expenses decreased by $1.5 million or 13.3% to $9.8 million
during the nine months period ended September 30, 2009, compared to the
same period in 2008. This decrease is primarily a result of cost saving
initiatives implemented by management. As a percentage of net sales, general and
administrative expenses increased slightly by 1.1% to 7.4% from 6.3% for the
first nine months of fiscal year 2008 compared to the same period in 2009 as a
result of decreased net sales. During the nine months of fiscal year 2009,
included in general and administrative expenses were non-factory depreciation
and amortization of $1,331,317 and amortization of intangible assets of
$357,449, compared to $1,283,585 and $256,722, respectively during the same
period in 2008.
Operating
Income
Nine Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Amount
|
% of
Operating
income
|
Amount
|
% of
Operating
income
|
Dollar
Change
|
% Change
|
|||||||||||||||||||
P.R.C.
|
$ | 28.2 | 115.1 | % | $ | 35.4 | 104.7 | % | $ | (7.2 | ) | -20.3 | % | |||||||||||
US
|
$ | (1.0 | ) | -4.1 | % | $ | 1.8 | 5.3 | % | $ | (2.8 | ) | -155.6 | % | ||||||||||
Corporate
|
$ | (2.7 | ) | -11.0 | % | $ | (3.4 | ) | -10.0 | % | $ | 0.7 | -20.6 | % | ||||||||||
Total
operating income
|
$ | 24.5 | 100.0 | % | $ | 33.8 | 100.0 | % | $ | (9.3 | ) | -27.5 | % |
Operating
income for the nine months ended September 30, 2009 declined approximately $9.3
million, or 27.5%, compared to the same period in 2008, which was primarily due
to lower net sales and partially offset by cost savings initiatives implemented
by management.
The
operating income in the P.R.C. segment decreased approximately $7.2 million, or
20.3%, for the nine months ended September 30, 2009, when compared to the same
period in 2008, primarily due to a decline in total net sales.
The
operating income in the US segment decreased approximately $2.8 million for the
nine months ended September 30, 2009, when compared to the same period in 2008,
primarily, as a result of lower net sales. In the US
segment, manufacturing overhead accounted for 18% of net sales in the third
quarter of 2009 compared to 13% of net sales in the third quarter of 2008. Our
US segment capacity utilization rate was approximately 26.5% year-to-date
as of September 30, 2009 compared to 41.7% in the similar period in
2008. Gross margins were negatively affected due to operating at fractional
capacity, but were offset by significant cost savings initiatives implemented by
management which included employee reductions and restructuring. Additionally,
raw material changes were incorporated; lowering cost, thereby lowering COGS,
and thereby offsetting gross margin reductions realized due to underabsorption
of manufacturing.
- 59
-
Other
Income (Expense)
Interest
Income (Expense)
Nine Months Ended September 30,
|
Change
|
|||||||||||||||
(in millions)
|
2009
|
2008
|
Dollar
|
%
|
||||||||||||
Interest
Income
|
$
|
0.2
|
$
|
0.5
|
$
|
(0.3
|
)
|
-60.0
|
%
|
|||||||
Interest
Expense
|
$
|
(4.2
|
)
|
$
|
(7.4
|
)
|
$
|
3.2
|
-43.2
|
%
|
||||||
Net
Interest Expense
|
$
|
(4.0
|
)
|
$
|
(6.9
|
)
|
$
|
2.9
|
-42.0
|
%
|
||||||
as
a percentage of net sales
|
-3.0
|
%
|
-3.8
|
%
|
0.8
|
%
|
Net
interest expense decreased by approximately $2.9 million, or 42.0%, during for
the nine months ended September 30, 2009, compared to the same period in 2008.
This decrease is primarily the result of the repayment of Dalian’s short term
bank loans and one time interest accrued and amortization of costs in the amount
of $2.0 million relating to commission on debt issues in the second quarter of
2008. As a percentage of net sales, net interest expense decreased from 3.8% for
the nine months ended September 30, 2008 to 3.0% in the same period of
2009.
Gain on convertible note
extinguishment
On August
13, 2009, the Company entered into a Notes Purchase Agreement (the “Repurchase
Agreement”) with Citadel Equity Fund Ltd. Pursuant to the Repurchase Agreement,
the Company repurchased $2.0 million principal amount of the convertible notes
in exchange for the issuance 440,529 shares of our common stock, valued at $4.0
million. The remaining $3.0 million principal amount will be
repurchased for cash in the amount of $6,060,000. The early
repurchase of the notes prior to the maturity date will result in a recognized
gain of $3.8 million.
Change in fair value of
derivative instruments and liabilities
The fair
market values of our warrant and conversion option derivatives are determined by
the market price of our stock, strike price, volatility, risk free interest
rate, expected life and dividend yield. An increase in our stock price can
generate material losses on our warrant and conversion option
derivatives.
For the
nine months ended September 30, 2009 and 2008, the Company recognized a loss in
the change in fair value of derivative liability – conversion option in the
amounts of $7,181,198 and $0, respectively.
For the
nine months ended September 30, 2009 and 2008, the Company recognized a loss in
the change in fair value of derivative liability – warrants in the amounts of
$752,114 and $0, respectively.
Tax
Dalian
|
Fayetteville &
Telford
|
Parent Company
|
Consolidated
|
|||||||||||||
Profit
(Loss) before income tax
|
$ |
28.2
|
$ |
(1.3
|
)
|
$ |
(12.2
|
)
|
$ |
14.7
|
||||||
Income
tax expense (credit)
|
4.1
|
-
|
(3.3
|
)
|
0.8
|
|||||||||||
Profit
(Loss) after income tax
|
$ |
24.1
|
$ |
(1.3
|
)
|
$ |
(8.9
|
)
|
$ |
13.9
|
The
amount of taxable income that the US companies] must generate in order to
recover the $11,057,111 deferred tax asset balance at September 30, 2009, is
approximately $32,520,914 in the next 20 years. As of September 30,
2009, the accumulated pretax loss is $36,611,291, of which $33,780,643 is
incurred by the parent company, Fushi Copperweld, and only $2,830,648 incurred
by our operations at our Fayetteville facility. The parent company does not
generate revenues and its expenses primarily include interest expenses on the
High Yield Notes, stock-based compensation, changes in fair value of derivative
liabilities related to Convertible Notes conversion options, hedge and warrants,
as well as professional fees and outside service expenses.
