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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2010
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 333-149898
Pacific Bepure Industry Inc.
(Exact name of registrant as specified in its charter)
Delaware 26-1272059
(State or other jurisdiction (I.R.S. Employer I.D. No.)
incorporation or organization)
No. 78 Kanglong East Road, Yangdaili, Chendai Township,
Jinjiang City, Fujian Province, P. R. China 362200
(Address of principal executive offices, including Zip Code)
(86 595) 8677 0999 (China)
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No[X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
The Company is unable to calculate the amount value of the Company's common
equity held by non-affiliates as of June 30, 2010 due to the lack of any active
trading market in the Company's securities at that time.
As of March 31, 2011, there were 15,000,000 shares of Common Stock issued and
outstanding.
PACIFIC BEPURE INDUSTRY INC.
TABLE OF CONTENTS
Number Page
------ ----
PART I
Item 1 Business 3
Item 1A Risk Factors 12
Item 1B Unresolved Staff Comments 23
Item 2 Properties 23
Item 3 Legal Proceedings 25
Item 4. [Removed and Reserved] 25
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 25
Item 6 Selected Financial Data 26
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Item 7A Quantitative and Qualitative Disclosures about Market Risk 36
Item 8 Financial Statements and Supplementary Data 36
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 36
Item 9A Control and Procedures 36
Item 9B Other Information 37
PART III
Item 10 Directors, Executive Officers and Corporate Governance 37
Item 11 Executive Compensation 40
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 45
Item 13 Certain Relationships and Related Transactions, and Director
Independence 46
Item 14 Principal Accountant Fees and Services 47
PART IV
Item 15 Exhibits and Financial Statement Schedules 48
Signatures 49
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K constitute "forward-looking statements".
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. The forward-looking
statements in this Form 10-K are identified by words such as "believes",
"anticipates", "expects", "intends", "may", "will", "estimate", "continue" and
other similar expressions regarding our intent, belief and current expectations.
However, these words are not the exclusive means of identifying such statements.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances and statements made in the
future tense are forward-looking statements. Actual results may differ
materially from those projected in the forward-looking statements as a result of
various factors, many of which are beyond our control. We undertake no
obligation to revise or update such results that may be made to reflect events
or circumstances occurring subsequent to the filing of this Form 10-K with the
Securities and Exchange Commission. Readers are urged to carefully review and
consider the various disclosures made by us in this Form 10-K, including those
set forth under "Risk Factors".
USE OF DEFINED TERMS
Except as otherwise indicated by the context, references in this Annual Report
on Form 10-K to the "Company," "Pacific Bepure," "we," "us" or "our" are
references to the combined business of Pacific Bepure Industry Inc, a Delaware
corporation, and its consolidated subsidiaries. References to "Peakway" are
references to Peakway Worldwide Limited, a British Virgin Islands corporation
that is wholly-owned by Pacific Bepure, and references to "Alberta" are
references to Alberta Holdings Limited, a Hong Kong corporation that is
wholly-owned by Peakway. References to "Pacific Shoes" are to Fujian Jinjiang
Pacific Shoes Co., Limited, a PRC Company, and references to "Baopiao Shoes" are
to Fujian Baopiao Light Industry Co., Limited, a PRC company, (collectively
"Chinese Subsidiaries"). References to "Cabo" are references to Cabo Development
Limited, a British Virgin Islands corporation that is the majority shareholder
of the Company. The term "Securities Act" means the Securities Act of 1933, as
amended, and the term "Exchange Act" means the Securities Exchange Act of 1934,
as amended, the term "RMB" means Renminbi, the legal currency of China and the
terms "U.S. dollar," "$" and "US$" mean the legal currency of the United States.
References to "China" and "PRC" are references to "People's Republic of China."
References to "BVI" are references to the "British Virgin Islands."
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a Delaware corporation that was incorporated on October 9, 2007 and
formerly named Wollemi Mining Corp. From our inception until November 11, 2009,
we were primarily engaged in the acquisition and exploration of mining
properties and had not realized any revenues from our planned operations.
On May 31, 2008, we sold 1,000,000 shares of common stock to 25 investors for
$.03 per share pursuant to our S-1 registration statement.
On November 5, 2009, we entered into the Share Exchange Agreement with Peakway
Worldwide Limited and its shareholder, Cabo Development Limited. On November 11,
2009, we consummated the transactions contemplated the Share Exchange Agreement
with Cabo. Pursuant to the Share Exchange Agreement, we acquired 100% of the
outstanding capital stock of Peakway in exchange for 10,500,000 shares of our
newly issued common stock, par value $.0001 per share that will constitute
3
approximately 70% of the issued and outstanding common stock. As a result of
this transaction, Cabo became the beneficial owner of approximately 70% of our
outstanding capital stock. The structure after the reverse acquisition is as
below:
Cabo Development Limited Former Shareholders
70% 30%
Pacific Bepure Industry Inc.
100%
Peakway Worldwide Limited (BVI)
100%
Alberta Holdings Limited (Hong Kong)
100% 100%
Fujian Jinjiang Pacific Fujian Baopiao Light
Shoes Co., Limited Industry Co., Limited
Following the reverse acquisition, we, through our Chinese Subsidiaries,
develop, research, design, manufacture and sell series of casual footwear, men's
and ladies' sports footwear mainly in the PRC as well as in the South America
through our distributors. We are now headquartered in Fujian Province, China. On
December 17, 2009, we changed the name from "Wollemi Mining Corp." to "Pacific
Bepure Industry Inc".
OUR PRODUCTS
We market our products mainly under the brand name "[Chinese Graphic]" or
"Baopiao" in English translation. We mainly provide products for female
consumers and with additional production for men. We aim to impress our
consumers with professional designs, advanced technology, maximum comfort,
function and fashionable products. Our target demographic is between 18-48 years
old, particularly, the 20-35 age group. Based on different age, gender,
occupation and life style, we mainly target following customers:
Targeted group Gender Description
-------------- ------ -----------
18-48 years old Female Urban dwellers, students, professional women,
homemakers, women who live in the second and
third tier cities or countryside.
18-40 years old Male Students, urban dwellers, and the males who
live in the second and third tier cities or
countryside.
4
Each year we offer an average of approximately 100 new footwear styles
(excluding different colors) with moderate retail prices generally ranging from
$18 to $30 that are affordable to our consumers.
Currently, our Baopiao branded products can be divided into the following four
broad categories: "Business Travel", "Free Travel", "Outdoor Travel" and "Urban
Travel". These four series approximately account for 25%, 30%, 20% and 25%
respectively in our total sales for the fiscal year ended December 31, 2010. We
have designed exclusive symbols and icons to fit the above four categories in
order to appeal to our consumers and demonstrate the unique nature of our
Baopiao brand.
OUR BUSINESS MODEL
Our business model is illustrated in the following diagram:
Procurement of Raw materials
Production Outsourcing
Distribution
Consumers
PROCUREMENT OF RAW MATERIAL
In general, raw materials used for making both sports and casual footwear are
leather, buffed leather, imitation leather, composite fabric, PU, natural
rubber, synthetic rubber, adhesive and the like. All of the Company's raw
materials are acquired from Chinese suppliers mainly located in Fujian province.
We believe that we have good relationships with raw material suppliers. As a
steady supply of quality raw materials is crucial to our production, we
constantly evaluate the suitability of our suppliers and their ability to assure
the timely delivery of quality raw materials. Our quality control department has
established internal rules and criteria to govern our procurement from our
suppliers.
For the fiscal year ended December 31, 2010, our five largest suppliers
accounted for approximately 32.77% of the aggregate amount of purchases from all
suppliers, and our largest supplier accounted for approximately 9.89% of the
aggregate amount of purchases from all suppliers.
OUR PRODUCTION
Our footwear production facilities are located in Jinjiang, Fujian province,
PRC, and have a total gross floor of 11,500 square meters with three production
lines. As of December 31, 2010, our aggregate annual production volume was
approximately 2.1 million pairs of footwear. In order to meet the increasing
demand for our products, the state-of-the-art production facilities at our
Baopiao Shoes for a total area of 57,728 square meters commenced production in
February of 2011.
5
The production facilities at our Pacific Shoes began production in 1993. Our
production machinery is comprised mainly of sewing machines, molding machines,
pressing machines, heating machines, cooling machines, compressing machines,
various kinds of testing machines and a CAD computerized design system.
QUALITY CONTROL MEASURES
Through Pacific Shoes, we passed the ISO9001:2000 International Quality Control
System Authentication in 2002 and implemented the comprehensive quality control
in accordance with the requirements of the quality control system. We have set
up the quality control section in each production unit, headed by the team
managers who station in the workshop with other inspectors. Pacific Shoes
employs 30 quality inspectors to undertake the field testing and inspection in
the factory. The quality control department and other relevant departments,
adopt the abrasion resistance tester, tension tester, folding resistance tester,
non-yellowing tester, low-temperature bending machine, hydrostatic pressure
tester, color fastness tester and other precise instruments and equipment to get
comprehensive technical parameters and properties of raw and auxiliary
materials, semi-manufactured goods and finished products. We apply complete
quality testing and control system throughout the production. With all
inspection and test machines installed, the Company is capable of conducting a
series of tests, such as avulsion, peeling, compression, bending resistance,
over the finished products, the semi-manufactured products, the raw materials,
and the like.
OUTSOURCING
Our products are manufactured through a cost effective combination of internal
and external production, to meet unforeseen demand. We outsourced certain of our
products with external contract manufacturers to reduce our production cost,
while making good use of our three production lines. For the fiscal year ended
December 31, 2010, approximately 54.75% of our footwear products were produced
by 11 external contract manufacturers. We do not enter into long term agreements
with our external contract manufacturers, and these purchase contracts do not
contain any terms that will restrict our ability to engage other contract
manufacturers.
SALES AND MARKETING
We sell our products substantially on a wholesale basis to our distributors who
are responsible for distribution to retail outlets which sell our products to
consumers. Through our distributors, the sales network of our products has
covered 24 Chinese provinces and administrative regions in various modes, such
as retail outlets, counters in department stores and shopping malls, and wall
racks in large supermarkets. In addition, our products, including our branded
products and ODM products, sold to the South America through local and Taiwan
distributors account for 20.63 % of the total sales for the fiscal year ended
December 31, 2010.
In 2010, we primarily employed a wholesale business model in the Chinese market.
We entered into annual distributorship agreements with our distributors which
set out key terms, such as the geographic area within which they are authorized
to sell our products, credit and payment terms and annual sales and network
expansion targets. As of December 31, 2010, we had a total of 30 distributors
including 22 independent distributors in 22 provinces and regions and eight (8)
authorized distributors in four (4) cities. We do not directly own or operate
any retail outlets, or enter into any contractual relationship with third party
retail outlet operators. As of December 31, 2010, there are 98 retail locations
and 1,521 counters in the shopping malls distributing and selling our products.
Independent Distributors. In 2010, we had 22 independent distributors covering
22 provinces and regions of China. Each distributor is entitled to sell our
products exclusively in one province or region. We sell our products to the
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distributors at a uniform discount to the unified retail price. The distributors
then distribute our products through their sales network in their respective
provinces. Our independent distributors manage local networks through the third
party retail operators they appointed. In 2010, our independent distributors
controlled a total of 24 retail outlets in 22 provinces and regions.
Authorized Distributors. To be qualified as our authorized distributor, one
needs to own and directly manage a minimum of three retail outlets, counters in
department stores and shopping malls, or wall racks in large supermarkets. In
2010, we had eight (8) authorized distributors who own and directly manage their
branches and retail stores to sell our products in four cities. The authorized
distributors are required to sell our products to the consumers at a
predetermined retail price.
We issue cash awards (which are not to be repaid) to independent distributors
demonstrating competitive operating results to encourage them to expand the
number of retail outlets and distribution points in the related geographic areas
in which they are located. We set guidelines for our authorized distributors in
respect of the location and decoration of the retail outlets, with the aim to
increase their sales and improve the recognition of our Baopiao branded
products. We believe our business model enables us to achieve growth by
leveraging the resources of our distributors, as well as their expertise in
retail management and local relationship. Among others, our largest distributor,
Taiwan Quanyi Xingye Co., Ltd. (through a Jinjiang import and export agent) had
a total value of $7,506,167 of sales of our products (including our branded
shoes and ODM products) for the fiscal year ended December 31, 2010.
In addition to our traditional wholesale model, we have started to deploy
"On-line Sales" model as a supplementary sale approach since February 2009.
Customers in China can browse over 300 styles of footwear (including different
colors ) among our four products series and place orders through our online
retail store (http://baopiao.taobao.com/, http://www.paixie.net/baopiao/). We
accept payments through wiring, remittance, cash on delivery and Alipay (a third
party online payment service provider similar to Paypal). All of our websites
have registered for an internet content provider (ICP) license which is required
by PRC Ministry of Information. At the very early development stage, our On-line
Sales generated revenue of $165,453 for the fiscal year ended December 31, 2010,
representing less than 1% of our total sales during the reporting period.
PRICING
We adopt "unified retail price" rule pursuant to which we sell our products to
our distributors at discounts to the suggested retail price. We believe that
this ensures fairness and transparency within our distribution network. The
suggested retail price in the PRC for our products ranged from approximately $18
to $30. In determining the suggested retail prices, we take into account of the
market supply and demand, the cost of production, the prices of competing
products and our consumers' purchasing power. All retail outlets are required to
follow our pricing policies. Certain discount or adjustment to our retail price
is generally permitted for the end of season sales and the holiday promotions.
The level of any such discount is decided and approved by us on a case-by-case
basis.
CREDIT CONTROL
We generally grant line of credit to our distributors based on their
creditworthiness and credit history. We grant credit periods, normally for six
months, to some agents with good sales performance.
CUSTOMER SERVICES
We have established a customer service system which deals with the feedback from
customers in time. We have set up a toll-free telephone in the PRC for customer
communication. Our after-sale specialists are designated to handle the
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complaints, the disputes and the quality arbitrations reported by our customers.
Customers can dial the toll free telephone number to report quality complaint.
All problems and complaints are thoroughly studied by us to seek a fair
resolution.
MARKETING AND BRAND PROMOTION
We believe that to create a strong brand image and recognition is crucial to our
operation. We primarily utilize the Internet, magazines and outdoor displays in
our media advertising. We also organize various activities to promote our
Baopiao brand in collaboration with our distributors, during the holidays, the
end-of-season sales and the seasonal new product launches. These promotion
campaigns include discount sales, gifts, outdoor advertisements, magazine
advertisements, on-line activities and the like. Our distributors also
contribute to the marketing and promotion of our brand by conducting local
promotions within their geographic areas.
ORIGINAL DESIGN MANUFACTURER ("ODM")
In addition to manufacturing footwear products for our own brands, we also
engage in ODM manufacturing whereby we are commissioned by APIS, a footwear
brand in South America to manufacture footwear according to their
specifications.
OUR COMPETITION
We compete with an increasing number of local and international players. We
believe our strongest competitors in the footwear market include sports footwear
brands Nike, Li Ning, and Anta, and casual footwear brands BELLE group, Teenmix
and Saturday in terms of brand recognition in the PRC.
OUR RESEARCH AND DEVELOPMENT
We believe that technological innovation is a key to increasing product quality.
Our internal research and development center was set up in 2002. Our research
and development efforts are focused on: preparing and setting the technical
strategy for the Company, introducing and applying new technologies and
materials, creating and improving the footwear molds, materials, types and
functions, detecting and determining the technical performance of products,
improving the technical indexes of products, and providing technical support for
the manufacturing department, the sales department and the quality control
department. As of March 31, 2011, we have 28 staff members dedicated to research
and development, including 2 market analysts, 9 pattern makers, 4 computer-aided
designers and 13 sample makers. All of them have many years' experience in the
footwear industry. Our market analysts attend various domestic footwear trade
exhibitions to keep themselves informed of the latest fashion trends. Our
pattern makers work closely with the sales and procurement teams in designing
new products and in improving existing products. Our design team develops and
improves concepts and ideas upon the sales records of our products and other
market information. We spent $158,829 and $108,263 respectively, on research and
development activities during the fiscal years ended December 31, 2010 and 2009,
representing approximately 0.44% and 0.43%, respectively, of our total revenues.
OUR INTELLECTUAL PROPERTY
TRADEMARKS
Pacific Shoes has registered 11 trademarks for "Baopiao" and "Chinese Graphic"
with the Trademark Bureau under the State Administration for Industry & Commerce
of the PRC, as follows:
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Trademarks Certificate No. Categories
---------- --------------- ----------
[Chinese Graphic] No.4060268 No.16: paper, bathroom tissue,
tissue, cardboard, publications,
office clamps, pens, cartons and
boxes
[Chinese Graphic] No.4060266 No.25: garments, ties, socks,
jerseys, swimsuits, hats, gloves
[Chinese Graphic] No.4060267 No.28: harness
[Chinese Graphic] No.4060397 No.28: game machine, toys, chessman,
rackets, sports equipments, bows and
arrows, fishing tackles, skeelers
[Chinese Graphic] No.4060396 No.26: flounce clothing, shoes
decorations, clothes decorations,
buttons, shoe buckles, zips, manmade
flowers, needles, wigs
[Chinese Graphic] No.4060395 No.35: posters, advertisements,
market researches, export and import
agent, promotions, Auctions, job
intermidary, accounting, photos
[Chinese Graphic] No.6964726 No.25: garment, ties, socks,
swimsuits, hats, gloves, jerseys
[Chinese Graphic] No.6964728 No.25: garment, ties, socks,
swimsuits, hats, gloves, jerseys
[Chinese Graphic] No.7073833 No.25: garment, ties, socks,
swimsuits, hats, gloves, jerseys
[Chinese Graphic] No.7998584 No.25: garment, ties, socks,
swimsuits, hats, gloves, jerseys
[Chinese Graphic] No.5511839 No.25: garment, ties, socks,
swimsuits, hats, gloves, jerseys
[Chinese Graphic] No.5511838 No.25: garment, ties, socks,
swimsuits, hats, gloves, jerseys
[Chinese Graphic] No.6964730 No.25: garment, ties, socks,
swimsuits, hats, gloves, jerseys
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[Chinese Graphic] No.5511840 No.25: garment, ties, socks,
swimsuits, hats, gloves, jerseys
[Chinese Graphic] No.575209 No.25: Shoes
[Chinese Graphic] No.1937788 No.25: Shoes, sports shoes,
undersoles
Pacific Shoes also has applied for the following trademarks:
Pending Trademarks Application No. Application Date
------------------ --------------- ----------------
[Chinese Graphic] No.7467384 June 12, 2009
[Chinese Graphic] No.7467428 June 12, 2009
[Chinese Graphic] No.7998635 January 15, 2010
No.7467421 June 12, 2009
[Chinese Graphic] No.8304755 May 17, 2010
[Chinese Graphic] No.8765483 October 21, 2010
[Chinese Graphic] No.9023858 January 5, 2010
[Chinese Graphic] No.9023876 January 5, 2010
PATENTS
Our CEO, Mr. Haiting Li has received the certificates of the following two
patents from the State Intellectual Property Office of the PRC:
Categories
of Patents Certificate No. Issue Date Description
---------- --------------- ---------- -----------
Utility No.200920165757.0 May 29,2010 A kind of shoes, especially a
kind of shoe products including
insole and outsole, designed
according to human engineering
with shock absorption feature.
Design No.200930195047.8 May 29,2010 A kind of footwear shape
Mr. Li has also filed for another patent application as follows:
Categories of
Pending Patents Application No. Application Date Description
--------------- --------------- ---------------- -----------
Utility No. 201020561916.1 Oct 15, 2010 A kind of footwear shape
Mr. Li has signed the license agreement with Baopiao Shoes and Pacific Shoes to
use above three patents free of charge.
DOMAIN NAMES
Pacific has registered the following domain names:
1. "Chinabaopiao.com"
2. "Baopiao.com"
3. "Bepure.com.cn"
4. "ir.baopiao.com"
5. "www.baopiao.com"
10
OUR EMPLOYEES
As of March 31, 2011, our Chinese Subsidiaries have a total of 1,147 full-time
employees. As required by applicable Chinese laws, we have entered into
employment contracts with all of our officers and managers. We believe that our
relationships with our employees are good. We compensate our production line
employees by unit produced (piece work) and compensate other employees by
salaries and bonus based on performance. We also provide training for our staff
from time to time to enhance their technical and product knowledge as well as
their knowledge of industry quality standards.
We have not experienced any significant problems or disruption to our operations
due to labor disputes, nor have we experienced any difficulties in recruitment
and retention of experienced staff.
REGULATIONS
We are subject to a wide range of regulation covering every aspect of our
business. The most significant of these regulations are set forth below.
