Unassociated Document
Filed Pursuant
to Rule 424(b)(4)
Registration No. 333-168496
OSSEN
INNOVATION CO., LTD.
5,000,000 American
Depositary Shares
This is
the initial public offering of American Depositary Shares, or ADSs, of Ossen
Innovation Co., Ltd. Each ADS represents one of our ordinary shares, par value
$0.01 per share. Ossen Innovation Co., Ltd. is offering 5,000,000
American Depositary Shares in this offering.
The
public offering price of our ADSs is $4.50 per share. Prior to this
offering, there has been no public market for our ADSs. Our ADSs have been
approved to be listed on the Nasdaq Global Market under the symbol
“OSN”.
Investing
in our ADSs involves risks.
Please
read the risks under the section captioned “Risk Factors” beginning on page 10
of this prospectus.
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Per ADS
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Total
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Initial
public offering price
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$ |
4.50
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$ |
22,500,000
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Underwriting
discounts and commissions (1)
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$ |
0.315
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$ |
1,575,000
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Proceeds, before expenses, to us
(2)
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$ |
4.185
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$ |
20,925,000
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(1) Does
not include any shares sold in the over-allotment option. See section
entitled “Underwriting.”
(2) We
estimate that the total expense of this offering, excluding the underwriters’
discount, will be approximately $1.3 million.
The
underwriters have an option exercisable within 45 days from the date of this
prospectus to purchase up to 750,000 additional ADSs from us at the public
offering price less the underwriting discount.
Neither
the Securities and Exchange Commission nor any state securities commission or
other relevant local authority has approved or disapproved of these securities
or determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The
underwriters expect to deliver our ADSs to the purchasers on or about December
23, 2010.
Global
Hunter Securities
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Knight
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Ladenburg
Thalmann & Co. Inc.
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The
date of this prospectus is December 21, 2010.
TABLE
OF CONTENTS
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Pages
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Conventions
used in this prospectus
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ii
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Prospectus
Summary
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1
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Risk
Factors
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10
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Special
Note Regarding Forward-Looking Statements and Other Information
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26
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Use
of Proceeds
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27
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Dividend
Policy
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28
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Capitalization
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29
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Dilution
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30
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Exchange
Rate Information
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31
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Enforceability
of Civil Liabilities
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32
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Selected
Historical Consolidated Financial Data
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33
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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35
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Industry
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54
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Corporate
Structure and Organization
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58
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Business
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61
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PRC
Government Regulations
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80
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Management
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85
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Beneficial
Ownership
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92
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Certain
Relationships and Related Party Transactions
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94
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Description
of Share Capital
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96
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Description
Of American Depositary Shares
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103
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Shares
Eligible for Future Sale
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113
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Taxation
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114
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Underwriting
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119
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Other
Expenses of Issuance and Distribution
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127
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Legal
Matters
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128
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Experts
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129
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Where
You Can Find Additional Information
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130
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Index
to Consolidated Financial Statements
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F-1
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You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with any information or to make any
representations about us, the securities being offered pursuant to this
prospectus or any other matter discussed in this prospectus, other than the
information and representations contained in this prospectus. If any other
information or representation is given or made, such information or
representation may not be relied upon as having been authorized by
us.
The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of our ordinary shares. Neither the delivery of this prospectus nor any
distribution of securities in accordance with this prospectus shall, under any
circumstances, imply that there has been no change in our affairs since the date
of this prospectus. This prospectus will be updated and made available for
delivery to the extent required by the federal securities laws.
CONVENTIONS
USED IN THIS PROSPECTUS
Unless
otherwise indicated or the context clearly implies otherwise, references to
“we,” “us,” “our,” the “Company” and “Ossen” refer to Ossen Innovation Co.,
Ltd., formerly known as Ultra Glory International Ltd. or Ultra Glory, a company
organized in the British Virgin Islands, and its subsidiaries, subsequent to the
business combination referred to below. Unless the context indicates otherwise,
all references to “Ossen Materials” refer to Ossen Innovation Materials Co.,
Ltd., a subsidiary of Ossen and one of the entities through which the operating
business is held, all references to “Ossen Jiujiang” refer to Ossen
(Jiujiang) Steel Wire & Cable Co., Ltd., a subsidiary of Ossen Materials and
one of the entities through which our operating business is held, and all
references to “Ossen Materials Group” refer to Ossen Innovation Materials Group,
Co., Ltd., our wholly-owned subsidiary, which is a holding company that
indirectly owns Ossen Materials and Ossen Jiujiang. The “business combination”
refers to the share exchange between Ultra Glory International Ltd., the sole
shareholder of Ultra Glory, Ossen and the shareholders of Ossen, resulting in
the acquisition of all of the outstanding securities of Ossen Materials Group by
Ultra Glory, which was consummated on July 7, 2010.
In
addition, unless the context otherwise requires, in this
prospectus:
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“shares”
or “ordinary shares” refers to our ordinary shares, par value $0.01 per
share;
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“ADSs”
refers to our American Depositary Shares, each of which represents one
ordinary share, and “ADRs” refers to American Depositary Receipts, which,
if issued, evidence our ADSs;
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“China”
or “PRC” refers to the People’s Republic of China, excluding the Hong Kong
Special Administrative Region, the Macau Special Administrative Region and
Taiwan;
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“RMB”
or “Renminbi” refers to Renminbi yuan, the legal currency of China;
and
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“$”,
“US$” or “U.S. dollars” refers to the legal currency of the United
States.
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For
convenience, certain amounts in Renminbi have been converted to US dollars at an
exchange rate in effect at the date of the related financial statements or the
related event. Assets and liabilities are translated at the exchange
rate as of the balance sheet date. Income and expenditures are translated at the
average exchange rate of the relevant period.
PROSPECTUS
SUMMARY
This
summary highlights information contained in other parts of this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing in our ADSs. You should read the entire
prospectus and the registration statement of which this prospectus forms a part
in their entirety, carefully, including the section captioned “Risk Factors” and
the more detailed information in our consolidated financial statements and
related notes appearing elsewhere beginning on page F-1 in this
prospectus.
Overview
We
manufacture and sell an array of plain surface prestressed steel materials and
rare earth coated and zinc coated prestressed steel materials, which we believe
is the most comprehensive array among our competitors in China. Our
materials are used in the construction of bridges, highways and other
infrastructure projects in the PRC and internationally. Our
facilities are located in Maanshan City, Anhui Province and in Jiujiang City,
Jiangxi Province, in the People’s Republic of China. According to a report issued by the Institute of
Quantitative and Technical Economics, Chinese Academy of Social Sciences, or the
CASS report, dated October 8, 2010, we were among the top five prestressed
concrete, or PC, material producers in the PRC as measured by annual output from
2006 through 2008. According to the PRC PC Strand
Industry Investment and Market Operation Research Report, in 2008, our products
were ranked third in sales in the PRC for PC strands and wires, and ranked
first in export sales of these materials by Chinese prestressed steel
manufacturers. Historically, we and our customers have had a greater
than 90% success rate with respect to winning projects on which either we or our
customers have bid. Based on our extensive experience in the
industry, we believe that Ossen is one of the leading enterprises in the PRC in
the design, engineering, manufacture and sale of customized prestressed steel
materials used in the construction of bridges, highways, and other
infrastructure projects in China.
During
the six months ended June 30, 2010, we generated revenue of approximately $31.4
million, or 53.5% of our total revenue, from sales of our rare earth coated PC
wires and PC strands. We believe that we are the only prestressed
steel material manufacturer in the PRC that currently manufactures rare earth
coated materials. Based on current and anticipated orders, we estimate
that revenues generated by sales of coated products (including rare earth coated
and zinc coated products in the aggregate) for the year ending December 31, 2010
will comprise approximately 49% of our total revenue. Based on filled
and anticipated orders, we believe that 95% of our revenues generated by coated
product sales in the year ending December 31, 2010 will be generated by sales of
rare earth coated products and the remaining 5% will be generated by sales of
zinc coated products. Our plan is to continue to increase sales of
our rare earth coated products to manufacturers of steel cables for bridges and
other infrastructure projects, both in the PRC and internationally, in order to
increase our revenues and profits.
While we
believe that our rare earth coating capabilities provide us with a competitive
advantage among our competitors, it is likely that our competitors will
seek to develop similar competing products in the near future. We intend to
continue to expend research and development efforts to advance our rare earth
coating applications even further. However, there can be no assurance that our
initial competitive advantage will be retained and that one or more competitors
will not develop products that are equal or superior to ours in quality or are
better priced than our rare earth coated products.
The
primary characteristics of these newly designed rare earth coated products,
which are used primarily in the construction of new bridges and the renovation
of older bridges in need of repair, are as follows:
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Superior
corrosion resistance;
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Superior
toughness and plasticity;
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Endurance
against extreme heat;
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Smooth
and appealing coating; and
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According
to the CASS report, bridge and other
infrastructure construction is currently experiencing significant growth in
China, which trend is expected to continue until 2020. Under existing
PRC governmental policies, significant investments are expected to be made
during the next decade to construct more than 200 new bridges over dozens of
Chinese rivers, including the Yangtze River, Yellow River, Songhua River,
Jiangxi River, Xiang River, Han River, Minjiang River and Pearl
River. In addition, approximately 400 old bridges will need to be
reinforced or expanded during that period. In addition, over the next
decade, China is expected to build four cross-sea bridges and tunnels, including
the Bohai Bay Cross-Sea Bridge, the Hong Kong-Zhuhai-Macao Cross-Sea Bridge, the
Qiongzhou Strait Bridge and the Taiwan Strait Tunnel.
Our
management’s core strategy for the near future is to expand the production
capacity for our rare earth coated PC strands and PC wires, which generate
higher margins than our other products, in order to continue to take advantage
of current trends in the bridge and infrastructure industries in the PRC and
other international markets, including in Southeast Asia and Australia, in the
development and renovation of bridges and other infrastructure
projects. Our products are marketed under the “Ossen” brand name both
domestically and internationally. We handle all aspects of market
research, product design, engineering, manufacturing, sales and
marketing. We conduct our manufacturing operations in our ISO 9001
manufacturing facilities in Maanshan City and Jiujiang City, in the
PRC.
Ossen
Materials, our operating subsidiary, was founded in 2004. In 2005, we
expanded our manufacturing capabilities by acquiring a facility in Jiujiang City
in the PRC and forming Ossen Jiujiang. The founders of Ossen were
among the first in China to introduce and promote the use of prestressed steel
materials in construction projects. The founders of Ossen have been
involved in producing prestressed materials since 1994 and have accumulated more
than 15 years of experience in the prestressed materials industry.
Our
Growth Strategy
Our goal
is to expand our industry position while maximizing shareholder value and
pursuing a growth strategy that includes the following:
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Increasing
our production capacity for our newly developed higher margin rare earth
coated prestressed materials.
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Strengthening
our relationships with key customers, diversifying our customer base and
exploiting new business opportunities through our relationship with an
affiliated company.
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Pursuing
strategic relationships and acquisition
opportunities.
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Competitive
Advantages
We
believe that the following competitive strengths contribute to our strong market
position and will enable us to continue to improve our profitability and cash
flow:
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We
are taking advantage of industry trends in the bridge and infrastructure
sectors in the PRC and other international
markets.
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Leading
provider of coated prestressed steel
materials.
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Strong
in-house research and development
capabilities.
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Efficient
proprietary production technology.
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Strong
recognition from domestic and international customers for supplying
materials for infrastructure
projects.
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Rigorous
quality control standards.
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Experienced
management and operational teams with domestic PRC market
knowledge.
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Our
Risks and Challenges
We
believe that the following are the most significant risks and uncertainties that
may materially adversely affect our business, financial condition, results of
operations and prospects:
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Our
revenues are highly dependent on a limited number of
customers;
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We
have ceased doing business with some international customers because of
anti-dumping duties;
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We
expect to experience increased needs to finance our working capital
requirements;
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We
may need to establish a more diverse supplier
network;
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Our
revenues could decrease if steel prices
decline;
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We
face intense competition;
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We
may be unable to maintain sufficient levels of working
capital;
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We
may be unable to protect our intellectual
property;
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Adverse
changes in the economy of China may affect our
business.
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See “Risk
Factors” beginning on page 10 and other information included in this prospectus
for a detailed discussion of these risks, challenges and
uncertainties.
Corporate
Structure
Business
Combination
On July
7, 2010, Ultra Glory and its sole shareholder entered into a share exchange
agreement with Ossen Innovation Group, a British Virgin Islands limited
liability company organized on April 30, 2010 under the BVI Business Companies
Act, 2004, or the BVI Act, and the shareholders of Ossen Innovation
Group. Pursuant to the share exchange agreement, Ultra Glory acquired from
the shareholders of Ossen Innovation Group all of the issued and outstanding
shares of Ossen Innovation Group, in exchange for an aggregate of 10,000,000
newly issued ordinary shares issued by Ultra Glory to the shareholders of Ossen
Innovation Group. In addition, the sole shareholder of Ultra Glory
sold all of the 5,000,000 ordinary shares of Ultra Glory that were issued and
outstanding prior to the business combination, to the shareholders of Ossen
Innovation Group for cash, at a price of $0.03 per share. As a
result, the individuals and entities that owned shares of Ossen Innovation Group
prior to the business combination acquired 100% of the equity of Ultra Glory,
and Ultra Glory acquired 100% of the equity of Ossen Innovation
Group. Ossen Innovation Group is now a wholly owned subsidiary of
Ultra Glory. In conjunction with the business combination, Ultra
Glory filed an amended charter, pursuant to which Ultra Glory changed its name
to Ossen Innovation Co., Ltd., changed its fiscal year end to December 31,
changed the par value of its ordinary shares to $0.01 per share and increased
its authorized shares to 100,000,000. Upon the consummation of the
business combination, we ceased to be a shell company.
Ossen
Innovation Group, our wholly owned subsidiary, is the sole shareholder of two
holding companies organized in the British Virgin Islands: Ossen Group (Asia)
Co., Ltd., or Ossen Asia, and Topchina Development Group Ltd., or
Topchina. All of the equity of Ossen Asia and Topchina had been held
by Dr. Tang, our Chairman, since inception. In May 2010, Dr. Tang
transferred these shares to Ossen Innovation Group in anticipation of the public
listing of our company’s shares in the United States.
Ossen
Asia is a British Virgin Islands limited liability company organized on February
7, 2002. Ossen Asia has one direct operating subsidiary in China,
Ossen Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia
owns 81% of the equity of Ossen Materials.
Topchina
is a British Virgin Islands limited liability company organized on November 3,
2004. Ossen Materials and Topchina directly own an operating
subsidiary in China, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., or Ossen
Jiujiang. Ossen Materials owns 15% of the equity of Ossen Jiujiang
and Topchina owns 85%.
Ossen
Materials
Ossen
Materials was formed in China on October 27, 2004 as a Sino-foreign joint
venture limited liability company under the name Ossen (Ma’anshan) Steel Wire
and Cable Co., Ltd. On May 8, 2008, Ossen Materials was restructured
from a Sino-foreign joint venture limited liability company to a
corporation. The name of the entity was changed at that time to Ossen
Innovation Materials Co., Ltd.
Ossen
Asia owns 81% of the equity of Ossen Materials. The remaining 19% is
held in the aggregate by four Chinese entities, two of which are controlled by
Chinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a
company whose shares are listed on the Shanghai Stock Exchange, and one of which
is controlled by Chinese citizens.
Through
Ossen Materials, we have manufactured and sold plain surface PC strands, zinc
coated PC steel wires and PC wires in our Maanshan City facility since
2004. The primary markets for the products manufactured at our
Maanshan facility are Anhui Province, Jiangsu Province, Zhejiang Province and
Shanghai City, each in the PRC.
Ossen
Jiujiang
On April
6, 2005, Shanghai Ossen Investment Holdings (Group) Co., Ltd., or Ossen
Shanghai, acquired a portion of the bankruptcy assets of Jiujiang Steel &
Iron Company, including equipment, land use rights and inventory, for
approximately RMB 20,000,000 (approximately $2.9 million). Ossen
Jiujiang was formed by Ossen Shanghai in the PRC as a Sino-foreign joint
venture limited liability company on April 13, 2005. Ossen Shanghai
then transferred the newly acquired assets to Ossen Jiujiang. At its inception,
Ossen Jiujiang was owned by two entities: 33.3% of its equity was held by Ossen
Asia and 66.7% by Ossen Shanghai. In June 2005, Ossen Shanghai
transferred its entire interest in Ossen Jiujiang to Topchina in exchange for
approximately $2.9 million. In October 2007, Topchina transferred 41.7% of the
equity in Ossen Jiujiang to Ossen Asia for no consideration. On December
17, 2007, Ossen Asia transferred all of its shares in Ossen Jiujiang to Ossen
Materials. From December 2007 until November 24, 2010, 75% of the
equity of Ossen Jiujiang has been held by Ossen Materials and 25% by Topchina.
As a result of an additional capital contribution on November 24, 2010,
Topchina's ownership percentage increased to 85% and Ossen Materials ownership
percentage decreased to 15%.
Through
Ossen Jiujiang, we manufacture zinc coated PC wires and strands, plain surface
PC strands, unbonded PC strands, helical rib PC wires, sleeper PC wires and
indented PC wires. The primary markets for the PC strands
manufactured in our Jiujiang facility are Jiangxi Province, Wuhan Province,
Hunan Province, Fujian Province and Sichuan Province, each in the
PRC.
Our
Shareholders
Dr. Tang,
our chairman, owns 100% of the shares of Effectual Strength Enterprises Ltd., a
British Virgin Islands company, which owned 79% of the shares of Ossen
Innovation Group prior to the business combination, and owns 79% of our shares
since the business combination. The spouse of our chief executive
officer, Wei Hua, owns 100% of the shares of Fascinating Acme Development Ltd.,
which owned 4% of the shares of Ossen Innovation Group prior to the
business combination, and owns 4% of our shares since the business
combination. The spouse of the chief executive officer of Shanghai
ZFX, which is an affiliated company of ours that supplies us with raw materials,
owns 100% of the shares of Gross Inspiration Development Ltd., which owned 4% of
the shares of Ossen Innovation Group prior to the business combination, and owns
4% of our shares since the business combination. The holders of the
remaining 13% of our shares are investors that are residents of the PRC and are
unaffiliated with Ossen.
Organizational
Chart
The
following chart reflects our organizational structure as of the date of this
prospectus.
Corporate
Information
Our
principal executive offices are located at Ossen Innovation Co., Ltd.,
Shangcheng Road, Floor 17, Shanghai, 200120, People’s Republic of
China. Our telephone number is +86 (21) 6888-8886 and our fax number
is +86 (21) 6888-8666.
You
should direct all inquiries to us at the address and telephone number of our
principal executive offices set forth above. Our website is http://220.178.253.10/ossen/index.html. The information contained on our website is not a part
of this prospectus. Our agent for service of process in the
United States is CT Corporation System, 111 Eighth Avenue New York, New York
10011, (212) 894-8940.
The
Offering
Price
per ADS
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The
public offering price of our ADSs is $4.50.
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ADSs
being offered by us
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5,000,000
ADSs
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Ordinary
shares outstanding before this offering
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15,000,000
ordinary shares
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Ordinary
shares to be outstanding immediately after this offering
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20,000,000
ordinary shares
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ADSs
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Each
ADS represents one ordinary share, par value $0.01 per
share.
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JP
Morgan Chase Bank, N.A., the depositary, will be the holder of the
ordinary shares underlying your ADSs and you will have rights as provided
in the deposit agreement.
Although
we do not expect to pay dividends in the foreseeable future, if we declare
dividends on our ordinary shares, the depositary will pay you the cash
dividends and other distributions it receives on our ordinary shares,
after deducting fees of up to $0.05 per ADS per distribution and
expenses.
In
addition, the depositary may charge a fee of up to $0.05 per ADS per
calendar year (or a portion thereof) for services it performs in
administering the ADSs (which may be charged on a periodic basis during
each calendar year and shall be assessed against holders of ADSs as of the
record date or record dates set by the depositary during each calendar
year).
We may
amend or terminate the deposit agreement without your consent, and if you
continue to hold your ADSs, you agree to be bound by the deposit agreement
as amended.
You
should carefully read the section in this prospectus entitled “Description
of American Depositary Shares” to better understand the terms of the ADSs.
You should also read the deposit agreement, which is an exhibit to the
registration statement that includes this prospectus.
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Over-allotment
option
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We
have granted to the underwriters an option, exercisable for 45 days from
the date of this prospectus, to purchase up to an additional 750,000
ADSs, at the initial public offering price set forth on the cover page of
this prospectus, less underwriting discounts and commissions, solely for
the purpose of covering over-allotments, if any.
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Use
of proceeds
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We
estimate that we will receive net proceeds of approximately $19.6 million
from this offering, assuming an initial public offering price of $4.50 per
ADS. We intend to use approximately $2 million for the related
construction costs associated with the extension of our current facility
and approximately $20 million to purchase and install eight new production
lines for coated prestressed materials. Proceeds
from this offering above the amount needed for expansion if any, would be
used for working capital. If we are unable to raise sufficient funds from
this offerings to pay for our anticipated expansion in full, we intend to
use cash from our operations or bank loans to complete the
expansion. See the section entitled “Use of Proceeds.”
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Risk
factors
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See
the section captioned “Risk Factors” and other information included in
this prospectus for a discussion of factors you should consider before
deciding to invest in our ADSs.
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Payment
and settlement
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Our
ADSs are expected to be delivered against payment on December 23,
2010. The ADSs will be deposited with a custodian for, and
registered in the name of a nominee of, The Depository Trust Company, or
DTC, in New York, New York. In general, beneficial interests in
our shares will be shown on, and transfers of these beneficial interests
will be effected only through, records maintained by DTC and its direct
and indirect participants.
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Listing
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Our
ADSs have been approved to be listed on the Nasdaq Global Market under the
symbol “OSN.”
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Depositary
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JP
Morgan Chase Bank, N.A.
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Lock-up
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Our
directors and executive officers, and the holders of all of our
outstanding ordinary shares, have agreed with the underwriters not to
sell, transfer or otherwise dispose of any of our ordinary shares, or ADSs
representing our ordinary shares, for 180 days after the date of this
prospectus. See
“Underwriting.”
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Unless
stated otherwise, the information in this prospectus assumes:
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an
initial public offering price of $4.50 per ADS;
and
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no
exercise of the underwriters’ option to purchase up to 750,000
additional ADSs from us to cover over-allotments.
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Summary
Consolidated Financial Data
The
following summary financial information should be read in connection with, and
is qualified by reference to, our consolidated financial statements and their
related notes and the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” each of which is included
elsewhere in this registration statement. The audited consolidated
statements of operations and comprehensive income data for the fiscal years
ended December 31, 2008 and 2009 and the unaudited consolidated statements of
operations and comprehensive income data for the six months ended June 30, 2009
and 2010 and the audited balance sheets data as of December 31, 2008 and 2009
and the unaudited balance sheets data as of June 30, 2009 and 2010 are derived
from the consolidated financial statements included elsewhere in this
registration statement. The consolidated statements of operations and
comprehensive income data for the fiscal years ended December 31, 2005, 2006 and
2007 and the balance sheets data as of December 31, 2005, 2006 and 2007 have
been derived from unaudited financial statements that are not included in this
prospectus. Our historical results for any of these periods are not
necessarily indicative of results to be expected in any future
period.
|
|
Year Ended December 31,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2009
(Audited)
|
|
|
2008
(Audited)
|
|
|
2007
(Unaudited)
|
|
|
2006
(Unaudited)
|
|
|
2005
(Unaudited)
|
|
|
2010
(Unaudited)
|
|
|
2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
101,087,796 |
|
|
$ |
82,742,310 |
|
|
$ |
71,909,873 |
|
|
$ |
59,547,454 |
|
|
$ |
17,195,347 |
|
|
$ |
58,708,775 |
|
|
$ |
40,416,407 |
|
Cost
of goods sold
|
|
|
87,659,925 |
|
|
|
70,532,733 |
|
|
|
63,340,890 |
|
|
|
56,853,946 |
|
|
|
15,216,951 |
|
|
|
47,101,721 |
|
|
|
35,741,095 |
|
Gross
profit
|
|
|
13,427,871 |
|
|
|
12,209,577 |
|
|
|
8,568,983 |
|
|
|
2,693,508 |
|
|
|
1,978,395 |
|
|
|
11,607,054 |
|
|
|
4,675,312 |
|
Selling
and distribution expenses
|
|
|
503,724 |
|
|
|
4,326,491 |
|
|
|
3,662,373 |
|
|
|
1,024,209 |
|
|
|
219,650 |
|
|
|
195,706 |
|
|
|
241,880 |
|
General
and administrative expenses
|
|
|
1,143,672 |
|
|
|
1,316,606 |
|
|
|
571,498 |
|
|
|
340,847 |
|
|
|
255,270 |
|
|
|
532,276 |
|
|
|
638,499 |
|
Total Operating
Expenses
|
|
|
1,647,396 |
|
|
|
5,643,097 |
|
|
|
4,288,796 |
|
|
|
1,410,056 |
|
|
|
501,920 |
|
|
|
727,982 |
|
|
|
880,379 |
|
Income
from operations
|
|
|
11,780,475 |
|
|
|
6,566,480 |
|
|
|
4,280,187 |
|
|
|
1,283,451 |
|
|
|
1,476,475 |
|
|
|
10,879,072 |
|
|
|
3,794,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expenses, net
|
|
|
(1,496,712 |
) |
|
|
(1,891,671 |
) |
|
|
(1,189,027 |
) |
|
|
(359,130 |
) |
|
|
(22,920 |
) |
|
|
(1,069,659 |
) |
|
|
(730,104 |
) |
Other
income, net
|
|
|
183,495 |
|
|
|
380,766 |
|
|
|
278,924 |
|
|
|
211,875 |
|
|
|
56,362 |
|
|
|
96,720 |
|
|
|
14,583 |
|
Income
before income taxes
|
|
|
10,467,258 |
|
|
|
5,055,575 |
|
|
|
3,370,084 |
|
|
|
1,136,196 |
|
|
|
1,509,917 |
|
|
|
9,906,133 |
|
|
|
3,079,412 |
|
Income
taxes
|
|
|
(740,053 |
) |
|
|
(291,520 |
) |
|
|
(233,674 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,370,598 |
) |
|
|
(348,394 |
) |
Net
income
|
|
|
9,727,205 |
|
|
|
4,764,055 |
|
|
|
3,136,410 |
|
|
|
1,136,196 |
|
|
|
1,509,917 |
|
|
|
8,535,535 |
|
|
|
2,731,018 |
|
Less:
Net Income Attributable
to non- controlling
interest
|
|
|
1,714,670 |
|
|
|
809,437 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,430,029 |
|
|
|
484,515 |
|
Net
income attributable to controlling interest
|
|
|
8,012,535 |
|
|
|
3,954,618 |
|
|
|
3,136,410 |
|
|
|
1,136,196 |
|
|
|
1,509,917 |
|
|
|
7,105,506 |
|
|
|
2,246,503 |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain, net of tax
|
|
|
31,146 |
|
|
|
420,883 |
|
|
|
66,913 |
|
|
|
360,384 |
|
|
|
37,135 |
|
|
|
117,535 |
|
|
|
13,684 |
|
Total
Other comprehensive income, net of tax
|
|
|
31,146 |
|
|
|
420,883 |
|
|
|
66,913 |
|
|
|
360,384 |
|
|
|
37,135 |
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$ |
8,043,681 |
|
|
$ |
4,375,501 |
|
|
$ |
3,203,323 |
|
|
$ |
1,496,580 |
|
|
$ |
1,547,052 |
|
|
$ |
7,223,041 |
|
|
$ |
2,260,187 |
|
Balance Sheets Data (qat end of period)
|
|
December 31
|
|
|
June 30,
|
|
(in U.S. Dollars)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2010
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
and cash equivalents
|
|
$ |
8,409,467 |
|
|
$ |
3,761,315 |
|
|
$ |
6,735,616 |
|
|
$ |
7,828,750 |
|
|
$ |
3,120,317 |
|
|
$ |
3,460,341 |
|
Total
current assets
|
|
|
68,374,508 |
|
|
|
47,316,208 |
|
|
|
35,162,129 |
|
|
|
18,712,764 |
|
|
|
9,901,704 |
|
|
|
91,415,426 |
|
Total
non-current assets
|
|
|
17,343,079 |
|
|
|
18,580,174 |
|
|
|
17,464,579 |
|
|
|
12,733,621 |
|
|
|
9,898,165 |
|
|
|
16,712,373 |
|
Total
assets
|
|
|
85,717,587 |
|
|
|
65,896,382 |
|
|
|
52,626,708 |
|
|
|
31,436,385 |
|
|
|
19,799,869 |
|
|
|
108,127,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
65,538,241 |
|
|
|
55,475,387 |
|
|
|
47,390,651 |
|
|
|
18,297,807 |
|
|
|
8,317,707 |
|
|
|
79,295,383 |
|
Total
shareholders’ equity
|
|
|
20,179,346 |
|
|
|
10,420,995 |
|
|
|
5,236,057 |
|
|
|
13,138,578 |
|
|
|
11,482,162 |
|
|
|
28,832,416 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
85,717,587 |
|
|
$ |
65,896,382 |
|
|
$ |
52,626,708 |
|
|
$ |
31,436,385 |
|
|
$ |
19,799,869 |
|
|
$ |
108,127,799 |
|
RISK
FACTORS
You
should carefully consider the risks described below in evaluating our business
before investing in our ADSs. If any of the following risks were to occur, our
business, results of operations and financial condition could be harmed. In that
case, the trading price of our ADSs could decline and you might lose all or part
of your investment in our ADSs. You should also refer to the other information
set forth in this prospectus, including our consolidated financial statements
and the related notes and the section captioned “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” before deciding
whether to invest in our ADSs.
Risks
Related to Our Business and Our Industry
Our
revenues are highly dependent on a limited number of customers and the loss of
any one of our major customers could materially and adversely affect our growth
and our revenues.
During
the years ended December 31, 2008 and 2009, our six largest customers
contributed 81.0% and 86.7% of our total sales, respectively. During
the six months ended June 30, 2009 and 2010, our six largest customers
contributed 89.8% and 79.6% of our total sales, respectively. As a
result of our reliance on a limited number of customers, we may face pricing and
other competitive pressures, which may have a material adverse effect on our
profits and our revenues. The volume of products sold for specific customers
varies from year to year, especially since we are not the exclusive provider for
any customers. In addition, there are a number of factors, other than
our performance, that could cause the loss of a customer or a substantial
reduction in the products that we provide to any customer and that may not be
predictable. For example, our customers may decide to reduce spending on our
products or a customer may no longer need our products following the completion
of a project. The loss of any one of our major customers, a decrease in the
volume of sales to these customers or a decrease in the price at which we sell
our products to them could materially adversely affect our profits and our
revenues.
In
addition, this customer concentration may subject us to perceived or actual
leverage that our customers may have in negotiations with us, given their
relative size and importance to us. If our customers seek to negotiate their
agreements on terms less favorable to us and we accept such unfavorable
terms, such unfavorable terms may have a material adverse effect on our
business, financial condition and results of operations. Accordingly, unless and
until we diversify and expand our customer base, our future success will
significantly depend upon the timing and volume of business from our largest
customers and the financial and operational success of these
customers.
We
have ceased doing business with some of our international customers because of
anti-dumping duties imposed by foreign governments on our products.
In 2008,
we sold approximately 32% of our products to customers in the United States and
Europe. The Crispin Company, a US company, and Ibercordones
Pretensados S.L., a Spanish Company, were two of our top three customers in
2008.
However,
in May 2009, the Council of the European Union imposed an anti-dumping duty on
imports of certain prestressed wires and wire strands originating in
China. Dumping occurs when a foreign company sells a product at a
price that is considered less than fair value in the country into which the
product is imported. Following an anti-dumping investigation
initiated in February 2008, the Council concluded that imports of these products
originating in China caused material injury to the European industry. The
rate of the anti-dumping duty applicable to us has been set at 31.1% and the
duty applicable to our competitors generally has been set at 46.2%.
On May
17, 2010, the U.S. Department of Commerce announced an affirmative final
decision, imposing an anti-dumping rate of 193.55% for imports of certain
prestressed concrete steel wire strands including the plain surface materials we
had been selling to our U.S. customers, exported from China to the
U.S. The U.S. Customs and Border Protection have been instructed to
collect a cash deposit or bond based on this rate.
In
anticipation of these rulings, we discontinued sales to these regions at the end
of 2008. If these anti-dumping measures remain in place and we are
unable to continue increasing our sales to customers in China or other regions
in which we sell our products, these measures could have a negative impact on
our business and results of operations.
We
have recently experienced, and expect to continue to experience, increased needs
to finance our working capital requirements, which may materially and adversely
affect our financial position and results of operations.
Historically,
we sold a significant portion of our products to international customers. In
2008, we collected approximately half of the revenues generated by international
sales by letter of credit, enabling us to convert our accounts receivable into
cash more quickly, prepay our suppliers and reduce the amount of funds that we
needed to finance our working capital requirements. However, at the end of 2008,
as a result of the global economic crisis and in anticipation of the
anti-dumping measures ultimately imposed by the U.S. and the European Union, we
had to exit some of these international markets entirely and turn to the
domestic PRC customers, which generally pay approximately 40 days after
receiving the materials at the construction site. These longer
payment terms have negatively impacted our short-term liquidity. Although we
have been able to maintain adequate working capital primarily through short-term
borrowing, any failure by our customers to settle outstanding accounts
receivable in the future could materially and adversely affect our cash flow,
financial condition and results of operations.
Some
of the terms of the agreements between Ossen Materials and its affiliates may be
less favorable to us than similar agreements negotiated between unaffiliated
third parties.
Historically,
we purchased a significant amount of our raw materials from Shanghai
Zhengfangxing Steel Co., Ltd., or Shanghai ZFX, an affiliate of
ours. Specifically, we acquired 30.2%, 22.2% and 4.2% of our raw
materials from Shanghai ZFX in the years ended December 31, 2008 and 2009 and
the six months ended June 30, 2010, respectively. In addition, we
have sold a significant amount of our products to Shanghai Zhaoyang New Metal
Material Co., Ltd., an entity that owns a 40% interest in Shanghai Ossen
Investment Holding (Group) Co., Ltd., of which Dr. Tang, our chairman, is
president.
While we
believe we benefit from these agreements, due to our relationship with these
entities such agreements may not reflect the terms that would have been reached
by two unaffiliated parties negotiating at arm’s length. The
transactions may be less favorable to us than would be the case if they were
negotiated with unaffiliated third parties.
As
we expand our operations, we may need to establish a more diverse supplier
network for our raw materials. The failure to secure a more diverse
and reliable supplier network could have an adverse effect on our financial
condition.
We
currently purchase almost all of our raw materials from a small number of
suppliers. Purchases from our five largest suppliers amounted to
86.5% and 89.5% of our raw material purchases in the years ended December 31,
2008 and 2009, respectively and 100% during the six months ended June 30, 2009
and 2010, respectively. As we increase the scale of our production,
we may need to establish a more diverse supplier network, while attempting to
continue to leverage our purchasing power to obtain favorable pricing and
delivery terms. However, in the event that we need to diversify our
supplier network, we may not be able to procure a sufficient supply of raw
materials at a competitive price, which could have an adverse effect on our
results of operations, financial condition and cash flows.
Furthermore,
despite our efforts to control our supply of raw materials and maintain good
relationships with our existing suppliers, we could lose one or more of our
existing suppliers at any time. The loss of one or more key suppliers
could increase our reliance on higher cost or lower quality supplies, which
could negatively affect our profitability. Any interruptions to, or
decline in, the amount or quality of our raw materials supply could materially
disrupt our production and adversely affect our business, financial condition
and financial prospects.
Volatile
steel prices can cause significant fluctuations in our operating results. Our
revenues and operating income could decrease if steel prices decline or if we
are unable to pass price increases on to our customers.
Our
principal raw material is high carbon steel wire rods that we typically purchase
from multiple primary steel producers. The steel industry as a whole is cyclical
and, at times, pricing and availability of steel can be volatile due to numerous
factors beyond our control, including general domestic and international
economic conditions, labor costs, sales levels, competition, levels of inventory
held by us and other steel service centers, consolidation of steel
producers, higher raw material costs for steel producers, import duties and
tariffs and currency exchange rates. This volatility can significantly affect
the availability and cost of raw materials for us.
We, like
many other steel manufacturers, maintain substantial inventories of steel to
accommodate the short lead times and just-in-time delivery requirements of our
customers. Accordingly, we purchase steel in an effort to maintain our inventory
at levels that we believe to be appropriate to satisfy the anticipated needs of
our customers based upon historic buying practices, supply agreements with
customers and market conditions. Our commitments to purchase steel are generally
at prevailing market prices in effect at the time we place our orders. We have
no long-term, fixed-price steel purchase contracts. When steel prices increase,
as they did in 2008, competitive conditions will influence how much of the price
increase we can pass on to our customers. To the extent we are unable to pass on
future price increases in our raw materials to our customers, the revenues and
profitability of our business could be adversely affected.
When
steel prices decline, as they did in the fourth quarter of 2008 and through the
first half of 2009, customer demands for lower prices and our competitors'
responses to those demands could result in lower sale prices, lower margins and
inventory valued at the lower of cost or market adjustments as we use existing
steel inventory. Significant or rapid declines in steel prices or
reductions in sales volumes could result in us incurring inventory or goodwill
impairment charges. Therefore, changing steel prices could significantly impact
our revenues, gross margins, operating income and net income.
We
are subject to various risks and uncertainties that might affect our ability to
procure quality raw materials.
Our
performance depends on our ability to procure low cost, high quality raw
materials on a timely basis from our suppliers. Our suppliers are
subject to certain risks, including availability of raw materials, labor
disputes, inclement weather, natural disasters, and general economic and
political conditions, which might limit the ability of our suppliers to provide
us with low cost, high quality merchandise on a timely
basis. Furthermore, for these or other reasons, one or more of our
suppliers might not adhere to our quality control standards, and we might not
identify the deficiency. Our suppliers’ failure to supply quality
materials at a reasonable cost on a timely basis could reduce our net sales,
damage our reputation and have an adverse effect on our financial
condition.
Our
operations are cash intensive, and our business could be adversely affected if
we fail to maintain sufficient levels of liquidity and working
capital.
Historically,
we have spent a significant amount of cash on our operational activities,
principally to procure raw materials for our products. We have
financed our operations mainly through cash flows from our operations,
short-term bank loans and proceeds from bank acceptance notes. If we
fail to continue to generate sufficient cash flow from these sources, we may not
have sufficient liquidity to fund our operating costs and our business could be
adversely affected.
Our
short-term loans are from Chinese banks and are generally secured by our fixed
assets, receivables and/or guarantees by third parties. The term of
almost all such loans is one year or less. Historically, we have
rolled over such loans on an annual basis. However, we may not have
sufficient funds available to pay all of our borrowings upon maturity in the
future. Failure to roll over our short-term borrowings at maturity or
to service our debt could result in the imposition of penalties, including
increases in interest rates, legal actions against us by our creditors, or even
insolvency.
If
available liquidity is not sufficient to meet our operating and loan obligations
as they come due, our plans include considering pursuing alternative financing
arrangements, reducing expenditures as necessary, or limiting our plans for
expansion to meet our cash requirements. However, there is no
assurance that, if required, we will be able to raise additional capital, reduce
discretionary spending or efficiently limit our expansion to provide the
required liquidity. Currently, the capital markets for small
capitalization companies are extremely difficult and banking institutions have
become stringent in their lending requirements. Accordingly, we
cannot be sure of the availability or terms of any third party
financing. If we are unable to raise additional financing, we may be
unable to implement our long-term business plan, develop or enhance our
products, take advantage of future opportunities or respond to competitive
pressures on a timely basis. In the alternative, if we raise capital
by issuing equity or convertible debt securities, such issuances could result in
substantial dilution to our shareholders.
Our
inability to manage our growth may have a material adverse effect on our
business, results of operations and financial condition.
We have
experienced significant growth since we began operations in 2004. Our
revenues have grown from approximately $17.2 million in 2005 to approximately
$101.1 million in 2009. Our revenues were $58.7 million during the
six months ended June 30, 2010.
|
·
|
recruiting,
training and retaining sufficient skilled sales and management
personnel;
|
|
·
|
adhering
to our high quality and process execution
standards;
|
|
·
|
maintaining
high levels of customer
satisfaction;
|
|
·
|
creating
and managing economies of scale;
|
|
·
|
maintaining
and managing costs to correspond with timeliness of revenue recognition;
and
|
|
·
|
developing
and improving our internal administrative infrastructure, including our
financial, operational and communication systems, processes and
controls.
|
Any
inability to manage our growth may have a material adverse effect on our
business, results of operations and financial condition.
We
face intense competition, and if we are unable to compete effectively we may not
be able to maintain profitability.
We
compete with many other companies located in the PRC and internationally that
manufacture materials similar to ours. Many of our competitors are
larger companies with greater financial resources than us. In
addition, we expect that as demand in the PRC and in other foreign countries for
high quality, prestressed materials continues to grow, new competitors will
enter the market. Increased competition may adversely affect our
future financial performance or reputation. Moreover, increased
competition may result in potential or actual litigation between us and our
competitors relating to such activities as competitive sales practices,
relationships with key suppliers and customers or other matters.
During
the six months ended June 30, 2010, we generated revenue of approximately $31.4
million, or 53.5% of our total revenue, from sales of our rare earth coated PC
wires and PC strands. We believe that we are the only prestressed
steel material manufacturer in the PRC that currently manufactures rare earth
coated materials. While we believe that our rare earth coating
capabilities provide us with a competitive advantage among our competitors, it
is likely that our competitors will seek to develop similar competing products
in the near future. We intend to continue to expend research and development
efforts to advance our rare earth coating applications even further. However,
there can be no assurance that our initial competitive advantage will be
retained and that one or more competitors will not develop products that are
equal or superior to ours in quality or are better priced than our rare earth
coated products.
We
may lose our competitive advantage, and our operations may suffer, if we fail to
prevent the loss or misappropriation of, or disputes over, our intellectual
property.
We rely
on a combination of patents, trademarks, trade secrets and confidentiality
agreements to protect our intellectual property rights. While we are not
currently aware of any infringement on our intellectual property rights, our
ability to compete successfully and to achieve future revenue growth will
depend, in significant part, on our ability to protect our proprietary
technology. Despite many laws and regulations promulgated, and other
efforts made, by China over the past several years in an attempt to protect
intellectual property rights, intellectual property rights are not as certain in
China as they would be in many Western countries, including the United
States. Furthermore, enforcement of such laws and regulations in
China has not been fully developed. Neither the administrative
agencies nor the court systems in China are as equipped as their counterparts in
developed countries to deal with violations or handle the nuances and
complexities between compliant technological innovation and non-compliant
infringement.
Our
competitors may independently develop proprietary methodologies similar to ours
or duplicate our products, which could have a material adverse effect on our
business, results of operations and financial condition. The misappropriation or
duplication of our intellectual property could disrupt our ongoing business,
distract our management and employees, reduce our revenues and increase our
expenses. We may need to litigate to enforce our intellectual property rights.
Any such litigation could be time consuming and costly and the outcome of any
such litigation cannot be guaranteed.
Our
operating results may vary significantly from quarter to quarter. Therefore, we
believe that period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as an indication of our
future performance. It is possible that in the future some of our quarterly
results of operations may be below the expectations of market analysts and
our investors, which could lead to a significant decline in the trading price of
our ordinary shares.
Factors
which affect the fluctuation of our revenues, expenses and profits
include:
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changes
in prices of our raw materials, with higher prices leading to reduced
operating income;
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variations,
expected or unexpected, in the duration, size, timing and scope of
purchase orders;
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changes
in our pricing policies or those of our
competitors;
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changes
in compensation, which may reduce our gross profit for the quarter in
which they are effected;
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our
inability to manage costs, including those related to our raw materials,
personnel, infrastructure and
facilities;
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exchange
rate fluctuations; and
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general
economic conditions.
