Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2009
or
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
1934
For the
transition period from _______ to _______
Commission
File No.: 333-139008
GREAT
EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC
(Exact
Name of Registrant as Specified in Its Charter)
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Florida
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59-2318378
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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203 Hankow Center, 5-15
Hankow Road, Tsimshatsui, Kowloon, Hong Kong
(Address
of Principal Executive Offices) (Zip Code)
Registrant’s
telephone number, including area code: 852-2192-4805
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01
per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes x No o
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 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.
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer o Smaller
reporting company x
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
State the
aggregate market value of the common stock held by non-affiliates of the Issuer
on June 30, 2009: $2,850,000
Indicate
the number of shares outstanding of each of the Registrant’s classes of common
stock, as of the latest practicable date: 40,200,000 at March 15,
2010.
Documents
incorporated by reference: None
TABLE
OF CONTENTS
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Page
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ITEM
1.
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BUSINESS
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1
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ITEM
1A.
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RISK
FACTORS
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11
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ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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19
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ITEM
2.
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PROPERTIES
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19
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ITEM
3.
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LEGAL
PROCEEDINGS
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21
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ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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21
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ITEM
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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21
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ITEM
6.
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SELECTED
FINANCIAL DATA
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22
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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22
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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26
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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26
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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26
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ITEM
9A.(T)
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CONTROLS
AND PROCEDURES
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26
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ITEM
9B.
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OTHER
INFORMATION
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29
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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29
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ITEM
11.
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EXECUTIVE
COMPENSATION
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31
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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32
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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32
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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35
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ITEM
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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36
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Item
1.
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Business
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Introduction
As used
herein, unless the context otherwise requires, “Registrant” and the “Company”
(and “we”, “our” and similar expressions) refer to the business of Great East
Bottles & Drinks (China) Holdings, Inc. (formerly named Jomar Specialties,
Inc.) before the Share Exchange (as hereinafter defined) and Great East Bottles
& Drinks (BVI) Inc. (“GEBD BVI”, formerly known as Citysky Investment
Holdings, Inc.) after the Share Exchange.
We were
incorporated on July 8, 1983 in the business of providing specialty printing
services to the commercial printing industry. Until consummation of
the Share Exchange, our revenue was derived from providing printing services to
other printing businesses.
On March
10, 2008, we entered into a Share Exchange Agreement (the “Share Exchange
Agreement”) with GEBD BVI and Guy A-Tsan Chung (formerly known as Chung A. San
Guy), the sole shareholder of GEBD BVI (the “Shareholder”) to acquire 100% of
the outstanding equity of GEBD BVI from the Shareholder in consideration for
32,460,000 shares of our common stock (the “Share Exchange”). The
Share Exchange was consummated on March 10, 2008.
Subsequent
to the completion of the Share Exchange Agreement, GEBD BVI’s business became
our major business and the Shareholder became our majority shareholder. Our
operating entities produced beverage bottles which mainly are made of PET, a
type of plastic with desirable characteristic for packaging including a clear
and wide range of colors and shapes and tough resistance to heat, moisture and
dilute acid. The operating entities manufacture and sell beverage bottles in
China for bottling of Carbonated Soft Drinks (“CSD”) for world brands including
Coca-Cola and Pepsi.
In
December 2009, we restructured our group so that our subsidiary, HGEP, held our
operating entities GEPNJ and GEPXA. As a result, any operations that we had were
either conducted by HGEP or by its subsidiaries. In December 2009,
HGEP through its subsidiary, acquired a 99.99% interest in three new operating
entities from a company controlled by Mr. Guy Chung. These entities
were United Joy International Limited (“United Joy”), Upjoy Holdings Limited
(“Upjoy”) and Greatgrand Global Limited (“Greatgrand”).
In
exchange for these new operating entities, we transferred shares in a
wholly-owned subsidiary that holds a 15% interest in HGEP to a company
controlled by Mr. Guy Chung. Additionally, we granted another company
controlled by Mr. Guy Chung an option exercisable at $1 to purchase 60% of our
subsidiary GEPI whose sole assets are an 84% interest in HGEP.
We have
assumed for the purposes of this annual report and the financial statements
included herein that the option to acquire a 60% interest in GEPI has been
exercised. As a result, our only assets are our 33.6% interests in
the operating entities described herein.
1
The
following chart sets out our group structure as of March 15, 2010:
General
Description of Business
Business
Overview
OUR
PRODUCTS
We mainly
produce 3 types of products: PET CSD bottles, PET CSD preforms for CSD bottles
and OEM water bottles. PET (Polyethylene terephthalate) is a thermoplastic
polymer resin of the polyester family. It is widely used as raw
material for synthetic fibers, beverage /food / liquid containers, thermoforming
applications and as engineering resins. PET CSD bottles are completed
bottles ready for CSD bottling while PET CSD preforms are pre-production tubes
made from PET resin that are used in a stretch-blow-molding machine to produce
the final PET bottle
PET CSD
preforms
PET CSD
preforms are pre-production tubes made from PET resin that are used in a
stretch-blow-molding machine to produce the final PET bottle. PET CSD
preforms can be colored green or blue according to customers’ requirements. The
weight of PET CSD preforms determines the volume of the final PET CSD
bottle. Heavier PET preforms are used to produce larger PET CSD
bottles. Sizes of our PET CSD preforms range from 25g to 56g, which
is our customers’ required weight range.
Newly
produced PET CSD preforms are stored in warehouses for scheduled PET CSD bottle
blowing process. PET preforms expire three months from their production
date.
PET CSD
bottles
PET CSD
bottles are transformed from PET CSD preforms through a stretch-blow-molding
manufacturing process. PET CSD bottles are popular containers for the
CSD bottling process.
2
Unlike
aluminum cans and glass bottles, PET CSD bottles are applied to medium to large
volume CSD products, i.e., over 500ml. Volume of PET CSD bottles
ranges from 500ml to 2,500ml with PET CSD preforms weights ranging from 25g to
56g, respectively. The shapes of the CSD bottle are designed by the
customers.
Newly
produced PET CSD bottles are stored in warehouses for scheduled CSD bottling
process. The expiry period of PET CSD preforms varies from 15 days to 3 months
from the date produced, depending on the storing conditions such as room
temperature and relative humidity
OEM water
bottles
Some of
the operating entities manufacture OEM water bottles. These operating
entities purchase preforms for OEM water bottles from an unrelated third party
called Guo Zhu Group and then use the preforms to create OEM water bottles in a
process that is similar to the production of the PET CSD bottles. The
operating entities then fill the OEM water bottles with distilled water and
deliver the bottled water to Coca Cola’s distribution centers. The sizes of the
OEM water bottles range from 550ml to 1,500ml.
PET
bottles are suitable for various applications including water, tea drinks, CSD
and other beverages bottling. Our PET CSD bottles and PET CSD
preforms are targeted to CSD application, while our OEM business is targeted to
bottled water application. CSD contains instable carbonate components and
it demands higher quality requirements on PET bottles and PET preforms compared
to those applied to OEM water bottles and bottles for tea
drinks. Thus, CSD applications represent a higher margin segment in
the PET bottles and PET preforms market as it demands a higher quality standard,
and OEM applications represent a lower margin segment.
INDUSTRY
AND MARKET ENVIRONMENT
The
operating entities are part of the plastic packing case and container
manufacturing industry in China. Their existing market is the market for
PET-plastic bottles for beverages in China.
The
Chinese market for the industry has been expanding steadily at double-digit
growth rates for the last several years. While there are no official statistical
data on the industry’s growth, we believe that the market size and market growth
of the industry has increased due to the unit volume sales growth experienced in
these industries that we supply. In particular, we believe that
higher volume growth in plastic-bottled beverages would likely imply a
corresponding similar volume growth in plastic bottles
manufacturing.
OUR MAJOR
CUSTOMERS
Our major
customers are Coca-Cola and Pepsi, the two leading worldwide brands in the CSD
industry. Our company continues to keep good customer relationship with
Coca-Cola and Pepsi and they renewed the contracts with us in 2008. United Joy
and Upjoy also signed agreements with NJBC and HZBC, respectively, for supplying
OEM water bottles.
Coca-Cola
We serve
Coca-Cola through our GEHZ, GENJ, United Joy, Upjoy and Greatgrand production
facilities. GEHZ signed a Coordinated Supply Agreement to serve Coca–Cola
through Hangzhou BC Foods Company Limited (“HZBC”) and GENJ signed a Coordinated
Supply Agreement to serve Coca–Cola through Nanjing BC Foods Company Limited
(“NJBC”). HZBC and NJBC are subsidiaries of Swire Pacific Limited,
which is the CSD bottler for Coca-Cola in China.
3
Terms
HZBC and
NJBC signed four year contracts commencing June 1, 2004 with GEHZ and GENJ,
respectively. Both HZBC and NJBC have indicated that they renewed
their contracts with GEHZ and GENJ, respectively, on June 1, 2008 on similar
terms and conditions. Contracts of United Joy and Upjoy commenced in
2008 and will expire in 2012. Contracts of Greatgrand commenced in
2009 and will expire in 2011.
Raw
material
For PET
CSD bottles, we are not required to purchase PET resin under the contracts and
Coca–Cola has agreed to make special arrangement for us. For
instance, based on GEHZ’s expected production volume, HZBC shall purchase an
adequate amount of PET resin from its approved suppliers, who will then deliver
the PET resin directly to GEHZ. NJBC and GENJ have the same supply
arrangement. For OEM water bottles, we are required to purchase PET
resin for production.
Pricing
We are
obliged to offer Coca-Cola whatever is the lowest price we offer PET CSD bottles
to our other customers with substantially equivalent quality we sold to
Coca-Cola under “the most favor customer” clause. Moreover, we have
to meet the most competitive pricing from other competitors over the market, who
offer PET CSD bottles with substantially equivalent quality we sold to
Coca-Cola.
The price
of PET CSD bottles includes PET CSD bottles blowing, PET CSD preforms
conversion, all packaging materials and pallet, transportation to customers,
value added tax and colorant, but excludes PET resin and label
price. Except for PET resin which we are required to purchase, the
price of OEM water bottles includes the same elements as PET CSD
bottles.
Pepsi
We serve
Pepsi through our GEXN production facilities. GEXN has signed an
Inline Mode Coordinated Supply Agreement (the “Pepsi Agreement”) to serve Pepsi
through Xian Pepsi-Cola Beverage Company Limited, which is a joint venture
company between PepsiCo Investment (China) Ltd. and local food and beverage
companies in Xian.
We
produce PET CSD bottles with capacities ranging from 600ml to 2,500ml with
certain performance criteria including appearance, dimension, weight, fill point
capacity, wall thickness & sectional weights, perpendicularity, burst
resistance, thermal stability, stress crack, top load test, drop impact and
carbonation loss.
The Pepsi
Agreement was renewed on March 18, 2008 and has a term of five years. If we
cannot reach a mutual consent for the renewal of this agreement, Pepsi has the
right to buy back our production line for a price to be determined by 15 years
depreciation without residual value.
Pepsi has
committed a volume guarantee to us of not less than 70% of Pepsi’s annual PET
CSD bottles requirements in Xian province during the terms of the
contract. Pursuant to the terms of the contract, we are obligated to
guarantee a non interrupted supply of our PET CSD bottles to Pepsi.
We must
offer the lowest competitive price to Pepsi. The price includes PET resin, the
tolling fee of PET CSD bottles blowing and value added tax, but excludes
label price, the tolling fee of label and colorant.
4
OUR
PRODUCTION FACILITIES
We own
and operate 8 manufacturing facilities in China: GEHZ, GENJ, GEXN, United Joy,
Upjoy and Greatgrand.
GEHZ
GEHZ is
located at No. 1 Road, Economic & Technological Development Zone, Jiubao
Jianggan District, Hangzhou, China. It is comprised of 2 buildings,
one of which serves as an administration office, production line factory and
warehouse and the other serves as a staff canteen and quality control office.
GEHZ operates one PET CSD bottle production line and four PET CSD preform
production lines.
The PET
CSD bottles production line produces PET CSD bottles with capacities ranging
from 0.5L to 2.5L. It consists of one stretch blow molding machine and one basic
robot labeling machine:
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1.
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The
stretch blow molding machine consists of 10 molds with a production
capacity of 12,000 bottles per hour.
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2.
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The
robot labeling machine model has a production capacity of 18,000 bottles
per hour.
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GEHZ’s
PET CSD bottles production line is operated as an offline production mode
(“Offline Mode”) Under Offline Mode, PET CSD bottles are blow-molded at GEHZ’s
own production line factory, packed and delivered to Coca–Cola’s manufacturing
plant for their bottle-filling process. Coca–Cola’s manufacturing
plant is located adjacent to GEHZ’s production line factory to ensure timely
delivery of the PET CSD bottles supply and also to minimize transportation
costs.
GENJ
GENJ is
located at 16 Nanjing New & High Technology Industry Development Zone,
Nanjing Jiangsu Province, China. It is comprised of two buildings, one of which
serves as an administration office and the other serves as a production line
factory and warehouse. GENJ operates three PET CSD bottles production lines and
three PET CSD preforms production lines.
The 3 PET
CSD bottles production lines produce PET CSD bottles with capacities ranging
from 500ml to 2,500ml.
One of
GENJ’s PET CSD bottles production lines is operated as an inline production mode
(“Inline Mode”). Under Inline Mode, PET CSD bottles are blow-molded at
Coca-Cola’s manufacturing plant and are then directly fed into Coca-Cola’s
manufacturing production lines via conveyor belts for bottle-filling
process.
Two of
GENJ’s PET CSD bottles production lines are operated under Offline Mode.
Coca-Cola’s manufacturing plant is located adjacent to GENJ’s production line
factory.
Each
production line consists of one stretch-blow-molding machine and one labeling
machine:
GEXN
GEXN is
located at No. 36 Development Road, New Type Industrial Garden High–Tech
Industrial Development Zone, Xian, China. GEXN operates two PET CSD bottles
production lines.
The two
PET CSD bottles production lines produce PET CSD bottles with capacities ranging
from 600ml to 2,500ml. Each production line consists of one stretch-blow-molding
machine and one labeling machine:
5
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●
The stretch-blow-molding machines have with production capacities of
12,000 bottles (Inline Mode) and 10,000 bottles per hour respectively.
They consist of 10 molds each machine.
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● The
labeling machines have a production capacity of 18,000 bottles per hour
each machine.
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One of
GEXN’s PET CSD bottles production lines is operated under Inline Mode and the
other production line is under Offline Mode. Pepsi’s manufacturing plant is
located adjacent to GEXN’s production line factory.
United
Joy
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United
Joy has two OEM water
bottle manufacturing facilities located at 6, Feng Huang Lu, Pu Kou
Economic and Development Zone, Nanjing, Jiangsu Province and North Guan Qi
Road, He Fe Economic and Development Zone, He Fe, An Hui
Province. Both are operated under Offline mode, and each has
one OEM water bottle production line with capacity ranging from 550ml to
1,500ml.
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Upjoy
Upjoy has
two OEM water bottle
manufacturing facilities located at No. 1 Road, Economic &
Technological Development Zone, Jiubao Jianggan District, Hangzhou and Jiang Nan Logistic Centre, Jing
Jiang Nan Lu, Lin Hai, Taizhou. Both are operated under Offline mode,
and each has one OEM water bottle production line with capacity ranging from
550ml to 1,500ml.
Greatgrand
Greatgrand
has a hot fill packaging facility
located in 8 Jia 2, No 7 Jie, Shenyang Economic and Development Zone,
Shenyang. Hot fill packaging is another process adopted in packaging
of beverage such as tea, juice and milk based beverage. The major
difference between hot fill bottles and CSD bottles and OEM water bottles lies
in the top of the bottle as hot fill bottles requires a crystallization
manufacturing process for sustaining the heat involved in the hot fill
process. Greatgrand has one inline hot fill bottles production
lines that produces PET hot fill bottles with capacities ranging from 600ml to
2,500ml that consists of one stretch-blow-molding machine and one labeling
machine:
PRODUCTION
PROCEDURES
Through
eight of our operating facilities , we operate several PET CSD preforms
production lines, several PET CSD bottles production lines, four OEM water
bottle production lines, one hot fill bottle production line (some under Offline
Mode and some under Inline Mode).
PET CSD
preforms
PET CSD
preforms are produced through the injection molding manufacturing process
described below:
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PET
CSD preforms molds and changed.
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PET
resin is transferred from warehouse to the raw materials room
.
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PET
resin is drawn into the feed hopper through pipeline by
suction.
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PET
resin is heated, dried and moved into the Injection Molding
machine.
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6
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While
PET resin enters the Injection Molding machine, it is heated above its
transition temperature and move forward in the molds.
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PET
resin undergoes extreme pressure and is molded into PET CSD
preforms.
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The
PET CSD preforms are automatically stripped through action of the mold
after cooling.
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PET
CSD preforms undergo quality check by production team and quality control
department to ensure the quality to achieve customers’
requirement.
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PET
CSD preforms are packaged and sent to
storage.
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PET CSD
bottles
PET CSD
bottles are produced through a stretch-blow-molding manufacturing process and
operated under two operations modes, Inline Mode and Offline Mode.
Offline
Mode
The
following are the procedures followed in the Offline Mode:
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PET
CSD bottles molds are changed.
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PET
CSD preforms are transferred from warehouse to a PET CSD preforms
container.
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PET
CSD preforms are sorted by a sorting machine, which is part of Stretch
Blowing Machine.
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The
sorting machine screens out those PET CSD preforms of poor
quality.
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The
PET CSD preforms are transferred to the main body of Stretch Blowing
Machine and are heated (typically by infrared heaters) above their
transition temperature.
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PET
CSD preforms are blown into bottles using high pressure air and the metal
blow molds.
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PET
CSD bottles are transferred to the conveyor belt after
cooling.
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Our
production team and quality control department perform quality check to
ensure the quality of the PET CSD bottles meet Coca-Cola’s or Pepsi’s
quality requirements.
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PET
CSD bottles are transferred to the labeling machine through conveyor belt
for labeling.
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Our
production team and quality control department perform quality check on
the labeled PET CSD bottles to ensure the quality meets Coca-Cola’s or
Pepsi’s requirements.