We are subject to national and local laws of China, including China's
environmental laws and regulations. Under the relevant Chinese environmental
laws, all manufacturing enterprises must submit an environmental impact report
to the relevant environmental protection authority before starting production
operations. In addition, manufacturing enterprises must engage professional
environmental organizations to monitor and report on pollutants and emission
regularly. The main pollutants generated by our plants of Pacific Shoes are
solid waste and exhaust gas. We have taken the necessary measures to control the
discharge of these pollutants. We have carried out the relevant environment
impact assessments and have obtained all the required permits and environmental
approvals for our production facilities. Our Baopiao Shoes has passed the
environment impact assessment before commencing construction of production
facilities. We are in material compliance with the Chinese environmental laws
and regulations as of March 31, 2011.
Moreover, we are subject to the Product Quality Law of the PRC, which is
applicable to all activities of production and sale of any product within the
territory of the PRC, and the producers and sellers shall be liable for product
quality in accordance with such law.
In addition, according to the Consumer Protection Law of the PRC, the rights and
interests of the consumers who buy or use commodities for the purposes of daily
consumption or those who receive services are protected and all manufacturers
and distributors involved must ensure that the products and services will not
cause damage to persons and properties.
The PRC Production Safety Law also requires that we shall maintain conditions
for safe production as provided in the Production Safety Law and other relevant
laws, regulations, and various standards. Any entity that is not sufficiently
equipped to ensure safe production is prohibited from engaging in production and
business operation activities. We are required to offer education and training
programs to our employees regarding the production safety. During the reporting
period, none of our employees was involved in any major accident at our
facilities and we were not subject to disciplinary actions with respect to the
labor protection issues.
11
ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
OUR BAOPIAO BRANDED PRODUCTS HAVE A LIMITED HISTORY IN THE BRANDED FOOTWEAR
INDUSTRY AND FAILURE TO EFFECTIVELY PROMOTE OR MAINTAIN OUR BAOPIAO BRAND MAY
ADVERSELY AFFECT OUR PERFORMANCE AND SALES.
Our Baopiao branded products were first introduced to the market in 2003. We
seek to position our brand as a high quality sports and casual footwear brand
targeting consumer groups between the ages of 18 and 48. We believe our brand is
critical to our success, in that market perception and consumer acceptance of a
brand is a determining factor for consumers in purchasing decisions. Our
revenues from sales of our Baopiao branded products were approximately
$32,978,692 and $24,140,000 representing approximately 90.66% and 94.93% of the
total revenues in 2010 and 2009, respectively. We market our brands mainly
through media commercials including outdoor advertising and magazine
advertising. We are dependent on market perception and consumer acceptance of
our products, over which we have no control. Any negative publicity or disputes
regarding our brands, products, or the loss of any award or accreditation
associated with our Baopiao brand such as "PRC Fujian Province Well-Known
Trademark" and "China Well-Known Trademark" could materially and adversely
affect our business, financial condition. If we fail to successfully promote our
brands position, the market recognition of our brands may suffer. As a result,
consumer confidence in our brands may be eroded and our business, profitability
and results of operations may be adversely affected.
WE RELY ON A SMALL NUMBER OF SUPPLIERS FOR A LARGE PORTION OF OUR RAW MATERIAL
AND PRODUCT SUPPLY AND ANY INTERRUPTION OF SUPPLY FROM THESE SUPPLIERS WOULD
AFFECT OUR RESULTS OF OPERATIONS.
The principal raw materials used in the production of our footwear products are
leather, buffed leather, fabrics, nature rubber, synthetic rubber, soles and
plastics. All of raw materials are obtained from domestic suppliers in the PRC.
For the fiscal years ended December 31, 2010 and 2009, our five largest raw
material suppliers accounted for approximately 32.77% and 27.66% respectively,
of the aggregate amounts of raw materials we purchased, and our largest raw
material supplier accounted for approximately 9.89% and 8.49% for the fiscal
years ended December 31, 2010 and 2009, respectively, of the aggregate amounts
of raw materials we purchased. We do not enter into long-term agreements with
our raw material suppliers and generally procure the raw materials that we
required through purchase orders issued by us from time to time which set out
the terms regarding the price, purchase quantity, delivery terms and settlement
terms, among others. There is no assurance that such suppliers would be able to
deliver raw materials to us in a timely manner or at acceptable prices and
quality. We cannot guarantee that there will be no interruption in the supply of
raw materials from our suppliers. Any disruption in supply from our suppliers
may adversely affect our business and results of operations. Fluctuations in the
costs of our principal raw materials and our inability to pass on any increases
in raw materials costs to our customers by increasing the suggested retail
prices of our products may materially and adversely affect our cost of sales.
WE MAINLY RELY ON DISTRIBUTORS FOR THE SALES OF OUR PRODUCTS AND ANY FAILURE BY
US TO MAINTAIN GOOD RELATIONSHIPS WITH THEM MAY ADVERSELY AFFECT OUR BUSINESS.
Substantially all of our revenues were generated from sales of our products to
our distributors, which in turn sell our products to consumers in the PRC
through retail outlets operated or controlled by them. Prior to 2011, we did not
sell any of our products directly to consumers and did not own or operate any
authorized retail outlets. In 2010, we sold over 70.24% of our products through
over 30 distributors (including 22 independent distributors and 8 authorized
distributors). Our five largest distributors accounted for approximately 26.58%
and 28.00% of our total revenues for the fiscal years ended December 31, 2010
and 2009 respectively, and our largest distributor accounted for approximately
7.22%, and 6.15% of our total revenues for the financial years ended December
31, 2010 and 2009. We therefore expect to continue to rely on these distributors
12
for our sales of products. As such, the sales performance of our distributors
and the ability of our distributors to expand their business and sales networks
are crucial to the future growth of our business. Furthermore, we do not have
long-term agreements with these distributors, but generally enter into
distributorship agreements with them for a term of one year, renewable annually.
There is no assurance that we will be able to renew the distributorship
agreements with these distributors on mutually acceptable terms or at all. If
any of our distributors terminates or does not renew its distributorship
agreement with us, we may not be able to replace such distributor with a new and
effective distributor in a timely manner or on terms acceptable to us, or at
all. Our distributors are required to meet minimum purchase targets. However, if
our distributors do not place orders at historical levels or at all or, if any
major distributors substantially reduce their volume of purchases from us or
ceases its business relationship with us, our business, financial condition
could materially suffer.
A DISTRIBUTORS' FAILURE TO PERFORM ITS OBLIGATIONS UNDER ITS DISTRIBUTORSHIP
AGREEMENT WITH US COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS IN A
GEOGRAPHIC AREA IN THE PRC.
As each of our distributors has exclusive distribution rights over a certain
geographic area, the failure by such distributor to perform its obligations
under its distributorship agreement with us may result in a material adverse
effect on the business in such area. Most of our distributors are granted
exclusivity over one province or region. If any of our distributors becomes
unable or unwilling to supply our products in the geographic area over which
such distributor has exclusively distribution rights, the business in that area
will be materially affected.
Further, we also rely on the obligations set forth in the distributorship
agreements with our distributors to impose our retail policies on them. As we do
not enter into any agreements with the third party retail outlet operators, we
rely on our distributors to manage these retail outlets and to ensure that they
operate in accordance with our retail policies. There is no assurance that our
distributors or the third party retail operators will comply with, or that the
distributors will enforce our retail policies. In such event, we may not be able
to effectively manage our sales network or maintain a uniform brand image, and
we cannot guarantee that such third party retail operators would offer quality
services to consumers. Although we intend to replace any distributors who
consistently fail to comply with, or fail to cause the third party operators to
comply with our retail policies, we may be unable to replace them in a timely
manner. As a result, our business, financial condition, results of operations
may be adversely affected.
BECAUSE WE DEPEND ON THE THIRD PARTY TO MARKET OUR PRODUCTS IN THE INTERNATIONAL
MARKET, ANY PROBLEMS ENCOUNTERED BY SUCH PARTY COULD AFFECT OUR SALES.
We do not have any offices outside of the PRC, and we depend on a third party,
Taiwan Quanyi Xingye Co., Ltd. to market our Baopiao branded products to South
America. As a result, we are dependent upon such distributor, over which we have
no control, to develop and implement an international marketing effort. Any
problems encountered by such party, including potential violations of laws of
the PRC or other countries, may affect their ability to sell our products which
would, in turn, affect our net sales.
OUR SALES VOLUME AND OPERATING RESULTS ARE SENSITIVE TO SEASONALITY.
Substantially all of our revenue is derived from our sales in the PRC. Our
performance is sensitive to local consumers spending patterns. Our operation
results have fluctuated from season to season. We generally recorded higher
sales in the first quarter and fourth quarters than in the second and third
quarters. The seasonality of our sales is primarily attributable to the seasonal
nature of some of our products. In addition, there are other factors relevant to
seasonality which may affect our sales, including national holidays and weather
conditions. Accordingly, any unpredictable change during such periods may
13
adversely affect our operation results, and any comparison of our operating
results between our interim and annual results in a calendar year is not
necessarily meaningful.
WE MAY BE UNABLE TO MANAGE FUTURE RAPID GROWTH.
We have grown rapidly over the last few years. Our sales increased by 43.05%
from $25,428,497 in 2009 to $36,376,209 in 2010. In 2008, we phased out
approximately 60 footwear styles and had approximately 100 new footwear styles.
In 2009, we had approximately 160 new footwear styles. In 2010, we sold
approximately 250 styles of footwear. We intend to continue to expand the volume
and variety of products we offer, as well as the geographical scope of our sales
and production facilities. Our business growth could place a significant strain
on our managerial, operational and financial resources. Our ability to manage
future growth will depend on our ability to continue to implement and improve
operational, financial and management information systems on a timely basis and
to expand, train, motivate and manage our workforce. We cannot assure you that
our personnel, systems, procedures and controls will be adequate to support our
future growth. If we are unable to effectively manage our growth, including the
rapid expansion of the distribution network, it may be difficult for us to
execute our growth strategy and a decrease in the market demand for our products
could result in an accumulation of inventory at the distribution network. As a
result, it may materially and adversely affect our business, financial
condition, and results of operation.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND LOSS OF THESE KEY PERSONNEL COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR RESEARCH AND DEVELOPMENT, OPERATIONS AND
REVENUE.
Our success and ability to expand our operations depend heavily on our ability
to attract, retain and motivate qualified key personnel, in particular, we rely
on our chairman and chief executive officer, Mr. Haiting Li. Mr. Li, together
with other senior management, has been the key driver of our strategy and has
been fundamental to our achievements to date. The successful management of our
business is, to a considerable extent, dependent on the services of Mr. Li 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 our business effectively and our
business and future growth may be adversely affected. Furthermore, if we are
unable to attract and retain qualified employees, we may be unable to meet our
business and financial goals.
WE ARE SUBJECT TO CREDIT RISK IN RESPECT OF ACCOUNT RECEIVABLES.
We sold the majority of our products to our distributors, who are generally
granted a credit period between 90 to 180 days, the exact terms of which are
determined based on factors such as past sales performance and credit history.
For each of the two years ended December 31, 2010, our third party trade
receivables outstanding were $7,274,214 and $13,094,012, which accounted for
26.10% and 36.90%, of our total assets, respectively. We perform ongoing credit
evaluations of our distributors' financial condition and generally require no
collateral from them to secure their payment obligations. As our sales increase,
the amount of accounts receivable from our distributors will increase. Should a
significant number of our distributors fail to settle the account receivables in
full in a timely matter for any reasons, our financial conditions and
profitability could be adversely affected.
WE FACE INCREASING COMPETITION FROM BOTH DOMESTIC AND FOREIGN COMPANIES, WHICH
MAY AFFECT OUR MARKET SHARE AND PROFIT MARGINS.
We believe that the footwear industry is highly competitive in the PRC and on a
world-wide basis. Our ability to compete against other national and
international enterprises is, to a significant extent, dependent on our ability
to distinguish our products from those of our competitors by providing high
quality products at reasonable prices that appeal to consumers' tastes and
14
preferences. Some of our competitors may have been in business longer than we
have, may be better established in their markets. Our current or future
competitors may provide products comparable or superior to those we provide or
adapt more quickly than we do to evolving industry trends or changing market
requirements. Increased competition may result in price reductions, reduced
margins and loss of market share, any of which could materially adversely affect
our profit margins. We cannot assure you that we will be able to compete
effectively against current and future competitors.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY INTELLECTUAL PROPERTY RIGHTS
DISPUTES OR PROCEEDINGS WITH THIRD PARTIES FOR POSSIBLE INFRINGEMENT OF THEIR
INTELLECTUAL PROPERTY RIGHTS.
Our principal intellectual property rights include our trademarks for our brand,
and our domain names. To date, we have 11 trademarks, seven (7) pending
trademarks and five domain names. There is no assurance that we will be
successful in obtaining trademarks currently under application or which we may
develop in the future, and that the third parties will not infringe our
intellectual property rights. We depend, in large part, on the PRC laws to
protect our trademarks, patents and other intellectual property rights. Our
efforts to enforce or defend our intellectual property rights may not be
adequate and may require significant attention from our management and may be
costly. The outcome of any legal actions to protect our intellectual property
rights is uncertain. If we are unable to adequately protect or safeguard our
intellectual property rights, our business, financial condition and results of
operations may be materially and adversely affected.
OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED BY CLAIMS OF THIRD
PARTIES FOR POSSIBLE INFRINGEMENT OF THEIR INTELLECTUAL PROPERTY RIGHTS.
We have not faced any claims that our products have infringed upon any third
parties' intellectual property rights, but we may face such claims from time to
time during our operation. If any legal proceeding against us for infringement
of intellectual property rights is successful, we may be prohibited from
manufacturing or selling products which are dependent on the usage of such
intellectual property. In such case, we may experience a material adverse effect
on our business and reputation, and could have a material adverse effect on our
business, financial condition, and results of operations.
OUR BORROWING LEVELS AND SIGNIFICANT INTEREST PAYMENT OBLIGATIONS COULD LIMIT
THE FUNDS WE HAVE AVAILABLE FOR VARIOUS BUSINESS PURPOSES.
We have relied mainly on a high level of borrowings to fund a portion of our
capital requirements, and expect to continue to do so in the future. As of
December 31, 2010, we had total borrowings of $4,717,870. The bank loans as of
December 31, 2010 were collateralized by the buildings, land use right, and
guaranteed by Mr. Haiting Li, the CEO of the Company, his brother and a third
party. Historically, we have repaid a significant portion of such short-term
loans by rolling over the loans on an annual basis. In addition, we may not have
sufficient funds available to pay all of our borrowings upon maturity. Failure
to roll over our short-term borrowings at maturity or to settle our debt could
result in the imposition of penalties, including increases in rates of interest
that we pay on our debt and legal actions against us by our creditors, or even
insolvency.
THE REGISTERED CAPITAL OF BAOPIAO SHOES HAS NOT YET BEEN FULLY CONTRIBUTED.
Baopiao Shoes was incorporated on February 15, 2006 with an approved registered
capital of 50 million Hong Kong dollars. As of this report, 16,370,478 Hong Kong
dollars has been contributed to Baopiao Shoes which accounts for 32.74% of its
registered capital. Pursuant to its Articles of Association, its registered
capital must be contributed within three years from the date of issuance of the
business license of such enterprise, otherwise, pursuant to the current PRC
regulations, the business license for Baopiao footwear shall become invalid or
be revoked. Although the local Industrial and Commercial Bureau renewed Baopiao
Shoes' business license on March 24, 2009, the local Bureau of Commerce issued a
written consent on April 8, 2009 to approve the extension of capital
15
contribution of Baopiao Shoes until December 31, 2010 and an amendment on
December 7, 2010 to extend the contribution term to December 6, 2011. We cannot
predict whether the business license may be held invalid by other competent PRC
governmental authorities. If the business license is held invalid or revoked, it
would adversely affect our business operation.
WE ARE SUBJECT TO RISKS OF DOING BUSINESS INTERNATIONALLY. IF THE INTERNATIONAL
MARKET DOES NOT GROW AS WE EXPECT, OUR BUSINESS AND FINANCIAL CONDITION MAY BE
ADVERSELY AFFECTED.
Through one of our distributors, 20.63% of our total revenues are generated from
the sales to South America, including the sales of our ODM products. Our
revenues from the oversea sales are subject to a number of inherent risks,
including local economic and political conditions, including disruptions in
trading markets; restrictive foreign governmental actions, including
restrictions on transfers of funds and trade; protection measures, including
export duties and quotas and customs duties and tariffs; and currency exchange
rate fluctuations. Any of the foregoing risks could have a material and adverse
effect on our operating results. As a result, our products and our revenues
would be decreased and we may need to adjust our market strategy.
INCREASE IN LABOR COSTS IN CHINA MAY ADVERSELY AFFECT OUR BUSINESS AND OUR
PROFITABILITY.
The footwear industry in labor is intensive. Labor costs in China have been
increasing recently, and we cannot assure you that the cost of labor in China
will not continue to increase in the future or that we will be able to increase
the prices of our products to offset such increases. If labor costs in China
continue to increase, our production costs will increase. If we are not able to
pass these increases on to our customers, our business, profitability and
results of operations may be adversely affected.
WE MAY BE EXPOSED TO PRODUCT LIABILITY, PROPERTY DAMAGE OR PERSONAL INJURY
CLAIMS AND OUR CURRENT INSURANCE COVERAGE MAY NOT SUFFICIENT TO COVER THE RISKS
RELATED TO OUR OPERATIONS
We do not presently maintain product liability insurance. We may be exposed to
product liability claims from time to time and as a result, we may have to
expend significant financial resources to defend against such claims. We believe
that such product liability claims risks will increase as legal concepts in
product liability claims begin to develop in the PRC. Therefore, we may face
significant costs and expenses to defend against such claims or enter into
settlement agreements, and we may suffer serious damage to our reputation, be
subject to material monetary damages and be subject to government
investigations. As a result, our reputation, business and financial condition
will be materially and adversely affected.
Currently we maintain insurance policies in respect of damage to properties,
equipment, raw material and inventories. Any events and any losses or
liabilities that are not covered by our current insurance policies could have a
material adverse effect on our business, financial condition, and results of
operations.
WE MAY FAIL TO ANTICIPATE OR RESPOND TO CHANGES IN CONSUMER TASTES AND FASHION
TRENDS IN THE FOOTWEAR INDUSTRY IN A TIMELY MANNER.
We operate in an industry that is subject to rapid and unpredictable changes in
consumer preferences. Our success depends on our ability to identify and respond
to constantly shifting consumer tastes and fashion trends and to develop new and
appealing products on a timely basis. This requires continued anticipation and
responsiveness to ever changing market and fashion trends. If we misjudge
consumer tastes or fashion trends, the demand for our products may decrease and
our business, financial condition and results of operations may be adversely
affected.
16
WE ARE A HOLDING COMPANY THAT HEAVILY RELIES ON DIVIDENDS AND OTHER
DISTRIBUTIONS PAID BY OUR SUBSIDIARIES TO FUND FUTURE CASH AND FINANCING
REQUIREMENTS.
We are a holding company and operate our core business through our subsidiaries
in the PRC. We may rely on dividends and other distributions on equity paid by
our subsidiaries for our future cash and financing requirements. If our
subsidiaries incur debt in the future, instruments governing the debt may
restrict their ability to pay dividends or make other distributions to us.
Furthermore, relevant PRC laws and regulations permit payment of dividends by
PRC companies only out of their retained earnings, if any, determined in
accordance with PRC accounting standards and regulations. Under PRC laws and
regulations, our Chinese subsidiaries are required to set aside 10% of its
after-tax profits each year to fund a statutory surplus reserve. As a result of
these PRC laws and regulations, our Chinese subsidiaries are restricted in its
ability to transfer a portion of its net assets to us in the form of dividends.
Limitations on the ability of our Chinese subsidiaries to pay dividends to us
could adversely affect our ability to grow, make investments or acquisitions
that could be beneficial to our business, pay dividends or otherwise fund and
conduct the our business.
RISKS RELATED TO DOING BUSINESS IN CHINA
ALL OF OUR ASSETS ARE LOCATED IN THE PRC AND ANY ADVERSE CHANGES IN PRC ECONOMIC
AND POLITICAL POLICIES COULD HAVE A MATERIAL ADVERSE EFFECT ON THE OVERALL
ECONOMIC GROWTH OF CHINA, WHICH COULD REDUCE THE DEMAND FOR OUR PRODUCTS AND
HARM OUR RESULTS OF OPERATIONS.
We carry on all of our business and generate most of our sales in the PRC.
Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in the PRC. The PRC economy differs from the economies of most
developed countries in many respects, including:
* the higher level of government involvement;
* the early stage of development of the market-oriented sector of the
economy;
* the rapid growth rate;
* the higher level of control over foreign exchange; and
* the allocation of resources.
* the balance of payment position.
The PRC economy has been transitioning from a planned economy to a more
market-oriented economy, and as a key market in the global economy, is also
influenced by world-wide economic conditions including the recent global
economic slowdown. For the past three decades the PRC government has implemented
economic reform measures emphasizing utilization of market forces in the
development of the PRC economy. Some of these measures will benefit the overall
PRC economy, but may have a negative effect on us. Our business, financial
condition and results of operations may be adversely affected by:
* changes in PRC political, economic and social conditions;
* changes in policies of the PRC government, including without
limitation, changes in policies affecting private business, foreign
investment and footwear industry;
* changes in laws and regulations or the interpretation of laws and
regulations;
* measures which may be introduced to control inflation or deflation;
* changes in the rate or method of taxation; and
* imposition of additional restrictions on currency conversion and
remittances abroad.
17
China's social and political conditions are also not as stable as those of the
United States and other developed countries. The PRC government has previously
taken actions to stabilize the country's economy and any possible social unrest.
It has implemented various measures intended to create stable momentum and
growth. We cannot assure that such growth will be sustained in the future. Any
sudden changes to China's political system or the occurrence of widespread
social unrest could have a material adverse effect on the overall economic
growth and the level of the development of footwear industry in China, which in
turn could lead to a reduction in demand for our products and consequently have
a material adverse effect on our businesses.
A DOWNTURN IN THE ECONOMY OF CHINA MAY SLOW OUR GROWTH AND PROFITABILITY.
The growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business.
OUR BUSINESS IS LARGELY SUBJECT TO THE UNCERTAIN LEGAL ENVIRONMENT IN CHINA AND
LEGAL PROTECTION COULD BE LIMITED TO YOU AND US.
We are a holding company, and we conduct our business primarily through our
operating subsidiaries incorporated in China. We and our operating subsidiaries
are generally subject to laws and regulations applicable to foreign investments
in China and, in particular, laws applicable to wholly foreign-owned
enterprises. Furthermore, Chinese law governs almost all of our material
agreements. The PRC legal system is based on written statutes. Unlike common law
systems, it is a system in which prior court decisions may be cited for
reference but have limited precedential value. Since 1979, the PRC government
has been developing a comprehensive system of commercial laws, and considerable
progress has been made in introducing laws and regulations dealing with economic
matters, such as foreign investment, corporate organization and governance,
commerce, taxation and trade. However, as these laws and regulations are
relatively new, and due to the limited volume of published cases and judicial
interpretation and their lack of precedential force, interpretation and
enforcement of these laws and regulations involve significant uncertainties,
which may limit legal protections available to us. In addition, some regulatory
requirements issued by certain PRC government authorities may not be
consistently applied by other government authorities (including local government
authorities), thus making strict compliance with all regulatory requirements
impractical. Furthermore, intellectual property rights and confidentiality
protections in China may not be as effective as in the U.S. These uncertainties
could limit the legal protections available to us and investors.
IT IS DIFFICULT TO ACQUIRE JURISDICTION AND ENFORCE LIABILITIES AGAINST OUR
OFFICERS, DIRECTORS AND ASSETS BASED IN CHINA.
As majority of our officers and our executive directors are residents of China
and not of the U.S., and substantially all the assets of these persons are
located outside the U.S. As a result, it could be difficult for United States
investors to enforce their legal rights, effect service of process in the U.S.,
or to enforce a judgment obtained in the U.S. against our Chinese officers,
directors and subsidiaries. There is also uncertainty as to whether the courts
in China would enforce judgments of United States courts against us or our
directors and officers based on the civil liabilities provisions of the
securities laws of the United States or any other state, or adjudicate an
original action brought in China based upon the securities laws of the United
States or any other state. Further, it is unclear if extradition treaties now in
effect between the United States and China would permit effective enforcement of
criminal penalties of the Federal securities laws. In addition, any litigation
in China may be protracted and result in substantial costs and diversion of our
resources and management attention.
18
PRICE INFLATION IN CHINA COULD NEGATIVELY AFFECT OUR COMPETITIVE ADVANTAGES AND
OUR RESULTS OF OPERATIONS.
In recent years, the Chinese economy has experienced periods of rapid expansion
and highly fluctuating rates of inflation. Because we purchase raw materials
from suppliers in China, this price inflation has increased the costs of the raw
materials we must purchase for production. This trend risks counteracting the
competitive advantage we enjoy as a result of the relatively lower production
costs we incur from operating in China. If inflationary trends continue in
China, China could lose its competitive advantage as a low-cost manufacturing
venue, including with respect to our products, which could in turn lessen any
competitive and reputational advantages we gain through China-based
manufacturing. Accordingly, continuing or increasing inflation in China may
weaken our competitiveness in our markets and have a material adverse effect on
our profitability in China. Negative inflation may also cause a period where
consumers are reluctant to spend, as consumers anticipate lower prices for
products in the future.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND USE OUR
REVENUES EFFECTIVELY AND LIMIT THE ABILITY OF OUR CHINESE SUBSIDIARIES TO OBTAIN
FINANCING.
All of our revenues and expenses are denominated in Renminbi. As a result, any
restrictions on currency exchange may limit its ability to use revenue generated
in Renminbi to:
* fund business activities outside the PRC;
* settle and repay its indebtedness; and
* pay out dividends to its shareholders.
Under China's existing foreign exchange regulations, our Chinese subsidiaries
may purchase foreign currencies for settlement of current account transactions,
including payments of dividends to us, without prior approval from the State
Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. However, we cannot assure you that the Chinese
government will not take further measures in the future to restrict access to
foreign currencies for current account transactions. Furthermore, Foreign
exchange transactions under the capital account will be subject to significant
foreign exchange controls and require the approval of or need to register with
Chinese government authorities, including SAFE. Capital account transactions
refer to inflows and outflows of capital, produce increases or reductions in
debt and equity, including direct investments, various types of borrowings and
investments in securities. If our Chinese subsidiaries borrow foreign currency
through loans from us or other foreign lenders, these loans must be registered
with SAFE and if the loans exceed certain borrowing limits, must be approved by
SAFE. In addition, if we finance the subsidiaries by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities, including the Ministry of Commerce, or their respective
local counterparts. These limitations could affect our Chinese subsidiaries'
ability to obtain foreign exchange through debt or equity financing, including
by means of loans or capital contributions from us.
FAILURE TO COMPLY WITH CHINESE REGISTRATION REQUIREMENTS RELATING TO THE
ESTABLISHMENT OF OFFSHORE SPECIAL PURPOSE COMPANIES BY THE PRC RESIDENT
SHAREHOLDER MAY ADVERSELY AFFECT US.
On October 21, 2005, SAFE issued a regulation ("SAFE Circular No. 75") entitled
"Circular on Several Issues Concerning Foreign Exchange Regulation of Corporate
Finance and Roundtrip Investment by PRC Residents through Special Purpose
Companies Incorporated Overseas". SAFE Circular No. 75 requires PRC residents to
register with the competent local SAFE branches with respect to the offshore
special purpose companies (the "SPVs") in which they have invested, directly or
indirectly, and to file amendments to their registrations in connection with
certain material transactions involving capital variations of the SPVs. Under
SAFE Circular No. 75, failure to comply with the registration procedures set
forth above may limit our ability to contribute additional capital into or
provide loans to our Chinese subsidiaries and may also result in penalties,
19
including imposition of restrictions on a PRC subsidiary's foreign exchange
activities and its ability to distribute dividends to the SPV and its ability to
pay the SPV proceeds from any reduction in capital, share transfer or
liquidation in respect of the PRC subsidiary.
On May 29, 2007, SAFE formulated internal implementation rules and guidelines
("SAFE Circular No. 106") for SAFE officials to apply and enforce SAFE Circular
No. 75. SAFE Circular No. 106 was aimed at interpreting and clarifying SAFE
Circular No. 75. However, as these rules were only recently promulgated, it is
currently unclear as to how they will be interpreted and implemented. In
addition, as SAFE Circular No. 106 is an internal implementation rule within the
SAFE authorities, it is unclear how the regulation, and any future legislation
concerning offshore or cross-border transactions will be interpreted, amended
and implemented by the relevant government authorities. Mr. Li being the
beneficial shareholder of Peakway and domestic residents of the PRC, has
successfully obtained the foreign exchange registration of overseas investments
at the local branch of the SAFE in accordance with the SAFE Circular 75 on
November 22, 2010.
However, Mr. Li is required to file a modification to the foreign exchange
registration for overseas investment in the event of any material capital
changes, including a subsequent equity financing for our companies outside of
the PRC. Payment of dividends, profits and other payments to us will not be
permitted unless the aforesaid modification has been filed. The failure or
inability by Mr. Li to comply with the SAFE rules, if SAFE requires it, may
subject him to fines or other sanctions and may also limit our ability to
contribute additional capital into or our Chinese subsidiaries, limit our
Chinese Subsidiaries' ability to pay dividends to us, or otherwise distribute
profits or proceeds from any reduction in capital, share transfer or liquidation
to us, or otherwise adversely affect us. Failure by our beneficial owner to
comply with SAFE filing requirements described above could result in liability
to these shareholders or our Chinese subsidiaries under PRC laws for evasion of
applicable foreign exchange restrictions.
RECENT PRC REGULATIONS RELATING TO CROSS-BORDER MERGERS AND ACQUISITIONS MAY
IMPACT US.
On August 8, 2006, six Chinese regulatory agencies, including the Ministry of
Commerce, the China Securities Regulatory Commission ("CSRC") and the SAFE,
jointly issued the Regulation on Mergers and Acquisitions of Domestic Companies
by Foreign Investors, or the New M&A Rule, which became effective on September
8, 2006, to more effectively regulate foreign investment in PRC domestic
enterprises. The new M&A Rule also has certain provisions that require offshore
special purpose vehicles formed for the purpose of acquiring Chinese domestic
companies and directly or indirectly established or controlled by Chinese
entities or individuals, to obtain the approval of the CSRC prior to publicly
listing their securities on an overseas stock market. On September 21, 2006, the
CSRC published on its official website a notice specifying the documents and
materials that are required to be submitted for obtaining CSRC approval.
The application of this new M&A rule is currently unclear. Although we acquired
the equity interests in Baopiao Shoes and Pacific Footwear after the New M&A
Rule became effective, they were established as qualified foreign invested
enterprises prior to the effective date and we acquired such equity interests
from another offshore company. Our PRC legal counsel believes that the new M&A
rule and the CSRC approval do not apply to us.
It is not clear how the provisions in the new regulation regarding the offshore
listing and trading of the securities of a special purpose vehicle apply to us.
We believe, based on the interpretation of the new regulation, that CSRC
approval is not required for this reverse acquisition. Since the new regulation
has only recently been adopted, there remains some uncertainty as to how this
regulation will be interpreted or implemented. If the CSRC or another Chinese
regulatory agency subsequently determines that the CSRC's approval is required,
we may face sanctions by the CSRC or another Chinese regulatory agency. If this
happens, these regulatory agencies may impose fines and penalties on our
operations in China, limit our operating privileges in China, delay or restrict
the repatriation of our net proceeds from this offering into China, restrict or
prohibit payment or remittance of dividends to us or take other actions that
20
could have a material adverse effect on our business, financial condition,
results of operations, and our reputation.
WE ARE SUBJECT TO RISKS PRESENTED BY THE FOREIGN EXCHANGE RATE BETWEEN U.S.
DOLLARS AND RENMINBI.
We publish our financial statements in U.S. dollars, while all of our revenue is
denominated in Renminbi. The value of our common stock will be affected by the
foreign exchange rate between U.S. dollars and Renminbi. Since 2005, the PRC
government has managed floating exchange rate system to allow the value of the
Renminbi to fluctuate within a regulated band based on market supply and demand
and by reference to a basket of currencies. However, we cannot predict when the
PRC government will allow free conversion of Renminbi into foreign currencies.
For example, to the extent that we need to convert U.S. dollars into Renminbi
for our operational needs and should the Renminbi appreciate against the U.S.
dollar at that time, our financial position may be harmed. Conversely, if we
decide to convert our Renminbi into U.S. dollars for the purpose of declaring
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
from our subsidiaries in China would be reduced.
THE DISCONTINUATION OF ANY PREFERENTIAL TAX TREATMENT OR OTHER INCENTIVES
CURRENTLY AVAILABLE TO US IN THE PRC COULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our subsidiaries enjoy certain special or preferential tax treatments regarding
foreign enterprise income tax in accordance with the "Income Tax Law of the PRC
for Enterprises with Foreign Investment and Foreign Enterprises" and its
implementing rules. Accordingly, they have been entitled to tax concessions
whereby the profit for the first two financial years beginning with the first
profit-making year (after setting off tax losses carried forward from prior
years) is exempt from income tax in the PRC and the profit for each of the
subsequent three financial years is taxed at 50% of the prevailing tax rates set
by the relevant tax authorities. However, on March 16, 2007, the PRC's National
People's Congress passed a new corporate income tax law, which is effective on
January 1, 2008. This new corporate income tax unifies the corporate income tax
rate, cost deduction and tax incentive policies for both domestic and
foreign-invested enterprises. According to the new corporate income tax law, if
an enterprise incorporated outside the PRC has its "effective management"
located within the PRC, such enterprise may be recognized as a PRC tax resident
enterprise and be subject to the unified enterprise income tax rate of 25% over
a five-year grandfather period. We cannot rule out the possibility that our
subsidiaries not incorporated in the PRC may be recognized as a PRC tax resident
enterprise under the new corporate income tax law in the future. The
discontinuation of any such special or preferential tax treatment or other
incentives could have an adverse affect our business, financial condition and
results of operations.
CHINESE CORPORATE INCOME TAX LAW COULD ADVERSELY AFFECT OUR BUSINESS AND OUR NET
INCOME.
Under the Enterprise Income Tax Law effective from January 1, 2008 ("New EIT
Law"), an enterprise established outside of China with "de facto management
bodies" within China is considered a "resident enterprise," meaning that it can
be treated in a manner similar to a Chinese domestic enterprise for enterprise
income tax purposes. The implementing rules of the New EIT Law define de facto
to management as "substantial and overall management and control over the
production and operations, personnel, accounting, and properties" of the
enterprise. On April 22, 2009, the State Administration of Taxation issued the
Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment
Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to
Criteria of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation with respect to
non-Chinese enterprises or group controlled offshore entities. Pursuant to the
Notice, an enterprise incorporated in an offshore jurisdiction and controlled by
a Chinese enterprise or group will be classified as a "non-domestically
incorporated resident enterprise" if (i) its senior management in charge of
daily operations reside or perform their duties mainly in China; (ii) its
financial or personnel decisions are made or approved by bodies or persons in
21
China; (iii) substantial assets and properties, accounting books, corporate
chops, board and shareholder minutes are kept in China; and (iv) at least half
of its directors with voting rights or senior management often resident in
China. A resident enterprise would be generally subject to the uniform 25%
enterprise income tax rate as to its worldwide income. Although the Notice is
directly applicable to enterprises registered in an offshore jurisdiction and
controlled by Chinese domestic enterprises or groups, it is uncertain whether
the PRC tax authorities will make reference to the Notice when determining the
resident status of other offshore companies, such as Pacific Bepure Industry
Inc., Peakway Worldwide Limited and Alberta Holdings Limited. Since
substantially all of our management is currently based in China, it is likely we
may be treated as a Chinese resident enterprise for enterprise income tax
purposes. The tax consequences of such treatment are currently unclear, as they
will depend on how local tax authorities apply or enforce the New EIT Law or the
implementation regulations.
In addition, under the New EIT Law and implementation regulations, the PRC
income tax at the rate of 10% is applicable to dividends payable to investors
that are "non-resident enterprises" (and that do not have an establishment or
place of business in the PRC, or that have such establishment or place of
business but the relevant income is not effectively connected with the
establishment or place of business) to the extent that such dividends have their
source within the PRC unless there is an applicable tax treaty between the PRC
and the jurisdiction in which an overseas holder resides which reduces or
exempts the relevant tax. Similarly, any gain realized on the transfer of shares
by such investors is also subject to the 10% PRC income tax if such gain is
regarded as income derived from sources within the PRC.
If we are considered a PRC "resident enterprise", it is unclear whether the
dividends we pay with respect to our shares, or the gain you may realize from
the transfer of our shares, would be treated as income derived from sources
within the PRC and be subject to PRC tax. If we are required under the New EIT
Law to withhold PRC income tax on our dividends payable to our foreign
shareholders, or if you are required to pay PRC income tax on the transfer of
your shares, the value of your investment in our shares may be materially and
adversely affected.
RISKS RELATED TO THE MARKET FOR OUR STOCK
OUR COMMON STOCK IS QUOTED ON THE OTC BULLETIN BOARD WHICH MAY HAVE AN
UNFAVORABLE IMPACT ON OUR STOCK PRICE AND LIQUIDITY.
Our common stock is quoted on the OTC Bulletin Board under the symbol "PBEP.OB".
The OTC Bulletin Board is a significantly more limited market than the New York
Stock Exchange or NASDAQ system. The market for our securities has been
extremely limited, sporadic and characterized by very low volumes. The quotation
of our shares on the OTC Bulletin Board may result in a less liquid market
available for existing and potential stockholders to trade shares of our common
stock, could depress the trading price of our common stock and could have a
long-term adverse impact on our ability to raise capital in the future.
OUR PRINCIPAL STOCKHOLDER HAS THE POWER TO CONTROL OUR BUSINESS.
Our principal stockholder, Cabo Development Limited, owns 70% of our common
stock as of March 31, 2011. As a result, Cabo Development Limited has the
ability to elect all of our directors and to approve any action requiring
stockholder action, without the vote of any other stockholders. Our principal
stockholder may also have the effect of delaying or preventing a future change
in control, impeding a merger, consolidation, takeover or other business
combination or discourage a potential acquirer from making a tender offer.
22
WE ARE SUBJECT TO PENNY STOCK REGULATIONS AND RESTRICTIONS.
The SEC has adopted regulations which generally define so-called "penny stocks"
to be an equity security that has a market price less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exemptions. As a
"penny stock," our common stock may become subject to Rule 15g-9 under the
Exchange Act of 1934, or the "Penny Stock Rule." This rule imposes additional
sales practice requirements on broker-dealers that sell such securities to
persons other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions covered by
Rule 15g-9, a broker-dealer must make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to sale. As a result, this rule may affect the ability of
broker-dealers to sell our securities and may affect the ability of purchasers
to sell any of our securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Disclosure is also
required to be made about sales commissions payable to both the broker-dealer
and the registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption from
the Penny Stock Rule. In any event, even if our common stock were exempt from
the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the
Securities Exchange Act of 1934, or "Exchange Act", which gives the SEC the
authority to restrict any person from participating in a distribution of penny
stock, if the SEC finds that such a restriction would be in the public interest.
STANDARDS FOR COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 ARE
UNCERTAIN, AND IF WE FAIL TO COMPLY IN A TIMELY MANNER, OUR BUSINESS COULD BE
HARMED AND OUR STOCK PRICE COULD DECLINE.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of
2002 require annual assessment of our internal control over financial reporting.
We may encounter problems or delays in completing activities necessary to make
an assessment of our internal control over financial reporting. If we cannot
assess our internal control over financial reporting as effective, investor
confidence and share value may be negatively impacted.
ITEM 1B. UNRESOLVED STAFF COMMENTS
NA.
ITEM 2. PROPERTIES
All land in China is stated-owned or collectively-owned. Individuals and
companies are permitted to acquire rights to use land or land use rights for
specific purposes. In the case of land used for industrial purposes, land use
rights are granted for 50 years. Granted land use rights are transferable and
may be used as security for borrowings and other obligations.
PACIFIC SHOES
Pacific Shoes' main office and manufacturing facilities are located in Jinjiang
City, Fujian Province, China, on a plot of land approximately 3,000 square
meters in size. It has been issued a Land Use Right Certificate for the land and
valid until September 29, 2057 by the municipal government of Jinjiang. It
currently owns three buildings on the property as listed below.
23
Pacific Shoes' land use rights are set forth below:
User of the Land Pacific Shoes
---------------- -------------
Location No.8 Qiguang Dong Road, Handai Village, Chendai
County, Jinjiang City, Fujian Province
Usage Industrial
Area ((C)O) 3,000
Expiration Date 9/29/2057
Encumbrances Pledged to China Agricultural Bank, Jinjiang City
Branch. Pledge period: 4/2/2010 - 4/1/2013
Pacific Shoes owns the following buildings:
Part 1 Part 2 Part 3
------ ------ ------
Area ((C)O) 5127.38 2204.17 2562.07
Usage of Design Factory Factory Factory
Structure Mixture Mixture Mixture
Owner Pacific Shoes
Location No.8 Qiguang Dong Road, Handai Village, Chendai County,
Jinjiang City, Fujian Province
Encumbrances Pledged to China Agricultural Bank, Jinjiang City Branch.