U.S.
operations at our Fayetteville facility experienced profits in the first three
quarters of fiscal year 2008 and the third quarter of fiscal year 2009 of
$1,036,996, $244,546, $102,198 and $242,365 respectively. The net loss in the
fourth quarter of 2008 and the first two quarters of 2009 was mainly
due to the global economy downturn, but management believes Fayetteville will be
able to generate enough profit in the next 20 years to realize the deferred tax
assets at that time. Furthermore, cost savings initiatives at the Fayetteville
facility have effectively lower its breakeven levels, as evidenced by the profit
realized in the third quarter of fiscal year 2009 despite slight declines in net
sales. . With these cost saving measures in place, we believe that it is
possible to realize profit at current sales levels at our Fayetteville facility
and that we will be well positioned to experience increased profitability when
the global economic crisis subsides and sales begin to rebound to historical
levels.
- 60
-
As a
result, we did not record a valuation allowance at September 30, 2009. A
valuation allowance would not cause us to violate any debt covenants in our High
Yield Notes.
The
Company has cumulative undistributed earnings from foreign subsidiaries of
approximately $126.1 million as of September 30, 2009, included in the
consolidated retained earnings and will continue to be re-invested in
international operations. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
Net
Income
Nine Months Ended September 30,
|
Change
|
|||||||||||||||
(in millions)
|
2009
|
2008
|
Dollar
|
%
|
||||||||||||
Net
Income Before Taxes
|
$
|
14.7
|
$
|
27.1
|
$
|
(12.4
|
)
|
-45.8
|
%
|
|||||||
(Benefit)
Provision for Income Taxes
|
$
|
0.8
|
|
$
|
(3.2
|
)
|
$
|
(2.4
|
)
|
-75.0
|
%
|
|||||
Net
Income After Taxes
|
$
|
13.9
|
$
|
23.9
|
$
|
(10.0
|
)
|
-41.8
|
%
|
|||||||
as
a percentage of net sales
|
10.6
|
%
|
13.2
|
%
|
-2.7
|
%
|
Net
income for the nine months period ending September 30, 2009, was $13.9 million
compared to $23.9 million for the comparable period in 2008, a decrease of
approximately $10.0 million or 41.8%. Net income as a percentage of net sales
declined from 13.2% for the prior period to 10.6%, principally a result of lower
revenue and a significant non-cash loss in the change in fair value of
derivative liability.
Earnings
Per Share
Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Unaudited
|
Unaudited
|
|||||||
Net
Income for Basic Earnings Per Share
|
$ |
13,858,550
|
$ |
23,898,292
|
||||
Basic
Weighted Average Number of Shares
|
27,827,152
|
27,263,638
|
||||||
Net
Income per Share – Basic
|
$ |
0.50
|
$ |
0.88
|
||||
Net
Income for Diluted Earnings Per Share
|
13,858,550
|
23,780,949
|
||||||
Diluted
Weighted Average Number of Shares
|
28,676,832
|
28,601,237
|
||||||
Net
Income per Share – Diluted
|
$ |
0.48
|
$ |
0.83
|
Basic and
diluted earnings per share (EPS) for the nine months ended September 30, 2009,
were $0.50 and $0.48, respectively, compared to $0.88 and $0.83, respectively,
for the same period last year.
Selected
Balance Sheet Data at September 30, 2009 (unaudited) and the year ended December
31, 2008:
Selected Balance Sheet Data
|
||||||||||||||||
September 30,
|
December 31, 2008
|
Change
|
||||||||||||||
(in millions)
|
Unaudited
|
Dollar
|
%
|
|||||||||||||
Cash
|
$ | 60.0 | $ | 65.6 | $ | (5.6 | ) | -8.5 | % | |||||||
Accounts
Receivable, net
|
$ | 69.1 | $ | 49.8 | $ | 19.3 | 38.8 | % | ||||||||
PP&E
|
$ | 115.6 | $ | 119.8 | $ | (4.2 | ) | -3.5 | % | |||||||
Total
Assets
|
$ | 294.3 | $ | 294.5 | $ | (0.2 | ) | -0.1 | % | |||||||
Short
Term Debt
|
$ | 14.0 | $ | 27.3 | $ | (13.3 | ) | -48.7 | % | |||||||
Long
Term Debt
|
$ | 25.0 | $ | 40.0 | $ | (15.0 | ) | -37.5 | % | |||||||
Shareholders'
Equity
|
$ | 220.4 | $ | 203.0 | $ | 17.4 | 8.6 | % |
Our
financial condition continues to improve as measured by an increase of 8.6% in
shareholders’ equity during the nine months of 2009. Cash decreased 8.5% during
the period primarily due to the repayment of $17.6 million short term loans.
Accounts receivable increased 38.8% as a result of extended credit terms in 2009
to certain credible customers that have long-standing business relationships
with us in order to capture increased market share. Short term debt decreased by
48.7% primarily as a result of repayments of short term loans at our PRC
operation. Long term debt declined by $15.0 million because a $5.0 million
due note was repaid and $10.0 million of our outstanding $35.0 million notes was
reclassified to short term debt because of January and July 2010 due dates on
such portion of the notes.