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Labeled
PET CSD bottles are packed and
stored.
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Inline
Mode
All
procedures are exactly the same as Offline Mode except: that instead of packing
the labeled PET CSD bottles for storage, the bottles are sent directly to
Coca-Cola’s production line or Pepsi’s production line through a conveyor
belt.
Under
Inline Mode, if we cannot meet the customers’ bottle-filling process schedule,
the labeled PET CSD bottles will not be sent to the customer’s production line
directly, but will be packaged and sent to our storage.
7
OEM water
bottles
PET
preforms used for OEM water bottles are produced exactly the same way as PET CSD
bottles described above. The PET preforms are then processed exactly the same
way as offline mode PET CSD bottles described above except that the OEM water
bottles are filled with distilled water before they are packed and
stored.
Hot fill
bottles
PET
preforms used for hot fill bottle are produced exactly the same way as PET CSD
bottles described above. Hot fill bottles are produced exactly the same way as
inline mode PET CSD bottles described above except that it involves an
additional crystallization manufacturing process for sustaining the heat
involved in the hot fill process.
INTELLECTUAL
PROPERTY
We do not
hold, own or license any patents, trademarks or other intellectual
property.
RESEARCH
AND DEVELOPMENT
We do not
incur or pay any costs in relation to research and development in 2009 as our
products are able to satisfy the existing product specifications from our major
customers.
SEASONALITY
Sales by
the operating entities are subject to seasonality. In general, we
believe sales will be higher in the second and third quarters of the year when
the weather is hot and dry and lower in the first and fourth quarters of the
year when the weather is cold and wet. Sales peak during the months
from June to September.
COMPETITION
There are
a few PET CSD bottle producers that serve international CSD producers and a few
CSD bottlers serving international CSD producers. The demand for high quality
CSD bottles is expected to grow in line with the growth rate of the sales of
international CSD products, which is associated with the strong economic growth
of China.
We
believe that the current competitive environment for the operating entities is
moderate. There are only two PET CSD bottles producers that compete with our
scale in an environment of high industry growth rate. According to our customers
(Coca-Cola in GENJ / GEHZ and Pepsi in GEXN), their expected grow rates for 2009
are both at 10% level. Pepsi is the official sponsor of the World Cup
2010.
Glass
bottles and aluminum cans are common substitutes for PET CSD bottles. We do not,
however believe that glass bottles and aluminum cans would be considered
desirable substitutes for PET CSD bottles by customers for the following
reasons:
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·
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Glass
bottles and aluminum cans are for typically for low volume CSD packing
(less than 500ml) while PET bottles are for 500ml up to
2,500ml.
|
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·
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Glass
bottles are heavier in weight and incur high transaction costs for
delivery compared to PET CSD
bottles.
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·
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Aluminum,
the basic raw material for aluminum cans, has doubled its price in the
past six years. Current aluminum price
levels are more expensive than the PET
price.
|
We
believe that the threat of the entry of new competitors into the PET CSD market
is low due to high barriers to entry which include the
following:
8
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Production
facilities have to be set up proximate to customers’ CSD bottling
facilities. Because of high transaction costs, every PET CSD bottles
producer has a limited perimeter of serving area.
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Highly
specialized and expensive production equipment are designated by
customers.
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International
CSD producers, for example, Coca-Cola & Pepsi, have strict
requirements on PET CSD bottles producer; at this time there are only
a few PET CSD bottles producers who are qualified and capable of serving
the international CSD producers.
|
Although
customer concentration rate is high in the industry, the switching cost for
customers to change vendors is also high as there are only a few PET CSD bottle
producers in China qualified to produce high quality PET CSD bottles and PET CSD
preforms to meet international standards. In addition, there is no current
comparable substitute product for PET CSD bottles.
Due to
low level of competitive rivalry threat and substitute products threat, we
believe competition for the industry should continue to be moderate during the
next 3-5 years.
United
Joy, Upjoy and Greatgrand face similar competitive environments as GEHZ, GENJ
and GEXA.
Major
competitors
We
consider international CSD producers and CSD bottlers serving international CSD
producers to be the target market for the operating entities. There are two
major competitors in the China market competing with the operating entities to
serve the same market. They are Zhuhai Zhongfu Enterprise Co. Ltd.
(“Zhongfu”) and Shanghai Zijiang Enterprise Co. Ltd. (“Zijiang”).
Zhongfu
is a listed company on the Shenzhen Stock Exchange stock symbol 000659.sz.
Zhongfu manufactures and sells PET preforms, PET bottles, and film labels and
has an approximately $282 million in annual revenue and 934
employees. Zhongfu has 30 production facilities throughout China
including Shenzhen, Kunshan, Chengdu, Tianjin and Beijing.
Zijiang
is a listed company on the Shanghai Stock Exchange stock symbol 600210.ss.
Zijiang manufactures PET preforms, PET bottles, bottle caps, plastic bags and
other diversified businesses, including real estate and
hotels. Zijiang has approximately $550 million in annual revenue and
683 employees. Zijiang has production facilities in 15 locations in
China.
REGULATION
Our
company has a policy to comply with all applicable laws and regulations not only
in China but also all countries throughout the world in which we do
business.
The
production in China of the operating entities’ is generally subject to
environmental protection regulations that require all manufacturing industries
to adopt measures to control the disposal of industrial waste, industrial
manufacturing licensing and company licensing laws that regulate the business
scope of companies, taxation laws that require income tax payable to the Chinese
government, and labor laws that restrict maximum work-hours.
9
Environmental
Protection Regulations
The
Environmental Protection Law of China has been developed and implemented by the
Ministry of Environment Protection (the “Ministry”). Since 1984, the
Chinese government has attempted to mitigate its pollution problem amid the
industrialization process. The Ministry has set up subsidiary bureaus throughout
all provinces of China to implement fast-improving measures for environmental
protection. In particular, companies are required to adopt measures to control
pollution engendered by industrial waste, noise, radiation, and vibration. All
companies are required to report to the bureau in their county about the status
of pollutants and the measures adopted to deal with the pollutants. Penalty fees
are levied on companies whose pollutant discharge levels exceed the standards
set by the Ministry. The Ministry also often issues warning notices and fines,
and may mandate temporary suspension of production for installation of pollution
control facilities. In serious cases where the pollution causes physical or
personal damage, the Ministry may impose sanctions, demand compensation to
victims, coerce permanent termination of companies, or sue company owners for
criminal liability.
Our
Company only paid some minimal administrative costs with respect to submitting
environmental reports and other related documents to the Ministry of Environment
Protection in accordance with environmental laws in China. No other substantial
cost was paid relating to compliance with environmental protection laws in
China.
Company
Laws and Regulations
The
Chinese government has promulgated company laws and regulations through its
State Administration for Industry and Commerce. To operate a business in China,
a company has to apply for business and production licenses at the Enterprise
Registration Bureau and/or the Registration Bureau of Foreign-Invested
Enterprise. Such various licenses have to be obtained for companies
manufacturing important industrial products such as plastic bottles and
containers. Application for production licenses requires official tests and
inspections by the government be passed, and maintenance of the licenses require
subsequent regular periodic inspections. Production and product quality is also
monitored by government, through the General Administration of Quality
Supervision, Inspection, and Quarantine of PRC.
Corporate
Income Taxation
Income
taxes chargeable to companies in China may differ across industries and location
due to differences in preferential tax treatment or subsidies. In general, the
corporate income tax rate has a ceiling of 33%, but foreign-invested companies
shall enjoy preferential rates: full tax exemption applies to the first two
years when the company records profits, and thereafter there is a 50% tax
exemption for the subsequent third to fifth years. Our company belongs to this
foreign-invested category, hence our present and future subsidiaries shall enjoy
the same tax concessions.
Labor
Laws
According
to Chinese Labor Law, the maximum work hours for a labor are 40 hours per week.
Owing to the seasonality factor, the PET CSD bottle production industry has peak
and non-peak seasons throughout the year. During peak seasons, our employees may
have to work for more than 40 hours per week; but during non-peak seasons, our
employees may have to work for less than 40 hours per week. The operating
entities have therefore applied for and have been granted approvals from
relevant government authorities to count the work hours for a labor on yearly
basis instead of weekly basis. As a result, the operating entities have not
violated the maximum work-hour requirement, but at the same time have greatly
improved flexibility of their labor force in coping with the seasonality
problem.
10
Employees
As of
March 1, 2010, the Company and the operating entities had about 713
employees.
The
following table summarizes the employees of GEBD BVI and of GEHZ, GENJ, GEXN,
United Joy, Upjoy Greatgrand and their operations.
|
Department
|
GEBD
BVI
|
GEHZ
|
GENJ
|
GEXN
|
United
Joy
|
Upjoy
|
Great-
grand
|
Total
|
|
CEO
|
1
|
1
|
||||||
|
COO
|
1
|
1
|
||||||
|
CFO
|
1
|
1
|
||||||
|
General
manager
|
1
|
1
|
1
|
1
|
1
|
5
|
||
|
Human
resources and administration
|
3
|
3
|
3
|
6
|
6
|
3
|
24
|
|
|
Storage
and transportation
|
15
|
15
|
15
|
30
|
30
|
15
|
120
|
|
|
Quality
control
|
15
|
18
|
8
|
16
|
16
|
8
|
81
|
|
|
Equipment
maintenance
|
5
|
5
|
5
|
10
|
10
|
5
|
40
|
|
|
Bottle
Blowing
|
40
|
40
|
20
|
40
|
40
|
20
|
200
|
|
|
Preforms
Production
|
40
|
40
|
20
|
40
|
40
|
20
|
200
|
|
|
Sales
& Marketing
|
1
|
1
|
1
|
2
|
2
|
1
|
8
|
|
|
Purchasing
|
1
|
1
|
1
|
2
|
2
|
1
|
8
|
|
|
Finance
|
3
|
3
|
3
|
6
|
6
|
3
|
24
|
|
|
Total
|
3
|
124
|
127
|
77
|
153
|
152
|
77
|
713
|
|
Item
1A.
|
Risk
Factors
|
Risks Related to Our
Business
If
the option to acquire 60% of one of our subsidiaries is exercised, another
person will have a majority interest in all of the operating
entities.
GEPH, an
affiliate of Mr. Guy Chung, our principal shareholder who owns approximately 75%
of our outstanding and issued common stock, has an option for $1 to purchase 60%
of GEPI. GEPI is our subsidiary that holds an 84% interest in
HZGE. HZGE is our subsidiary that owns over 99% of all of our
operating entities, including GEPNJ, GEPXA, United Joy, Upjoy and Greatgrand,
that together generate all of our revenue and compromise substantially all of
our assets. An affiliate of Mr. Guy Chung’s already owns a 15% stake
in GEPI.
If GEPH
exercises its option, our effective ownership of these operating entities would
be reduced from 84% to 33.6%. We have assumed in the preparation of
our audited financial statements that GEPH has exercised the
option. In that instance, we will become a minority shareholder in
all of our current operations and other entities controlled by Mr. Guy Cheung
will hold 64.4 percent of those operations. As a result, we will no
longer have the majority vote regarding the operating entities described herein,
the operations described herein or the assets described herein. If
the interests of the persons who will have majority control of the operating
entities as to management, disposition of assets, the future of the operating
entities or any other matters affecting their results of operations differ from
our interests, our interest may not be protected.
The
operating entities engage in significant transactions with a related party and
in the future such transactions may lead to a conflict of interests
The
operating entities have engaged in significant transactions with companies that
are controlled by our majority shareholder, Mr. Guy Chung, and that have an
effective interest in 65.6% of the operating entities. In the year
ended December 31, 2009, these transactions included
11
|
|
●
|
the
acquisition of significant assets from GEPH with an enterprise value that
we estimate at approximately $9.9
million,
|
|
|
●
|
the
disposition of significant assets to GEPH and another entity controlled by
Mr. Guy Chung with an enterprise value that we estimate at approximately
$9.4 million,
|
|
|
●
|
the
receipt of advances from GEPH totaling $16,431,222 as of December 31,
2009,
|
|
|
●
|
the
advancement of funds to GEPH totaling $16,431,222 as of December 31,
2009,
|
|
|
●
|
the
purchase of preforms for OEM water bottles and other materials from GEPH
totaling $402,466 in the year ended December 31, 2009
and
|
|
|
●
|
sales
to GEPH totaling $1,391,949 in the year ended December 31,
2009.
|
We strive
to make sure any such transactions are either conducted at an arm’s length basis
or, if not on an arm’s length basis, that they are for the benefit of the
operating entities, such as was the case with advances from GEPH being interest
free. However, we cannot guarantee that we were successful in these
efforts or that the interests of our minority shareholders will not conflict
with the interests of our related parties or the controlling shareholder in
these and future transactions. Any such conflicts may not be resolved in the
favor of the minority shareholders.
We
may be classified as an inadvertent investment company.
The
Investment Company Act of 1940 (the "ICA") regulates the activities of an entity
which is deemed to be an ''investment company" under the ICA. The regulations
are extensive, and among other things, impose a restriction on the types of
businesses an investment company can engage in, imposes reporting requirements,
limits leverage and affiliate transactions and imposes limitations on capital
structure and dividend paying ability. An unregistered investment company is
prohibited by the ICA from engaging in any business in interstate
commerce.
Under the
ICA, an entity is generally deemed to be an investment company if the value of
its investment securities (excluding securities of majority-owned subsidiaries)
exceeds 40% of the value of such issuer's total assets (exclusive of government
securities and cash).
If the
GEPH exercises its option to acquire approximately 50.4% of the operating
entities, our equity percentage ownership in the operating entities, including
those that until December 2009 were majority-owned subsidiaries, will be reduced
to approximately 33.6%. Since our interest in the operating entities comprises
substantially all of our assets, we may be deemed to have become an
'inadvertent' investment company under the ICA, even though we are not engaged
in the business of investing, reinvesting or trading in securities and we do not
hold ourselves out as being engaged in those activities.
We are
considering seeking an order from the SEC which will exempt us from being
characterized as an investment company. We may not seek such an order or receive
confirmation of an exemption from the SEC if we do
As long
as we may be an investment company under the ICA but are not registered as such
thereunder, we may have trouble raising money in capital
markets. Additionally, if we do not register as an investment company
under the ICA and do not qualify for an exemption, we could be subject to an
enforcement action by the SEC which could result in the imposition of
significant fines and other penalties.
If we
determine that we are an investment company under the ICA, we will register as
such under the ICA. Such registration will be an expensive
proposition that will require a diversion of management’s
resources. If we become an investment company, our ability to engage
in certain actions will be restricted and the value of your investment could be
affected as a result.
12
We may not successfully integrate our
recent acquisitions into the group.
We
recently acquired an interest in United Joy, Upjoy, Greatgrand and their
operations. Failure to integrate those holdings into our group
structure may cause us to lose out on cost savings from expected synergies, lead
to additional costs, increase our liabilities or alienate our key
customers.
The
operating entities expansion strategy may not be proven successful.
One of
the key strategies of our operating entities is to aggressively expand
production capacity. They will need to engage in various forms of capacity
expansion activities at corporate level, and of production activities at
operational level in order to carry out those plans. Therefore, the operations
are subject to all of the risks inherent in the unforeseen costs and expenses,
challenges, complications and delays frequently encountered in connection with
the formation of any new business, as well as those risks that are specific to
the bottled water industry in general. Despite their best efforts, they may
never overcome these obstacles to financial success. We cannot assure you that
the efforts will be successful or result in revenue or profit, or that investors
will not lose their entire investment.
Results
of operations may fluctuate due to seasonality.
Sales of
the operating entities are subject to seasonality. For example, sales of bottled
water are typically higher in summer time in coastal cities while the sales
remain constant through out the entire year in some inland cities. In general,
we believe sales will be higher in the second and third quarters of the year
when the weather is hot and dry, and lower in the fourth and first quarters of
the year when the weather is cold and wet. Sales peak during the months from
June to September. Sales can also fluctuate during the course of a financial
year for a number of other reasons, including weather conditions and the timing
of advertising and promotional campaigns. As a result of these reasons,
operating results may fluctuate. In addition, the seasonality of results may be
affected by other unforeseen circumstances, such as production interruptions.
Due to these fluctuations, comparison of sales and operating results between the
same periods within a single year, or between different periods in different
financial years, are not necessarily meaningful and should not be relied on as
indicators of performance.
Increases
in raw material prices that may not be passed along to customers would reduce
profit margins
The
principal raw materials used in production, is subject to a high degree of price
volatility caused by external conditions like price fluctuations of PET raw
materials-the byproducts of oil, which account for a significant portion of
product cost. We cannot guarantee that the price of the raw materials will be
stable in the future. Price changes to raw materials may result in unexpected
increases in production, packaging and distribution costs, and the operating
entities may be unable to increase the prices our final products to offset these
increased costs to customers for instance, Pepsi, and therefore may suffer a
reduction to our profit margins. We do not currently hedge against changes in
raw material prices.
The
operating entities face increasing competition from both domestic and foreign
companies, which may affect market share and profit margin.
The PET
bottles industry in China is highly competitive, and we expect it to continue to
become even more competitive. The ability of the operating entities to compete
against these enterprises depends, to a significant extent, on the ability to
distinguish the products of the operating entities from those of competitor by
providing high quality products at reasonable prices that appeal to consumers.
Some competitors may have been in business longer than the operating entities,
may have substantially greater financial and other resources than the operating
entities have and may be better established in their markets. Competitors in any
particular market may also benefit from raw material sources or production
facilities that are closer to such markets, which provide them with competitive
advantages in terms of costs and proximity to consumers.
13
We cannot
assure you that current or potential competitors will not provide products
comparable or superior to those the operating entities provide or adapt more
quickly than the operating entities do to evolving industry trends or changing
market requirements. It is also possible that there will be significant
consolidation in the PET bottle industry among competitors, alliances may
develop among competitors and these alliances may rapidly acquire significant
market share. Furthermore, competition may lead competitors to substantially
increase their advertising expenditures and promotional activities or to engage
in irrational or predatory pricing behavior. We also cannot assure you that
third parties will not actively engage in activities, whether legal or illegal,
designed to undermine the brand name of the operating entities and product
quality or to influence consumer confidence in those products. Increased
competition may result in price reductions, reduced margins and loss of market
share, any of which could materially adversely affect profit margin. We cannot
assure you that the operating entities will be able to compete effectively
against current and future competitors.