Pledge period: 4/2/2010 - 4/1/2013
BAOPIAO SHOES
Baopiao Shoes has two plots of land located in Hui'an County, Quanzhou City,
Fujian Province, China. It has been issued two Land Use Right Certificates for
the land that are valid until December 31, 2056 by the municipal government of
Hui'an County.
Baopiao Shoes's land use rights are set forth below:
User of the Land Baopiao Shoes
Location Qunxian Village & Xiagong Village, Zhangban Town,
Huian County, Quanzhou City, Fujian Province
Usage Industrial
Area ((C)O) 27,783.9
Expiration Date 12/31/2056
Encumbrances Pledged to Agricultural Bank of China.
Pledge period: January 12, 2011 to January 11, 2014
User of the Land Baopiao Shoes
Location Qunxian Village &Xiagong Village, Zhangban Town,
Huian County, Quanzhou City, Fujian Province
Usage Industrial
Area ((C)O) 29,944.0
Expiration Date 12/31/2056
Encumbrances Pledged to Agricultural Bank of China.
Pledge period: January 12, 2011 to January 11, 2014
24
Baopiao Shoes owns the following buildings:
Part 1 Part 2
------ ------
Area ((C)O) 16,171.76 12,166.50
Usage of Design Factory Dormitory
Structure Mixture Mixture
Owner Baopiao Shoes
Location Xiagong, Quanxian Village, Zhangban Township (Huian
Industrial District)
Encumbrances Pledged to Industrial and Commercial Bank of China.
Pledge period: January 12, 2011 to January 11, 2014
We believe that all our properties have been adequately maintained in good
condition, and are suitable and adequate for our business needs.
ITEM 3. LEGAL PROCEEDINGS
We have no pending legal proceedings. From time to time, we may be involved in
various claims, lawsuits and disputes with third parties, actions involving
allegations of discrimination or breach of contract actions incidental to the
normal operations of the business.
ITEM 4. [REMOVED AND RESERVED]
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
On July 3, 2008 our common stock began quoting on the Over the Counter Bulletin
Board under the symbol "WOLI". There was no trading of our securities, and,
therefore, no high and low bid pricing prior to November 12, 2009.
On December 17, 2009, our trading symbol was changed to "PBEP.OB". The following
table sets forth the range of high and low closing sale prices for our common
stock as reported during the fiscal years ended December 31, 2010 and 2009. The
market for our securities is extremely limited, volatile and is characterized by
very low trading volumes. The quotations below reflect inter-dealership prices,
without retail markup, markdown or commissions and may not represent actual
transactions.
Quarter Ended High Low
------------- ---- ---
2010
1st Quarter $4.50 $2.05
2nd Quarter $4.40 $3.23
3rd Quarter $3.23 $2.50
4th Quarter $2.40 $0.51
25
Quarter Ended High Low
------------- ---- ---
2009
1st Quarter $0.00 $0.00
2nd Quarter $0.00 $0.00
3rd Quarter $0.00 $0.00
4th Quarter $2.05 $0.673
The above tables set forth the range of high and low closing bid prices per
share of our common stock as reported by QuoteMedia for the periods indicated.
As of March 30, 2011, the closing price of our common stock on the OTC Bulletin
Board was $1.30.
As of December 31, 2010, the Company had approximately 35 holders of record.
After the reverse merger, we have not paid, nor declared, any dividends and we
do not intend to declare any such dividends in the foreseeable future. Our Board
of Directors will make any future decisions regarding dividends. We currently
intend to retain and use any future earnings for the development and expansion
of our business. Our ability to pay dividends is also subject to limitations
imposed by Delaware law and the laws of the PRC.
The Company did not issue any unregistered securities during the fourth quarter
of 2010. There were no purchases of the Company's securities by the Company or
any of its affiliates.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting issuer (as defined in Item 10(f)(1) of Regulation S-K),
the Company is not required to report selected financial data specified in Item
301 of Regulation S-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K contains both historical and "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements, written, oral or otherwise made, represent the
Company's expectation or belief concerning future events. All statements, other
than statements of historical fact, are or may be forward-looking statements.
For example, statements concerning projections, predictions, expectations,
estimates or forecasts, and statements that describe our objectives, future
performance, plans or goals are, or may be, forward-looking statements. These
forward-looking statements reflect management's current expectations concerning
future results and events and can generally be identified by the use of words
such as "may," "will," "should," "could," "would," "likely," "predict,"
"potential," "continue," "future," "estimate," "believe," "expect,"
"anticipate," "intend," "plan," "foresee" and other similar words or phrases, as
well as statements in the future tense.
Forward-looking statements involve known and unknown risks, uncertainties,
assumptions, and other important factors that may cause our actual results,
performance or achievements to be different from any future results, performance
and achievements expressed or implied by these statements. The following
discussion and analysis should be read in conjunction with our consolidated
financial statements and the related notes thereto and other financial
information contained elsewhere in this Form 10-K. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's opinions only as of the date hereof. We undertake no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the factors described in the Section
entitled "Risk Factors" on Form 10-K and other documents we file from time to
time with the Securities and Exchange Commission ("SEC").
26
OUR HISTORY AND CORPORATE STRUCTURE
Pacific Bepure Industry Inc. (the "Company") is a Delaware corporation that was
incorporated on October 9, 2007. We are headquartered in Fujian Province, China.
On November 11, 2009, we completed a reverse acquisition transaction with
Peakway Worldwide Limited ("Peakway"), a company incorporated under the laws of
the British Virgin Islands pursuant to the terms of a Share Exchange Agreement
dated November 5, 2009 ("Share Exchange Agreement"). Alberta Holdings Limited is
a Hong Kong company incorporated on November 4, 2006 and was acquired by Peakway
on November 1, 2007. Alberta presently has two wholly-owned subsidiaries: Fujian
Jinjiang Pacific Shoes Co., Limited and Fujian Baopiao Light Industry Co.,
Limited.
Fujian Jinjiang Pacific Shoes Co., Limited ("Pacific Shoes") was established as
a sino-foreign equity joint venture entity in the PRC on April 9, 1993. On
January 12, 2009, Alberta acquired 100% equity interest in Pacific Shoes.
Fujian Baopiao Light Industry Co., Limited ("Baopiao") was established as a
wholly foreign-owned enterprise ("WFOE") in the PRC on February 15, 2006. On
February 26, 2009, Alberta acquired 100% equity interest in Baopiao. As of the
date of this report, Baopiao is still in its development stage and has not yet
generated any revenue.
We are now a fully reporting issuer with our common stock publicly quoted on the
OTC bulletin board under the symbol "PBEP". As of December 31, 2010, we had
15,000,000 shares of common stock issued and outstanding.
BUSINESS REVIEW
The Company is mainly engaged in professional design, manufacture and
distribution of sports and casual footwear through its Chinese Subsidiaries. We
target at both female and male customers, particularly the 20-35 years old
female consumers, among whom our Baopaio (or "Bepure") label has witnessed an
increasing recognition. For the fiscal year ended December 31, 2010, the
Company's sales revenues increased 43.05% to $36,376,209 compared with
$25,428,497 in the same period of 2009. The growth is mainly attributable to the
increasing demand for our sport and casual footwear products in the PRC market
where consumers are in transition to much healthier and more fashion life
styles, in line with stronger purchasing powers.
To meet the market demand, the Company implemented its "Travel Times" marketing
strategy in 2010. Under this strategy, our products fall into four categories:
"Free Travel", "Business Travel", "Outdoor Travel" and "Urban Travel", based
upon the target customers the Company intends to reach and capture: (a) "Free
Travel" represents a collection of canvas and skateboard shoes appealing to a
younger demographic, e.g. students, etc. with an emphasis on the creativity,
freedom and adventure; (b) "Business Travel" refer to the shoes the Company
designs for consumers at different business occasions, for instance, our shoes
with invisible heals help to boost one's confidence and relieve any added
physical stress; (c) "Outdoor Travel" are the shoes that are suitable for
customers who are fond of outdoor activities; and (d) "Urban Travel" includes
the Company designed shoes that are intended to meet the fashion and practical
needs of female urban professionals.
BRAND PROMOTION
Under Baopiao's brand strategy, we aim at building our fashionable and
distinctive brand image in the casual footwear market through celebrity
endorsement and activity sponsorship.
In 2010, we hired the popular singer Ms. Rui Ma to endorse our Baopiao branded
products. In July 2010, Ms. Rui Ma posed for our professional photographers to
facilitate an official launch of our fall-to-winter new products in Xiamen and
many pictures taken at this event were applied to our corresponding advertising
and promotion campaigns, including but not limited to various commercials,
posters, in-store advertising, outdoor advertising, products albums, online
advertising and print advertising.
27
SALES NETWORK
We design, develop, manufacture and distribute sports and casual footwear in
China and South America through our indirectly owned Chinese subsidiaries. All
of our products are sold under the brand "" ("Baopiao" in English). We sell our
products to consumers in the People's Republic of China (for purpose of this
Form 10-K, excludes Hong Kong Special Administration Region, Macau Special
Administration Region and Taiwan), or so-called "domestic market" and South
America. In the domestic market, we sell our products substantially on a
wholesale basis to our distributors who are responsible for distribution to
retail outlets. Through our distributors, our sales network covers 24 provinces
and administrative regions in various modes, including retail outlets, counters
in department stores and shopping malls, and wall racks in large supermarkets.
Our products, including our branded products and ODM (Original Design
Manufacture) products, are sold in the South America through our distributors.
In the domestic market, we adopted the sales mode of "four-prong sales", which
is a combination of four retail approaches, including distributor-operated
stores, retailer-operated stores, franchise stores and online stores. At the
distributor-operated stores, distributors sell our product exclusively. At the
retailer operated stores, distributor appointed retailers sell our products
exclusively. We have certain control over these distributor appointed retailers
because when we enter into distribution agreements with distributors, we have
the right to approve or reject the distributor's request to appoint certain
retailers. The franchise stores refer to stores operated by our franchisees
pursuant to franchise agreements with us. In 2010, we extended our coverage and
control of sales terminals by adding retail outlets in some major cities. As of
December 31, 2010, 98 retail locations and 1,521 counters in the shopping malls
are authorized to sell our products and they are under the direct management of
our distributors. We continue to refresh our brand image with in-store
advertising and decorations, so that consumers will enjoy a much happier
purchase experience at the retail outlets.
Through years of effort in expanding the market share, the Company now maintains
a solid distribution base with a retail management system is under development
as well. This enables us to monitor the overall retail situation and respond to
the market changes in a more timely manner. As part of our online marketing and
distribution strategy, we improved our online shopping portal and registered
Bepure official online store with Taobao, a leading Internet destination for
shopping, socializing and information sharing in China.
PRODUCT R&D
The Company consistently aims to develop attractive footwear products to satisfy
the demand of its target market and to interpret fashion trends. To help
accomplish this, the Company has been focused on the R&D and application of new
craftsmanship, new materials and new technologies, to streamline the Company's
innovative brand concept and international sports fashion. We increased the R&D
cost, updated the equipment and introduced additional talents to develop
fashionable and practical products. In addition, the Company keeps adding new
elements into the product designs to earn more selling points and consumer
recognition on the Baopiao brand, thus constantly striving for the fashion
leader position of "Baopiao" in the female sports and casual footwear market.
In order to build an appropriate, scalable and multiple product structure, the
Company has increased the percentage of men's products to the total sales and
divided its products into four categories, namely, the "Free Travel," the
"Business Travel," the "Outdoor Travel" and the "Urban Travel" as discussed
above.
28
SUPPLY CHAIN MANAGEMENT
We have adopted a cost control system in its business operation. Our procurement
team works closely with engaged suppliers and outsourcing companies to shares
the cost trend of main materials. Meanwhile, we are able to decrease both costs
and pollutants by implementing strict production standards at our existing
facilities while outsourcing certain low margin products. We also try to reduce
the cost of raw materials through bulk purchases, in which our outsourcing
partners are co-buyers.
INFORMATION MANAGEMENT
The Company has set up an information management system which consists of
financial management, sales management, supply chain management, production
management, decision-making support and database service functions, which
contributes significantly to the operation development.
This is an integrated IT system that is able to handle the ever-increasing
requirements of business development. The Company will continue to extend the
new system to its sales channels, especially retail outlets.
The Enterprise Resource Planning (ERP) System of the Company was in full
operation at the end of 2010. The system (i) comprehensively records the
information of sales and goods allotment which is the basis for implementation
of sales policies; (ii) provides exact and thorough analysis data for management
of production; (iii) assists the management in planning and decision-making by
providing access to close domination each department.
EXPANDED CAPACITY
In order to adapt to uncertain market environment, from time to time the Company
varies amounts produced internally vs amounts of production outsourced. For the
fiscal year ended December 31, 2010, the Company had produced 2,190,000 pairs of
shoes in its own industry, while 2,650,000 pairs of shoes had been processed
through outsourcing.
The new facility in Quanzhou furnished with two production lines commenced
production in February of 2011. Presently it is furnished with two production
lines. It is anticipated that the production capacity of the Company will be
enlarged by 70 percent in 2011.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements, as well as the reported amounts of revenue and expenses during the
reported period. These amounts and estimates include, but are not limited to,
the valuation of trade and bills receivables, inventories and estimation on
useful lives and residual values of properties, plant and equipment and
intangible asset. Actual results could differ from these estimates.
29
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined
on a weighted average basis and includes all expenditures incurred in bringing
the goods to the point of sale and putting them in a saleable condition.
In addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company writes down the
inventories for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventories and the estimated market value based
upon assumptions about future demand and market conditions.
There were no provisions for obsolete inventories made during the reporting
period. Historically, the actual net realizable value is close to the management
estimation.
PROPERTIES, PLANT AND EQUIPMENT
Properties, plant and equipment are stated at cost less accumulated
depreciation. Cost represents the purchase price of the asset and other costs
incurred to bring the asset into its existing use.
Depreciation is provided on a straight-line basis over the assets' estimated
useful lives. The useful lives are as follows:-
Estimated
useful lives
------------
Plant and machinery 3 to 8 years
Office equipment 3 to 5 years
Buildings 30 years
Maintenance or repairs are charged to expense as incurred. Upon sale or
disposal, the applicable amounts of asset cost and accumulated depreciation are
removed from the accounts and the net amount less proceeds from disposal is
charged or credited to income.
CONSTRUCTION-IN-PROGRESS
Construction-in-progress represents assets under construction and is stated at
cost. This includes cost of construction of buildings and other direct costs.
Construction-in-progress is not depreciated until such time the relevant assets
are completed and put into use.
INTANGIBLE ASSET
The intangible asset of the Company is comprised of shoes designing software and
an accounting software, with estimated useful lives of five (5) years pursuant
to the management's experience. The software is stated at cost of purchase less
accumulated amortization and any identified impairment losses in the annual
impairment review.
30
LAND USE RIGHTS
Land use rights are stated at cost less accumulated amortization. Amortization
is provided using the straight-line method over the terms of the lease of 50
years obtained from the relevant PRC land bureau.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are tested for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. The Company recognizes impairment of long-lived assets in the event
that the net book values of such assets exceed the future undiscounted cash
flows attributable to such assets. During the reporting period, the Company has
not identified any indicators that would require testing for impairment.
REVENUE RECOGNITION
Revenue from sales of the Company's products is recognized when the significant
risks and rewards of ownership have been transferred to the buyer at the time of
delivery, the sales price is fixed or determinable and collection is reasonably
assured. Returns and exchange require approval from management and discounts are
based on trade terms. The Company reviews and estimates the rates of return and
exchange monthly and made provision for return based on customers' and
distributors' past records. From the past records, the return and exchange are
insignificant.
COST OF SALES
Cost of sales consists primarily of material costs, purchasing and receiving
costs, inspection costs, wages, employees' compensation, depreciation and
related costs, which are directly attributable to the production of products.
Write down of inventory to lower of cost or market value is also recorded in
cost of sales.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes
pursuant to ASC 740 "Income Taxes". Under the asset and liability method of ASC
740, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statements carrying amounts of existing assets and liabilities and loss carried
forward and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
FINANCIAL RESULTS FOR THE FISCAL YEARS EDNED DECEMBER 31, 2010 AND 2009
The following table summarizes our operating results and key financial ratios
for the years ended December 31, 2010 and December 31, 2009, respectively:
31
Year ended
December 31, Comparison
------------------------- ---------------------
2010 2009 Amount %
---------- ---------- ---------- -------
Sales revenue 36,376,209 25,428,497 10,947,712 43.05%
Cost of sales 24,492,757 16,796,818 7,695,939 45.82%
Gross profit 11,883,452 8,631,679 3,251,773 37.67%
Total operating expenses 1,602,990 1,438,159 164,831 11.46%
Income from operations 10,280,462 7,193,520 3,086,942 42.91%
Other income 164,488 29,869 134,619 450.70%
Finance costs 287,176 124,207 162,969 131.21%
Income before income taxes 10,157,774 7,099,182 3,058,592 43.08%
Income taxes 2,623,735 1,897,661 726,074 38.26%
Net income 7,534,039 5,201,521 2,332,518 44.84%
This table below illustrates the key operating results and financial indicators
of the Company for the fiscal years ended December 31, 2010 and 2009,
respectively:
Year ended
December 31, Comparison
------------------------- ---------------------
2010 2009 Amount %
---------- ---------- ---------- -------
Sale revenue 36,376,209 25,428,497 10,497,712 43.05%
Gross profit 11,883,452 8,631,679 3,251,773 37.67%
Income from operations 10,280,462 7,193,520 3,086,942 42.91%
Net income 7,534,039 5,201,521 2,332,518 44.84%
Gross profit margin 32.67% 33.94% -1.27%
Operating profit margin 28.26% 28.29% -0.03%
Net profit margin 20.71% 20.46% -0.26%
Ratio of general
administrative expenses
to revenue 3.50% 4.62% -1.12%
Ratio of selling expenses
to revenue 0.86% 1.04% -0.18%
Average inventory turnover
days 1,500.00% 1,500.00%
Turnover days of trade
receivable 102 96
Turnover days of trade
payable 48 50
REVENUES
For the year ended December 31, 2010, the Company achieved revenues of
$36,376,209, representing an increase of $10,947,712 or 43.05% when compared to
$25,428,497 for the same period in 2009. We attribute this increase mainly to
(i) higher demand by and among Chinese customers; (ii) our launch of several new
products of the "Free Travel" series during the first six months of the 2010
year, which were specifically designed to appeal to the fashion conscious
younger consumer demographic; (iii) our promotion of new products featured with
heat insulation attracted more customers and translated into additional sales;
(iv) our marketing efforts, including the product shows in Fujian, Zhejiang and
Jiangsu provinces where our sales have been historically low; and (v) our
efforts to extend our products into more supermarkets through our new
distributors in Fujian, Zhejiang and Jiangsu provinces. In particular, our
revenue from the eastern section has increased by 114.85% due to the above
factors.
32
GEOGRAPHIC SEGMENTS OF REVENUES IN THE YEARSE NDED DECEMBER 31, 2010 AND 2009:
Year ended Year ended
December 31, 2010 December 31, 2009 Comparison
--------------------- ---------------------- --------------------
$ % $ % $ %
---------- ------ ---------- ------ ---------- -----
International markets 7,550,038 20.76% 5,151,812 20.26% 2,398,226 46.55%
PRC market 28,826,171 79.24% 20,276,685 79.74% 8,549,486 42.16%
The eastern section (1) 7,166,703 19.70% 3,335,603 13.12% 3,831,100 114.85%
The northern section (2) 12,797,751 35.18% 9,545,096 37.54% 3,252,655 34.08%
The southern section (3) 8,861,717 24.36% 7,395,986 29.08% 1,465,731 19.82%
Total revenues 36,376,209 100.00% 25,428,497 100.00% 10,947,712 43.05%
Note:
1. The eastern section refers to the city of Shanghai and the provinces of
Zhejiang, Jiangsu, Anhui, Hubei, Hunan, Jiangxi and Shandong in the PRC;
2. The northern section refers to the city of Beijing and the provinces of
Xinjiang, Gansu, Ningxia, Hebei, Henan, Tianjin, Shanxi, Inner Mongolia,
Liaoning, Jilin and Heilongjiang in the PRC;
3. The southern section refers to the city of Chongqing and provinces of
Guangdong, Guangxi, Fujian, Hainan, Sichuan, Guizhou, Yunnan and Tibet in
the PRC.