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A portion
of our expenses, particularly those related to personnel and facilities are
generally fixed in advance of any particular quarter. As a result, unanticipated
variations in the number and timing of our purchase orders or prices of our raw
materials may cause significant variations in our operating results in any
particular quarter.
We
may undertake strategic acquisitions, joint ventures and alliances, which may
prove to be difficult to integrate and manage or may not be successful, and may
result in increased expenses or write-offs.
We may
over time pursue strategic acquisitions, joint ventures and alliances to enhance
our capabilities and expand our industry expertise and geographic coverage. It
is possible that we may not identify suitable acquisition candidates, alliances
or joint venture partners, or if we do identify suitable candidates or partners,
we may not complete those transactions on terms commercially acceptable to us or
at all. The inability to identify suitable acquisition targets, joint ventures
or alliances, or our inability to complete such transactions on terms
commercially acceptable to us or at all, may adversely affect our ability to
compete and grow.
These
types of transactions involve numerous risks, including:
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difficulties
in integrating operations, systems, technologies, accounting methods and
personnel;
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difficulties
in supporting and transitioning clients of our acquired companies or
strategic partners;
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disruption
of our ongoing business;
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diversion
of financial and management resources from existing
operations;
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risks
of entering new markets;
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potential
loss of key employees; and
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inability
to generate sufficient revenue to offset transaction costs and
expenses.
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Furthermore,
any such transaction that we attempt, whether or not completed, or any media
reports or rumors with respect to any such transactions, may materially and
adversely affect the value of our ordinary shares.
We may
finance future transactions through debt financing or the issuance of our equity
securities or a combination of the foregoing. Acquisitions financed with the
issuance of our equity securities or convertible debt securities could be
dilutive, which could affect the market price of our ordinary shares.
Acquisitions financed with debt could require us to dedicate a substantial
portion of our cash flow to principal and interest payments and could subject us
to restrictive covenants. Acquisitions also frequently result in the recording
of goodwill and other intangible assets that are subject to potential
impairments in the future that could harm our financial
results. Moreover, if we fail to properly evaluate acquisitions,
alliances or investments, we may not achieve the anticipated benefits of those
transactions, and we may incur costs in excess of what we had anticipated.
Our
success depends in large part upon our senior management and key personnel. Our
inability to attract and retain these individuals could materially and adversely
affect our business, results of operations and financial condition.
We are
highly dependent on our senior management and other key employees, including our
Chairman, Dr. Tang, Mr. Hua and Mr. Gu. Our future performance will
be dependent upon the continued service of members of our senior management and
key employees. We do not maintain key man life insurance for any of the members
of our management team or other key personnel. Competition for senior management
in our industry is intense, and we may not be able to retain our senior
management and key personnel or attract and retain new senior management
and key personnel in the future, which could materially and adversely affect our
business, results of operations and financial condition.
We are
exposed to risks associated with product liability claims in the event that the
use of our products results in property damage or personal injury. Since our
products are ultimately incorporated into bridges, buildings, railways and other
large structures, it is possible that users of these structures or people
installing our products could be injured or killed by such structures, whether
as a result of defects, improper installation or other causes. Because we
continue to expand our customer base, we are unable to predict whether product
liability claims will be brought against us in the future or to predict the
impact of any resulting adverse publicity on our business. The successful
assertion of product liability claims against us could result in potentially
significant monetary damages and require us to make significant payments. We do
not carry product liability insurance and may not have adequate resources to
satisfy a judgment in the event of a successful claim against us. As the
insurance industry in China is still in its early stages of development, even
the insurance that we currently carry offers limited coverage compared with that
offered in many other countries. Any business interruption or natural disaster
could result in substantial losses and diversion of our resources and materially
and adversely affect our business, financial condition and results of
operations.
One
shareholder will own a large percentage of our outstanding stock after this
offering and could significantly influence the outcome of our corporate
matters.
Following
this offering, Dr. Tang will own approximately 59.4% of our outstanding ordinary
shares, thereby retaining a majority equity interest in our
company. Currently, Dr. Tang, our chairman, beneficially owns
approximately 79% of our outstanding ordinary shares. As our majority
shareholder, Dr. Tang is, and will continue to be, able to elect our board of
directors, approve, and determine the outcome of all matters requiring
shareholder approval (unless the voting requirement for a particular matter is
greater than Dr. Tang’s ownership at the time of the vote) significant corporate
transactions that we may consider, such as a merger or other sale of our company
or its assets. This concentration of ownership in our shares by Dr.
Tang will limit your ability to influence corporate matters and may have the
effect of delaying or preventing a third party from acquiring control over
us. In addition, sales of significant amounts of ordinary shares held
by Dr. Tang, or the prospect of these sales, could adversely affect the market
price of our ordinary shares.
If
we are unable to maintain appropriate internal financial reporting controls and
procedures, it could cause us to fail to meet our reporting obligations, result
in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, and cause investors to lose
confidence in our reported financial information.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud.
As a
public company, we have significant requirements for enhanced financial
reporting and internal controls. We will be required to document and test our
internal control procedures in order to satisfy the requirements of Section 404
of the Sarbanes-Oxley Act of 2002, which requires annual management assessments
of the effectiveness of our internal controls over financial reporting and, for
many companies, a report by the independent registered public accounting firm
addressing these assessments. The process of designing and implementing
effective internal controls is a continuous effort that requires us to
anticipate and react to changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a system of
internal controls that is adequate to satisfy our reporting obligations as a
public company.
We cannot
assure you that we will in the future identify areas requiring improvement in
our internal control over financial reporting. We cannot assure you that the
measures we will take to remediate any areas in need of improvement will be
successful or that we will implement and maintain adequate controls over our
financial processes and reporting in the future as we continue our growth. If we
are unable to establish appropriate internal financial reporting controls and
procedures, it could cause us to fail to comply with Sarbanes-Oxley and meet our
reporting obligations, result in the restatement of our financial statements,
harm our operating results, subject us to regulatory scrutiny and sanction, and
cause investors to lose confidence in our reported financial
information.
We
will incur increased costs as a result of being a public company.
As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. We expect the rules and regulations
to which public companies are subject, including the Sarbanes-Oxley Act of 2002,
to increase our legal, accounting and financial compliance costs and to make
certain corporate activities more time-consuming and costly. In addition, we
will incur additional costs associated with our public company reporting
requirements.
Risks
Related to Doing Business in China
Changes
in China’s political or economic situation could harm us and our operating
results.
Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some of the things that
could have this effect are:
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Level
of government involvement in the
economy;
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Control
of foreign exchange;
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Methods
of allocating resources;
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Balance
of payments position;
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International
trade restrictions; and
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International
conflict.
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The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways.
For example, state-owned enterprises still constitute a large portion of the
Chinese economy, and weak corporate governance and the lack of a flexible
currency exchange policy still prevail in China. As a result of these
differences, we may not develop in the same way or at the same rate as might be
expected if the Chinese economy were similar to those of the OECD member
countries.
The PRC
government has exercised, and continues to exercise, substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property, and other
matters. We believe that our operations in China are in material compliance
with all applicable legal and regulatory requirements. However, the central or
local governments of the jurisdictions in which we operate may impose new,
stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations. Accordingly, government
actions in the future, including any decision not to continue to support recent
economic reforms and to return to a more centrally planned economy or regional
or local variations in the implementation of economic policies, could have a
significant effect on economic conditions in China or particular regions
thereof.
Future
inflation in China may inhibit our ability to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 5.9% and as low as (0.8)%. These factors have led
to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for
our products and our company.
You
may have difficulty enforcing judgments against us.
Our
assets are located, and our operations are conducted, in the PRC. In addition,
all of our directors and officers are nationals and residents of the PRC and a
substantial portion of their assets is located outside the United States. As a
result, it may be difficult for you to effect service of process within the
United States upon these persons. In addition, there is uncertainty as to
whether the courts of the PRC would recognize or enforce judgments of U.S.
courts because China does not have any treaties or other arrangements that
provide for the reciprocal recognition and enforcement of foreign judgments with
the United States. In addition, according to the PRC Civil Procedures Law,
courts in the PRC will not enforce a foreign judgment against us or our
directors and officers if they decide that the judgment violates basic
principles of PRC law or national sovereignty, security, or the public
interest.
Most
of our revenues are denominated in Renminbi, which is not freely convertible for
capital account transactions and may be subject to exchange rate
volatility.
We are
exposed to the risks associated with foreign exchange controls and restrictions
in China, as our revenues are primarily denominated in Renminbi, which is
currently not freely exchangeable. The PRC government imposes control over the
convertibility between Renminbi and foreign currencies. Under the PRC foreign
exchange regulations, payments for “current account” transactions, including
remittance of foreign currencies for payment of dividends, profit distributions,
interest and operation-related expenditures, may be made without prior approval
but are subject to procedural requirements. Strict foreign exchange control
continues to apply to “capital account” transactions, such as direct foreign
investment and foreign currency loans. These capital account transactions must
be approved by, or registered with, the PRC State Administration of Foreign
Exchange, or SAFE. Further, capital contribution by an offshore shareholder
to its PRC subsidiaries may require approval by the Ministry of Commerce in
China or its local counterparts. We cannot assure you that we are able to meet
all of our foreign currency obligations to remit profits out of China or to fund
operations in China.
On August
29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues
concerning the Improvement of the Administration of Payment and Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 142, to
regulate the conversion by foreign invested enterprises, or FIEs, of foreign
currency into Renminbi by restricting how the converted Renminbi may be used.
Circular 142 requires that Renminbi converted from the foreign
currency-dominated capital of a FIE may be used only for purposes within
the business scope approved by the applicable government authority and may not
be used for equity investments within the PRC unless specifically provided. In
addition, SAFE strengthened its oversight over the flow and use of Renminbi
funds converted from the foreign currency-dominated capital of a FIE. The
use of such Renminbi may not be changed without approval from SAFE, and may not
be used to repay Renminbi loans if the proceeds of such loans have not yet been
used. Compliance with Circular 142 may delay or inhibit our ability to complete
such transactions, which could affect our ability to expand our
business.
Fluctuation
in the value of the Renminbi and of the U.S. dollar may have a material adverse
effect on investments in our ordinary shares.
Any
significant revaluation of the Renminbi may have a material adverse effect on
the U.S. dollar equivalent amount of our revenues and financial condition as
well as on the value of, and any dividends payable on, our ordinary shares in
foreign currency terms. For instance, a decrease in the value of Renminbi
against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our
financial results, the value of your investment in our ordinary shares and the
dividends we may pay in the future, if any, all of which may have a material
adverse effect on the prices of our common shares. A significant portion of our
revenues are denominated in Renminbi. Any further appreciation of Renminbi
against U.S. dollars may result in significant exchange losses.
Prior to
1994, the Renminbi experienced a significant net devaluation against most major
currencies, and there was significant volatility in the exchange rate during
certain periods. Upon the execution of the unitary managed floating rate system
in 1994, the Renminbi was devalued by 50% against the U.S. dollar. Since 1994,
the Renminbi to U.S. dollar exchange rate has largely stabilized. On July 21,
2005, the People’s Bank of China announced that the exchange rate of U.S. dollar
to Renminbi would be adjusted from $1 to RMB8.27 to $1 to RMB8.11, and it ceased
to peg the Renminbi to the U.S. dollar. Instead, the Renminbi would be pegged to
a basket of currencies, whose components would be adjusted based on changes in
market supply and demand under a set of systematic principles. On September 23,
2005, the PRC government widened the daily trading band for Renminbi against
non-U.S. dollar currencies from 1.5% to 3.0% to improve the flexibility of the
new foreign exchange system. Since the adoption of these measures, the value of
Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow
ranges, but overall has further strengthened against the U.S. dollar. In June
2010, the Chinese government announced its intention to allow the Renminbi to
fluctuate within the June 2005 parameters. There remains significant
international pressure on the PRC government to further liberalize its currency
policy, which could result in a further and more significant appreciation in the
value of the Renminbi against the U.S. dollar. The Renminbi may be revalued
further against the U.S. dollar or other currencies, or may be permitted to
enter into a full or limited free float, which may result in an appreciation or
depreciation in the value of the Renminbi against the U.S. dollar or other
currencies.
China’s
legal system is different from those in some other countries.
China is
a civil law jurisdiction. Under the civil law system, prior court decisions may
be cited as persuasive authority but do not have binding precedential effect.
Although progress has been made in the promulgation of laws and regulations
dealing with economic matters, such as corporate organization and governance,
foreign investment, commerce, taxation and trade, China’s legal system remains
less developed than the legal systems in many other countries. Furthermore,
because many laws, regulations and legal requirements have been recently
adopted, their interpretation and enforcement by the courts and administrative
agencies may involve uncertainties. Sometimes, different government departments
may have different interpretations. Licenses and permits issued or granted by
one government authority may be revoked by a higher government authority at a
later time. Government authorities may decline to take action against unlicensed
operators which may work to the disadvantage of licensed operators, including
us. The PRC legal system is based in part on government policies and internal
rules that may have a retroactive effect. We may not be aware of our violation
of these policies and rules until some time after the violation. Changes in
China’s legal and regulatory framework, the promulgation of new laws and
possible conflicts between national and provincial regulations could adversely
affect our financial condition and results of operations. In addition, any
litigation in China may result in substantial costs and diversion of resources
and management attention.
On August
8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and
Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A
Rule, which became effective on September 8, 2006. According to the 2006 M&A
Rule, a “round-trip investment” is defined as having taken place when a PRC
business that is owned by PRC individuals is sold to a non-PRC entity that is
established or controlled, directly or indirectly, by those same PRC
individuals. Under the 2006 M&A Rules, any round-trip investment must be
approved by MOFCOM, and any indirect arrangement or series of arrangements which
achieves the same end result without the approval of MOFCOM is a violation of
PRC law.
The
direct shareholders of Ossen Materials, Ossen Asia and Topchina, are British
Virgin Islands limited liability companies that were owned by Ossen Materials
Group, a British Virgin Islands limited liability company that was controlled by
Dr. Tang prior to our business combination. Topchina also holds
shares in Ossen Jiujiang. We have been advised that we are not
required to obtain MOFCOM approval because the relevant transactions occurred
prior to the effectiveness of the 2006 M&A Rule.
However,
the PRC regulatory authorities may take the view that the acquisition of shares
in our PRC operating subsidiaries by Ossen Asia and Topchina, and the share
exchange between Ultra Glory and Ossen Materials Group, are part of an overall
series of arrangements which constitute a round-trip investment. If the PRC
regulatory authorities take this view, we cannot assure you we may be able to
obtain the approval required from MOFCOM. It is also possible that the PRC
regulatory authorities could invalidate our acquisition and ownership of our
Chinese subsidiaries, and that these transactions require the prior approval of
the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is
obtained.
If these
regulatory actions occur, we cannot assure you that we will be able to
re-establish control of our Chinese subsidiaries’ business operations, that any
such contractual arrangements will be protected by PRC law, or that we would
receive as complete or effective an economic benefit and control of our
Chinese subsidiaries’ business as if we had direct ownership of our Chinese
subsidiaries.
All
employee participants in our share incentive plans who are PRC citizens may be
required to register with the SAFE. We may also face regulatory uncertainties
that could restrict our ability to adopt additional option plans for our
directors and employees under PRC law.
In
December 2006, the People’s Bank of China promulgated the Administrative
Measures for Individual Foreign Exchange, which set forth the respective
requirements for foreign exchange transactions by PRC individuals under either
current account or the capital account. In January 2007, the SAFE issued the
Implementation Rules of the Administrative Measures for Individual Foreign
Exchange, which, among other things, specified approval requirements for certain
capital account transactions such as a PRC citizen’s participation in the
employee stock ownership plans or stock option plans of an overseas
publicly-listed company. On March 28, 2007, the SAFE promulgated the
Processing Guidance on Foreign Exchange Administration for Domestic Individuals
Participating in Employee Stock Ownership Plans or Stock Option Plans of
Overseas-Listed Companies, or the Stock Option Rule. Under the Stock Option
Rule, PRC citizens who are granted stock options by an overseas publicly-listed
company are required, through a qualified PRC domestic agent or PRC subsidiary
of such overseas publicly-listed company, to register with the SAFE and complete
certain other procedures.
We and
our PRC citizen employees participating in our stock incentive plan will be
subject to the Stock Option Rule after this offering. Failure to comply with the
Stock Option Rule and other relevant rules will subject us or our PRC citizen
employees participating in our stock incentive plan to fines and other legal or
administrative sanctions and impose restrictions on our execution of option
plans, including the grant of options under such plans to our employees, which
could adversely affect our business operations.
Under
the New Enterprise Income Tax Law, we may be classified as a “resident
enterprise” of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC shareholders.
China
passed a New Enterprise Income Tax Law, or the New EIT Law, which became
effective on January 1, 2008. Under the 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 enterprise for enterprise income tax purposes. The implementing rules of
the New EIT Law define de facto management as “substantial and overall
management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. In addition, a circular issued by
the State Administration of Taxation on April 22, 2009 clarified that dividends
and other income paid by such resident enterprises will be considered to be PRC
source income and subject to PRC withholding tax. This recent circular also
subjects such resident enterprises to various reporting requirements with the
PRC tax authorities.
Restrictions
under PRC law on our PRC subsidiaries' ability to pay dividends and make other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our business.
Our
revenues are generated by our PRC subsidiaries. However, PRC regulations
restrict the ability of our PRC subsidiaries to pay dividends and make other
payments to their offshore parent company. PRC legal restrictions permit
payments of dividends by our PRC subsidiaries only out of their accumulated
after-tax profits, if any, determined in accordance with PRC accounting
standards and regulations. Our PRC subsidiaries are also required under PRC laws
and regulations to allocate at least 10% of their annual after-tax profits
determined in accordance with PRC GAAP to a statutory general reserve fund until
the amounts in said fund reaches 50% of their registered capital. Allocations to
these statutory reserve funds can be used only for specific purposes and are not
transferable to us in the form of loans, advances, or cash dividends. Any
limitations on the ability of our PRC subsidiaries to transfer funds to us could
materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends and
otherwise fund and conduct our business.
Any
failure to comply with PRC environmental laws may require us to incur
significant costs.
We carry
on our business in an industry that is subject to PRC environmental protection
laws and regulations. These laws and regulations require enterprises
engaged in manufacturing and construction that may cause environmental waste to
adopt effective measures to control such waste. In addition, such
enterprises are required to pay fines, or to cease operations entirely under
extreme circumstances, should they discharge
waste substances. The Chinese government may also change the
existing laws or regulations or impose additional or stricter laws or
regulations, compliance with which may cause us to incur significant capital
expenditures, which we may be unable to pass on to our customers through higher
prices for our products.
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from making prohibited payments to foreign officials
for the purpose of obtaining or retaining business. Corruption,
extortion, bribery, pay-offs, theft and other fraudulent practices occur from
time to time in mainland China. If any of our non-U.S. listed
competitors that are not subject to the Foreign Corrupt Practices Act engage in
these practices, they may receive preferential treatment and secure business
from government officials in a way that is unavailable to
us. Furthermore, although we inform our personnel that such practices
are illegal, we cannot assure you that our employees or other agents will not
engage in illegal conduct for which we might be held responsible under U.S.
law. If our employees or other agents are found to have engaged in
such practices, we could suffer severe penalties.
Because
our funds are held in banks that do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue our
business operations.
Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. As a result, in the event of a bank failure, we may not have access
to funds on deposit. Depending upon the amount of money we maintain in a bank
that fails, our inability to have access to our cash could impair our
operations, and, if we are not able to access funds to pay our suppliers,
employees and other creditors, we may be unable to continue our business
operations.
If
relations between the United States and China worsen, investors may be unwilling
to hold or buy our ordinary shares and our share price may
decrease.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our ordinary
shares.
Risks
Related to Our ADSs and This Offering
The
market price for our ADSs may be volatile.
The
market price for our ADSs is likely to be highly volatile and subject to wide
fluctuations in response to various factors, including the
following:
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actual
or anticipated fluctuations in our quarterly operating results and
revisions to our expected results;
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changes
in financial estimates by securities research
analysts;
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conditions
in the markets for our products;
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changes
in the economic performance or market valuations of companies specializing
in our industry or our customers or their
industries;
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announcements
by us or our competitors of new products, acquisitions, strategic
relationships, joint ventures or capital
commitments;
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addition
or departure of our senior management and key
personnel;
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fluctuations
of exchange rates between the Renminbi and the U.S.
dollar;
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litigation
related to our intellectual
property;
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release
or expiry of transfer restrictions on our outstanding ordinary shares;
and
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sales
or perceived potential sales of our
ADSs.
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In
addition, the securities market has from time to time, and to an even greater
degree since the last quarter of 2007, experienced significant price and volume
fluctuations that are not related to the operating performance of particular
companies. These market fluctuations may also have a material adverse effect on
the market price of our ADSs. Furthermore, in the past, following
periods of volatility in the market price of a public company’s securities,
shareholders have frequently instituted securities class action litigation
against that company. Litigation of this kind could result in substantial costs
and a diversion of our management’s attention and resources.
The
sale or availability for sale of substantial amounts of our ADSs could adversely
affect their market price.
Sales of
substantial amounts of our ADSs in the public market after the completion of
this offering, or the perception that these sales could occur, could adversely
affect the market price of our ADSs and could materially impair our future
ability to raise capital through offerings of our ADSs.
Your
ability to bring an action against us or against our directors and executive
officers, or to enforce a judgment against us or them, will be
limited.
We are
not incorporated in the United States. We conduct our business outside the
United States, and substantially all of our assets are located outside the
United States. Most of our directors and executive officers are non-U.S.
citizens and residents, and substantially all of the assets of those persons are
located outside the United States. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in
the United States in the event that you believe that your rights have been
infringed under U.S. securities laws or otherwise. Even if you are successful in
bringing an action of this kind, the laws of the British Virgin Islands or the
PRC may render you unable to enforce a judgment against our assets or the assets
of our directors and executive officers. For more information regarding the
relevant laws of the British Virgin Islands and the PRC, see “Enforceability of
Civil Liabilities.”
We
may not pay any dividends on our shares.
Under
British Virgin Islands law, we may pay dividends if the directors declare that
the company is able to satisfy the provisions of Section 57 of the BVI
Act. Pursuant to this provision, the company, immediately after the
distribution, must satisfy the solvency test, in so far as its assets exceeds
its liabilities, and the company must be able to pay its debts as they become
due. Our ability to pay dividends will therefore depend on our ability to
generate sufficient profits. Even if we are able to pay dividends, we cannot
give any assurance that we will declare dividends of any amounts, at any rate or
at all in the future. We have not paid any dividends in the past. Future
dividends, if any, will be at the discretion of our board of directors, subject
to the approval of our shareholders, and will depend upon our results of
operations, our cash flows, our financial condition, the payment of our
subsidiaries of cash dividends to us, our capital needs, future prospects and
other factors that our directors may deem appropriate. We currently
intend to retain most, if not all, of our available funds and any future
earnings to operate and expand our business.
As
the public offering price is substantially higher than the pro forma net
tangible book value per share, you will incur immediate and substantial
dilution.
If you
purchase ADSs in this offering, you will pay more for your ADSs than the amount
paid by existing shareholders for their ordinary shares on a per ADS basis. As a
result, you will experience immediate and substantial dilution of approximately
$2.28 per ADS, representing the difference between our pro forma net tangible
book value per ADS as of June 30, 2010, after giving effect to this offering and
the public offering price of $4.50 per ADS. See “Dilution” for a more
complete description of how the value of your investment in our ADSs will be
diluted upon the completion of this offering.
We
may use the net proceeds in ways with which you may not agree.
We intend
to use the net proceeds from this offering to increase our production
capacity. However, our management will have considerable discretion
in the application of the proceeds received by us. You will not have the
opportunity, as part of your investment decision, to assess whether the proceeds
are being used appropriately. You must rely on the judgment of our management
regarding the application of the net proceeds of this offering. The net proceeds
may be used for corporate purposes that do not improve our profitability or
increase our ADS price. The net proceeds from this offering may also be placed
in investments that do not produce income or lose value.
You
may not have the same voting rights as the holders of our ordinary shares and
may not receive voting materials in time to be able to exercise your right to
vote.
Except as
described in this prospectus and in the deposit agreement, holders of our ADSs
will not be able to exercise voting rights attaching to the shares represented
by our ADSs on an individual basis. Holders of our ADSs will appoint the
depositary or its nominee as their representative to exercise the voting rights
attached to the ordinary shares represented by the ADSs. You may not receive
voting materials in time to instruct the depositary to vote, and it is possible
that you, or persons who hold their ADSs through brokers, dealers or other third
parties, will not have the opportunity to exercise your right to
vote.
Your
right to participate in any rights offering may be limited, which may cause
dilution to your holdings, and you may not receive cash dividends if it is
impractical to make them available to you.
We may
from time to time distribute rights to our shareholders, including rights to
acquire our securities. However, we cannot make rights available to you in the
United States unless we register the rights, and the securities to which the
rights relate, under the Securities Act, or unless an exemption from
registration is available. Under the deposit agreement, the depositary will not
make rights available to you unless both the rights and the underlying
securities to be distributed to ADS holders are either registered under the
Securities Act or exempt from registration. We are under no obligation to file a
registration statement with respect to any such rights or securities or to
endeavor to cause such a registration statement to be declared effective and we
may not be able to establish a necessary exemption from registration under the
Securities Act. Accordingly, you may be unable to participate in our rights
offerings and may experience dilution in your holdings as a result.
The
depositary of our ADSs has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on our ordinary shares or other
deposited securities after deducting its fees and expenses. You will receive
these distributions in proportion to the number of ordinary shares your ADSs
represent. However, the depositary may, at its discretion, decide that it is
inequitable or impractical to make a distribution available to holders of ADSs.
For example, the depositary may determine that it is not practicable to
distribute certain property through the mail, or that the value of certain
distributions may be less than the cost of mailing them. In these cases, the
depositary may decide not to distribute such property to you.
You
may be subject to limitations on transfer of your ADSs.
Your ADSs
are transferable on the books of the depositary. However, the depositary may
close its transfer books at any time or from time to time when it deems
expedient in connection with the performance of its duties. In addition, the
depositary may refuse to deliver, transfer or register transfers of ADSs
generally when our books or the books of the depositary are closed, or at any
time if we or the depositary deems it advisable to do so because of any
requirement of law or of any government or governmental body, or under any
provision of the deposit agreement, or for any other reason.
There
has been no public market for our ADSs prior to this offering, and you may not
be able to resell our ADSs at or above the price you paid, or at
all.
Prior to
this initial public offering, there has been no public market for our ADSs. We
expect our ADSs to be approved for listing on the Nasdaq Global Market. If an
active trading market for our ADSs does not develop after this offering, the
market price and liquidity of our ADSs will be materially and adversely affected
and you may not be able to resell our ADSs at or above the price you paid, or at
all. The initial public offering price for our ADSs will be determined by
negotiations between us and the underwriters and may bear no relationship to the
market price for our ADSs after this initial public offering. An active trading
market for our ADSs may not develop in a timely manner or at all, and the market
price of our ADSs may decline below the initial public offering price. If the
price at which our ADSs are traded after this offering declines below the
initial public offering price, you will experience a decrease in the value of
your ADSs regardless of our operating performance or prospects.
If
we are classified as a passive foreign investment company, our U.S. shareholders
may suffer adverse tax consequences.
Generally,
if for any taxable year, after applying certain look-through rules, 75% or more
of our gross income is passive income, or at least 50% of our assets (generally
based on average value determined on a quarterly basis) are held for the
production of, or produce, passive income, we may be characterized as a passive
foreign investment company, or PFIC, for U.S. federal income tax purposes. This
characterization could result in adverse U.S. tax consequences to our
shareholders who are U.S. taxpayers, including gain realized on the disposition
of our ADSs being treated as ordinary income rather than capital gain and in
punitive interest charges being applied to such sales proceeds. Rules similar to
those applicable to dispositions apply to amounts treated as “excess
distributions.”
We do not
believe that we will be a PFIC for our 2010 taxable year based upon our
estimates of income, the expected composition of our assets and the expected
value of our assets as determined based on our anticipated market capitalization
after this offering. However, because PFIC status is based on the composition of
our income and assets for the entire taxable year, it is not possible at this
time to determine whether we will become a PFIC for our 2010 taxable year until
after the close of the taxable year. Therefore, we may become a PFIC for our
2010 taxable year or in any future taxable year. U.S. shareholders should
consult with their own U.S. tax advisors with respect to the U.S. tax
consequences of investing in our ordinary shares if we were to become a PFIC.
See “Taxation — U.S. Federal Income Taxation — Tax Consequences if We Are a
Passive Foreign Investment Company.”
If
equity research analysts do not publish research or reports about our company or
if they issue unfavorable commentary or downgrade our ADSs, the price of our
ADSs could decline.
The
trading market for our ADSs will rely in part on the research and reports that
equity research analysts publish about us and our company. We do not control
these analysts. The price of our ADSs could decline if one or more equity
analysts downgrade our ordinary shares or if they issue other unfavorable
commentary, or cease publishing reports, about us or our company.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
We make
“forward-looking statements” in the “Summary,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Business” sections and elsewhere throughout this prospectus. Whenever you read
a statement that is not simply a statement of historical fact (such as when we
describe what we “believe,” “expect” or “anticipate” will occur, and other
similar statements), you must remember that our expectations may not be correct,
even though we believe that they are reasonable. We do not guarantee that the
transactions and events described in this prospectus will happen as described or
that they will happen at all. You should read this prospectus completely and
with the understanding that actual future results may be materially different
from what we expect. The forward-looking statements made in this prospectus
relate only to events as of the date on which the statements are made. Except
for events or circumstances which occur up to the date of our prospectus, we
undertake no obligation, beyond that required by law, to update any
forward-looking statement to reflect events or circumstances after the date on
which the statement is made in this prospectus, even though our situation will
change in the future. Forward-looking statements include statements
about:
|
·
|
our
ability to attract and retain
customers;
|
|
·
|
the
anticipated benefits and risks associated with our business strategy,
including those relating to our current and future product
offerings;
|
|
·
|
our
future operating results;
|
|
·
|
the
anticipated benefits and risks of our key strategic customer relationships
and strategic acquisitions, joint ventures and alliances;
and
|
|
·
|
the
anticipated size or trends of the markets in which we compete and the
anticipated competition in those
markets.
|
Whether
actual results will conform with our expectations and predictions is subject to
a number of risks and uncertainties, many of which are beyond our control, and
reflect future business decisions that are subject to change. Some of the
assumptions, future results and levels of performance expressed or implied in
the forward-looking statements we make inevitably will not materialize, and
unanticipated events may occur which will affect our results. The “Risk Factors”
section of this prospectus describes the principal contingencies and
uncertainties to which we believe we are subject, which include the following
risks:
|
·
|
Our
revenues are highly dependent on a limited number of
customers;
|
|
·
|
We
have ceased doing business with some international customers because of
anti-dumping duties;
|
|
·
|
We
expect to experience increased needs to finance our working capital
requirements;
|
|
·
|
We
may need to establish a more diverse supplier
network;
|
|
·
|
Our
revenues could decrease if steel prices
decline;
|
|
·
|
We
face intense competition;
|
|
·
|
We
may be unable to maintain sufficient levels of working
capital;
|
|
·
|
We
may be unable to protect our intellectual property;
and
|
|
·
|
Adverse
changes in the economy of China may affect our
business.
|
Except as
required by law, we undertake no obligation to publicly update any
forward-looking statements for any reason following the date of this prospectus
to conform these statements to actual results or to changes in our expectations
or to publicly release the result of any revisions to these forward-looking
statements which we may make to reflect events or circumstances after the date
of this prospectus or to reflect the occurrence of unanticipated
events.
USE
OF PROCEEDS
We
estimate that we will receive net proceeds of approximately $19.6 million from
this offering, or approximately $22.7 million assuming
the underwriters exercise their option to purchase additional ADSs in full,
after deducting estimated underwriting discounts, commissions and estimated
offering expenses payable by us.
We intend
to use an aggregate of approximately $22 million of the net proceeds from this
offering to increase our production capacity. Specifically, our plan
is to allocate:
|
·
|
$2
million toward the construction costs associated with the extension of our
Maanshan facility; and;
|
|
·
|
$20
million toward the purchase and installation of eight new production
lines, to be located in the extended facility, which will be used for the
production of approximately 30,000 tons annually of coated PC wires and PC
strands.
|
The
amounts and timing of these expenditures may vary depending on our ability to
expand our business, the amount of cash generated by our operations, competitive
and technological developments and the rate of growth, if any, of our business.
Accordingly, our management will have significant discretion in the allocation
of the net proceeds we will receive for this offering. Depending on future
events and other changes in the business climate, we may determine at a later
time to use the net proceeds for different purposes. Proceeds
from this offering above the amount needed for expansion, if any, would be used
for working capital. If we are unable to raise sufficient funds from this
offerings to pay for our anticipated expansion in full, we intend to use cash
from our operations or bank loans to complete the expansion.
Pending
the use of the net proceeds, we intend to invest the net proceeds in a variety
of capital preservation instruments, including short-term, investment-grade,
interest-bearing instruments.
DIVIDEND
POLICY
We do not
currently have any plans to pay any cash dividends in the foreseeable future on
our ordinary shares underlying the ADSs being sold in this offering. We
currently intend to retain most, if not all, of our available funds and any
future earnings to operate and expand our business.
We are a
holding company incorporated in the British Virgin Islands. Our revenues are
generated by our PRC subsidiaries. However, PRC regulations restrict the ability
of our PRC subsidiaries to pay dividends and make other payments to their
offshore parent company. PRC legal restrictions permit payments of dividends by
our PRC subsidiaries only out of their accumulated after-tax profits, if any,
determined in accordance with PRC accounting standards and regulations. Our PRC
subsidiaries are also required under PRC laws and regulations to allocate at
least 10% of their annual after-tax profits determined in accordance with PRC
GAAP to a statutory general reserve fund until the amounts in said fund reaches
50% of their registered capital. Allocations to these statutory reserve funds
can be used only for specific purposes and are not transferable to us in the
form of loans, advances, or cash dividends. The board of directors of each of
our PRC subsidiaries has the discretion to allocate a portion of its
after-tax profits to its staff welfare and bonus funds, which is likewise not
distributable to its equity owners except in the event of a liquidation of the
foreign-invested enterprise. If we decide to pay dividends in the
future, these restrictions may impede our ability to pay
dividends. In addition, if any of these Chinese entities incurs debt
on its own behalf in the future, the instruments governing the debt may restrict
its ability to pay dividends or make other distributions to us.
Our Board
of Directors has complete discretion on whether to pay
dividends. Even if our Board of Directors decides to pay dividends,
the form, frequency and amount will depend upon our future operations and
earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that our Board of Directors may deem
relevant. Any dividend we declare will be paid to the holders of our ADSs,
including the fees and expenses payable thereunder. Cash dividends on our
ordinary shares, if any, will be paid in U.S. dollars.
CAPITALIZATION
The
following table sets forth our capitalization as of June 30, 2010:
|
·
|
on
an actual basis; and
|
|
·
|
on
a pro forma as adjusted basis to give effect to the issuance and sale
of 5,000,000 of our ADSs by us in this offering, assuming an initial
public offering price of $4.50 per ADS, the midpoint of the estimated
range of the initial public offering price set forth on the cover page of
this prospectus, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us of approximately
$2,800,000, assuming that the underwriters do not exercise their
over-allotment option and there is no other change to the number of ADSs
sold by us as set forth on the cover page of this prospectus.
|
You
should read this table together with our financial statements and the related
notes appearing at the end of this prospectus and the “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” section of this
prospectus.
As of June 30, 2010
|
|
Actual
|
|
|
Pro forma as
adjusted
|
|
Cash:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,460,341
|
|
|
|
23,160,341
|
|
Restricted
cash (1)
|
|
|
12,149,706
|
|
|
|
12,149,706
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Notes
payable - bank acceptance notes (1)
|
|
|
22,030,961
|
|
|
|
22,030,961
|
|
Short-term
bank loans (2)
|
|
|
36,277,649
|
|
|
|
36,277,649
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Ordinary
shares
|
|
|
500
|
|
|
|
200,000
|
|
Additional
paid-in capital
|
|
|
- |
|
|
|
19,750,000
|
|
Accumulated
other comprehensive income
|
|
|
660,571
|
|
|
|
660,571
|
|
Statutory
reserve
|
|
|
2,049,085
|
|
|
|
2,049,085
|
|
Retained
earnings
|
|
|
19,219,153
|
|
|
|
18,969,653
|
|
Non-controlling
interest
|
|
|
6,903,107 |
|
|
|
6,903,107 |
|
Total
shareholders’ equity
|
|
$
|
28,832,416 |
|
|
|
48,532,416 |
|
(1) Restricted
cash represents amounts held by a bank as security for bank acceptance notes and
therefore is not available for our use until such time as the bank acceptance
notes have been fulfilled or expired, normally within a twelve month
period. All the notes payable are subject to bank charges of 0.05% of
the principal amount as commission on each loan transaction.
(2) Short-term
bank loans are obtained from local banks in China. All the short-term bank loans
are repayable within one year and are secured by property, plant and equipment
and land use rights owned by us, as well as by guarantees made by our
affiliates.
DILUTION
If you
invest in our ADSs, your interest will be diluted to the extent of the
difference between the initial public offering price per ADS and our net
tangible book value per ADS after this offering. Dilution results from the fact
that the initial public offering price per ADS is substantially in excess of the
book value per ADS attributable to the existing shareholders for our presently
outstanding ADSs.
Our net
tangible book value as of June 30, 2010 was $24.6 million, or $1.64 per ADS. Net
tangible book value represents the amount of our total consolidated tangible
assets, minus the amount of our total consolidated liabilities. Without taking
into account any other changes in such net tangible book value, other than to
give effect to the issuance and sale of 5,000,000 ADSs by us in this offering,
at the initial public offering price of $4.50 per ADS and after deduction of the
underwriting discounts and commissions and estimated offering expenses of this
offering payable by us, our adjusted net tangible book value as of June 30, 2010
would have increased to $44.3 million, or $2.22 per ADS. This represents an
immediate increase in net tangible book value of $0.57 per ADS to our existing
shareholders and an immediate dilution in net tangible book value of $2.28 per
ADS to investors purchasing shares in this offering. In the event
that the closing date of this offering deviates from that assumed in this
prospectus, we will include the adjusted ADS number in our final prospectus
relating to this offering. The following table illustrates such per share
dilution:
Assumed
initial public offering price per ADS
|
|
$
|
4.50
|
|
Net
tangible book value per ADS as of June 30, 2010
|
|
$
|
1.64
|
|
Increase
in adjusted net tangible book value per ADS attributable to
this offering
|
|
$
|
0.57 |
|
Pro
forma net tangible book value per ADS after this offering
|
|
$
|
2.22 |
|
Dilution
in net tangible book value per ADS after this offering
|
|
$
|
2.28 |
|
The
following table summarizes, on a pro forma basis as of June 30, 2010, the
differences between existing shareholders and the new investors with respect to
the number of ADSs purchased from us, the total consideration paid and the
average price per ADS paid before deducting the underwriting discounts and
commissions and estimated offering expenses. The total number of ADSs does not
include ADSs issuable upon the exercise of the over-allotment option granted to
the underwriters.
|
|
ADSs Purchased
|
|
|
Total Consideration
|
|
|
Average
Price
Per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
ADS
|
|
Existing
shareholders
|
|
|
15,000,000
|
|
|
|
75
|
%
|
|
$
|
150,000
|
|
|
|
0.76
|
%
|
|
$
|
0.01
|
|
New
investors
|
|
|
5,000,000
|
|
|
|
25
|
%
|
|
$
|
19,700,000
|
|
|
|
99.24
|
%
|
|
$
|
3.94
|
|
Total
|
|
|
20,000,000
|
|
|
|
100
|
%
|
|
$
|
19,850,000
|
|
|
|
100
|
%
|
|
$
|
0.99
|
|
EXCHANGE
RATE INFORMATION
The
financial records of our consolidated entities are maintained in RMB, which is
our functional currency. Capital accounts of our consolidated
financial statements are translated into U.S. dollars from RMB at their
historical exchange rates when the capital transactions occurred. Assets and
liabilities are translated at the exchange rate as of the balance sheet date.
Income and expenditures are translated at the average exchange rate of the
relevant period. RMB is not freely convertible into foreign currency and all
foreign exchange transactions must take place through authorized institutions.
No representation is made that the RMB amounts could have been, or could be,
converted into U.S. dollars at the rates used in translation.
The
exchange rates used to translate amounts in RMB and HK$ into U.S. Dollars for
the purposes of preparing the consolidated financial statements are as
follows:
|
|
Six months ended June 30,
|
|
Year ended September 30,
|
|
|
2010
|
|
2009
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Balance
sheet items,
|
|
RMB6.8086=$1
|
|
RMB6.8448=$1
|
|
RMB6.8290=$1
|
|
RMB6.8183=$1
|
except
for equity accounts
|
|
HK$7.7335=$1
|
|
|
|
HK$7.7805=$1
|
|
|
Items
in statements of
|
|
RMB6.8347=$1
|
|
RMB6.8432=$1
|
|
RMB6.83055=$1
|
|
RMB7.1643=$1
|
income
and cash flows
|
|
HK$7.7275=$1
|
|
|
|
HK$7.7890=$1
|
|
|
There is
no assurance that the RMB and HK$ amounts could have been, or could be,
converted into U.S. dollars at the above rates.
ENFORCEABILITY
OF CIVIL LIABILITIES
Ossen
Innovation Co., Ltd. is a British Virgin Islands company and most of its
executive officers and directors are located outside of the United States. In
addition, a substantial portion of its assets and the assets of its directors
and officers are located outside of the United States. As a result, you may have
difficulty serving legal process within the United States upon Ossen Innovation
Co., Ltd. or any of these persons. You may also have difficulty enforcing, both
in and outside the United States, judgments you may obtain in U.S. courts
against Ossen Innovation Co., Ltd. or these persons in any action, including
actions based upon the civil liability provisions of U.S. federal or state
securities laws.
Furthermore,
there is substantial doubt that the courts of the British Virgin Islands or the
People’s Republic of China would enter judgments in original actions brought in
those courts predicated on U.S. federal or state securities laws.