The
operating entities inability to diversify may subject us to economic
fluctuations within our industry.
Our
limited financial resources reduce the likelihood that we will be able to
diversify our holdings into other operations. Our probable inability to
diversify our holdings into activities in more than one business area will
subject us to economic fluctuations within the bottled water industry and
therefore increase the risks associated with our operations.
The
operating entities are subject to environmental laws and regulations in the PRC.
Changes in the existing laws and regulations or additional or stricter laws and
regulations on environmental protection in China may result in significant
capital expenditures, and we cannot assure that the operating entities will be
able to comply with any such laws and regulations.
The
operating entities carry on business in an industry that is subject to PRC
environmental protection laws and regulations. These laws and regulations
require enterprises engaged in manufacturing and construction that may cause
environmental waste to adopt effective measures to control and properly dispose
of waste gases, waste water, industrial waste, dust and other environmental
waste materials, as well as fee payments from producers discharging waste
substances. Fines may be levied against producers causing pollution. If failure
to comply with such laws or regulations results in environmental pollution, the
administrative department for environmental protection can levy fines. If the
circumstances of the breach are serious, it is at the discretion of the central
government of the PRC including all governmental subdivisions to cease or close
any operation failing to comply with such laws or regulations. There can also be
no assurance that operation will fail to comply with such laws or regulations.
There can also be no assurance that the PRC government will not change the
exiting laws or regulations or impose additional or stricter laws or
regulations, compliance with which may cause us to incur significant capital
expenditure, which we may be unable to pass on to our customers through higher
prices for our products. In addition, we cannot assure that we will be able to
comply with any such laws and regulations.
The
operating entities depend on a few key customers, the loss of any of which could
cause a significant decline in our revenues.
Coca-Cola
and Pepsi accounted for80% and 15%, respectively, of the operating entities’ net
revenue in 2009 and 70% and 12%, respectively, of our net revenue in
2008. The loss of either of these customers or a significant
reduction in sales to either of these customers would materially adversely
affect our profitability.
Supplying
PET bottles to beverage and service companies constitutes a major portion of the
revenue of the operating entities. Any delays in delivery may affect sales,
damage long-term relationship with clients, and even incur penalty.
Sales
made to beverage and service companies account for a large portion of the total
sales of the operating entities. Recently, their production capacity is at more
than 95%. If we failed in deliver the goods to those companies on time, we may
run into a risk of damaging our long-term relationship with the
client.
14
We
may not successfully manage our growth.
Our
success will depend upon the expansion of the operating entities and the
effective management of their growth, which will place a significant strain on
our management and administrative, operational, and financial resources. To
manage this growth, we must expand the facilities of the operating entities,
augment their operational, financial and management systems, and hire and train
additional qualified personnel. Our ability to manage these changes will be
significantly reduced if we lose our controlling interest in the operating
entities through GEPH’s exercise of the option to acquire an interest over 50%
of the operating entities. If we are unable to manage growth of the operating
entities effectively, our business would be harmed.
The
operating entities may experience material disruptions to
manufacturing.
The
operating entities operate facilities in compliance with applicable rules and
regulations and take measures to minimize the risks of disruption at their
facilities. A material disruption at one of those facilities could
prevent them from meeting customer demand, reduce sales and/or negatively impact
financial results. Any of such manufacturing facilities, or any
machine within an otherwise operational facility, could cease operations
unexpectedly due to a number of events including:
|
·
|
unscheduled
maintenance outages;
|
|
·
|
prolonged
power failures;
|
|
·
|
an
equipment failure;
|
|
·
|
disruptions
in the transportation infrastructure, including roads, bridges and
railroad tracks;
|
|
·
|
fires,
floods, earthquakes or other catastrophes; and
|
|
·
|
other
operational problems.
|
We
rely on key executive officers. Their knowledge of our business and technical
expertise would be difficult to replace.
We were
founded in 1994 by Mr. Guy A-Tsan Chung. Since then, Mr. Stetson
Chung, the son of Guy A-Tsan Chung, and our senior management team have
developed the operating entities into a large scale PET bottle production group.
Stetson Chung, together with other senior management, has been key to the
group’s strategy and has been fundamental to its achievements to date. The
successful management of the operating entities depends, to a considerable
extent, on the services of Stetson Chung and other senior management. The loss
of the services of any key management employee or failure to recruit a suitable
or comparable replacement could have a significant impact upon our ability to
manage the operating entities and our business and future growth may be
adversely affected.
The
ownership of our common stock is concentrated and one stockholder is able to
exercise significant influence over all matters requiring stockholder approval
and over the operating entities.
Guy
A-Tsan Chung currently owns 73.88% of our outstanding common stock. As a result,
Guy A-Tsan Chung will be able to continue to exercise significant influence over
all matters requiring stockholder approval, including the election of directors
and approval of mergers, acquisitions and other significant corporate
transactions. In addition, this concentration of stock ownership may have the
effect of delaying or preventing a change in control of our
Company.
In
addition to his 73.88 interest in our outstanding common stock, Mr. Guy Chung
has a controlling interest in an entity that has a 15% interest in the operating
entities and has a controlling interest in an entity that may acquire a 50.4%
interest in the operating entities.
15
We
are subject to the reporting requirements of federal securities laws, which can
be expensive.
We are a
public reporting company in the U.S. and, accordingly, subject to the
information and reporting requirements of the Exchange Act and other federal
securities laws, and the compliance obligations of the Sarbanes-Oxley Act. The
costs of preparing and filing annual and quarterly reports, proxy statements and
other information with the SEC and furnishing audited reports to stockholders
will cause our expenses to be higher than they would be if we remained a
privately-held company.
Our
compliance with the Sarbanes-Oxley Act and SEC rules concerning internal
controls may be time consuming, difficult and costly.
It may be
time consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by
Sarbanes-Oxley. We may need to hire additional financial reporting,
internal controls and other finance staff in order to develop and implement
appropriate internal controls and reporting procedures. If we are unable to
comply with Sarbanes-Oxley’s internal controls requirements, we may not be able
to obtain the independent accountant certifications that Sarbanes-Oxley Act
requires publicly-traded companies to obtain.
There
is not now, and there may not ever be, an active market for our common
stock.
There
currently is no market for our common stock. Further, although our common stock
may be quoted on the OTC Bulletin Board, trading of our common stock has been,
and may continue to be, extremely sporadic. For example, several days may pass
before any shares may be traded. We cannot assure you that a more active market
for the common stock will develop.
Because
we became public by means of a “reverse merger”, we may not be able to attract
the attention of major brokerage firms.
Additional
risks may exist since we will become public through a “reverse merger.”
Securities analysts of major brokerage firms may not provide coverage of us
since there is little incentive to brokerage firms to recommend the purchase of
our common stock. We cannot assure you that brokerage firms will want to conduct
any secondary offerings on behalf of our company in the future.
We
cannot assure you that the common stock will become liquid or that it will be
listed on a securities exchange.
We would
like to list our common stock on the American Stock Exchange or the NASDAQ
Capital Market as soon as practicable. However, we cannot assure you that we
will be able to meet the initial listing standards of either of those or of any
other stock exchange, or that we will be able to maintain any such listing.
Until the common stock is listed on an exchange, we expect that it would be
eligible to be quoted on the OTC Bulletin Board, another over-the-counter
quotation system, or in the “pink sheets.” In those venues, however, an investor
may find it difficult to obtain accurate quotations as to the market value of
the common stock. In addition, if we failed to meet the criteria set forth in
SEC regulations, various requirements would be imposed by law on broker-dealers
who sell our securities to persons other than established customers and
accredited investors. Consequently, such regulations may deter broker-dealers
from recommending or selling the common stock, which may further affect its
liquidity. This would also make it more difficult for us to raise additional
capital.
There
may be issuances of shares of preferred stock in the future.
Although
we currently do not have preferred shares outstanding, the board of directors
could authorize the issuance of a series of preferred stock that would grant
holders preferred rights to our assets upon liquidation, the right to receive
dividends before dividends would be declared to common stockholders, and the
right to the redemption of such shares, possibly together with a premium, prior
to the redemption of the common stock. To the extent that we do issue preferred
stock, the rights of holders of common stock could be impaired thereby,
including without limitation, with respect to liquidation.
16
We
have never paid dividends.
We have
never paid cash dividends on our common stock and do not anticipate paying any
for the foreseeable future.
Our
common stock is considered a “penny stock.”
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share, subject to
specific exemptions. The market price of our common stock is less than $5.00 per
share and therefore is a “penny stock.” Broker and dealers effecting
transactions in “penny stock” must disclose certain information concerning the
transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the securities. These rules may
restrict the ability of brokers or dealers to sell our common stock and may
affect your ability to sell shares. In addition, if our common stock is quoted
on the OTC Bulletin Board as anticipated, investors may find it difficult to
obtain accurate quotations of the stock, and may find few buyers to purchase
such stock and few market makers to support its price.
Risks relating to doing
business in China
Substantially
all of our business assets are located in China, and substantially all of our
sales is derived from China. Accordingly, our results of operations, financial
position and prospects are subject to a significant degree to the economic,
political and legal development in China.
The
operating entities derive a substantial portion of sales from China
Substantially
all sales by the operating entities are generated from China. We anticipated
that sales of the operating entities’ products in China will continue to
represent a substantial proportion of our total sales in the near future. Any
significant decline in the condition of the PRC economy could adversely affect
consumer buying power and reduce consumption of their products, among other
things, which in turn would have a material adverse effect on our business and
financial condition.
The
ability to implement planned development depends on many factors, including the
ability to receive various governmental permits.
In
accordance with PRC laws and regulations, the operating entities are required to
maintain various licenses and permits in order to operate at each production
facility including, without limitation, hygiene permits and industrial products
production permits. The operating entities are required to comply with
applicable hygiene and food safety standards in relation to production
processes. Failure to pass these inspections, or the loss of or suspend some or
all of production activities, could disrupt their operations and adversely
affect our business.
Changes
in the policies of the Chinese government could have a significant impact upon
the ability to sustain growth and expansion strategies.
Since
1978, the PRC government has promulgated various reforms of its economic system
and government structure. These reforms have resulted in significant economic
growth and social progress for China in the last two decades. Many of the
reforms are unprecedented or experimental, and such reforms are expected to be
modified from time to time. Although we can not predict whether changes in
China’s political, economic and social conditions, laws, regulations and
policies will have any materially adverse effect on the operating entities’
current or future business, results of operation or financial
condition.
The
operating entities’ ability to continue to expand business depends on a number
of factors, including general economic and capital market conditions in China
and credit availability from banks and other lenders in China. Recently, the PRC
government has implemented various measures to control the rate of economic
growth and tighten its monetary policies. Slower economic growth rate may in
turn have an adverse effect on the ability to sustain the growth rate
historically achieved due to the aggregate market demand for consumer goods like
bottled water.
17
Fluctuation
in the value of the RMB may have a material adverse effect on your
investment.
The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic
conditions. The operating entities’ revenues and costs are mostly
denominated in RMB. Any significant fluctuation in value of RMB may
materially and adversely affect our cash flows, revenues, earnings and financial
position, and the value of our stock in U.S. dollars. For example, an
appreciation of RMB against the U.S. dollar would make any new RMB denominated
investments or expenditures more costly, to the extent that the operating
entities need to convert U.S. dollars into RMB for such purposes. In
addition, the depreciation of significant U.S. dollar denominated assets could
result in a charge to our income statement and a reduction in the value of the
assets of the operating entities.
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some of our competitors, are
not subject to these prohibitions. Corruption, extortion, bribery,
pay-offs, theft and other fraudulent practices occur from time-to-time in
mainland China. If our competitors engage in these practices, they
may receive preferential treatment from personnel of some companies, giving our
competitors an advantage in securing business or from government officials who
might give them priority in obtaining new licenses, which would put us at a
disadvantage. Although we inform our personnel that such practices
are illegal, we can not assure you that our employees or other agents will not
engage in such conduct for which we might be held responsible. If our
employees or other agents are found to have engaged in such practices, we could
suffer severe penalties.
Failure
to comply with the State Administration of Foreign Exchange regulations relating
to the establishment of offshore special purpose companies by PRC residents may
adversely affect the operating entities.
On
October 21, 2005, the State Administration of Foreign Exchange issued a new
public notice which became effective on November 1, 2005. The notice requires
PRC residents to register with the local State Administration of Foreign
Exchange branch before establishing or controlling any company, referred to in
the notice as a “special purpose offshore company”, outside of China for the
purpose of capital financing. PRC residents who are shareholders of a special
purpose offshore company established before November 1, 2005 were required to
register with the local State Administration of Foreign Exchange Branch. Our
beneficial owners need to comply with the relevant the State Administration of
Foreign Exchange requirements in all material respects in connection with our
investments and financing activities. If such beneficial owners fail to comply
with the relevant the State Administration of Foreign Exchange requirements,
such failure may subject the beneficial owners to fines and legal sanctions and
may also adversely affect our business operations.
Because
assets and operations of the operating entities are located outside the United
States and a majority of our officers and directors are non-United States
citizens living outside of the United States, investors may experience
difficulties in attempting to enforce judgments based upon United States federal
securities laws against us and our directors. United States laws and/or
judgments might not be enforced against us in foreign
jurisdictions.
All of
our holdings are held through a subsidiary corporation organized and located
outside of the United States, and all the assets of our subsidiary and the
operating entities are located outside the United States. In addition, all of
our officers and directors are foreign citizens. As a result, it may be
difficult or impossible for U.S. investors to enforce judgments made by U.S.
courts for civil liabilities against the operating entities or against any of
our individual directors or officers. In addition, U.S. investors should not
assume that courts in the countries in which our subsidiary is incorporated or
where the assets of our subsidiary or the operating entities are located (i)
would enforce judgments of U.S. courts obtained in actions against us or our
subsidiary based upon the civil liability provisions of applicable U.S. federal
and state securities laws or (ii) would enforce, in original actions,
liabilities against us or our subsidiary based upon these laws.
18
The
legal system in China has inherent uncertainties that may limit the legal
protections available in the event of any claims or disputes with third
parties.
The legal
system in China is based on written statutes. Prior court decisions may be cited
for reference but have limited precedential value. Since 1979, the central
government has promulgated laws and regulations dealing with economic matters
such as foreign investment, corporate organization and governance, commerce,
taxation and trade. As China’s foreign investment laws and regulations are
relatively new and the legal system is still evolving, the interpretation of
many laws, regulations and rules is not always uniform and enforcement of these
laws, regulations and rules involve uncertainties, which may limit the remedies
available in the event of any claims or disputes with third parties. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.
The
Chinese government exerts substantial influence over the manner in which we the
operating entities must conduct their business activities.
The
operating entities depend on their relationships with the local governments in
the province in which they operate. The Chinese government has
exercised and continues to exercise substantial control over virtually every
sector of the Chinese economy through regulation and state
ownership. Operations in China may be harmed by changes in its laws
and regulations, including those relating to taxation, environmental
regulations, land use rights, property and other matters. We believe
that the operating entities are in material compliance with all applicable legal
and regulatory requirements. However, the central or local governments of these
jurisdictions may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or
interpretations. Accordingly, government actions in the future,
including any decision not to continue to support recent economic reforms and to
return to a more centrally planned economy or regional or local variations in
the implementation of economic policies, could have a significant effect on
economic conditions in China or particular regions thereof, and could require us
to divest ourselves of any interest we then hold in Chinese
properties.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The PRC
historically has been deficient in Western style management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards. We concluded that our internal controls
over financial reporting were not effective as of the periods for our annual
reports for the fiscal years December 31, 2008 and 2009.
|
Item
1B.
|
Unresolved
Staff Comments
|
Not
Applicable.
|
Item
2.
|
Properties
|
According
to the law of PRC, the government owns all the land in the PRC. Companies or
individuals are authorized to possess and use the land only through land use
right granted by the PRC government for 40 to 50 years. The table below sets
which land the operating entities are authorized to possess and use and for how
long:
19
|
Entity
|
Locations
and addresses
|
Areas
|
Authorization
Until
|
||||
|
GEHZ
|
No.
1 Road, Economic & Technological Development Zone, Jiubao Jianggan
District, Hangzhou, China
|
163,977
square feet
|
March
16, 2049
|
||||
|
GENJ
|
16
Nanjing New & High Technology Industry Development Zone, Nanjing
Jiangsu Province, China
|
133,515
square feet
|
July
21, 2053
|
||||
|
NJCP
|
6,
Feng Huang Lu, Pu Kou Economic and Development Zone, Nanjing, Jiangsu
Province, China
|
266,800
square feet
|
January
13, 2054
|
||||
The
following properties are leased by the Company and the operating
entities:
|
Entity
|
Locations
and addresses
|
Areas
|
Rent
|
Leasing
period until
|
Owner
|
|||||
|
GEXA
|
No.
36 Development Road, New Type Industrial Garden High-tech Industrial
Develop Zone, Xian, China
|
10,764
square feet
|
$1,428
per month
|
Oct.
21, 2010
|
Xian
Pepsi
|
|||||
|
GEXA
|
North-east
corner of Development Road and Chuanghui Road, New Type Industrial Garden
High-Tech Industrial Development Zone, Xian China
|
40,545
square feet
|
$5,919
per month
|
June
1, 2011
|
Xian
Yongxin Huanbao Equipment Co. Ltd.
|
|||||
|
GENJ
|
No.
8 Gaoxin Road, Nanjing New & High Technology Industry Development
Zone, Nanjing Jiangsu Province, China
|
69,965
square feet
|
$7,142
per month
|
Dec.
31, 2010
|
Nanjing
Kingbrand Property Management Co. Ltd.
|
|||||
|
GESY
|
8 Jia 2, No 7 Jie, Shenyang
Economic and Development Zone, Shenyang, China
|
100,000
square feet
|
$918
per month
|
January
11, 2011
|
Mr.