For the year ended December 31, 2010, $7,550,038 of our sales revenues were
generated from foreign markets, representing an increase of 46.55% when compared
to $5,151,812 for the same period in 2009. The Company has seen increasing
penetration rate and brand recognition in South American market. In 2010, the
Company strengthened its R&D in developing products for export.
For the year ended December 31, 2010, the domestic eastern market contributed
$7,166,703 to the Company's sales revenue, representing an increase of 114.85%,
when compared to $3,335,603 earned a year ago; The northern market generated
sales revenues of $12,797,751, representing an increase of 34.08%, when compared
to $9,545,096 for the same period in 2009; The southern market achieved sales
revenues of $8,861,717, representing an increase of 19.82%, when compared to
$7,395,986 for the same period in 2009. Such changes are mainly due to the
following:
I) We complete a thorough sales adjustment and market expansion in eastern
section, refined the sales mode taken by distributors and optimized the product
structure. As a result, the sales in eastern section increase by 114.85% on
year-on -year basis. In addition, the sales growth in Jiangsu and Zhejiang
Provinces contributed much to the sales revenue of eastern section. It
accelerated our effort to enter the first-tier cities (such as Shanghai and
Hangzhou).
2) The northern section market benefits from the year-over-year sales growth.
For 2010, the sales increased by 34.08% from $9,545,096 to $12,797,751 under the
support of refined product structure.
3) We have witnessed a sales growth rate of approximately 20% in southern
section. Respectively, sales amount in some regions (such as Guangxi and Guizhou
Provinces) are rather low due to the fewer retail terminals. Guangdong province
33
continues to evidence increased sales. The sales revenue also increases as we
properly utilize the sales terminals in larger supermarkets.
GROSS PROFIT AND GROSS PROFIT MARGIN
Year ended
December 31, Comparison
------------------------- ---------------------
2010 2009 Amount %
---------- ---------- ---------- -------
Sales revenue 36,376,209 25,428,497 10,947,712 43.05%
Cost of sales 24,492,757 16,796,818 7,695,939 45.82%
Gross profit 11,883,452 8,631,679 3,251,773 37.67%
Gross profit margin 32.67% 33.94%
For the fiscal year ended December 31, 2010, the Company's gross profit was
$11,883,452, representing an increase of $3,251,773 or 37.67% as compared to
$8,631,679 for the previous year.
For the fiscal year ended December 31, 2010, the Company's gross profit margin
was 32.67%, representing a slight decrease of 1.27% compared with 33.94% in the
same period of 2009. Such decrease is mainly due to the increase of employee
salaries.
OPERATING AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the year ended December 31, 2010, our selling expenses were $311,491,
representing an increase of $47,742 or 18.10%, compared to $263,749 for the same
period in 2009. The increase was mainly attributable to the larger amount of
expenditure used in marketing: (i) we increased our sales force to assist the
distributors in sales promotion; (ii) we provide allowances to distributors for
their construction of brand image stores; (iii) we increased expenditures of
free gifts provided to customers in promotion activities and (iv) we increased
expenditure applied in products promotion and advertisement of image stores.
For the year ended December 31, 2010, the administrative expenses were
$1,273,636, representing an increase of 8.45% compared to $1,174,410 of the same
period in 2009. The increase was mainly because the salaries to our executive
officers increased by 10%.
FINANCE COST
For the fiscal year ended December 31, 2010, the finance cost was $287,176,
representing an increase of $162,969 or 131.21% comparing to $124,207 for the
same period in 2009. The increase primarily relates to increase in debt
servicing cost on the huge increase in bank loans which were applied to the
marketing expansion, consolidated construction of retails and the new factory.
NET PROFIT
For the fiscal year ended December 31, 2010, the net profit was $7,534,039,
representing an increase of $2,332,518 or 44.84% compared to $5,201,521 for the
same period in 2009, primarily as a result of the growth in revenues and profit
margin.
NET PROFIT MARGIN
For the fiscal year ended December 31, 2010, the net profit margin is 20.71%,
representing an increase of 0.25% compared to 20.46% for the same period in
2009.
34
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2010, our total assets were $35,489,537, which consist of
cash and cash equivalents of $5,815,257, trade receivables of $13,094,012,
inventories of $1,232,557, prepayments and other receivable of $249,118,
advances to customers and distributors of $1,293,733, properties, plant and
equipment of $7,592,866, intangible asset of $190,505 and land use rights of
$6,021,489.
As of December 31, 2010, total liabilities were $14,477,839. Total liabilities
are composed of trade payables of $2,988,361, short-term loans of $4,717,870,
income tax payable of $ 1,248,649, amount due to a director of $1,998,085 and
other payables and accrued expense of $3,524,874. As of December 31, 2010,
stockholders' equity was $21,011,698. As of December 31, 2010, the gearing ratio
is 40.80%.
We offer what we believe to be reasonable credit limits to our customers at
credit terms of 180 days to maintain control of trade receivable. The average
turnover was 102 days for our trade receivable for the fiscal year of 2010,
while the average turnover was 96 days for our trade receivable in the same
period of 2009.
For the fiscal year ended December 31, 2010, the average inventory trade
turnover was 15 days for our inventories which was the same for the same period
of 2009.
Our cash and bank deposits are mainly denominated in RMB, while the revenue,
expense, assets and liabilities are denominated in RMB and US dollars. The PRC
currency is exchanged to US dollars at a floating rate. It did not have any
substantial impact on our financial condition because we own few assets
denominated in US dollars.
CASH FLOW
As of December 31, 2010, our cash and cash equivalents were $5,815,257,
representing an increase of $1,490,081, compared to $4,325,176 for the same
period of 2009. We believe our ability to generate cash from operating
activities is one of our fundamental financial strengths. In addition to cash
from operating activities, we also maintain loan arrangements with state-owned
banks (e.g. Agricultural Bank of China, Construction Bank of China, etc.) for
our capital requirements. Our future capital expenditures will include building
new manufacturing facilities, improving and upgrading our existing production
facilities, expanding product lines, research and development capabilities, and
making acquisitions as we deem appropriate. We believe that we have adequate
cash to fund our operations and to meet our anticipated cash requirements for
the next 12 months. If we need additional cash, we may seek to raise capital
either through the issuance of stock or increase our borrowing level with our
lender.
As of December 31, 2010, net cash used in operating activities was $723,420. Net
cash used in investing activities was $996,992. Such cash was mainly used in the
construction of the new production facility.
As of December 31, 2010, net cash provided by financing activities was
$3,026,788.
CONTINGENT LIABILITIES
In accordance with the PRC tax regulations, the Company's sales are subject to
value added tax ("VAT") at 17% upon the issuance of VAT invoices to its
customers. When preparing these financial statements, the Company recognized
revenue when goods were delivered, and made full tax provision in accordance
with relevant national and local laws and regulations of the PRC.
35
The Company follows the practice of reporting its revenue for PRC tax purposes
when invoices are issued. In the local statutory financial statements prepare
under PRC GAAP, the Company recognized revenue on an "invoice basis" instead of
when goods are delivered. Accordingly, despite the fact that the Company has
made full tax provision in the financial statements, the Company may be subject
to a penalty for the deferred reporting of tax obligations. The exact amount of
penalty cannot be estimated with any reasonable degree of certainty. The
director considers it is very unlikely that the tax penalty will be imposed.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any off balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This report does not include information described under Item 305 of Regulation
S-K pursuant to the rules of the Securities and Exchange Commission that permit
"smaller reporting companies" to omit such information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and supplementary data are listed in the Index to
Financial Statement starting from page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report, under the supervision
and with the participation of management, including the Chief Executive Officer
and Chief Financial Officer (the "Certifying Officers"), the Company conducted
an evaluation of its disclosure controls and procedures. As defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act, the term "disclosure controls and
procedures" means controls and other procedures of an issuer that are designed
to ensure that information required to be disclosed by the issuer in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer's management,
including the Certifying Officers, to allow timely decisions regarding required
disclosure. Based on this evaluation, the Certifying Officers have concluded
that the Company's disclosure controls and procedures were effective as of
December 31, 2010.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act Rule 13a-15(f)).
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our internal control over financial reporting as of December 31,
2010, based on the framework in Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Based on our evaluation under the framework in Internal Control - Integrated
Framework, management concluded that our internal control over financial
reporting was effective as of December 31, 2010.
36
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
This Annual Report on Form 10-K does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. A significant deficiency is a deficiency, or a combination
of deficiencies, in internal control over financial reporting that is less
severe than a material weakness, yet important enough to merit attention by
those responsible for oversight of the company's financial reporting.
The management's assessment of internal controls over financial reporting was
not subject to auditor attestation as of December 31, 2010 pursuant to rules of
the Securities and Exchange Commission. Accordingly, this Annual Report does not
include an attestation report by our independent registered public accounting
firm regarding internal control over financial reporting.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There was no change in the Company's internal control over financial reporting
during the most recently completed fiscal year that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the name and position of each of our current executive
officers and directors.
Name Age Position
---- --- --------
Haiting Li 46 Chairman of the Board, Chief Executive Officer,
President, and Secretary
Zhong Zhao 46 Chief Financial Officer and Treasurer
Rongyan Ding 47 Director
Fuhsin Chen 66 Independent director
Minghua Liu 50 Independent director
Erik Vonk 57 Independent director
The following is a summary of the biographical information of our directors and
officers:
37
HAITING LI Mr. Li became a director and our Chief Executive Officer and General
Manager on November 11, 2009 when we completed our reverse acquisition of
Peakway. Before the reverse acquisition, Mr. Li had served as the chairman and
CEO of Pacific Shoes since 2000 and as the Chairman and CEO of Baopiao Shoes
since 2006. Mr. Li served as the general manager of Pacific Shoes from 1993 to
2000. He served as the manager of Jinjiang Xinxing Footwear Factory from 1989 to
1993. He worked as the technician of Footwear Jinjiang Handai Factory from 1982
to 1989. Mr. Li's industry expertise and day to day leadership, as Chief
Executive Officer of our Company, provides him with intimate knowledge of our
operations.
ZHONG ZHAO Mr. Zhao became our CFO on November 11, 2009. Mr. Zhao had been the
CFO of Pacific Shoes and Baopiao Shoes since January 8, 2009. He served as the
financial manager of Beijing Telestone Technology Corporation from March 2004 to
December 2008, and as the financial manager of Hubei Dangyang Hydraulic
Engineering Bureau from July 1990 to 2003. Mr. Zhao brings his experience in the
accounting field to the Company's day to day operations.
RONGYAN DING Mr. Ding became a director of the Company on November 11, 2009. Mr.
Ding had been the deputy general manager of Pacific Shoes since 2003. From 1992
to 2002 he was engaged in the wholesale of footwear in Zhengzhou City, Henan
Province. Mr. Ding brings industry expertise and experience to the Company in
his management of our production and operations.
FUHSIN CHEN Mr. Chen became our independent director on November 11, 2009. Mr.
Chen joined the footwear industry since 1965. His experience includes serving as
director of General Manager of Xieruan Technology Company from 2002 to 2008, as
the president of shoe- training class of Kechuang Shoemaking Training Center
from 2002 to 2008, as the president of Fuhsin Chen footwear sample studio in
Taiwan from 2000 to 2002, as the president of Fuhsin Chen Shoe Pattern Workroom
in Taiwan from 1987 to 2000. Mr. Chen owns the Patent of Manufacturing System
and Manufacturing Method on Footwear Edition-opening (Patent No.: i 271160). Mr.
Chen's in-depth experience in the footwear industry, in various capacities for
the past two decades brings a great deal of insight and value to our Board.
MINGHUA LIU Ms Liu became our independent director on November 11, 2009. She had
been the General Manager of OSCAR Company (Taipei) from 1991 to 2008. From 1984
to 1991 she served as Shipping Manager of Yudong Company. Ms. Liu's brings
general management perspective and insights for the benefit of our Board.
ERIK VONK Mr. Vonk became our independent director on November 11, 2009. From
2002 to 2007 he was Chairman and CEO of Gevity HR, a NASDAQ listed Company.
Previously, he was President and CEO of Randstad North America and a Member of
the Group Executive Board of Randstad NV, the world's third largest staffing
company. This followed 14 years in international banking where he began his
career. Mr. Vonk earned an undergraduate degree in Holland and holds an MBA from
Golden Gate University, San Francisco (1984). Mr. Vonk brings his experience and
expertise in the areas of capital raising, investor relations, financial
management and analysis, and business strategy to the Board and the Company.
BOARD COMPOSITION AND COMMITTEES
Except as set forth below, there are no other family relationships between any
of the Company's executive officers or directors. Mr. Rongyan Ding, our VP of
Production and a management director, is Mr. Li's brother-in-law; Jingou Li, the
Administrative Manager of the Company, is the nephew of Mr. Li.
There were no material changes to the procedures by which shareholders may
recommend nominees to the Board since the Company's last disclosure of such
policies.
38
No director or officer of the Company has, during the last 10 years, has been
subject to or involved in any legal proceedings described under Item 401(f) of
Regulation S-K, been convicted of any criminal proceeding (excluding traffic
violations or similar misdemeanors), or been a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to, United
States federal or state securities laws or finding any violations with respect
to such laws.
BOARD OF DIRECTORS
The Board oversees the business affairs of our Company and monitors the
performance of management. Each director holds office for the term for which he
or she is elected or until his or her successor is duly elected. There has been
no material change in the procedures by which shareholders may recommend
nominees to the Company's Board.
AUDIT COMMITTEE
Erik Vonk currently serves as chairman of the Audit Committee. The Board has
determined that Erik Vonk is an audit committee financial expert as defined by
Item 407(d) of Regulation S-K under the Securities Act and is "independent"
within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Other members of the Audit Committee are Fuhsin Chen and Minghua Liu. The Board
has determined that each member of the Audit Committee is "independent" as
required by the NYSE Amex Company Guide and under the federal securities laws.
Notwithstanding the fact that the Company's securities are not listed on a U.S.
securities stock exchange, the Board has determined to adhere to the
"independence" standards set forth in the NYSE Amex Company Guide. The Audit
Committee has a written charter adopted by the Board, which is available on the
Company's website and at no charge by contacting the Company at its headquarters
as listed on the cover page of this report. Information appearing on the
Company's website is not part of this Annual Report.
The purpose of the Audit Committee is to assist the Board in its general
oversight of the Company's financial reporting, internal controls and audit
functions. As described in the Audit Committee Charter, which is available at
the Company's website, the Audit Committee's primary responsibilities are to:
* Review whether or not management has maintained the reliability and
integrity of the accounting policies and financial reporting and
disclosure practices of the Company;
* Review whether or not management has established and maintained
processes to ensure that an adequate system of internal controls is
functioning within the Company;
* Review whether or not management has established and maintained
processes to ensure compliance by the Company with legal and
regulatory requirements that may impact its financial reporting and
disclosure obligations;
* Oversee the selection and retention of the Company's independent
public accountants, their qualifications and independence;
* Prepare a report of the Audit Committee for inclusion in the proxy
statement for the Company's annual meeting of shareholders;
* Review the scope and cost of the audit, the performance and procedures
of the auditors, the final report of the independent auditors; and
* Perform all other duties as the Board may from time to time designate.
CODE OF CONDUCT AND ETHICS
The Board had adopted and maintains a Code of Conduct and Ethics applicable to
all directors, officers and employees, in compliance with Item 406 of Regulation
S-K. A copy of this Code of Conduct is available at the Company's website, and
39
is available at no charge by contacting the Company at its headquarters as
listed on the cover page of this Annual Report. Information appearing on the
Company's website is not part of this Annual Report.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
officers, directors and persons who own more than ten percent of a registered
class of equity securities to, within specified time periods, file certain
reports of ownership and changes in ownership with the SEC. As of the date
hereof, no forms have been furnished to the Company pursuant to Rule 16a-3 under
this Act. It is the Company's understanding that none of the Forms 3, 4 or 5
required to be filed pursuant to Section 16(a) have been filed by the executive
officers, directors and security holders required to file since the such persons
have become subject to such reporting requirements following the change in shell
status in November 2009. The Company is working diligently to obtain SEC filing
codes and complete all such filings as soon as possible.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding annual and long-term
compensation with respect to the fiscal years ended December 31, 2010 and 2009,
paid or accrued by us to or on behalf of those persons who were, during the
fiscal year ended December 31, 2010, our Chief Executive Officer, Chief
Financial Officer, and our most highly compensated executive officers (not
including the CEO and CFO) (the "Named Executive Officers"). During 2010 and
2009, the Named Executive Officers consisted of the following persons.
* Haiting Li - Chairman, CEO, President and Secretary
* Zhong Zhao - Chief Financial Officer and Treasurer
* Yi Chen - former CEO, CFO, Secretary and director until his
resignation on November 11, 2009
* Susana Gomez - former CEO, CFO, Secretary and director until her
resignation on October 22, 2009
Name and Option All Other
Principal Position Year Salary Bonus Awards(5) Compensation Total
------------------ ---- ------ ----- --------- ------------ -----
Haiting Li, CEO(1) 2010 $ 0 $ 0 $ 0 $ 0 $ 0
2009 $ 0 $ 0 $ 0 $ 0 $ 0
Zhong Zhang, CFO (2) 2010 $15,000 $ 0 $1,546 $ 0 $16,546
2009 $15,000 $ 0 $ 0 $ 0 $15,000
Susana Gomez,former 2010 -- -- -- -- --
Director, CEO, CFO 2009 $ 0 $ 0 $ 0 $ 0 $ 0
and secretary (3)
Yi Chen, Former 2010 -- -- -- -- --
Director, CEO, CFO 2009 $ 0 $ 0 $ 0 $ 0 $ 0
and secretary (4)
----------
(1) Mr. Haiting Li became our Chief Executive Officer and Chairman of the Board
on November 11, 2009.
(2) Mr. Zhong Zhao became our Chief Financial Officer on November 11, 2009.
(3) Ms. Susana Gomez served as our Director, CEO, CFO and secretary from
September 8, 2008 until her resignation on October 22, 2009.
(4) Mr. Yi Chen served as our Director, CEO, CFO and secretary from October
2009 until his resignation on November 11, 2009.
(5) Amounts under Option Awards represent the grant date fair value of options
granted during 2010.
40
EQUITY COMPENSATION, RETIREMENT AND DEFERRED COMPENSATION PLANS
Historically, we have not granted equity awards as a component of compensation.
The terms and provisions of our 2010 Stock Option Plan are provided below.
Currently, we do not provide any company sponsored retirement benefits to any
employee, including the named executive officers. We do not have any bonus,
deferred compensation or retirement plan. All decisions regarding compensation
are determined by our Compensation Committee.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Fujian Jinjiang Pacific Shoes Co., Limited, our PRC-based operating company, has
executed an employment agreement with Li Haiting, our President and Chief
Executive Officer. The term of his employment is from December 5, 2007 through
December 4, 2010, and has been extended for another 5 years. Haiting Li's annual
salary under the terms of the agreement is $0, subject to adjustment in the
Board's discretion. The agreement does not provide any change in control or
severance benefits to the executive, and we do not have any separate
change-in-control agreements with any of our executive officers.
Fujian Jinjiang Pacific Shoes Co., Limited, our PRC-based operating company, has
executed an employment agreement with Zhong Zhao, our Chief Financial Officer,
effective as of January 8, 2009. The term of his employment is from January 8,
2009 through January 7, 2014. Zhong Zhao's annual salary under the terms of the
agreement is $15,000, subject to adjustment in the Board's discretion. The
agreement does not provide any change in control or severance benefits to the
executive, and we do not have any separate change-in-control agreements with any
of our executive officers.