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The
following selected financial information should be read in connection with, and
is qualified by reference to, our consolidated financial statements and their
related notes and the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” each of which is included
elsewhere in this registration statement. The audited consolidated
statements of operations and comprehensive income data for the fiscal years
ended December 31, 2008 and 2009 and the unaudited consolidated statements of
operations and comprehensive income data for the six months ended June 30, 2009
and 2010 and the audited balance sheets data as of December 31, 2008 and 2009
and the unaudited balance sheets data as of June 30, 2009 and 2010 are derived
from the consolidated financial statements included elsewhere in this
registration statement. The consolidated statements of operations and
comprehensive income data for the fiscal years ended December 31, 2005, 2006 and
2007 and the balance sheets data as of December 31, 2005, 2006 and 2007 have
been derived from unaudited financial statements that are not included in this
prospectus. Our historical results for any of these periods are not
necessarily indicative of results to be expected in any future
period.
|
|
Year
Ended December 31,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
(Audited)
|
|
|
2008
(Audited)
|
|
|
2007
(Unaudited)
|
|
|
2006
(Unaudited)
|
|
|
2005
(Unaudited)
|
|
|
2010
(Unaudited)
|
|
|
2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
101,087,796 |
|
|
$ |
82,742,310 |
|
|
$ |
71,909,873 |
|
|
$ |
59,547,454 |
|
|
$ |
17,195,347 |
|
|
$ |
58,708,775 |
|
|
$ |
40,416,407 |
|
Cost
of goods sold
|
|
|
87,659,925 |
|
|
|
70,532,733 |
|
|
|
63,340,890 |
|
|
|
56,853,946 |
|
|
|
15,216,951 |
|
|
|
47,101,721 |
|
|
|
35,741,095 |
|
Gross
profit
|
|
|
13,427,871 |
|
|
|
12,209,577 |
|
|
|
8,568,983 |
|
|
|
2,693,508 |
|
|
|
1,978,395 |
|
|
|
11,607,054 |
|
|
|
4,675,312 |
|
Selling
and distribution expenses
|
|
|
503,724 |
|
|
|
4,326,491 |
|
|
|
3,662,373 |
|
|
|
1,024,209 |
|
|
|
219,650 |
|
|
|
195,706 |
|
|
|
241,880 |
|
General
and administrative expenses
|
|
|
1,143,672 |
|
|
|
1,316,606 |
|
|
|
571,498 |
|
|
|
340,847 |
|
|
|
255,270 |
|
|
|
532,276 |
|
|
|
638,499 |
|
Total
Operating Expenses
|
|
|
1,647,396 |
|
|
|
5,643,097 |
|
|
|
4,288,796 |
|
|
|
1,410,056 |
|
|
|
501,920 |
|
|
|
727,982 |
|
|
|
880,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
11,780,475 |
|
|
|
6,566,480 |
|
|
|
4,280,187 |
|
|
|
1,283,451 |
|
|
|
1,476,475 |
|
|
|
10,879,072 |
|
|
|
3,794,933 |
|
Interest
expenses, net
|
|
|
(1,496,712 |
) |
|
|
(1,891,671 |
) |
|
|
(1,189,027 |
) |
|
|
(359,130 |
) |
|
|
(22,920 |
) |
|
|
(1,069,659 |
) |
|
|
(730,104 |
) |
Other
income, net
|
|
|
183,495 |
|
|
|
380,766 |
|
|
|
278,924 |
|
|
|
211,875 |
|
|
|
56,362 |
|
|
|
96,720 |
|
|
|
14,583 |
|
Income
before income taxes
|
|
|
10,467,258 |
|
|
|
5,055,575 |
|
|
|
3,370,084 |
|
|
|
1,136,196 |
|
|
|
1,509,917 |
|
|
|
9,906,133 |
|
|
|
3,079,412 |
|
Income
taxes
|
|
|
(740,053 |
) |
|
|
(291,520 |
) |
|
|
(233,674 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,370,598 |
) |
|
|
(348,394 |
) |
Net
income
|
|
|
9,727,205 |
|
|
|
4,764,055 |
|
|
|
3,136,410 |
|
|
|
1,136,196 |
|
|
|
1,509,917 |
|
|
|
8,535,535 |
|
|
|
2,731,018 |
|
Less:
Net Income Attributable
to non- Controlling
interest
|
|
|
1,714,670 |
|
|
|
809,437 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,430,029 |
|
|
|
484,515 |
|
Net
income attributable to controlling interest
|
|
|
8,012,535 |
|
|
|
3,954,618 |
|
|
|
3,136,410 |
|
|
|
1,136,196 |
|
|
|
1,509,917 |
|
|
|
7,105,506 |
|
|
|
2,246,503 |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain, net of tax
|
|
|
31,146 |
|
|
|
420,883 |
|
|
|
66,913 |
|
|
|
360,384 |
|
|
|
37,135 |
|
|
|
117,535 |
|
|
|
13,684 |
|
Total
Other comprehensive income, net of tax
|
|
|
31,146 |
|
|
|
420,883 |
|
|
|
66,913 |
|
|
|
360,384 |
|
|
|
37,135 |
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$ |
8,043,681 |
|
|
$ |
4,375,501 |
|
|
$ |
3,203,323 |
|
|
$ |
1,496,580 |
|
|
$ |
1,547,052 |
|
|
$ |
7,223,041 |
|
|
$ |
2,260,187 |
|
Balance Sheets Data (qat end of period)
|
|
December 31
|
|
|
June 30,
|
|
(in U.S. Dollars)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2010
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
and cash equivalents
|
|
$ |
8,409,467 |
|
|
$ |
3,761,315 |
|
|
$ |
6,735,616 |
|
|
$ |
7,828,750 |
|
|
$ |
3,120,317 |
|
|
$ |
3,460,341 |
|
Total
current assets
|
|
|
68,374,508 |
|
|
|
47,316,208 |
|
|
|
35,162,129 |
|
|
|
18,712,764 |
|
|
|
9,901,704 |
|
|
|
91,415,426 |
|
Total
non-current assets
|
|
|
17,343,079 |
|
|
|
18,580,174 |
|
|
|
17,464,579 |
|
|
|
12,733,621 |
|
|
|
9,898,165 |
|
|
|
16,712,373 |
|
Total
assets
|
|
|
85,717,587 |
|
|
|
65,896,382 |
|
|
|
52,626,708 |
|
|
|
31,436,385 |
|
|
|
19,799,869 |
|
|
|
108,127,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
65,538,241 |
|
|
|
55,475,387 |
|
|
|
47,390,651 |
|
|
|
18,297,807 |
|
|
|
8,317,707 |
|
|
|
79,295,383 |
|
Total
shareholders’ equity
|
|
|
20,179,346 |
|
|
|
10,420,995 |
|
|
|
5,236,057 |
|
|
|
13,138,578 |
|
|
|
11,482,162 |
|
|
|
28,832,416 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
85,717,587 |
|
|
$ |
65,896,382 |
|
|
$ |
52,626,708 |
|
|
$ |
31,436,385 |
|
|
$ |
19,799,869 |
|
|
$ |
108,127,799 |
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following management’s discussion and analysis should be read in conjunction
with our consolidated financial statements and the notes thereto and the other
financial information appearing elsewhere in this prospectus. In
addition to historical information, the following discussion contains certain
forward-looking statements. These statements relate to our future
plans, objectives, expectations and intentions. These statements may
be identified by the use of words such as “may”, “will”, “could”, “expect”,
“anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, “project” and
similar terms or terminology, or the negative of such terms or other comparable
terminology. Although we believe the expectations expressed in these
forward-looking statements are based on reasonable assumptions within the bound
of our knowledge of our business, our actual results could differ materially
from those discussed in these statements. Factors that could
contribute to such differences include, but are not limited to, those discussed
in the “Risk Factors” section of this prospectus and our other filings with the
Securities and Exchange Commission. We undertake no obligation to
update publicly any forward-looking statements for any reason even if new
information becomes available or other events occur in the future.
Our
financial statements are prepared in U.S. dollars and in accordance with
accounting principles generally accepted in the United States. See “Exchange
Rate Information” above for information concerning the exchange rates at which
Renminbi have been translated into U.S. dollars at various pertinent dates and
for pertinent periods.
Overview
General
We
manufacture and sell an array of plain surface prestressed steel materials and
rare earth coated and zinc coated prestressed steel materials, which we believe
is the most comprehensive array among our competitors in China. Our
materials are used in the construction of bridges, highways and other
infrastructure projects in the PRC and internationally. Our
facilities are located in Maanshan City, Anhui Province and in Jiujiang City,
Jiangxi Province, in the People’s Republic of China. According to the
CASS report, we were among the top five PC material producers in the PRC as
measured by annual output from 2006 through 2008. According to the
PRC PC Strand Industry Investment and Market Operation Research Report, in 2008,
our products were ranked third in sales in the PRC for PC strands and wires, and
ranked first in export sales of these materials by Chinese prestressed steel
manufacturers. Historically, we and our customers have had a greater
than 90% success rate with respect to winning projects on which either we or our
customers have bid. Based on our extensive experience in the
industry, we believe that Ossen is one of the leading enterprises in the PRC in
the design, engineering, manufacture and sale of customized prestressed steel
materials used in the construction of bridges, highways, and other
infrastructure projects in China.
On July
7, 2010, Ultra Glory and its sole shareholder entered into a share exchange
agreement with Ossen Innovation Materials Group Co., Ltd., or Ossen Innovation
Group, a British Virgin Islands limited liability company organized on April 30,
2010 under the BVI Act and the shareholders of Ossen Innovation Group. Pursuant
to the share exchange agreement, Ultra Glory acquired from the shareholders of
Ossen Innovation Group all of the issued and outstanding shares of Ossen
Innovation Group, in exchange for an aggregate of 10,000,000 newly issued
ordinary shares issued by Ultra Glory to the shareholders of Ossen Innovation
Group. In addition, the sole shareholder of Ultra Glory sold all of
the 5,000,000 ordinary shares of Ultra Glory that were issued and outstanding
prior to the business combination, to the shareholders of Ossen Innovation Group
for cash, at a price of $0.03 per share. As a result, the individuals
and entities that owned shares of Ossen Innovation Group prior to the business
combination acquired 100% of the equity of Ultra Glory, and Ultra Glory acquired
100% of the equity of Ossen Innovation Group. Ossen Innovation Group
is now a wholly owned subsidiary of Ultra Glory. In conjunction with
the business combination, Ultra Glory filed an amended charter, pursuant to
which Ultra Glory changed its name to Ossen Innovation Co., Ltd, changed its
fiscal year end to December 31, changed the par value of its ordinary shares to
$0.01 per share and increased its authorized shares to
100,000,000. Upon the consummation of the business combination, we
ceased to be a shell company.
Important
Factors Affecting our Results of Operations and Existing Trends
International
and Domestic Markets
Our
results of operations depend in part on the proportion of international sales to
domestic sales that we attain during a particular financial reporting
period. Sales to international customers have historically generated
higher profit margins for us. In addition, we have historically
collected a significant percentage of revenues generated by international sales
by letter of credit, which enables us to convert accounts receivable into cash
more quickly. Our domestic customers generally pay approximately 40
days after receiving the materials at the construction site. In 2008,
we sold 37.6% of our products to international customers. However, in
2009 and during the six months ended June 30, 2010, we sold only 3.7% and 3.1%
respectively, of our products to international customers, as a result of the
global economic and financial crisis and the imposition of anti-dumping duties
by the U.S. and the European Union.
According
to the CASS report, bridge and other infrastructure construction is currently
experiencing significant growth in China, which trend is expected to continue
until 2020. Under existing PRC governmental policies, significant
investments are expected to be made during the next decade to construct more
than 200 new bridges over dozens of Chinese rivers, including the Yangtze River,
Yellow River, Songhua River, Jiangxi River, Xiang River, Han River, Minjiang
River and Pearl River. In addition, approximately 400 old bridges
will need to be reinforced or expanded during that period. In
addition, over the next decade, China is expected to build four cross-sea
bridges and tunnels, including the Bohai Bay Cross-Sea Bridge, the Hong
Kong-Zhuhai-Macao Cross-Sea Bridge, the Qiongzhou Strait Bridge and the Taiwan
Strait Tunnel.
We
generated approximately 3.1% of our revenue during the six months ended June 30,
2010 from sales to customers in Southeast Asia (including primarily Taiwan and
South Korea) and Australia, primarily for use in the construction of
bridges. Due to increased demand for our products in the PRC market
and these other markets, we do not intend to reestablish a presence in the
United States or the European Union at the levels we experienced in 2008 in the
near future. However, if opportunities arise in the U.S. or EU
markets or in other international markets for us to win bids on projects or to
reengage with former customers or establish relationships with new customers, we
would pursue such opportunities.
Product
Mix, Backlog and Industry Trends
Our
results of operations also depend on the product mix that we attain during a
particular financial reporting period. We produce and sell products
according to customer orders. The sales prices of our rare earth
coated products are higher than the prices of our plain surface, stabilized and
zinc coated products. Since the increase in our expenses in
developing and selling rare earth coated materials is less than the increased
sales prices, these products generate higher revenues.
Since
2007, the average gross margin of our plain surface and stabilized products has
been approximately 13% and the average gross margin of our coated products
(including rare earth coated and zinc coated products) has been approximately
23%. However, the gross margin on our coated products in particular
may decrease in the future in the event that more competitors that successfully
develop products of the same quality as our coated products at a lower cost
penetrate our market or if demand for our coated product weakens because the PRC
government scales back spending on infrastructure projects or for other reasons.
As an
overall percentage of sales, sales of our coated products increased from 4% in
2008 to 18% in 2009. For the first six months of 2010, sales of our coated
products comprised approximately 56% ($33.4 million of $58.7 million) of our
total revenue. Based on current and anticipated orders, we estimate that
sales of coated products for the year ending December 31, 2010 will comprise
approximately 49% of our total revenue. Based on filled and
anticipated orders, we believe that 95% of our coated product sales in the year
ending December 31, 2010 will be sales of rare earth coated products and the
remaining 5% will be zinc coated products. Our plan is to continue to
increase sales of our rare earth coated products to manufacturers of steel
cables for bridges and other infrastructure projects, both in the PRC and
internationally, in order to increase our revenues and profits.
Backlog
represents the value of our sales orders that we expect to fill over time. As of
November 15, 2010, our rare earth coated and zinc coated materials backlog
consisted of 13 bridge projects, located in the PRC, Taiwan and South Korea,
with contract values during 2011 of approximately
$32.3 million. The majority of these bridge projects will
utilize our rare earth coated materials. This figure represents
anticipated revenue from deliveries to be made by us in 2011 to fill sales
orders for these bridge projects. In addition, as of
November 15, 2010, our plain surface materials backlog consisted of 21
highway, railway and bridge restoration projects throughout the PRC, with
contract values during 2011 of approximately $51.1 million, representing
anticipated revenue from deliveries to be made by us in 2011 to fill sales
orders for these infrastructure projects. Cancellations of projects
or reductions of project scope in existing contracts could materially reduce our
backlog and our future revenues. Our failure to replace cancelled or
reduced backlog would have an adverse impact on future revenues.
One of
our affiliates, Ossen Shanghai, recently acquired Shanghai Pujiang Cable Co.,
Ltd. and its subsidiary Zhejiang Pujiang Cable Co., Ltd., or Shanghai Pujiang, a
downstream manufacturer of cables for use in bridge construction in the
PRC. In the bridge construction industry, cable manufacturers are
asked to bid on new projects. Manufacturers of prestressed materials,
such as us, who provide the raw materials for the bridge cables, either
participate indirectly in the bidding process through the cable manufacturers or
participate directly. Since we are now affiliated with one of the
leading cable manufacturers in the PRC, we anticipate that we will have more
opportunities to participate in bids for bridge projects. We expect
sales of our rare earth coated products and our profits to increase as a result
of this acquisition. See “Business – Our Growth Strategy –
Strengthening our relationships with key customers, and diversifying our
customer base” below.
Favorable
price and terms for supply of principal raw materials
Our
principal raw material is high carbon steel wire rods that we typically purchase
from multiple primary steel producers. The steel industry as a whole is cyclical
and, at times, pricing and availability of steel can be volatile due to numerous
factors beyond our control, including general domestic and international
economic conditions, labor costs, sales levels, competition, levels of
inventory held by us and other steel service centers, consolidation of steel
producers, higher raw material costs for steel producers, import duties and
tariffs and currency exchange rates. This volatility can significantly affect
the availability and cost of raw materials for us.
We, like
many other steel service centers, maintain substantial inventories of steel to
accommodate the short lead times and just-in-time delivery requirements of our
customers. Accordingly, we purchase steel in an effort to maintain our inventory
at levels that we believe to be appropriate to satisfy the anticipated needs of
our customers based upon historic buying practices, supply agreements with
customers and market conditions. Our commitments to purchase steel
are generally at prevailing market prices in effect at the time we place
our orders. We have no long-term, fixed-price steel purchase contracts. When
steel prices increase, as they did in 2008, competitive conditions will
influence how much of the price increase we can pass on to our customers. To the
extent we are unable to pass on future price increases in our raw materials to
our customers, the net sales and profitability of our business could be
adversely affected.
When
steel prices decline, as they did in the fourth quarter of 2008 and through the
first half of 2009, customer demands for lower prices and our competitors'
responses to those demands could result in lower sale prices and, consequently,
lower margins. Significant or rapid declines in steel prices or reductions in
sales volumes could result in us incurring inventory or goodwill impairment
charges. Changing steel prices therefore could significantly impact our net
sales, gross margins, operating income and net income. During the first
half of 2010, the impact of steel price fluctuation on our results of operations
was immaterial.
We
currently purchase almost all of our new materials from a very small number of
suppliers. Purchases from our five largest suppliers amounted to 86.5%,
89.5% and 100% of our total raw material purchases in 2008 and 2009 and during
the six months ended June 30, 2010, respectively. To date, we have been
able to obtain favorable pricing and delivery terms from these suppliers.
However, as we continue to increase the scale of our production, we may need to
further diversify our supplier network and, as a result, may not be able to
obtain favorable pricing and delivery terms from new suppliers.
We
acquired 30.2%, 22.2% and 4.2% of our raw materials from Shanghai ZFX in the
years ended December 31, 2008 and 2009 and the six months ended June 30, 2010,
respectively. Shanghai ZFX procures materials from the limited number of
high quality manufacturers and suppliers of our raw materials in the PRC.
However, since the introduction in 2009 of our rare earth coated materials,
which undergo a coating process that reduces the loss in strength and
performance that prestressed materials otherwise undergo during our
manufacturing processes, we have lowered the standards for strength and
performance requirements for our raw materials. As a result, we have been able
to expand our supplier base to include suppliers of products with lower levels
of strength and performance and have not relied as heavily on supplies from
Shanghai ZFX. As sales of our rare earth coated materials increase, we
expect that the percentage of purchases from Shanghai ZFX will continue to
decrease in the near future.
Production
capacity
In order
to capture additional market share for our products, we have expanded over the
past several years, and plan to continue to expand, our production
capacity. Increased capacity has had, and could continue to have, a
significant effect on our results of operations, by allowing us to produce and
sell more products to generate higher revenues and profits. We intend
to use the net proceeds from this offering to increase our production
capacity. Our growth strategy is to increase our production capacity
from 140,000 tons annually to 170,000 tons annually following the anticipated
construction of our new facility and the installation of eight production
lines. Our plan is to construct a new building and to install eight
new production lines which will be used for the production of approximately
30,000 tons annually of higher margin rare earth coated prestressed materials,
including rare earth coated PC wires and PC strands. See “Use of
Proceeds” above.
For 2011,
based on current orders and existing trends, we estimate that 90,000 tons of our
annual production capacity will be utilized for plain surface products and
stabilized products and 50,000 tons will be utilized for coated product, of
which approximately 90% will be rare earth coated products. Based on
existing and anticipated trends in our industry, we believe that utilization in
2012 will reflect 2011 utilization rates, and we anticipate adding 30,000 tons
of annual production capacity for rare earth coated products by that time as a
result of our planned construction.
Growth
of the Chinese economy
We
operate our manufacturing facilities in China and derive the majority of our
revenues from sales to customers in China. As such, economic conditions in China
affect virtually all aspects of our operations, including the demand for our
products, the availability and prices of our raw materials and our other
expenses. According to the National Bureau of Statistics of China, China has
experienced significant economic growth, achieving a Compound Annual Growth Rate
of 12.1% in gross domestic product from 1997 through 2007. Domestic demand for,
and consumption of, prestressed steel products has increased substantially as a
result of this growth. We anticipate that the demand for our materials in China
will continue to increase as the Chinese government carries out its stimulus
plan and other plans to further develop the transportation infrastructure in the
PRC. However, any adverse changes in economic conditions or regulatory
environment in China may have a material adverse effect on our future
performances.
Level
of income tax and preferential tax treatment
Our net
income is affected by the income tax that we pay and any preferential tax
treatment that we are able to receive. Our operating subsidiaries are
subject to the PRC enterprise income tax, or EIT. According to the
relevant laws and regulations in the PRC, foreign invested enterprises
established prior to January 1, 2008 are entitled to full exemption from income
tax for two years beginning with the first year in which such enterprise is
profitable and a 50% income tax reduction for the subsequent three years.
Ossen Materials was entitled to an EIT exemption during the two years ended
December 31, 2006 and was subject to a 50% income tax reduction during the three
years ended December 31, 2009. Ossen Jiujiang was entitled to the EIT
exemption during the two years ended December 31, 2008, was subject to a 50%
income tax reduction during the year ended December 31, 2009 and will be subject
to a 50% income tax reduction during the period from January 1, 2010 to December
31, 2011. Our income taxes increased from $0.7 million during the year
ended December 31, 2009 to $1.4 million during the six months ended June
30, 2010 as a result of the expiration of the tax reduction to which Ossen
Materials was entitled to in 2009. Ossen Materials is subject to a 15% tax
rate through 2011 as the result of its being designated a high-tech enterprise,
and Ossen Jiujiang will be subject to a 15% tax rate through 2012 as a result of
its being designated a high-tech enterprise. As our income tax obligations
increase over time, our net income will be affected.
Costs
of being a public company
Prior to
the business combination, Ossen did not operate as a public company. Ossen
expects that compliance with its obligations as a public company will require
significant management time and continued increases in general administrative
expenses, including insurance, legal and financial compliance
costs.
Foreign
currency translation
Our
financial statements are expressed in U.S. dollars but the functional
currency of our operating subsidiaries is RMB. Our results of operations are
translated at average exchange rates during the relevant financial reporting
periods, assets and liabilities are translated at the unified exchange rate at
the end of these periods and equity is translated at historical exchange rates.
Adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive
income.
Description
of Selected Income Statement Items
Revenues. We generate
revenue from sales of our prestressed steel products, including plain surface
products and rare earth coated products.
Cost of goods sold.
Cost of goods sold consists of costs directly attributable to production,
including the cost of raw materials, salaries for staff engaged in production
activity, electricity, depreciation, packing materials, and related
expenses.
Selling and distribution
expenses. Selling and distribution expenses consist of sales
commissions, payroll, traveling expenses, transportation expenses and
advertising expenses. We pay our distribution customers a commission
ranging from 0.6% to 1.4% of invoiced amounts (including VAT) actually paid to
us.
General and administrative
expenses. General and administrative expenses consist primarily of
employee remuneration, payroll taxes and benefits, general office expenses and
depreciation. We expect administrative expenses to continue to increase as
we incur additional expenses related to costs of compliance with securities laws
and other regulations, including increased audit and legal fees and investor
relations expenses.
Interest expenses.
Interest expenses consist of interest expense on bank loans.
Other Income. Our other
income consisted of government grants and revenue from sales of scrap materials
in 2008 and 2009.
Income Taxes. The PRC
Enterprise Income Tax Law imposed a unified income tax rate of 33% prior to and
including 2007 and of 25% beginning in 2008 for enterprises registered in the
PRC. Both Ossen Materials and Ossen Jiujiang were designated by the local
tax authority as a foreign-invested enterprise engaged in manufacturing
activities. As a result, Ossen Materials was entitled to an EIT exemption
during the two years ended December 31, 2006 and was subject to a 50% income tax
reduction during the three years ended December 31, 2009. Ossen
Jiujiang was entitled to the EIT exemption during the two years ended December
31, 2008, was subject to 50% income tax reduction during the year ended December
31, 2009, and will be subject to 50% income tax reduction during the period from
January 1, 2010 to December 31, 2011.
Ossen
Materials and Ossen Jiujiang have been recognized by their respective local
government agencies as high-tech enterprises. As a result, our
subsidiaries will be subject to an income tax rate of 15% under relevant PRC
income tax laws. These adjusted income tax rates have been approved
through December 2011 for Ossen Materials and through 2012 for Ossen
Jiujiang.
As our
income tax obligations increase over time, our net income will be
affected.
The
following table sets forth the key components of our results of operations for
the periods indicated, in dollars and as a percentage of revenue.
|
|
(All amounts in U.S. dollars, except for percentages)
|
|
|
|
For Six Months Ended June 30,
|
|
|
For Year Ended December 31,
|
|
|
|
2010
|
|
|
% of
Revenue
|
|
|
2009
|
|
|
% of
Revenue
|
|
|
2009
|
|
|
% of
Revenue
|
|
|
2008
|
|
|
% of
Revenue
|
|
Revenues
|
|
$ |
58,708,775 |
|
|
|
100 |
% |
|
$ |
40,416,407 |
|
|
|
100 |
% |
|
$ |
101,087,796 |
|
|
|
100 |
% |
|
$ |
82,742,310 |
|
|
|
100 |
% |
Cost
of Goods Sold
|
|
|
47,101,721 |
|
|
|
80.2 |
% |
|
|
35,741,095 |
|
|
|
88 |
% |
|
|
87,659,925 |
|
|
|
86.7 |
% |
|
|
70,532,733 |
|
|
|
85.2 |
% |
Gross
profit
|
|
|
11,607,054 |
|
|
|
19.8 |
% |
|
|
4,675,312 |
|
|
|
11.6 |
% |
|
|
13,427,871 |
|
|
|
13.2 |
% |
|
|
12,209,577 |
|
|
|
14.8 |
% |
Selling
and distribution expenses
|
|
|
195,706 |
|
|
|
0.3 |
% |
|
|
241,880 |
|
|
|
0.6 |
% |
|
|
503,724 |
|
|
|
0.5 |
% |
|
|
4,326,491 |
|
|
|
5.2 |
% |
General
and administrative expenses
|
|
|
532,276 |
|
|
|
0.9 |
% |
|
|
638,499 |
|
|
|
1.6 |
% |
|
|
1,143,672 |
|
|
|
1.1 |
% |
|
|
1,316,606 |
|
|
|
1.6 |
% |
Total
operating expenses
|
|
|
727,982 |
|
|
|
1.2 |
% |
|
|
880,379 |
|
|
|
2.2 |
% |
|
|
1,647,396 |
|
|
|
1.6 |
% |
|
|
5,643,097 |
|
|
|
6.8 |
% |
Income
from operation
|
|
|
10,879,072 |
|
|
|
18.5 |
% |
|
|
3,794,933 |
|
|
|
9.4 |
% |
|
|
11,780,475 |
|
|
|
11.1 |
% |
|
|
6,566,480 |
|
|
|
7.9 |
% |
Interest
expenses, net
|
|
|
(1,069,659 |
) |
|
|
1.8 |
% |
|
|
(730,104 |
) |
|
|
1.8 |
% |
|
|
(1,496,712 |
) |
|
|
1.5 |
% |
|
|
(1,891,671 |
) |
|
|
2.3 |
% |
Other
income, net
|
|
|
96,720 |
|
|
|
0.2 |
% |
|
|
14,583 |
|
|
|
- |
|
|
|
183,495 |
|
|
|
0.2 |
% |
|
|
380,766 |
|
|
|
0.5 |
% |
Income
before income taxes
|
|
|
9,906,133 |
|
|
|
16.9 |
% |
|
|
3,079,412 |
|
|
|
7.6 |
% |
|
|
10,467,258 |
|
|
|
10.4 |
% |
|
|
5,055,575 |
|
|
|
6.1 |
% |
Income
Taxes
|
|
|
(1,370,598 |
) |
|
|
2.3 |
% |
|
|
(348,394 |
) |
|
|
0.9 |
% |
|
|
(740,053 |
) |
|
|
0.8 |
% |
|
|
(291,520 |
) |
|
|
0.4 |
% |
Net
Income
|
|
|
8,535,535 |
|
|
|
14.5 |
% |
|
|
2,731,018 |
|
|
|
6.8 |
% |
|
|
9,727,205 |
|
|
|
9.6 |
% |
|
|
4,764,055 |
|
|
|
5.7 |
% |
Less:
net income attributable to non-controlling interest
|
|
|
1,430,029 |
|
|
|
2.4 |
% |
|
|
484,515 |
|
|
|
1.2 |
% |
|
|
1,714,670 |
|
|
|
1.7 |
% |
|
|
809,437 |
|
|
|
1.0 |
% |
Net
income attributable to controlling interest
|
|
|
7,105,506 |
|
|
|
12.1 |
% |
|
|
2,246,503 |
|
|
|
5.6 |
% |
|
|
8,012,535 |
|
|
|
7.9 |
% |
|
|
3,954,618 |
|
|
|
4.7 |
% |
Other
comprehensive income-Foreign currency translation gain, net of
tax
|
|
|
117,535 |
|
|
|
0.2 |
% |
|
|
(13,684 |
) |
|
|
- |
|
|
|
31,146 |
|
|
|
- |
|
|
|
420,883 |
|
|
|
0.5 |
% |
Total
other comprehensive income, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
31,146 |
|
|
|
- |
|
|
|
420,883 |
|
|
|
0.5 |
% |
Comprehensive
Income
|
|
$ |
7,223,041 |
|
|
|
12.3 |
% |
|
$ |
2,260,187 |
|
|
|
5.6 |
% |
|
$ |
8,043,681 |
|
|
|
7.9 |
% |
|
$ |
4,375,501 |
|
|
|
5.3 |
% |
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net Revenues. During
the year ended December 31, 2009, we had revenues of approximately $101.1
million as compared to revenues of approximately $82.7 million during year ended
December 31, 2008, an increase of approximately $18.3 million, or
22.2%. The growth in our revenues during the year ended December 31,
2009 was attributable to a significant increase of volume sold during such
period as compared to the year ended December 31, 2008.
The
following table provides a breakdown of our revenues during the years ended
December 31, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain
surface PC strands
|
|
|
30,081,890 |
|
|
|
32 |
% |
|
|
47,842,855 |
|
|
|
60 |
% |
|
|
(37.1 |
)% |
Zinc
coated PC wires and PC
strands
|
|
|
2,225,114 |
|
|
|
2 |
% |
|
|
3,332,883 |
|
|
|
4 |
% |
|
|
(33.2 |
)% |
Stabilized
PC wires
|
|
|
52,179,268 |
|
|
|
51 |
% |
|
|
32,166,572 |
|
|
|
36 |
% |
|
|
62.2 |
% |
Rare
earth coated PC wires and PC
strands
|
|
|
16,601,524 |
|
|
|
15 |
% |
|
|
- |
|
|
|
- |
|
|
|
- |
|
The
reasons for the change in our product mix from 2008 to 2009, with sales of plain
surface products decreasing significantly and sales of products stabilized PC
wires increasing significantly, are twofold. One, as a result of an
overall decrease in demand in international markets for our products due to the
global financial and economic crisis and the anti-dumping duties imposed by the
U.S. and the European Union, we had to decrease our international sales, which
were comprised primarily of plain surface materials in 2008. Two, we
increased sales of our higher margin rare earth and zinc coated products and
stabilized PC wires, primarily in the domestic PRC market in 2009 to take
advantage of the growth and stimulus measures existing in the PRC.
Cost of Goods Sold.
Cost of goods sold was approximately $87.7 million during the year ended
December 31, 2009, as compared to approximately $70.5 million during the year
ended December 31, 2008, representing an increase of 24.3%, or approximately
$17.2 million. As a percentage of net sales, cost of sales increased from 85.2%
to 86.7% during the year ended December 31, 2009. This increase resulted
from the increase in purchases of zinc in order to produce greater quantities of
our coated materials, of which zinc is a crucial element.
Gross Profit and Gross
Margin. Our gross profit is equal to the difference between our
revenues and our cost of goods sold. Our gross profit increased 10.0% to
approximately $13.4 million during the year ended December 31, 2009, from
approximately $12.2 million for the same period in 2008. The increase was
primarily attributable to increased sales volume.
For the
years ended December 31, 2009 and 2008, our gross margin was 13.2% and 14.8%,
respectively. The reason for this decrease in gross margin is that we
decreased our international sales, which generally generate higher margins than
domestic sales, as a result of the global economic crisis and anti-dumping
duties imposed by the U.S. and the European Union.
General and Administrative Expenses.
General
and administrative expenses totaled approximately $1.1 million for the year
ended December 31, 2009, as compared to approximately $1.3 million for the year
ended December 31, 2008, representing a decrease of 13.1%. This decrease was
primarily attributable to costs incurred in connection with a potential
financing transaction in 2008.
Selling and Distribution
Expenses. Selling and distribution expenses totaled $0.5 million
for the year ended December 31, 2009, as compared to $4.3 million for the year
ended December 31, 2008, a decrease of 88.4%. This decrease was
attributable primarily to a significant decrease in our freight costs and other
costs related to international sales as a result of the significant decrease in
international sales in 2009.
Operating Income. As a result of the
foregoing, operating income for the year ended December 31, 2009 was
approximately $11.8 million, an increase of 78.8% as compared to approximately
$6.6 million for the same period in 2008. As a percentage of net sales,
operating income increased from 7.9% to 11.7% during the year ended December 31,
2009.
Other Income. Our other
income for the year ended December 31, 2009 totaled $0.2 million, compared to
other income of $0.4 million for the previous year, a decrease of 51.8%.
This decrease was attributable to the receipt of a government subsidy in 2008 in
recognition of our high level of exports, which grant was not made in
2009.
Income Taxes. We
incurred income tax expenses of $740,053 and $291,520 in fiscal years ended
December 31, 2009 and 2008, respectively.
Net Income. As a result of
the foregoing, our net income totaled approximately $9.7 million for the year
ended December 31, 2009, as compared to approximately $4.8 million for the year
ended December 31, 2008, an increase of 106%.
Net Income Attributable to
Non-controlling Interest. We own 81% of our operating
subsidiaries. Net income attributable to non-controlling interest
represents the net income attributable to the holders of the remaining
19%.
Foreign Currency Translation. Our financial
statements are expressed in U.S. dollars but the functional currency of our
operating subsidiary is RMB. Our results of operations are translated at average
exchange rates during the relevant financial reporting periods, assets and
liabilities are translated at the unified exchange rate at the end of these
periods and equity is translated at historical exchange rates. Adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive
income.
Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009
Net Revenues. During
the six months ended June 30, 2010, we had revenues of approximately $58.7
million as compared to revenues of approximately $40.4 million during the six
months ended June 30, 2009, an increase of approximately $18.3 million, or
45.3%. The growth in our revenues during the six months ended June
30, 2010 was attributable primarily to a significant increase of volume sold
during such period as compared to the six months ended June 30, 2009. In
addition, during the six months ended June 30, 2010, 53.5% of our revenue was
generated by sales of our newly developed rare earth coated products, whose
sales prices are higher than those of our other products and which are used
primarily in the construction of bridges.
The
following table provides a breakdown of our revenues by product type during the
six months ended June 30, 2010 and 2009, respectively:
|
|
Six months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain
surface PC strands
|
|
|
18,004,460 |
|
|
|
30.7 |
|
|
|
7,245,040 |
|
|
|
17.9 |
|
|
|
148.5 |
% |
Zinc
coated PC wires and PC
strands
|
|
|
1,516,857 |
|
|
|
2.6 |
|
|
|
978,756 |
|
|
|
2.4 |
|
|
|
55.0 |
% |
Stabilized
PC wires
|
|
|
7,261,189 |
|
|
|
12.4 |
|
|
|
32,192,611 |
|
|
|
79.7 |
|
|
|
(77.4 |
)% |
Rare
earth coated PC wires and PC
strands
|
|
|
31,926,269 |
|
|
|
54.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
The
reasons for the change in our product mix from 2009 to 2010, with sales of plain
surface PC strands increasing significantly, sales of stabilized PC wires
decreasing significantly and sales of other rare earth coated PC wires and PC
strands increasing significantly were as follows:
|
·
|
We
experienced increased demands for our plain surface PC strands for use in
highways, docks and other infrastructure projects in the PRC, resulting in
a 148.5% increase in sales of these products during the six months ended
June 30, 2010 as compared to the six months ended June 30, 2009. The
reason for this significant increase in demand is that the PRC Ministry of
Transportation’s implementation of the Eleventh Five-Year Plan is focused
in large part on the construction of highways, docks and other
infrastructure projects. Although we expect demand for these
products to remain high in the PRC in the near future, we do not expect to
continue to increase our revenues from sales of plain surface PC strands
at this rate because we intend to utilize a greater percentage of our
production capacity to manufacture rare earth coated PC wires and PC
strands to be used in the construction of bridges. Rare earth coated
materials generate higher profit margins, and demand for these products in
the PRC market is high as well.
|
|
·
|
We
generated over half of our revenue from sales of our rare earth coated
products during the six months ended June 30, 2010. Demand for our
rare earth coated PC wires and PC strands, which are new products that we
began selling in the second half of 2009, has been very high in the PRC,
and we expect this trend to continue in the near future. Our
customers that are in the bridge construction and restoration industry in
the PRC and overseas have reported that they prefer rare earth coated
products to zinc coated products because of the anti-corrosion and other
beneficial properties of the rare earth coated products, including their
long life span. In addition, because of the high strength of the
individual rare earth coated PC strands and wires, fewer wires and strands
are required for these projects, thereby decreasing the overall cost to
our customers. During the six months ended June 30, 2010, we entered
into 13 contracts to supply rare earth PC wires and PC strands to be used
in the construction of bridges in the PRC, Taiwan and South
Korea.
|
|
·
|
We
generated significantly lower levels of revenue from sales of our
stabilized PC wires, which are products that are developed during the
middle stages of our production process prior to coating, during the six
months ended June 30, 2010. Stabilized PC wires are lower margin
products compared to rare earth coated or zinc coated products.
During the first half of 2009, when we had to increase sales in the PRC in
response to anti-dumping regulations in the US and the EU, our revenue
stream was heavily dependent on these products, which were in demand due
to the limited number of supplies of the products in the PRC. Once
we initiated production of our rare earth coated materials during the
second half of 2009, we began producing rare earth coated materials in
place of stabilized PC wires, since the margins are higher. We
expect that revenue generated by sales of our rare earth coated products
will continue to increase, especially after we construct a new building
and install a new rare earth coated material production line, as we plan
to fill more orders for rare earth coated materials from the PRC and
international markets, where demand for use of these products in the
construction and restoration of bridges is expected to continue to grow in
the near future.
|
Cost of Goods Sold.
Cost of goods sold was approximately $47.1 million during the six months
ended June 30, 2010, as compared to approximately $35.7 million during the six
months ended June 30, 2009, representing an increase of 31.8%, or approximately
$11.4 million. As a percentage of net sales, cost of sales decreased from 88.4%
during the six months ended June 30, 2009 to 80.2% during the six months ended
June 30, 2010. This decrease resulted from the changes in our product mix
during the six months ended June 30, 2010 as compared to the six months ended
June 30, 2009. The cost of goods sold for our rare earth coated products,
including rare earth coated PC wires and strands, is proportionately lower than
the cost of goods sold of our plain surface products and stabilized
products.
Gross Profit and Gross
Margin. Our gross profit is equal to the difference between our
revenues and our cost of goods sold. Our gross profit increased 148.2% to
approximately $11.6 million during the six months ended June 30, 2010, from
approximately $4.7 million for the same period in 2009. For the six months
ended June 30, 2010 and 2009, our gross margin was 19.8% and 11.6%,
respectively. These increases were attributable to the increase in our
revenues and decrease in the proportion of our cost of goods sold, as explained
above.
General and Administrative Expenses.
General
and administrative expenses totaled approximately $0.5 million for the six
months ended June 30, 2010, as compared to approximately $0.6 million for the
six months ended June 30, 2009, representing a decrease of 16.6%. This decrease
was primarily attributable to the elimination of an allowance for bad debt
during the six months ended June 30, 2010.
Operating Income. As a result
of the foregoing, operating income for the six months ended June 30, 2010 was
approximately $10.9 million, an increase of 186.7% as compared to approximately
$3.8 million for the same period in 2009. As a percentage of net sales,
operating income increased from 9.4% during the six months ended June 30, 2009
to 18.5% during the six months ended June 30, 2010.
Income Taxes. We
incurred income tax expenses of $1,370,598 and $348,394 in the six months
ended June 30, 2010 and 2009, respectively. This increase was attributable
to an increase in our profits.
Net Income. As a result of
the foregoing, our net income totaled approximately $8.5 million for the six
months ended June 30, 2010, as compared to approximately $2.8 million for the
six months ended June 30, 2009, an increase of 212.5%. This increase was
attributable to an increase in our profits.
Net Income Attributable to
Non-controlling Interest. We own 81% of our operating
subsidiaries. Net income attributable to non-controlling interest
represents the net income attributable to the holders of the remaining
19%.
Foreign Currency Translation.
Our financial statements are expressed in U.S. dollars but the functional
currency of our operating subsidiary is RMB. Our results of operations are
translated at average exchange rates during the relevant financial reporting
periods, assets and liabilities are translated at the unified exchange rate at
the end of these periods and equity is translated at historical exchange rates.
Adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive
income.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. Our financial statements reflect the selection and
application of accounting policies, which require management to make significant
estimates and judgments. See Note 1 to our consolidated financial statements,
“Summary of Significant Accounting Policies.” We believe that the following
paragraphs reflect the most critical accounting policies that currently affect
our financial condition and results of operations.
Revenue
Recognition
Revenues
represent the invoiced value of goods sold recognized upon
delivery. Revenues are recognized when all of the following criteria
are met:
|
·
|
Persuasive
evidence of an arrangement exists;
|
|
·
|
Delivery
has occurred or services have been
rendered;
|
|
·
|
The
seller’s price to the buyer is fixed or determinable;
and
|
|
·
|
Collectability
is reasonable assured.
|
Accounts
Receivable
Accounts
receivable are carried at net realizable value. We review our accounts
receivable on a periodic basis and make general and specific allowances when
there is doubt as to the collectability of individual balances. In
evaluating the collectability of individual receivable balances, we consider
many factors, including the age of the balance, customer’s historical payment
history, its current credit-worthiness and current economic trends.
Accounts are written off after exhaustive efforts at collection. If
accounts receivable are to be provided for, or written off, they would be
recognized in the consolidated statement of operations within operating
expenses. The balance of allowance of doubtful accounts was $42,487 and
$35,782 at December 31, 2009 and 2008, respectively and $34,868 and $103,571 at
June 30, 2010 and 2009, respectively. In addition, we have not provided
for, or written off, accounts receivable for the years ended December 31, 2009
and 2008 or the six months ended June 30, 2010 and 2009. Among the
accounts receivable balance of $15,157,087, the aging of $10,583,532 was within
60 days, $4,372,855 was between 60-90 days and $243,188 was over 90 days.
The balance of accounts receivable was $15,157,087 at December 31, 2009,
$15,069,143 of which was subsequently collected.
Prepayments
Prepayments
represent cash paid in advance to suppliers for purchases of raw
materials. The balance of prepayments was $19,833,561 and $19,270,693 at
December 31, 2009 and 2008, respectively. Of the balance of $19,833,561 at
December 31, 2009, the aging of $19,787,733 was within 60 days, $2,218 was
between 60 and 90 days and $43,610 was over 90 days.
The
balance of prepayments was $17,942,685 and $19,833,561 at June 30, 2010 and
December 31, 2009, respectively. Of the balance of $17,942,685 at June 30,
2010, the aging of $8,428,002 was within 60 days, $4,686,993 was between 60 and
90 days and $4,827,690 was over 90 days. We expect production will
continue to grow in the second half of 2010 and therefore, we kept a relatively
high balance of advance to suppliers with several top suppliers in case we will
need large amounts of inventory to meet the demand of sales increases. We
do not believe that an allowance for doubtful accounts should be recorded for
the balance of advance to suppliers at June 30, 2010. We will continuously
monitor the status of the allowance for doubtful accounts.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequence
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences are
expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statement of income in the period that
includes the enactment date. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before the
Company is able to realize their benefits, or that future deductibility is
uncertain.
Foreign
Currency Translation
The
accompanying consolidated financial statements are presented in United States
dollars. Our functional currency is Renminbi. The consolidated financial
statements are translated into United States dollars from RMB at year-end
exchange rates as to assets and liabilities and average exchange rates as to
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred. The resulting transaction
adjustments are recorded as a component of shareholders’ equity. Gains and
losses from foreign currency transactions are included in net
income.
|
|
|
|
|
|
|
|
|
|
|
Year
ended RMB: US$ exchange rate
|
|
|
6.8372 |
|
|
|
6.8542 |
|
Average
yearly RMB: US$ exchange rate
|
|
|
6.8409 |
|
|
|
6.9623 |
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended RMB: US$ exchange rate
|
|
|
6.8086 |
|
|
|
6.8448 |
|
Average
yearly RMB: US$ exchange rate
|
|
|
6.8347 |
|
|
|
6.8432 |
|
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into U.S.
dollars at the rates used in translation.
Fair
Value of Financial Instruments
FASB ASC
820 (formerly SFAS No. 157 Fair Value Measurements) establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value.