Tang Xian Liang
|
|||||
|
HFCP
|
North Guan Qi Road, He Fe
Economic and Development Zone, He Fe, An Hui Province,
China
|
166,60
square feet
|
$3,972
per month
|
January
13, 2011
|
Hefe
Shen He Jin Shu Zhi Pin Company Limited
|
|||||
|
TZCP
|
Jiang Nan Logistic Centre, Jing
Jiang Nan Lu, Lin Hai, Taizhou, China
|
233,600
square feet
|
$4,235
per month
|
February
13, 2011
|
Jiang
Nan Logistic Centre
|
|||||
20
|
Item
3.
|
Legal
Proceedings
|
To the
knowledge of our management, there is no litigation currently pending or
contemplated against us or any of our officers or directors in their capacity as
such.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
During
the fourth quarter of our fiscal year ended December 31, 2009, there were no
matters submitted to a vote of security holders.
PART
II
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Our
common stock has been traded on the Over the Counter Bulletin Board (OTCBB)
under the symbol “GEBD,” since May 22, 2008. The following table sets
forth the high and low bid information for our common stock from the
commencement of trading on May 22, 2008 through March 15, 2010 as reported by
OTCBB.
|
Period
|
Low
($)
|
High
($)
|
||||||
|
2010
First
Quarter (through March 15, 2010)
|
$
|
0.1
|
$
|
0.36
|
||||
|
2009
Fourth
Quarter
|
$
|
0.05
|
$
|
0.35
|
||||
|
2009
Third
Quarter
|
$
|
0.25
|
$
|
0.35
|
||||
|
2009
Second
Quarter
|
$
|
0.28
|
$
|
0.5
|
||||
|
2009
First
Quarter
|
$
|
0.25
|
$
|
1.01
|
||||
|
2008
Fourth
Quarter
|
$
|
1.01
|
$
|
3.75
|
||||
|
2008
Third
Quarter
|
$
|
1.50
|
$
|
3.49
|
||||
|
2008
Second
Quarter (Beginning May 22, 2008) (1)(2)
|
$
|
2.25
|
$
|
2.65
|
||||
(1) Our
common stock commenced trading on May 22, 2008.
(2) On
April 16, 2008, our board of directors approved a 1-for-5 forward stock split
(the “Forward Split”) of our common stock. The record date for the Forward Stock
split was April 26, 2008. Pursuant to the Forward Split, every one
(1) share of our then issued and outstanding Common Stock was reclassified
and divided into five (5) post-split shares of our Common
Stock.
Number
of Holders of Common Stock
The
number of holders of record of our common stock on March 15, 2010 was
67.
21
Dividends
There
were no cash dividends or other cash distributions made by us during the fiscal
year ended December 31, 2008 or the fiscal year ended December 31, 2009.
The payment of dividends in the future will be contingent upon our revenues and
earnings, if any, capital requirements and general financial
condition. The payment of any dividends is within the discretion of
our board of directors. It is the present intention of our board of
directors to retain all earnings, if any, for use in our business operations
and, accordingly, our board does not anticipate declaring any dividends in the
foreseeable future.
Recent
Sales of Unregistered Securities and Use of Proceeds
In July
2009, we issued to a consultant in exchange for services rendered and services
to be rendered 200,000 shares of our common stock. We issued these
shares in transactions relying on the registration exemption provided by Section
4(2) of the Securities Act of 1933.
Repurchases
of Equity Securities
None.
Equity
Compensation Plan Information
None.
|
Item
6.
|
Selected
Financial Data
|
As a
smaller reporting company, we are not required to include this information in
our annual report on Form 10-K.
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Note regarding forward –
looking statements
This
annual report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as "anticipate", "expect", "intend", "plan", "will", "we believe", "the Company believes", "management believes" and
similar language. The forward-looking statements are based on the current
expectations of the Company and are subject to certain risks, uncertainties and
assumptions, including those set forth in the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this
report. The actual results may differ materially from results anticipated in
these forward-looking statements. We base the forward-looking statements on
information currently available to us, and we assume no obligation to update
them.
Investors
are also advised to refer to the information in our filings with the Securities
and Exchange Commission, specifically Forms 10-Q and 8-K, in which we discuss in
more detail various important factors that could cause actual results to differ
from expected or historic results. It is not possible to foresee or identify all
such factors. As such, investors should not consider any list of such factors to
be an exhaustive statement of all risks and uncertainties or potentially
inaccurate assumptions.
Except as
otherwise indicated by the context, references in this Form 10-K to “we”, “us”, “our”, “the Registrant”, “our Company” or “the Company” are to Great East Bottles
& Drinks (China) Holdings, Inc., a Florida corporation and its consolidated
subsidiaries. Unless the context otherwise requires, all references to (i) “BVI” are to British Virgin
Islands; (ii) “PRC” and
“China” are to the
People’s Republic of China; (iii) “U.S. dollar”, “$” and “US$” are to United States
dollars; (iv) “RMB” are
to Yuan Renminbi of China; (v) “Securities Act” are to the
Securities Act of 1933, as amended; and (vi) “Exchange Act” are to the
Securities Exchange Act of 1934, as amended.
22
Critical Accounting Policies
and Estimates
Our
financial statements and related public financial information are based on the
application of accounting principles generally accepted in the United States
("US GAAP"). US GAAP
requires the use of estimates; assumptions, judgments and subjective
interpretations of accounting principles that have an impact on the assets,
liabilities, revenues and expenses amounts reported. These estimates can also
affect supplemental information contained in our external disclosures including
information regarding contingencies, risk and financial condition. We believe
our use of estimates and underlying accounting assumptions adhere to GAAP and
are consistently and conservatively applied. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions. We continue to
monitor significant estimates made during the preparation of our financial
statements.
We
believe the following is among the most critical accounting policies that impact
our consolidated financial statements. We suggest that our significant
accounting policies, as described in our consolidated financial statements in
the Summary of Significant Accounting Policies, be read in conjunction with this
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
We
recognize revenue in accordance with ASC 605. All of the following criteria must
exist in order for us to recognize revenue:
|
|
●
|
Persuasive
evidence of an arrangement exists;
|
|
|
●
|
Delivery
has occurred;
|
|
|
●
|
The
seller's price to the buyer is fixed or determinable;
and
|
|
|
●
|
Collectability
is reasonably assured.
|
The
majority of the Company's revenue results from sales contracts with direct
customers and revenues are generated upon the shipment of goods. The Company's
pricing structure is fixed and there are no rebate or discount programs.
Management conducts credit background checks for new customers as a means to
reduce the subjectivity of assuring collectability. Based on these factors, the
Company believes that it can apply the provisions of ASC 605 with minimal
subjectivity.
Recent Accounting
Pronouncements
The
Company does not expect that the adoption of any recent accounting
pronouncements will have any material impact on its financial
statements.
Results of Operations – Twelve Months Ended December 31, 2009 as compared to Twelve Months Ended December 31, 2008
The
following table summarizes the results of our operations during the twelve-month
period ended December 31, 2009 and 2008, and provides information regarding the
dollar and percentage increase or (decrease) from the twelve-month period ended
December 31, 2009 to the twelve-month period ended December 31,
2008.
23
|
Twelve months ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
Increase/(Decrease)
|
% Increase/(Decrease)
|
|||||||||||||
|
Revenue
|
$ | 47,845,825 | $ | 44,478,224 | $ | 3,367,601 | 7.57 | % | ||||||||
|
Cost
of sales
|
35,909,267 | 34,868,946 | 1,040,321 | 2.98 | % | |||||||||||
|
Gross
margin
|
11,936,558 | 9,609,278 | 2,327,280 | 24.22 | % | |||||||||||
|
General
& administrative expenses
|
4,418,799 | 2,937,253 | 1,481,546 | 50.44 | % | |||||||||||
|
Selling
and distribution
|
1,031,579 | 785,131 | 246,448 | 31.39 | % | |||||||||||
|
Operating
income
|
6,486,180 | 5,886,894 | 599,286 | 10.18 | % | |||||||||||
|
Other
expense
|
745,682 | 1,028,290 | (282,608 | ) | (27.48 | %) | ||||||||||
|
Provision
for income taxes
|
1,159,279 | 948,949 | 210,330 | 22.16 | % | |||||||||||
|
Net
income attributable to noncontrolling interest
|
3,635,486 | 2,559,589 | 1,075,897 | 42.03 | % | |||||||||||
|
Loss
from discontinued operations
|
0
|
30,094 | (30,094 | ) | (100 | %) | ||||||||||
|
Net
income attributable to Great East Bottles & Drinks (China) Holdings,
Inc. and Subsidiaries
|
945,733 | 1,319,972 | (374,239 | ) | (28.36 | %) | ||||||||||
| Net Income | 4,581,219 | 3,879,561 | 701,658 | 18.09 | % | |||||||||||
Revenues
Sales
revenue increased from $44,478,224 in the twelve months of 2008 to $47,845,825
in the same period in 2009, representing a 7.57% increase. The increase in
revenue was mainly due to the increase in sales of HFCP and TZCP, which were set
up in 2008.
Cost of
sales and gross margin
Cost of
sales increased from $34,868,946 in the twelve months of 2008 to $35,909,267 in
the same period in 2009, representing a 2.98% increase. The increase was due to
the increase in sales of HFCP and TZCP in the twelve months of 2009 as compared
to the same period last year. We recorded a gross margin of 24.95 % in the
twelve months of 2009, an increase of 24.22% as compared to 21.60 % in the same
period last year. The increase was mainly due to the decrease in materials
costs, which increased gross profits.
Selling
and distribution expenses
Selling
and distribution expenses increased by $246,448 or 31.39% from $785,131 in
twelve months of 2008 to $1,031,579 in the same period 2009. The increase was
mainly due to increase in selling expenses, which increased primarily as a
result of an increase in freight charges.
24
General
and administrative expenses
General
and administrative expenses increased from $2,937,253 in the twelve months of
2008 to $4,418,799 for the same period 2009, representing an increase of
$1,481,546 or 50.44%. The increase was mainly due to significant increases in
staff costs and reorganization related legal and professional fees and
travelling costs.
Net
income
Net
income for the twelve months ended December 31, 2009 was $4,581,219 as compared
to $3,879,561 for the same period in 2008. Net income increased between these
two periods because gross margin improved.
Despite
the increase in net income overall, net income attributable to Great East
Bottles & Drinks (China) Holdings, Inc. and Subsidiaries decreased to
$945,733 for the year ended December 31, 2009 from $1,319,972 for the same
period in 2008. Although our interest in the operating entities is 33.6%, the
share of net income attributable to Great East Bottles & Drinks (China)
Holdings, Inc. and Subsidiaries is not equal to 33.6% of net income as our
administrative expenses are borne entirely by us and added to expenses prior to
the calculation of net income. The noncontrolling interests do not
share the administrative expenses covered by GEBD. Net income attributable to
Great East Bottles & Drinks (China) Holdings, Inc. and Subsidiaries
decreased between the periods mainly because the administrative expenses paid by
GEBD in 2009 in connection with the operating entities United Joy, Upjoy and
Greatgrand used to be paid by GEPI.
Liquidity and Capital
Resources
Cash
Our cash
balance at December 31, 2009 was $1,630,739, representing an increase of
$1,423,431, compared with our cash balance of $207,308 as at December 31, 2008.
The material increase was mainly attributable to the decrease in purchase of
machine and equipment in 2009.
Cash
flow
Operating
Activities
Net cash
provided by operating activities during the twelve months ended December 31,
2009 amounted to $6,764,376, which is in line with net cash inflows from
operating activities of $6,896,018 in the same period of 2008.
Investing
Activities
Net
cash used in investing activities decreased from $10,203,994 for the
twelve months ended 2008 to $3,028,969 for the same period of 2009, representing
a decrease of $ 7,175,025. The change was primarily due to the decrease in
purchase of machine and equipment in 2009.
Financing
Activities
Net cash
used in financing activities was $2,302,077 for the twelve months of 2009,
representing an increase of $4,802,950 over the net cash porvided by
financing activities $2,500,873 recorded in the same period of 2008. The
change was primarily due to the increase in restricted cash in 2009.
25
Working
capital
Our cash
and cash equivalents increased by $1,423,431 to $1,630,739 at December 31, 2009
from $ 207,308 at December 31, 2008, mainly due to a decrease in net cash
outflow from investing activities during the twelve months of 2009.
We
currently generate our cash flow through production and sales of PET CSD
bottles, PET CSD preforms and OEM water bottles water in China. We believe that
our cash flow generated from operations will be sufficient to sustain operations
for at least the next 12 months. There is no identifiable expansion plan as of
December 31, 2009, but from time to time, we may identify new expansion
opportunities for which there will be a need for use of cash.
Our
working capital deficit decreased to $9,317,824 at December 31, 2009 from
$12,555,748 at December 31, 2008.
Off-Balance Sheet
Arrangements
We do not
have any off balance sheet arrangements
Inflation
Inflation
has not had a material impact on our business and we do not expect inflation to
have an impact on our business in the near future
Currency Exchange
Fluctuations
All of
the Company’s revenues and a majority of its expenses in the twelve months ended
December 31, 2009 were denominated in Renminbi (“RMB”), the currency of
China, and were converted into US dollars at the exchange rate of 6.812 to 1. In
the third quarter of 2005, the Renminbi began to rise against the US dollar. We
cannot assure you that RMB-to-U.S. dollar exchange rates will remain stable. A
devaluation of RMB relative to the U.S. dollar would adversely affect our
business, consolidated financial condition and results of operations. We do not
engage in currency hedging.
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
As a
smaller reporting company, we are not required to include this information in
our annual report on Form 10-K.
|
Item
8.
|
Financial
Statements and Supplementary Data
|
The
response to this item is included in a separate section of this Annual Report.
See “Index to Consolidated Financial Statements” on Page F-1.
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
Not
Applicable.
|
Item
9A.
|
(T)
Controls and Procedures
|
Evaluation of
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Exchange Act) that are designed to
ensure that information required to be disclosed by us in reports that we file
under the Exchange Act is recorded, processed, summarized and reported as
specified in the SEC’s rules and forms and that such information required to be
disclosed by us in reports that we file under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer, or
CEO, and our Chief Financial Officer, or CFO, to allow timely decisions
regarding required disclosure. Management, with the participation of our CEO and
CFO, performed an evaluation of the effectiveness of our disclosure controls and
procedures as of December 31, 2009. Based on that evaluation and as
described below under “Management’s Report on Internal Control Over Financial
Reporting”, we have identified a material weakness in our internal control over
financial reporting. As a result of this material weakness and as a result
of our failure to identify this material weakness in our internal control over
financial reporting as a material weakness in our disclosure controls and
procedures, our management, including our CEO and CFO, concluded that our
disclosure controls and procedures were not effective as of December 31,
2009.
26
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision and with
the participation of our management, including our principal executive officer
and principal financial officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In connection with management's assessment of our internal
control over financial reporting as required under Section 404 of the
Sarbanes-Oxley Act of 2002, we identified the following material weakness in our
internal control over financial reporting as of December 31, 2009:
|
1.
|
Insufficient
accounting personnel with the appropriate level of accounting knowledge,
experience and training in the application of accounting principles
generally accepted in the United States commensurate with financial
statement reporting requirements.
|
As a
result, we have concluded that our internal controls over financial reporting
are not effective as of December 31, 2009.
Remediation
of Material Weakness in Internal Control
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can only
provide reasonable assurances with respect to financial statement preparation
and presentation. In addition, any evaluation of effectiveness for future
periods is subject to the risk that controls may become inadequate because of
changes in conditions in the future.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.
To
remediate the material weakness surrounding this, we have performed and are
continuing to perform, among others, the following actions:
|
•
|
additional
training of our accounting personnel by our independent accountants of the
proper format and compilation of data for US GAAP financial
statements;
|
|
•
|
implementation
of new software to facilitate the handling of all financial data as well
as the accumulation of data in a format more user friendly to the
preparation of US GAAP financial statements;
and
|
|
•
|
additional
coordination with our local accountants and auditors to strengthen our
controls in an attempt to supplement the additional training of our
employees.
|
The
Company has begun to convene meetings among its top executives to address
budgeting issues. As a private company for over fourteen years, the
budgeting process was never formalized. We have recently begun to
utilize an independent third party to assist in the preparation of formal budget
forecasts
Changes
in Internal Control over Financial Reporting
Our
Certifying Officers have indicated that there were significant changes in our
internal controls or other factors that could significantly affect such controls
subsequent to the date of their evaluation, and there were such control actions
with regard to significant deficiencies and material weaknesses. We
have performed, among others, the following actions:
27
|
•
|
additional
training of our accounting personnel by our independent accountants of the
proper format and compilation of data for US GAAP financial
statements;
|
|
•
|
implementation
of new software to facilitate the handling of all financial data as well
as the accumulation of data in a format more user friendly to the
preparation of US GAAP financial statements;
and
|
|
•
|
additional
coordination with our local accountants and auditors to strengthen our
controls in an attempt to supplement the additional training of our
employees.
|
28
|
Item
9B.
|
Other
Information
|
None.
PART
III
|
Item
10.
|
Directors,
Executive Officers and Corporate
Governance
|
Our
current directors and executive officers are as follows:
|
Name
|
Age
|
Position
|
||
|
Stetson
Chung
|
43
|
Chief
Executive Officer, President, Director
|
||
|
Elvan
Kwong
Danny
Poon
|
44
38
|
Chief
Operating Officer
Chief
Financial Officer
|
Stetson
Chung, aged 43, is the Chief Executive Officer, Acting Chief Financial Officer
and Director of GEBD. Stetson assumed his current role of the company in 1996.
Prior to GEBD, he worked for the IT industry and was the youngest recipient of
the prestigious Governor’s Award for Industry Grand Prize (Consumer product
design – video conferencing) in Hong Kong. Stetson is responsible for the
overall management of the company. Stetson graduated from Dartmouth College in
the United States with a degree in Economics and Computer Science.