Number of Securities Number of Securities Option Option
Underlying Unexercised Underlying Unexercised Exercise Expiration
Name Options Exercisable Options Unexercisable Price Date
---- ------------------- --------------------- ----- ----
Zhong Zhao 30,000 70,000 $1.75 6-Jan-16
Huolian Li 18,000 42,000 $1.75 6-Jan-16
Jingou Li 24,000 56,000 $1.75 6-Jan-16
Qingfu Li 18,000 42,000 $1.75 6-Jan-16
Qingpu Chen 24,000 56,000 $1.75 6-Jan-16
Rongyan Ding 24,000 56,000 $1.75 6-Jan-16
Yaqing Li 9,000 21,000 $1.75 6-Jan-16
Zhiyan Li 21,000 49,000 $1.75 6-Jan-16
COMPENSATION COMMITTEE
The duties of the Compensation Committee include establishing any director
compensation plan or any executive compensation plan or other employee benefit
plan which requires shareholder approval; establishing significant long-term
director or executive compensation and director or executive benefits plans
which do not require stockholder approval; determination of any other matter,
such as severance agreements, change in control agreements, or special or
supplemental executive benefits, within the Committee's authority; determining
the overall compensation policy and executive salary plan; and determining the
annual base salary, annual bonus, and annual and long-term equity-based or other
incentives of each corporate officer, including the CEO. The CEO reviews the
performance of the executive officers of the Company (other than the CEO) and,
41
based on that review, the CEO makes recommendations to the Compensation
Committee about the compensation of executive officers (other than the CEO). The
CEO does not participate in any deliberations or approvals by the compensation
committee or the Board with respect to his own compensation. The Compensation
Committee makes recommendations to the Board about all compensation decisions
involving the CEO and the other executive officers of the Company. The Board
reviews and votes to approve all compensation decisions involving the CEO and
the executive officers of the Company. The Compensation Committee and the Board
will use data, showing current and historic elements of compensation, when
reviewing executive officer and CEO compensation.
The Committee is empowered to review all components of executive officer and
director compensation for consistency with the overall policies and philosophies
of the Company relating to compensation issues. The Committee may retain and
receive advice, in its sole discretion, from compensation consultants. The
Compensation Committee does not currently employ compensation consultants in
determining or recommending the amount or form of executive and director
compensation. None of the members of our Compensation Committee is one of our
officers or employees. None of our executive officers currently serves, or in
the past year has served, as a member of the Board or compensation committee of
any entity that has one or more executive officers serving on our Board or
Compensation Committee. Our compensation committee consists of Fuhsin Chen and
Minghua Liu (Chairman).
DIRECTOR COMPENSATION
Except as set forth below, the Company does not compensate our directors in
connection with their services on the Board or standing committees of the Board.
The Company provides reimbursements to its directors for reasonable travel,
out-of-pocket and other expenses incidental to their attendance of the Board or
committee meetings. In 2010, the Company paid a total of $13,500 in such
expenses to all directors. In lieu of the foregoing expense reimbursement, Erik
Vonk receives a quarterly retainer $4,500 from a less than 3% shareholder of the
Company which covers Mr. Vonk's travel and other expenses related to his
services on the Board and its committees. The Board has reviewed all such
arrangements in light of the "independence" review and determined that it had no
material effect on any such determination.
THE 2010 STOCK OPTION PLAN
In July 2010, our Board adopted and approved by unanimous written consent, the
Company's 2010 Stock Option Plan (the "Plan"), under which stock option awards
may be made to officers, directors and key employees of the Company. In December
2010, stockholders of the Company owning approximately 80% of the Company's
outstanding shares of Common Stock approved the Plan by means of written consent
of the stockholders. We have reserved 560,000 shares of common stock for
issuance under the Plan, subject to customary anti-dilution and changes in
capitalization adjustments. As of March 31, 2011, we had 0 shares issued and
outstanding under the Plan.
General. The purposes of this Plan are, among others, to attract and retain the
best available personnel, to provide additional incentives to employees,
directors and consultants. In addition, the 2010 Plan is to advance the
interests of the Company by providing to directors and officers of the Company
and to other key employees of the Company who have substantial responsibility
for the direction and management of the Company additional incentives to exert
their best efforts on behalf of the Company, to increase their proprietary
interest in the success of the Company, to reward outstanding performance and to
provide a means to attract and retain persons of outstanding ability to the
service of the Company.
Administration. The Plan will be administered by the Board or a standing
committee thereof, which committee will be constituted in such a manner as to
satisfy the applicable laws and, once appointed, such committee will continue to
serve in its designated capacity until otherwise directed by the Board. The
administrator of the Plan will have broad powers and authority to, among others,
42
select and determine the individuals to whom options may be granted, grant
terms, provisions and amounts, amend and interpret the terms of outstanding
options, and, otherwise take such other action, not inconsistent with the terms
of the Plan, as the administrator deems appropriate.
Eligibility. Under the 2010 Plan, awards may be granted from time to time to
officers, directors and key employees. Each award under the Plan will be
evidenced by a separate written agreement which sets forth the terms and
conditions of the award. There is no maximum number of persons eligible to
receive awards under the 2010 Plan, nor is there any limit on the amount of
awards that may be granted to any such person. The administrator of the 2010
Plan may grant either incentive stock options (for purposes of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified
stock options under the Stock Option Plan. The administrator generally has the
discretion to determine the persons to whom stock options will be granted, the
numbers of shares subject to such options, the exercise prices of such options,
the vesting schedules with respect to such options, the terms of such options,
as well as the period, if any, following a participant's termination of service
during which such option may be exercised, and the circumstances in which all or
a portion of an option may become immediately exercisable or be forfeited. The
written agreement may, but need not, include a provision whereby the optionee
may elect at any time while an employee, director or consultant to exercise any
part or all of the option prior to full vesting of the option. The term of each
option will be the term stated in the option agreement, provided, however, that
the term of an incentive share option will be no more than three years from the
date of grant thereof.
Transferability of Options. Incentive share options may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any matter other than by
will or the laws of descent, and during the lifetime of the optionee, may only
be exercised by the optionee. Other options may be transferred during the
lifetime of the optionee if authorized by the administrator.
TERMINATION OF OPTIONS.
* TERMINATION OF EMPLOYMENT. If an optionee is no longer an employee for
any reason other than death or disability, the optionee has the right
to exercise any vested option held within 90 days of the termination
of employment.
* DEATH OF OPTIONEE. Upon the death of optionee, any vested options must
be exercised within 12 months.
* DISABILITY OF OPTIONEE. Any vested option must be exercised within 12
months after optionee's termination of employment.
Option Exercise. The exercise or purchase price is to be determined by the
Administrator; however, the Incentive Share Option per share exercise price
shall not be less than 100% of the fair market value per share on the date of
the grant, and the Non-Qualified Share Option per share exercise price shall not
be less than 85% of the fair market value per share on the date of grant. An
option is deemed to be exercised when the Company receives written notice and
full payment for the options.
Corporate Transactions and Changes in Control. Unless expressly assumed in
connection with a corporation transaction involving, among other things, merger,
sale, transfer or other disposition of all or substantially all of the assets of
the Company, complete liquidation or dissolution of the Company, or any reverse
merger, all outstanding options under the Plan will terminate. In the event of a
Change of Control transaction, the Administrator may determine that each
outstanding option will automatically become fully vested and exercisable and be
released from any repurchase or forfeiture rights. Any incentive stock option so
accelerated will remain exercisable under the Code only to the extent the
$100,000 dollar limitation of Section 422(d) of the Code is not exceeded.
Effective Date and Term of Plan. The Plan will become effective upon the earlier
to occur of its adoption by the Board or its approval by the shareholders of the
Company. It will continue in effect for a term of five years unless sooner
terminated. The grant of incentive share options under the Plan will be subject
to approval by the shareholders of the Company within twelve months after the
43
date the Plan is adopted. Such shareholder approval will be obtained in the
degree and manner required under applicable laws. The Administrator may grant
incentive share options under the Plan prior to approval by the shareholders,
but until such approval is obtained, no such options will be exercisable. In the
event that shareholder approval is not obtained within the twelve month period
provided above, all incentive share options previously granted under the Plan
shall be exercisable as non-qualified share options.
Amendment or Termination of the Plan. The Board may at any time amend, suspend
or terminate the Plan; provided, however, that no such amendment will be made
without the approval of the Company's stockholders to the extent such approval
is required by applicable or to the extent such amendment would change certain
provisions of the Plan.
Reservation of Shares. The Company, during the term of the Plan, will at all
times reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
Federal Income Tax Consequences. The following is a brief description of the
Federal income tax consequences to the participants and the Company of the
issuance and exercise of stock options under the 2010 Plan. All ordinary income
recognized by a participant with respect to awards under the 2010 Plan shall be
subject to both wage withholding and employment taxes. The deduction allowed to
us for the ordinary income recognized by a participant with respect to an award
under the 2010 Plan will be limited to amounts that constitute reasonable,
ordinary and necessary business expenses.
INCENTIVE STOCK OPTIONS. In general, no income will result for Federal income
tax purposes upon either the granting or the exercise of any incentive option
issued under the 2010 Plan. If certain holding period requirements (at least two
years from the date of grant of the option and at least one year from the date
of exercise of the option) are satisfied prior to a disposition of stock
acquired upon exercise of an incentive option, the excess of the sales price
upon disposition over the option exercise price generally will be recognized by
the participant as a capital gain, and the Company will not be allowed a
business expense deduction. If the holding period requirements with respect to
incentive options are not met, the participant generally will recognize, at the
time of the disposition of the stock, ordinary income in an amount equal to the
difference between the option price of such stock and the lower of the fair
market value of the stock on the date of exercise and the amount realized on the
sale or exchange. The difference between the option price of such stock and the
fair market value of the stock on the date of exercise is a tax preference item
for purposes of calculating the alternative minimum tax on a participant's
federal income tax return. If the amount realized on the sale or exchange
exceeds the fair market value of the stock on the date of exercise, then such
excess generally will be recognized as a capital gain. In the case of a
disposition prior to satisfaction of the holding period requirements which
results in the recognition of ordinary income by the participant, we generally
will be entitled to a deduction in the amount of such ordinary income in the
year of the disposition. If a participant delivers shares of our Common Stock in
payment of the option price, the participant generally will be treated as having
made a like-kind exchange of such shares for an equal number of the shares so
purchased, and no gain or loss will be recognized with respect to the shares
surrendered in payment of said option price. In such a case, the participant
will have a tax basis in a number of shares received pursuant to the exercise of
the option equal to the number of shares of Common Stock used to exercise the
option and equal to such participants tax basis in the shares of Common Stock
submitted in payment of the option price. The remaining shares of Common Stock
acquired pursuant to the exercise of the option will have a tax basis equal to
the gain, if any, recognized on the exercise of the option and any other
consideration paid for such shares on the exercise of the option.
Notwithstanding the foregoing, if a participant delivers any stock that was
previously acquired through the exercise of an incentive stock option in payment
of all or a portion of the option price of an option, and the holding period
requirements described above have not been satisfied with respect to the shares
of stock so delivered, the use of such stock to pay a portion of the option
price will be treated as a disqualifying disposition of such shares, and the
participant generally will recognize income.
44
NONQUALIFIED STOCK OPTIONS. The grant of nonqualified stock options under the
Stock Option Plan will not result in any income being taxed to the participant
at the time of the grant or in any tax deduction for us at such time. At the
time a nonqualified stock option is exercised, the participant will be treated
as having received ordinary income equal to the excess of the fair market value
of the shares of Common Stock acquired as of the date of exercise over the price
paid for such stock. At that time, we will be allowed a deduction for Federal
income tax purposes equal to the amount of ordinary income attributable to the
participant upon exercise. The participant's holding period for the shares of
Common Stock acquired will commence on the date of exercise, and the tax basis
of the shares will be the greater of their fair market value at the time of
exercise or the exercise price.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 31, 2011, based on information
obtained from the persons named below, the beneficial ownership of shares of our
Common Stock held by (i) each person known by us to be the owner of more than 5%
of our outstanding shares of Common Stock, (ii) each director, (iii) each named
executive officer, and (iv) all executive officers and directors as a group:
Name And Address of Amount And Nature of Percent
Beneficial Owner (1) Beneficial Ownership of Class
-------------------- -------------------- --------
Cabo Development Limited (2) 10,500,000 70%
2nd Floor, Abbott Building,
Road Town,Tortola,
British Virgin Islands
Haiting Li (2) 10,500,000 70%
Zhong Zhao (3) 30,000 2%
Fuhsin Chen (4) 0 0
4F, No.1, Lane 36, Yongping Street,
Taipei, Taiwan
Minghua Liu (4) 0 0
9F, No.92, Xingyun Street
Taipei, Taiwan
Erik Vonk (4) 0 0
773 Hideaway Bay Drive
Longboat Key, Florida 34228
All Directors and Executive
Officers (a group of 5 persons) 10,530,000 72%
----------
* Less than 1%.
(1) Unless otherwise stated, the address of all persons in the table is No.78
Kanglong East Road, Handan Village, Chendai Town, Jinjiang City, Fujian
Province, China. Unless otherwise stated below, each such person has sole
voting and investment power with respect to all such shares and, under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned
by such person, but are not deemed outstanding for the purpose of
calculating the percentage owned by each other person listed. As of March
31, 2011, we had 15,000,000 shares of our common stock issued and
outstanding.
(2) On November 11, 2009, we acquired Peakway in a reverse acquisition with
Cabo Development Limited. As merger consideration for the Peakway shares
received from the Cabo Development Limited, we issued and delivered to Cabo
Development Limited 10,500,000 of our newly-issued shares of common stock.
Cabo Development Limited is beneficially owned by Haiting Li, our Chief
Executive Officer and President.
45
(3) Chief Financial Officer of the Company. On December 6, 2010, he was granted
100,000 options pursuant to 2010 Stock Option Plan. Of 30,000 options to
purchase shares of the Company's common stock is vested on January 6, 2011.
(4) Independent Director.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The Company maintains the 2010 Stock Option Plan approved by its shareholders
that authorizes awards representing up to 560,000 shares of common stock. As of
the date hereof, we have issued 560,000 options pursuant to the Plan, 168,000
shares of which were already vested.
Number of Securities to Be
Issued Upon Exercise of
Outstanding Options, Weighted Average Exercise Securities Remaining
Warrants, and Rights Price of Outstanding Options Available for Future
Plan Category Weighted Warrants, and Rights Issuance
------------- -------- -------------------- --------
Equity compensation plans
approved by security holders 0 $1.75 560,000
Equity compensation plans not
approved by security holders n/a n/a n/a
Total 0 $1.75 560,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Except for the ownership of the Company's securities, and except as set forth
below, none of the directors, executive officers, holders of more than five
percent of the Company's outstanding common stock, or any member of the
immediate family of any such person have, to the knowledge of the Company, had a
material interest, direct or indirect, in any transaction or proposed
transaction which may materially affect the Company.
During February 2008 and October 2008, Pacific Shoes provided five unsecured,
non-interest bearing loans to our CEO and the Chairman of the Board, Haiting Li,
in the total amount of RMB 31 million. In January 2009, the loans had been paid
in full by Haiting Li out of the dividends he received from Pacific Shoes.
Our board of directors is charged with reviewing and approving all potential
related party transactions. All such related party transactions must then be
reported under applicable SEC rules. We have not adopted other procedures for
review, or standards for approval, of such transactions, but instead review them
on a case-by-case basis.
DIRECTOR INDEPENDENCE
Notwithstanding the fact that the Company's securities are not listed on a U.S.
securities stock exchange, the Board has determined to adhere to the
"independence" standards set forth in the NYSE Amex Company Guide. Our Board has
determined that a majority of our directors and all current members of the Audit
Committee, the Compensation Committee and the Nominating and Governance
Committee are "independent" under such standards and that the members of the
46
Audit Committee are also "independent" for purposes of the US securities laws.
The Board based these determinations primarily on a review of the responses of
the directors and executive officers to questions regarding employment and
transaction history, affiliations and family and other relationships and on
discussions with the directors. Based upon information submitted to the Board
and consistent with the foregoing requirements, the Board has determined that
Fuhsin Chen, Minghua Liu and Erik Vonk are independent directors on the Board.
None of such directors engage in any transaction, relationship or arrangement
contemplated under Section 404(a) of Regulation S-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
On November 5, 2009, we dismissed Chang G. Park, CPA, as our independent
auditor, and elected to appoint PKF, CPA as our independent auditor.
The committee has determined that the payments made to its independent
accountant for these services are compatible with maintaining such auditor's
independence. The principal accountant fees of the fiscal year 2010 and 2009 are
as follows:
Year 2010 Year 2009
--------- ---------
Audit Fees (1) $94,000 $94,000
Audit-Related Fees(2) $ 0 $ 0
Tax Fees(3) $ 0 $ 0
All Other Fees(4) $ 0 $ 0
------- -------
Total $94,000 $94,000
======= =======
----------
(1) During the fiscal years ended December 31, 2010 and 2009, PKF billed us
$94,000 and $94,000 respectively in fees for professional services for the
audit of our annual financial statements and the review of financial
statements included in our Form 10-Q quarterly reports.
(2) During the fiscal years ended December 31, 2010 and 2009, PKF billed us $0
in fees for assurance and related services relating to the performance of
the audit and review of the Company's financial statement.
(3) During the fiscal years ended December 31, 2010 and 2009, PKF billed us $0
in fees for professional services for tax planning and preparation.
(4) During the fiscal years ended December 31, 2010 and 2009, PKF billed us $0
in fees for all other services.
47
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(c) Exhibits
2.1 Share Exchange Agreement, dated as of November 5, 2009 among the
Company, Cabo Development Limited, and Peakway Worldwide Limited
(Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on November 12, 2009).
3.1 Certificate of Incorporation (Incorporated by reference from the
Registrant's registration statement on Form S-1 filed with the SEC on
March 26, 2008).
3.1.1 Certificate of Amendment of the Certificate of Incorporation
(Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on November 12, 2009).
3.2 Bylaws (Incorporated by reference from the Registrant's registration
statement on Form S-1 filed with the SEC on March 26, 2008).
10.1 Equity Transfer Agreement of Fujian Baopiao Light Industry Co., Ltd.
dated February 26, 2009 (Incorporated by reference from the
Registrant's registration statement on Form S-1 filed with the SEC on
March 26, 2008).
10.2 Equity Transfer Agreement of Fujian Jinjiang Pacific Shoes Co., Ltd.
dated January 12, 2009 (Incorporated by reference from the Registrant's
registration statement on Form S-1 filed with the SEC on March 26,
2008).
10.3 Employment Agreement, dated December 5, 2007, by and between Fujian
Jinjiang Pacific Shoes Co., Ltd. and Haiting Li (Incorporated by
reference from the Registrant's Current Report on Form 8-K filed with
the SEC on November 12, 2009).**
10.4 Loan Agreement, dated June 9, 2009, between Fujian Jinjiang Pacific
Shoes Co., Ltd. and China Agricultural Bank, Jinjiang Branch
(Incorporated by reference from the Registrant's registration statement
on Form S-1 filed with the SEC on March 26, 2008).
10.5 Purchase Contract, dated January 11, 2008, by and between Fujian
Jinjiang Pacific Shoes Co., Ltd. and Huachang Footwear Materials
Company (Incorporated by reference from the Registrant's registration
statement on Form S-1 filed with the SEC on March 26, 2008).
10.6 Distribution Agreement of Fujian Jinjiang Pacific Shoes Co., Ltd. dated
April 30, 2009 (Incorporated by reference from the Registrant's
registration statement on Form S-1 filed with the SEC on March 26,
2008).
10.7 2010 Stock Option Plan (Incorporated by reference from Exhibit 10.1
filed with the Registrant's Current Report on Form 8-K filed with the
Commission on July 6, 2010 (File No. 333-149898).**
14.1 Code of Ethics and Conduct
21.1 List of Subsidiaries*
23.1 Consent of Certified Public Accountants. *
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and
Rule 15d-14(a) of the Exchange Act.*
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and
Rule 15d-14(a) of the Exchange Act.*
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
----------
* Filed herewith
** Management or compensatory contract, plan or arrangement
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Pacific Bepure Industry Inc.
Dated: March 31, 2011 By: /s/ Haiting Li
--------------------------------------------
Haiting Li
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of registrant and in
the capacities and on the date as indicated.
Dated: March 31, 2011 By: /s/ Haiting Li
--------------------------------------------
Haiting Li
Chief Executive Officer
Dated: March 31, 2011 By: /s/ Zhong Zhao
--------------------------------------------
Zhong Zhao
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 31, 2011 By: /s/ Rongyan Ding
--------------------------------------------
Rongyan Ding
Director
Dated: March 31, 2011 By: /s/ Fuhsin Chen
--------------------------------------------
Fuhsin Chen
Independent Director
Dated: March 31, 2011 By: /s/ Minghua Liu
--------------------------------------------
Minghua Liu
Independent Director
Dated: March 31, 2011 By: /s/ Erik Vonk
--------------------------------------------
Erik Vonk
Independent Director
49
Pacific Bepure Industry Inc.
Consolidated Financial Statements
For The Fiscal Year Ended December 31, 2010
Index to Consolidated Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income and Comprehensive Income F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholder's Equity F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of directors and Stockholders of
Pacific Bepure Industry Inc.
We have audited the accompanying consolidated balance sheets of Pacific Bepure
Industry Inc. (the "Company") and its subsidiaries as of December 31, 2010 and
2009, and the related consolidated statements of income and comprehensive
income, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 2010. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2010 and 2009 and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2010 in conformity with accounting principles generally
accepted in the United States of America.