The hierarchy prioritizes the inputs into three levels based on the extent to
which inputs used in measuring fair value are observable in the
market
These
tiers include:
|
·
|
Level
1—defined as observable inputs such as quoted prices in active
markets;
|
|
·
|
Level
2—defined as inputs other than quoted prices in active markets that are
either directly or indirectly observable;
and
|
|
·
|
Level
3—defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own
assumptions.
|
The
assets measured at fair value on a recurring basis subject to the disclosure
requirements of ASC 820 as of June 30, 2010 were as follows:
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Carrying value
as of
June 30, 2010
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Cash
and cash equivalents
|
|
$ |
3,460,341 |
|
|
$ |
3,460,341 |
|
|
|
- |
|
|
|
- |
|
Restricted
cash
|
|
$ |
12,149,706 |
|
|
$ |
12,149,706 |
|
|
|
- |
|
|
|
- |
|
Property,
Plant, and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation, and
include expenditure that substantially increases the useful lives of existing
assets.
Depreciation
is provided over their estimated useful lives, using the straight-line
method. Estimated useful lives are as follows:
Buildings
and improvements
|
5 -
20 years
|
Machinery
and equipment
|
5 -
20 years
|
Motor
vehicles
|
5
years
|
Office
Equipment
|
5 -
10 years
|
When
assets are sold or retired, their costs and accumulated depreciation are
eliminated from the consolidated financial statements and any gain or loss
resulting from their disposal is recognized in the period of disposition as an
element of other income. The cost of maintenance and repairs is charged to
income as incurred, whereas significant renewals and betterments are
capitalized.
Recently
Issued Accounting Pronouncements
In
January 2010, the FASB issued Accounting Standards Update 2010-05 (ASU 2010-05),
“Compensation – Stock Compensation (Topic 718)”. This standard codifies
EITF Topic D-110 Escrowed Share Arrangements and the Presumption of Compensation
and is effective immediately. The provisions of ASU 2010-05 did not have a
material effect on the Company’s consolidated financial statements and is
effective immediately.
In
January 2010, the FASB issued Accounting Standards Update 2010-06 (ASU 2010-06),
“Fair Value Measurements and Disclosures (Topic 820)”: Improving Disclosures
about Fair Value Measurements. This amendment to Topic 820 has improved
disclosures about fair value measurements on the basis of input received from
the users of financial statements. This is effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. Early adoption is
permitted. The provisions of ASU 2010-06 did not have a material effect on
the Company’s consolidated financial statements.
In
February 2010, the FASB issued Accounting Standards Update 2010-09 (ASU
2010-09), "Subsequent Events (Topic 855)." The amendments remove the
requirements for an SEC filer to disclose a date, in both issued and revised
financial statements, through which subsequent events have been reviewed.
Revised financial statements include financial statements revised as a result of
either correction of an error or retrospective application of U.S. GAAP.
ASU 2010-09 is effective for interim or annual financial periods ending after
June 15, 2010. The provisions of ASU 2010-09 did not have a material
effect on the Company’s consolidated financial statements.
In
February 2010, the FASB issued Accounting Standards Update 2010-10 (ASU
2010-10), "Consolidation (Topic 810)." The amendments to the
consolidation requirements of Topic 810 resulting from the issuance of Statement
167 are deferred for a reporting entity's interest in an entity (1) that has all
the attributes of an investment company or (2) for which it is industry practice
to apply measurement principles for financial reporting purposes that are
consistent with those followed by investment companies. An entity that
qualifies for the deferral will continue to be assessed under the overall
guidance on the consolidation of variable interest entities in Subtopic 810-10
(before the Statement 167 amendments) or other applicable consolidation
guidance, such as the guidance for the consolidation of partnerships in Subtopic
810-20. The deferral is primarily the result of differing consolidation
conclusions reached by the International Accounting Standards Board ("IASB") for
certain investment funds when compared with the conclusions reached under
Statement 167. The deferral is effective as of the beginning of a
reporting entity's first annual period that begins after November 15, 2009, and
for interim periods within that first annual reporting period, which coincides
with the effective date of Statement 167. Early application is not
permitted. The provisions of ASU 2010-10 are effective for the Company
beginning in 2010. The adoption of ASU 2010-10 did not have a material
impact on the Company’s consolidated financial statements.
The FASB
issued Accounting Standards Update (ASU) No. 2010-20. Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses, on
July 21, 2010, requiring companies to improve their disclosures about the credit
quality of their financing receivables and the credit reserves held against
them. The extra disclosures for financing receivables include aging of past due
receivables, credit quality indicators, and the modifications of financing
receivables. This guidance is effective for interim and annual periods ending on
or after December 15, 2010. We do not expect the adoption of this update
to have a material impact on our consolidated financial position, results of
operations or cash flows.
Liquidity
and Capital Resources
The major
sources of our liquidity for fiscal years 2008 and 2009 and the six months ended
June 30, 2010 were cash generated from operations, bank borrowings, including
loans from banks and bank acceptance notes. We expect to continue to
finance our operations and working capital needs in the near future from cash
generated from operations and short-term borrowings.
Our cash
and cash equivalents, which are denominated in RMB, were approximately $8.4
million at December 31, 2009, as compared to $3.8 million at December 31, 2008,
which increase was mainly due to increasing customer deposits and net proceeds
from short-term bank loans. Our cash and cash equivalents were
approximately $3.5 million and $1.7 million at June 30, 2010 and 2009,
respectively, which decrease was due to a $15.9 million decrease in net
cash used in operating activities, offset by a $10.9 million increase in net
cash provided by financing activities during the six months ended June 30, 2010,
as described below under the heading “Cash Flows – Six Months ended June 30,
2010 and 2009.” We believe that our cash reserves, together with
expected cash flow from operations and short-term loans, are sufficient to allow
us to continue to operate for the next 12 months. However, we are issuing
equity in this offering in part in order to enhance our liquidity position and
to increase our cash reserves for future expansion.
Accounts
Receivable
International
sales accounted for 37.6% of our revenues in 2008 but only 3.7% in 2009 and 3.1%
during the six months ended June 30, 2010 as a result of the global financial
and economic crisis and the anti-dumping tariffs imposed by the European Union
and the U.S. In 2008, we collected approximately half of the revenues
generated by international sales by letter of credit, enabling us to convert our
accounts receivable into cash more quickly, prepay our suppliers and reduce the
amount of funds that we needed to finance our working capital
requirements. Our domestic customers generally pay approximately 40 days
after receiving the materials at their construction site. As a result, our
accounts receivable increased significantly in 2009 and the six months ended
June 30, 2010 as compared to 2008. We have collected more than 99% of the
$15.2 million of accounts receivable outstanding as of December 31, 2009 in
cash. In addition, we have collected 100% of the $33.8 million of accounts
receivable outstanding as of June 30, 2010 in cash as of the date of this
filing. See note 4 to our audited financial statements and note 3 to our
unaudited financial statements provided elsewhere in this prospectus for a
schedule of our valuation account. We do not expect our accounts
receivable to decrease to 2008 levels until we are able to significantly
increase our international sales. During the six months ended June 30,
2010, our international customers were located primarily in Southeast Asia and
Australia, but not in Europe or the United States. We expect that trend to
continue in the near future since demand for our higher margin rare earth coated
products is high in the PRC and is expected to continue to grow. However,
if opportunities arise in the U.S. or EU markets or in other international
markets for us to win bids on projects or to reengage with former customers or
establish relationships with new customers, we would pursue such
opportunities.
Major
Customers
During
the years ended December 31, 2008 and 2009 and the six months ended June 30,
2010, our six largest customers contributed 81.0%, 86.7% and 79.5% of our total
sales, respectively. See “Business—Our Customers” below. As a result
of our reliance on a limited number of customers, we may face pricing and other
competitive pressures, which may have a material adverse effect on our profits
and our revenues. The volume of products sold for specific customers varies from
year to year, especially since we are not the exclusive provider for any
customers. In addition, there are a number of factors, other than our
performance, that could cause the loss of a customer or a substantial reduction
in the products that we provide to any customer and that may not be predictable.
For example, our customers may decide to reduce spending on our products or a
customer may no longer need our products following the completion of a project.
The loss of any one of our major customers, a decrease in the volume of sales to
these customers or a decrease in the price at which we sell our products to them
could materially adversely affect our profits and our revenues.
In
addition, this customer concentration may subject us to perceived or actual
leverage that our customers may have in negotiations with us, given their
relative size and importance to us. If our customers seek to negotiate their
agreements on terms less favorable to us and we accept such unfavorable terms,
such unfavorable terms may have a material adverse effect on our business,
financial condition and results of operations. Accordingly, unless and until we
diversify and expand our customer base, our future success will significantly
depend upon the timing and volume of business from our largest customers and the
financial and operational success of these customers.
Bank
Loans
At
December 31, 2009, we had approximately $27.4 million of short-term bank loans
and $19.7 million of bank acceptance notes outstanding, as compared to $19.4
million and $18.2 million at December 31, 2008, respectively. At June 30,
2010, we had approximately $36.3 million of short-term bank loans and $22.0
million of bank acceptance notes outstanding.
Short-term
bank loans are obtained from local banks in China. All short-term bank loans are
repayable within one year and are secured by property, plant and equipment and
land use rights owned by us. None of our short-term bank loans have
financial covenants. However, each loan contains a covenant restricting
our use of the funds received to either purchases of raw materials or working
capital.
The
weighted average annual interest rate of our short-term bank loans was 5.5% and
6.42% as of December 31, 2009 and 2008, respectively. Interest expense was
$1.5 and $1.9 million for the years ended December 31, 2009 and 2008,
respectively.
The
weighted average annual interest rate of our short-term bank loans was 5.33% as
of June 30, 2010. Interest expense was $1.1 million and $0.7 million for
the six months ended June 30, 2010 and 2009, respectively.
We have
not experienced any difficulties in the acquisition and rollover of the
short-term bank loans that we use to fund our daily operations. We
anticipate rollovers of all current facilities that are set to mature in the
2010 and do not anticipate a reduction in the availability of short-term bank
loans to fund our operations and meet our growth objectives. Two of our
affiliates, namely Shanghai ZFX and Shanghai Ossen, have provided guarantees for
certain of our short-term bank loans for no consideration. There can be no
assurance that Shanghai ZFX and Shanghai Ossen will be willing or able to
continue to provide similar guarantees on this basis with respect to future
borrowings.
Working
Capital
Our
working capital was approximately $2.8 million at December 31, 2009 as compared
to $(8.2 million) at December 31, 2008, which increase was due primarily to a
$4.6 million increase in cash and cash equivalents, a $10.4 million increase in
accounts receivable, a $1.8 million note receivable from a related party and a
$0.9 million increase in inventories, offset by a $9.5 million increase in
short-term bank loans and bank acceptance notes and a $2.3 million increase in
customer deposits.
Our
working capital was approximately $12.1 million at June 30, 2010, an increase of
approximately $9.3 million as compared to December 31, 2009. This increase
was due primarily to a $18.6 million increase in accounts receivable, a $4.9
million increase in inventories and $8.3 million due from an advance to a
related party. These amounts were offset by a decrease of approximately
$4.9 million in cash and cash equivalents, a $1.9 million decrease in advances
to suppliers, payment of a $1.8 million note receivable from a related party, a
$2.3 million increase in bank acceptance notes, a $8.9 million increase in
short-term bank loans, a $0.5 million increase in accounts payable, a $1.2
million increase in customer deposits and a $0.8 million increase in income
taxes payable.
Due
to Related Party
Our
chairman, Dr. Tang, provided a one-time interest-free loan to Topchina and Ossen
Asia in connection with an investment in our subsidiary, Ossen Materials, by
such companies, which were wholly owned by Dr. Tang at that
time. This loan has been recorded as an amount due to a related party
in the financial statements included elsewhere in this prospectus. As of
November 26, 2010, pursuant to a loan contribution agreement in the amount of
$12,924,000, the loan has been cancelled and forgiven, and the loan balance will
be treated as a contribution to the capital of the
Company.
Advance
to Related Party
During
the six months ended June 30, 2010, we advanced $8.3 million to our affiliate,
Shanghai ZFX, which is also a supplier and an affiliate of ours. These
advances have been recorded as an advance to a related party in the financial
statements included elsewhere in this prospectus. Such amounts have been
credited towards our purchases of Shanghai ZFX’s supplies. The reason for
these advances is that we received certain loans from PRC banks which PRC
regulations require us to use for purchases of, or advances for, raw materials
in the same month in which the loans were made. We have already purchased
approximately $2.3 million of raw materials against these advances from Shanghai
ZFX, and the remainder of the advances is still available for future purchases
of supplies by us from Shanghai ZFX. We do not anticipate making advances
to Shanghai ZFX in the near future to the same extent that we did during the
first half of 2010.
Inventories
We, like
many other steel manufacturers, maintain substantial inventories of steel to
accommodate the short lead times and just-in-time delivery requirements of our
customers. Accordingly, we purchase steel in an effort to maintain our
inventory at levels that we believe to be appropriate to satisfy the anticipated
needs of our customers based upon historic buying practices, supply agreements
with customers and market conditions.
Cash
Flows
Years
Ended December 31, 2009 and 2008
The
following table sets forth a summary of our net cash flow information for the
periods indicated:
(All
amounts in U.S. dollars)
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
Net
cash used in operating activities
|
|
$ |
(2,769,330 |
) |
|
$ |
(2,234,087 |
) |
Net
cash used in investing activities
|
|
|
(209,511 |
) |
|
|
(2,666,665 |
) |
Net
cash provided by financing activities
|
|
|
7,558,779 |
|
|
|
345,059 |
|
Operating
Activities
Net cash
used in operating activities was approximately $2.8 million in 2009, as compared
to $2.2 million in 2008. This increase in cash used in operating
activities was primarily attributable to a $10.4 million increase in accounts
receivable in 2009 as compared to a $1.0 million decrease in 2008 due to a shift
in sales, with sales to international customers decreasing significantly in
2009, and $1.8 million in notes receivable from a related party in
2009. This increase in cash used was offset by an increase in our net
income for the reasons discussed above under “Results of Operations,” a smaller
increase in inventories in 2009 as compared to 2008 because we increased
inventories significantly in 2008 in anticipation of the increase in steel
prices at the end of 2008, and a smaller increase in prepayments in 2009 as
compared to 2008 as a result of required prepayments to a new customer in
2008.
Investing
Activities
Net cash
used in investing activities was approximately $0.2 million in 2009, as compared
to $2.7 million in 2008. This decrease in cash used in investing
activities was attributable to a smaller increase in purchases of plant and
equipment in 2009. Specifically, in 2008 we incurred approximately $2.3
million of expenditures in connection with the purchase of equipment for a new
production line.
Financing
Activities
Net cash
provided by financing activities for the year ended December 31, 2009 was
approximately $7.6 million, as compared to approximately $0.3 million in
2008. The increase in cash provided by financing activities was primarily
due to increased proceeds from short-term bank loans, which were used to
purchase raw materials and other working capital requirements, a smaller
increase in restricted cash, representing amounts held by banks as security for
bank acceptance notes, a decrease in repayments of notes payable to a related
party and cash dividends in 2009, offset by an increase in repayments of
short-term bank loans and a decrease in proceeds from notes payable. In
2008, Ossen Materials and Ossen Jiujiang paid an aggregate of $2.4 million in
cash dividends to their shareholders, which dividends were declared in
2007.
Six
Months Ended June 30, 2010 and 2009
The
following table sets forth a summary of our net cash flow information for the
periods indicated:
(All
amounts in U.S. dollars)
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net
cash used in operating activities
|
|
$ |
(15,911,651 |
) |
|
$ |
(6,285,373 |
) |
Net
cash used in investing activities
|
|
|
(96,887 |
) |
|
|
(129,876 |
) |
Net
cash provided by financing activities
|
|
|
10,887,816 |
|
|
|
4,472,848 |
|
Operating
Activities
Net cash
used in operating activities was approximately $16.0 million in the six months
ended June 30, 2010, as compared to $6.3 million in the six months ended June
30, 2009. This increase in cash used in operating activities was primarily
attributable to a $18.6 million increase in accounts receivable in 2010 as
compared to a $6.8 million increase in 2009 as a result of the significant
increase in sales to Chinese customers, which generally pay us 40 days after
reviewing our materials, a $8.3 million advance to Shanghai ZFX and a $4.9
million increase in inventories in 2010 as compared to a $1.8 million increase
in 2009 as a result of the new PRC regulation that certain bank loans be used
for the purchase or advance for raw materials. These amounts were offset
primarily by a $5.8 million increase in net income for the reasons described
above under the heading “Results of Operations,” a $1.9 million decrease in
advances to suppliers in 2010 as compared to a $1.7 million increase in 2009 as
a result of better management of prepayments and improved relationships with
suppliers, a $1.2 million increase in customer deposits in 2010 as compared
to a $0.36 million decrease in 2009 and a $1.8 million decrease in notes
receivable from a related party due to the fact that the related party used cash
as payment instead of notes.
Financing
Activities
Net cash
provided by financing activities for the six months ended June 30, 2010 was
approximately $10.9 million, as compared to approximately $4.5 million in
2009. This increase was due to a $0.3 million increase in restricted cash
in 2010 as compared to a $14.4 million increase in 2009 due to increased use of
bank acceptance notes in domestic sales when the company refocused its business
towards the domestic PRC market, an increase of $29.8 million in proceeds from
short-term bank loans in 2010 as compared to an increase of $22.2 million in
2009, and $19.7 million of note repayments in 2010 as compared to $18.2 million
in 2009. These amounts were offset by an increase in repayments of
short-term bank loans in the amount of $20.9 million in 2010 as compared to
$15.5 million in 2009 and $22.0 million in proceeds from notes payable in 2010
as compared to $30.4 million in 2009.
Capital
Expenditures
Our
capital expenditures consist primarily of expenditures on property, plant and
equipment. Capital expenditures on property, plant and equipment were $2.9
million in 2007, $2.3 million in 2008, $0.2 million in 2009 and $0.1 million
during the six months ended June 30, 2010. We financed our capital expenditure
requirements from the cash flows generated by our operating activities and from
short-term bank loans. We have no current commitments for capital
expenditures. However, if we are successful in raising sufficient funds in
this offering, we intend to expand our facility. See “Use of Proceeds”
above.
Contractual
Obligations
Our
contractual obligations consist of short-term debt obligations. The
following table sets forth a breakdown of our contractual obligations as of June
30, 2010:
|
|
Payments due by period (in thousands of dollars)
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
|
More than
5 years
|
|
|
|
($US
in Thousands)
|
|
Short-term
debt obligations (1)
|
|
|
58,408,610 |
|
|
|
58,408,610 |
|
|
|
|
- |
|
|
|
- |
|
(1)
Attributable to short-term bank loans and bank acceptance notes.
Quantitative
and Qualitative Disclosures about Market Risk
Financial
instruments that expose us to concentrations of credit risk primarily consist of
cash and accounts receivables. The maximum amount of loss due to credit risk in
the event of other parties failing to perform their obligations is represented
by the carrying amount of each financial asset as stated in our consolidated
balance sheets.
As of
December 31, 2009 and 2008 and June 30, 2010, substantially all of our cash
included bank deposits in accounts maintained within the PRC where there is
currently no rule or regulation in place for obligatory insurance to cover bank
deposits in the event of bank failure. However, we have not experienced any
losses in such accounts and we believe we are not exposed to any significant
risks on our cash in bank accounts.
We are
exposed to various types of market risks, including changes in foreign exchange
rates, commodity prices and inflation in the normal course of
business.
Interest
rate risk
We are
subject to risks resulting from fluctuations in interest rates on our bank
balances. A substantial portion of our cash is held in China in interest bearing
bank deposits and denominated in RMB. To the extent that we may need to raise
debt financing in the future, upward fluctuations in interest rates would
increase the cost of new debt. We do not currently use any derivative
instruments to manage our interest rate risk.
Commodity
price risk
Certain
raw materials used by us are subject to price volatility caused by supply
conditions, political and economic variables and other unpredictable factors.
The primary purpose of our commodity price management activities is to manage
the volatility associated with purchases of commodities in the normal course of
business. We do not speculate on commodity prices.
Foreign
exchange risk
The RMB
is not a freely convertible currency. The PRC government may take actions that
could cause future exchange rates to vary significantly from current or
historical exchange rates. Fluctuations in exchange rates may adversely affect
the value of any dividends we declare.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign
currencies.
Inflation
risk
In recent
years, China has not experienced significant inflation or deflation and thus
inflation and deflation have not had a significant effect on our business during
the past three years. Inflationary factors such as increases in the cost of our
products and overhead costs may adversely affect our operating results. A
high rate of inflation in the future may have an adverse effect on our ability
to maintain current levels of gross margin and selling, general and
administrative expenses as a percentage of net revenues if the selling prices of
our products do not increase proportionately with these increased
costs.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have, or are reasonably likely to
have, a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our
investors.
Change
in Accountants
On July
7, 2010, our board of directors approved the engagement of Sherb & Co., LLP
as our independent registered public accounting firm for the year ending
December 31, 2009. The board determined not to renew the engagement of Li &
Company, PC as our independent registered public accounting firm.
The Board
determined to engage Sherb & Co., LLP in order to realize economies and
efficiencies, since Sherb & Co., LLP acted as the independent registered
public accounting firm for Ossen prior to the business combination.
The
report of Li & Company, PC on the financial statements of the Company as of
February 28, 2010 did not contain an adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or accounting
principles.
In
connection with the audit of our financial statements for the period ended
February 28, 2010, there were no disagreements with Li & Company, PC on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
Li & Company, PC, would have caused Li & Company, PC to make reference
to the matter of such disagreements in their reports.
We
engaged Sherb & Co., LLP as our new independent registered public accounting
firm as of July 7, 2010. During our two most recent fiscal years neither our
company nor anyone on its behalf has consulted with Sherb & Co., LLP
regarding either (i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on our financial statements, and neither a written report was
provided to us nor oral advice was provided by Sherb & Co. that was an
important factor considered by us in reaching a decision as to any accounting,
auditing or financial reporting issue; or (ii) any matter that was the subject
of a disagreement, as that term is defined by SEC regulations, or a reportable
event, as that term is defined by SEC regulations.
INDUSTRY*
General
The
Chinese prestressed material industry began in 1984 and has developed
significantly, both in terms of the quality of the materials and the quantity of
productions, since then. In 2009, the output of the PRC’s prestressed materials
surpassed 3,000,000 tons, making China the largest producer of prestressed
materials in the world.
The
prestressed materials made in China have developed from the single prestressed
concrete wire into a series of products consisting of:
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Rare
earth coated prestressed materials.
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These
prestressed materials have been used for single-layer and multi-layer buildings,
highways, bridges, railway sleepers, electric poles, pressure drainpipes,
storage tanks, water towers, wide-span bridges, high-rise buildings, underground
construction, high-rise structures, hydraulic construction, offshore structures,
airport construction (runway and terminal) as well as pressure vessels in
nuclear power stations.
Transportation
Construction in the PRC
Transportation
has historically been among the key factors restricting the economic development
of the PRC. In recent years, there has been a rapid development of highway,
bridge and railway systems in China. It is expected that transportation
construction will continue to be the subject of key infrastructure projects in
China through this decade.
Bridge
construction is one of the important infrastructure sectors in China.
Under the existing policy, more than 200 bridges will be built over dozens of
Chinese rivers by 2020, including the Yangtze River, Yellow River, Songhua
River, Jiangxi River, Xiang River, Han River, Minjiang River and Pearl
River. In addition, approximately 400 old bridges need to be reinforced
and expanded during that period. These bridge projects will require
approximately 6 million tons of coated prestressed materials in the
aggregate. In addition, over the next decade, China is expected to build
four cross-sea bridges and tunnels, including the Bohai Bay Cross-Sea Bridge,
the Hong Kong-Zhuhai-Macao Cross-Sea Bridge, the Qiongzhou Strait Bridge and the
Taiwan Strait Tunnel. These projects are expected to require approximately 8
million tons of coated prestressed materials.
According
to the PRC National Development and Reform Commission, growth in demand will be
further supported by a $570 billion Chinese government stimulus package, of
which, 46% ($262 billion) is to be allocated to the rural and urban
infrastructure build-out, as described in the following chart:
* This section is based on information
obtained from a report, dated October 8, 2010, issued by the Institute of
Quantitative and Technical Economics, Chinese Academy of Social Services.
According
to the PRC National Development and Reform Commission, 81,000 kilometers of
highway will be built over the next decade requiring 10 million tons of PC materials. In
addition, it is expected that an additional 14 million tons of coated PC
materials will be required over the next decade in
connection with the construction of more than 200 new bridges, and the
reinforcement and/or expansion of approximately 400 existing bridges, over
dozens of Chinese rivers, along with the construction of four cross-sea bridges and tunnels.
Rare
Earth Coated Prestressed Material
Rare
earth coated prestressed materials (including PC wires and PC strands) are
anti-corrosion prestressed materials that have recently gained increasing
attention from the market due to the advanced technology used in the production
of these materials and the solid anti-corrosion performance of these materials.
The rare earth coated prestressed material can be used in special circumstances
in place of zinc coated materials to prolong the service life of these products,
thereby generating social and economic benefits. Currently, the average zinc
coated anti-corrosion coated material widely used in China has a service life of
20 years. In contrast, the service life of anti-corrosion rare earth coated
prestressed materials is up to 50 years. The advantage of the long service
life of rare earth coated prestressed materials is more evident when they are
used in large prestressed concrete elements, such as bridge cables, steel tower
and parapets.
Rare
earth coated prestressed materials primarily use cerium, lanthanum and other
rare earth elements. The proper amount of rare earth can refine coating
grain and improve a material’s corrosion resistance.
The rare
earth resources in China account for 80% of the rare earth resources in the
world. There are 36,000,000 tons of rare earth resources in China,
including large reserves in Jiangxi Province, where one of our facilities is
located, and future reserves are 100,000,000 tons. By applying rare earth
alloy to prestressed materials, we have a unique competitive advantage in the
prestressed material market.
The
unique characteristics of rare earth coated prestressed materials are as
follows:
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Superior
corrosion resistance, which is 2-3 times than that of common hot dip zinc
coated products;
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Superior
formability, toughness, plasticity and torsional
resistance;
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Superior
bonding properties and creep
resistance;
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Able
to endure high temperature of up to 320°C, while pure zinc coating can
endure a temperature of 230°C only;
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The
melting point temperature of rare earth plating bath is lower than that of
pure zinc coating, which helps to save 10-15% energy and better preserves
the mechanical property of prestressed
material;
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Rare
earth alloy coating layer is more smooth and appealing than common zinc
coating; and
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Easily
coated and amenable to changes in color of zinc
coating.
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In China,
there are only 3 companies other than our company that produce zinc coated
prestressed products. We are the only Chinese company that produces rare
earth coated prestressed products. Our goal is to continue to focus on the
production of the rare earth coated prestressed material used primarily in
bridge cables. We plan to continue to produce increasing levels of rare
earth coated prestressed materials and to provide top quality prestressed steel
products for world class bridges.
There are
approximately fifteen Chinese manufacturers that manufacture and export
prestressed materials. From 2006 to 2008, we were the leading Chinese
exporter to the U.S. market.
Other
suppliers of international prestressed materials are based primarily in South
Korea, Thailand, Malaysia, India, Japan, the United States and
Spain.
Domestic
PRC Market
Due to
the continuous growth in the demand for prestressed materials in the domestic
infrastructure and building markets, the growth rate of China's domestic market
demand for the prestressed material is estimated to be 20% per year in the next
five years.
The
following chart reflects the demand for prestressed materials in Chinese
domestic market during the next decade (2010-2020):
Forecast
for Domestic Demand
To
address the current financial crisis, the Chinese State Council set forth ten
measures in November 2008 to drive domestic demand and promote economic
growth. It will take RMB 4 trillion to implement those measures in the
next two years.
Coated
Prestressed Materials Market
Coating
technology is a technology that is used to coat one or more layers of surface
material on the surface of substrate material to endow the surface of the
material with special performance so as to give the material excellent decay and
wear resistance, and anti-oxidization by means of physics, chemistry or
electrochemistry with the precondition of neither changing the constituent of
the substrate material nor lowering its intensity or other properties.
Advanced coating technology is a high-tech material surface processing
technology, and its primary features are continuity, low-cost, high-performance,
high quality, functionality and pollution-free.
Coated
prestressed material is used primarily in projects of suspended cables, stay
cables and external cables of large-span bridges and cables of prestressed steel
structure. These materials are a substitute for plain surface prestressed
materials. Coated products include coated PC wires, coated PC strands and
unbonded coated PC strands. Approximately 70 bridges need to be built
across the Yangtze River so as to allow the national expressway networks and
high-level highway networks of the provinces and regions along the river to
exert their due efficiency. It is anticipated that there will be a
continuously durable and prosperous growth on bridge construction across the
Yangtze River over the next decade. It is estimated that the number of
bridges across the Yangtze River will be up to 124 by 2020. In addition,
20 to 30 bridges will be built across the Yellow River. Accordingly, the
demand for bridge cables is undergoing significant growth and there will be an
increasing demand for rare earth coated prestressed materials. According
to relevant statistics, the demand on coated PC wires for bridge cables in the
PRC before 2004 was about 20,000 tons annually, and in 2005 to 2008 the demand
was about 40,000 to 50,000 tons annually. It is estimated in the next few
years, the yield of this kind of products will be up to more than 100000t/year
and the demand will surpass the supply. Due to demanding requirements on the
constituent elements of coated PC wires for high-performance bridge cables and
the sophisticated production process, in the past the domestic infrastructure
projects almost completely depended on imports.
CORPORATE
STRUCTURE AND ORGANIZATION
We are a
British Virgin Islands limited liability company organized on January 21, 2010
under the BVI Act under the name Ultra Glory International Ltd., or Ultra Glory,
as a blank check company for the purpose of acquiring, through a share exchange,
asset acquisition or other similar business combination, an operating
business.
Business
Combination
On July
7, 2010, Ultra Glory and its sole shareholder entered into a share exchange
agreement with Ossen Innovation Group, a British Virgin Islands limited
liability company organized on April 30, 2010 under the BVI Act and the
shareholders of Ossen Innovation Group. Pursuant to the share exchange
agreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group
all of the issued and outstanding shares of Ossen Innovation Group, in exchange
for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra
Glory to the shareholders of Ossen Innovation Group. In addition, the sole
shareholder of Ultra Glory sold all of the 5,000,000 ordinary shares of Ultra
Glory that were issued and outstanding prior to the business combination, to the
shareholders of Ossen Innovation Group for cash, at a price of $0.03 per
share. As a result, the individuals and entities that owned shares of
Ossen Innovation Group prior to the business combination acquired 100% of the
equity of Ultra Glory, and Ultra Glory acquired 100% of the equity of Ossen
Innovation Group. Ossen Innovation Group is now a wholly owned subsidiary
of Ultra Glory. In conjunction with the business combination, Ultra Glory
filed an amended charter, pursuant to which Ultra Glory changed its name to
Ossen Innovation Co., Ltd., changed its fiscal year end to December 31, changed
the par value of its ordinary shares to $0.01 per share and increased its
authorized shares to 100,000,000. Upon the consummation of the business
combination, we ceased to be a shell company.
Our
Shareholders
Dr. Tang,
our chairman, owns 100% of the shares of Effectual Strength Enterprises Ltd., a
British Virgin Islands company, which owned 79% of the shares of Ossen
Innovation Group prior to the business combination, and owns 79% of our shares
since the business combination. The spouse of our chief executive officer,
Wei Hua, owns 100% of the shares of Fascinating Acme Development Ltd., which
owned 4% of the shares of Ossen Innovation Group prior to the business
combination, and owns 4% of our shares since the business combination. The
spouse of the chief executive officer of Shanghai ZFX, which is an affiliated
company of ours that supplies us with raw materials, owns 100% of the shares of
Gross Inspiration Development Ltd., which owned 4% of the shares of Ossen
Innovation Group prior to the business combination, and owns 4% of our shares
since the business combination. The holders of the remaining 13% of our
shares are investors that are residents of the PRC and are unaffiliated with
Ossen.
Our
Subsidiaries
British
Virgin Islands Companies
Ossen
Innovation Group, our wholly owned subsidiary, is the sole shareholder of two
holding companies organized in the British Virgin Islands: Ossen Group (Asia)
Co., Ltd., or Ossen Asia, and Topchina Development Group Ltd., or
Topchina. All of the equity of Ossen Asia and Topchina had been held by
Dr. Tang, our Chairman, since inception. In May 2010, Dr. Tang transferred
these shares to Ossen Innovation Group in anticipation of the public
listing of our company’s shares in the United States.
Ossen
Asia is a British Virgin Islands limited liability company organized on February
7, 2002. Ossen Asia has one direct operating subsidiary in China, Ossen
Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia owns 81% of
the equity of Ossen Materials.
Topchina
is a British Virgin Islands limited liability company organized on November 3,
2004. Ossen Materials and Topchina directly own an operating subsidiary in
China, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., or Ossen
Jiujiang. Ossen Materials owns 15% of the equity of Ossen Jiujiang and
Topchina owns 85%.
Ossen
Materials
Ossen
Materials was formed in China on October 27, 2004 as a Sino-foreign joint
venture limited liability company under the name Ossen (Ma’anshan) Steel Wire
and Cable Co., Ltd. On May 8, 2008, Ossen Materials was restructured from
a Sino-foreign joint venture limited liability company to a corporation.
The name of the entity was changed at that time to Ossen Innovation
Materials Co., Ltd.
Ossen
Asia owns 81% of the equity of Ossen Materials. The remaining 19% is held
in the aggregate by four Chinese entities, two of which are controlled by
Chinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a
company whose shares are listed on the Shanghai Stock Exchange, and one of which
is controlled by Chinese citizens.
Through
Ossen Materials, we have manufactured and sold plain surface PC strands, zinc
coated PC steel wires and PC wires in our Maanshan City facility since
2004. The primary markets for the products manufactured at our Maanshan
facility are Anhui Province, Jiangsu Province, Zhejiang Province and Shanghai
City, each in the PRC.
Ossen
Jiujiang
On April
6, 2005, Shanghai Ossen Investment Holdings (Group) Co., Ltd., or Ossen
Shanghai, acquired a portion of the bankruptcy assets of Jiujiang Steel &
Iron Company, including equipment, land use rights and inventory, for
approximately RMB 20,000,000 (approximately $2.9 million). Ossen Jiujiang
was formed by Ossen Shanghai in the PRC as a Sino-foreign joint venture limited
liability company on April 13, 2005. Ossen Shanghai then transferred the
newly acquired assets to Ossen Jiujiang. At its inception, Ossen Jiujiang was
owned by two entities: 33.3% of its equity was held by Ossen Asia and 66.7% by
Ossen Shanghai. In June 2005, Ossen Shanghai transferred its entire
interest in Ossen Jiujiang to Topchina in exchange for approximately $2.9
million. In October 2007, Topchina transferred 41.7% of the equity in Ossen
Jiujiang to Ossen Asia for no consideration. On December 17, 2007, Ossen Asia
transferred all of its shares in Ossen Jiujiang to Ossen Materials. From
December 2007 until November 24, 2010, 75% of the equity of
Ossen Jiujiang has been held by Ossen Materials and 25% by Topchina. As a
result of an additional capital contribution on November 24, 2010, Topchina’s
ownership percentage increased to 85% and Ossen Materials ownership percentage
decreased to 15%.
Through
Ossen Jiujiang, we manufacture zinc or rare earth coated PC wires and strands,
plain surface PC strands, unbonded PC strands, helical rib PC wires, sleeper PC
wires and indented PC wires. The primary markets for the PC strands
manufactured in our Jiujiang facility are Jiangxi Province, Wuhan Province,
Hunan Province, Fujian Province and Sichuan Province, each in the
PRC.
Organizational
Structure Chart
The
following chart reflects our organizational structure as of the date of this
prospectus
BUSINESS
Overview
We
manufacture and sell an array of plain surface prestressed steel materials and
rare earth coated and zinc coated prestressed steel materials, which we believe
is the most comprehensive array among our competitors in China. Our
materials are used in the construction of bridges, highways and other
infrastructure projects in the PRC and internationally. Our
facilities are located in Maanshan City, Anhui Province and in Jiujiang City,
Jiangxi Province, in the People’s Republic of China. According to the
CASS report, we were among the top five PC material producers in the PRC as
measured by annual output from 2006 through 2008. According to the
PRC PC Strand Industry Investment and Market Operation Research Report, in 2008,
our products were ranked third in sales in the PRC for PC strands and wires, and
ranked first in export sales of these materials by Chinese prestressed steel
manufacturers. Historically, we and our customers have had a greater
than 90% success rate with respect to winning projects on which either we or our
customers have bid. Based on our extensive experience in the
industry, we believe that Ossen is one of the leading enterprises in the PRC in
the design, engineering, manufacture and sale of customized prestressed steel
materials used in the construction of bridges, highways, and other
infrastructure projects in China.
During
the six months ended June 30, 2010, we generated revenue of approximately $31.4
million, or 53.5% of our total revenue, from sales of our rare earth coated PC
wires and PC strands. We believe that we are the only prestressed
steel material manufacturer in the PRC that currently manufactures rare earth
coated materials. Based on current and anticipated orders, we
estimate that revenues generated by sales of coated products (including rare
earth coated and zinc coated products in the aggregate) for the year ending
December 31, 2010 will comprise approximately 49% of our total
revenue. Based on filled and anticipated orders, we believe that 95%
of our revenues generated by coated product sales in the year ending December
31, 2010 will be generated by sales of rare earth coated products and the
remaining 5% will be generated by sales of zinc coated products. Our
plan is to continue to increase sales of our rare earth coated products to
manufacturers of steel cables for bridges and other infrastructure projects,
both in the PRC and internationally, in order to increase our revenues and
profits.
While we
believe that our rare earth coating capabilities provide us with a competitive
advantage among our competitors, it is likely that our competitors will seek to
develop similar competing products in the near future. We intend to continue to
expend research and development efforts to advance our rare earth coating
applications even further. However, there can be no assurance that our initial
competitive advantage will be retained and that one or more competitors will not
develop products that are equal or superior to ours in quality or are better
priced than our rare earth coated products.
The
primary characteristics of these newly designed rare earth coated products,
which are used primarily in the construction of new bridges and the renovation
of older bridges in need of repair, are as follows:
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Superior
corrosion resistance;
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Superior
toughness and plasticity;
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Endurance
against extreme heat;
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Smooth
and appealing coating; and
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According
to the CASS report, bridge and other infrastructure construction is currently
experiencing significant growth in China, which trend is expected to continue
until 2020. Under existing PRC governmental policies, significant
investments are expected to be made during the next decade to construct more
than 200 new bridges over dozens of Chinese rivers, including the Yangtze River,
Yellow River, Songhua River, Jiangxi River, Xiang River, Han River, Minjiang
River and Pearl River. In addition, approximately 400 old bridges
will need to be reinforced or expanded during that period. In
addition, over the next decade, China is expected to build four cross-sea
bridges and tunnels, including the Bohai Bay Cross-Sea Bridge, the Hong
Kong-Zhuhai-Macao Cross-Sea Bridge, the Qiongzhou Strait Bridge and the Taiwan
Strait Tunnel.
Our
management’s core strategy for the near future is to expand the production
capacity for our rare earth PC strands and PC wires, which generate higher
margins than our other products, in order to continue to take advantage of
current trends in the bridge and infrastructure industries in the PRC and other
international markets, including in Southeast Asia and Australia, in the
development and renovation of bridges and other infrastructure projects.
Our products are marketed under the “Ossen” brand name both domestically and
internationally. We handle all aspects of market research, product design,
engineering, manufacturing, sales and marketing. We conduct our
manufacturing operations in our ISO 9001 manufacturing facilities in Maanshan
City and Jiujiang City, in the PRC.
Ossen
Materials, our operating subsidiary, was founded in 2004. In 2005, we
expanded our manufacturing capabilities by acquiring a facility in Jiujiang City
in the PRC and forming Ossen Jiujiang. The founders of Ossen were among
the first in China to introduce and promote the use of prestressed steel
materials in construction projects. The founders of Ossen have been
involved in producing prestressed materials since 1994 and have accumulated more
than 15 years of experience in the prestressed materials industry.
We are
affiliated with the Ossen Group, which is a Chinese conglomerate controlled by
our Chairman, Dr. Tang. The Ossen Group’s core businesses include steel
manufacturing, real estate and other investments. There is no active
business relationship between our company and any of the other entities that
comprise the Ossen Group other than what we have disclosed under the heading
“Certain Relationships and Related Party Transactions” below.
Our
Growth Strategy
We intend
to expand our industry position while maximizing shareholder value and pursuing
a growth strategy that includes increasing our production capacity and
strengthening our relationships with key customers, diversifying our customer
base and pursuing strategic relationships and acquisition
opportunities.
Increasing
our production capacity for our newly developed higher margin rare earth coated
prestressed materials.
We intend
to use a significant portion of the net proceeds of this offering to construct a
new building on empty land located in our Maanshan facility and to install a new
production line which will be used for the production of approximately 30,000
tons annually of higher margin, rare earth coated prestressed materials,
including rare earth coated PC wires and PC strands. The expected cost of
the construction of the building and the installation of this production line is
approximately $25 million.
We
believe that the expansion of our production capacity will enable us to benefit
from the continued growth in overall demand for prestressed steel materials in
China, especially with respect to our rare earth coated materials, which are
generally used in the construction of bridges with a long life span, which is an
industry currently experiencing tremendous growth in the PRC. Growth in
this industry is expected to continue through the next decade. During
the six months ended June 30, 2010, more than half of our revenue was generated
from sales of our rare earth coated materials, as compared to 0% in the prior
year. The demand for these materials is high in the PRC due to the
suitability of these durable, high quality products in major infrastructure
projects. We intend to sell the added products to new and existing
customers in China, Southeast Asia and Australia.
Strengthening
our relationships with key customers, diversifying our customer base and
exploiting new business opportunities through our relationship with an
affiliated company.
We intend
to strengthen our relationships with key customers while further expanding our
customer base. We plan to continue providing high-quality and
cost-competitive products to our existing customers and to use our existing
customer network and strong industry reputation to expand into new regions
within the PRC, beyond the 17 provinces in which we currently sell our products,
and internationally. We intend to continue to use customer feedback to
improve the quality of our products and technical after-sales services and to
strengthen our long-term base of domestic and international
customers.
In
addition, we expect that our recent acquisition of Shanghai Pujiang, a
downstream manufacturer of cables for use in bridge construction in the PRC, by
a member of the Ossen Group will enhance our opportunities to participate in
bids for bridge construction and renovation projects. We expect sales of
our rare earth coated products and our profits to increase as a result of this
acquisition.
Shanghai
Pujiang was founded in 1998 and is the first company in China specializing in
the production of cables used in the construction of bridges. Shanghai
Pujiang has an annual production capacity of 100,000 tons, which includes 70,000
tons of suspension bridge cables and 30,000 tons of stay cable. We believe that
Shanghai Pujiang is the largest company in the bridge cable production industry
in China, as measured by production capacity. Shanghai Pujiang has been
awarded the GB/T19001-2008 and ISO9001:2008 certifications. Shanghai
Pujiang owns 44 patents and patent applications related to bridge cable
production. Since inception, Shanghai Pujiang has completed 650 cable
projects, including 57 suspension bridges, 155 stay cable bridges and over 400
industrial buildings and arch bridges in
the PRC and internationally, including the U.S., India and South Korea. We
anticipate selling a significant portion of our rare earth coated products to
Shanghai Pujiang for use in bridge construction projects in the PRC and
internationally.
Pursuing
strategic relationships and acquisition opportunities
We intend
to evaluate and pursue acquisition opportunities and strategic partner
relationships which could enhance our product offerings, customer base or
geographic reach, or which could allow us to achieve economies of scale and
operating efficiencies. We currently have no plans, agreements or
commitments with respect to any material acquisitions or strategic
relationships.
Competitive
Advantages
Our
management believes that the following competitive strengths differentiate us
from other domestic and international competitors and are the key factors to our
success:
We
are Taking Advantage of Industry Trend in the Bridge Infrastructure Sectors in
the PRC and Other International Markets
Due to
the demand for prestressed materials in infrastructure construction in the
domestic PRC market, and in particular the construction and restoration of
bridges in the PRC that would benefit from the quality and durability of our
newly developed rare earth coated prestressed materials, we believe that our
industry will grow significantly for at least the next ten years.