- 61
-
Plant and
equipment consisted of the following:
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
Land
|
$
|
100,726
|
$
|
100,726
|
||||
Buildings
and improvements
|
43,662,801
|
43,418,544
|
||||||
Transportation
equipment
|
4,177,659
|
4,138,892
|
||||||
Machinery
and equipment
|
73,131,989
|
55,147,707
|
||||||
Office
furniture
|
1,169,789
|
1,166,477
|
||||||
Construction
in progress
|
16,865,916
|
33,163,330
|
||||||
Totals
|
139,108,880
|
137,135,676
|
||||||
Less
accumulated depreciation
|
(23,498,298
|
)
|
(17,374,649
|
)
|
||||
Totals
|
$
|
115,610,582
|
$
|
119,761,027
|
Construction
in progress at September 30, 2009 consisted of the following:
September 30, 2009
|
Commencement
|
Expected
|
|||||||
No.
|
Project Description
|
(Unaudited)
|
Date
|
completion date
|
|||||
1
|
Manufacturing
machinery and equipment for CCA/CCS (Multiple)
|
$
|
3,081,574
|
Dec-07
|
Mar-10
|
||||
2
|
Corporation
administration office building
|
13,143,496
|
May-03
|
Dec-10
|
|||||
3
|
Manufacture
building (Dalian)
|
630,346
|
Jan-08
|
Dec-09
|
|||||
4
|
Manufacturing
machinery and equipment for CCA
|
10,500
|
July-09
|
Mar-10
|
|||||
Total
|
$
|
16,865,916
|
Construction
in progress as of December 31, 2008 consisted of the following:
No.
|
Project description
|
December 31,
2008
|
Commencement
date
|
Expected
completion date
|
|||||
1
|
Manufacturing
machinery and equipment for CCA/CCS
|
$
|
14,507,534
|
Dec-07
|
Mar-10
|
||||
2
|
Corporation
administration office building
|
12,964,718
|
May-03
|
Dec-10
|
|||||
3
|
Manufacturing
machinery and equipment for CCA (Multiple)
|
3,298,681
|
Oct-07
thru Jan-08
|
Mar-09
thru Dec-09
|
|||||
4
|
Manufacturing
machinery and equipment for CCS (Multiple)
|
1,775,300
|
Mar-07
thru Sep-08
|
Mar-09
thru Dec-09
|
|||||
5
|
Manufacture
building
|
617,097
|
Jan-08
|
Dec-09
|
|||||
Total
|
$
|
33,163,330
|
At
September 30, 2009, construction in progress mainly consists of $13.1 million in
Tower B (corporate administration office building) located at our Dalian
facility. The building consists of two towers, Tower A and Tower B. For Tower A,
approximately $11 million had been recorded in construction in progress and
transferred to fixed assets when management determined that the building was
completed and ready for use in 2007. Tower A is currently utilized as
administration offices for our Dalian facility. Tower B began
construction in May 2003 and was originally designed to be constructed as a
hotel; however, construction plans were amended in 2007 to construct Tower B as
solely additional office space which will be solely used by the Company
instead. The Company does not expect any lease cancellation/moving
expenses/impairment charges as we are not moving out of our current office
space, which is Tower A. Tower B will be used as the Company’s additional office
space and the Company does not plan to lease any part of Tower B to others.
Total gross floor area of Tower B is approximately 13,000 square
meters. Tower B is still currently under construction and is expected to be
completed by December 2010. All costs incurred relating to Tower B
have all been recorded in construction in progress Project No. 2 and have not
yet transferred to fixed assets. As of September 30, 2009, the total
construction in progress balance related to Project No.2 is
$13,143,496. The estimated costs to complete Tower B as of September 30,
2009, and December 31, 2008, were approximately $2.91 million and $3.09
million, respectively.
- 62
-
Construction
in progress at September 30, 2009 also consists of a $3 million project of
manufacturing machinery and equipment related to CCA and CCS production lines
and ancillary equipment, which is used to produce CCA and CCS wire products
respectively. Management believes that these CCA and CCS related machinery and
equipment will be in service for a minimum of 10 years. Upon
successful installation, these production lines and ancillary equipment
will increase the Company’s CCA and CCS wire production capacity in Dalian which
the Company believes will have a positive impact on their future cash flow
through increased sales and profit. The designed/expected annual capacity of the
$14.5 million machinery/equipment as of December 31, 2008 is approximately 6,000
Metric tons (not including relocated capacity between Fayetteville and Dalian
facilities). At December 31, 2008, the production capacity in Dalian
was 34,800 Metric tons. The Company believes the addition of this
machinery/equipment could result in a production capacity increase of
approximately 17%. The machinery and equipment is located in Dalian, China. The
estimated completion date of this project is March 2010. By September 30, 2009,
$13.1 million of the above mentioned machinery and equipment was completed and
transferred to fixed assets. The $3 million balance as of September 30, 2009 is
primarily related to relocated CCS product lines from Fayetteville facility to
Dalian facility, which will add approximately 8,200 Metric tons of CCS capacity
annually to the Dalian facility and the project is expected to be completed by
the end of first quarter 2010. The estimated additional annual costs to operate
and maintain the relocated machinery and equipment range from approximately
$100,000 to $150,000. The estimated costs to complete this project as of
September 30, 2009, and December 31, 2008 were $1.99 million and $2.34 million,
respectively.
LIQUIDITY
AND CAPITAL RESOURCES
We have
historically financed our operations and capital expenditures principally
through private placements of debt and equity, bank loans, and cash provided by
operations. Significant factors affecting our cash liquidity include (1) cash
provided by operating activities, (2) cash used for capital expenditures,
and (3) our available credit facilities and other borrowing arrangements. At
September 30, 2009, the majority of our liquid assets were held in RMB
denominations deposited in banks within the PRC. The PRC has strict rules for
converting RMB to other currencies and for movement of funds from the PRC to
other countries. Consequently, in the future, we may face difficulties in moving
funds deposited within the PRC to fund working capital or capital expenditure
requirements for our locations outside the PRC. To mitigate the difficulties of
moving funds, we plan to maintain and expand our working capital lines for
Fayetteville and Telford as necessary as our sales increases and our
working capital needs grow.
Under PRC
Company Law and relevant rules and regulations, our PRC subsidiaries may pay
dividends only out of their retained earnings/net profit, if any, calculated
according to PRC accounting principles determined in accordance with PRC
accounting standards, and only after accumulated losses from preceding years
have been fully covered and the following appropriations have been
made:
a)
appropriations to the statutory surplus reserve equivalent to 10% of its net
profits less any accumulated losses, as determined under PRC GAAP; no further
appropriations to the statutory surplus reserve are required once this reserve
reaches an amount equal to 50% of its respective registered
capital;
b)
appropriations to a discretionary surplus reserve as approved by the
shareholders in shareholders' meeting.
The
transference of operating funds from Dalian to our non-PRC subsidiaries and
parent company during 2008 was $6.1 million. For the nine months and the three
months ended September 30, 2009 the amounts transferred were $9.6 million
and $3.4 million respectively.