Elvan Kwong, aged 44, is the Chief
Operating Officer. Elvan began his career with us in 1996 as General
Manager. Elvan has over 8 years' experience in the PET bottle industry and over
15 years experience in the manufacturing industry in China. He oversees the
general managers of all facilities in the country and supervises and monitors
the daily operation including technical, purchasing, Sales & Marketing and
HR & Administration. Mr. Kwong works closely with the CEO and CFO to manage
the implementation of new product development with potential clients. He is a
graduate of the Chinese University of Hong Kong with a BBA degree in business
management and international business.
On
September 14, 2009, we appointed Danny Poon as our new Chief Financial
Officer. Mr. Poon graduated from Simon Fraser University in Canada
with a BBA degree in Accounting. He is a CPA and a member of the American
Institute of Certified Public Accountants. He speaks fluent English,
Mandarin, and Cantonese. Prior to joining Great East Bottles & Drinks, Mr.
Poon spent 5 years as financial controller for Meng Ding Tea Co., Ltd. a
Sino-Japanese joint venture in Sichuan province that specializes in seasonal
green tea processing. During this period, he was also assigned to a number of
external projects in a wide range of professional and managerial activities,
such as set up of Sino-foreign joint ventures, consolidation accounting, and
financial restructuring for companies in the food and beverages, textiles, and
semi-conductor manufacturing industries at places like Dongguan, Chongqing,
Heyuan, and Hong Kong. From 1997 to 2003, he was with PricewaterhouseCoopers at
Hong Kong and Guangzhou. His main responsibilities included MNC audits, IPOs and
special assignments such as due diligence projects. His client portfolio
included listed companies at the US NYSE, China A and B shares, London Stock
Exchange, Singapore Main Board, and the HK Stock Exchange, in the food,
machinery, pharmaceuticals, Insurance, Software, and Telecom
industries.
CORPORATE
GOVERANCE
Number
and Term of Directors
The
Company’s sole director is Stetson Chung. Mr. Chung shall serve as a director
until his successor has been duly elected and is qualified.
29
Audit
Committee
In October 2009, our board of directors
established an audit committee . The audit committee consists of two
independent members: Mr. Ivan Lee, a financial expert, and Ms. Hu Hui
Lin. The scope of the audit committee includes:
|
|
●
|
oversight
over independent auditors (including engaging the auditors, receiving
reports from auditors, resolving auditor/management disputes, reviewing
the quality of the auditing firm, compensating the auditors, approving
non-audit services, and replacing the auditors, when necessary), and
acting as a channel for communication between the independent auditors and
the full board;
|
|
|
●
|
oversight
of financial reporting, including recommending to the full board that
financial information be included in the annual report filed with the
SEC;
|
|
|
●
|
oversight
over the certifications attached to this annual
report;
|
|
|
●
|
oversight
over internal control over financial reporting and disclosure controls and
procedures;
|
|
|
●
|
oversight
over the internal audit function;
|
|
|
●
|
preparation
of the audit committee report, for inclusion in the company's annual proxy
statement;
|
|
|
●
|
adoption
and maintenance an audit committee charter;
and
|
|
|
●
|
maintenance
of “whistleblower” systems.
|
Other
Committees
We intend
to establish compensation, nominating committees of the Board of Directors
within the twelve months after the year end of 2009.
Family
Relationships
Stetson
Chung, our sole officer and director is the son of Guy A-Tsan Chung, our 73.88%
shareholder and an affiliate of the entity that has a 15% interest in the
operating entities and in an entity that has an option to acquire a 50.4%
interest in the operating entities for $1.
Code
of Ethics
We have
adopted a Code of Business Conduct and Ethics (the “Code”) that applies to our
directors and employees, including our principal executive officer, principal
financial officer, principal accounting officer and controller, or persons
performing similar functions in accordance with applicable federal securities
laws. The Code was filed as Exhibit 14 to our Registration Statement on Form
SB-2 (Registration No. 333-139008).
Changes
in Director Nomination Process for Stockholders
None.
30
Beneficial
Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act requires our directors, executive officer
and persons who own more than 10% of our common stock to file reports of
ownership and changes in ownership of our common stock with the Securities and
Exchange Commission. Our directors, executive officer and persons who own more
than 10% of our common stock are required by Securities and Exchange Commission
regulations to furnish to us copies of all Section 16(a) forms they file. To our
knowledge, based solely upon a review of Forms 3, 4 and 5 and amendments to
these forms furnished to the Company, none of our directors, executive
officer or persons who own more than 10% of our common stock filed Forms 3, 4
and 5 on a timely basis during the year ended December 31, 2009.
|
Item
11.
|
Executive
Compensation
|
The
following table sets forth all cash compensation paid or to be paid by the
Company, as well as certain other compensation paid or accrued, during each of
the Company’s last two fiscal years to each of the following named executive
officers (the “Named Executive Officers”):
SUMMARY
COMPENSATION TABLE
|
Name &
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension value
and
Nonqualified
deferred
compensation
earnings
($)
|
All other
Compensation
($)
|
Total
($)
|
||||||||||||||||||||||||
|
Stetson
Chung
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
||||||||||||||||||||||||
|
CEO,
President
|
2008
|
0(1)
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
||||||||||||||||||||||||
|
Danny
Poon
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
||||||||||||||||||||||||
|
CFO
|
|||||||||||||||||||||||||||||||||
(1) Although
no compensation was paid to our officers in 2008, in 2008 Stetson Chung accrued
compensation in the amount of $90,000. Mr. Chung waived such compensation and it
has been accounted for as paid in capital.
Employment
Agreements
None.
Equity
Compensation Plans
We do not
maintain any equity compensation plans and we have not granted any stock options
or stock appreciation rights or any awards under long-term incentive
plans.
Pension
Benefits
We do not
sponsor any qualified or non-qualified defined benefit plans.
31
Nonqualified
Deferred Compensation
We do not
maintain any non-qualified defined contribution or deferred compensation
plans.
DIRECTOR
COMPENSATION
The
following table summarizes compensation that our directors earned during 2009
for services as members of our Board.
|
Name
|
Fees Earned or
Paid
in Cash
($)
|
Options
Awards
($)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||||||||
|
Stetson
Chung
|
0
|
0
|
0
|
0
|
||||||||||||
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
following table sets forth, as of March 15, 2010, certain information regarding
beneficial ownership of our common stock by each person who is known by us to
beneficially own more than 5% of our common stock. The table also identifies the
stock ownership of each of our directors, our officer, and all directors and our
officer as a group. Except as otherwise indicated, the stockholders listed in
the table have sole voting and investment powers with respect to the shares
indicated.
Shares of
common stock which an individual or group has a right to acquire within 60 days
pursuant to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group, but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership (1)
|
Percentage
of Outstanding Common Stock
|
||||||
|
Guy
A-Tsan Chung
|
29,700,000
|
74
|
%
|
|||||
|
Stetson
Chung, Director (2)
|
0
|
0
|
||||||
|
Mary
and Joseph Flad
|
4,600,000
|
11.4
|
%
|
|||||
|
All
directors and executive officers as a group
|
0
|
0
|
||||||
______________
|
(1)
|
Based
on 40,200,000 outstanding shares of common stock on March 15,
2010.
|
|
(2)
|
The
business address for each of our sole director and officer is c/o Great
East Bottles & Drinks (China) Holdings, Inc, 203 Hankow Center, 5-15
Hankow Road, Tsimshatsui, Kowloon, Hong
Kong
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
There has
not been since January 1, 2009 nor is there currently pending any transaction or
series of similar transactions to which we were or are to be a party in which
the amount involved exceeded $120,000 and in which any director, executive
officer, holder of more than 5% of our Common Stock or any member of the
immediate family of any of these persons had or will have a direct or indirect
material interest other than the following.:
32
Acquisitions/Dispositions
We
entered into a series of transactions to acquire several business owned by Mr.
Guy Chung, our majority shareholder who beneficially owns approximately 74% of
our shares of common stock, through his affiliate GEPH. As a result
of these transactions, our wholly-owned subsidiary HGEP acquired 99.99% of the
outstanding share capital of United Joy, Upjoy and Greatgrand.
In
exchange for GEPH’s sale of Upjoy, United Joy and Greatgrand, GEBD BVI entered
into a sale and purchase agreement with Top Sharp, by which Top Sharp acquired
the entire issued share capital of Best Key Investment Limited (“Best Key”) for
a consideration of HK$1 and Best Key’s only asset was its 15% ownership of HGEP.
As a result of the sale of Best Key, our beneficial ownership interest in our
all of our operating entities, including GEPNJ, GEPXA, HGEP, GEPL, Upjoy, United
Joy and Greatgrand, decreased from at least 99.99% to 84%.
In
addition to the sale of Best Key, GEPI granted GEPH a three-year share option to
subscribe for 9,638,769 ordinary shares of GEPI, an amount equal to 60% of
GEPI’s enlarged share capital. GEPH may exercise this option for US$1
until December 31, 2012. If GEPH were to exercise this option, our
beneficial ownership interest in our all of our operating entities, including
GEPNJ, GEPXA, HGEP, GEPL, Upjoy, United Joy and Greatgrand would decrease from
84% to 33.6%.
As the
acquisitions and dispositions were with Mr. Guy Chung, a related party, we hired
Huayan Assets Appraisal Co., Ltd., an independent evaluator, to calculate the
enterprise value of the subsidiaries of which we would dispose a substantial
ownership interest in if GEPH exercised its option to acquire 60% of GEPI,
namely HGEP, GEPNJ and GEPXA, and of the subsidiaries that we acquired, namely
United Joy, Upjoy and Greatgrand. Based on their appraisal, we calculate that
the consideration we received for the dispositions exceeds the
consideration we paid for the acquisitions.
Consideration paid for
acquisitions
We
estimate the cost of the sale of Best Key and the 60% interest in GEPI, if the
option is exercised, at approximately 64.2 million Renminbi (or US$9.4
million). Huayan Assets Appraisal estimated that the value of HGEP
and the subsidiaries that we restructured under HEGP, including GEPNJ and GEPXA,
amounted to 98.3 million Renminbi (approximately US$14.4 million). By
disposing of Best Key, we disposed of our interest in 15% of that amount, or
14.7 million Renminbi (approximately US$2 million).
Additionally,
if GEPH exercised its option to acquire 60% of GEPI, our interest in that amount
would be further reduced by 50.4%, which represents 60% of GEPI’s 84% interest
in HGEP, GEPNJ and GEPXA. 50.4% of 98.3 million Renminbi amounts to
49.5 million Renminbi (approximately US$7.3 million).
Consideration received for
dispositions
We
estimate the gain to us of the acquisition of United Joy, Upjoy and Greatgrand,
assuming GEPH exercises its option to acquire a 60% interest in GEPI, is
approximately 67.7 million Renminbi (or US$9.9 million). Huayan Assets Appraisal
estimated that the value of the subsidiaries that HGEP acquired, including
United Joy, Upjoy and Greatgrand, amounted to 201.6 million Renminbi (or
approximately US$29.4 million). Our interest in those subsidiaries is
through our interest in GEPI, which has an 84% interest in HGEP. If
GEPH exercised its option to acquire 60% of GEPI, our portion of the value of
those subsidiaries would be approximately 33.6%. 33.6% of 201.6
million Renminbi is 67.7 million Renminbi (or approximately US$9.9
million).
33
All
intercompany gains and losses discussed in this subsection have been eliminated
in the consolidation. All of the above currency translations were made at
an exchange rate of US$1:RMB0.146.
Advances from
GEPH
In 2009,
GEPH provided us with advances of capital for working capital use. All amounts
advanced to us by GEPH since January 1, 2009 were interest free and had no fixed
terms of repayment. No interest has been due or paid on the advances
since January 1, 2009. As of December 31, 2009, advances from GEPH totaled
$16,431,222, and as of February 28, 2010, they totaled $16,522,234. The largest
aggregate amount of advances outstanding during 2009 was
$16,431,222. We did not repay any advances in 2009.
Advances to
GEPH
In 2009,
we provided GEPH with advances of capital. We made these advances to GEPH and
its subsidiaries, including United Joy, Upjoy and Greatgrand, prior to our
acquisition of an interest in those entities on December 31, 2009. All amounts
that we advanced to GEPH in 2009 bore interest at 9% per annum and had no fixed
terms of repayment. GEPH paid us $39,985 on these advances in
2009. As of December 31, 2009 and February 28, 2010, we had no
advances to GEPH outstanding. The largest aggregate amount of advances
outstanding during 2009 was $450,188.
Sales to
GEPH
During our fiscal year ended December
31, 2009, the operating entities sold PET CSD bottles, OEM water bottles and
other materials to GEPH in an aggregate amount of $1,391,949. There
were no supply agreements or other contracts governing theses
sales. We believe that these sales were made at the prevailing sales
price in the market and were on terms similar to other purchasers of these items
from the operating entities.
Purchases from
GEPH
During
our fiscal year ended December 31, 2009, the operating entities purchased PET
CSD bottles, OEM water bottles and other materials from GEPH in an aggregate
amount of $402,466. There were no supply agreements or other
contracts governing these purchases. We believe that these sales were
made at the prevailing price in the market and were on terms similar to other
sellers of these items to the operating entities.
Loan
Guarantees
The operating entities have entered
into arrangements with several banks to borrow funds on a short term basis to
purchase raw materials or finance the business operations of the Company. Bank
loans as of December 31, 2009 included Hong Kong Dollar (“HKD”) and RMB bank
loans. As of December 31, 2009, these loans totaled $11,102,725 with
interest rates ranging from 4.9% to 10.8% and terms ranging from early 2010 to
early 2015. Each of these loans have been guaranteed by several
related parties, including
|
|
●
|
our
director, Mr. Stetson Chung,
|
|
|
●
|
our
directors wife, Ms. Christine Wong,
|
|
|
●
|
our
majority shareholder, Mr. Guy Chung,
and
|
|
●
several companies controlled by Mr. Guy Chung, including GEPH, Great East
Packaging (Hong Kong) Limited, Janwise Limited and Shanghai Great East
Packaging Co. Ltd.
|
Director
Independence
The
Company’s sole director is not an “independent director” within the meaning of
Rule 121(A) of the American Stock Exchange Company Guide and Rule 10A-3
promulgated under the Securities Act of 1934, as amended.
34
|
Item
14.
|
Principal
Accountant Fees and Services
|
On
January 14, 2008, the Company engaged Madsen & Associates CPA Inc.
(“Madsen”) as its new principal independent accountants. The decision to engage
Madsen as the Company’s principal independent accountants was approved by the
Company’s Board of Directors on April 18, 2008. During
the Company’s fiscal years ended December 31, 2007 and 2006 and through January
14, 2008, the Company did not consult with Madsen on (i) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that may be rendered on the Company’s financial
statements, and Madsen did not provide either a written report or oral advice to
the Company that was an important factor considered by the Company in reaching a
decision as to any accounting, auditing, or financial reporting issue; or (ii)
the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation
S-K and the related instructions, or a reportable event within the meaning set
forth in Item 304(a)(1)(v) of Regulation S-K.
The
Company paid the following fees to its auditors during its fiscal years ended
December 31, 2009 and 2008:
|
Fee
Category
|
2009
|
2008
|
||||||
|
Audit
fees – Madsen
|
$
|
52,600
|
$
|
42,370
|
||||
|
|
|
|
|
|
||||
Audit
Fees
Audit
fees consist of fees for professional services rendered for the audit of the
Company’s financial statements and review of the final financial statements
included in our annual reports on Form 10-K.
Audit
Related Fees
We did
not incur any audit-related fees with Madsen for the years ended December 31,
2009 and 2008.
Tax
Fees
We did
not incur any tax fees with Madsen for the years ended December 31, 2009 and
2008.
35
All
Other Fees
We did
not incur any fees with Madsen for other professional services rendered for the
years ended December 31, 2009 or 2008.
Pre-Approval
of Services
The Board
of Director’s policy is to pre-approve all audit and permissible non-audit
services provided by the independent auditors. These services may include audit
services, audit-related services, tax services and other services. The Board may
also pre-approve particular services on a case-by-case basis.
|
Item
15.
|
Exhibits,
Financial Statement Schedules
|
(a)(1)
Financial Statements
An index
to Consolidated Financial Statements appears on page F-1.
(b)
Exhibits
The
following Exhibits are filed as part of this report:
|
Exhibit
No.
|
Description
|
|
|
10.1
|
Restructuring
Agreement, dated December 30, 2009, between Great East Bottles &
Drinks (BVI) Inc. and Great East Packaging Holdings Limited (English
translation)
|
|
|
10.2
|
Subscription
Agreement, dated December 30, 2009, between Upjoy Holdings Limited and
Great East (Overseas) Packaging Limited (English
translation)
|
|
|
10.3
|
Subscription
Agreement, dated December 30, 2009, between United Joy International
Limited and Great East (Overseas) Packaging Limited (English
translation)
|
|
|
10.4
|
Subscription
Agreement, dated December 30, 2009, between Greatgrand Global Limited and
Great East (Overseas) Packaging Limited (English
translation)
|
|
|
10.5
|
Agreement,
dated December 30, 2009, among Great East Bottles & Drinks (BVI) Inc.,
Top Sharp Investments Limited and Best Key Investment Limited (English
translation)
|
|
|
10.6
|
Option
Agreement, dated December 30, 2009, between Great East Packaging
International Limited and Great East Packaging Holdings Limited (English
translation)
|
|
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Rule 13-14(a) of the
Securities Exchange of 1934
|
|
|
31.2
|
Certification
of the Acting Principal Accounting Officer and Principal Financial Officer
pursuant to Rule 13-14(a) of the Securities Exchange of
1934
|
|
|
32.1
|
Certificate
of the Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2
|
Certificate
of the Acting Principal Accounting Officer and Principal Financial Officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
99.1
|
Audit
Committee Charter
|
36
SIGNATURES
In
accordance with the requirements of the Securities and Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
GREAT
EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC
|
|||
|
March
23, 2010
|
By:
|
/s/
Stetson Chung
|
|
|
Name:
|
Stetson
Chung
|
||
|
Title:
|
Chief
Executive Officer, President,
Director
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
March
23, 2010
|
By:
|
/s/
Stetson Chung
|
|
|
Name:
|
Stetson
Chung
|
||
|
Title:
|
Chief
Executive Officer, President and Director
|
||
|
March
23, 2010
|
By:
|
/s/
Danny Poon
|
|
|
Name:
|
Danny
Poon
|
||
|
Title:
|
Chief
Financial Officer (Acting Principal Accounting Officer)
|
||
37
To the
Board of Directors and Shareholders of
Great
East Bottles and Drinks (China) Holdings, Inc. and subsidiaries
Hong
Kong
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
We have
audited the accompanying consolidated balance sheets of Great East Bottles and
Drinks (China) Holdings, Inc. and subsidiaries (the Company) as of December 31,
2009 and 2008 and the consolidated statements of income, stockholders’ equity
and comprehensive income and cash flows for each of the years in the two year
period ended December 31, 2009. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (“PCAOB”). Those standards require that we
plan and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used, significant estimates made by
management and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, these consolidated financial statements referred to above present
fairly, in all material aspects, the consolidated financial position of the
Company as of December 31, 2009 and 2008, and the consolidated results of its
operations and cash flows for each of the years in the two year period ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.
s/Madsen &
Associates CPA’s, Inc.