Specifically, we expect the market for premium rare earth coated products,
including rare earth coated prestressed PC strands and PC wires, which are used
primarily in the construction of bridges, to grow in the PRC during this
period.
Many
reports indicate that our industry will experience significant growth in the
coming years. For example, based on the 11th five-year plan for highway
and waterway transportation by the Ministry of Transportation of the PRC, the
government plans to invest $730 billion in the national highway network from
2009 to 2013, which drives huge demand for prestressed materials.
Similarly, the Railway Network Plan issued by the Ministry of Railways of the
PRC has indicated that $290 billion will be invested in railway construction
from 2009 to 2013, which further drives the demands for prestressed materials.
From now until 2020, we believe that 200 new bridges will be built on dozens of
rivers in the PRC, including the Yangtze River, Yellow River, Songhua River,
Jiangxi River, Xiangjiang River, Han River, Minjiang River and Pearl
River. The bridge projects will require approximately 6 million tons of
coated prestressed materials in the aggregate.
The China
National Nuclear Industry Group has estimated that the PRC government will
invest approximately $60 billion by 2020 for nuclear power construction, which
would require approximately two million tons of prestressed materials. Further,
the ongoing building of a large number of rural roads, highways and buildings
should continue to generate significant demands for prestressed
materials.
Leading
Provider of Customized Prestressed Steel Materials
Based on
our extensive experience in the industry, we believe that Ossen is one of the
leading enterprises in the PRC in the design, engineering, manufacture and sale
of customized prestressed steel materials used in the construction of bridges,
highways, and other infrastructure projects in China. We manufacture and
sell an array of plain surface prestressed steel materials and rare earth coated
and zinc coated prestressed steel materials, which we believe is the most
comprehensive array among our competitors in China and which are used in the
construction of bridges, highways and other infrastructure projects in the PRC
and internationally. Our facilities are located in Maanshan City, Anhui
Province and in Jiujiang City, Jiangxi Province, in the People’s Republic of
China. According to the PRC PC Strand Industry Investment and Market
Operation Research Report, in 2008, our products were ranked third in sales in
the PRC for PC, strands and ranked first in export sales of these materials by
Chinese prestressed steel manufacturers.
Strong
In-House Research and Development Capabilities
Our
research and development team consists of members educated in top universities
in China, and our management team has fifteen years of industry experience on
average. We have built a recognized brand name in the industry by introducing
innovative solutions to the prestressed materials industry, and particularly
coated prestressed materials, in China and internationally. Our
engineering team works closely with our customers in order to understand their
requirements. We have been able to introduce new equipment to enhance cost
saving and time reduction in the construction of bridges, highways, railways and
buildings, as well as numerous other projects.
Efficient
Proprietary Production Technology
We
continually pursue technological improvements to our manufacturing processes via
our strong in-house development teams. We have been granted eighteen patents by
the State Intellectual Property Office of the PRC, including one invention
patent and seventeen utility model patents. In addition, we have applied for an
additional seven invention patents and five utility model patents, which are
currently pending. These patents and patent applications are intended to protect
our technologies, including production processes of various wire ropes, pickling
methods for steel wire materials and devices designed for the production of
steel wire. Our research and development efforts have generated technological
improvements that have been instrumental in controlling our production costs and
increasing our operational efficiency, most notably with respect to the
development of our rare earth coated materials.
Strong
Recognition from Domestic and International Customers for Supplying Materials
for Infrastructure Projects
The solid
reputation that our management team has developed over the past 15 years in the
prestressed material industry in China and in other countries such as Canada,
the United States, South Korea, Italy and Spain, including an established track
record for consistently providing quality products at competitive prices, has
enabled us to develop a strong customer base and to be involved in major
building projects. Some of our recent projects are listed below under the
heading “Recent Projects.”
We
generated approximately 3.1% of our revenue during the six months ended June 30,
2010 from sales to customers in Southeast Asia (including primarily Taiwan and
South Korea) and Australia, primarily for use in the construction of
bridges. Due to increased demand for our products in the PRC market and
these other markets, we do not intend to reestablish a presence in the United
States or the European Union at the levels we experienced in 2008 in the near
future. However, if opportunities arise in the U.S. or EU markets or in
other international markets for us to win bids on projects or to reengage with
former customers or establish relationships with new customers, we would pursue
such opportunities.
Rigorous
Quality Control Standards
Consistent
with our continuing commitment to quality, we impose rigorous quality control
standards at various stages of our production process. We strictly comply
with various national and international quality standards with respect to the
manufacture of prestressed materials. Our certifications and accreditations
include the United Kingdom Accreditation Service (UKAS), the British Standards
Institution (BSI) certification, the Korean Standards Association (KS)
certification from South Korea, the Market Access certification from the Spanish
Ministry of Industry and an ISO 9001 certification. We believe that these
certifications, together with the numerous national awards that we have been
awarded demonstrate our commitment to producing high-quality products as well as
providing us with a competitive advantage over some of our competitors in
certain international markets and in China.
Experienced
Management and Operational Teams with Domestic PRC International Market
Knowledge
Our
senior management team and key operating personnel have extensive management
skills, relevant operating experience and industry knowledge. In
particular, Dr. Tang, our Chairman, is a Doctor of Economics, Senior Engineer
and Professor of Finance and Statistics at the School of East China Normal
University, and has extensive experience managing and operating companies in the
prestressed steel industry. We believe our management team’s
experience and in depth knowledge of the market in China and internationally
will enable us to continue to successfully execute our expansion strategies. In
addition, we believe our management team’s strong track record will enable us
to continue to take advantage of market opportunities that may
arise.
Our
Products
Our
prestressed steel materials are categorized as plain surface products and coated
products.
Plain
Surface Products
Our plain
surface products, which term refers to our uncoated plain surfaced and
stabilized products, are characterized as follows:
Plain
surface prestressed concrete, or PC, strands. These products consist of PC
wires that are twisted into a bundle and used as precast concrete plates on the
riding surface of bridges. These products are categorized based on size,
strength and structure. Sizes range from 9.3mm to 17.8mm. Strength
level ranges from 1570MPa (megapascal) to 2000MPa. The number of strands
in the products varies between 3 and 7.
Unbonded
plain surface PC strands. These products consist of plain surface PC
strands that are coated with grease and extruded with high-density polyethylene.
These products are used primarily in the construction of bridges and
buildings.
PC wires,
also referred to as stabilized materials. These products are further
divided among the following three categories:
|
§
|
Plain
surface PC wires. This product consists of an individual round wire
used in the construction of
buildings.
|
|
§
|
Indented
PC wires. This product consists of an individual round wire that
contains an indentation used in the construction of
buildings.
|
|
§
|
Helical
(spiral) rib PC wires. This product consists of an individual round
wire whose surface is pulled out into a helical rib pattern used in the
construction of railway ties, or sleepers, and
buildings.
|
PC wires
are categorized based on size, strength and structure. Sizes range from
4.0mm to 9.0mm. Strength level ranges from 1570MPa to 2000MPa. The
number of strands in the products varies between 3 and 7.
Coated
Prestressed Products
Our
coated prestressed products included zinc coated PC products and rare earth
coated PC products. Rare earth coated products are plain surface materials that
are zinc coated with a rare earth zinc-plating protective layer so as to produce
materials that are more corrosion-resistant and long-lasting. The purpose of
galvanizing is to generate a surface layer to protect the materials from
erosion, abrasion and oxidization, without changing the elements of the basic
materials or weakening the basic material’s strength or other functionality
through any techniques that utilize physical chemistry or
electrochemistry. The coating process can cause loss of strength in
regular steel materials, but the loss of strength in zinc coated prestressed
products is minimal.
The
application of rare earth coating technology enables our product to meet the
higher standards of bridge project. We are and will continue to allocate more
resource on rate earth coated PC products.
Our rare
earth coated products are characterized as the following:
Rare
earth coated PC wires. These products are further divided as
follows:
|
·
|
Ф5.0
Series, used for suspension
bridges.
|
|
·
|
Ф7.0
Series, used for cable-stayed
bridges.
|
Rare
earth coated PC strands, used for bridges and buildings.
Customers
that purchase our prestressed materials also purchase other supporting products,
such as anchorage devices and ripple tubes, to complement our materials.
These supplementary products are produced by anchorage manufacturing factories
that are unaffiliated with us.
China is
one of the world’s largest producers and markets for prestressed steel
materials. In 2009 and during the six months ended June 30, 2010, our
sales were predominantly to customers located in the PRC, and as a result, our
primary competitors were PRC domestic companies.
We
believe that being located in China provides us with a number of competitive
factors within our industry, including the following:
|
·
|
Pricing.
Flexibility to control pricing of products and the ability to use
economies of scale to secure competitive pricing
advantages;
|
|
·
|
Technology.
Ability to manufacture products efficiently, utilize low-cost raw
materials, and to achieve better production quality;
and
|
|
·
|
Barriers to entry.
Technical knowledge, access to capital, local market knowledge and
established relationships with suppliers and customers to support the
development of commercially viable production facilities and
products.
|
Competition
among manufacturers of plain surface steel products in China can be
characterized as fragmented, with many large and small companies competing with
each other. Our primary competitors for these products are Baosteel Group
Shanghai Ergang Co. Ltd., Jiangyin Fasten Steel Products Co., Ltd., Jiangyin
Walsin Steel Cable Co. Ltd and Shuangyou Eaststeel.
Competition
among PRC manufacturers of zinc coated prestressed products in China is limited
to only four companies. Our main competitors for these products are
Baosteel Group Shanghai Ergang Co. Ltd., Shuangyou Eaststeel and Jiangyin Walsin
Steel Cable Co. Ltd. Furthermore, we believe that we are the only Chinese
rare earth coated prestressed material manufacturer. While we believe that
our rare earth coating capabilities provide us with a competitive advantage
among our competitors, it is likely that our competitors will seek to develop
similar competing products in the near future. We intend to continue to expend
research and development efforts to advance our rare earth coating applications
even further. However, there can be no assurance that our initial competitive
advantage will be retained and that one or more competitors will not develop
products that are equal or superior to ours in quality or are better priced than
our rare earth coated products.
We
believe that we differentiate ourselves because we have built a recognized brand
name in the industry and because we offer superior product quality, timely
delivery and high value. We believe that we have the following advantages
over many of our competitors:
|
·
|
the
performance and cost effectiveness of our
products;
|
|
·
|
our
ability to manufacture and deliver products in required volumes, on a
timely basis, and at competitive
prices;
|
|
·
|
superior
quality and reliability of our
products;
|
|
·
|
our
after-sale support capabilities, from both an engineering and an
operational perspective;
|
|
·
|
effectiveness
of customer service and our ability to send experienced operators and
engineers as well as a seasoned sales force to assist our customers;
and
|
|
·
|
overall
management capability.
|
Seasonality
Demand
for our products remains fairly consistent throughout the year.
Our
Raw Materials and Supply
Raw
Materials
High
carbon steel wire rods are the primary raw material required to manufacture
prestressed steel materials. The quality and cost of the rods we purchase differ
between our plain surface products and our rare earth and zinc coated products.
Rare earth and zinc coated products require higher-priced rods that are higher
in purity and durability. The price for certain rods needed for coated
products is approximately $150 per ton higher than rods needed for plain surface
products. B87 MnQL, a type of high carbon steel wire rod, is the most
expensive material that we purchase from Chinese suppliers, costing as much as
approximately $1,000 per ton. DLP, a type of high carbon steel wire rod
that we import from Japan, is the most expensive material that we purchase
overall, costing as much as approximately $1,500 per ton.
Our
Supply Sources
We select
our suppliers by assessing criteria such as the quality of materials supplied,
the duration of the supplier’s business relationship with us, pricing, delivery
reliability and response time to orders placed by us. To minimize
purchasing costs, we use a limited number of suppliers. Because we
purchase substantial quantities from these suppliers, we are often able to
procure these products at competitive prices. We usually enter into a
one-year purchase agreement with each supplier and then order on a spot basis
for each delivery. We negotiate pricing with our suppliers on an arm’s
length basis prior to the delivery of these supplies to us, based upon the
prevailing market prices at such time. As we increase the scale of our
production, we may need to establish a more diverse supplier network while
attempting to continue to leverage our purchasing power to obtain favorable
pricing and delivery and payment terms.
Historically,
we purchased a significant percentage of our raw materials from an affiliated
entity, Shanghai Z.F.X. Steel Co., Ltd., or Shanghai ZFX, a supplier of steel
wire rods, which is controlled by our chairman, Dr. Tang. In fiscal years
2008 and 2009 and during the six months ended June 30, 2010, we purchased
approximately 30.2%, 22.2% and 4.2% of our raw materials from Shanghai ZFX,
respectively. We expect that we will continue to purchase the bulk of our
supplies from unaffiliated suppliers in the future, as we did in 2009 and the
first six months of 2010. Specifically, as we expand our rare earth
business, we anticipate that our purchases from Shanghai ZFX will remain at or
near their levels during the first six months of 2010.
The three
suppliers that are unaffiliated with us that supplied us with a significant
percentage of our raw materials in 2008 or 2009 were Zhangjiagang Free Trade
Zone JinDe Trading Co., Ltd., Jiangsu Shagang and LiaoNing TongDa Building
Material Industrial, all based in China. The suppliers that supplied
us with a significant percentage of our raw materials during the six months
ended June 30, 2010 were Jiangyin Runde Logistics Co., Ltd. and Jiangsu Shagang
Group Co., Ltd., each of which provided more than 10% of our supplies during
that period.
Purchases
from our five largest suppliers amounted to 86.5%, 89.5% and 100% of our raw
material purchases in 2008, 2009 and the six months ended June 30, 2010,
respectively.
We are
not dependent on any one of our suppliers, as we are able to source raw
materials from alternative vendors should the need arise. We have not
experienced significant production disruptions due to a supply shortage from our
suppliers, nor have we had any major dispute with a
material supplier.
Volatility
of Price of Raw Materials
We have
no long-term, fixed-price steel purchase contracts. When steel prices
increase, as they did in 2008, competitive conditions will influence how much of
the price increase we can pass on to our customers. When steel prices
decline, as they did in the fourth quarter of 2008 and through the first half of
2009, customer demands for lower prices and our competitors' responses to those
demands could result in lower sale prices, lower margins and inventory valued at
lower of cost or market adjustments as we use existing steel inventory.
During the first half of 2010, the impact of steel price fluctuation on our
results of operations was immaterial.
Manufacturing
Process
Equipment
Our
production facilities use innovative equipment and machinery imported from
France and Italy and is of the highest quality in metal wire drawing, wire
stranding, zinc plating and finishing. Our production lines produce prestressed
steel materials that meet quality standards mandated by numerous countries,
including Spain, the United Kingdom and South Korea.
We own
cutting edge technologies in over 20 high-tech fields, including oil-immersion
preservation technology, new coating production technology, skin pass coating
technology, coating stabilization technology, rare earth alloy plating
technology, new high-temperature phosphorization heating technology, new
material traction technology, rare earth alloy technology, new fixed scoring
technology, new high-temperature low-speed thread stripping technology, and
double coating stabilization, among others. We believe that we are the
leading company in our industry with respect to the implementation of innovative
technologies in the manufacture of prestressed steel materials.
Production
Process
The
production of our products involves various steps, including inspection,
pickling, washing, rinsing, phosphatizing, boronizing, surface treatment,
plating, baking, coating, cooling, polishing, inspection and packaging.
The technology and procedures used in the above processes vary among the
different products that we manufacture and depend upon the product
specifications prescribed by a particular customer.
Generally,
the manufacturing process involves the following:
|
·
|
Cleaning
steel wire rods or other similar raw materials by chemical pickling,
mechanical de-scaling or a similar process. The materials are then
cold drawn and reduced until the desired diameter and resistance
characteristics are achieved. This process is what provides the material
with its strength.
|
|
·
|
In
the production of strands, the individual wires (either 3 or 7 wires) are
braided together to form a
strand.
|
|
·
|
The
final step is to subject the steel material to a thermo-chemical process
which endows the material with mechanical properties, such as low
relaxation, which enable the material to last over
time.
|
Production
Lines
We
currently have 18 production lines, consisting of the following:
|
·
|
Two
surface treatment production lines, one located in our Maanshan facility
and one in our Jiujiang facility, each composed of an acid pickling bath,
rinsing bath, high pressure water rinsing bath, phosphating bath,
saponification (boronizing) bath and cleaning
bath.
|
|
·
|
Seven
wire drawing production lines, four located in our Maanshan facility and
three in our Jiujiang facility, each composed of a pay-off machine, drawn
can and take-up machine. Each of our half-finished products is processed
on a wire drawing production line.
|
|
·
|
Three
PC strand stabilization treatment production lines, two located in our
Maanshan facility and one in our Jiujiang facility, each composed of
stranding machines, straightening wheels, jockey wheels, medium frequency
furnace, cooling tank, take-up and pay-off machines, a wire arraying
machine and a layer winding machine. The PC strand stabilization
product lines in our Jiujiang facility produce plain surface PC strands
and zinc coated PC strands of various
specifications.
|
|
·
|
One
zinc galvanization production line, located in our Jiujiang facility,
composed of a pay-off machine, degreasing furnace, acid rinsing pickling
tank, assistant plating tank, drying furnace, galvanizing furnace, drawing
tower and take-up machine. Half-finished products needed for different
series of zinc coated PC wires and strands are produced on this
line.
|
|
·
|
Two
surface finishing production lines, both located in our Jiujiang facility,
each composed of a pay-off machine, a finishing machine and a take-up
machine. These production lines are used to produce half-finished products
of zinc coated PC wires and
strands.
|
|
·
|
Two
PC wire stabilization treatment production lines, both located in our
Jiujiang facility, each composed of a pay-off machine, jockey wheel,
straightening machine, indent marking machine, medium frequency furnace,
cooling tank, towing machine, shearing machine and take-up machine. Zinc
coated PC wires, round PC wires, indented PC wires and helical rib PC
wires are produced on these production
lines.
|
|
·
|
One
unbonded PC strand production line, located in our Jiujiang facility,
composed of a pay-off machine, oiling machine, high-density polyethylene
plastic injection machine, water tank, towing machine and take-up machine.
This production line is used to produce different series of unbonded plain
surface PC strands and unbonded zinc coated PC
strands.
|
Quality
Control
Consistent
with our continuing commitment to quality, we impose rigorous quality control
standards at various stages in the production process. In addition, our
facilities are equipped with first-class testing equipment, such as a tensile
strength tester and a relaxation tester, which guarantee the high quality and
safety of our products.
We
strictly comply with various national and international quality standards with
respect to the manufacture of pre-stressed materials. Our certifications and
accreditations include the United Kingdom Accreditation Service (UKAS), the
British Standards Institution (BSI) certification, the Korean Standards
Association (KS) certification from South Korea, Market Access certification
from the Spanish Ministry of Industry and an ISO 9001
certification.
Our
procedure when discovering any product quality problem in the production process
includes immediate shut down for inspection. Once the problem is solved, we
continue with production. If a problem occurs with a product, the product
inspector stamps a nonconformity seal and hangs a nonconformity label on the
problematical product. The nonconforming product is moved to a separate area and
is not transferred to the next procedure. We do not deliver nonconforming
products to users.
Facilities
Under PRC
law, land is owned by the state. “Land use rights” are granted to an
individual or entity after payment of a land use right grant fee is made to
the applicable land authority. Land use rights allow the holder the right to use
the land for a specified long-term period.
We have
land-use rights for facilities at two locations in the PRC, one in Maanshan
City, Anhui Province and one in Jiujiang City, Jiangxi Province, which are
utilized for production, research and development and employee living
quarters. We have paid all amounts relating to these properties. The
land-use rights for our Maanshan facility expires in 2058 and the rights for our
Jiujiang facilities expire at different intervals, ranging from 2055 to
2057. Our facilities cover an aggregate of approximately 106,136 square
meters.
As of
June 30, 2010, our production facility in Maanshan City had a total gross floor
area of approximately 47,356 square meters and we employed 63 production
personnel at that facility. Our Maanshan facility contained seven production
lines with an annual production of approximately 80,392 tons in 2009. As of
December 31, 2009, our production facility in Jiujiang City had a total gross
floor area of approximately 58,780 square meters and we employed 65 production
personnel at that facility. Our Jiujiang facility contained eleven production
lines with an annual production of approximately 46,495 tons in 2009.
Historically, we have not experienced any form of disruption in our production
facilities.
We
believe that our current property rights are sufficient for our current
operations. However, to continue growth, we expect to expand our production
capacity in the future. Specifically, we intend to construct a new
building at our Maanshan facility using a portion of the net proceeds from this
offering.
Sales,
Marketing and Distribution
Sales
and Marketing
We have
been successful to date in maintaining long-term relationships with numerous
customers by satisfying their commercial needs. In addition, our marketing team
monitors the market and responds accordingly in order to increase our customer
base. We have a dedicated marketing and sales team of 11 employees that
proactively follows up on new sales leads.
Our
marketing team develops strategies for the short-term and long-term by obtaining
first-hand information about our products’ market positioning, monitoring
national macro-economic policies, inquiring about current and future markets
needs, following the progress of existing projects and the satisfaction of
existing customers. In addition, our technicians and marketing specialists
regularly visit governmental departments, construction development companies,
design institutes, supervision institutions, national construction quality
inspection institutions and builders to promote new products. We have also
joined the PRC national bridge exhibition for marketing purposes.
Bidding
Process
Many of
the projects in our industry are awarded through a competitive bidding process
among qualified bidders. The evaluation of proposals is undertaken objectively,
consistently and without bias towards particular bidders. Qualified bidders are
evaluated against a predetermined set of criteria, and contracts are almost
never awarded on the basis of price alone. A contract is awarded to the bidder
or bidders that provide what is considered a proposal that offers the best value
to the purchaser, as determined by the predetermined criteria set by the
purchaser. The criteria vary depending on the type of contract. Examples of
criteria include price, technical merit, flexibility to future changes to
requirements, speed of project delivery, sustainability and quality.
During the bid evaluation process, our marketing team and members of our
management respond to various inquiries and our company undergoes various
assessments, including compliance, technical, commercial bid and qualification
assessments.
Distribution
Both of
our manufacturing plants are equipped with facilities for cargo lifting,
shipment and distribution. Products for domestic customers are distributed to
the destination designated by our customers. Products for international
customers are delivered either to carriers at various ports of exit in China or
delivered to a designated destination overseas.
Technical
After-Sales Services
Our team
of experienced engineers and technicians provides after-sales services to our
customers. After the delivery of our materials, our engineers train our
customers to install and identify and address safety and maintenance
concerns. After a sale of our product, we introduce and advertise the
company brand position, distribute a guide application method process, issue
regulation manuals, and explain and solve general and difficult
problems.
We sell
the majority of our products domestically in China. Since our inception,
we have also exported our products to foreign countries, including the United
States, Canada, Spain, South Korea, Taiwan, Australia and Saudi Arabia, among
others. Our customers are diverse in nature, as we sell our products
directly to end users, to other manufacturers and to distributors, in each case
depending on the nature of the product and the utilization of the
product.
The six
customers whose purchases comprised a significant percentage of our sales in
2008 or 2009 were Shanghai Zhaoyang New Metal Material (China), the Crispin
Company (United States), Ibercordones Pretensados (Spain), National Metal
Manufacturing and Casting Co. (Saudi Arabia), Zhangjiagang Ruifeng Iron and
Steel Co. (China) and Hada Railway Passenger Dedicated Lines Co., Ltd.
Shanghai Zhaoyang New Metal Material (China) owns a 40% interest in Shanghai
Ossen Investment Holding (Group) Co., Ltd., of which Dr. Tang, our chairman, is
president.
While we
value our relationship with each of our customers, we believe that generally the
loss of any particular customer, including our largest customers, would not
materially impact our business in the long-term. Many of our customer
contracts relate to designated infrastructure projects which are performed
during a defined period of time, and are not necessarily long-term in
nature. Accordingly, if any of our customers were to discontinue
purchasing our products, we would actively seek new customers, which we have
been successful doing in the past. However, we currently consider our
newly established relationship with Zhangjiagang Ruifeng Iron and Steel Co.,
Ltd. to be important to our business. In addition, one of our customers,
whose sales did not amount to 10% or more of our overall revenues in 2008 or
2009, has been a long-term strategic partner of ours.
In
anticipation of the imposition of anti-dumping rates by the U.S. and the
European Union, which were ultimately implemented in 2009, we discontinued sales
of our plain surface materials to Crispin, Ibercordones and our other customers
in those regions at the end of 2008.
In 2008,
2009 and the six months ended June 30, 2010, sales to our six largest customers,
in the aggregate, accounted for approximately 81.0%, 86.7% and 79.5% of our
total sales, respectively. The following table provides the name of each
customer that contributed to 10% of our revenues in each of 2008, 2009 and the
six months ended June 30, 2010 and the revenues generated from such customer
during these periods.
Name of Customer
|
|
2008 Revenues
(%)
|
|
|
2009 Revenues
(%)
|
|
|
First Half of 2010
Revenues (%)
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai
Zhaoyang New Metal Material Co., Ltd.
|
|
|
35.8 |
|
|
|
53.8 |
|
|
|
20.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crispin
Company
|
|
|
18.8 |
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ibercordones
Pretensados S.L.
|
|
|
15.7 |
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhangjiagang
Ruifeng Iron and Steel Co., Ltd.
|
|
|
* |
|
|
|
17.5 |
|
|
|
35.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jiangyin
Jingchen Logistics Distribution Exchange Co., Ltd.
|
|
|
* |
|
|
|
* |
|
|
|
12.8 |
|
* Less
than 10% of our annual revenues.
The
following table describes the breakdown of our sales in 2008, 2009 and the six
months ended June 30, 2010 between our domestic and international
customers.
|
|
Year Ended December 31,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
Domestic
Sales
|
|
$ |
97,361,596 |
|
|
$ |
51,611,646 |
|
|
|
56,911,895 |
|
|
|
38,452,787 |
|
International
Sales
|
|
|
3,726,200 |
|
|
|
31,130,664 |
|
|
|
1,796,880 |
|
|
|
1,963,610 |
|
Total
Sales
|
|
$ |
101,087,796 |
|
|
$ |
82,742,310 |
|
|
$ |
58,708,775 |
|
|
$ |
40,416,407 |
|
The
following list is a sample of some of the recent projects in which our
prestressed steel materials were used in both the domestic and the international
markets:
Nanchang
New Bayi Bridge, PRC
|
Jiujiang-Lushan
Railway Project, PRC
|
Hefei-Bangbu
Passenger Dedicated Line, PRC
|
Beijing-Shanghai
Express Rail, PRC
|
|
|
|
|
Shenzhan
Bay Bridge, PRC
|
Boyang
Lake Railway Bridge, PRC
|
Wenfu
Railway, PRC
|
Wuhan-Guangzhou
Railway, PRC
|
|
|
|
|
Pantian
Highway, PRC
|
Shanghai
No. 6 Subway, PRC
|
Nanjing-Hangzhou
Passenger Dedicated Line, PRC
|
Yunnan
Shi-Suo Expressway, PRC
|
|
|
|
|
Alameda
Corridor Turnpike, Alameda, California, U.S.A.
|
MGM
Grand Parking, Las Vegas, Nevada, U.S.A.
|
Dallas
Center of Performing Arts, Dallas, Texas, U.S.A.
|
Trois
Rivieres Grand Anchors, Canada
|
|
|
|
|
Nam
Chang Bridge, South Korea
|
Parking
Apron in the Cadiz Airport, Spain
|
Grand
Hyatt San Antonio, Texas, U.S.A.
|
Trump
Tower, Las Vegas, Nevada,
U.S.A.
|
In
addition, our rare earth coated prestressed materials are being used in a number
of bridge construction projects in the PRC, including Ningbo Yongjiang Grand
Bridge, Balimiao Canal Bridge, Taohuayu Yellow River Bridge, Aizhai Suspension
Bridge and Lishui Grand Bridge.
Our
research and development efforts are focused on three objectives:
|
·
|
Superior
product safety and quality;
|
|
·
|
Reduction
of operating costs; and
|
|
·
|
Sustaining
growth through the development of new
products.
|
We have a
research and development staff at each of our facilities. In total,
nineteen employees are dedicated to research and development. We spent
$0.5 million, $1.1 million, $1.5 million and $1.7 million in the six months
ended June 30, 2010 and in fiscal years 2009, 2008 and 2007, respectively, on
our research and development activities.
We
regularly train the members of our research and development department in order
to consistently enhance our research and development capabilities in the field
of coating technology. We have developed a business model that involves a very
close interrelationship between our research and development department and our
product development and marketing departments. As a result, we focus our
research and development activities on projects that would enable us to branch
out our products into new desired markets. In addition, we conduct
research and development activities that enable us to increase our market share
in existing markets in the PRC and internationally. We also focus certain
of our research and development activities on higher margin products that can be
sold to customers in international markets.
Specifically,
we have entered into cooperation agreements with Jiujiang Institute pursuant to
which the institute assists us in our efforts to improve the comprehensive
function and manufacturing technique of our high strength, anti-erosion zinc
coated prestressed strands. These high strength products, which have high
endurance against erosion, are sold domestically and internationally. In
addition, we are cooperating with other steel manufacturers in research efforts
regarding zinc coated PC wires, which serve as raw materials for our zinc coated
PC strands, indented PC wires and helical rib PC wires with high performance and
are designed for our international customers.
We have
also entered into an agreement with the Shanghai Machinery Manufacturing
Technology Research Institute. Pursuant to this agreement, the institute
designs high strength, indented PC wire and zinc coated PC wire for us according
to our specifications.
We
believe that our research and development activities and production technology
for rare-earth zinc coated materials have contributed significantly to our
growth. By using rare earth zinc-plating technology, we are able to lower
the temperature for the stabilizing treatment during the production process and
thereby minimize the loss of strength during the stabilizing process.
As a result, this technology reduces the level of strength required of our raw
materials under circumstances of unvaried finished product strength requirement
and enables us to produce materials with greater strength under circumstances in
which the strength of raw materials remains firm. We believe that we are
the only enterprise which can produce rare-earth zinc coated pre-stressing
materials of 1,860 megapascal and 15.20 mm in the world, as a result of our
rare earth zinc-plating technology.
We plan
to continue our research and development efforts to strengthen our leading
position in our industry. For example, we plan to develop rare earth coated
prestressed materials that are larger (up to 15.24 mm and 1,860 mPa) and can
withstand greater levels of pressure as well as new greased prestressed
materials of 12.7 mm and 1,860 mPa. We also own or lease various technologies
that improve the quality of our products and reduce our operating costs,
including coating polished technology, stabilizing treatment technology for dual
tension gear zinc coated prestressing material, warning technology for missing
plating of coating production line, stranded wire greasing technology, water
cut-off technology by strander infrared temperature detection and other core
technologies.
We will
continue to focus on developing fundamental coating technology and applications
for the following technologies in the future:
|
·
|
Rare
earth coating technology;
|
|
·
|
Surface
finishing/ polishing technology;
|
|
·
|
Dual
tension gear wire stabilizing treatment
process;
|
|
·
|
Connector
production technology without
shutdown;
|
|
·
|
New
technology on constant high temperature constant tension stabilizing
treatment; and
|
|
·
|
High
speed stabilizing treatment
technology.
|
We rely
on a combination of patents, trademarks, domain names and confidentiality
agreements to protect our intellectual property. Our manufacturing processes are
based on technology developed primarily in-house by our research and development
and engineering personnel.
With
respect to proprietary know-how that is not patentable and processes for which
patents are difficult to enforce, we rely on, among other things, trade secret
protection and confidentiality agreements to safeguard our interests. All of our
research and development personnel have entered into confidentiality and
proprietary information agreements with us. These agreements address
intellectual property protection issues and require our associates to assign to
us all of the inventions, designs and technologies they develop during the
course of employment with us. We are not aware of any material
infringement of our intellectual property rights.
Patents
We have
been granted eighteen patents by the State Intellectual Property Office of the
PRC, including one invention patent and seventeen utility model patents. In
addition, we have applied for an additional seven invention patents and five
utility model patents, which are currently pending. Actual examination times for
patent applications in China vary, but examinations of similar patent
applications have taken approximately one year. These patents and patent
applications are intended to protect the production processes of various wire
ropes, pickling methods of materials of steel wire and devices designed for the
steel wire production. The term of all of the utility model patents is ten years
from the filing of the application and the term of all of the invention patents
is twenty years from the filing of the application. We currently do not
have any patents registered or pending in any jurisdiction outside of the
PRC.
The
following table provides the name, the application number or patent number, the
name of the applicant or patent holder and the status of our registered
invention patents and each of our invention patent applications, and the
expiration date of our registered invention patent:
Name
|
|
ApplicationNo.
/Patent No.
|
Applicant
/Patent
Holder
|
Status
|
Expiration
Date
|
|
|
|
|
|
|
Stabilizing
Process of Indented Wire
|
|
2007101571490
|
Ossen
Jiujiang
|
Registered
|
11/22/2027
|
|
|
|
|
|
|
Method
to Change the Length of Waste of Stranded Wire Joint
|
|
200910144241.2
|
Ossen
Materials
|
Pending
|
-
|
|
|
|
|
|
|
Stirring
& Pickling Process of Raw Materials of Stranded Wire
|
|
200910144242.7
|
Ossen
Materials
|
Pending
|
-
|
|
|
|
|
|
|
Multi-Bath
Pickling Process of Materials of Stranded Wire
|
|
200910144243.1
|
Ossen
Materials
|
Pending
|
-
|
|
|
|
|
|
|
Production
Process of Zinc Coated Steel Wire
|
|
2010101051799
|
Ossen
Jiujiang
|
Pending
|
-
|
|
|
|
|
|
|
Production
Process of Helical Rib Steel Wire
|
|
2010101051534
|
Ossen
Jiujiang
|
Pending
|
-
|
|
|
|
|
|
|
Production
Process of Pre-stressed Zinc Coated Stranded Wire
|
|
2010101052062
|
Ossen
Jiujiang
|
Pending
|
-
|
|
|
|
|
|
|
Stabilizing
Production Process of High Strength Rare Earth Coated PC Steel
Wire
|
|
2010101051784
|
Ossen
Jiujiang
|
Pending
|
-
|
The
following table provides the name, the application number or patent number, the
name of the applicant or patent holder and the status of each of our registered
utility model patents and utility model patent applications, and the expiration
dates of our registered utility model patents:
Name
|
|
ApplicationNo.
/Patent
No.
|
Applicant
/Patent
Holder
|
Status
|
Expiration
Date
|
|
|
|
|
|
|
Loose
Tensile Test Device for PC Wire
|
|
ZL200720192972.0
|
Ossen
Materials
|
Registered
|
12/02/2017
|
|
|
|
|
|
|
Hanging
Box Used in Phosphate Bath of Stranded Wire
|
|
ZL200820185077.0
|
Ossen
Materials
|
Registered
|
08/21/2018
|
|
|
|
|
|
|
Oiling
Device for PC Strand
|
|
ZL200820185079. x
|
Ossen
Materials
|
Registered
|
08/21/2018
|
|
|
|
|
|
|
Water
Cut-off Device to Test Infrared Temperature of Stranding
Machine
|
|
ZL200820185080.2
|
Ossen
Materials
|
Registered
|
08/21/2018
|
|
|
|
|
|
|
Infrared
Safety Control Device for Lift Truck
|
|
ZL200820185081.7
|
Ossen
Materials
|
Registered
|
08/21/2018
|
|
|
|
|
|
|
Device
Designed to Control Smoke by Temperature
|
|
ZL200820185082.1
|
Ossen
Materials
|
Registered
|
08/21/2018
|
|
|
|
|
|
|
Device
Designed to Control Water Temperature When Phosphatizing the PC
Strand
|
|
200920233724.5
|
Ossen
Materials
|
Registered
|
07/29/2019
|
|
|
|
|
|
|
Device
for Testing Center Steel Wire Broken for Stranded Wire
|
|
200920233725.x
|
Ossen
Materials
|
Registered
|
07/29/2019
|
|
|
|
|
|
|
Device
Designed to Test Temperature of Steel Wire When Drawing the Stranded
Wire
|
|
200920233726.4
|
Ossen
Materials
|
Registered
|
07/29/2019
|
Name
|
|
ApplicationNo.
/Patent
No.
|
Applicant
/Patent
Holder
|
Status
|
Expiration
Date
|
|
|
|
|
|
|
Steel
Wire Joint Machine with Pressure Detecting Function
|
|
200920233728.3
|
Ossen
Materials
|
Registered
|
07/29/2019
|
|
|
|
|
|
|
Automatic
Paper Rolling Device of Asphalt Paper
|
|
200920233729.8
|
Ossen
Materials
|
Registered
|
07/29/2019
|
|
|
|
|
|
|
Aerial
Overhaul Platform for Forklift
|
|
200920233730.0
|
Ossen
Materials
|
Registered
|
07/29/2019
|
|
|
|
|
|
|
Skid
Used When Packing PC Strand
|
|
200920233731.5
|
Ossen
Materials
|
Registered
|
07/29/2019
|
|
|
|
|
|
|
Precision
Measurement Instrument for measuring Indented Depth of Pre-stressed
Indented PC Wire
|
|
2010201102461
|
Ossen
Jiujiang
|
Pending
|
-
|
|
|
|
|
|
|
Double-Pump
Spray Device of Zinc Coated Steel Wire’s Coating- Assistant
Tank
|
|
2010201102599
|
Ossen
Jiujiang
|
Pending
|
-
|
|
|
|
|
|
|
A
New Dual-Conical-Surfaces Self-locking Power Lock
|
|
2010201102809
|
Ossen
Jiujiang
|
Pending
|
-
|
|
|
|
|
|
|
A
New Stranding Pulley Designed for Production of High Strength Pre-stressed
Rare Earth Coated Steel Wire
|
|
201020117245x
|
Ossen
Jiujiang
|
Pending
|
-
|
|
|
|
|
|
|
Cooling
Device Designed for the Cutter Bit for Indentation Used for Production of
Indented PC Wire
|
|
ZL200720192974.x
|
Ossen
Jiujiang
|
Registered
|
12/02/2017
|
|
|
|
|
|
|
Adjustable
Ingress Pipe of Steel Wire-rewinding Machine
|
|
ZL200720192973.5
|
Ossen
Jiujiang
|
Registered
|
12/02/2017
|
|
|
|
|
|
|
A
Control Device for Alarming the Coating Leakage on the Zinc Coating
Production Line
|
|
ZL200720192533.x
|
Ossen
Jiujiang
|
Registered
|
11/22/2017
|
|
|
|
|
|
|
Device
Designed to Remove Dust of High Strength Pre-stressed Rare Earth Coated
Steel Wire
|
|
2010201102654
|
Ossen
Jiujiang
|
Registered
|
02/08/2020
|
|
|
|
|
|
|
Stabilizing
Temperature Alarm Control Device for High Strength Pre-stressed Rare Earth
Coated Steel Wire
|
|
2010201172407
|
Ossen
Jiujiang
|
Pending
|
-
|
We have
been granted a total of five trademarks, three of which are registered
trademarks in the PRC and two of which are registered with the World
Intellectual Property Organization (WIPO) in accordance with Madrid Agreement.
The five trademarks which are described in the table below, were transferred by
Shanghai Ossen Investment Co., Ltd. to Ossen Materials in 2008 and
2009.
Name of Trademark
|
|
Application No.
/Trademark No.
|
|
Applicant
/Trademark
Holder
|
|
Status
|
|
|
|
|
|
|
|
A
Figurative Trademark (Registered
under Madrid Agreement)
|
|
0973552
|
|
Ossen
Innovation Materials
|
|
Registered
|
“OSSEN” (Registered
under Madrid Agreement)
|
|
0945308
|
|
Ossen
Innovation Materials
|
|
Registered
|
A
Figurative Trademark (PRC Domestic Registered)
|
|
4396898
|
|
Ossen
Innovation Materials
|
|
Registered
|
“OSSEN”
(PRC Domestic Registered)
|
|
4396895
|
|
Ossen
Innovation Materials
|
|
Registered
|
“” (Domestic Registered)
|
|
4396896
|
|
Ossen
Innovation Materials
|
|
Registered
|
Environmental
Matters
The
Environmental Protection Law, promulgated by the National People’s Congress on
December 26, 1989, is the primary law for environmental protection in
China. The law establishes basic principles for coordinated
advancement of economic growth, social progress and environmental protection,
and defines the rights and duties of governments at all levels. Local
environmental protection bureaus may set stricter local standards than the
national standards and enterprises are required to comply with the stricter of
the two sets of standards. Due to the nature of our business, we
produce certain amounts of waste water, gas and solid waste materials during the
course of our production. We believe that we are in compliance in all
material respects with applicable PRC laws and regulations. All of
our products meet the relevant environmental requirements under PRC laws and
during the two years ended December 31, 2009 and the six months ended June 30,
2010, we were not subject to any fines or legal action involving non-compliance
with any relevant environmental regulation, nor are we aware of any threatened
or pending action, including by any environmental regulatory
authority.
Governmental
Regulations
Business
license
Any
company that conducts business in the PRC must have a business license that
covers a particular type of work. Our business license covers our present
business of manufacturing, processing, procuring and selling metallic materials,
metallic products, new alloy materials, rare earth application products,
building materials, general machinery and related products. Prior to expanding
our business beyond that of our business license, we are required to apply and
receive approval from the PRC government.
Employment
laws
We are
subject to laws and regulations governing our relationship with our employees,
including: wage and hour requirements, working and safety conditions,
citizenship requirements, work permits and travel restrictions. These include
local labor laws and regulations, which may require substantial resources for
compliance. China’s National Labor Law, which became effective on January 1,
1995, and China’s National Labor Contract Law, which became effective on January
1, 2008, permit workers in both state and private enterprises in China to
bargain collectively. The National Labor Law and the National Labor Contract Law
provide for collective contracts to be developed through collaboration between
the labor union (or worker representatives in the absence of a union) and
management that specify such matters as working conditions, wage scales, and
hours of work. The laws also permit workers and employers in all types of
enterprises to sign individual contracts, which are to be drawn up in accordance
with the collective contract.
Patent
protection in China
The PRC
has domestic laws for the protection of copyrights, patents, trademarks and
trade secrets. The PRC is also signatory to some of the world’s major
intellectual property conventions, including:
|
·
|
Convention
establishing the World Intellectual Property Organization (WIPO
Convention) (June 4, 1980);
|
|
·
|
Paris
Convention for the Protection of Industrial Property (March 19,
1985);
|
|
·
|
Patent
Cooperation Treaty (January 1, 1994);
and
|
|
·
|
The
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
(November 11, 2001).
|
Patents
in the PRC are governed by the China Patent Law and its Implementing
Regulations, each of which went into effect in 1985. Amended versions
of the China Patent Law and its Implementing Regulations came into effect in
2001 and 2003, respectively.
The PRC
is signatory to the Paris Convention for the Protection of Industrial Property,
in accordance with which any person who has duly filed an application for a
patent in one signatory country shall enjoy, for the purposes of filing in the
other countries, a right of priority during the period fixed in the convention
(12 months for inventions and utility models, and 6 months for industrial
designs).
The
Patent Law covers three kinds of patents - patents for inventions, utility
models and designs. The Chinese patent system adopts the principle of first to
file, which means that a patent may be granted only to the person who first
files an application. Consistent with international practice, the PRC allows the
patenting of inventions or utility models that possess the characteristics of
novelty, inventiveness and practical applicability only. For a design to be
patentable it cannot be identical with, or similar to, any design which, before
the date of filing, has been publicly disclosed in publications in the country
or abroad or has been publicly used in the country, and should not be in
conflict with any prior right of another.