As is
customary in the industry, we provide payment terms to most of our customers
that exceed terms that we receive from our suppliers. Therefore, the Company’s
liquidity needs have generally consisted of working capital necessary to finance
receivables and raw material inventory. Capital expenditures have historically
been necessary to expand the production capacity of the Company’s manufacturing
operations.
We
recognize revenue according to the shipment date to ensure that revenues are
recorded in the proper period. Every sales transaction has a formal written
customer order that identifies the price and quantities of the product and
payment terms.
In
summary, our cash flows were:
Nine Months Ended September 30,
|
||||||||
(in millions)
|
2009
|
2008
|
||||||
Net
cash provided by (used in) operating activities
|
$
|
15.6
|
$
|
(19.8
|
)
|
|||
Net
cash used in investing activities
|
$
|
(5.4
|
)
|
$
|
(17.4
|
)
|
||
Net
cash (used in) provided by financing activities
|
$
|
(15.8
|
)
|
$
|
2.1
|
|||
Effect
of exchange rate on cash
|
$
|
(0.0
|
)
|
$
|
5.3
|
|||
Cash
and cash equivalents at beginning of period
|
$
|
65.6
|
$
|
79.9
|
||||
Cash
and cash equivalents at end of period
|
$
|
60.0
|
$
|
50.0
|
For the
nine months ended September 30, 2009, net cash provided by operating activities
was $15.6 million, which is an increase of $35.4 million from a deficit of $19.8
million for the same period in 2008, reflecting a significant improvement in
operating cash flow year over year. The favorable change is primarily
attributable to decreases in advance to suppliers consistent with decreased
revenue and add-back deprecation, partially offset by an increase in accounts
receivables and inventory and a decrease in net income.
- 63
-
For the
nine months ended September 30, 2009, net cash used in investing activities
was a deficit of $5.4 million, and was primarily attributable to $5.2 million in
property and equipment purchases and advances compared to $18.7 million for
the same period ended September 30, 2008. The repairs and maintenance expense
for the nine months ended September 30, 2009 and 2008, amounted to $391,809 and
$707,564 respectively. The repairs and maintenance expense for the three months
ended September 30, 2009 and 2008 amounted to $66,696 and $192,792,
respectively. We do not expect significant increases in repairs and maintenance
in the future. For the three and nine months ended September 30, 2009 and
2008, there were no amounts expended for major renewals and betterments that
were capitalized.
For the
nine months ended September 30, 2009, net cash provided by financing activities
was a cash deficit of $15.8 million, which was primarily attributable to the
repayments on $17.6 million in bank loans, scheduled repayment of $5 million
principal of high yield notes and a decrease in our revolving line of credit of
$0.7 million partially offset by proceeds on a private placement of $1.9
million.
At
September 30, 2009, our cash balance was $60.0 million compared to $50.0 million
at December 31, 2008.
Days
sales outstanding (DSO) has increased from 82 days at December 31, 2008, to
122 days at September 30, 2009, while days payable outstanding remains
relatively stable at 15 days as of September 30, 2009, compared to 16 days
at December 31, 2008.
Standard
Customer and Supplier Payment Terms (days) as below:
Year ended December 31, 2008
|
Nine months ended September 30, 2009
|
|||
Customer
Payment Term
|
Payment
in advance to 90 days
|
Payment
in advance to 120 days
|
||
Supplier
Payment Term
|
Payment
in advance to 30 days
|
Payment
in advance to 30 days
|
The
increase in DSO was because we extended credit terms for our P.R.C. segment in
late 2008 and 2009 to certain credible customers that have long-standing
business relationships with us in order to capture increased market share. We
believe that our ability to extend credit terms puts pressure on our smaller
competitors whose limited capital resources have become further strained due to
the global economic crisis and who are unable to make such adjustments for
customers. Prior to this adjustment in customer credit policies, the
standard number of days we gave our customers to pay was 90 days. We write off
receivables specifically based on the facts we obtain about the customers’
ability to pay. The Company has established appropriate procedures to facilitate
collection.
Aging
Analysis of accounts receivable:
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
1-30
days
|
$
|
20,548,072
|
$
|
7,967,992
|
||||
31-60
days
|
14,542,153
|
14,981,574
|
||||||
61-90
days
|
12,583,790
|
17,033,521
|
||||||
91-180
days
|
21,446,134
|
9,394,901
|
||||||
180-365
days
|
852,020
|
723,089
|
||||||
Over
365 days
|
261,879
|
-
|
||||||
Bad
debts allowance
|
(1,181,365
|
)
|
(318,529
|
)
|
||||
Total
|
$
|
69,052,683
|
$
|
49,782,548
|
Inventory
turnover days increased slightly from 16 days at December 31, 2008, to 18 days
at September 30, 2009. The Company’s principal raw materials consist of aluminum
and steel rods and copper strips. Changes in the price of copper, which has an
established history of volatility, directly affect the prices of the Company’s
products and influence the demand for products. The Company’s decision to make
advanced purchases of raw materials is mainly based upon (1) the current and
projected future market price of raw materials, (2) the demand and supply
situation in the raw materials market, and (3) the forecasted demand of
products.
Advance
to supplier’s turnover days has decreased from 45 days at December 31, 2008, to
15 days at September 30, 2009, as we utilized the advances to purchase raw
materials. Due to globally depressed commodity prices, the Company believed
there was an opportunity to secure lower purchase prices through increased
investments in deposit (advance) to suppliers which in turn lowered the average
purchase price of raw materials and minimized the loss resulting from the
significant decline in spot prices in the fourth quarter of
2008
- 64
-
Like all
businesses, we are assessing the current financial environment on a daily basis
from financial data published in the market place, discussions with our
customers regarding their current and future purchasing plans and through
discussions with our suppliers and others with some insight within the financial
realm in order to develop a better perspective of the future opportunities for
our company. At this time, we believe that our sales will continue to
grow because of the infrastructure development in the PRC and throughout Asia.