Madsen
& Associates CPA’s, Inc.
March 23,
2010
Salt Lake
City, Utah
GREAT
EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
December
31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,630,739 | $ | 207,308 | ||||
|
Restricted
cash
|
9,771,965 | 5,678,732 | ||||||
|
Accounts
receivable
|
5,620,841 | 3,987,739 | ||||||
|
Inventories,
net
|
4,348,410 | 4,474,969 | ||||||
|
Prepaid
expenses and other receivables
|
2,074,952 | 2,336,141 | ||||||
|
Total current
assets
|
23,446,907 | 16,684,889 | ||||||
|
PROPERTY,
PLANT & EQUIPMENT, NET
|
33,661,061 | 33,909,117 | ||||||
|
LAND
USE RIGHTS, NET
|
614,116 | 636,680 | ||||||
|
TOTAL
ASSETS
|
$ | 57,722,084 | $ | 51,230,686 | ||||
|
LIABILITIES
AND EQUITY
|
||||||||
|
LIABILITIES
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable
|
$ | 4,632,352 | $ | 4,653,505 | ||||
|
Notes
payable
|
1,725,727 | 2,303,646 | ||||||
|
Accrued
expenses and other payables
|
1,470,897 | 1,223,879 | ||||||
|
Amount
due to a related party
|
16,431,222 | 15,493,979 | ||||||
|
Taxes
payable
|
537,520 | 735,758 | ||||||
|
Current
maturities of long-term bank loans
|
7,967,013 | 4,829,870 | ||||||
|
Total current
liabilities
|
32,764,731 | 29,240,637 | ||||||
|
LONG-TERM BANK
LOAN
|
3,135,712 | 4,791,966 | ||||||
|
TOTAL
LIABILITIES
|
35,900,443 | 34,032,603 | ||||||
|
SHAREHOLDERS’
EQUITY
|
||||||||
|
Common stock, Par value $0.01;
375,000,000 shares authorized; $0.01 par value; 40,200,000 and 40,000,000
shares issued and outstanding in 2009 and 2008,
respectively
|
402,000 | 400,000 | ||||||
|
Additional paid in
capital
|
3,335,106 | 3,237,106 | ||||||
|
PRC statutory
reserves
|
919,146 | 830,672 | ||||||
|
Retained earnings/(accumulated
deficit)
|
658,399 | (198,860 | ) | |||||
|
Accumulated other comprehensive
income
|
1,557,163 | 1,613,808 | ||||||
|
Total
shareholders’ equity attributable to Great East Bottles & Drink
(China) Holdings, Inc. and subsidiaries
|
6,871,814 | 5,882,726 | ||||||
|
Noncontrolling
interests
|
14,949,827 | 11,315,357 | ||||||
|
TOTALSHAREHOLDERS’
EQUITY
|
21,821,641 | 17,198,083 | ||||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 57,722,084 | $ | 51,230,686 | ||||
See
accompanying notes to consolidated financial statements
F-1
GREAT
EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
Years
Ended December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
REVENUE
|
$ | 47,845,825 | $ | 44,478,224 | ||||
|
COST
OF SALES
|
35,909,267 | 34,868,946 | ||||||
|
GROSS
MARGIN
|
11,936,558 | 9,609,278 | ||||||
|
EXPENSES
|
||||||||
|
Selling and
distribution
|
1,031,579 | 785,131 | ||||||
|
General and
administrative
|
4,418,799 | 2,937,253 | ||||||
|
TOTAL
OPERATING EXPENSE
|
5,450,378 | 3,722,384 | ||||||
|
OPERATING
INCOME
|
6,486,180 | 5,886,894 | ||||||
|
OTHER
INCOME/(EXPENSE)
|
||||||||
|
Other
income
|
450,924 | 431,992 | ||||||
|
Interest income
|
167,043 | 347,237 | ||||||
|
Interest
expense
|
(755,567 | ) | (867,395 | ) | ||||
|
Other expenses
|
(608,082 | ) | (940,124 | ) | ||||
|
TOTAL
OTHER EXPENSE
|
(745,682 | ) | (1,028,290 | ) | ||||
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
5,740,498 | 4,858,604 | ||||||
|
PROVISION
FOR INCOME TAXES
|
1,159,279 | 948,949 | ||||||
|
INCOME
FROM CONTINUING OPERATIONS
|
4,581,219 | 3,909,655 | ||||||
|
DISCONTINUED
OPERATIONS
|
||||||||
|
Income from discontinued
operations
|
- | 1,311 | ||||||
|
Loss on disposal of
subsidiary
|
- | (31,405 | ) | |||||
|
LOSS
FROM DISCONTINUED OPERATIONS
|
- | (30,094 | ) | |||||
|
NET
INCOME
|
$ | 4,581,219 | $ | 3,879,561 | ||||
|
NET
INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
|
3,635,486 | 2,559,589 | ||||||
|
NET
INCOME ATTRIBUTABLE TO GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS,
INC. AND SUBSIDIARIES
|
945,733 | 1,319,972 | ||||||
|
OTHER
COMPREHENSIVE (LOSS)/INCOME ATTRIBUTABLE TO GREAT EAST BOTTLES &
DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
|
||||||||
|
(Loss)/gain
on foreign exchange translation
|
(56,645 | ) | 701,569 | |||||
|
COMPREHENSIVE
INCOME ATTRIBUTABLE TO GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS,
INC. AND SUBSIDIARIES
|
$ | 889,088 | $ | 2,021,541 | ||||
|
EARNINGS
PER SHARE, BASIC AND DILUTED
|
$ | 0.02 | $ | 0.03 | ||||
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
|
40,083,836 | 40,000,000 | ||||||
See
accompanying notes to consolidated financial statements
F-2
GREAT
EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY
AND
COMPREHENSIVE INCOME
Years
Ended December 31, 2009 and 2008
|
Common
stock
|
||||||||||||||||||||||||||||||||||||
|
Number
of shares
|
Amount
|
Additional
paid incapital
|
Capital
reserves
|
(Accumulated
deficit)/ retained earnings
|
Accumulated
other comprehensive income
|
Shareholders’
equity attributable to Great East Bottles & Drinks (China) Holdings,
Inc. and subsidiaries
|
Non-controlling
interest
|
Total
equity
|
||||||||||||||||||||||||||||
|
Balance
at January 1, 2008
|
8,000,000 | $ | 80,000 | $ | 3,467,106 | $ | 732,160 | $ | (1,418,962) | $ | 912,239 | $ | 3,772,543 | $ | 7,353,010 | $ | 11,125,553 | |||||||||||||||||||
|
Net
income for the year
|
- | - | - | - | 1,319,972 | - | 1,319,972 | 2,559,589 | 3,879,561 | |||||||||||||||||||||||||||
|
1
for 5 forward split
|
32,000,000 | 320,000 | (320,000) | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
Non-cash
capital contribution by an officer
|
- | - | 90,000 | - | - | - | 90,000 | - | 90,000 | |||||||||||||||||||||||||||
|
Utilization
during the year
|
- | - | - | (1,358) | - | - | (1,358) | - | (1,358) | |||||||||||||||||||||||||||
|
Transfer
from retained earnings to PRC statutory reserves
|
- | - | - | 99,870 | (99,870) | - | - | - | - | |||||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | - | 701,569 | 701,569 | 1,402,758 | 2,104,327 | |||||||||||||||||||||||||||
|
Balance
at December 31, 2008 and January
1, 2009
|
40,000,000 | $ | 400,000 | $ | 3,237,106 | $ | 830,672 | $ | (198,860) | $ | 1,613,808 | $ | 5,882,726 | $ | 11,315,357 | $ | 17,198,083 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net
income for the year
|
- | - | - | - | 945,733 | - | 945,733 | 3,635,486 | 4,581,219 | |||||||||||||||||||||||||||
|
Stock
issued for services at $.50 per share
|
200,000 | 2,000 | 98,000 | - | - | - | 100,000 | - | 100,000 | |||||||||||||||||||||||||||
|
Transfer
from retained earnings to PRC statutory reserves
|
- | - | - | 88,474 | (88,474) | - | - | - | - | |||||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | - | (56,645) | (56,645) | (1,016) | (57,661) | |||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
40,200,000 | $ | 402,000 | $ | 3,335,106 | $ | 919,146 | $ | 658,399 | $ | 1,557,163 | $ | 6,871,814 | $ | 14,949,827 | $ | 21,821,641 | |||||||||||||||||||
See
accompanying notes to consolidated financial statements
F-3
GREAT
EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
income
|
$ | 4,581,219 | $ | 3,879,561 | ||||
|
Less: Net
income attributable to noncontrolling interests
|
3,635,486 | 2,559,589 | ||||||
|
Net
income attributable to Great East Bottles & Drinks (China) Holdings,
Inc. and Subsidiaries
|
945,733 | 1,319,972 | ||||||
|
Adjustments
to reconcile net income to net cash flows provided by operating activities
for:
|
||||||||
|
Depreciation
|
3,285,260 | 2,621,025 | ||||||
|
Amortization
of land use right
|
15,624 | 15,434 | ||||||
|
Stock
issued for services
|
100,000 | - | ||||||
|
Net
income attributable to noncontrolling interest
|
3,635,486 | 2,559,589 | ||||||
|
Non
cash contribution by an officer
|
- | 90,000 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Increase
in accounts receivable
|
(1,633,102 | ) | (198,404 | ) | ||||
|
Decrease
in inventories
|
126,559 | 79,209 | ||||||
|
Decrease/(increase)
in prepaid expenses and other receivables
|
261,189 | (1,539,365 | ) | |||||
|
Decrease
in other assets
|
- | 275 | ||||||
|
(Decrease)/increase
in accounts payable
|
(21,153 | ) | 1,588,517 | |||||
|
Decrease
in taxes payable
|
(198,238 | ) | (29,075 | ) | ||||
|
Increase
in accrued expenses and other payables
|
247,018 | 388,839 | ||||||
|
Net
cash provided by operating activities
|
6,764,376 | 6,896,016 | ||||||
|
Cash
flows from investing activities
|
||||||||
|
Purchase
of plant and equipment
|
(3,028,969 | ) | (10,203,994 | ) | ||||
|
Net
cash used in investing activities
|
(3,028,969 | ) | (10,203,994 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Proceeds
from bank loans
|
6,293,627 | 7,103,993 | ||||||
|
Repayment
of bank loans
|
(4,861,795 | ) | (7,444,293 | ) | ||||
|
(Decrease)/increase
in notes payable
|
(577,919 | ) | 1,217,690 | |||||
|
Increase/(decrease)
in amount due to a related party
|
937,243 | (91,169 | ) | |||||
|
Decrease
in capital reserve
|
- | (1,358 | ) | |||||
|
(Decrease)/increase
in restricted cash
|
(4,093,233 | ) | 1,716,010 | |||||
|
Net
cash (used in)/provided by financing activities
|
(2,302,077 | ) | 2,500,873 | |||||
|
Net
increase/(decrease) in cash and cash equivalents
|
1,433,330 | (807,105 | ) | |||||
|
Effect
of foreign exchange rate changes
|
(9,899 | ) | 794,815 | |||||
|
Cash
and cash equivalents at beginning of year
|
207,308 | 219,598 | ||||||
|
Cash
and cash equivalents at end of year
|
$ | 1,630,739 | $ | 207,308 | ||||
|
Supplemental
disclosure of cash flows information:
|
||||||||
|
Cash
paid for interest
|
$ | 755,567 | $ | 867,395 | ||||
|
Cash
paid for income taxes
|
$ | 1,206,884 | $ | 1,065,083 | ||||
|
Non
cash financing activities:
|
||||||||
|
Stock
issued for services
|
$ | 100,000 | $ | - | ||||
|
Officer
compensation contributed to additional paid-in capital
|
$ | - | $ | 90,000 | ||||
See
accompanying notes to consolidated financial statements
F-4
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE 1 – ORGANIZATION AND
PRINCIPAL ACTIVITIES
Great
East Bottles & Drinks (China) Holdings, Inc. and subsidiaries (the
“Company”) are a group of manufacturers producing beverage bottles and OEM
bottled water in the People’s Republic of China (“PRC” or “China”).
At
December 31, 2009, details of the Company’s subsidiaries are as
follows:
|
Name
|
Place
of
incorporation
|
Effective
ownership
|
Principal
activities
|
|||
|
Great
East Bottles & Drinks (BVI) Inc., formerly known as Citysky Investment
Holding Inc (“GEBD BVI” or “Citysky”)
|
BVI
|
100%
|
Investment
holdings
|
|||
|
Great
East Bottles & Drinks Holdings, Limited
|
Hong
Kong
|
100%
|
Provision
of management services for group companies
|
|||
|
Great
East Packaging International Limited (“GEPI”)
|
BVI
|
33.6%
|
Investment
holding
|
|||
|
Great
East Packaging (Nanjing) Limited (“GEPNJ”)
|
BVI
|
33.6%
|
Investment
holding
|
|||
|
Great
East Packaging (Xian) Limited (“GEPXA”)
|
BVI
|
33.6%
|
Investment
holding
|
|||
|
Hangzhou
Great East Packaging Co., Limited (“HZGE”)
|
PRC
|
33.6%
|
Production
of beverage bottles
|
|||
|
Nanjing
Great East Packaging Co., Limited (“NJGE”)
|
PRC
|
33.6%
|
Production
of beverage bottles
|
|||
|
Xian
Great East Packaging Co., Limited (“XAGE”)
|
PRC
|
33.6%
|
Production
of beverage bottles
|
|||
|
Upjoy
Holdings Limited (“Upjoy”)
|
BVI
|
33.6%
|
Investment
holding
|
|||
|
United
Joy International Limited (“United Joy”)
|
BVI
|
33.6%
|
Investment
holding
|
|||
|
Greatgrand
Global Limited (“Greatgrand”)
|
BVI
|
33.6%
|
Investment
holding
|
|||
|
Hangzhou
Crystal Pines Beverages & Packaging Co. Ltd (“HZCP”)
|
PRC
|
33.6%
|
Production
of OEM bottled water
|
|||
|
Nanjing
Crystal Pines Beverages & Packaging Co. Ltd (“NJCP”)
|
PRC
|
33.6%
|
Production
of OEM bottled water
|
|||
|
Shenyang
Great East Packaging Co. Ltd (“SYGE”)
|
PRC
|
33.6%
|
Production
of OEM bottled water
|
|||
|
Great
East (Overseas) Packaging Limited (“GEOP”)
|
Hong
Kong
|
33.6%
|
Investment
holdings
|
In June
2008, Hangzhou Crystal Pines opened a branch in Taizhou city, Zhejiang province
of the PRC, which engages in the same business as Hangzhou Crystal
Pines.
In July
2008, Nanjing Crystal Pines setup opened a branch in Hefei city, Anhui province
of the PRC, which engages in the same business as Nanjing Crystal
Pines.
On August
10, 2009, Citysky formed Great East Bottles & Drinks Holdings, Limited, a
wholly owned subsidiary registered in Hong Kong. The new subsidiary has
authorized and issued 10,000 common shares of HK$1 each, and is principally
engaged in the provision of management services for group
companies.
On August
19, 2009, Citysky changed its name to Great East Bottles & Drinks (BVI)
Inc.
F-5
NOTE 2 –
REORGANIZATION
On
December 30, 2009, the Company reorganized by transferring effectively 60% of
its equity interests in its three operating subsidiaries (as owned through GEPI)
to GEPH, in return for effectively a 33.6% equity ownership interest in three
other operating entities previously owned by GEPH. The Company and GEPH are
affiliated through majority common ownership by Mr. Guy A-Tsan
Chung.
This
reorganization was accounted for as a transfer of entities under common control
in a manner similar to a pooling of interests. Accordingly, the financial
statements of the commonly controlled entities have been combined
retrospectively, as if the transaction had occurred as of the beginning of the
periods presented.
NOTE 3 – PRINCIPLES OF
CONSOLIDATION
The
accompanying consolidated financial statements include the accounts of the
Company and the Company’s subsidiaries (see Note 1). The consolidated financial
statements are prepared in accordance with generally accepted accounting
principles used in the United States of America, and all significant
intercompany balances and transactions have been eliminated.
Despite a
less than majority percentage of ownership, the Company is consolidating all
entities listed in Footnote 1 with effective ownership percentages of 33.6%, in
accordance with ASC 810 due to the following facts:
|
-
|
The
Company possesses controlling power through voting rights to direct the
activities of these entities that most significantly impact the entity’s
economic performance, and
|
|
-
|
The
Company has the obligation to absorb losses of these entities, if
any.
|
All
assets transferred between entities under common control are accounted for at
historical cost similar to a pooling of interest.
The
functional currency for the majority of the Company’s operations is the Renminbi
(“RMB”), while the reporting currency is the US Dollar.
NOTE 4 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Economic
and Political Risk
|
The
Company’s major operations are conducted in China. Accordingly, the political,
economic, and legal environments in the PRC, as well as the general state of the
PRC’s economy may influence the Company’s business, financial condition, and
results of operations.