Value
added tax
Pursuant
to the Provisional Regulation of China on Value Added Tax and their implementing
rules, all entities and individuals that are engaged in the sale of goods, the
provision of repairs and replacement services and the importation of goods in
China are generally required to pay VAT at a rate of 17.0% of the gross sales
proceeds received, less any deductible VAT already paid or borne by the
taxpayer. Furthermore, when exporting goods, the exporter is entitled to a
portion, or in some instances all, of the VAT refund that the exporter
previously paid.
Foreign
currency exchange
Under the
PRC foreign currency exchange regulations applicable to us, the Renminbi is
convertible for current account items, including the distribution of dividends,
interest payments, and trade and service-related foreign exchange transactions.
Conversion of Renminbi for capital account items, such as direct investment,
loan, security investment and repatriation of investment, however, is still
subject to the approval of the PRC State Administration of Foreign Exchange, or
SAFE. Foreign-invested enterprises may buy, sell and/or remit foreign currencies
only at those banks authorized to conduct foreign exchange business, after
providing valid commercial documents and, in the case of capital account item
transactions, obtaining approval from SAFE. Capital investments by
foreign-invested enterprises outside of China are also subject to limitations,
which include approvals by the Ministry of Commerce, SAFE and the State Reform
and Development Commission.
Mandatory
statutory reserve and dividend distributions
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends out of their accumulated profits only, if any, as determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10% of
its after-tax profit based on PRC accounting standards each year for its general
reserve until the cumulative amount of such reserve reaches 50% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Employees
As of
June 30, 2010, we had 238 full-time employees. The following table shows the
breakdown in numbers and percentages of employees by department:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
127 |
|
|
|
54 |
% |
Technology
|
|
|
45 |
|
|
|
19 |
% |
Research
& Development
|
|
|
19 |
|
|
|
8 |
% |
Quality
Control
|
|
|
9 |
|
|
|
4 |
% |
General
Administration, Purchasing, Sales and Marketing
|
|
|
38 |
|
|
|
16 |
% |
Total
|
|
|
238 |
|
|
|
100 |
% |
We have
not experienced any significant labor disputes and consider our relationship
with our employees to be good. Our employees are not covered by any collective
bargaining agreement.
We have
established an employee welfare plan in accordance with the relevant PRC laws
and regulations. Our total expenses for this plan was approximately $26,286,
$39,735 and $30,807 in 2008, 2009 and the six months ended June 30, 2010,
respectively.
As we
continue to expand our business, we believe it is critical to hire and retain
top talent, especially in the areas of marketing, metal surface treatment,
materials science, and technology engineering. We believe we have the ability to
attract and retain high quality engineering talent in China based on our
competitive salaries, annual performance-based bonus system, and equity
incentive program for senior employees and executives. In addition, we have a
training program for entry-level engineers that allows them to work closely with
an experienced mentor to gain valuable hands-on experience and provide other
professional development opportunities, including seminars where experienced
engineers give lectures on specific engineering topics and new methods that can
be applied to various projects.
Legal
Proceedings
From time
to time, we may be involved in various claims and legal proceedings arising in
the ordinary course of business. We are not currently a party to any such claims
or proceedings which, if decided adversely to us, would either, individually or
in the aggregate, have a material adverse effect on our business, financial
condition, results of operations or cash flows.
PRC
GOVERNMENT REGULATIONS
This
section sets forth a summary of the material regulations or requirements that
affect our business activities in China. Certain of these regulations and
requirements, such as those relating to tax, foreign currency exchange, dividend
distribution, regulation of foreign exchange in certain offshore investment
transactions, and new mergers and acquisitions rules, may affect our
shareholders’ right to receive dividends and other distributions from
us.
Tax
According
to the relevant laws and regulations in the PRC, foreign invested enterprises
established prior to January 1, 2008 are entitled to full exemption from income
tax for two years beginning with the first year in which such enterprise is
profitable and a 50% income tax reduction for the subsequent three
years. Ossen Materials was entitled to an EIT exemption during the
two years ended December 31, 2006, was subject to a 50% income tax reduction
during the three years ended December 31, 2009. Ossen Jiujiang was
entitled to the EIT exemption during the two years ended December 31, 2008, was
subject to 50% income tax reduction during the year ended December 31, 2009, and
will be subject to 50% income tax reduction during the period from January 1,
2010 to December 31, 2011. Ossen Materials is subject to a 15% tax
rate through 2011 as the result of its being designated a high-tech enterprise,
and Ossen Jiujiang will be subject to a 15% tax rate through 2012 as a result of
its being designated a high-tech enterprise. As our income tax
obligations increase over time, our net income will be affected.
Under the
new PRC Enterprise Tax Law, a resident enterprise is subject to an enterprise
income tax at a rate of 25% on its global taxable income, and a non-resident
enterprise with any institution or establishment within China is subject to an
income tax rate of 25% on taxable income derived by such institution or
establishment from within China as well as on taxable income earned outside of
China but which as a de facto connection with such institution or establishment.
In addition, non-resident enterprises without any institution or establishment
within China, or non-resident enterprises whose income has no connection to its
institution or establishment inside China, must pay a withholding income tax at
the rate of 20% on taxable income derived from inside China. Dividends payable
by a FIE to its foreign investors are not expressly exempted from the income tax
on dividends under the new PRC enterprise tax law. The new tax law empowers the
State Council of the PRC to promulgate appropriate implementation rules and
regulations. However, the State Council and PRC tax authorities have not
promulgated any related implementation rules.
Under the
PRC Enterprise Income Tax Law, enterprises established under the laws of foreign
countries or regions whose “de facto management organs” are located within the
PRC territory are considered resident enterprises and will normally be subject
to the enterprise income tax at the rate of 25% on their global income, but the
PRC Enterprise Income Tax Law does not define the term “de facto management
organs.” Substantially all of our management personnel are currently located in
the PRC, and if they remain located in the PRC after the effective date of the
PRC Enterprise Income Tax Law, we may be considered a resident enterprise and
therefore be subject to the enterprise income tax at the rate of 25% on our
global income.
Although
substantially all of our operational management is currently based in the PRC,
it is unclear whether PRC tax authorities would require (or permit) us to be
treated as a PRC resident enterprise. To our knowledge, there is a lack of clear
guidance regarding the criteria pursuant to which the PRC tax authorities will
determine the tax residency of a company under the EIT Law. As a result, we cannot be certain as to whether we will be
subject to the tax applicable to resident enterprises or non-resident
enterprises under the EIT Law. If we and our offshore holding companies are
considered to be PRC resident enterprises, we would be subject to the PRC
enterprise income tax at the rate of 25% on our worldwide income. In such cases,
however, there is no guarantee that the preferential treatments to PRC tax
residents will automatically apply to us, such as the withholding tax exemption
on dividends between PRC resident companies.
For risks
and uncertainties related to the PRC Enterprise Income Tax Law, see “Risk
Factors — Risks Related to Doing Business in China.”
Dividend
Distribution
Foreign
invested enterprises in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with China’s accounting
standards and regulations. In addition, foreign invested enterprises
in China are required to set aside at least 10% of their respective after-tax
profits based on PRC accounting standards each year, if any, to fund its general
reserves fund, until the accumulative amount of such reserves reaches 50% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of each of our PRC subsidiaries, each of which is a foreign
invested enterprise, has the discretion to allocate a portion of its after-tax
profits to its staff welfare and bonus funds, which is likewise not
distributable to its equity owners except in the event of a liquidation of the
foreign-invested enterprise.
Regulation
of Foreign Exchange in Certain Onshore and Offshore Transactions
In
October 2005, the SAFE issued a regulation entitled “Circular on Certain Issues
Concerning Foreign Exchange Regulation of Fund Raising and Roundtrip Investments
by Domestic Residents through Offshore Special Purpose Companies,” or SAFE
Notice No. 75, which became effective as of November 1, 2005. Under SAFE
Notice No. 75, domestic residents, whether natural or legal persons, must
register with the relevant local SAFE branch prior to the time they establish or
take control of an offshore special purpose company for the purpose of overseas
equity financing based on onshore assets or equity interests held by them. The
term “domestic legal person residents” as used in SAFE Notice No. 75 refers to
those entities with legal person status or other economic organizations
established within the territory of China. The term “domestic natural person
residents” as used in SAFE Notice No. 75 includes all Chinese citizens and all
other natural persons who habitually reside in China for economic
interest.
Domestic
residents are required to complete amended registrations with the local SAFE
branch upon (i) injection of equity interests or assets of an onshore
enterprise to the offshore special purpose company and (ii) subsequent
overseas equity financing by such offshore special purpose company. Domestic
residents are also required to complete amended registrations or filing with the
local SAFE branch within 30 days of any material change in the shareholding
or capital of the offshore special purpose company without involving roundtrip
investment, such as changes in share capital, share transfers and long-term
equity or debt investments and providing security for debt. Domestic residents
who have already incorporated or gained control of offshore special purpose
companies that have made onshore investment in China before SAFE Notice No. 75
became effective must make such registration with the local SAFE branch on or
before March 31, 2006.
Under
SAFE Notice No. 75, Domestic residents are further required to repatriate back
into China all of their dividends, profits or capital gains obtained from their
shareholdings in the offshore special purpose company within 180 days of
their receipt of such dividends, profits or capital gains. The registration and
filing procedures under SAFE Notice No. 75 are prerequisites for other approval
and registration procedures necessary for capital inflow from the offshore
entity, such as inbound investments or shareholders loans, or capital outflow to
the offshore entity, such as the payment of profits or dividends, liquidating
distributions, equity sale proceeds, or the return of funds upon a capital
reduction.
Our PRC
shareholders, including Dr. Tang, have not yet registered under SAFE Notice No.
75. We have requested that these individuals make the required
registrations in connection with this offering.
Regulation
of Overseas Investments and Listings and the New Merger and Acquisition
Rules
On
August 8, 2006, six PRC regulatory agencies, including the Ministry of
Commerce, the State Assets Supervision and Administration Commission, the State
Administration for Taxation, the State Administration for Industry and Commerce,
the CSRC, and SAFE, jointly adopted the Regulation on Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, or the new M&A rule, which
became effective on September 8, 2006. This regulation includes provisions
that purport to require offshore special purpose companies, controlled directly
or indirectly by PRC companies or individuals contemplating listing on an
overseas stock exchange their operating companies or assets located in China, to
obtain the approval of the CSRC prior to the listing and trading of their
securities on any overseas stock exchange.
On
September 21, 2006, the CSRC published on its official website a notice
specifying documents and materials required to be submitted to the CSRC relating
to overseas listings by special purpose companies.
The
application of the new M&A rule with respect to overseas listings of special
purpose companies remains unclear, with no consensus currently among the leading
PRC law firms regarding the scope of the applicability of the CSRC approval
requirement.
Grandall
Legal Group, our PRC counsel, has advised us that CSRC approval is not required
in connection with the establishment of our PRC subsidiaries because the equity
interests in these entities were established by us prior to the effective date
of the regulation.
Regulations
on Employee Share Options
On
December 25, 2006, the People’s Bank of China promulgated the
Administrative Measures for Individual Foreign Exchange. On January 5,
2007, SAFE issued the Implementation Rules of the Administrative Measures for
Individual Foreign Exchange, or the Individual Foreign Exchange Rule, which,
among other things, specifies approval requirements for a PRC citizen’s
participation in the employee stock ownership plans or stock option plans of an
overseas publicly-listed company. On March 28, 2007, SAFE issued the
Processing Guidance on Foreign Exchange Administration of Domestic Individuals
Participating in the Employee Stock Ownership Plans or Stock Option Plans of
Overseas-Listed Companies, or the Stock Option Rule. According to the Stock
Option Rule, if a PRC domestic individual participates in any employee stock
ownership plan or stock option plan of an overseas listed company, a qualified
PRC domestic agent or the PRC subsidiaries of such overseas listed company
shall, among other things, file, on behalf of such individual, an application
with SAFE to obtain approval for an annual allowance with respect to the
purchase of foreign exchange in connection with the stock purchase or stock
option exercise as PRC domestic individuals may not directly use overseas funds
to purchase stocks or exercise stock options. Such PRC individuals’ foreign
exchange income received from the sale of stocks and dividends distributed by
the overseas listed company and any other income shall be fully remitted into a
collective foreign currency account in the PRC opened and managed by the PRC
subsidiaries of the overseas listed company or the PRC agent before distribution
to such individuals.
Our PRC
citizen employees who have been granted share options, or PRC optionees, will be
subject to the Stock Option Rule when our company becomes an overseas listed
company upon the completion of this offering. If we or our PRC optionees fail to
comply with the Individual Foreign Exchange Rule and the Stock Option Rule, we
and/or our PRC optionees may be subject to fines and other legal sanctions. See
“Risk Factors—All employee participants in our share incentive plans who are PRC
citizens may be required to register with the SAFE. We may also face regulatory
uncertainties that could restrict our ability to adopt additional option plans
for our directors and employees under PRC law.”
In
addition, the State Administration for Taxation has issued certain circulars
concerning employee share options. Under these circulars, our employees working
in the PRC who exercise share options will be subject to PRC individual income
tax. Our PRC subsidiaries have obligations to file documents related to employee
share options with relevant tax authorities and to withhold individual income
taxes of those employees who exercise their share options. If our employees fail
to pay or we fail to withhold their income taxes according to relevant laws and
regulations, we may face sanctions imposed by the tax authorities or other PRC
government authorities.
Regulations
on Tax Collection for Share Transfers by Non-PRC Resident
Enterprises
Pursuant
to the Notice on Strengthening Administration of Enterprise Income Tax for Share
Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the
State Administration of Taxation on December 10, 2009 with retroactive effect
from January 1, 2008, where a foreign investor transfers its direct equity
interest in a PRC subsidiary, or a Direct Transfer, gains derived from such
Direct Transfer shall be subject to PRC withholding tax at a rate of up to 10%.
For instance, any transfer or disposal of equity interest in our PRC
subsidiaries, Ossen Materials or Ossen Jiujiang, by our BVI subsidiaries, Ossen
Asia or Topchina, such a transfer would constitute a Direct Transfer. It further
provides that where a foreign investor or entity which directly or indirectly
holds equity in a PRC resident enterprise and transfers its indirect equity
interest in a PRC resident enterprise by disposing of its equity interests in an
overseas holding company, or an Indirect Transfer, and such overseas holding
company is located in a tax jurisdiction that: (i) has an effective tax rate
less than 12.5% or (ii) does not tax foreign income of its residents, the
foreign investor shall report to the competent tax authority of the PRC resident
enterprise this Indirect Transfer. The documents for reporting are:
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Equity
transfer contract or agreement;
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Documents
illustrating the relationship between the non-PRC resident enterprise’s
investor and the overseas intermediary holding company being transferred
in respect of financing, operation, sales and
purchase;
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·
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Documents
illustrating the operation, personnel, finance and properties of the
overseas intermediary holding company being
transferred;
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Documents
illustrating the relationship between the overseas intermediary holding
company being transferred and the PRC resident enterprise in respect of
financing, operation, sales and
purchase;
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Documents
illustrating the reasonable commercial purpose of the non-PRC resident
enterprise’s investor in setting up the overseas intermediary holding
company being transferred; and
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Other
relevant documents required by the tax
authority.
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The PRC
tax authority may disregard the existence of the overseas holding company if it
lacks a reasonable commercial purpose and was established for the purpose of
avoiding PRC tax. We may from time to time dispose of or transfer the equity
interest in our offshore subsidiaries holding equity interest in our PRC
resident enterprises. In particular, we may dispose or transfer the equity
interest in our BVI subsidiaries, which in turn hold equity interests in our PRC
subsidiaries. Any such transaction may be deemed an Indirect Transfer. As a
result, gains derived from such Direct Transfer or Indirect Transfer may be
subject to PRC withholding tax at a rate of up to 10%.
Circular
698 also provides that, where a non-PRC resident enterprise transfers its equity
interests in a PRC resident enterprise to its related parties at a price lower
than the fair market value, the relevant tax authority has the power to make a
reasonable adjustment to the taxable income of the transaction
Environmental
Matters
Our
manufacturing facilities are subject to various pollution control regulations
with respect to noise, water and air pollution and the disposal of waste and
hazardous materials. We are also subject to periodic inspections by local
environmental protection authorities.
The major
environmental regulations applicable to us include:
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the
Environmental Protection Law of the
PRC;
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the
Law of PRC on the Prevention and Control of Water
Pollution;
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Implementation
Rules of the Law of PRC on the Prevention and Control of Water
Pollution;
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the
Law of PRC on the Prevention and Control of Air
Pollution;
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Implementation
Rules of the Law of PRC on the Prevention and Control of Air
Pollution;
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the
Law of PRC on the Prevention and Control of Solid Waste Pollution;
and
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the
Law of PRC on the Prevention and Control of Noise
Pollution.
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We are
periodically inspected by local environmental protection authorities. Our
operating subsidiaries have received certifications from the relevant PRC
government agencies in charge of environmental protection indicating that their
business operations are in material compliance with the relevant PRC
environmental laws and regulations. We are not currently subject to any pending
actions alleging any violations of applicable PRC environmental laws. To date,
the Company’s cost of compliance has been insignificant. The Company does not
believe the existence of these environmental laws, as currently written and
interpreted, will materially hinder or adversely affect the Company’s business
operations; however, there can be no assurances of future events or changes in
laws, or the interpretation of laws, governing our industry.
MANAGEMENT
Directors,
Executive Officers and Key Employees
The
following table sets forth the name, age, positions and a brief description of
the business experience of each of our directors, executive officers and key
employees as of the date of this prospectus.
Name
|
|
Position(s)
|
|
Age
|
Liang
Tang
|
|
Chairman
of Board
|
|
42
|
Wei
Hua
|
|
Chief
Executive Officer and Director
|
|
47
|
Yilun
Jin
|
|
Chief
Financial Officer
|
|
35
|
Junhong
Li
|
|
Director
|
|
43
|
Xiaobing
Liu
|
|
Director
|
|
50
|
Yingli
Pan
|
|
Director
|
|
55
|
Zhongcai
Wu
|
|
Director
|
|
60
|
There are
no family relationships among our directors and officers. There are
no arrangements or understandings with major shareholders, customers, suppliers
or others, pursuant to which any person referred to above was selected as a
director or member of senior management. The address of each of our directors
and executive officers is c/o Ossen Innovation Co., Ltd., 518 Shangcheng Road,
Floor 17, Shanghai, 200120, People’s Republic of China.
Executive
Officers and Directors
Dr. Liang Tang was appointed
as our Chairman following our business combination. Dr. Tang has been the Chairman
and President of Ossen Materials, our subsidiary, since 2008. Dr.
Tang has also been President of Shanghai Ossen Investment Holding (Group) Co.,
Ltd. since 2001. He has more than 20 years of experience in the steel
industry. Prior to joining our Company in 2004, from 1994 until 1998,
Dr. Tang was the President of Zhongmin Group of PRC Ministry of Civil
Affairs. From 1988 until 1994, Dr. Tang was Head of Enterprise
Administrative Division of the Shanghai Municipal Metallurgical Industry
Bureau. Prior to that date, Dr. Tang was the Deputy Director of
Enterprise Management at Baosteel Group Shanghai Ergang Co., Ltd., a competitor
of ours. Dr. Tang is involved in many charity affairs and social
organizations including China Committee of Corporate Citizenship and China
Chamber of Metallurgy Industry. Dr. Tang has received the title of
Shanghai Leader by the Shanghai Municipal Government, Outstanding Innovation
Entrepreneur by the Symposium on Chinese Enterprise Innovation and the Royal
Knight Medal of Spain by the King of Spain. Dr. Tang received a bachelors degree
from Shanghai University, a Masters degree in International Finance from Peking
University and an MBA from Fordham University. Dr. Tang also received
a doctoral degree in world economics from East China Normal
University.
Mr. Wei Hua was appointed as
a director of ours following our business combination. Mr. Hua
has served as Chairman of the Board of Directors of Ossen Jiujiang since 2007.
Since 2000, he has been the Assistant Chief Executive Officer for the Steel
Department of Ossen Group. Before joining Ossen Group in 2000, from
1988 until 2000, Mr. Hua was a vice supervisor of the department of
technology and quality supervision at Baosteel Group Shanghai Ergang Co.,
Ltd. From 1985 until 1988, Mr. Hua worked at Shanghai No. 5 steel
factory. He graduated from Shanghai University with a degree in
Business Management.
Mr. Yilun Jin was appointed
as our Chief Financial Officer in October 2010. Mr. Jin served as
Chief Financial Officer at American Lorain Corporation from September 2008 until
October 2010. Prior to working at American Lorain Corporation, he
served in various capacities at Citigroup in New York from 2002 until September
2008, at which time he was Vice President of Markets and Banking. Mr. Jin
graduated from Thunderbird School of Global Management in 2002, earning a Master
of Business Administration degree in International Management, with a
specialization in Finance, and was honored with a Citigroup Fellowship. Mr. Jin
served as manager of the Corporate Finance Division at the Shanghai Branch of
the Bank of Tokyo-Mitsubishi Ltd. from August 1997 until July 2000. Mr. Jin
earned a Bachelor of Arts degree in economics from Fudan University in Shanghai,
China in 1997. Mr. Jin is also a CFA charterholder and is fluent in English and
Mandarin.
Mr. Junhong Li has been one of our
directors since July 2010. Mr. Li has been the Senior Partner and
Deputy Chief Accountant at Continental Certified Public Accountants since
2008. Prior to joining Continental Certified Public Accountants in
2008, from 2007 until 2008, Mr. Li was the Executive Director and Chief
Financial Officer of ZMAY Holdings Limited. From 2004 until 2007, Mr.
Li was Chief Financial Officer of Zhongmin On Line Technology Co.
Ltd. Mr. Li has more than 20 years of experience in mergers
and acquisitions, reorganizations and management consulting. Mr. Li
received a bachelor’s degree from Central University of Finance and Economics
and he is qualified as a certified public accountant.
Mr. Xiaobing Liu has been one
of our directors since July 2010. Mr. Liu has served as Chairman of
the Board of Huachen Trust since 2009. From 2005 until 2009, Mr. Liu was
Chairman of the Board of Directors of Shanghai Dingfeng Technology Co.,
Ltd. Since 2002, he has also been an independent director of Southern
Building Material Co., Ltd. Mr. Liu graduated from the University of
Shanghai for Science and Technology with a bachelor’s degree in optical
instruments.
Ms. Yingli Pan has been one
of our directors since July 2010. Professor Pan has been a professor
in the Department of Finance at Antai College of Economics & Management of
Shanghai since 2005. Prior to being appointed professor at Antai
College of Economics & Management of Shanghai in 2005, from 1994 until 2005,
Professor Pan was a professor in the Finance Department at East China Normal
University. Professor Pan received a bachelor’s degree in economics
from East China Normal University, a master’s degree in economics from Shanghai
University of Finance and Economics and a doctoral degree in economics from East
China Normal University.
Mr. Zhongcai Wu has been one
of our directors since July 2010. Mr. Wu has been Chief Engineer in
the Communications Department of Yunnan Province since 2002. Mr. Wu received a
bachelor’s degree in road and bridge engineering from Hunan
University.
Each of
our directors will serve as a director until our next annual general meeting and
until their successors are duly elected and qualified.
Board
of Directors
Board
Composition and Terms of Directors and Officers
Our board
of directors currently consists of six directors. Messrs. Li, Liu, Wu
and Ms. Pan qualify as independent directors under Nasdaq marketplace
rules.
Pursuant
to our memorandum and articles of association, the business of our company is
managed by our board of directors. Commencing with the first annual meeting of
the shareholders, directors are elected for a term of office to expire at the
next succeeding annual meeting of the shareholders after their
election. Each director holds office until the expiration of his
or her term of office and until his or her successor has been elected and
qualified, or until his or her earlier death, resignation or removal by
resolution of shareholders or a resolution of directors in accordance with the
memorandum and articles of association.
The
directors may at any time by resolution of directors appoint any person to be a
director to fill a vacancy. There is a vacancy if a director dies or
otherwise ceases to hold office as a director. The directors may not
appoint a director to fill a vacancy for a term exceeding the term that remained
when the person ceasing to be a director ceased to hold office.
Our
officers are appointed by resolution of our directors and hold office until
removed from office by our directors, whether or not a successor is
appointed.
Committees
of the Board of Directors
We have
established three committees of the Board of Directors: an audit committee, a
compensation committee and a corporate governance and nominating committee. In
addition, our board of directors has determined that Junhong Li is qualified as
an audit committee financial expert within the meaning of SEC regulations. In
compliance with Rule 5605 of the Marketplace Rules of the Nasdaq Stock Market,
which we refer to as the Nasdaq rules, a majority of the members of our audit
committee will be required to be independent directors during the 90 day
transition period after our ordinary shares are listed on the Nasdaq Global
Market, and all of the members of our audit committee will be required to be
independent directors within one year of listing. We have adopted a
charter for each of the three committees. Each committee’s members and functions
are described below. In addition, since we are a foreign private
issuer, the Nasdaq Marketplace Rules will generally permit us, with certain
exceptions, to follow our home country rules in lieu of certain
requirements.
Audit Committee. Our
audit committee consists of Junhong Li, Yingli Pan and Xiaobing Liu, each of
whom satisfies the independence requirements of Rule 10A-3 under the Securities
Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and
Rule 5605 of the Nasdaq rules. The audit committee will oversee our accounting
and financial reporting processes and audits of the financial statements of our
company. The audit committee will be responsible for, among other
things:
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selecting
our independent auditors and pre-approving all audit and non-audit
services permitted to be performed by our independent
auditors;
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reviewing
with our independent auditors any audit problems or difficulties and
management’s response;
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reviewing
and approving all proposed related party transactions, as defined in
Item 404 of Regulation S-K;
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discussing
our annual audited financial statements with management and our
independent auditors;
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|
reviewing
major issues as to the adequacy of our internal controls and any special
audit steps adopted in light of material control deficiencies;
and
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meeting
separately and periodically with management and our independent
auditors.
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Compensation
Committee. Our compensation committee consists of Xiaobing Liu,
Yingli Pan and Junhong Li, each of whom satisfies the independence requirements
of Rule 5605 of the Nasdaq rules. The compensation committee will assist the
Board in reviewing and approving the compensation structure, including all forms
of compensation relating to our directors and executive officers. Our Chief
Executive Officer may not be present at any committee meeting during which his
compensation is deliberated. The compensation committee will be responsible for,
among other things:
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reviewing
and approving the total compensation package for our senior executives;
and
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reviewing
periodically, and approving, any long-term incentive compensation or
equity plans, programs or similar arrangements, annual bonuses, employee
pension and welfare benefit plans.
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Corporate Governance and Nominating
Committee. Our corporate governance and nominating committee
consists of Yingli Pan, Zhongcai Wu and Xiaobing Liu, each of whom satisfies the
independence requirements of Rule 5605 of the Nasdaq rules. The corporate
governance and nominating committee will assist the Board in selecting
individuals qualified to become members of our Board and in determining the
composition of the Board and its committees. The corporate governance and
nominating committee will be responsible for, among other things:
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identifying
and recommending to the board qualified candidates to be nominated for the
election or re-election to the board of directors and committees of the
board of directors, or for appointment to fill any
vacancy;
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|
reviewing
annually with the board of directors the current composition of the board
of directors with regards to characteristics such as independence, age,
skills, experience and availability of service to us;
and
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advising
the board of directors periodically with regard to significant
developments in the law and practice of corporate governance as well as
our compliance with these laws and practices, and making recommendations
to the board of directors on all matters of corporate governance and on
any remedial actions to be taken, if
needed.
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Code
of Ethics
We plan
to adopt a Code of Business Conduct and Ethics prior to our initial public
offering. The Code of Ethics is designed to deter wrongdoing and to promote
ethical conduct and full, fair, accurate, timely and understandable reports that
the company files or submits to the Securities and Exchange Commission and
others. A copy of the Code of Ethics will be included as Exhibit 99.1 to the
registration statement of which this prospectus forms a part. A printed copy of
the Code of Ethics may also be obtained free of charge by writing to us at our
headquarters located at 518 Shangcheng Road, Floor 17, Shanghai, 200120,
People’s Republic of China.
Duties
of Directors
Under
British Virgin Islands law, our directors have a duty to act honestly, in good
faith and in what they believe to be in the best interests of our company. See
“Description of Share Capital — Differences in Corporate Law” for additional
information on our directors’ fiduciary duties under British Virgin Islands law.
In fulfilling their duty of care to us, our directors must ensure compliance
with our memorandum of association and articles of association. We have the
right to seek damages if a duty owed by our directors is breached.
The
functions and powers of our board of directors include, among
others:
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appointing
officers and determining the term of office of the
officers;
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authorizing
the payment of donations to religious, charitable, public or other bodies,
clubs, funds or associations as deemed
advisable;
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exercising
the borrowing powers of the company and mortgaging the property of the
company;
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executing
checks, promissory notes and other negotiable instruments on behalf of the
company; and
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maintaining
or registering a register of mortgages, charges or other encumbrances of
the company.
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We have
not entered into a director service contract with any of our
directors.
Interested
Transactions
A
director may vote, attend a board meeting or sign a document on our behalf with
respect to any contract or transaction in which he or she is interested. After
becoming aware of the fact that he or she is interested in a transaction we have
entered into or are to enter into, a director must promptly disclose such
interest to all other directors. A general notice or disclosure to the board or
otherwise contained in the minutes of a meeting or a written resolution of the
board or any committee of the board that a director is a shareholder, director,
officer or trustee of any specified firm or company and is to be regarded as
interested in any transaction with such firm or company will be sufficient
disclosure, and, after such general notice, it will not be necessary to give
special notice relating to any particular transaction.
Appointment
of Directors
The
directors are appointed by the shareholders of our company for such term as our
shareholders may determine.
Remuneration
and Borrowing
The
directors may receive such remuneration as our board of directors may determine
from time to time. Each director is entitled to be repaid or prepaid all
traveling, hotel and incidental expenses reasonably incurred or expected to be
incurred in attending meetings of our board of directors or committees of our
board of directors or shareholder meetings or otherwise in connection with the
discharge of his or her duties as a director. The compensation committee will
assist the directors in reviewing and approving the compensation structure for
the directors.
Our board
of directors may exercise all the powers of the company to borrow money and to
mortgage or charge our undertakings and property or any part thereof, to issue
debentures, debenture stock and other securities whenever money is borrowed or
as security for any debt, liability or obligation of the company or of any third
party.
Qualification
A
director is not required to hold shares as a qualification to
office.
Limitation
on Liability and Other Indemnification Matters
British
Virgin Islands law does not limit the extent to which a company’s memorandum of
association and articles of association may provide for indemnification of
officers and directors, except to the extent any such provision may be held by
the British Virgin Islands courts to be contrary to public policy, such as to
provide indemnification against civil fraud or the consequences of committing a
crime.
Under our
memorandum of association and articles of association, we may indemnify our
directors, officers and liquidators against all expenses, including legal fees,
and against all judgments, fines and amounts paid in settlement and reasonably
incurred in connection with civil, criminal, administrative or investigative
proceedings to which they are party or are threatened to be made a party by
reason of their acting as our director, officer or liquidator. To be entitled to
indemnification, these persons must have acted honestly and in good faith with a
view to the best interest of the company and, in the case of criminal
proceedings, they must have had no reasonable cause to believe their conduct was
unlawful.
Terms
of Directors and Officers
Except as
otherwise provided by law, vacancies on our board may be filled by the
affirmative vote of a majority of the directors then in office, or by our
shareholders.
Employment
Agreements
We have
entered into an employment agreement with Dr. Liang Tang. Dr. Tang is
employed as Chairman of the Board of our Company. The term of his
agreement expires on December 31, 2013. We compensate Mr. Tang at an
annual rate of $14,041. We may terminate the employment agreement for
cause as specified in the agreement. Mr. Tang may terminate the
employment agreement with thirty days written notice. The employment
agreement may be renewed upon the mutual agreement of the parties.
We have
entered into an employment agreement with Mr. Yilun Jin. Mr. Jun is
employed as Chief Financial Officer of our Company. The term of his
agreement is from October 26, 2010 until October 26, 2011 and the agreement may
be automatically renewed for one year terms thereafter. We compensate
Mr. Jin at an annual rate of $73,416. Mr. Jin was awarded stock
options to purchase 150,000 shares of the Company’s ordinary shares at the
exercise price to be determined by the 10-day volume weighted average price per
share calculated from the date of the Company’s initial public offering. Mr. Jin
may exercise, by cashless exercise, 50,000 options on the first date of his
employment and 50,000 options on each of the first two anniversaries following
the first date of employment. The stock options will expire on the tenth
anniversary of Mr. Jin’s employment. We may terminate the agreement
for cause as specified in the agreement.
Each
executive officer has agreed to hold in confidence any confidential information
that he has obtained about the Company.
Compensation
of Directors and Executive Officers
For the
year ended December 31, 2009, the aggregate cash compensation that we paid to
our executive officers and directors was approximately $48,934. There are no
service contracts between us and any of our directors, except for those
directors who are also our executive officers. Pursuant to PRC law,
25% of our executive officers’ salaries have been set aside for pension and
retirement.
Stock
Option Plan
On July
26, 2010, our Board of Directors adopted the Ossen Innovation Co., Ltd. 2010
Stock Option Plan, or the 2010 Plan. To date, other than the option
to acquire 150,000 ordinary shares issued to our new chief financial officer, as
described in footnote 2 to the table under the heading “Beneficial Ownership”
below, no shares have been issued under the 2010 Plan. The 2010 Plan
allows us to grant stock options to our officers, directors, and executive,
managerial, professional or administrative employees of ours or our subsidiaries
or joint ventures, and to our consultants. We refer to these individuals
collectively as key persons. Up to ten percent of our outstanding ordinary
shares may be issued under the 2010 Plan. The purpose of the 2010
Plan is to provide certain key persons, on whose initiative and efforts the
successful conduct of our business depends, with incentives to: (a) enter into
and remain in our service, (b) acquire a proprietary interest in our success,
(c) maximize their performance and (d) enhance our long-term performance
(whether directly or indirectly through enhancing the long-term performance of a
subsidiary, joint venture or consultant.
The
administrator of the 2010 Plan is the compensation committee of our Board of
Directors, or may be any other committee appointed by the Board of Directors for
that purpose. The administrator has full power and authority to
administer, construe and interpret the 2010 Plan. Grants under the 2010 Plan
will be governed by individualized grant agreements and may be subject to either
time-based or performance-based vesting provisions.
The
administrator establishes the terms of stock options, subject to certain
parameters set forth in the 2010 Plan. The following are the general
terms of stock options:
• The
exercise price must be at least equal to the par value of shares.
• The
term of a stock option may not exceed ten years from the date of
grant.
• Unless
the administrator determines otherwise, if an option holder terminates
employment, his or her unvested options expire immediately and vested options
may be exercised during the three-month period following termination, after
which they will expire. If the employee terminates employment due to
death or disability, the three month period is extended to one
year.
• Stock
options generally may not be transferred, except to immediate family
members.
The 2010
Plan will automatically terminate on the fifth anniversary of the 2010 Plan’s
adoption. However, outstanding stock options will continue to be effective after
the 2010 Plan’s termination.
Our board
of directors has the authority to amend, alter, suspend or terminate the 2010
Plan or any outstanding stock option. The consent of an option holder
is necessary for any amendment that would adversely affect an outstanding
option.
Nasdaq
Requirements for Director Independence
Under the
Nasdaq rules, a majority of our directors must meet the definition of
“independence” contained in those rules within one year of our listing on the
Nasdaq Global Market. Our Board has determined that four of our directors,
Junhong Li, Xiaobing Liu, Yingli Pan and Zhongcai Wu, meet the independence
standards contained in the Nasdaq rules. We do not believe that any of these
directors have any relationships that would preclude a finding of independence
under these rules and, in reaching its determination, our Board determined that
any other relationships that these directors have with us do not and would not
impair their independence. Consistent with the Nasdaq rules, a majority of our
Board will be independent within twelve months from the date of this
prospectus.
BENEFICIAL
OWNERSHIP
The
following table sets forth certain information regarding the beneficial
ownership of our ordinary shares as of October 28, 2010, as adjusted to reflect
the sale of our ordinary shares in this offering, by:
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·
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each
of our directors and executive officers;
and
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|
·
|
each
person known to us to beneficially own more than 5% of our outstanding
ordinary shares.
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Beneficial
ownership is determined in accordance with the rules of the SEC, and generally
includes any ordinary shares over which a person exercises sole or shared voting
or investment power. The information under the column “Shares Beneficially Owned
After Offering” gives effect to the issuance and sale of 5,000,000 of our
ordinary shares by us in this offering, at an initial public offering price of
$4.50 per ordinary share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, assuming that the
underwriters do not exercise their over-allotment option and there is no other
change to the number of ordinary shares sold by us as set forth on the cover
page of this prospectus. Ownership is based on 15,000,000 ordinary shares
outstanding as of October 28, 2010 and 20,000,000 ordinary shares outstanding
upon the completion of this offering.
As of
October 28, 2010, we were not aware of any U.S. persons that were holders of
record of our ordinary shares.
None of
our existing shareholders currently has different voting rights from other
shareholders, and none of our existing shareholders will have different voting
rights after the closing of this offering. We are not aware of any arrangement
that may, at a subsequent date, result in a change in control of our
company.
Unless
otherwise noted below, the address for each listed shareholder, director or
executive officer is 518 Shangcheng Road, Floor 17, Shanghai, 200120, People’s
Republic of China.
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Shares Beneficially
Owned
Prior to Offering(1)
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|
|
Shares Beneficially
Owned
After Offering
|
|
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Shares Beneficially Owned
Assuming Exercise of an Option
Granted to the Underwriters to
Purchase
Additional Shares
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|
Name
|
|
Number
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors,
Executive Officers and 5% Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liang
Tang
|
|
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11,889,500
|
|
|
|
79
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%
|
|
|
11,889,500
|
|
|
|
59.4
|
%
|
|
|
11,889,500
|
|
|
|
57.3
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%
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Wei Hua(2)
|
|
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600,000
|
|
|
|
4
|
%
|
|
|
600,000
|
|
|
|
3.0
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%
|
|
|
600,000
|
|
|
|
2.9
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%
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Yilun Jin(3)
|
|
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50,000
|
|
|
|
*
|
|
|
|
50,000
|
|
|
|
*
|
|
|
|
50,000
|
|
|
|
*
|
|
Junhong
Li
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Xiaobing
Liu
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Yingli
Pan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Zhongcai
Wu
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules and regulations of
the SEC. Percentage of beneficial ownership of each listed person prior to
this offering is based on ordinary shares outstanding as of the date of
this prospectus, including ordinary shares convertible from all
outstanding preferred shares, and the ordinary shares underlying any
options and warrants exercisable by such person within 60 days of the date
of this prospectus. Percentage of beneficial ownership of each listed
person after this offering is based on ordinary shares outstanding
immediately after the closing of this offering and the ordinary shares
underlying any options and warrants exercisable by such person within 60
days of the date of this
prospectus.
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|
(2)
|
The
spouse of our chief executive officer, Wei Hua, owns 100% of the shares of
Fascinating Acme Development Ltd., which owned 4% of the shares of Ossen
Innovation Group prior to the business combination, and owns 4% of our
shares since the business combination. Mr. Hua may be deemed to
beneficially own these shares under SEC rules and
regulations.
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|
(3)
|
Mr.
Jin has been granted a stock option to purchase up to 150,000 ordinary
shares pursuant to our 2010 Employee Stock Option Plan. 50,000
shares are currently exercisable, 50,000 shares will be exercisable in
October 2011 and 50,000 in October
2012.
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transfers
of Shares Between Related Parties
Several
of our subsidiaries and affiliates which are, or at one time were, controlled by
our chairman, transferred shares with other entities controlled by Mr.
Tang. See the discussion under “Corporate Structure and Organization”
above for a description of these transactions.
Issuance
of Shares to Related Parties
The
spouse of our chief executive officer, Wei Hua, owns 100% of the shares of
Fascinating Acme Development Ltd., which owned 4% of the shares of Ossen
Innovation Group prior to the business combination, and owns 4% of our shares
since the business combination. The spouse of the chief executive
officer of Shanghai ZFX, which is an affiliated company of ours that supplies us
with raw materials, owns 100% of the shares of Gross Inspiration Development
Ltd., which owned 4% of the shares of Ossen Innovation Group prior to the
business combination, and owns 4% of our shares since the business
combination.
Purchases
from a Related Party
Historically,
we have purchased a significant percentage of our raw materials from an
affiliated entity, Shanghai Zhengfangxing Steel Co., Ltd., or Shanghai ZFX, an
agent that supplies steel wire rods to prestressed concrete manufacturers in
China such as our company. Shanghai ZFX is controlled by our chairman, Dr.
Tang. Shanghai ZFX is a member of the Ossen Group, whose relationship
to us is described above under the heading “Business – Overview.”
Shanghai
ZFX procures materials from the limited number of high quality manufacturers and
suppliers of our raw materials in the PRC. However, since the introduction in
2009 of our rare earth coated materials, which undergo a coating process that
reduces the loss in strength and performance that prestressed materials
otherwise undergo during our manufacturing processes, we have lowered the
standards for strength and performance requirements for our raw materials. As a
result, we have been able to expand our supplier base to include suppliers of
products with lower levels of strength and performance and have not relied as
heavily on supplies from Shanghai ZFX.
In 2008,
we purchased $20.5 million, or approximately 28.2%, of our raw materials from
Shanghai ZFX. In 2009, we purchased $11.5 million, or approximately
23.9%, of our raw materials from Shanghai ZFX. During the six months
ended June 30, 2010, we purchased $2.3 million, or approximately 4.6%, of our
raw materials from Shanghai ZFX. As sales of our rare earth coated
materials increase, we expect that the percentage of purchases from Shanghai ZFX
will continue to decrease in the near future.
We have
entered into sales contracts with Shanghai ZFX, each of which has a term of one
year. The contracts generally specify the name of the products,
specifications, price and quantity. Pursuant to the contracts, we
must take delivery of the materials within a specified number of
days. If we disagree with the quality of the materials received, we
must notify Shanghai ZFX in writing within thirty days of receipt of the
materials. The materials may be paid for by cash or bank
acceptance. If we determine a change is necessary to the method of
taking delivery, product ordered, steel or product specifications or quantity,
we must notify Shanghai ZFX. in writing at least thirty days in
advance. We or Shanghai ZFX may rescind the contract/purchase order,
which must be negotiated to the mutual agreement of both parties.
Management
believes the transactions referenced above were on terms at least as favorable
to us as we could have obtained from unaffiliated parties.
Advances
to a Related Party
During the six months ended June 30,
2010, we advanced $8.3 million to our affiliate, Shanghai ZFX, which is also a
supplier of ours. Such amounts have been credited towards our
purchases of Shanghai ZFX’s supplies. The reason for these advances
is that we received certain lower interest loans from PRC banks which PRC
regulations require us to use for purchases of, or advances for, raw materials
in the same month in which the loans were made. As our reliance on
Shanghai ZFX decreases, as discussed above under “Purchases from a Related
Party,” we anticipate that the amounts we loan to Shanghai ZFX will
decrease.
Sales
to a Related Party
We have
sold a significant amount of our products to Shanghai Zhaoyang New Metal
Material Co., Ltd., an entity that owns a 40% interest in Shanghai Ossen
Investment Holding (Group) Co., Ltd., of which Dr. Tang, our chairman, is
president. In 2008, 2009 and 2010, we generated approximately 35.8%,
53.8% and 20.5% of our revenues from sales to Shanghai Zhaoyang New Metal
Material Co., Ltd.
Notes
Receivable and Notes Payable
We
provided Shanghai ZFX with interest-free, unsecured notes in the aggregate
amount of $1.8 million during the year ended December 31, 2009 to assist
Shanghai ZFX with working capital needs. Such amounts were
subsequently repaid during the six months ended June 30, 2010.
Our
chairman, Dr. Tang, provided a one-time interest-free loan to Topchina and Ossen
Asia in connection with an investment in our subsidiary, Ossen Materials, by
such companies, which were wholly owned by Dr. Tang at that
time. This loan has been recorded as an amount due to a related party
in the financial statements included elsewhere in this
prospectus. As of November 26, 2010,
pursuant to a loan contribution agreement in the amount of $12,924,000, the loan
has been cancelled and forgiven, and the loan balance will be treated as a
contribution to the capital of the Company.