As a result of our acquisition of Copperweld, we have realized significant
savings on capital expenditures by moving underutilized equipment to locations
with a need for that equipment and believe we will continue to benefit from such
savings in future periods. We anticipate that our working capital requirements
may increase as a result of the continued expansion of our combined business,
continued increases or recovery in sales, potential increases in the price of
copper and our other raw materials over the longer term, competition and our
relationship with suppliers or customers. We believe that our existing cash,
cash equivalents and cash flows from operations, combined with availability
under our revolving credit facility, will be sufficient to meet our presently
anticipated future cash needs for at least the next 12 to 18 months. We may,
however, require additional cash resources due to changed business conditions or
other future developments, including any investments or acquisitions we may
decide to pursue. Considering the current global liquidity shortage, there can
be no assurance that such finding will be available when needed, or, if
available, that it will be available on terms acceptable to the
Company.
COMMITMENTS
AND CONTINGENCIES
Contractual
Obligations
Set out
below are our contractual obligations at September 30, 2009:
Contractual obligations
|
Total
|
Payment due by
less than 1 year
|
2–3 years
|
4-5 years
|
More than 5
years
|
|||||||||||||||
Long-Term
Debt Obligations-High Yield note principal
|
$
|
35,000,000
|
$
|
10,000,000
|
$
|
25,000,000
|
$
|
0
|
$
|
0
|
||||||||||
Estimated
variable rate interest payment related to High Yield notes
(semi-annual)
|
$
|
3,930,378
|
$
|
2,128,955
|
$
|
1,801,423
|
$
|
0
|
$
|
0
|
||||||||||
Long-Term
Debt Obligations-SWAP settlement
|
$
|
7,652,664
|
$
|
2,519,771
|
$
|
5,132,893
|
$
|
0
|
$
|
0
|
||||||||||
Repurchase
of Convertible Notes
|
$
|
6,060,000
|
$
|
6,060,000
|
$
|
-
|
$
|
0
|
$
|
0
|
||||||||||
Capital
Lease Obligations
|
$
|
243,022
|
$
|
68,976
|
$
|
174,046
|
$
|
0
|
$
|
0
|
||||||||||
Total
|
$
|
52,886,064
|
$
|
20,777,702
|
$
|
32,108,362
|
$
|
0
|
$
|
0
|
Assumption:
· We will repay the HY Note strictly
according to the mandatory redemption schedule defined in the HY note
agreement. Six months LIBOR as of July 24, 2009 is 0.95% and spread rate is 5.60%. The
USD/CNY Spot Rate is 6.8264.
· According to the Convertible Notes repurchase
agreement dated3
August 13, 2009, the outstanding balance as
of
September
20, 2009 was $6.06 million and due in less than one year. As of
November 9, 2009 and as described in Note 10, “Repurchase of Convertible Notes”,
the Company has communicated to the note holders and prepared all wire transfers
to be made related to the repurchase of the remaining outstanding debt owed to
Citadel in the amount of $6,060,000.
Legal
Proceedings
On August
5, 2008, a judgment was entered in the Kuhn’s Brothers, Inc., Kuhn’s Brothers
Securities Corp., and Kuhn’s Bros. & Co. Inc. (collectively “Kuhn’s”) matter
awarding the plaintiffs $7.2 million which we have already accrued $7.2 million
for this litigation settlement as a contingent liability in the second quarter
of 2008 and allocated the amount into deferred commissions, additional paid in
capital and current expenses based on the nature of each charge due to Kuhn’s as
below:
Description
|
Amount
|
Accounting Treatment
|
|||
Placement
agent fees associated with the Copperweld acquisition and Common stock
issuance and to be deducted from the proceeds and debit to additional
paid-in capital
|
$ | 3,487,250 |
Allocated
to additional paid-in capital in 2008
|
||
Deferred
placement agent fee related to $60 million Citadel Notes
issuance
|
3,000,000 |
Being
amortized over the Notes' life and $1,762,500 has been amortized as at 31
March 2009 under FAS 91.
|
|||
Interests
of all due placement agent fees
|
710,544 |
Expensed
in 2008
|
|||
Total
|
$ | 7,197,794 |
As
disclosed in the Current Report on Form 8-K filed on May 26, 2009, we entered
into a Settlement and Forbearance Agreement and Release with Kuhn’s in which
Kuhn’s agreed to reduce the judgment to $7,000,000 (the “Judgment”) and we
agreed to withdraw the appeal.
- 65
-
Pursuant
to the settlement agreement, the Judgment shall be satisfied in full no later
than January 15, 2010 through a combination of cash and shares. As partial
payment to reduce the Judgment, we delivered to Kuhn’s on May 21, 2009,
$1,000,000 plus accrued interest (the “Escrow Payment”), which was being held in
an escrow account (the “Escrow Assets”) located in the U.S. that was governed by
an Escrow Agreement between us and Kuhn’s, dated October 3, 2007. This is the
only cash payment to be made per the settlement agreement (cash was not
transferred out of China), therefore, we do not believe that it has any material
adverse effect on our liquidity. At a closing which was held on June 5, 2009
(the “Closing Date”), we (i) delivered to Kuhns a stock certificate for 100,000
shares of Common Stock (the “Initial Shares”), which had been part of the Escrow
Assets, and (ii) deposited a stock certificate for 2.2 million shares of Common
Stock in escrow (the “Escrow Shares”) with the Escrow Agent along with an
executed stock power in blank, to be held pursuant to the Escrow Agreement. We
agreed to deposit a total of 2.2 million shares of Common Stock. We were
obligated to have a registration statement registering the Escrow Shares
declared effective by October 3, 2009. Upon effectiveness, Kuhn’s
could only receive proceeds from the sale of such number of Escrow Shares
necessary to satisfy the Judgment. As a result of our failure to have the
registration statement timely declared effective, under the terms of the
settlement agreement, Kuhns elected to receive 1,370,352 shares as restricted
shares from the escrow account in full satisfaction of the Judgment, which as of
October 4, 2009, was in the principal amount of $5,626,993 with an additional
$184,997 in accrued interest.
Off-Balance
Sheet Arrangements
We have
not engaged in any off-balance sheet transactions.
Critical
Accounting Policies
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. For
example, the Company estimates the fair value of its derivative instrument.
Actual results could differ from those estimates.
Revenue
recognition
Sales
revenue is recognized at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer
deposits.
Segment
reporting
The
Company uses a “management approach” model for segment reporting. The management
approach model is based on the way a company’s management organizes segments
within the company for making operating decisions and assessing performance. As
of September 30, 2009, the Company has two reportable segments: China and US.