/s/ PKF
-----------------------------
PKF
Certified Public Accountants
Hong Kong, China
March 28, 2011
F-2
Pacific Bepure Industry Inc.
Consolidated Balance Sheets
(Stated in US Dollars)
As of December 31,
----------------------------------
2010 2009
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 5,815,257 $ 4,325,176
Trade receivables 13,094,012 7,274,214
Prepayments and other receivables - Note 4 249,118 69,618
Advances to customers and distributors - Note 5 1,293,733 2,934,000
Inventories - Note 6 1,232,557 698,135
------------ ------------
Total current assets 21,684,677 15,301,143
Properties, plant and equipment, net - Note 7 7,592,866 6,407,851
Land use rights - Note 8 6,021,489 5,949,593
Intangible asset - Note 9 190,505 214,182
------------ ------------
TOTAL ASSETS $ 35,489,537 $ 27,872,769
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Trade payables $ 2,988,361 $ 3,477,541
Other payables and accrued expenses - Note 10 3,524,874 6,201,508
Dividend payable - Note 11 -- 2,019,252
Loans payable - Note 12 4,717,870 1,467,000
Amount due to a director - Note 14 1,998,085 --
Income tax payable 1,248,649 1,986,162
------------ ------------
Total current liabilities 14,477,839 15,151,463
------------ ------------
TOTAL LIABILITIES 14,477,839 15,151,463
------------ ------------
COMMITMENTS AND CONTINGENCIES - Note 15
STOCKHOLDERS' EQUITY
Common stock : par value of $0.0001 per share
Authorized 70,000,000 shares; issued and outstanding
15,000,000 shares in 2010 and 2009 1,500 1,500
Additional paid-in capital 3,234,650 3,124,213
Statutory reserve - Note 22 309,688 309,688
Accumulated other comprehensive income 1,987,222 1,341,306
Retained earnings 15,478,638 7,944,599
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 21,011,698 12,721,306
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,489,537 $ 27,872,769
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-3
Pacific Bepure Industry Inc.
Consolidated Statements of Income and Comprehensive Income
(Stated in US Dollars)
Year ended December 31,
-----------------------------------
2010 2009
------------ ------------
Sales revenue $ 36,376,209 $ 25,428,497
Cost of sales 24,492,757 16,796,818
------------ ------------
Gross profit 11,883,452 8,631,679
------------ ------------
Operating expenses
Administrative expenses 1,273,636 1,174,410
Share-based compensation - Note 13 17,863 --
Selling expenses 311,491 263,749
------------ ------------
1,602,990 1,438,159
------------ ------------
Income from operations 10,280,462 7,193,520
Other income - Note 16 164,488 29,869
Finance costs - Note 17 (287,176) (124,207)
------------ ------------
Income before income taxes 10,157,774 7,099,182
Income taxes - Note 18 (2,623,735) (1,897,661)
------------ ------------
Net income $ 7,534,039 $ 5,201,521
============ ============
Other comprehensive income
Foreign currency translation adjustments 645,916 48,519
------------ ------------
Total comprehensive income $ 8,179,955 $ 5,250,040
============ ============
Earnings per share: - Note 19
- Basic $ 0.50 $ 0.46
- Diluted $ 0.50 $ 0.46
============ ============
Weighted average number of shares: - Note 19
- Basic 15,000,000 11,202,740
- Diluted 15,006,915 11,202,740
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-4
Pacific Bepure Industry Inc.
Consolidated Statements of Cash Flows
(Stated in US Dollars)
Year ended December 31,
-----------------------------------
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,534,039 $ 5,201,521
Adjustments to reconcile net income to net cash
flows (used in)/provided by operating activities:
Depreciation 154,778 150,905
Amortization of intangible asset and land
use rights recognized as expenses 59,211 53,800
Share-based compensation 17,863 --
Changes in operating assets and liabilities :
Restricted cash -- 74,858
Trade receivables (5,421,280) (1,136,883)
Prepayments and other receivables (172,339) 282,466
Advances to customers and distributors 1,693,233 --
Inventories (496,827) (65,346)
Trade payables (591,281) 2,322,560
Other payables and accrued expenses (2,717,371) (1,671,580)
Income tax payable (783,446) (1,569,094)
------------ ------------
Net cash flows (used in)/provided by operating activities (723,420) 3,643,207
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments to acquire properties, plant and equipment (968,948) (783,852)
Payment to acquire intangible asset (28,044) --
------------ ------------
Net cash flows used in investing activities (996,992) (783,852)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceed from loans 4,590,360 2,052,540
Repayment of loans (1,476,000) (3,505,121
Dividend paid -- (735,966)
Repayment of amount due to a director (87,572) --
------------ ------------
Net cash flows provided by/(used in) financing activities 3,026,788 (2,188,547)
------------ ------------
Effect of foreign currency translation on cash and cash
Equivalents 183,705 20,439
------------ ------------
Net increase in cash and cash equivalents 1,490,081 691,247
Cash and cash equivalents - beginning of year 4,325,176 3,633,929
------------ ------------
Cash and cash equivalents - end of year $ 5,815,257 $ 4,325,176
============ ============
F-5
Pacific Bepure Industry Inc.
Consolidated Statements of Cash Flows (cont'd)
(Stated in US Dollars)
Year ended December 31,
-----------------------------------
2010 2009
------------ ------------
Supplemental disclosures for cash flow information:-
Cash paid for:-
Interest $ 279,553 $ 121,911
Income taxes $3,407,181 $3,466,755
========== ==========
Non-cash financing activities
Expenses paid by a director as capital contribution $ 92,574 $ 134,940
Dividends - Note 11 $2,019,252 $4,544,372
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements
F-6
Pacific Bepure Industry Inc.
Consolidated Statements of Stockholders' Equity
(Stated in US Dollars)
Common stock Accumulated
------------------- Additional Statutory other Total
Number paid-in reserve comprehensive Retained stockholders'
of shares Amount capital (Note 22) income earnings equity
--------- ------ ------- --------- ------ -------- ------
Balance, January 1, 2009 10,500,000 $ 1,050 $2,989,723 $309,688 $1,292,787 $10,042,668 $14,635,916
Net income -- -- -- -- -- 5,201,521 5,201,521
Foreign currency translation
adjustment -- -- -- -- 48,519 -- 48,519
Recapitalization 4,500,000 450 (450) -- -- -- --
Capital contribution to a
subsidiary -- -- 134,940 -- -- -- 134,940
Dividend -- -- -- -- -- (7,299,590) (7,299,590)
---------- ------- ---------- -------- ---------- ----------- -----------
Balance, December 31, 2009 15,000,000 $ 1,500 $3,124,213 $309,688 $1,341,306 $ 7,944,599 $12,721,306
Net income -- -- -- -- -- 7,534,039 7,534,039
Foreign currency translation
adjustment -- -- -- -- 645,916 -- 645,916
Capital contribution to a
subsidiary -- -- 92,574 -- -- -- 92,574
Share-based compensation -- -- 17,863 -- -- -- 17,863
---------- ------- ---------- -------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 2010 15,000,000 $ 1,500 $3,234,650 $309,688 $1,987,222 $15,478,638 $21,011,698
========== ======= ========== ======== ========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements
F-7
1. CORPORATE INFORMATION AND DESCRIPTION OF BUSINESS
Pacific Bepure Industry Inc. (the "Company") was incorporated on October 9, 2007
under the laws of the State of Delaware with authorized share capital of $7,500,
divided into 75,000,000 common shares of $0.0001 par value each. The Company's
shares are quoted for trading on the Over-the-counter Bulletin Board in the
United States of America.
On November 5, 2009, the Company entered a share exchange agreement (the "Share
Exchange Agreement") with Peakway Worldwide Limited ("Peakway"), a British
Virgin Islands company, and its sole shareholder, Cabo Development Limited
("Cabo"), a British Virgin Islands company. Pursuant to the Share Exchange
Agreement, the Company acquired 100% of the issued and outstanding capital stock
of Peakway in exchange for 10,500,000 of the Company's newly issued common stock
at par value of $0.0001 each, which constitute 70% of the Company's issued and
outstanding capital stock as of and immediately after the consummation of the
transactions contemplating by Share Exchange Agreement (the "RTO").
As a result of the RTO completed on November 11, 2009, the Company acquired 100%
of the capital stock of Peakway and consequently, control of the business and
operations of Peakway. From and after the closing of the Share Exchange
Agreement, the Company's primary operations consist of the business and
operations of Peakway, which acts as an investment holding company and currently
has three subsidiaries namely, Alberta Holdings Limited ("Alberta"), Fuijang
Jinjiang Pacific Shoes Company Limited ("Pacific Shoes") and Fujian Baopiao
Light Industry Company Limited ("Baopiao").
Peakway Worldwide Limited ("Peakway") was incorporated in the British Virgin
Islands (the "BVI") on November 3, 2006 as a limited liability company with
authorized share capital of $50,000, dividend into 50,000 common shares of $1
par value each. The issued share capital of Peakway is $1,000, dividend into
1,000 common shares of $1 par value each.
Alberta was incorporated in Hong Kong on November 4, 2006 as a limited liability
company with authorized share capital of 10,000 Hong Kong dollars ("HK$"),
divided into 10,000 common shares of HK$1 par value each. The issued share
capital of Alberta is HK$1, being 1 common share of HK$1 par value. Alberta is
also a holding company and had no other operation since its incorporation.
Pacific Shoes was established as a sino-foreign equity joint venture entity in
the People's Republic of China (the "PRC") on April 9, 1993 with registered
capital of 5,000,000 Renminbi ("RMB") (which are not divided into shares) and
its registered capital was fully paid up.
Baopiao was established as a wholly foreign-owned enterprise ("WFOE") in the PRC
on February 15, 2006 with registered capital of HK$50,000,000 (which are not
divided into shares). As of December 31, 2010, its paid up capital was
HK$16,370,478 of which HK$15,401,180 was certified. Baopiao had been under
development and had not started commercial operations.
Following the RTO, the Company, through its subsidiaries, commenced to be
engaged in the design, manufacturing and trading of footwear under the brand
names of "BEPURE" through a network across the PRC. The major target market of
the Company's products is the PRC.
F-8
2. GROUP REORGANIZATION AND BASIS OF PRESENTATION
Pursuant to the Share Exchange Agreement dated on November 5, 2009, the Company
issued 10,500,000 shares, par value $0.0001 per share, to the stockholders of
Peakway, representing approximately 70% of the Company post-exchange issued and
outstanding common stock, in exchange for 100% of the outstanding capital stock
of Peakway.
The RTO is accounted for as a recapitalization effected by a share exchange,
wherein Peakway is considered the acquirer for accounting and financial
reporting purposes. Peakway's assets and liabilities would be brought forward at
their book value and no goodwill would be recognized. These consolidated
financial statements are issued under the name of the Company, represent the
continuation of the financial statements of Peakway.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated in consolidation.
Use of estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements, as well as the reported amounts of revenues and expenses during the
reported period. These amounts and estimates include, but are not limited to,
the valuation of accounts receivable, inventories and estimation on useful lives
and residual values of properties, plant and equipment and intangible asset.
Actual results could differ from these estimates.
F-9
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
trade receivables and advances to customers and distributors. As of December 31,
2010 and 2009, all of the Company's cash and cash equivalents were held by major
financial institutions located in the PRC, which management believes are of high
credit quality. With respect to trade receivables and advances to customers and
distributors, the Company extends credit based on evaluations of the customers'
and distributors' financial positions. The Company generally does not require
collateral for customers and distributors.
During the reporting period, customers representing 10% or more of the Company's
sales are as follows:-
Year ended December 31,
--------------------------------
2010 2009
---------- ----------
Taiwan Quanyi Xingye Co., Ltd. $7,506,167 $3,999,529
========== ==========
Details of customers for 10% or more of the Company's trade receivables are:-
As of December 31,
--------------------------------
2010 2009
---------- ----------
Taiwan Quanyi Xingye Co., Ltd. $1,839,049 $1,009,848
========== ==========
Cash and cash equivalents
Cash and cash equivalents include all cash, deposits in banks and other highly
liquid investments with initial maturities of three months or less. As of
December 31, 2010 and 2009, almost all the cash and cash equivalents were
denominated in Renminbi ("RMB") and were placed with banks in the PRC. RMB are
not freely convertible into foreign currencies and the remittance of these funds
out of the PRC is subject to exchange control restrictions imposed by the PRC
government.
The remaining insignificant balance of cash and cash equivalent denominated in
United States dollars.
F-10
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Allowance for doubtful accounts
The Company establishes an allowance for doubtful accounts based on management's
assessment of the collectability of trade receivables. A considerable amount of
judgment is required in assessing the amount of the allowance. The Company
considers the historical level of credit losses and applies percentages to aged
receivable categories. The Company makes judgments about the creditworthiness of
each customer based on ongoing credit evaluations, and monitors current economic
trends that might impact the level of credit losses in the future. If the
financial positions of the customers are to deteriorate, resulting in their
inability to make payments, a larger allowance may be required.
Based on the above assessment, during the reporting period, the management
considers that the establishment of general provisioning policy is not necessary
as the bad debt experience was rare and insignificant. For those amounts
identified as doubtful after assessment, the Company makes specific provision
for these doubtful amounts. Bad debts are written off when identified.
The Company extends unsecured credit to customers ranging from 30 to 90 days in
the normal course of business. The Company does not accrue interest on trade
receivables.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined
on a weighted average basis and includes all expenditures incurred in bringing
the goods to the point of sale and putting them in a saleable condition.
In addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company writes down the
inventories for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventories and the estimated market value based
upon assumptions about future demand and market conditions.
There was no provision of obsolete inventories made during the reporting period.
Historically, the actual net realizable value is close to the management
estimation.
Properties, plant and equipment
Properties, plant and equipment are stated at cost less accumulated
depreciation. Cost represents the purchase price of the asset and other costs
incurred to bring the asset into its existing use.
Depreciation is provided on a straight-line basis over the assets' estimated
useful lives. The useful lives are as follows:-
Estimated
useful lives
------------
Plant and machinery 3 to 8 years
Office equipment 3 to 5 years
Buildings 30 years
F-11
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Properties, plant and equipment (Cont'd)
Maintenance or repairs are charged to expense as incurred. Upon sale or
disposition, the applicable amounts of asset cost and accumulated depreciation
are removed from the accounts and the net amount less proceeds from disposal is
charged or credited to income.
Construction-in-progress
Construction-in-progress represents assets under construction and is stated at
cost. This includes cost of construction of buildings and other direct costs.
Construction-in-progress is not depreciated until such time the relevant assets
are completed and put into operational use.
Intangible asset
The intangible asset of the Company is comprised of accounting software and
shoes designing software. The software is determined to have useful life of 5
years pursuant to the management experience. The software is stated at cost of
purchase less accumulated amortization and any identified impairment losses in
the annual impairment review.
Land use rights
Land use rights are stated at cost less accumulated amortization. Amortization
is provided using the straight-line method over the terms of the lease of 50
years obtained from the relevant PRC land bureau.
Impairment of long-lived assets
Long-lived assets are tested for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. The Company recognizes impairment of long-lived assets in the event
that the net book values of such assets exceed the future undiscounted cash
flows attributable to such assets. During the reporting period, the Company has
not identified any indicators that would require testing for impairment.
Revenue recognition
Revenue from sales of the Company's products is recognized when the significant
risks and rewards of ownership have been transferred to the buyer at the time of
delivery, the sales price is fixed or determinable and collection is reasonably
assured. Returns and exchange require approval from management and discounts are
based on trade terms. The Company reviews and estimates the rates of return and
exchange monthly and made provision for return based on customers' and
distributors' past records. From the past records, the return and exchange are
insignificant.
F-12
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Cost of sales
Cost of sales consists primarily of material costs, purchasing and receiving
costs, inspection costs, wages, employee compensation, depreciation and related
costs, which are directly attributable to the production of products. Write down
of inventory to lower of cost or market value is also recorded in cost of sales.
Selling expenses
Selling expenses mainly consist of advertising and transportation costs which
are incurred during the selling activities.
Advertising and transportation expenses and development expenses
Advertising, transportation and other product-related costs are charged to
expense as incurred.
Advertising expenses amounting to $64,273 and $100,990 for the years ended
December 31, 2010 and 2009, respectively, were included in selling expenses.
Transportation expenses amounting to $46,552 and $35,195 for the years ended
December 31, 2010 and 2009, respectively, were included in selling expense.
Research and development expenses amounting to $158,829 and $108,263 for the
years ended December 31, 2010 and 2009 respectively in selling expenses.
General and administrative expenses
General and administrative expenses consist of office expenses, staff welfare,
consumables, labor protection, design and salaries and wage which are incurred
at the administrative level and exchange difference.
Share-based compensation
The Company adopted the provisions of ASC 718, which requires the use of the
fair value method of accounting for share-based compensation. Under the fair
value based method, compensation cost related to employee stock options or
similar equity instruments which are equity-classified awards, is measured at
the grant date based on the value of the award and is recognized over the
requisite service period, which is usually the vesting period. ASC 718 also
requires measurement of cost of a liability-classified award based on its
current fair value.
Fair value of share options granted is determined using the Black-Scholes Option
Valuation Model. Under this model, certain assumptions, including the risk-free
interest rate, the expected life of the options and the estimated fair value of
the Company's common stock and the expected volatility, are required to
determine the fair value of the options. If different assumptions had been used,
the fair value of the options would have been different from the amount the
Company computed and recorded, which would have resulted in either an increase
or decrease in the compensation expense.
F-13
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods. These accounts and estimates include, but are not limited to,
the valuation of accounts receivable, inventories, deferred income taxes,
share-based compensation and the estimation on useful lives of property, plant
and equipment. Actual results could differ from those estimates.
Income taxes
The Company uses the asset and liability method of accounting for income taxes
pursuant to ASC 740 "Income Taxes". Under the asset and liability method of ASC
740, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statements carrying amounts of existing assets and liabilities and loss carry
forward and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
Comprehensive income
The Company has adopted ASC 220, "Comprehensive Income", which establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Components of comprehensive income include net income and
foreign currency translation adjustments. As at December 31, 2010 and 2009, the
only component of accumulated other comprehensive income was foreign currency
translation adjustment.
Foreign currency translation
The functional currency of the Company is Renminbi ("RMB") and RMB is not freely
convertible into foreign currencies. The Company maintains its financial
statements in the functional currency. Monetary assets and liabilities
denominated in currencies other than the functional currency are translated into
the functional currency at rates of exchange prevailing at the balance sheet
date. Transactions denominated in currencies other than the functional currency
are translated into the functional currency at the exchange rates prevailing at
the dates of the transactions. Exchange gains or losses arising from foreign
currency transactions are included in the determination of net income for the
respective periods.
F-14
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Foreign currency translation (Cont'd)
For financial reporting purposes, the financial statements of the Company which
are prepared using the functional currency have been translated into United
States dollars. Assets and liabilities are translated at the exchange rates at
the balance sheet dates and revenues and expenses are translated at the average
exchange rates and stockholder's equity is translated at historical exchange
rates. Any translation adjustments resulting are not included in determining net
income but are included in foreign exchange adjustment to other comprehensive
income as foreign exchange adjustments, a component of stockholders' equity. The
exchange rates in effect as at December 31, 2010 and 2009 were RMB1 for $0.1517
and $0.1467, respectively. The average exchange rates for the years ended
December 31, 2010 and 2009 were RMB1 for $0.1476 and $0.1466, respectively.
There is no significant fluctuation in exchange rate for the conversion of RMB
to United States dollars after the balance sheet date. Recorded in other
comprehensive income are translation exchange gains which amounted to $645,916
and $48,519 for the two years ended December 31, 2010 and 2009 respectively.
Operating leases
Leases where substantially all the rewards and risks of ownership of assets
remain with the lesser are accounted for as operating leases. Rental payables
under operating lease are recognized as expense on a straight-line basis over
the lease term.
Basic and diluted earnings per share
The Company reports basic earnings per share in accordance with ASC 260
"Earnings Per Share". Basic earnings per share is computed using the weighted
average number of shares outstanding during the periods presented. The weighted
average number of share of the Company represents the common stock outstanding
during the reporting period.
Commitment and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation,
fines and penalties and other sources are recorded when it is payable that a
liability has been incurred and the amount of the assessment can be reasonably
estimated.
Off-balance sheet arrangements
The Company does not have any off-balance sheet arrangements.