Guarantees
During
the years ended December 31, 2008 and 2009 and the six months ended June 30,
2010, Shanghai Ossen, an affiliate of ours, and Shanghai ZFX, an affiliate of
ours, provided guarantees for certain of our short-term bank
loans. Shanghai Ossen Investment Co., Ltd. is a member of the Ossen
Group, whose relationship to us is described above under the heading “Business –
Overview.” Shanghai Ossen guaranteed loans in the amount of
$5.4 million in each of 2008 and 2009 and $14.2 million during the six months
ended June 30, 2010. Shanghai ZFX guaranteed loans in the amount of
$6.9 million, $8.8 million and $27.5 million in 2008 and 2009 and the six months
ended June 30, 2010, respectively. These guarantees were provided for
no consideration. There can be no assurance that Shanghai ZFX and Shanghai Ossen
will be willing or able to continue to provide similar guarantees on this basis
with respect to future borrowings.
The
purpose of these loans is to fund our working capital and construction and
expansion. Local banks have required guaranties pursuant to their standard
regulations. The term of each of the loans is one year. The
loans that have come due were repaid in May, June and September
2010. The remaining loan is due in November 2010.
The terms
of the loan guarantees between the guarantor and the bank provide for the
following: if the borrower does not repay its loan, the bank may seek the
principal and interest of the loan from the guarantor; the guarantee period is
two years from the date the guaranteed loan is due; the bank may change the
terms of the loan with the borrower without receiving the consent of the
guarantor; the guarantor indemnifies the bank for actual damage or loss because
of any fraudulent misrepresentations made by the guarantor and if the guarantor
causes the contract to become invalid, the guarantor indemnifies the bank for
damages and losses.
DESCRIPTION
OF SHARE CAPITAL
We are a
British Virgin Islands exempted company with limited liability and our affairs
are governed by our memorandum and articles of association and the BVI Business
Companies Act, 2004 (as amended from time to time) which is referred to as the
BVI Act below.
As of
October 28, 2010, we are authorized to issue 100,000,000 ordinary shares, of
which 15,000,000 shares are issued and outstanding and fully paid.
We have
adopted an amended and restated memorandum and articles of
association. The following are summaries of material provisions of
our amended and restated memorandum and articles of association and the
Companies Law insofar as they relate to the material terms of our ordinary
shares.
Ordinary
Shares
Certificates
representing our ordinary shares are issued in registered form. Our shareholders
who are nonresidents of the British Virgin Islands may freely hold and vote
their shares. We are currently authorized to issue 100,000,000 ordinary
shares. We do not have the power to issue bearer shares.
Charter
Our
charter documents consist of our amended and restated memorandum of association
and our amended and restated articles of association, or the memorandum and
articles of association. We may amend our memorandum and articles of
association generally by a special resolution of our shareholders.
The
following description of certain provisions of our memorandum and articles of
association does not propose to be complete and is qualified in its entirety by
our memorandum and articles of association included as Exhibits 3.1 and 3.2,
respectively, to this prospectus. We have amended the charter that we
filed in connection with the business combination to amend certain provisions
relating primarily to shareholder meetings.
Corporate
Powers
Ultra
Glory was incorporated under the BVI Act on January 21,
2010. Pursuant to our memorandum of association, the objects for
which we were established are unrestricted and we have full power and authority
to carry out any objects not prohibited by the BVI Act, as the same may be
revised from time to time, or any other law of the British Virgin Islands,
except that we have no power to carry on banking or trust business, business as
an insurance or reinsurance company, insurance agent or insurance broker, the
business of company management, the business of providing the registered office
or the registered agent for companies incorporated in the British Virgin
Islands, or business as a mutual fund, mutual fund management or mutual fund
administrator, unless we obtain certain licenses under the laws of the British
Virgin Islands.
Board
Composition
Pursuant
to our memorandum and articles of association, the business of our company is
managed by our board of directors. Commencing with the first annual
meeting of the shareholders, directors are elected for a term of office to
expire at the next succeeding annual meeting of the shareholders after their
election. Each director will hold office until the expiration of his
or her term of office and until his or her successor has been elected and
qualified, or until his or her earlier death, resignation or removal by the
shareholders or a resolution passed by the majority of the remaining
directors.
In the
interim between annual meetings of shareholders, or special meetings of
shareholders called for the election of directors, any vacancy on the board of
directors may be filled by the vote of a majority of the remaining directors
then in office, although less than a quorum, or by the sole remaining director.
A director elected to fill a vacancy resulting from death, resignation or
removal of a director will serve for the remainder of the full term of the
director whose death, resignation or removal will have caused such vacancy and
until his successor will have been elected and qualified.
There is
no cumulative voting by shareholders for the election of
directors. We do not have any age-based retirement requirement and we
do not require our directors to own any number of shares to qualify as a
director.
Board
Meetings
Board
meetings may be held at the discretion of the directors at such times and in
such manner as the directors may determine upon not less than three days notice
having been given to all directors. Decisions made by the directors at meetings
shall be made by a majority of the directors. There must be at least
a majority of the directors (with a minimum of two) at each
meeting.
Directors
Interested in a Transaction
A
director must, immediately after becoming aware of the fact that he is
interested in a transaction entered into or to be entered into by us, disclose
such interest to the board of directors. A director who is interested
in a transaction entered into, or to be entered into, by the company, may vote
on a matter related to the transaction, attend a meeting of directors at which a
matter relating to the transaction arises and be included among the directors
present at the meeting for the purposes of a quorum and sign a document on
behalf of the company, or do any other thin in his capacity as a director, that
relates to the transaction. A director is not required to disclose
his interest in a transaction or a proposed transaction to our board of
directors if the transaction or proposed transaction is between the director and
us, or the transaction or proposed transaction is or is to be entered into the
ordinary course of our business and on usual terms and conditions.
The
directors may exercise all powers of our company to borrow money, mortgage or
charge our undertakings and property, issue debentures, debenture shares and
other securities whenever money is borrowed or as security for any debt,
liability or obligation of the company or of any third party.
Our
directors may, by resolution, fix the compensation of directors in respect of
services rendered or to be rendered in any capacity to us.
A
director may attend and speak at any meeting of the shareholders and at any
separate meeting of the holders of any class of our shares.
Rights
of Shares
We are
currently authorized to issue 100,000,000 ordinary shares. The shares
are made up of one class and one series, namely ordinary shares with a par value
of $0.01 per share. The ordinary shares have one vote each and have
the same rights with regard to dividends paid by the company and distributions
of the surplus assets of the company.
We may
purchase, redeem or acquire our shares, provided that we obtain the consent of
the member whose shares are being purchased, redeemed or otherwise
acquired.
Issuance
of Shares; Variation of Rights of Shares
Our
articles of association provide that directors may, without limiting or
affecting any right of holders of existing shares, offer, allot, grant options
over or otherwise dispose of our unissued shares to such persons at such times
and for such consideration and upon such terms and conditions as the directors
may determine.
Without
prejudice to any special rights previously conferred on the holders of any
existing shares or class of shares, we may issue shares, with such preferred,
deferred or other special rights or such restrictions, whether in regard to
dividend, voting or otherwise, as the directors from time to time may
determine.
If we
issue shares of more than one class, we will further amend and restate our
Memorandum and Articles of Association to reflect the rights attached to any
class (unless otherwise provided by the terms of issue of the shares of that
class) as may be varied with the consent in writing of the holders of not less
than three-fourths of the issued shares of that class and the holders of not
less than three-fourths of the issued shares of any other class of shares which
may be affected by such variation. The rights conferred upon the
holders of the shares of any class issued with preferred or other rights will
not, unless otherwise expressly provided by the terms of issue of the shares of
that class, be deemed to be varied by the creation or issue of further shares
ranking pari passu therewith.
Shareholders Meetings
Under our
memorandum and articles of association, we are required to hold an annual
meeting of shareholders each year at such date and time determined by our
directors. Meetings of shareholders may be called pursuant to board
resolution or the written request of shareholders holding more than 30% of the
votes of our outstanding voting shares. Written notice of meetings of
shareholders must be given to each shareholder entitled to vote at a meeting not
fewer than 10 days prior to the date of the meeting, with certain limited
exceptions. The written notice will state the place, time and
business to be conducted at the meeting. The shareholders listed in
our share register on the date prior to the date the notice is given shall be
entitled to vote at the meeting, unless the notice provides a different date for
determining the shareholders who are entitled to vote.
A meeting
of shareholders held without proper notice will be valid if shareholders holding
90% majority of the total number of shares entitled to vote on all matters to be
considered at the meeting, or 90% of the votes of each class or series of shares
where shareholders are entitled to vote thereon as a class or series, together
with an absolute majority of the remaining votes, have waived notice of the
meeting and, for this purpose, presence of a shareholder at the meeting is
deemed to constitute a waiver. The inadvertent failure of the
directors to give notice of a meeting to a shareholder, or the fact that a
shareholder has not received notice, will not invalidate a meeting.
Shareholders
may vote in person or by proxy. No business may be transacted at any
meeting unless a quorum of shareholders is present. A quorum consists
of the presence in person or by proxy of holders entitled to exercise at least
50% of the voting rights of the shares of each class or series of shares
entitled to vote as a class or series thereon and the same proportion of the
votes of the remaining shares entitled to vote thereon.
Changes in the Maximum Number of Shares the
Company is Authorized to Issue
Subject
to the provisions of the BVI Act, we may, by a resolution of shareholders, amend
our memorandum and articles of association to increase or decrease the number of
shares authorized to be issued. Our directors may, by resolution,
authorize a distribution by us at a time, of an amount, and to any shareholders
they think fit if they are satisfied, on reasonable grounds, that we will,
immediately after the distribution, satisfy the solvency test as set forth in
the BVI Act, which requires that the value of a company’s assets exceeds its
liabilities, and the company is able to pay its debts as they fall
due.
Indemnification
Subject
to the provisions of the BVI Act, we may indemnify any person who (a) is or was
a party or is threatened to be made a party to any threatened, pending or
completed proceedings, whether civil, criminal, administrative or investigative,
by reason of the fact that the person is or was a director of our company; or
(b) is or was, at our request, serving as a director of, or in any other
capacity is or was acting for, another company or a partnership, joint venture,
trust or other enterprise, against all expenses, including legal fees, and
against all judgments, fines and amounts paid in settlement and reasonably
incurred in connection with legal, administrative or investigative
proceedings.
History
of Securities Issuances
On
January 21, 2010, we issued 50,000 shares to our sole shareholder. On
July 7, 2010, these shares increased to 5,000,000 upon the change of the par
value of our ordinary shares from $1.00 to $0.01.
On July
7, 2010, we issued 10,000,000 ordinary shares in connection with our business
combination, as described above under “Corporate Structure and
Organization.”
Material
Differences Between U.S. Corporate Law and British Virgin Islands Corporate
Law
The BVI
Act differs from laws applicable to U.S. corporations and their shareholders.
Set forth below is a summary of the material differences between the provisions
of the BVI Act applicable to us and the laws applicable to companies
incorporated in the United States and their shareholders.
Differences
in Corporate Law
We were
incorporated under, and are governed by, the laws of the British Virgin Islands.
The corporate statutes of the State of Delaware and the British Virgin Islands
are similar, and the flexibility available under British Virgin Islands law has
enabled us to adopt memorandum of association and articles of association that
will provide shareholders with rights that do not vary in any material respect
from those they would enjoy if we were incorporated under the Delaware General
Corporation Law, or Delaware corporate law. Set forth below is a summary of some
of the differences between provisions of the BVI Act applicable to us and the
laws applicable to companies incorporated in Delaware and their
shareholders.
Director’s
Fiduciary Duties
Under
Delaware corporate law, a director of a Delaware corporation has a fiduciary
duty to the corporation and its stockholders. This duty has two components: the
duty of care and the duty of loyalty. The duty of care requires that a director
act in good faith, with the care that an ordinarily prudent person would
exercise under similar circumstances. Under this duty, a director must inform
himself of, and disclose to stockholders, all material information reasonably
available regarding a significant transaction. The duty of loyalty requires that
a director act in a manner he reasonably believes to be in the best interests of
the corporation. He must not use his corporate position for personal gain or
advantage. This duty prohibits self-dealing by a director and mandates that the
best interest of the corporation and its stockholders take precedence over any
interest possessed by a director, officer or controlling stockholder and not
shared by the stockholders generally. In general, actions of a director are
presumed to have been made on an informed basis, in good faith and in the honest
belief that the action taken was in the best interests of the corporation.
However, this presumption may be rebutted by evidence of a breach of one of the
fiduciary duties. Should such evidence be presented concerning a transaction by
a director, a director must prove the procedural fairness of the transaction,
and that the transaction was of fair value to the corporation.
British
Virgin Islands law provides that every director of a British Virgin Islands
company, in exercising his powers or performing his duties, shall act honestly
and in good faith and in what the director believes to be in the best interests
of the company. Additionally, the director shall exercise the care, diligence,
and skill that a reasonable director would exercise in the same circumstances
taking into account, but without limitation, the nature of the company, the
nature of the decision, the position of the director and the nature of his
responsibilities. In addition, British Virgin Islands law provides that a
director shall exercise his powers as a director for a proper purpose and shall
not act, or agree to the company acting, in a manner that contravenes British
Virgin Islands law or the memorandum association or articles of association of
the company.
Amendment
of Governing Documents
|
·
|
Under
Delaware corporate law, with very limited exceptions, a vote of the
stockholders is required to amend the certificate of incorporation. Under
British Virgin Islands law, no article or regulation shall be amended,
rescinded or altered, and no new article shall be made, without the
approval of the members pursuant to a special resolution, unless the
memorandum of association and articles of association provide
otherwise.
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Written
Consent of Directors
Under
Delaware corporate law, directors may act by written consent only on the basis
of a unanimous vote. Under British Virgin Islands law, directors’ consents need
only a majority of directors signing to take effect.
Written
Consent of Shareholders
Under
Delaware corporate law, unless otherwise provided in the certificate of
incorporation, any action to be taken at any annual or special meeting of
stockholders of a corporation, may be taken by written consent of the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to take such action at a meeting. As permitted by British Virgin
Islands law, shareholders’ consents need only a majority of shareholders signing
to take effect. Our memorandum of association and articles of association
provide that, other than changes to our memorandum of association and articles
of association, shareholders may approve corporate matters by way of a
resolution consented to at a meeting of shareholders or in writing by a majority
of shareholders entitled to vote thereon. Changes to our memorandum of
association and articles of association require the approval of 66 2/3% of the
votes of shareholders.
Shareholder
Proposals
Under
Delaware corporate law, a shareholder has the right to put any proposal before
the annual meeting of shareholders, provided it complies with the notice
provisions in the governing documents. A special meeting may be called by the
board of directors or any other person authorized to do so in the governing
documents, but shareholders may be precluded from calling special meetings.
British Virgin Islands law and our memorandum of association and articles of
association provide that our directors shall call a meeting of the shareholders
if requested in writing to do so by shareholders entitled to exercise at least
30% of the voting rights in respect of the matter for which the meeting is
requested.
Sale
of Assets
Under
Delaware corporate law, a vote of the stockholders is required to approve the
sale of assets only when all or substantially all assets are being sold. In the
British Virgin Islands, shareholder approval is required when more than 50% of
the company’s total assets by value are being disposed of or sold.
Dissolution;
Winding Up
Under
Delaware corporate law, unless the board of directors approves the proposal to
dissolve, dissolution must be approved by shareholders holding 100% of the total
voting power of the corporation. Only if the dissolution is initiated by the
board of directors may it be approved by a simple majority of the corporation’s
outstanding shares. Delaware corporate law allows a Delaware corporation to
include in its certificate of incorporation a supermajority voting requirement
in connection with dissolutions initiated by the board. As permitted by British
Virgin Islands law and our memorandum of association and articles of
association, we may be voluntarily liquidated under Part XII of the BVI Act by
resolution of directors and resolution of shareholders if we have no liabilities
and we are able to pay our debts as they fall due.
Redemption
of Shares
Under
Delaware corporate law, any stock may be made subject to redemption by the
corporation at its option or at the option of the holders of such stock provided
there remains outstanding shares with full voting power. Such stock may be made
redeemable for cash, property or rights, as specified in the certificate of
incorporation or in the resolution of the board of directors providing for the
issue of such stock. As permitted by British Virgin Islands law, and our
memorandum of association and articles of association, shares may be
repurchased, redeemed or otherwise acquired by us. Our directors must determine
that immediately following the redemption or repurchase we will be able to
satisfy our debts as they fall due and the value of our assets exceeds our
liabilities.
Variation
of Rights of Shares
Under
Delaware corporate law, a corporation may vary the rights of a class of shares
with the approval of a majority of the outstanding shares of such class, unless
the certificate of incorporation provides otherwise. As permitted by British
Virgin Islands law, and our memorandum of association and articles of
association, if our share capital is divided into more than one class of shares,
we may vary the rights attached to any class only with the consent in writing of
holders of not less than three-fourths of the issued shares of that class and
holders of not less than three-fourths of the issued shares of any other class
of shares which may be affected by the variation.
Removal
of Directors
Under
Delaware corporate law, a director of a corporation with a classified board may
be removed only for cause with the approval of a majority of the outstanding
shares entitled to vote, unless the certificate provides otherwise. As permitted
by British Virgin Islands law and our memorandum of association and articles of
association, directors may be removed by resolution of directors or resolution
of shareholders, with or without cause.
Mergers
Under the
BVI Act, two or more companies may merge or consolidate in accordance with the
statutory provisions. A merger means the merging of two or more constituent
companies into one of the constituent companies, and a consolidation means the
uniting of two or more constituent companies into a new company. In order to
merge or consolidate, the directors of each constituent company must approve a
written plan of merger or consolidation which must be authorized by a resolution
of shareholders.
Shareholders
not otherwise entitled to vote on the merger or consolidation may still acquire
the right to vote if the plan of merger or consolidation contains any provision
which, if proposed as an amendment to the memorandum association or articles of
association, would entitle them to vote as a class or series on the proposed
amendment. In any event, all shareholders must be given a copy of the plan of
merger or consolidation irrespective of whether they are entitled to vote at the
meeting or consent to the written resolution to approve the plan of merger or
consolidation.
Inspection
of Books and Records
Under
Delaware corporate law, any shareholder of a corporation may for any proper
purpose inspect or make copies of the corporation’s stock ledger, list of
shareholders and other books and records. Under the BVI Act, members, upon
giving written notice to us, are entitled to inspect the register of members,
the register of directors and minutes of resolutions of members, and to make
copies of these documents and records.
Conflict
of Interest
The BVI
Act provides that a director shall forthwith, after becoming aware that he is
interested in a transaction entered into or to be entered into by the company,
disclose that interest to the board of directors of the company. The failure of
a director to disclose that interest does not affect the validity of a
transaction entered into by the director or the company. A transaction entered
into by us, in respect of which a director is interested, is voidable by us
unless the director’s interest was disclosed to the board prior to the company’s
entry into the transaction or was not required to be disclosed. A transaction is
not voidable if the material facts of the director’s interest are known by the
members entitled to vote or if the transaction is approved or ratified by a
resolution of members. As permitted by British Virgin Islands law and our
memorandum of association and articles of association, a director interested in
a particular transaction may vote on it, attend meetings at which it is
considered, and sign documents on our behalf which relate to the
transaction.
Transactions
with Interested Shareholders
Delaware
corporate law contains a business combination statute applicable to Delaware
public corporations whereby, unless the corporation has specifically elected not
to be governed by such statute by amendment to its certificate of incorporation,
it is prohibited from engaging in certain business combinations with an
“interested shareholder” for three years following the date that such person
becomes an interested shareholder. An interested shareholder generally is a
person or group who or that owns or owned 15% or more of the target’s
outstanding voting stock within the past three years. This has the effect of
limiting the ability of a potential acquirer to make a two-tiered bid for the
target in which all shareholders would not be treated equally. The statute does
not apply if, among other things, prior to the date on which such shareholder
becomes an interested shareholder, the board of directors approves either the
business combination or the transaction that resulted in the person becoming an
interested shareholder. This encourages any potential acquirer of a Delaware
public corporation to negotiate the terms of any acquisition transaction with
the target’s board of directors.
British
Virgin Islands law has no comparable provision.
Independent
Directors
There are
no provisions under Delaware corporate law or under the BVI Act that require a
majority of our directors to be independent.
Cumulative
Voting
Under
Delaware corporate law, cumulative voting for elections of directors is not
permitted unless the company’s certificate of incorporation specifically
provides for it. Cumulative voting potentially facilitates the representation of
minority shareholders on a board of directors since it permits the minority
shareholder to cast all the votes to which the shareholder is entitled on a
single director, which increases the shareholder’s voting power with respect to
electing such director. There are no prohibitions to cumulative voting under the
laws of the British Virgin Islands, but our memorandum of association and
articles of association do not provide for cumulative voting.
Anti-takeover
Provisions in Our Memorandum of association and articles of
association
Some
provisions of our memorandum of association and articles of association may
discourage, delay or prevent a change in control of our company or management
that shareholders may consider favorable, including provisions that authorize
our board of directors to issue preference shares in one or more series and to
designate the price, rights, preferences, privileges and restrictions of such
preference shares.
Nasdaq
Stock Market Listing
We have
applied to list our ordinary shares for quotation on the Nasdaq Global
Market.
DESCRIPTION
OF AMERICAN DEPOSITARY SHARES
American
Depositary Receipts
JPMorgan
Chase Bank, N.A., as depositary will issue the ADSs which you will be entitled
to receive in this offering. Each ADS will represent an ownership
interest in one share which we will deposit with the custodian, as agent of the
depositary, under the deposit agreement among ourselves, the depositary and
yourself as an ADR holder. In the future, each ADS will also
represent any securities, cash or other property deposited with the depositary
but which they have not distributed directly to you. Unless
specifically requested by you, all ADSs will be issued on the books of our
depositary in book-entry form and periodic statements will be mailed to you
which reflect your ownership interest in such ADSs. In our
description, references to American depositary receipts or ADRs shall include
the statements you will receive which reflect your ownership of
ADSs.
The
depositary’s office is located at 1 Chase Manhattan Plaza, Floor 58, New York,
NY, 10005-1401.
You may
hold ADSs either directly or indirectly through your broker or other financial
institution. If you hold ADSs directly, by having an ADS
registered in your name on the books of the depositary, you are an ADR
holder. This description assumes you hold your ADSs
directly. If you hold the ADSs through your broker or financial
institution nominee, you must rely on the procedures of such broker or financial
institution to assert the rights of an ADR holder described in this
section. You should consult with your broker or financial institution
to find out what those procedures are.
As an ADR
holder, we will not treat you as a shareholder of ours and you will not have any
shareholder rights. British Virgin Island law governs shareholder
rights. Because the depositary or its nominee will be the shareholder
of record for the shares represented by all outstanding ADSs, shareholder rights
rest with such record holder. Your rights are those of an ADR
holder. Such rights derive from the terms of the deposit agreement to
be entered into among us, the depositary and all registered holders from time to
time of ADSs issued under the deposit agreement. The obligations of the
depositary and its agents are also set out in the deposit
agreement. Because the depositary or its nominee will actually be the
registered owner of the shares, you must rely on it to exercise the rights of a
shareholder on your behalf. The deposit agreement and the ADSs are
governed by New York law.
The
following is a summary of what we believe to be the material terms of the
deposit agreement. Notwithstanding this, because it is a summary, it may not
contain all the information that you may otherwise deem
important. For more complete information, you should read the entire
deposit agreement and the form of ADR which contains the terms of your
ADSs. You can read a copy of the deposit agreement which is filed as
an exhibit to the registration statement of which this prospectus forms a
part. You may also obtain a copy of the deposit agreement at the
SEC’s Public Reference Room which is located at 100 F Street, NE, Washington, DC
20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-732-0330. You may also
find the registration statement and the attached deposit agreement on the SEC’s
website at http://www.sec.gov.
Share
Dividends and Other Distributions
How
will I receive dividends and other distributions on the shares underlying my
ADSs?
We may
make various types of distributions with respect to our
securities. The depositary has agreed that, to the extent
practicable, it will pay to you the cash dividends or other distributions it or
the custodian receives on shares or other deposited securities, after converting
any cash received into U.S. dollars and, in all cases, making any necessary
deductions provided for in the deposit agreement. You will receive these
distributions in proportion to the number of underlying securities that your
ADSs represent.
Except as
stated below, the depositary will deliver such distributions to ADR holders in
proportion to their interests in the following manner:
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Cash. The
depositary will distribute any U.S. dollars available to it resulting from
a cash dividend or other cash distribution or the net proceeds of sales of
any other distribution or portion thereof (to the extent applicable), on
an averaged or other practicable basis, subject to (i) appropriate
adjustments for taxes withheld, (ii) such distribution being impermissible
or impracticable with respect to certain registered ADR holders, and (iii)
deduction of the depositary’s expenses in (1) converting any foreign
currency to U.S. dollars to the extent that it determines that such
conversion may be made on a reasonable basis, (2) transferring foreign
currency or U.S. dollars to the United States by such means as the
depositary may determine to the extent that it determines that such
transfer may be made on a reasonable basis, (3) obtaining any approval or
license of any governmental authority required for such conversion or
transfer, which is obtainable at a reasonable cost and within a reasonable
time and (4) making any sale by public or private means in any
commercially reasonable manner. If exchange rates fluctuate
during a time when the depositary cannot convert a foreign currency, you
may lose some or all of the value of the
distribution.
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Shares. In
the case of a distribution in shares, the depositary will issue additional
ADRs to evidence the number of ADSs representing such
shares. Only whole ADSs will be issued. Any shares
which would result in fractional ADSs will be sold and the net proceeds
will be distributed in the same manner as cash to the ADR holders entitled
thereto.
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Rights to receive additional
shares. In the case of a distribution of rights to
subscribe for additional shares or other rights, if we provide evidence
satisfactory to the depositary that it may lawfully distribute such
rights, the depositary will distribute warrants or other instruments in
the discretion of the depositary representing such
rights. However, if we do not furnish such evidence, the
depositary may:
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sell
such rights if practicable and distribute the net proceeds in the same
manner as cash to the ADR holders entitled thereto;
or
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if
it is not practicable to sell such rights, do nothing and allow such
rights to lapse, in which case ADR holders will receive
nothing.
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We
have no obligation to file a registration statement under the Securities
Act in order to make any rights available to ADR
holders.
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Other
Distributions. In the case of a distribution of
securities or property other than those described above, the depositary
may either (i) distribute such securities or property in any manner it
deems equitable and practicable or (ii) to the extent the depositary deems
distribution of such securities or property not to be equitable and
practicable, sell such securities or property and distribute any net
proceeds in the same way it distributes
cash.
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If the
depositary determines that any distribution described above is not practicable
with respect to any specific registered ADR holder, the depositary may choose
any method of distribution that it deems practicable for such ADR holder,
including the distribution of foreign currency, securities or property, or it
may retain such items, without paying interest on or investing them, on behalf
of the ADR holder as deposited securities, in which case the ADSs will also
represent the retained items.
Any U.S.
dollars will be distributed by checks drawn on a bank in the United States for
whole dollars and cents. Fractional cents will be withheld without
liability and dealt with by the depositary in accordance with its then current
practices.
The
depositary is not responsible if it decides that it is unlawful or impractical
to make a distribution available to any ADR holders.
There
can be no assurance that the depositary will be able to convert any currency at
a specified exchange rate or sell any property, rights, shares or other
securities at a specified price, nor that any of such transactions can be
completed within a specified time period.
Deposit,
Withdrawal and Cancellation
How
does the depositary issue ADSs?
The
depositary will issue ADSs if you or your broker deposit shares or evidence of
rights to receive shares with the custodian and pay the fees and expenses owing
to the depositary in connection with such issuance. In the case of
the ADSs to be issued under this prospectus, we will arrange with the
underwriters named herein to deposit such shares.
Shares
deposited in the future with the custodian must be accompanied by certain
delivery documentation, including instruments showing that such shares have been
properly transferred or endorsed to the person on whose behalf the deposit is
being made.
The
custodian will hold all deposited shares (including those being deposited by or
on our behalf in connection with the offering to which this prospectus relates)
for the account of the depositary. ADR holders thus have no direct
ownership interest in the shares and only have such rights as are contained in
the deposit agreement. The custodian will also hold any additional
securities, property and cash received on or in substitution for the deposited
shares. The deposited shares and any such additional items are
referred to as “deposited securities”.
Upon each
deposit of shares, receipt of related delivery documentation and compliance with
the other provisions of the deposit agreement, including the payment of the fees
and charges of the depositary and any taxes or other fees or charges owing, the
depositary will issue an ADR or ADRs in the name or upon the order of the person
entitled thereto evidencing the number of ADSs to which such person is
entitled. All of the ADSs issued will, unless specifically requested
to the contrary, be part of the depositary’s direct registration system, and a
registered holder will receive periodic statements from the depositary which
will show the number of ADSs registered in such holder’s name. An ADR
holder can request that the ADSs not be held through the depositary’s direct
registration system and that a certificated ADR be issued.
How
do ADR holders cancel an ADS and obtain deposited securities?
When you
turn in your ADR certificate at the depositary’s office, or when you provide
proper instructions and documentation in the case of direct registration ADSs,
the depositary will, upon payment of certain applicable fees, charges and taxes,
deliver the underlying shares to you or upon your written order. At
your risk, expense and request, the depositary may deliver deposited securities
at such other place as you may request.
The
depositary may only restrict the withdrawal of deposited securities in
connection with:
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temporary
delays caused by closing our transfer books or those of the depositary or
the deposit of shares in connection with voting at a shareholders’
meeting, or the payment of
dividends;
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the
payment of fees, taxes and similar charges;
or
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compliance
with any U.S. or foreign laws or governmental regulations relating to the
ADRs or to the withdrawal of deposited
securities.
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This
right of withdrawal may not be limited by any other provision of the deposit
agreement.
Record
Dates
The
depositary may, after consultation with us if practicable, fix record dates for
the determination of the registered ADR holders who will be entitled (or
obligated, as the case may be):
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to
receive any distribution on or in respect of
shares,
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to
give instructions for the exercise of voting rights at a meeting of
holders of shares,
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to
pay the fee assessed by the depositary for administration of the ADR
program and for any expenses as provided for in the ADR,
or
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to
receive any notice or to act in respect of other
matters
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all
subject to the provisions of the deposit agreement.
Voting
Rights
How
do I vote?
If you
are an ADR holder and the depositary asks you to provide it with voting
instructions, you may instruct the depositary how to exercise the voting rights
for the shares which underlie your ADSs. As soon as practicable after receiving
notice of any meeting or solicitation of consents or proxies from us, the
depositary will distribute to the registered ADR holders a notice stating such
information as is contained in the voting materials received by the depositary
and describing how you may instruct the depositary to exercise the voting rights
for the shares which underlie your ADSs, including instructions for giving a
discretionary proxy to a person designated by us. For instructions to
be valid, the depositary must receive them in the manner and on or before the
date specified. The depositary will try, as far as is practical,
subject to the provisions of and governing the underlying shares or other
deposited securities, to vote or to have its agents vote the shares or other
deposited securities as you instruct. The depositary will only vote
or attempt to vote as you instruct. The depositary will not itself
exercise any voting discretion. Furthermore, neither the depositary
nor its agents are responsible for any failure to carry out any voting
instructions, for the manner in which any vote is cast or for the effect of any
vote. We have agreed to ensure that a poll is demanded at each meeting of
shareholders so as to give effect to the votes submitted by or on behalf of the
depositary in accordance with the instructions of holders.
Notwithstanding
anything contained in the deposit agreement or any ADR, the depositary may, to
the extent not prohibited by law or regulations, or by the requirements of the
stock exchange on which the ADSs are listed, in lieu of distribution of the
materials provided to the depositary in connection with any meeting of, or
solicitation of consents or proxies from, holders of deposited securities,
distribute to the registered holders of ADRs a notice that provides such holders
with, or otherwise publicizes to such holders, instructions on how to retrieve
such materials or receive such materials upon request (i.e., by reference to a
website containing the materials for retrieval or a contact for requesting
copies of the materials).
Under our
constituent documents the depositary would be able to provide us with voting
instructions without having to personally attend meetings in person or by
proxy. Such voting instructions may be provided to us via facsimile,
email, mail, courier or other recognized form of delivery and we agree to accept
any such delivery so long as it is timely received prior to the meeting. We will
endeavor to provide the depositary with written notice of each meeting of
shareholders promptly after determining the date of such meeting so as to enable
it to solicit and receive voting instructions. In general, the depositary will
require that voting instructions be received by the depositary no less than five
business days prior to the date of each meeting of shareholders. We anticipate
that the 35 days’ notice required for annual general meetings will provide
sufficient time for the depositary to solicit voting instructions. However, for
extraordinary meetings, which may be called upon ten days’ notice, the
depositary may not have sufficient time to solicit voting instructions, and it
is possible that you, or persons who hold their ADSs through brokers, dealers or
other third parties, will not have the opportunity to exercise a right to vote.
There is no guarantee that you will receive voting materials in time to instruct
the depositary to vote and it is possible that you, or persons who hold their
ADSs through brokers, dealers or other third parties, will not have the
opportunity to exercise a right to vote.
Reports
and Other Communications
Will
ADR holders be able to view our reports?
The
depositary will make available for inspection by ADR holders at the offices of
the depositary and the custodian the deposit agreement, the provisions of or
governing deposited securities, and any written communications from us which are
both received by the custodian or its nominee as a holder of deposited
securities and made generally available to the holders of deposited
securities.
Additionally,
if we make any written communications generally available to holders of our
shares, and we furnish copies thereof (or English translations or summaries) to
the depositary, it will distribute the same to registered ADR
holders.
Fees
and Expenses
What
fees and expenses will I be responsible for paying?
The
depositary may charge each person to whom ADSs are issued, including, without
limitation, issuances against deposits of shares, issuances in respect of share
distributions, rights and other distributions, issuances pursuant to a stock
dividend or stock split declared by us or issuances pursuant to a merger,
exchange of securities or any other transaction or event affecting the ADSs or
deposited securities, and each person surrendering ADSs for withdrawal of
deposited securities or whose ADRs are cancelled or reduced for any other
reason, $5.00 for each 100 ADSs (or any portion thereof) issued, delivered,
reduced, cancelled or surrendered, as the case may be. The depositary
may sell (by public or private sale) sufficient securities and property received
in respect of a share distribution, rights and/or other distribution prior to
such deposit to pay such charge.
The
following additional charges shall be incurred by the ADR holders, by any party
depositing or withdrawing shares or by any party surrendering ADSs or to whom
ADSs are issued (including, without limitation, issuance pursuant to a stock
dividend or stock split declared by us or an exchange of stock regarding the
ADRs or the deposited securities or a distribution of ADSs), whichever is
applicable:
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a
fee of US$1.50 per ADR or ADRs for transfers of certificated or direct
registration ADRs;
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a
fee of up to US$0.05 per ADS for any cash distribution made pursuant to
the deposit agreement;
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a
fee of up to US$0.05 per ADS per calendar year (or portion thereof) for
services performed by the depositary in administering the ADRs (which fee
may be charged on a periodic basis during each calendar year and shall be
assessed against holders of ADRs as of the record date or record dates set
by the depositary during each calendar year and shall be payable in the
manner described in the next succeeding
provision);
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reimbursement
of such fees, charges and expenses as are incurred by the depositary
and/or any of the depositary’s agents (including, without limitation, the
custodian and expenses incurred on behalf of holders in connection with
compliance with foreign exchange control regulations or any law or
regulation relating to foreign investment) in connection with the
servicing of the shares or other deposited securities, the delivery of
deposited securities or otherwise in connection with the depositary’s or
its custodian’s compliance with applicable law, rule or regulation (which
charge shall be assessed on a proportionate basis against holders as of
the record date or dates set by the depositary and shall be payable at the
sole discretion of the depositary by billing such holders or by deducting
such charge from one or more cash dividends or other cash
distributions);
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a
fee for the distribution of securities (or the sale of securities in
connection with a distribution), such fee being in an amount equal to the
fee for the execution and delivery of ADSs which would have been charged
as a result of the deposit of such securities (treating all such
securities as if they were shares) but which securities or the net cash
proceeds from the sale thereof are instead distributed by the depositary
to those holders entitled thereto;
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stock
transfer or other taxes and other governmental
charges;
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cable,
telex and facsimile transmission and delivery charges incurred at your
request in connection with the deposit or delivery of
shares;
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transfer
or registration fees for the registration of transfer of deposited
securities on any applicable register in connection with the deposit or
withdrawal of deposited securities;
and
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expenses
of the depositary in connection with the conversion of foreign currency
into U.S. dollars.
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We will
pay all other charges and expenses of the depositary and any agent of the
depositary (except the custodian) pursuant to agreements from time to time
between us and the depositary. The charges described above may be
amended from time to time by agreement between us and the
depositary.
Our
depositary has agreed to reimburse us for certain expenses we incur that are
related to establishment and maintenance of the ADR program, including investor
relations expenses and exchange application and listing fees. Neither
the depositary nor we can determine the exact amount to be made available to us
because (i) the number of ADSs that will be issued and outstanding, (ii) the
level of fees to be charged to holders of ADSs and (iii) our reimbursable
expenses related to the ADR program are not known at this time. The depositary
collects its fees for issuance and cancellation of ADSs directly from investors
depositing shares or surrendering ADSs for the purpose of withdrawal or from
intermediaries acting for them. The depositary collects fees for making
distributions to investors by deducting those fees from the amounts distributed
or by selling a portion of distributable property to pay the fees. The
depositary may collect its annual fee for depositary services by deduction from
cash distributions, or by directly billing investors, or by charging the
book-entry system accounts of participants acting for them. The depositary will
generally set off the amounts owing from distributions made to holders of ADSs.
If, however, no distribution exists and payment owing is not timely received by
the depositary, the depositary may refuse to provide any further services to
holders that have not paid those fees and expenses owing until such fees and
expenses have been paid.
At the
discretion of the depositary, all fees and charges owing under the deposit
agreement are due in advance and/or when declared owing by the
depositary.
Payment
of Taxes
ADR
holders must pay any tax or other governmental charge payable by the custodian
or the depositary on any ADS or ADR, deposited security or
distribution. If an ADR holder owes any tax or other governmental
charge, the depositary may (i) deduct the amount thereof from any cash
distributions, or (ii) sell deposited securities (by public or private sale) and
deduct the amount owing from the net proceeds of such sale. In either
case the ADR holder remains liable for any shortfall. Additionally,
if any tax or governmental charge is unpaid, the depositary may also refuse to
effect any registration, registration of transfer, split-up or combination of
deposited securities or withdrawal of deposited securities until such payment is
made. If any tax or governmental charge is required to be withheld on
any cash distribution, the depositary may deduct the amount required to be
withheld from any cash distribution or, in the case of a non-cash distribution,
sell the distributed property or securities (by public or private sale) to pay
such taxes and distribute any remaining net proceeds to the ADR holders entitled
thereto.
By
holding an ADR or an interest therein, you will be agreeing to indemnify us, the
depositary, its custodian and any of our or their respective directors,
employees, agents and affiliates against, and hold each of them harmless from,
any claims by any governmental authority with respect to taxes, additions to
tax, penalties or interest arising out of any refund of taxes, reduced rate of
withholding at source or other tax benefit obtained.
Reclassifications,
Recapitalizations and Mergers
If we
take certain actions that affect the deposited securities, including (i) any
change in par value, split-up, consolidation, cancellation or other
reclassification of deposited securities or (ii) any distributions not made to
holders of ADRs or (iii) any recapitalization, reorganization, merger,
consolidation, liquidation, receivership, bankruptcy or sale of all or
substantially all of our assets, then the depositary may choose to:
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distribute
additional or amended ADRs;
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distribute
cash, securities or other property it has received in connection with such
actions;
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sell
any securities or property received and distribute the proceeds as cash;
or
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If the
depositary does not choose any of the above options, any of the cash, securities
or other property it receives will constitute part of the deposited securities
and each ADS will then represent a proportionate interest in such
property.
Amendment
and Termination
How
may the deposit agreement be amended?
We may
agree with the depositary to amend the deposit agreement and the ADSs without
your consent for any reason. ADR holders must be given at least 30
days notice of any amendment that imposes or increases any fees or charges
(other than stock transfer or other taxes and other governmental charges,
transfer or registration fees, cable, telex or facsimile transmission costs,
delivery costs or other such expenses), or otherwise prejudices any substantial
existing right of ADR holders. Such notice need not describe in detail the
specific amendments effectuated thereby, but must give ADR holders a means to
access the text of such amendment. If an ADR holder continues to hold an ADR or
ADRs after being so notified, such ADR holder is deemed to agree to such
amendment and to be bound by the deposit agreement as so amended.
Notwithstanding the foregoing, if any governmental body or regulatory body
should adopt new laws, rules or regulations which would require amendment or
supplement of the deposit agreement or the form of ADR to ensure compliance
therewith, we and the depositary may amend or supplement the deposit agreement
and the ADR at any time in accordance with such changed laws, rules or
regulations, which amendment or supplement may take effect before a notice is
given or within any other period of time as required for compliance. No
amendment, however, will impair your right to surrender your ADSs and receive
the underlying securities, except in order to comply with mandatory provisions
of applicable law.
How
may the deposit agreement be terminated?
The
depositary may, and shall at our written direction, terminate the deposit
agreement and the ADRs by mailing notice of such termination to the registered
holders of ADRs at least 30 days prior to the date fixed in such notice for such
termination; provided, however, if the depositary shall have (i) resigned as
depositary under the deposit agreement, notice of such termination by the
depositary shall not be provided to registered holders unless a successor
depositary shall not be operating under the deposit agreement within 45 days of
the date of such resignation, and (ii) been removed as depositary under the
deposit agreement, notice of such termination by the depositary shall not be
provided to registered holders of ADRs unless a successor depositary shall not
be operating under the deposit agreement on the 90th day
after our notice of removal was first provided to the
depositary. After termination, the depositary’s only responsibility
will be (i) to deliver deposited securities to ADR holders who surrender their
ADRs, and (ii) to hold or sell distributions received on deposited
securities. As soon as practicable after the expiration of six months
from the termination date, the depositary will sell the deposited securities
which remain and hold the net proceeds of such sales (as long as it may lawfully
do so), without liability for interest, in trust for the ADR holders who have
not yet surrendered their ADRs. After making such sale, the
depositary shall have no obligations except to account for such proceeds and
other cash.
Limitations
on Obligations and Liability to ADR holders
Limits
on our obligations and the obligations of the depositary; limits on liability to
ADR holders and holders of ADSs
Prior to
the issue, registration, registration of transfer, split-up, combination, or
cancellation of any ADRs, or the delivery of any distribution in respect
thereof, and from time to time, we or the depositary or its custodian may
require:
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payment
with respect thereto of (i) any stock transfer or other tax or other
governmental charge, (ii) any stock transfer or registration fees in
effect for the registration of transfers of shares or other deposited
securities upon any applicable register and (iii) any applicable fees and
expenses described in the deposit
agreement;
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the
production of proof satisfactory to it of (i) the identity of any
signatory and genuineness of any signature and (ii) such other
information, including without limitation, information as to citizenship,
residence, exchange control approval, beneficial ownership of any
securities, compliance with applicable law, regulations, provisions of or
governing deposited securities and terms of the deposit agreement and the
ADRs, as it may deem necessary or proper;
and
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compliance
with such regulations as the depositary may establish consistent with the
deposit agreement.
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The
issuance of ADRs, the acceptance of deposits of shares, the registration,
registration of transfer, split-up or combination of ADRs or the withdrawal of
shares, may be suspended, generally or in particular instances, when the ADR
register or any register for deposited securities is closed or when any such
action is deemed advisable by the depositary; provided that the ability to
withdrawal shares may only be limited under the following
circumstances: (i) temporary delays caused by closing transfer books of the
depositary or our transfer books or the deposit of shares in connection with
voting at a shareholders’ meeting, or the payment of dividends, (ii) the payment
of fees, taxes, and similar charges, and (iii) compliance with any laws or
governmental regulations relating to ADRs or to the withdrawal of deposited
securities.