The China segment, through the Dalian manufacturing facility, is engaged in
developing, designing, manufacturing, marketing and distributing copper-cladded
bi-metallic engineered conductor products, principally copper-clad aluminum
(CCA) and primarily services the Asia-Pacific region, and specifically the PRC
market. The US segment, consisting of two manufacturing facilities, one in
Fayetteville, Tennessee, USA and a second in Telford, England, are engaged in
developing, designing, manufacturing, marketing and distributing copper-cladded
bimetallic engineered conductor products, principally CCA and copper-clad steel
(CCS) and primarily service the North and South American, European, Middle
Eastern and North African markets.
Adoption
of EITF 07-5
Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
“Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock,” which is effective for financial statements for fiscal
years beginning after December 15, 2008 and which replaced the previous guidance
on this topic in EITF Issue 01-6. Paragraph 11a of FAS 133 specifies
that a contract that would otherwise meet the definition of a derivative
but is both (a) indexed to the Company’s own stock and (b) classified in
stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument. EITF 07-5 provides
a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the FAS 133 paragraph 11(a) scope exception.
The
conversion option embedded in the Company’s Convertible Notes previously met the
criteria in EITF Issue 01-6, as well as the other criteria of FAS 133, paragraph
11(a) and, accordingly, it was not separately accounted for as a derivative
instrument liability. However, the conversion option does not
meet the criteria of EITF 07-5 because it requires that the conversion price be
adjusted in certain circumstances that do not meet the “fixed-for-fixed’
criteria in that Issue. As a result, the Company is now required to
separately account for the embedded conversion option as a derivative instrument
liability, carried at fair value and marked-to-market each period, with changes
in the fair value each period charged or credited to income.
- 66
-
In
accordance with the transition provisions, the new guidance had been applied to
the $5,000,000 of the Company’s Convertible Notes that were outstanding as of
January 1, 2009. The cumulative effect of this change in accounting
principle of $1,357,150 has been recognized as a reduction of the opening
balance of Retained Earnings as of that date. That cumulative effect
adjustment is the difference between the amounts previously recognized in the
Company’s balance sheet as of December 31, 2008 and the amounts that would have
been recognized if the guidance had been applied from the issuance date of the
outstanding Convertible Notes.
Recent
Accounting Pronouncements
In
January 2009, the FASB issued an accounting standard which amended the
impairment model by removing its exclusive reliance on “market participant”
estimates of future cash flows used in determining fair value. Changing the cash
flows used to analyze other-than-temporary impairment from the “market
participant” view to a holder’s estimate of whether there has been a “probable”
adverse change in estimated cash flows allows companies to apply reasonable
judgment in assessing whether an other-than-temporary impairment has occurred.
The adoption of this accounting standard did not have a material impact on the
Company’s consolidated financial statements because all of the investments in
debt securities are classified as trading securities.
In April
2009, the FASB issued authoritative guidance related to the determination of
fair value when the volume and level of activity for an asset or liability has
significantly decreased, the identification of transactions that are not
orderly, the recognition and presentation of other-than-temporary impairments,
and the disclosure of the fair value of financial instruments on an interim
basis. The adoption of the guidance did not have a material impact on the
Company’s consolidated financial statements.
In April
2009, the FASB issued an accounting standard 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 standard will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This standard 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 standard 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 standard
became effective for interim and annual periods ending after June 15, 2009.
The adoption of this standard did not have a material impact on the Company’s
consolidated financial statements.
In April
2009, the FASB issued an accounting standard that requires 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 accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated financial
statements.
In May
2009, the FASB an accounting standard which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also requires entities to disclose the
date through which subsequent events were evaluated as well as the
rationale for why that date was selected. The standard is effective for interim
and annual periods ending after June 15, 2009, and accordingly, the Company
adopted this Standard during the second quarter of 2009. The standard requires
that public entities evaluate subsequent events through the date that the
financial statements are issued. The Company has evaluated subsequent events
through the time of filing these consolidated financial statements with the
SEC on November 9, 2009.
In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009. The Company has not completed the
assessment of the impact this new standard will have on the Company’s
financial condition, results of operations or cash flows.
In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within this accounting
standard. Further, this accounting standard requires a company to perform a
qualitative analysis when determining whether or not it must consolidate a VIE.
It also requires a company to continuously reassess whether it must consolidate
a VIE. Additionally, it requires enhanced disclosures about a company’s
involvement with VIEs and any significant change in risk exposure due to that
involvement, as well as how its involvement with VIEs impacts the company’s
financial statements. Finally, a company will be required to disclose
significant judgments and assumptions used to determine whether or not to
consolidate a VIE. This accounting standard is effective for financial
statements issued for fiscal years beginning after November 15,
2009. The Company has not completed their assessment of the
impact that this pronouncement will have on the Company’s financial condition,
results of operations or cash flows.
- 67
-
In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards Codification™ (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company in the third quarter of 2009, and accordingly, the
Company’s Quarterly Report on Form 10-Q for the quarter ending September 30,
2009 and all current and subsequent public filings will reference
the Codification as the sole source of authoritative
literature.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Commodity
Price Risk
Certain
raw materials used by us are subject to price volatility caused by supply
conditions, political and economic variables and other unpredictable factors.
The primary purpose of our commodity price management activities is to manage
the volatility associated with purchases of commodities in the normal course of
business. We do not speculate on commodity prices.
We are
primarily exposed to price risk related to our purchase of copper used in the
manufacturing of our products. Our copper price management strategy involves the
use of natural techniques, where possible, such as purchasing copper for future
delivery at fixed prices. We did not have any commodity price derivatives or
hedging arrangements outstanding at September 30, 2009, and did not employ any
commodity price derivatives during the nine months ended September 30,
2009.
Foreign
Exchange Risk
While our
reporting currency is the US dollar, a substantial percentage of our revenues
and costs are denominated in RMB and a significant portion of our assets and
liabilities are denominated in RMB. As a result, we are exposed to foreign
exchange risk as our revenues and results of operations may be affected by
fluctuations in the exchange rate between the US Dollar and RMB. If the RMB
depreciates against the US Dollar, the value of our RMB revenues and assets as
expressed in our US Dollar consolidated financial statements will
decline.