The
Company’s major operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic, and legal environment. The Company’s results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, and rates and methods of taxation,
among other things.
|
(b)
|
Cash
and Cash Equivalents
|
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The
Company maintains bank accounts in Hong Kong and China.
|
(c)
|
Restricted
cash
|
As of
December 31, 2009 and 2008, restricted cash consisted of cash pledged as
deposits for bankers’ notes facilities.
|
(d)
|
Accounts
Receivable
|
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Bad debts are
written off as incurred. There were no bad debts incurred for accounts
receivables during the years ended December 31, 2009 and 2008. Management
exercises judgment in establishing these allowances and considers payment
history and current credit status in developing these estimates. As the
Company’s sales are primarily to United States customers with excellent credit
ratings and since Company has incurred minimal bad debts in the past, no
allowance for doubtful accounts has been recorded as of December 31, 2009 or
2008.
F-6
|
(e)
|
Prepaids
and Other Receivables
|
Prepaid
expenses consists of payments and deposits made by the Company to third parties
in the normal course of business operations with no interest being charged and
no fixed terms of repayment. These payments are made for the purchase of goods
and services that are used by the Company for its current
operations.
The
Company evaluates the amounts recorded as prepaid expenses and other receivables
on a periodic basis and records a charge to the current operations of the
Company when the related expense has been incurred or when the amounts reported
as other receivables is no longer deemed to be collectible by the
Company.
|
(f)
|
Inventories
|
Inventories
consisting of raw materials, work-in-progress, goods in transit and finished
goods are stated at the lower of cost or net realizable value. Finished goods
are comprised of direct materials, direct labor and a portion of overhead.
Inventory costs are calculated using a weighted average, first in first out
(FIFO) method of accounting. Provision for slow moving inventories
for the years ended December 31, 2009 and 2008 was nil and $93,768,
respectively.
|
(g)
|
Property,
Plant and Equipment, Net
|
Property,
plant and equipment are carried at cost less accumulated depreciation. The cost
of maintenance and repairs is charged to operations as incurred, whereas
significant renewals and improvements are capitalized. The cost and the related
accumulated depreciation of assets sold or otherwise retired are eliminated from
the accounts and any gain or loss is included in the statement of
income.
|
(h)
|
Land
use rights
|
According
to the law of PRC, the government owns all the land in the PRC. Companies or
individuals are authorized to possess and use the land only through land use
rights granted by the PRC government for 40 to 50 years.
|
(i)
|
Depreciation
and Amortization
|
The
Company provides for depreciation of plant and equipment by use of the
straight-line method for financial reporting purposes.
Plant and
equipment are depreciated over the following estimated useful
lives:
|
Building
|
20
years
|
|
Leasehold
improvement
|
5
years
|
|
Office
equipment
|
5
years
|
|
Machinery
and equipment
|
5 –
15 years
|
|
Transportation
equipment
|
5
years
|
Land use
rights are amortized over 50 years.
Depreciation
expense for the years ended December 31, 2009 and 2008 was $3,285,260 and
$2,621,025, respectively.
Amortization
expense for the years ended December 31, 2009 and 2008 was $15,624 and $15,434,
respectively.
(j) Accounting
for the Impairment of Long-Lived Assets
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is possible that these assets could become
impaired as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the carrying amount
of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Impairment
analyses are based on our current plans, intended holding periods and available
market information at the time the analyses are prepared. If our estimates of
the projected future cash flows, anticipated holding periods, or market
conditions change, our evaluation of impairment losses may be different and such
differences could be material to our consolidated financial statements. The
evaluation of anticipated cash flows is subjective and is based, in part, on
assumptions regarding future events that could differ materially from actual
results. There were no impairments of long-lived assets for the years ended
December 31, 2009 and 2008.
F-7
(k) Income
Tax
Income
taxes are based on pre-tax financial accounting income. Deferred tax assets and
liabilities are recognized for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts. The Company periodically assesses the need to establish valuation
allowances against its deferred tax assets to the extent the Company no longer
believes it is more likely than not that the tax assets will be fully
utilized.
The
Company evaluates a tax position to determine whether it is more likely than not
that the tax position will be sustained upon examination, based upon the
technical merits of the position. A tax position that meets the
more-likely-than-not recognition threshold is subject to a measurement
assessment to determine the amount of benefit to recognize and the appropriate
reserve to establish, if any. If a tax position does not meet the
more-likely-than-not recognition threshold, no benefit is
recognized
In
accordance with the relevant tax laws and regulations of PRC, the applicable
corporation income tax rate was 25% for the years ended December 31, 2009 and
2008, respectively. At times generally accepted accounting principles
requires the Company to recognize certain income and expenses that do not
conform to the timing and conditions allowed by the PRC.
(l) Fair
Value of Financial Instruments
The
Company’s financial instruments primarily consist of cash and cash equivalents,
accounts receivable, prepaid expenses and other receivables, tax recoverable,
accounts payable, accrued expenses and other payables, note payables, taxes
payable and amount due to a related party.
The
estimated fair value amounts have been determined by the Company, using
available market information or other appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Consequently, the estimates are not necessarily
indicative of the amounts that could be realized or would be paid in a current
market exchange.
As of the
balance sheet dates, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented, due to the
short maturities of these instruments and the fact that the interest rates on
the borrowings approximate those that would have been available for loans of
similar remaining maturity and risk profiles at respective year
ends.
(m) Revenue
Recognition
Revenue
represents the invoiced value of goods sold recognized upon the shipment of
goods to customers. Revenue is recognized when all of the following criteria are
met:
|
a)
|
Persuasive
evidence of an arrangement exists,
|
|
b)
|
Delivery
has occurred,
|
|
c)
|
The
seller’s price to the buyer is fixed or determinable,
and
|
|
d)
|
Collectability
is reasonably assured.
|
(n) Earnings Per Share
Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were
dilutive. As of December 31, 2009 and 2008, there were no dilutive
securities outstanding.
(o) Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. Actual results may differ from those estimates.
(p) Retirement
Benefits
The
country of PRC mandates companies to contribute funds into the national
retirement system, which benefits qualified employees based on where they were
born within the country. The Company pays the required payment for qualified
employees of the Company as a payroll tax expense. Very few employees in the
Company fall under the mandatory conditions requiring the Company to pay as a
payroll tax expense into the retirement system of the PRC.
F-8
The
Company’s PRC subsidiaries are required to make appropriations to staff welfare
fund, based on after-tax net income determined in accordance with generally
accepted accounting principles of the People’s Republic of China (the “PRC
GAAP”). Appropriations to the staff welfare fund are made at the discretion of
the Board of Directors. The staff welfare fund is established for the purpose of
providing employee facilities and other collective benefits to the employees and
is non-distributable other than in liquidation.
The
Company provides no other retirement benefits to its employees.
(q) Comprehensive
Income
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, all
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. Comprehensive income includes net income and the foreign
currency translation gain, net of tax.
(r) Foreign
Currency Translation
The
accompanying consolidated financial statements are presented in United States
Dollars (US$). The functional currency of the Company is the Renminbi (RMB).
Capital accounts of the consolidated financial statements are translated into
United States dollars from RMB at their historical exchange rates when the
capital transactions occurred. Assets and liabilities are translated at the
exchange rates as of balance sheet date. Income and expenditures are translated
at the average exchange rate of the year. The translation rates are
as follows:
|
2009
|
2008
|
|||||||
|
|
||||||||
|
Year
end RMB : US$ exchange rate
|
0.1468 | 0.1458 | ||||||
|
Average
yearly RMB : US$ exchange rate
|
0.1464 | 0.1446 | ||||||
On July
21, 2005, the PRC changed its foreign currency exchange policy from a fixed
RMB/US$ exchange rate into a flexible rate under the control of the PRC’s
government.
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
(s) Share-based
payments
The
Company recognizes compensation expense for all stock-based payment awards made
to employees, contractors and non-employee directors. Stock-based compensation
expense is measured at the grant date based on the fair value of the award and
is recognized as expense over the requisite service period, which is generally
the vesting period.
Share-based
payments (stock issued for services) charged to administrative expenses for the
years ended December 31, 2009 and 2008 were $100,000 and nil,
respectively.
(t) Recent
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (the "FASB") issued guidance
which establishes the FASB Accounting Standards Codification (the “Codification”
or “ASC”) as the official single source of authoritative GAAP. All existing
accounting standards are superseded by the Codification, and all other
accounting guidance not included in the Codification will be considered
non-authoritative. The Codification also includes all relevant SEC guidance
organized using the same topical structure in separate sections within the
Codification. Following the Codification, the FASB will not issue new standards
in the form of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”), which
will serve to update the Codification, provide background information about the
guidance and provide the basis for conclusions on the changes to the
Codification. The Codification is not intended to change GAAP, but did change
the way GAAP is organized and presented. The Codification was effective for
interim and annual periods ending after September 15, 2009, and the Company
adopted the provisions of the Codification beginning with financial statements
issued after September 15, 2009. The impact on the Company’s financial
statements is limited to disclosures, in that references to authoritative
accounting literature no longer reference the prior guidance.
F-9
In August
2009, the FASB issued additional guidance clarifying the measurement of
liabilities at fair value. When a quoted price in an active market for the
identical liability is not available, the amendments require that the fair value
of a liability be measured using one or more of the listed valuation techniques
that should maximize the use of relevant observable inputs and minimize the use
of unobservable inputs. In addition the amendments clarify that when estimating
the fair value of a liability, an entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of the liability. The amendment also clarifies how
the price of a traded debt security (i.e., an asset value) should be considered
in estimating the fair value of the issuer’s liability. The amendments were
effective immediately. The adoption of this amendment did not have a significant
impact on the Company’s financial statements.
In
October 2009, the FASB issued guidance that supersedes certain previous rules
relating to how a company allocates consideration to all of its deliverables in
a multiple-deliverable revenue arrangement. The revised guidance eliminates the
use of the residual method of allocation in which the undelivered element is
measured at its estimated selling price and the delivered element is measured as
the residual of the arrangement consideration and alternatively requires that
the relative-selling-price method be used in all circumstances in which an
entity recognizes revenue for an arrangement with multiple-deliverables. The
revised guidance requires both ongoing disclosures regarding an entity’s
multiple-element revenue arrangements as well as certain transitional
disclosures during periods after adoption. All entities must adopt the revised
guidance no later than the beginning of their first fiscal year beginning on or
after June 15, 2010 with earlier adoption allowed. Entities may elect to adopt
the guidance through either prospective application or through retrospective
application to all revenue arrangements for all periods presented. The Company
plans to adopt the revised guidance effective January 1, 2011. The Company does
not believe the adoption of this new guidance will have a significant impact on
the Company’s financial statements.
In
January 2010, the FASB issued a standard update that clarifies the scope and
establishes the accounting and reporting guidance for noncontrolling interests
and changes in ownership interest of a subsidiary. This standard update is
effective beginning with the interim or annual reporting period ending on or
after December 15, 2009. The Company began applying this new amendment in its
December 31, 2009 financial statements. The adoption of this amendment did not
have a significant impact on the Company’s financial statements.
In June
2009, the FASB issued an update to ASC 810, Consolidation, which gives guidance
used in determining the primary beneficiary of a variable interest entity
(“VIE”) by requiring entities to qualitatively assess whether an enterprise is a
primary beneficiary, based on whether the entity has (I) power over the
significant activities of the VIE, and (ii) an obligation to absorb losses or
the right to receive benefits that could be potentially significant to the
VIE.
Partially
Owned Entities: In determining whether we have a controlling interest in a
partially owned entity and the requirement to consolidate the accounts of that
entity, we consider factors such as ownership interest, board representation,
management representation, authority to make decisions, and contractual and
substantive participating rights of the partners/members as well as whether the
entity is a variable interest entity in which we have power over significant
activities of the entity and the obligation to absorb a majority of the entity’s
expected losses, if they occur, or receive a majority of the expected residual
returns, if they occur, or both. We have concluded that we do not control a
partially owned entity if the entity is not considered a variable interest
entity and the approval of all of the partners/members is contractually required
with respect to major decisions, such as operating and capital budgets, the
sale, exchange or other disposition of real property, the hiring of a chief
executive officer, the commencement, compromise or settlement of any lawsuit,
legal proceeding or arbitration or the placement of new or additional financing
secured by assets of the venture.
NOTE 5 – ACCOUNTS
RECEIVABLE
The
Company’s accounts receivable as of the balance sheet dates are summarized as
follows:
|
2009
|
2008
|
|||||||
|
Accounts
receivable
|
$ | 5,620,841 | $ | 3,987,739 | ||||
|
Less:
Allowance for doubtful accounts
|
- | - | ||||||
|
Accounts
receivable, net
|
$ | 5,620,841 | $ | 3,987,739 | ||||
NOTE 6 – RESTRICTED
CASH
Amount
represents restricted cash pledged as deposits for bankers’ notes facilities
(Notes payable – see Footnote 12). As of December 31, 2009 and 2008, restricted
cash is summarized as follows:
F-10
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
China
Construction Bank
|
$ | 3,155,182 | $ | 3,488,114 | ||||
|
Bank
of China
|
1,407,064 | 1,458,367 | ||||||
|
Industrial
and Commercial Bank of China
|
- | 72,919 | ||||||
|
Guangdong
Development Bank
|
2,641,548 | 659,332 | ||||||
|
China
Merchants Bank
|
2,568,171 | - | ||||||
| $ | 9,771,965 | $ | 5,678,732 | |||||
NOTE 7 –
INVENTORIES
Inventories
as of December 31, 2009 and 2008 are summarized as follows:
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 1,610,478 | $ | 1,602,689 | ||||
|
Work-in-progress
|
1,724,006 | 2,130,942 | ||||||
|
Finished
goods
|
669,546 | 800,198 | ||||||
|
Goods-in-transit
|
344,380 | 34,908 | ||||||
|
Less:
Provision for slow moving inventories
|
- | (93,768 | ) | |||||
|
Total
|
$ | 4,348,410 | $ | 4,474,969 | ||||
Provision
for slow moving inventories for the year ended December 31, 2008 was $93,768.
The amount was charged off against gross inventories during the year ended
December 31, 2009.
F-11
NOTE 8 – PREPAID EXPENSES
AND OTHER RECEIVABLES
Prepaid
expenses and other receivables as of December 31, 2009 and 2008 are summarized
as follows:
|
2009
|
2008
|
|||||||
|
Prepaid
expenses
|
$ | 1,384,234 | $ | 1,658,051 | ||||
|
Other
receivables
|
689,423 | 528,421 | ||||||
|
Tax
recoverable
|
1,295 | 149,669 | ||||||
|
Total
|
$ | 2,074,952 | $ | 2,336,141 | ||||
NOTE 9 – PROPERTY, PLANT AND
EQUIPMENT, NET
Property,
plant and equipment of the Company consist primarily of manufacturing facilities
and equipment owned and operated by the Company’s subsidiaries in China.
Property, plant and equipment as of December 31, 2009 and 2008 are summarized as
follows:
|
2009
|
2008
|
|||||||
|
At
cost:
|
||||||||
|
Building
|
$ | 5,797,374 | $ | 5,847,302 | ||||
|
Machinery
|
45,979,781 | 43,176,811 | ||||||
|
Office
equipment
|
813,026 | 1,134,841 | ||||||
|
Leasehold
improvements
|
1,115,099 | 891,856 | ||||||
|
Transportation
vehicles
|
1,044,435 | 1,059,950 | ||||||
|
Construction in
progress
|
3,981,197 | 3,893,983 | ||||||
| 58,730,912 | 56,004,743 | |||||||
|
Less:
Accumulated depreciation/amortization
|
$ | (25,069,851 | ) | $ | (22,095,626 | ) | ||
|
Property,
plant and equipment, net
|
$ | 33,661,061 | $ | 33,909,117 | ||||
As of
December 31, 2009 and 2008, certain property, plant and equipment with net book
value of $4,062,438 and $4,489,243 were pledged to secure the Company’s bank
borrowings.
Depreciation
and amortization expense for the years ended December 31, 2009 and 2008 was
$3,285,260 and $2,621,025, respectively. The allocation of depreciation expense
for years ended December 31, 2009 and 2008 is summarized as
follows:
|
2009
|
2008
|
|||||||
|
Included
in cost of sales
|
$ | 3,200,575 | $ | 2,514,802 | ||||
|
Included
in general and administrative expenses
|
84,685 | 106,223 | ||||||
|
Total
depreciation and amortization expense
|
$ | 3,285,260 | $ | 2,621,025 | ||||
NOTE 10 – LAND USE
RIGHTS
Land use
rights as of December 31, 2009 and 2008 is summarized as follows:
|
2009
|
2008
|
|||||||
|
At
cost:
|
||||||||
|
Land use rights
|
$ | 773,754 | $ | 779,863 | ||||
|
Less:
Accumulated amortization
|
(159,638 | ) | (143,183 | ) | ||||
|
Total
|
$ | 614,116 | $ | 636,680 | ||||
Amortization
expense for the years ended December 31, 2009 and 2008 was $15,624 and $15,434,
respectively.
As of
December 31, 2009 and 2008, the Company’s land use right was pledged to secure
certain bank loans.
F-12
NOTE 11 –NOTES
PAYABLE
Banks
issue notes to the Company’s suppliers payable at any time prior to a maturity
date as part of the credit facility granted to the Company. Should the
supplier want to call the note prior to maturity, the bank would satisfy the
note at a discount, and then be paid the full face amount of the note by the
Company, at maturity. The Company is also required to make certain
deposits into its bank accounts at the date of issue and until maturity.
As such, there is no interest payable by the Company to the banks under this
credit facility, and Company payments are always due at the maturity
date.