Recently issued accounting pronouncements
ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS (INCLUDED IN AMENDED TOPIC ASC 860
"TRANSFERS AND SERVICING", PREVIOUSLY STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS ("SFAS") NO. 166, "ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS - AN
AMENDMENT OF FASB NO. 140."). The amended topic addresses information a
reporting entity provides in its financial statements about the transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor's continuing involvement in
transferred financial assets. Also, the amended topic removes the concept of a
qualifying special purpose entity, limits the circumstances in which a
transferor derecognizes a portion or component of a financial asset, defines
participating interest and enhances the information provided to financial
statement users to provide greater transparency. The amended topic is effective
for the first annual reporting period beginning after November 15, 2009 and was
effective for us as of January 1, 2010. The adoption of this amended topic had
no material impact on the Company's financial statements.
F-15
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Recently issued accounting pronouncements (Cont'd)
CONSOLIDATION OF VARIABLE INTEREST ENTITIES - AMENDED (INCLUDED IN AMENDED TOPIC
ASC 810 "CONSOLIDATION", PREVIOUSLY SFAS NO. 167 "AMENDMENTS TO FASB
INTERPRETATION NO. 46(R)"). The amended topic requires an enterprise to perform
an analysis to determine the primary beneficiary of a variable interest entity;
to require ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity and to eliminate the quantitative
approach previously required for determining the primary beneficiary of a
variable interest entity. The amended topic also requires enhanced disclosures
that will provide users of financial statements with more transparent
information about an enterprise's involvement in a variable interest entity. The
amended topic is effective for the first annual reporting period beginning after
November 15, 2009 and was effective for us as of January 1, 2010. The adoption
of this amended topic had no material impact on the Company's financial
statements.
The FASB issued Accounting Standards Update (ASU) No. 2009-13, Revenue
Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus
of the FASB Emerging Issues Task Force." This update provides application
guidance on whether multiple deliverables exist, how the deliverables should be
separated and how the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence, if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling price if neither vendor-specific or third-party evidence is available.
The Company will be required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011; however,
earlier application is permitted. The management is in the process of evaluating
the impact of adopting this ASU update on the Company's financial statements.
The FASB issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements. ASU 2010-06 amends ASC Topic 820 to require the following
additional disclosures regarding fair value measurements: (i) the amounts of
transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) reasons
for any transfers in or out of Level 3 of the fair value hierarchy and (iii) the
inclusion of information about purchases, sales, issuances and settlements in
the reconciliation of recurring Level 3 measurements. ASU 2010-06 also amends
ASC Topic 820 to clarify existing disclosure requirements, requiring fair value
disclosures by class of assets and liabilities rather than by major category and
the disclosure of valuation techniques and inputs used to determine the fair
value of Level 2 and Level 3 assets and liabilities. With the exception of
disclosures relating to purchases, sales, issuances and settlements of recurring
Level 3 measurements, ASU 2010-06 was effective for interim and annual reporting
periods beginning after December 15, 2009. The disclosure requirements related
to purchases, sales, issuances and settlements of recurring Level 3 measurements
will be effective for financial statements for annual reporting periods
beginning after December 15, 2010. The management is in the process of
evaluating the effect of disclosure requirements related to purchases, sales,
issuances and settlements of recurring Level 3 measurements on these financial
statements and results of operations and is currently not yet in a position to
determine such effects.
F-16
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Recently issued accounting pronouncements (Cont'd)
The FASB issued ASU No. 2010-02, "Consolidation (Topic 810) Accounting and
Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification".
This amendment affects entities that have previously adopted Topic 810-10
(formally SFAS No. 160). It clarifies the decrease in ownership provisions of
Subtopic 810-10 and removes the potential conflict between guidance in that
Subtopic and asset derecognition and gain or loss recognition guidance that may
exist in other US GAAP. An entity will be required to follow the amended
guidance beginning in the period that it first adopts SFAS No. 160 (now included
in Subtopic 810-10). For those entities that have already adopted SFAS No. 160,
the amendments are effective at the beginning of the first interim or annual
reporting period ending on or after December 15, 2009. The amendments should be
applied retrospectively to the first period that an entity adopted SFAS No. 160.
The adoption of this ASU update had no material impact on the Company's
financial statements.
Fair value of financial instruments
ASC 820 "Fair Value Measurements and Disclosures" requires the disclosure of the
estimated fair value of financial instruments including those financial
instruments for which the ASC 323 fair value option was not elected. Except for
collateralized borrowings disclosed below, the carrying amounts of other
financial assets and liabilities approximate their fair values due to short
maturities :-
As of December 31, 2010 As of December, 31, 2009
------------------------ -------------------------
Carrying Carrying
amount Fair value amount Fair value
---------- ---------- ---------- ----------
Collateralized short-term
bank loans $4,717,870 $4,713,661 $1,467,000 $1,464,258
========== ========== ========== ==========
The fair values of collateralized borrowings are based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
It is management's opinion that the Company is not exposed to significant price
or credit risks arising from these financial instruments.
4. PREPAYMENTS AND OTHER RECEIVABLES
As of December 31,
----------------------------------
2010 2009
------------ ------------
Prepayments to suppliers $ 131,846 $ --
Advances to staff 117,272 69,618
------------ ------------
$ 249,118 $ 69,618
============ ============
F-17
5. ADVANCES TO CUSTOMERS AND DISTRIBUTORS
As of December 31,
----------------------------------
2010 2009
------------ ------------
Interest-free loans advanced to customers
and distributors $ 1,293,733 $ 2,934,000
============ ============
During the years 2010 and 2009, in order to improve the market share and
increase the number of retailing points in the PRC, the management advanced cash
to the potential retailers for them to increase the number of retail shops and
distribution points in the related provinces in which they are located. The
amounts are interest-free, unsecured and payable upon demand.
6. INVENTORIES
As of December 31,
----------------------------------
2010 2009
------------ ------------
Raw materials $ 227,572 $ 307,077
Work-in-progress 445,249 161,297
Finished goods 559,736 229,761
------------ ------------
$ 1,232,557 $ 698,135
============ ============
7. PROPERTIES, PLANT AND EQUIPMENT
As of December 31,
----------------------------------
2010 2009
------------ ------------
Costs:
Plant and machinery $ 985,609 $ 904,816
Office equipment 115,060 71,995
Buildings 1,337,557 1,293,472
------------ ------------
2,438,226 2,270,283
Accumulated depreciation (1,261,688) (1,066,269)
Construction-in-progress 6,416,328 5,203,837
------------ ------------
$ 7,592,866 $ 6,407,851
============ ============
During the reporting period, depreciation is included in:-
Year ended December 31,
----------------------------------
2010 2009
------------ ------------
Cost of sales and overhead $ 90,563 $ 91,235
Administrative expenses 64,215 59,670
------------ ------------
$ 154,778 $ 150,905
============ ============
F-18
7. PROPERTIES, PLANT AND EQUIPMENT (CONT'D)
As of December 31, 2010 and 2009, buildings with carrying value of $852,833 and
$868,185 respectively, were pledged for the collateralized bank loans (Note
12a).
Construction-in-progress consist mainly the new factory and warehouse under
construction.
8. LAND USE RIGHTS
As of December 31,
----------------------------------
2010 2009
------------ ------------
Land use rights:-
Cost $ 6,414,392 $ 6,202,975
Accumulated amortization (392,903) (253,382)
------------ ------------
$ 6,021,489 $ 5,949,593
============ ============
The Company obtained the rights from the relevant PRC land bureau for a period
of 50 years to use the land on which the office premises, production facilities
and warehouse of the Company are situated.
As of December 31, 2010 and 2009, a land use right with carrying value of
$6,021,489 and $48,734 respectively, was pledged for a collateralized bank loan
(Note 12a).
During the two years ended December 31, 2010 and 2009, amortization for land use
rights amounted to $127,347 and $129,082, of which $126,320 and $128,062 have
been capitalized in construction-in-progress, respectively.
The estimated amortization of land use rights for the five succeeding years are
as follows:-
Year
----
2011 $ 127,347
2012 127,347
2013 127,347
2014 127,347
2015 127,347
------------
$ 636,735
============
F-19
9. INTANGIBLE ASSET
As of December 31,
----------------------------------
2010 2009
------------ ------------
Software:-
Cost $ 332,223 $ 293,400
Accumulated amortization (141,718) (79,218)
------------ ------------
$ 190,505 $ 214,182
============ ============
The software represents integrated software in designing footwear and an
accounting software, which were purchased by Pacific Shoes. Pursuant to the
management experience, both software estimated useful lives were 5 years. Since
their acquisition, an annual impairment review was performed by management and
no impairment was identified.
During the year ended December 31, 2010 and 2009, amortization for software
amounted to $59,800 and $52,780 respectively.
The estimated amortization of software for the four succeeding years are as
follows:-
Year
2011 $ 59,800
2012 59,800
2013 59,800
2014 11,105
------------
$ 190,505
============
10. OTHER PAYABLES AND ACCRUED EXPENSES
As of December 31,
----------------------------------
2010 2009
------------ ------------
Value added tax and other tax payable $ 1,712,724 $ 4,417,015
Staff welfare payables (Note 10a) 1,046,724 1,163,898
Accrued expenses and other payables 536,147 211,386
Salaries payable 229,279 409,209
------------ ------------
$ 3,524,874 $ 6,201,508
============ ============
Notes:-
a) Staff welfare payable represents accrued staff medical, industry injury
claims, labor and unemployment insurances. All of which are third parties
insurance and the insurance premiums are based on certain percentage of
salaries. The obligations of the Company are limited to those premiums
contributed by the Company.
F-20
11. DIVIDEND PAYABLE
On January 26, 2009, the Company declared interim dividend, amounting to
$7,299,590 (RMB50,000,000) with an outstanding balance of $2,019,252 as of
December 31, 2009. During 2010, the amount was transferred to a current account
with a director.
12. LOANS PAYABLE
As of December 31,
----------------------------------
2010 2009
------------ ------------
Collateralized short-term bank
loans (Note (a)) $ 3,079,510 $ 1,467,000
Uncollateralized short-term bank
loans (Note (b)) 1,638,360 --
------------ ------------
$ 4,717,870 $ 1,467,000
============ ============
Notes:-
a) The bank loans are denominated in RMB and carried average interest rate as
of December 31, 2010 and 2009 at 5.82% and 6.02%, respectively.
The bank loans were collateralized by the buildings and land use right with
carrying values of $852,833 (Note 7) and $6,021,489 (Note 8), respectively,
and guaranteed by Mr. Haiting Li, the sole director of the Company and his
brother and a third party.
During the reporting period, there was no covenant requirement under the
banking facilities granted to the Company.
b) The bank loans were collaterized by trade receivables of $1,638,360. These
trade receivables pledged had been settled during the year.
13. SHARE-BASED COMPENSATION
The Company granted share options to employees and a director to reward for
services.
(a) On December 6, 2010, the Company has granted 3 tranches of share option.
The option granted was designated as Incentive Stock Option. The Board of
Directors adopted the Pacific Bepure Industry Inc. Stock Option Plan (the
"2010 Plan") and the plan was approved by the Annual General Meeting on
January 14, 2011. The 2010 Plan authorized the issuance of 560,000 options
of the Company's common stock. The exercise price of the options granted,
pursuant to the 2010 Plan, must be at least equal to the fair market value
of the Company's common stock at the date of grant.
Pursuant to the Plan, the Company issued 560,000 options with an exercise
price of $1.75 per share on December 6, 2010. The three tranches of options
will vest and become exercisable from the date of January 5, 2011 to
January 5, 2013.
F-21
13. SHARE-BASED COMPENSATION (CONT'D)
A summary of share option plan activity for the year ended December 31, 2010 is
presented below:
Number of Exercise price
shares per share
-------- ---------
Outstanding as of January 1, 2010 -- $ --
Granted 560,000 1.75
Exercised -- --
Forfeited -- --
Cancelled -- --
-------- --------
Outstanding as of December 31, 2010 560,000 $ 1.75
======== ========
Exercisable as of December 31, 2010 -- $ --
======== ========
The grant-date fair values for tranches 1, 2 and 3 of options granted in 2010
are $0.62, $0.67 and $0.72 per share respectively. Compensation expense of
$17,863 arising from abovementioned share options granted was recognized for the
year ended December 31, 2010.
The fair values of the above option awards were estimated on the date of grant
using the Black-Scholes Option Valuation Model with the following assumptions.
Tranche 1 Tranche 2 Tranche 3
--------- --------- ---------
Expected life 2.583 years 3.083 years 3.583 years
Expected dividends Nil Nil Nil
Expected volatility 54.743% 54.743% 54.743%
Risk-free interest rate 1.572% 1.572% 1.572%
14. AMOUNT DUE TO A DIRECTOR
The amount is interest-free, unsecured and repayable on demand.
F-22
15. COMMITMENTS AND CONTINGENCIES
a. Capital commitment
As of December 31, 2010 and 2009, the Company had capital commitments
in respect of the construction of properties, amounting to $47,116 and
$351,211 respectively, which were contracted for but not provided for
in the financial statements.
b. Operating lease arrangement
As of December 31, 2010, there was no operating lease arrangement for
the Company.
The rental expense relating to the operating lease was $nil and
$10,942 for the years ended December 31, 2010 and 2009 respectively.
c. Contingencies
In accordance with the PRC tax regulations, the Company's sales are
subject to value added tax ("VAT") at 17% upon the issuance of VAT
invoices to its customers. When preparing these financial statements,
the Company recognized revenue when goods were delivered, and made
full tax provision in accordance with relevant national and local laws
and regulations of the PRC.
The Company follows the practice of reporting its revenue for PRC tax
purposes when invoices are issued. In the local statutory financial
statements prepared under PRC GAAP, the Company recognized revenue on
an "invoice basis" instead of when goods are delivered. Accordingly,
despite the fact that the Company has made full tax provision in the
financial statements, the Company may be subject to a penalty for the
deferred reporting of tax obligations. The exact amount of penalty
cannot be estimated with any reasonable degree of certainty. The
director considers it is very unlikely that the tax penalty will be
imposed.
16. OTHER INCOME
Year ended December 31,
----------------------------------
2010 2009
------------ ------------
Bank interest income $ 3,883 $ 8,430
Other income 160,605 21,439
------------ ------------
$ 164,488 $ 29,869
============ ============
17. FINANCE COSTS
Year ended December 31,
----------------------------------
2010 2009
------------ ------------
Bank loan interest expenses $ 279,553 $ 121,911
Bank charges 7,623 2,296
------------ ------------
$ 287,176 $ 124,207
============ ============
F-23
18. INCOME TAXES
United States
Pacific Bepure Industry Inc. is subject to the United States of America Tax law
at tax rate of 34%. No provision for the US federal income taxes has been made
as the Company had no taxable income in this jurisdiction for the reporting
period.
BVI
Peakway was incorporated in the BVI and, under the current laws of the BVI, is
not subject to income taxes.
Hong Kong
Alberta was incorporated in Hong Kong and is subject to profits tax rate of
16.5% (2009: 16.5%). It is currently not subject to income taxes because it
derived no taxable income during the reporting period.
PRC
On March 16, 2007, the National People's Congress approved the Corporate Income
Tax Law of the People's Republic of China (the "New CIT Law"). The New CIT Law
reduces the standard corporate income tax rate from 33% to 25% with effect from
January 1, 2008. Pursuant to the New CIT Law, Pacific Shoes and Baopiao have
been subjected to EIT at a unified rate of 25% from January 1, 2008 onwards.
According to the PRC tax laws and regulations, Pacific Shoes and Bapiao being a
sino-foreign equity joint venture entity and a WFOE respectively, were entitled
to, starting from the first profitable year, a two-year exemption from
enterprise income tax followed by a three-year 50% reduction in its enterprise
income tax ("Tax Holiday").
The Tax Holiday of Pacific Shoes commenced in year 1993 and ended in year 1997.
Baopiao has not started commercial operations and had no reportable profit under
China Accounting Regulations since its incorporation on February 15, 2006.
Baopiao had not applied for such Tax Holiday to the relevant PRC authority
before the New CIT Law became effective on January 1, 2008. However, pursuant to
the transitional provisions in the New CIT Law, companies qualified for Tax
Holiday must make application prior to January 1, 2008 and the Tax Holiday would
be deemed commence on January 1, 2008 regardless of results of operation.
Baopiao is therefore not entitled to Tax Holiday.
F-24
18. INCOME TAXES (CONT'D)
The components of the provision for income taxes from continuing operation are:-
Year ended December 31,
----------------------------------
2010 2009
------------ ------------
Current taxes - PRC $ 2,623,735 $ 1,897,661
Deferred taxes - PRC -- --
------------ ------------
$ 2,623,735 $ 1,897,661
============ ============
The effective income tax expenses differ from the PRC statutory income tax rate
from continuing operations in the PRC as follows:-
Year ended December 31,
----------------------------------
2010 2009
------------ ------------
Provision for income taxes at PRC
statutory income tax rate - 25% $ 2,539,444 $ 1,774,796
Non-deductible items 84,291 122,865
------------ ------------
$ 2,623,735 $ 1,897,661
============ ============
19. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS") for the periods indicated:
Year ended December 31,
----------------------------------
2010 2009
------------ ------------
Numerator:
Net income $ 7,534,039 $ 5,201,521
============ ============
Denominator:
Weighted average common shares
used to compute basic EPS 15,000,000 11,202,740
Dilutive potential from assumed exercise
of share options 6,915 --
------------ ------------
Weighted average common shares
used to compute diluted EPS 15,006,915 11,202,740
============ ============
Earnings per share - Basic $ 0.50 $ 0.46
Earnings per share - Diluted $ 0.50 $ 0.46
============ ============
F-25
19. EARNINGS PER SHARE (CONT'D)
All share and per share data have been adjusted to reflect the recapitalization
of the Company in the RTO.
20. RELATED PARTIES TRANSACTIONS
Apart from the transactions as disclosed in Notes 12(a) and 14, the Company had
no material transactions carried out with related parties during the reporting
period.
21. TRADEMARKS
Pacific Shoes, currently owns two trademarks, namely ("Bepure"), and ("Dilks")
which were registered in the PRC. These trademarks were transferred to the
subsidiary from a major stockholder of the Company for nil consideration during
2008.
22. STATUTORY RESERVE
As of December 31,
----------------------------------
2010 2009
------------ ------------
Statutory reserve $ 309,688 $ 309,688
============ ============
Under PRC regulations, Pacific Shoes and Baopiao may pay dividends only out of
their accumulated profits, if any, determined in accordance with PRC GAAP. In
addition, these companies are required to set aside at least 10% of their
after-tax net profits each year, if any, to fund the statutory reserves until
the individual balance of the reserve reaches 50% of their corresponding
individual registered capital. The statutory reserves are not distributable in
the form of cash dividends to the Company and can be used to make up cumulative
prior year losses.
For each of the two years in the period ended 31, 2010, no appropriation to this
statutory reserve was made as the reserve reached 50% of the Pacific Shoes'
registered capital and Baopiao did not make any profit during the reporting
period.
23. DEFINED CONTRIBUTION PLAN
Pacific Shoes and Baopiao have defined contribution plans for all qualified
employees in the PRC. Pacific Shoes and Baopiao and their employees are each
required to make contributions to the plans at the rates specified in the plans.
The only obligation of Pacific Shoes and Baopiao with respect to retirement
schemes is to make the required contributions under the plans. No forfeited
contribution is available to reduce the contribution payable in the future
years. The defined contribution plan contributions were charged to the
consolidated statements of income and comprehensive income. The Company
contributed $265,048 and $159,711 for the two years ended December 31, 2010 and
2009, respectively.
F-26
24. SEGMENT INFORMATION
The Company uses the "management approach" in determining reportable operating
segments. The management approach considers the internal organization and
reporting used by the Companyi-s chief operating decision maker for making
operating decisions and assessing performance as the source for determining the
Companyi-s reportable segments. Management, including the chief operating
decision maker, reviews operating results solely by monthly revenue and
operating results of the Company and, as such, the Company has determined that
the Company has one operating segments - footwear, as defined by ASC 280,
Segments Reporting.
All of the Company's long-lived assets are located in the PRC. Geographic
information about the revenues, which are classified based on the customers, is
set out as follows:-
As of December 31,
----------------------------------
2010 2009
------------ ------------
PRC $ 28,826,171 $ 20,276,685
Taiwan 7,550,038 5,151,812
------------ ------------
$ 36,376,209 $ 25,428,497
============ ============
25. SUBSEQUENT EVENT
The Company has evaluated its activities subsequent to December 31, 2010 and
concluded that, except for the information disclosed in the following paragraph,
no transactions have occurred that would require recognition or disclosure in
the consolidated financial statements.
On January 12, 2011, Baopiao Shoes pledged certain buildings under construction
with carrying value of $4,505,490 to obtain banking facilities granted to
Pacific Shoes.
F-2