The RMB
is currently freely convertible under the “current account”, which includes
dividends, trade and service-related foreign exchange transactions, but not
under the “capital account”, which includes foreign direct investment. On May
19, 2007, the People’s Bank of China announced a policy to expand the maximum
daily floating range of RMB trading prices against the U.S. dollar in the
inter-bank spot foreign exchange market from 0.3% to 0.5%. While the
international reactions to the RMB revaluation and widening of the RMB’s daily
trading band have generally been positive, with the increased
floating range of the RMB’s value against foreign currencies, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar or other
foreign currencies in the long term, depending on the fluctuation of the basket
of currencies against which it is currently valued.
We
recognized a foreign currency translation gain adjustment of $112,093 and
$14,062,515 for the nine months ended September 30, 2009 and 2008,
respectively.
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Interest
Rate Risk
We are
primarily exposed to interest rate risk arising from the 6 month LIBOR rate on
which the interest rate for our Guaranteed Senior Secured Floating Rate Notes
due 2012 (“HY Notes”) totaling $35 million or 50% of our total liability, is
based. If there was a hypothetical 1% change in the 6-month LIBOR interest rate,
the net impact to earnings would be approximately $0.35 million on an
annualized basis.
In order
to mitigate our exposure to volatility in interest rates and foreign currency
exchange rates associated with the HY Notes, on April 10, 2007, the Company
entered into a cross currency swap transaction (the “Swap”) with Merrill Lynch
Capital Services, Inc. (“MLCS”). The Swap, with a notional principal value of
$35 million, converts the LIBOR + 7% per annum USD variable interest rate to an
8.3% per annum RMB fixed interest rate. The agreement was deemed effective
January 24, 2007. The Swap requires semi-annual payments in arrears on July 24
and January 24 and matures the earlier of (1) cash settlement defined as early
termination; or (2) January 24, 2012, at which point the Swap requires an
exchange of RMB and USD based principals. Under the terms of the cross currency
swap, the Company receives variable interest rate payments in USD and makes
fixed interest rate payments in RMB with settlement netted in USD, thereby
creating the equivalent of fixed-rate debt. The Company uses this derivative
instrument only to hedge exposures in the ordinary course of business and does
not invest in derivative instruments for speculative purposes.
The fair
value of the Swap is determined based on our own model which reflects the
present values of the difference between estimated future variable-rate receipts
in USD and future fixed-rate payments in RMB. Since its effective date, the fair
value of this Swap agreement changed to a payable of $7,652,664 and $4,377,076
as of September 30, 2009, and December 31, 2008, respectively.
For the
nine months ended September 30, 2009, changes in fair value of the Swap resulted
in an increase in the liability and a loss to other comprehensive income of
$3,275,588. For the nine months ended September 30, 2008, changes in fair
value of the Swap resulted in a decrease in the liability and a profit to other
comprehensive income of $3,209,403, net of taxes.
For the
three months ended September 30, 2009, changes in fair value of the Swap
resulted in a decrease in the liability and a gain to other comprehensive
income of $237,768. For the three months ended September 30, 2008, changes in
fair value of the Swap resulted in a decrease in the liability and a gain to
other comprehensive income of $3,940,908, net of taxes.
Credit
Risk
We have
not experienced significant credit risk, as most of our customers are long-term
customers with excellent payment records. We review our accounts receivable on a
regular basis to determine if the allowance for doubtful accounts is adequate at
each quarter-end. We have not seen any major customer’s accounts receivable
experienced any material write-off of accounts receivable in the
past.
Inflation
Risk
In recent
years, China has not experienced significant inflation, and thus inflation has
not had a material impact on our results of operations. According to the
National Bureau of Statistics of China (NBS) (www.stats.gov.cn), the change in
Consumer Price Index (CPI) in China was 1.5%, 4.7% and 5.9% in 2006, 2007 and
2008, respectively. 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 margin and selling,
general and administrative expenses as a percentage of sales revenue if the
selling prices of our products do not increase with these increased
costs.
Item
4. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as such term is defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information
required to be disclosed in our reports filed pursuant to the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules, regulations and related forms, and that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, our principal executive
officer and principal financial officer concluded that as of September 30, 2009,
our disclosure controls and procedures were effective.
(b)
Changes in internal controls.
There
were no changes in our internal controls over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act of 1934) during the three
months ended September 30, 2009 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
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PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
As
previously disclosed, on November 27, 2006, Kuhns Brothers, Inc., Kuhns Brothers
Securities Corp. and Kuhns Brothers & Co. (collectively, “Kuhns”) filed a
lawsuit against us alleging a breach of an engagement letter, dated May 27,
2005, between us and Kuhns. On August 5, 2008, a judgment was entered
against us in the amount of $7,197,794, plus interest and attorneys fees, which
we subsequently appealed. Pursuant to a Settlement and Forbearance
Agreement and Release between Kuhns and us on May 19, 2009, Kuhns agreed to
reduce the judgment to $7,000,000. The judgment was to be satisfied
in full no later than January 15, 2010 through a combination of cash and
shares. As partial payment of the judgment we paid $1,000,000 in
cash, plus interest of $29,922.61 and released from escrow to Kuhns a stock
certificate for the 100,000 shares of common stock, which together with the cash
had been held in an escrow account, which was governed by an escrow agreement
between us and Kuhns, dated October 3, 2007. As part of the terms of
the settlement agreement, in June 2009 we also deposited a stock certificate in
the amount of 2,200,000 shares in a separate escrow account. We were
obligated to have a registration statement registering the shares declared
effective by October 3, 2009. Upon effectiveness, Kuhns would have
been able to sell from time to time and receive proceeds from the sale of such
number of shares in the escrow account necessary to satisfy the remaining amount
of the judgment. As a result of our failure to have the registration
statement timely declared effective, under the terms of the settlement
agreement, Kuhns elected to receive 1,370,352 shares as restricted shares from
the escrow account in full satisfaction of the judgment, which as of October 4,
2009, was in the principal amount of $5,626,993 with $184,997 in accrued
interest. The per share value of the 1,370,352 shares released from
the escrow was equal to fifty percent (50%) of the daily volume weighted average
price of the Common Stock on the Nasdaq Global Select market as reported by
Bloomberg for the ten trading days before the date of delivery of the shares to
Kuhns, which was equal to $4.24 per share. The remaining 829,648
shares in escrow shall be released to us and cancelled.