As of the
balance sheet dates, the Company’s notes payable were summarized as
follows:
|
Maturity
date
|
2009
|
2008
|
|||||||
|
China
Construction Bank
|
Jan
2009
|
$ | - | $ | 247,922 | ||||
|
China
Construction Bank
|
Feb
2009
|
- | 408,343 | ||||||
|
China
Construction Bank
|
Mar
2009
|
- | 218,755 | ||||||
|
DBS
Bank (Hong Kong) Limited
|
Mar
2010
|
439,851 | - | ||||||
|
DBS
Bank (Hong Kong) Limited
|
Jan
2010
|
145,608 | - | ||||||
|
DBS
Bank (Hong Kong) Limited
|
Jan
2010
|
146,753 | - | ||||||
|
DBS
Bank (Hong Kong) Limited
|
Jan
2009
|
- | 820,304 | ||||||
|
DBS
Bank (Hong Kong) Limited
|
Apr
2009
|
- | 54,142 | ||||||
|
Bank
of China
|
Jan
2010
|
626,634 | - | ||||||
|
Bank
of China
|
Mar
2010
|
366,881 | - | ||||||
|
Bank
of China
|
Feb
2009
|
- | 291,674 | ||||||
|
Bank
of China
|
May
2009
|
- | 262,506 | ||||||
|
Total
notes payable
|
$ | 1,725,727 | $ | 2,303,646 | |||||
As of the
balance sheet dates, all the notes of the Company are repayable within one year.
Finance charges in connection with discounted notes for the years ended December
31, 2009 and 2008 were $322,516 and $521,274, respectively.
NOTE 12 – AMOUNT DUE TO A
RELATED PARTY
Amount
due to a related party as of December 31, 2009 and 2008 represents advances from
GEPH for the Company’s working capital use. The amount is interest free and has
no fixed terms of repayment. GEPH is considered as a related party as the
Company’s majority shareholder, Mr. Guy A-Tsan Chung, owned 73.88% of the
Company and was an affiliate of GEPH as of December 31, 2009.
NOTE 13 – ACCRUED EXPENSES
AND OTHER PAYABLES
As of the
balance sheet dates, the Company’s accrued expenses and other payables are
summarized as follows:
|
2009
|
2008
|
|||||||
|
Deposit
received in advance from customers
|
$ | 527,287 | $ | 267,352 | ||||
|
Accrued
expenses
|
264,795 | 206,176 | ||||||
|
Other
payables
|
678,815 | 750,351 | ||||||
|
Total
|
$ | 1,470,897 | $ | 1,223,879 | ||||
Other
payables are non interest bearing and are payable within a year.
F-13
NOTE 14 – TAXES
PAYABLE
As of the
balance sheet dates, the Company’s taxes payable are summarized as
follows:
|
2009
|
2008
|
|||||||
|
Income
tax payables
|
$ | 215,705 | $ | 263,310 | ||||
|
Value
added tax and other tax payables
|
321,815 | 472,448 | ||||||
|
Total
|
$ | 537,520 | $ | 735,758 | ||||
NOTE 15 – BANK
LOANS
Bank
loans of the Company as of December 31, 2009 and 2008 were summarized as
follows:
|
Interest
rate
|
Bank
loan balance
|
||||||||
|
as
of December 31,
|
as
of December 31,
|
||||||||
|
Name
of bank
|
2009
|
2008
|
2009
|
2008
|
|||||
|
China
Construction Bank
|
5.310%
|
7.470%
|
1,467,527
|
875,020
|
|||||
|
Industrial
and Commercial Bank of China
|
4.860%
to
5.841%
|
7.920%
to
8.217%
|
587,010
|
1,283,363
|
|||||
|
Bank
of Communication
|
5.841%
|
7.330%
|
1,467,527
|
1,166,694
|
|||||
|
DBS
Bank (Hong Kong) Limited
|
6.910%
to
10.836%
|
9.180%
|
2,757,622
|
3,958,215
|
|||||
|
Hang
Seng Bank Limited
|
7.000%
|
7.750%
|
2,034,738
|
2,338,544
|
|||||
|
China
Merchants Bank
|
5.841%
|
N/A
|
1,320,774
|
-
|
|||||
|
Shanghai
Pudong Development Bank
|
5.840%
|
N/A
|
1,467,527
|
-
|
|||||
|
$
|
11,102,725
|
$
|
9,621,836
|
||||||
|
Less:
|
|||||||||
|
Repayable
after one year but within two years
|
(1,319,076)
|
(1,665,437)
|
|||||||
|
Repayable
after two years but within five years
|
(1,720,290)
|
(2,588,691)
|
|||||||
|
Repayable
after five years
|
(96,346)
|
(537,838)
|
|||||||
|
Current
portion
|
7,967,013
|
4,829,870
|
|||||||
The
maturity dates for the above bank loan are summarized as follows:
F-14
|
Bank
loan balance
|
||||||||||||
|
As
of December 31,
|
||||||||||||
|
Name
of bank
|
Drawn
down currency
|
Due
date
|
2009
|
2008
|
||||||||
|
China
Construction Bank
|
RMB
|
May-10
|
$ | 1,467,527 | $ | - | ||||||
|
China
Construction Bank
|
RMB
|
Apr-09
|
- | 875,020 | ||||||||
|
Industrial
and Commercial Bank of China
|
RMB
|
Jan-10
|
146,753 | - | ||||||||
|
Industrial
and Commercial Bank of China
|
RMB
|
Oct-10
|
440,258 | - | ||||||||
|
Industrial
and Commercial Bank of China
|
RMB
|
Sep-09
|
- | 845,853 | ||||||||
|
Industrial
and Commercial Bank of China
|
RMB
|
Sep-09
|
- | 437,510 | ||||||||
|
Bank
of Communication
|
RMB
|
Jul-10
|
733,763 | - | ||||||||
|
Bank
of Communication
|
RMB
|
Aug-10
|
733,763 | - | ||||||||
|
Bank
of Communication
|
RMB
|
Jun-09
|
- | 1,166,694 | ||||||||
|
DBS
Bank (Hong Kong) Limited
|
RMB
|
Nov-12
|
1,301,899 | 1,677,799 | ||||||||
|
DBS
Bank (Hong Kong) Limited
|
RMB
|
Mar-11
|
84,337 | 135,216 | ||||||||
|
DBS
Bank (Hong Kong) Limited
|
RMB
|
Mar-11
|
33,721 | 59,730 | ||||||||
|
DBS
Bank (Hong Kong) Limited
|
RMB
|
Mar-12
|
166,878 | 237,653 | ||||||||
|
DBS
Bank (Hong Kong) Limited
|
RMB
|
Apr-11
|
629,010 | 1,031,558 | ||||||||
|
DBS
Bank (Hong Kong) Limited
|
RMB
|
Jun-11
|
541,777 | 816,259 | ||||||||
|
Hang
Seng Bank Limited
|
HKD
|
Feb-15
|
1,010,665 | 1,163,054 | ||||||||
|
Hang
Seng Bank Limited
|
HKD
|
Mar-15
|
1,024,073 | 1,175,490 | ||||||||
|
China
Merchants Bank
|
RMB
|
Feb-10
|
1,320,774 | - | ||||||||
|
Shanghai
Pudong Development Bank
|
RMB
|
Dec-10
|
1,467,527 | - | ||||||||
| $ | 11,102,725 | $ | 9,621,836 | |||||||||
The bank loans were secured and guaranteed by the following:
|
Secured
by:
|
Machineries
of the Company
|
|
Land
and buildings of the Company
|
|
|
Guaranteed
by:
|
Sole director of the
Company
|
|
Mr.
Stetson Chung – (i)
|
|
|
Group companies
|
|
|
Hangzhou
Great East Packaging Co. Limited
|
|
|
Hangzhou
Crystal Pines Beverages & Packaging Company Limited
|
|
|
Nanjing
Great East Packaging Co. Limited
|
|
|
Shenyang
Great East Packaging Co. Ltd.
|
|
|
Related parties
|
|
|
Mr.
Chung A Tsan Guy
|
|
|
Ms.
Christine Wong – (ii)
|
|
|
Great
East Packaging Holdings Limited – (iii)
|
|
|
Janwise
Limited – (iii)
|
|
|
Great
East Packaging (Hong Kong) Limited – (iii)
|
|
|
Shanghai
Great East Packaging Co. Ltd. – (iii)
|
|
|
(i)
|
Mr.
Stetson Chung is also the directors of the Company’s subsidiaries in the
PRC.
|
|
(ii)
|
Ms.
Christine Wong is the spouse of Mr. Stetson
Chung.
|
|
(iii)
|
These
companies are considered as related parties, as Mr. Guy A-Tsan Chung, who
owned 73.88% of the Company, was an affiliate of these companies as of
December 31, 2009.
|
Interest
expenses for the bank loan for the years ended December 31, 2009 and 2008 were
$755,567 and $867,395, respectively.
F-15
NOTE 16 – COMMON
STOCK
The
Company has 375,000,000 authorized shares, $0.01 par value, of common stock as
of December 31, 2009 and 2008.
On March
10, 2008, the Company entered into and completed the Share Exchange Agreement
with Citysky and the Shareholder. Pursuant to the terms of the Share Exchange
Agreement, the Company acquired 100% ownership of Citysky from the Shareholder.
Consideration by the Company was the issuance of 6,492,000 shares of its common
stock to the Shareholder. Subsequent to the completion of the Share Exchange
Agreement, Citysky became a wholly owned subsidiary of the Company and the
Company had a total of 8,000,000 shares of its common stock issued and
outstanding.
On April
16, 2008, our Board of Directors approved a 1 for 5 forward stock split of our
common stock. The record date for the stock split was April 26, 2008. Upon the
completion of forward split, the Company has a total of 40,000,000 shares of
common stock issued and outstanding.
In July
2009, we issued to a consultant 200,000 shares of our common stock in exchange
for professional services rendered. Based on the share price of $.50 per share
on the grant date, the fair value of these issued shares is $100,000. This
non-cash compensation is recorded as a component of the Company’s general and
administrative expense for the year ended December 31, 2009.
NOTE 17 – EARNINGS PER
SHARE
Earnings
per share for the years ended December 31, 2009 and 2008 is analyzed as
follows:
|
2009
|
2008
|
|||||||
|
Net
income attributable to Great East Bottles & Drinks (China) Holdings,
Inc. and Subsidiaries
|
$ | 945,733 | $ | 1,319,972 | ||||
|
Weighted
average number of shares
|
40,083,836 | 40,000,000 | ||||||
|
Earnings
per share
|
$ | 0.02 | $ | 0.03 | ||||
The
calculation of weighted average number of shares for the year ended December 31,
2009 is illustrated as follows:
|
2009
|
||||||||
|
Number
of
shares
|
Weighted
average
number
of shares
|
|||||||
|
At
January 1, 2009
|
40,000,000 | 40,000,000 | ||||||
|
Share
issuance completed at close of July 31, 2009
|
200,000 | 83,836 | ||||||
|
At
December 31, 2009
|
40,200,000 | 40,083,836 | ||||||
As of
December 31, 2009 and 2008, there were no dilutive securities
outstanding.
NOTE 18 – ADDITIONAL PAID-IN
CAPITAL
In July
2009, the Company issued 200,000 shares of our common stock to a consultant in
exchange for professional services rendered. The fair value of the share based
payment is $100,000, and the premium over par value of $98,000 was credited to
the Company’s additional paid-in capital.
In 2008,
the Chief Executive Officer of the Company contributed his compensation for the
year of $90,000 to the Company’s additional paid-in capital.
F-16
NOTE 19 – PRC STATUTORY
RESERVES
In
accordance with the PRC Companies Law, the Company’s PRC subsidiaries were
required to transfer 10% of their profit after tax, as determined in accordance
with accounting standards and regulations of the PRC, to the statutory surplus
reserve and a percentage of not less than 5%, as determined by management, of
the profit after tax to the public welfare fund. With the amendment of the PRC
Companies Law which was effective January 1, 2006, enterprises in the PRC are no
longer required to transfer any profit to the public welfare fund. Any balance
of public welfare fund brought forward from December 31, 2005 should be
transferred to the statutory surplus reserve. The statutory surplus reserve is
non-distributable.
NOTE 20 – SEGMENT
INFORMATION
The
Company has determined that it operates in only one segment as the production of
beverage bottles and OEM bottled water are similar operations, exposed to
similar risks and have the same decision making channels.
NOTE 21 – INCOME
TAX
The
provisions for income taxes for each of the two years ended December 31 are
summarized as follows:
|
2009
|
2008
|
|||||||
|
Current
|
$ | 1,159,279 | $ | 920,640 | ||||
|
Underprovision
in prior year
|
- | 28,309 | ||||||
| 1,159,279 | 948,949 | |||||||
|
Deferred
|
- | - | ||||||
|
Total
|
$ | 1,159,279 | $ | 948,949 | ||||
There are
no timing differences between reported book or financial income and income
computed for income tax purposes. Therefore, the Company has made no
adjustment for deferred tax assets or liabilities.
A
reconciliation of the expected tax with the actual tax expense is as
follows:
|
2009
|
2008
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Income
before provision for income taxes
|
$ | 5,740,498 | 4,858,604 | |||||||||||||
|
Expected
PRC income tax expense at statutory tax rate of 25%
|
1,435,125 | 25.0 | 1,214,651 | 25.0 | ||||||||||||
|
Tax
exemption
|
(701,645 | ) | (12.2 | ) | (113,904 | ) | (2.3 | ) | ||||||||
|
Tax
loss utilized from previous periods
|
- | - | (67,041 | ) | (1.5 | ) | ||||||||||
|
Underprovision
in prior year
|
- | - | 28,309 | 0.6 | ||||||||||||
|
Tax
effect of income not subject to tax
|
- | - | (113,066 | ) | (2.3 | ) | ||||||||||
|
Tax
effect of expenses not deductible
|
425,799 | 7.4 | - | - | ||||||||||||
|
Actual
tax expense
|
$ | 1,159,279 | 20.2 | $ | 948,949 | 19.5 | ||||||||||
|
(i)
|
The
Company’s subsidiaries in PRC are subject to PRC income tax. The provision
for PRC income tax is based on a statutory rate of 25% of the assessable
income of the PRC subsidiaries as determined in accordance with the
relevant income tax rules and regulations of the PRC. NJCP, HZCP and SYGE
each enjoys a tax holiday for the year of 2008 and 2009, and the
corresponding assessable profits are exempted from income
tax.
|
|
(ii)
|
BVI
companies are not subject to tax in accordance with the relevant tax laws
and regulations of the BVI.
|
|
(iii)
|
The
Hong Kong companies did not generate any assessable profits since their
incorporation and therefore are not subject to Hong Kong
tax.
|
F-17
NOTE 22 – OTHER
INCOME
Other
revenue for the years ended December 31, 2009 and 2008 are summarized as
follows:
|
2009
|
2008
|
|||||||
|
Sale
of scrapped materials
|
$ | 184,791 | $ | 272,031 | ||||
|
PRC
government subsidy
|
31,628 | - | ||||||
|
Foreign
currency exchange gain
|
142,382 | 73,571 | ||||||
|
Others
|
92,123 | 86,390 | ||||||
|
Total
|
$ | 450,924 | $ | 431,992 | ||||
NOTE 23 – INTEREST
INCOME
Interest
income for the years ended December 31, 2009 and 2008 are summarized as
follows:
|
2009
|
2008
|
|||||||
|
Interest
income
|
$ | 127,058 | $ | 238,960 | ||||
|
Interest
income from a related party
|
39,985 | 108,277 | ||||||
|
Total
|
$ | 167,043 | $ | 347,237 | ||||
In the
second quarter of 2009, and the first half of 2008, GEPI, GEPNJ and GEPXA and
their subsidiaries in the PRC recorded a net amount due from GEPH. The net
amount due from GEPH, if any, bears a 9% interest per annum, calculated by using
the effective interest method by applying the rates to the net carry amount of
the assets. Interest income accrued for 2009 and 2008 was $39,985 and $108,277,
respectively.
GEPI,
GEPNJ and GEPXA and their PRC subsidiaries were the original subsidiaries of the
Company before the Reorganization as stated in Footnote 2.
NOTE 24 – OTHER
EXPENSES
Other
expenses for the years ended December 31, 2009 and 2008 are summarized as
follows:
|
2009
|
2008
|
|||||||
|
Finance
charges on discounted notes
|
$ | 322,516 | $ | 521,274 | ||||
|
Other
finance handling charges
|
184,129 | 150,212 | ||||||
|
Other
interest expenses
|
46,217 | 204,364 | ||||||
|
Others
|
55,220 | 64,274 | ||||||
|
Total
|
$ | 608,082 | $ | 940,124 | ||||
NOTE 25 – RELATED PARTY
TRANSACTIONS
In
addition to the transactions detailed elsewhere in these financial statements,
the Company entered into the following material transactions with GEPH for the
years ended December 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
Sale
of beverage bottles, OEM bottled water and materials
|
$ | 1,391,949 | $ | 2,174,257 | ||||
|
Purchase
of bottles and materials
|
||||||||
|
- Included
in cost of sales
|
$ | 377,316 | $ | 607,933 | ||||
|
- Included
in inventories
|
25,150 | 49,469 | ||||||
|
Total
purchase from GEPH
|
$ | 402,466 | $ | 657,402 | ||||
The above
transactions were entered into by the Company in the normal course of
business.
F-18
NOTE 26 – CONCENTRATION OF
CREDIT RISK
For the
years ended December 31, 2009 and 2008, the customers who account for 10% or
more of sales of the Company are presented as follows:
|
2009
|
2008
|
|||||||||||||||
|
Sales
|
%
|
Sales
|
%
|
|||||||||||||
|
Swire
BCD Company Limited and its group companies
|
$ | 38,194,525 | 79.8 | $ | 31,192,928 | 70.1 | ||||||||||
Swire BCD
Group is franchised to manufacture, market and distribute products of the
Coca-Cola in China.
NOTE 27 – CONTINGENCIES AND
COMMITMENTS
As of
December 31, 2009, NJGE and XAGE, the subsidiaries of the Company, had arranged
three non-cancelable operating leases with three third parties for their
production plants. The expected annual lease payments under
these operating leases are as follows:
|
December
31,
|
||||
|
2009
|
||||
|
For
the year ended December 31,
|
||||
|
2010
|
$ | 21,132 | ||
|
2011
|
21,132 | |||
|
2012
|
21,132 | |||
|
Total
|
$ | 63,396 | ||
NOTE 28 – SUBSEQUENT
EVENT
The
Company has evaluated for disclosure all subsequent events occurring through
March 23, 2010, the date the financial statements were issued and filed with the
United States Securities and Exchange Commission.
F-19