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Item
1A. Risk Factors
The
following are additional risk factors relating to our business operations since
the filing of our Annual Report on Form 10-K for the year ended December 31,
2008.
Recently
announced tightened controls on the convertibility of RMB into foreign currency
have made it more difficult to make payments in U.S. dollars and fund business
and operating activities of our subsidiaries located outside of
China.
Substantially
all of the cash on our balance sheet is in RMB. Recently tightened restrictions
on currency exchanges has considerably limited our ability to convert our cash
in RMB to make payments in U.S. dollars or fund business and operating
activities of our subsidiaries located outside of China, which has had the most
significant impact on our ability to support Copperweld’s operations in
Fayetteville, TN. Although as of September 30, 2009, our PRC subsidiaries could
legally pay approximately $116.4 million in dividends, our PRC subsidiaries have
never paid dividends to our non-PRC subsidiaries and parent company and do not
intend to do so for the foreseeable future. Historically our Dalian subsidiary
has provided financial support to our non-PRC subsidiaries and our parent
company to meet their cash requirements by the transferring of its operation
fund to those entities, and we expect that it will continue to do so over the
next 12 months, which may include providing the funds needed to meet our
obligations under the Note Purchase Agreement with Citadel in the amount of
approximately $6 million and the line of credit with Wells Fargo in the amount
of $4.5 million. The transferring of its operation fund from Dalian to our non-
PRC subsidiaries and parent company during 2008 and the nine months ended
September 30, 2009 was $6.1 million and $9.6 million, respectively. Although the
PRC government introduced regulations in 1996 to allow greater convertibility of
RMB for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises may only
buy, sell and/or remit foreign currencies at those banks authorized to conduct
foreign exchange business after providing valid commercial documents. In
addition, remittance of foreign currencies abroad and conversion of RMB for
capital account items, including direct investment and loans, is subject to the
approval of the PRC State Administration for Foreign Exchange, or SAFE, and
other relevant authorities, and companies are required to open and maintain
separate foreign exchange accounts for capital account items. As an example, the
new SAFE restrictions caused a delay in our ability to convert and provide
intercompany loans to our US subsidiary to pay interest on our outstanding HY
Notes and Convertible Notes, which required us to raise capital from outside
sources to allow for such payments to be made through Copperweld. We cannot
assure you that the Chinese regulatory authorities will not impose new or more
stringent restrictions on the convertibility of RMB, especially with respect to
foreign exchange transactions. Any adverse actions by SAFE could affect our
ability to get cash, by means of loans or capital contributions, to our parent
company and our non-PRC subsidiaries in order to fund operations and to meet our
payment obligations under the Notes Purchase Agreement with Citadel and the
Forbearance Agreement with Wells Fargo. Our failure to meet these obligations
under could result in a significant increase as default interest payments under
the obligations with Citadel and result in the acceleration of the amounts due
to Wells Fargo, which may trigger certain cross-defaults under the HY Notes and
Convertible Debentures, including acceleration of the amounts due thereunder.
Any of these consequences could have a material adverse effect on our cash
flows.
Previously,
we were not in compliance with certain financial covenants in our Financing
Agreement with Wells Fargo, and may not be able to further extend the
forbearance period under the Forbearance Agreement, as amended, with Wells
Fargo, which could have a material adverse impact on Copperweld’s
operations.
For both
quarters ended on June 30, 2009 and March 31, 2009, Copperweld reported a
negative fixed charge ratio due to the loss incurred on a rolling 12 months
basis, and as a result was in violation of maintaining a fixed charge ratio of
at least 1.0 to 1.0 under the financing agreement with Wells Fargo. This was the
sole violation of the covenants under the terms of the revolving line of credit
agreement with Wells Fargo. As of September 30, 2009, we had $4.0 million
in borrowings outstanding under the line of credit. The default did not result
in any cross defaults under our other existing debt, however, on May 6, 2009,
Wells Fargo exercised its right to implement a 2% additional default rate of
interest effective April 1, 2009 for the March 31 covenant violation. Although
Wells Fargo had the right to accelerate the amounts outstanding they did not
exercise such right and on August 11, 2009 we entered into a Forbearance
Agreement with them which expired on October 31, 2009. Prior to the expiration
on October 27, 2009, we entered into an amendment to the Forbearance Agreement
which extends the forbearance period to January 31, 2010. Entering into this
agreement is one of several steps we have taken to mitigate our liquidity
concerns, however, we can provide no assurance that we will have sufficient
resources either in the US or through intercompany loans from our PRC subsidiary
to fund our cash needs in the future. If we are not in compliance with the
covenants under the Financing Agreement or the Forbearance Agreement, Wells
Fargo would be entitled to accelerate our outstanding debt, and we may be unable
to negotiate another forbearance agreement with them. If our outstanding debt is
accelerated, the payment of the accelerated debt will have a material adverse
impact on the working capital and cash flows of Copperweld’s
operations.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
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Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibit
No.
|
Document Description
|
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of the Principal Accounting and Financial Officer pursuant to Rule
13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of the Principal Executive Officer and of the Principal Accounting and
Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002).
|
|
99.1
|
Condensed
Parent-Only Financial Statements of Fushi Copperweld, Inc. under Schedule
I of Article 5-04 of Regulation
S-X.
|
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
FUSHI
COPPERWELD, INC.
|
||
Date:
November 9, 2009
|
By:
|
/s/ Beihong
Linda Zhang
|
Name:
Beihong Linda Zhang
|
||
Title:
Chief Financial Officer
(Principal
Accounting and Financial Officer)
|
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Exhibit
Index
Exhibit
No.
|
Document Description
|
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of the Principal Accounting and Financial Officer pursuant to Rule
13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of the Principal Executive Officer and of the Principal Accounting and
Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002).
|
|
99.1
|
Condensed
Parent-Only Financial Statements of Fushi Copperweld, Inc. under Schedule
I of Article 5-04 of Regulation
S-X.
|
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