The
deposit agreement expressly limits the obligations and liability of the
depositary, ourselves and our respective agents. Neither we nor the
depositary nor any such agent will be liable if:
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any
present or future law, rule, regulation, fiat, order or decree of the
United States, the British Virgin Islands, the People’s
Republic of China or any other country, or of
any governmental or regulatory authority or securities exchange
or market or automated quotation system, the provisions of or governing
any deposited securities, any present or future provision of our charter,
any act of God, war, terrorism or other circumstance beyond our, the
depositary’s or our respective agents’ control shall prevent or delay, or
shall cause any of them to be subject to any civil or criminal penalty in
connection with, any act which the deposit agreement or the ADRs provide
shall be done or performed by us, the depositary or our respective agents
(including, without limitation,
voting);
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it
exercises or fails to exercise discretion under the deposit agreement or
the ADR;
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it
performs its obligations under the deposit agreement and ADRs without
gross negligence or bad faith;
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it
takes any action or refrains from taking any action in reliance upon the
advice of or information from legal counsel, accountants, any person
presenting shares for deposit, any registered holder of ADRs, or any other
person believed by it to be competent to give such advice or information;
or
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it
relies upon any written notice, request, direction or other document
believed by it to be genuine and to have been signed or presented by the
proper party or parties.
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Neither
the depositary nor its agents have any obligation to appear in, prosecute or
defend any action, suit or other proceeding in respect of any deposited
securities or the ADRs. We and our agents shall only be obligated to
appear in, prosecute or defend any action, suit or other proceeding in respect
of any deposited securities or the ADRs, which in our opinion may involve us in
expense or liability, if indemnity satisfactory to us against all expense
(including fees and disbursements of counsel) and liability is furnished as
often as may be required. The depositary and its agents may fully respond to any
and all demands or requests for information maintained by or on its behalf in
connection with the deposit agreement, any registered holder or holders of ADRs,
any ADRs or otherwise related to the deposit agreement or ADRs to the extent
such information is requested or required by or pursuant to any lawful
authority, including without limitation laws, rules, regulations, administrative
or judicial process, banking, securities or other regulators. The
depositary shall not be liable for the acts or omissions made by any securities
depository, clearing agency or settlement system in connection with or arising
out of book-entry settlement of deposited securities or
otherwise. Furthermore, the depositary shall not be responsible for,
and shall incur no liability in connection with or arising from, the insolvency
of any custodian that is not a branch or affiliate of JPMorgan Chase Bank,
N.A. The depositary and the custodian(s) may use third party delivery
services and providers of information regarding matters such voting,
corporate actions and class action litigation and use local agents to provide
extraordinary services such as attendance at annual
meetings. Although the depositary will use reasonable care (and cause
its custodians to use reasonable care) in the selection and retention of such
third party providers and local agents, it will not be responsible for any
errors or omissions made by them in providing the relevant information or
services.
Additionally,
none of us, the depositary or the custodian shall be liable for the failure by
any registered holder of ADRs or beneficial owner therein to obtain the benefits
of credits on the basis of non-U.S. tax paid against such holder’s or beneficial
owner’s income tax liability. Neither we nor the depositary shall incur any
liability for any tax consequences that may be incurred by holders or beneficial
owners on account of their ownership of ADRs or ADSs.
Neither
the depositary nor its agents will be responsible for any failure to carry out
any instructions to vote any of the deposited securities, for the manner in
which any such vote is cast or for the effect of any such
vote. Neither the depositary nor any of its agents shall be liable to
registered holders of ADRs or beneficial owners of interests in ADSs for any
indirect, special, punitive or consequential damages (including, without
limitation, lost profits) of any form incurred by any person or entity, whether
or not foreseeable and regardless of the type of action in which such a claim
may be brought.
In the
deposit agreement each party thereto (including, for avoidance of doubt, each
holder and beneficial owner and/or holder of interests in ADRs) irrevocably
waives, to the fullest extent permitted by applicable law, any right it may have
to a trial by jury in any suit, action or proceeding against the depositary
and/or the company directly or indirectly arising out of or relating to the
shares or other deposited securities, the ADSs or the ADRs, the deposit
agreement or any transaction contemplated therein, or the breach thereof
(whether based on contract, tort, common law or any other theory).
The
depositary may own and deal in any class of our securities and in
ADSs.
Disclosure
of Interest in ADSs
To the
extent that the provisions of or governing any deposited securities may require
disclosure of or impose limits on beneficial or other ownership of deposited
securities, other shares and other securities and may provide for blocking
transfer, voting or other rights to enforce such disclosure or limits, you agree
to comply with all such disclosure requirements and ownership limitations and to
comply with any reasonable instructions we may provide in respect
thereof. We reserve the right to instruct you to deliver your ADSs
for cancellation and withdrawal of the deposited securities so as to permit us
to deal with you directly as a holder of shares and, by holding an ADS or an
interest therein, you will be agreeing to comply with such
instructions.
Books
of Depositary
The
depositary or its agent will maintain a register for the registration,
registration of transfer, combination and split-up of ADRs, which register shall
include the depositary’s direct registration system. Registered
holders of ADRs may inspect such records at the depositary’s office at all
reasonable times, but solely for the purpose of communicating with other holders
in the interest of the business of our company or a matter relating to the
deposit agreement. Such register may be closed from time to time,
when deemed expedient by the depositary.
The
depositary will maintain facilities for the delivery and receipt of
ADRs.
Pre-release
of ADSs
In its
capacity as depositary, the depositary shall not lend shares or ADSs; provided,
however, that the depositary may (i) issue ADSs prior to the receipt of shares
and (ii) deliver shares prior to the receipt of ADSs for withdrawal of deposited
securities, including ADSs which were issued under (i) above but for which
shares may not have been received (each such transaction a “pre-release”). The
depositary may receive ADSs in lieu of shares under (i) above (which ADSs will
promptly be canceled by the depositary upon receipt by the depositary) and
receive shares in lieu of ADSs under (ii) above. Each such pre-release will be
subject to a written agreement whereby the person or entity (the “applicant”) to
whom ADSs or shares are to be delivered (a) represents that at the time of the
pre-release the applicant or its customer owns the shares or ADSs that are to be
delivered by the applicant under such pre-release, (b) agrees to indicate the
depositary as owner of such shares or ADSs in its records and to hold such
shares or ADSs in trust for the depositary until such shares or ADSs are
delivered to the depositary or the custodian, (c) unconditionally guarantees to
deliver to the depositary or the custodian, as applicable, such shares or ADSs,
and (d) agrees to any additional restrictions or requirements that the
depositary deems appropriate. Each such pre-release will be at all times fully
collateralized with cash, U.S. government securities or such other collateral as
the depositary deems appropriate, terminable by the depositary on not more than
five (5) business days’ notice and subject to such further indemnities and
credit regulations as the depositary deems appropriate. The depositary will
normally limit the number of ADSs and shares involved in such pre-release at any
one time to thirty percent (30%) of the ADSs outstanding (without giving effect
to ADSs outstanding under (i) above), provided, however, that the depositary
reserves the right to change or disregard such limit from time to time as it
deems appropriate. The depositary may also set limits with respect to the number
of ADSs and shares involved in pre-release with any one person on a case-by-case
basis as it deems appropriate. The depositary may retain for its own account any
compensation received by it in conjunction with the foregoing. Collateral
provided in connection with pre-release transactions, but not the earnings
thereon, shall be held for the benefit of the registered holders of ADRs (other
than the applicant).
Appointment
In the
deposit agreement, each registered holder of ADRs and each person holding an
interest in ADSs, upon acceptance of any ADSs (or any interest therein) issued
in accordance with the terms and conditions of the deposit agreement will be
deemed for all purposes to:
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be
a party to and bound by the terms of the deposit agreement and the
applicable ADR or ADRs, and
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appoint
the depositary its attorney-in-fact, with full power to delegate, to act
on its behalf and to take any and all actions contemplated in the deposit
agreement and the applicable ADR or ADRs, to adopt any and all procedures
necessary to comply with applicable laws and to take such action as the
depositary in its sole discretion may deem necessary or appropriate to
carry out the purposes of the deposit agreement and the applicable ADR and
ADRs, the taking of such actions to be the conclusive determinant of the
necessity and appropriateness
thereof.
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Governing
Law
The
deposit agreement and the ADRs shall be governed by and construed in accordance
with the laws of the State of New York. In the deposit agreement, we
have submitted to the jurisdiction of the courts of the State of New York and
appointed an agent for service of process on our behalf.
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to
this offering, there has been no public market for our ADSs. Future sales of
substantial amounts of our ADSs in the public market, or the perception that
such sales may occur, could adversely affect the market price of our
ADSs.
Upon the
closing of this offering, we will have 20,000,000 ADSs outstanding. Of these
ADSs, our ADSs being sold in this offering, which comprise 25.0% of the total
number of ADSs outstanding, will be freely tradable in the open market.
The remaining ADSs outstanding will be
held by residents of the PRC that are unaffiliated with Ossen, which will hold
9.5%, our chairman, who will hold 59.4%, the spouse of our president, who will
hold 3.0% and the wife of the chief executive officer of Shanghai ZFX, who will
hold 3.0%, in the aggregate. These ADSs will be “restricted securities”, as that
phrase is defined in Rule 144, and may not be resold in the absence of
registration under the Securities Act or pursuant to an exemption from such
registration, including among others, the exemptions provided by Rules 144
or 701 under the Securities Act, which are described below.
Rule 144
In
general, under Rule 144, a person (or persons whose shares are aggregated) who
is not deemed to have been an affiliate of ours at any time during the three
months preceding a sale, and who has beneficially owned restricted securities
within the meaning of Rule 144 for at least six months (including any period of
consecutive ownership of preceding non-affiliated holders) would be entitled to
sell those shares, subject only to the availability of current public
information about us. A non-affiliated person who has beneficially owned
restricted securities within the meaning of Rule 144 for at least one year would
be entitled to sell those shares without regard to the provisions of Rule
144.
In
general, under Rule 144, our affiliates or persons selling shares on behalf of
our affiliates are entitled to sell a number of shares that does not exceed the
greater of:
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1%
of the number of our ordinary shares then outstanding which will equal
approximately million shares immediately after this offering;
and
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the
average weekly trading volume of our ordinary shares on the exchange on
which we are listed at the time during the four calendar weeks preceding
the date on which notice of the sale is filed with the
SEC.
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Sales
under Rule 144 by our affiliates or persons selling shares on behalf of our
affiliates are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about
us.
Because
we were a shell company prior to our business combination, which occurred in
July 2010, under SEC rules Rule 144 will be unavailable to our shareholders
until July 2011.
Rule 701
Beginning
90 days after the date of this prospectus, persons other than affiliates who
purchased ADSs under a written compensatory plan or contract may be entitled to
sell such ADSs in the United States in reliance on Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell these shares in reliance on Rule 144 subject only to its
manner-of-sale requirements.
TAXATION
The following summary of the material British Virgin Islands,
PRC and U.S. tax consequences of an investment in our ordinary shares is based
upon laws and relevant interpretations thereof in effect as of the date of this
prospectus, all of which are subject to change, possibly with retroactive
effect. This summary is not intended to be, nor should it be construed as, legal
or tax advice to any prospective purchaser and is not exhaustive of all possible
tax considerations. This summary also does not deal with all possible tax
consequences relating to an investment in our ordinary shares, such as the tax
consequences under state, local, non-U.S., non-PRC, and non-British Virgin
Islands tax laws. You should consult your own tax advisors with respect to the
consequences of the acquisition, ownership and disposition of our ordinary
shares.
British
Virgin Islands Taxation
All
dividends, interests, rents, royalties, compensations and other amounts paid by
us are exempt from all forms of taxation in the British Virgin Islands and any
capital gains realized with respect to any of our shares, debt obligations, or
other securities are not subject to any form of taxation in the British Virgin
Islands. No estate, inheritance, succession or gift tax, rate, duty, levy or
other charge is payable under BVI law by persons who are not persons resident in
the British Virgin Islands with respect to any of our shares, debt obligation or
other securities. There are currently no withholding taxes or exchange control
regulations in the British Virgin Islands applicable to us or our shareholders.
Currently, there is no income tax treaty, convention or reciprocal tax treaty
regarding withholdings currently in effect between the United States and the
British Virgin Islands. We will only be liable to pay payroll tax
with respect to employees employed and working in the British Virgin
Islands. We do not currently have, and do not intend to have in the
near future, any employees in the British Virgin Islands.
People’s
Republic of China Taxation
Under the
former Income Tax Law for Enterprises with Foreign Investment and Foreign
Enterprises, any dividends payable by foreign-invested enterprises to non-PRC
investors were exempt from PRC withholding tax. In addition, any dividends
payable, or distributions made, by us to holders or beneficial owners of our
shares would not be subject to any PRC tax, provided that such holders or
beneficial owners, including individuals and enterprises, were not deemed to be
PRC residents under the PRC tax law and were not otherwise subject to PRC
tax.
On March
16, 2007, the PRC National People’s Congress approved and promulgated a new PRC
Enterprise Income Tax Law, which took effect as of January 1, 2008. Under the
new tax law, enterprises established under the laws of non-PRC jurisdictions but
whose “de facto management body” are located in China are considered “resident
enterprises” for PRC tax purposes. Under the implementation regulations issued
by the State Council relating to the new tax law, “de facto management body” is
defined as the body that has material and overall management control over the
business, personnel, accounts and properties of an enterprise. In April 2009,
the PRC State Administration of Taxation promulgated a circular to clarify the
definition of “de facto management body” for enterprises incorporated overseas
with controlling shareholders being PRC enterprises. It remains
unclear how the tax authorities will treat an overseas enterprise invested or
controlled by another overseas enterprise and ultimately controlled by PRC
individual residents as is in our case. We are currently not treated as a PRC
resident enterprise by the relevant tax authorities. Since substantially all of
our management is currently based in China and may remain in China in the
future, we may be treated as a “resident enterprise” for the PRC tax purposes,
in which case, we will be subject to PRC income tax as to our worldwide income
at a uniform income tax rate of 25%. In addition, the new tax law provides that
dividend income between qualified “resident enterprises” is exempt from income
tax.
Moreover,
the new tax law provides that an income tax rate of 10% is normally applicable
to dividends payable for earnings derived since January 1, 2008 to non-PRC
investors who are “non-resident enterprises,” to the extent such dividends are
derived from sources within China. We are a British Virgin Islands holding
company and substantially all of our income is derived from dividends, if any,
we receive from our operating subsidiaries located in China. Thus, dividends
payable to us by our subsidiaries in China may be subject to the 10% withholding
tax if we are considered as a “non-resident enterprise” under the new tax
law.
Moreover,
non-resident individual investors may be required to pay PRC individual income
tax at a rate of 20% on interests or dividends payable to the investors or any
capital gains realized from the transfer of ADSs or ordinary shares if such
gains are deemed income derived from sources within the PRC. Under the
Individual Income Tax Law or the IIT Law, non-resident individual refers to an
individual who has no domicile in China and does not stay in the territory of
China or who has no domicile in China and has stayed in the territory of China
for less than one year. Pursuant to the IIT Law and its implementation rules,
for purposes of the PRC capital gains tax, the taxable income will be the
balance of the total income obtained from the transfer of the ADSs or ordinary
shares minus all the costs and expenses that are permitted under PRC tax laws to
be deducted from the income. Therefore, if we are considered as a PRC "resident
enterprise" and dividends we pay with respect to our ADSs or ordinary shares and
the gains realized from the transfer of our ADSs or ordinary shares are
considered income derived from sources within the PRC by relevant competent PRC
tax authorities, such gains earned by non-resident individuals may also be
subject to PRC withholding tax at a rate of 20%.
Under the
currently available guidance of the new tax law, dividends payable by us to our
shareholders should not be deemed to be derived from sources within China and
therefore should not be subject to withholding tax at 10%, or a lower rate if
reduced by a tax treaty or agreement. However, what will constitute income
derived from sources within China is currently unclear. In addition, gains on
the disposition of our shares should not be subject to PRC withholding
tax. However, these conclusions are not entirely free from doubt. In
addition, it is possible that these rules may change in the future, possibly
with retroactive effect.
U.S.
Federal Income Taxation
The
following is a discussion of the material U.S. federal income tax considerations
that may apply to an investor with respect to the acquisition, ownership and
disposition of our ordinary shares. This discussion does not purport to address
all of the tax consequences of owning our ordinary shares with respect to all
categories of investors that acquire our ordinary shares, some of which (such as
financial institutions, regulated investment companies, real estate investment
trusts, tax-exempt organizations, insurance companies, persons holding our
ordinary shares as part of a hedging, integrated, conversion or constructive
sale transaction or a straddle, traders in securities that have elected the
mark-to-market method of accounting for their securities, persons liable for
alternative minimum tax, persons who are investors in pass-through entities,
grantor trusts, persons who own, directly or indirectly under applicable
constructive ownership rules, 10% or more (by voting power) of our ordinary
shares, certain former citizens and long-term residents of the United States,
dealers in securities or currencies and investors whose functional currency is
not the U.S. dollar) may be subject to special rules. This discussion deals only
with holders who purchase our ordinary shares and hold such ordinary shares as a
capital asset (i.e., for investment). Moreover, this discussion is based on the
Internal Revenue Code of 1986, as amended, or the Code, existing and proposed
Treasury regulations promulgated under the Code, published rulings, and
administrative and judicial interpretations of the Code, all as currently in
effect as of the date of this prospectus, all of which are subject to change,
possibly with retroactive effect. You should consult your own tax advisors
regarding the tax consequences arising in your own particular situation under
U.S. federal, state, local or foreign law with respect to the ownership of our
ordinary shares.
For
purposes of this discussion, the term “U.S. Holder” means (except as described
in the proceeding paragraph) a beneficial owner of our ordinary shares
that is, for United States federal income tax purposes, (i) an individual U.S.
citizen or resident, (ii) a corporation (or other entity taxable as a
corporation) created or organized under the laws of the United States or any
political subdivision thereof, or the District of Columbia, (iii) an estate the
income of which is subject to U.S. federal income taxation regardless of its
source, or (iv) a trust if either (x) a court within the United States is able
to exercise primary jurisdiction over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust, or (y) the trust has a valid election in effect under applicable Treasury
Regulations to be treated as a U.S. person. A beneficial owner of our ordinary shares
(other than a partnership) that is not a U.S. Holder is referred to below as a
“Non-U.S. Holder.”
If a U.S.
partnership, or an entity treated for U.S. federal income tax purposes as a
partnership, such as a U.S. limited liability company, holds our ordinary shares,
the tax treatment of a partner will depend on the status of the partner and upon
the activities of the partnership. If you are a partner in such a partnership
holding our ordinary
shares, you should consult your tax advisor.
U.S. Federal Income Taxation of U.S.
Holders
Distributions
Subject
to the discussion of Passive Foreign Investment Companies, or PFICs, below,
distributions made by us with respect to our ordinary shares to
a U.S. Holder will constitute dividends to the extent of our current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles. Distributions in excess of our earnings and profits will be treated
first as a nontaxable return of capital to the extent of the U.S. Holder’s tax
basis in our ordinary shares,
and thereafter as capital gain. Because we are not a U.S. corporation, U.S.
Holders that are corporations will not be entitled to claim a dividends-received
deduction with respect to any distributions they receive from us.
Subject
to the discussion of PFICs below, dividends paid on our ordinary shares that are
received by U.S. Holders that are individuals, estates or trusts will be taxed
at the rate applicable to long-term capital gains (a maximum rate of 15% for
taxable years beginning on or before December 31, 2010), provided that such
dividends meet the requirements of "qualified dividend income." For this
purpose, qualified dividend income includes dividends paid by a non-U.S.
corporation if certain holding period and other requirements are met, and the
stock of the non-U.S. corporation with respect to which dividends are paid is
readily tradable on an established securities market in the U.S. (such as the
Nasdaq Global market). Dividends that fail to meet such requirements,
and dividends received by corporate U.S. Holders, are taxed at ordinary income
rates. No dividend received by a U.S. Holder will be a qualified dividend (i) if
the U.S. Holder held the ordinary share with respect to which the dividend was
paid for less than 61 days during the 121-day period beginning on the date that
is 60 days before the ex-dividend date with respect to such dividend, excluding
for this purpose, under the rules of Code Section 246(c), any period
during which the U.S. Holder has an option to sell, is under a contractual
obligation to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such
ordinary share (or substantially identical securities); or (ii) to the extent
that the U.S. Holder is under an obligation (pursuant to a short sale or
otherwise) to make related payments with respect to positions in property
substantially similar or related to the ordinary share with respect to which the
dividend is paid. If we were to be a "passive foreign investment
company" (as such term is defined in the Code) for any taxable year, dividends
paid on our ordinary shares in such year or in the following taxable year would
not be qualified dividends. In addition, a non-corporate U.S. Holder
will be able to take a qualified dividend into account in determining its
deductible investment interest (which is generally limited to its net investment
income) only if it elects to do so; in such case the dividend will be taxed at
ordinary income rates.
Sale, Exchange or Other Disposition of
Ordinary
Shares
Subject
to the discussion of PFICs below, a U.S. Holder will recognize taxable gain or
loss upon a sale, exchange or other taxable disposition of our ordinary shares in
an amount equal to the difference between the amount realized by the U.S. Holder
from such disposition and the U.S. Holder’s tax basis in such stock. Such gain
or loss will be treated as long-term capital gain or loss if the U.S. Holder’s
holding period is greater than one year at the time of the disposition.
Long-term capital gains of non-corporate U.S. Holders are eligible for reduced
rates of taxation. A U.S. Holder’s ability to deduct capital losses is subject
to certain limitations.
Tax Consequences If We Are A Passive
Foreign Investment Company
We will
be a passive foreign investment company (a “PFIC”) if either:
·
|
75%
or more of our gross income in a taxable year consists of “passive income”
(including dividends, interest, gains from the sale or exchange of
investment property and certain rents and royalties);
or
|
·
|
at
least 50% of our assets in a taxable year (averaged over the year and
generally determined based upon value) produce or are held for the
production of passive income.
|
We do not
believe that we will be a PFIC for our 2010 taxable year based upon our
estimates of income, the expected composition of our assets and the expected
value of our assets as determined based on our anticipated market capitalization
after this offering. However, because PFIC status is based on the composition of
our income and assets for the entire taxable year and because of possible
fluctuations in our market capitalization, it is not possible at this time to
determine whether we will become a PFIC for our 2010 taxable year until after
the close of the taxable year. Therefore, we may become a PFIC for our 2010
taxable year or in any future taxable year.
If we
were to be treated as a PFIC for any taxable year (and regardless of whether we
remain a PFIC for subsequent taxable years), each U.S. Holder who is
treated as owning our stock for purposes of the PFIC rules would be liable to
pay U.S. federal income tax at the highest applicable income tax rates on
ordinary income upon the receipt of excess distributions (i.e., the portion of
any distributions received by the U.S. Holder on our ordinary shares in
a taxable year in excess of 125 percent of the average annual distributions
received by the U.S. Holder in the three preceding taxable years, or, if
shorter, the U.S. Holder’s holding period for the ordinary shares)
and on any gain from the disposition of our ordinary shares,
plus interest on such amounts, as if such excess distributions or gain had been
recognized ratably over the U.S. Holder’s holding period of our ordinary
shares.
The above
rules relating to the taxation of excess distributions and dispositions will not
apply to a U.S. Holder who has made a timely “qualified electing fund”
(“QEF”) election for all taxable years that the holder has held our ordinary shares and
that we were a PFIC. Instead, each U.S. Holder who has made a timely QEF
election is required for each taxable year that we are a PFIC to include in
income a pro rata share of our ordinary earnings as ordinary income and a pro
rata share of our net capital gain as long term capital gain, regardless of
whether we have made any distributions of the earnings or gain. The
U.S. Holder’s basis in our ordinary shares
will be increased to reflect taxed but undistributed income. Distributions of
income that had been previously taxed will result in a corresponding reduction
in the basis of the ordinary shares and
will not be taxed again once distributed. A U.S. Holder making a QEF
election would recognize capital gain or loss on the sale, exchange or other
taxable disposition of our ordinary shares. If
we determine that we are a PFIC for any taxable year, we may provide each
U.S. Holder with all necessary information in order to make the QEF
election described above.
Alternatively,
if we were to be treated as a PFIC for any taxable year and provided that our
ordinary
shares are treated as “marketable stock” (e.g., “regularly traded” on the
Nasdaq Global Market) a U.S. Holder may make a mark-to-market election.
Under a “mark-to-market” election, in any taxable year that we are a PFIC, any
excess of the fair market value of the ordinary shares at
the close of any taxable year over the U.S. Holder’s adjusted tax basis in
the ordinary
shares is included in the U.S. Holder’s income as ordinary income.
In addition, the excess, if any, of the U.S. Holder’s adjusted tax basis at
the close of any taxable year over the fair market value of the ordinary shares is
deductible in an amount equal to the lesser of the amount of the excess or the
amount of the net mark-to-market gains that the U.S. Holder included in
income in prior years. A U.S. Holder’s tax basis in its ordinary shares
would be adjusted to reflect any such income or loss. For any taxable year that
we are a PFIC, gain realized on the sale, exchange or other disposition of our
ordinary
shares would be treated as ordinary income, and any loss realized on the
sale, exchange or other disposition of the ordinary shares
would be treated as ordinary loss to the extent that such loss does not exceed
the net mark-to-market gains previously included by the U.S. Holder. There
can be no assurances that there will be sufficient trading volume with respect
to the ordinary shares for the ordinary shares to be considered “regularly
traded,” or that our ordinary shares will continue to trade on the Nasdaq Global
Market. Accordingly, there are no assurances that the ordinary shares
will be marketable stock for these purposes.
A
U.S. Holder who holds our ordinary shares
during a period when we are a PFIC will be subject to the foregoing rules for
that taxable year and all subsequent taxable years with respect to that
U.S. Holder’s holding of our ordinary shares,
even if we cease to be a PFIC, subject to certain exceptions for
U.S. Holders who made a timely mark-to-market or QEF election.
U.S. Holders are urged to consult their tax advisors regarding the PFIC
rules in the event that we are a PFIC, including as to the advisability and
consequences of making a QEF or mark-to-market election.
U.S. Federal Income Taxation of
Non-U.S. Holders
Non-U.S.
Holders will not be subject to U.S. federal income tax or withholding tax on
dividends received from us on our ordinary shares
unless the income is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the United States (“effectively connected
income”) (and, if an income tax treaty applies, the income is attributable to a
permanent establishment maintained by the Non-U.S. Holder in the United States
or, in the case of an individual, the income is attributable to a fixed place of
business).
Non-U.S.
Holders will not be subject to U.S. federal income tax or withholding tax on any
gain realized upon the sale, exchange or other disposition of our ordinary shares,
unless either:
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·
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the
gain is effectively connected income (and, if a treaty applies, the gain
is attributable to a permanent establishment maintained by the Non-U.S.
Holder in the United States or, in the case of an individual, the income
is attributable to a fixed place of business);
or
|
|
·
|
the
Non-U.S. Holder is an individual who is present in the United States for
183 days or more during the taxable year of disposition and certain other
conditions are met.
|
Effectively
connected income may be subject to regular U.S. federal income tax in the same
manner as discussed in the section above relating to the taxation of U.S.
Holders, unless exempt under an applicable income tax treaty. In addition,
effectively connected income of a corporate Non-U.S. Holder may be subject to an
additional branch profits tax at a rate of 30%, or at a lower rate as may be
specified by an applicable income tax treaty.
Non-U.S.
Holders may be subject to tax in jurisdictions other than the United States on
dividends received from us on our ordinary shares and
on any gain realized upon the sale, exchange or other disposition of our ordinary shares.
Non-U.S. Holders should consult with their own tax advisors regarding such other
jurisdictions.
Backup Withholding and Information
Reporting
U.S.
Holders (other than exempt recipients such as corporations) may be subject to
information reporting requirements with respect to dividends paid in the United
States on, or proceeds from the disposition of, our ordinary shares. In
addition, a U.S. Holder may be subject, under certain circumstances, to backup
withholding at a rate of up to 28% with respect to dividends paid on, or
proceeds from the disposition of, our ordinary shares unless the U.S. Holder
provides proof of an applicable exemption or correct taxpayer identification
number and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. Holder of our ordinary shares who provides an
incorrect taxpayer identification number may be subject to penalties imposed by
the IRS.
Non-U.S.
Holders are not subject to information reporting or backup withholding with
respect to dividends paid on, or proceeds from the disposition of, our ordinary
shares, provided that the Non-U.S. Holder provides its taxpayer identification
number, certifies to its foreign status, or establishes another exemption to the
information reporting or back-up withholding requirements.
Stamp
Taxes
If you
purchase our ordinary shares offered in this prospectus, you may be required to
pay stamp taxes and other charges under the laws and practices of the country of
purchase, in addition to the offering price listed on the cover page of this
prospectus.
UNDERWRITING
We are offering the ADSs described in
this prospectus through the underwriters named below. Global Hunter Securities,
LLC and Knight Capital Markets LLC are acting as joint book-runners of the
offering and as representatives of the underwriters. We have entered into an
underwriting agreement dated December 20, 2010 with the
underwriters. Subject to the terms and conditions of the underwriting
agreement, we have agreed to sell to the underwriters, and the underwriters have
agreed to purchase, at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this prospectus, the number of
ADSs listed next to their respective names in the following table:
Name
|
|
Number of
Shares
|
|
Global
Hunter Securities, LLC
|
|
|
3,150,000
|
|
Knight
Capital Markets LLC
|
|
|
1,350,000
|
|
Ladenburg
Thalmann & Co. Inc. |
|
|
500,000
|
|
Total
|
|
|
5,000,000 |
|
The
underwriters are committed to purchase all of the ADSs offered by us other than
those covered by the option to purchase additional ADSs described below, if it
purchases any ADSs. The obligations of the underwriters may be
terminated upon the occurrence of certain events specified in the underwriting
agreement. Furthermore, pursuant to the underwriting agreement,
the underwriters’ obligations are subject to customary conditions,
representations and warranties contained in the underwriting agreement, such as
receipt by the underwriters of officers’ certificates and legal opinions.
The
underwriters propose to offer the ADSs directly to the public at the initial
public offering price set forth on the cover page of this prospectus and to
certain dealers that are members of the Financial Industry Regulatory Authority,
or FINRA, at that price less a concession not in excess of $0.20 per ADS. Any
such dealers may resell ADSs to certain other brokers or dealers at a discount
of up to $0.20 per ADS from the initial public offering price. After
the initial public offering of the ADSs, the offering price and other selling
terms may be changed by the underwriters.
The
following table shows the per share and total underwriting discounts and
commissions that we are to pay to the underwriters in connection with this
offering. These amounts are shown assuming both no exercise and full exercise of
the over-allotment option.
|
|
Per
Share
|
|
|
Total
Without
Over-
Allotment
Option
|
|
|
Total
With
Over-
Allotment
Option
|
|
Public
offering price
|
|
$
|
4.50
|
|
|
$
|
22,500,000
|
|
|
$
|
25,875,000
|
|
Underwriting
discount
|
|
$
|
0.315
|
|
|
$
|
1,575,000
|
|
|
$
|
1,811,250
|
|
Proceeds,
before expenses, to us
|
|
$
|
4.185
|
|
|
$
|
20,925,000
|
|
|
$
|
24,063,750
|
|
The total
expenses of this offering, including registration, filing and listing fees,
printing fees and legal and accounting expenses, but excluding the underwriting
discounts and commissions, will be approximately $1.3 million.
We have
granted a 45-day option to the underwriters to purchase up to an additional $3.4
million of ADSs sold on the date hereof, at the same price to the public, and
with the same underwriting discount, as the initial ADSs offered. If
the underwriters fully exercise this option, the total public offering price,
underwriting fees and expenses and net proceeds (before expenses) to us will be
$25,875,000, $1,811,250 and $24,063,750, respectively.
We have
agreed to indemnify the underwriters against certain liabilities, including
civil liabilities under the Securities Act.
We and
each of our directors, executive officers and securityholders are subject to
lock-up agreements that prohibit us and them from offering for sale, selling,
contracting to sell, granting any option for the sale of, transferring or
otherwise disposing of any ADSs, options or warrants to acquire ADSs or any
security or instrument related to such ADSs, option or warrant for a period of
at least 180 days following the date of this prospectus without the prior
written consent of the underwriters, subject to certain customary
exceptions.
The
180-day lock-up period in all of the lock-up agreements is subject to extension
if (1) during the last 17 days of the lock-up period we issue an earnings
release or material news, or a material event relating to our company occurs, or
(2) prior to the expiration of the lock-up period, we announce that we will
release earnings results during the 16-day period beginning on the last day of
the lock-up period, in which case the restrictions imposed by these lock-up
agreements shall continue to apply until the expiration of the 18-day period
beginning on the issuance of the earnings release or the occurrence of the
material news or material event, unless the underwriters waive such extension in
writing.
We have
granted Global Hunter the right of
participation to act as lead underwriter or minimally as co-manager for a period
of twelve (12) months from the issuance of the securities offered by this
prospectus, for any and all public and private equity and debt offerings for our
company or any of our subsidiaries, excluding ordinary course of business
financings such as bank lines of credit, accounts receivable and factoring
arrangements. We shall provide written notice to Global Hunter with terms of such offering and if
Global Hunter fails to accept in writing
any such proposal for such public or private sale within twenty (20) days after
receipt of a written notice from us containing such proposal, then Global Hunter will have no claim or right with
respect to any such sale contained in any such notice.
A
prospectus in electronic format may be made available on the web sites
maintained by the underwriters, or selling group members, if any, participating
in the offering. The underwriters may agree to allocate a number of ADSs to
selling group members for sale to their online brokerage account
holders. Internet distributions will be allocated by the underwriters
to selling group members that may make Internet distributions on the same basis
as other allocations.
Our ADSs
are listed on the NASDAQ Global Market and will trade under the symbol
“OSN”.
In
connection with this offering, the underwriters may engage in stabilizing
transactions, which involve making bids for, purchasing and selling ADSs in the
open market for the purpose of preventing or retarding a decline in the market
price of the ADSs while this offering is in progress. These
stabilizing transactions may include making short sales of the ADSs, which
involves the sale by the underwriters of a greater number of ADSs than they are
required to purchase in this offering, and purchasing ADSs on the open market to
cover positions created by short sales. Short sales may be “covered” shorts or
may be “naked” shorts. The underwriters may close out any covered short position
by purchasing ADSs in the open market. A naked short position is more likely to
be created if the underwriters are concerned that there may be downward pressure
on the price of the ADSs in the open market that could adversely affect
investors who purchase in this offering. To the extent that the
underwriters create a naked short position, they will purchase shares in the
open market to cover the position.
The
underwriters have advised us that, pursuant to Regulation M promulgated under
the Securities Act, they may also engage in other activities that stabilize,
maintain or otherwise affect the price of the ADSs, including the imposition of
penalty bids. This means that if the representatives of the
underwriters purchase ADSs in the open market in stabilizing transactions or to
cover short sales, the representatives can require the underwriter that sold
those ADSs as part of this offering to repay the underwriting discount received
by it.
These
activities may have the effect of raising or maintaining the market price of the
ADSs or preventing or retarding a decline in the market price of the ADSs, and,
as a result, the price of the ADSs may be higher than the price that otherwise
might exist in the open market. If the underwriters commence these activities,
they may discontinue them at any time. The underwriters may carry out
these transactions on the NASDAQ Global Market, in the over-the-counter market
or otherwise.
In determining the initial public
offering price, we and the underwriters expect to consider a number of factors
including:
|
|
the
information set forth in this prospectus and otherwise available to the
representatives;
|
|
|
our
prospects and the history and prospects for the industry in which we
operate;
|
|
|
an
assessment of our management;
|
|
|
our
prospects for future earnings;
|
|
|
the
general condition of the securities markets at the time of this
offering;
|
|
|
the
recent market prices of, and demand for, publicly traded securities of
generally comparable companies; and
|
|
|
other
factors deemed relevant by the underwriters and
us.
|
Neither
we, nor the underwriters can assure investors that an active trading market will
develop for our ADSs, or that the ADSs will trade in the public market at or
above the public offering price.
Persons
into whose possession this prospectus comes are advised to inform themselves
about and to observe any restrictions relating to the offering and the
distribution of this prospectus. This prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any securities offered by
this prospectus in any jurisdiction in which such an offer or a solicitation is
unlawful.
The
underwriters and their affiliates may provide from time to time in the future
certain commercial banking, financial advisory, investment banking and other
services for us and such affiliates in the ordinary course of their business,
for which they may receive customary fees and
commissions. In addition, from time to time, the underwriters
and their affiliates may effect transactions for their own account or the
account of customers, and hold on behalf of themselves or their customers, long
or short positions in our debt or equity securities or loans, and may do so in
the future.
Foreign
Regulatory Restrictions on Purchase of Shares
Other
than in the United States, no action has been taken by us or the underwriters
that would permit a public offering of the securities offered by this prospectus
or the possession, circulation or distribution of this prospectus in any
jurisdiction where action for that purpose is required. Accordingly,
the securities offered by this prospectus may not be offered or sold, directly
or indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such securities be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of that
jurisdiction.
In
addition to the public offering of the ADSs in the United States, the
underwriters may, subject to the applicable foreign laws, also offer ADSs to
certain institutions or accredited persons in the following countries:
United
Kingdom. No offer of ADSs has been made or will be made to the
public in the United Kingdom within the meaning of Section 102B of the Financial
Services and Markets Act 2000, as amended, or FSMA, except to legal entities
which are authorized or regulated to operate in the financial markets or, if not
so authorized or regulated, whose corporate purpose is solely to invest in
securities or otherwise in circumstances which do not require the publication by
us of a prospectus pursuant to the Prospectus Rules of the Financial Services
Authority, or FSA. Each underwriter: (i) has only communicated or caused to be
communicated and will only communicate or cause to be communicated an invitation
or inducement to engage in investment activity (within the meaning of Section 21
of FSMA) to persons who have professional experience in matters relating to
investments falling within Article 19(5) of the Financial Services and Markets
Act 2000 (Financial Promotion) Order 2005 or in circumstances in which Section
21 of FSMA does not apply to us; and (ii) has complied with, and will comply
with all applicable provisions of FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the United
Kingdom.
European Economic
Area. In relation to each member state of the European
Economic Area which has implemented the Prospectus Directive, which we refer to
as a Relevant Member State, with effect from and including the date on which the
Prospectus Directive is implemented in that Relevant Member State, which we
refer to as the Relevant Implementation Date, no offer of ADSs has been made and
or will be made to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the ADSs which has been approved by
the competent authority in that Relevant Member State or, where appropriate,
approved in another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with the Prospectus
Directive, except that, with effect from and including the Relevant
Implementation Date, an offer of ADSs may be made to the public in that Relevant
Member State at any time: (a) to legal entities which are authorized or
regulated to operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in securities; (b) to any
legal entity which has two or more of (i) an average of at least 250 employees
during the last financial year; (ii) a total balance sheet of more than
€43,000,000 and (iii) an annual net turnover of more than €50,000,000, as shown
in its last annual or consolidated accounts; or (c) in any other circumstances
which do not require the publication by us of a prospectus pursuant to Article 3
of the Prospectus Directive. For the purposes of this provision, the expression
an “offer of ordinary shares to the public” in relation to any ADS in any
Relevant Member State means the communication in any form and by any means of
sufficient information on the terms of the offer and the ADS to be offered so as
to enable an investor to decide to purchase or subscribe the ADSs, as the same
may be varied in that Relevant Member State by any measure implementing the
Prospectus Directive in that Relevant Member State and the expression Prospectus
Directive means Directive 2003/71/ EC and includes any relevant implementing
measure in each Relevant Member State.
Germany. Any
offer or solicitation of ADSs within Germany must be in full compliance with the
German Securities Prospectus Act (Wertpapierprospektgesetz — WpPG). The offer
and solicitation of securities to the public in Germany requires the approval of
the prospectus by the German Federal Financial Services Supervisory Authority
(Bundesanstalt fr Finanzdienstleistungsaufsicht — BaFin). This prospectus has
not been and will not be submitted for approval to the BaFin. This prospectus
does not constitute a public offer under the German Securities Prospectus Act
(Wertpapierprospektgesetz). This prospectus and any other document relating to
the ADSs, as well as any information contained therein, must therefore not be
supplied to the public in Germany or used in connection with any offer for
subscription of the ADSs to the public in Germany, any public marketing of the
ADSs or any public solicitation for offers to subscribe for or otherwise acquire
the ADSs. The prospectus and other offering materials relating to the offer of
the ADSs are strictly confidential and may not be distributed to any person or
entity other than the designated recipients hereof.
Greece. This
prospectus has not been approved by the Hellenic Capital Markets Commission or
another EU equivalent authority and consequently is not addressed to or intended
for use, in any way whatsoever, by Greek residents. The ADSs have not been
offered or sold and will not be offered, sold or delivered directly or
indirectly in Greece, except to (i) “qualified investors” (as defined in article
2(f) of Greek Law 3401/2005) and/or to (ii) less than 100 individuals or legal
entities, who are not qualified investors (article 3, paragraph 2(b) of Greek
Law 3401/2005), or otherwise in circumstances which will not result in the offer
of the new ADSs being subject to the Greek Prospectus requirements of preparing
a filing a prospectus (under articles 3 and 4 of Greek Law
3401/2005).
Italy. This
offering of the ADSs has not been cleared by Consob, the Italian Stock Exchanges
regulatory agency of public companies, pursuant to Italian securities
legislation and, accordingly, no ADSs may be offered, sold or delivered, nor may
copies of this prospectus or of any other document relating to the ADSs be
distributed in Italy, except (1) to professional investors (operatori
qualificati); or (2) in circumstances which are exempted from the rules on
solicitation of investments pursuant to Decree No. 58 and Article 33, first
paragraph, of Consob Regulation No. 11971 of May 14, 1999, as amended. Any
offer, sale or delivery of the ADSs or distribution of copies of this prospectus
or any other document relating to the ADSs in Italy under (1) or (2) above must
be (i) made by an investment firm, bank or financial intermediary permitted to
conduct such activities in Italy in accordance with Decree No. 58 and
Legislative Decree No. 385 of September 1, 1993, or the Banking Act; and (ii) in
compliance with Article 129 of the Banking Act and the implementing guidelines
of the Bank of Italy, as amended from time to time, pursuant to which the issue
or the offer of securities in Italy may need to be preceded and followed by an
appropriate notice to be filed with the Bank of Italy depending, inter alia, on
the aggregate value of the securities issued or offered in Italy and their
characteristics; and (iii) in compliance with any other applicable laws and
regulations.
Cyprus. Each
of the Underwriters has agreed that (i) it will not be providing from or within
Cyprus any “Investment Services”, “Investment Activities” and “Non-Core
Services” (as such terms are defined in the Investment Firms Law 144(I) of 2007,
(the “IFL”) in relation to the ADSs, or will be otherwise providing Investment
Services, Investment Activities and Non-Core Services to residents or persons
domiciled in Cyprus. Each underwriter has agreed that it will not be concluding
in Cyprus any transaction relating to such Investment Services, Investment
Activities and Non-Core Services in contravention of the IFL and/or applicable
regulations adopted pursuant thereto or in relation thereto; and (ii) it has not
and will not offer any of the ADSs other than in compliance with the provisions
of the Public Offer and Prospectus Law, Law 114(I)/2005.
Switzerland. This
document does not constitute a prospectus within the meaning of Art. 652a of the
Swiss Code of Obligations. The ADSs may not be sold directly or indirectly in or
into Switzerland except in a manner which will not result in a public offering
within the meaning of the Swiss Code of Obligations. Neither this document nor
any other offering materials relating to the ADSs may be distributed, published
or otherwise made available in Switzerland except in a manner which will not
constitute a public offer of the ADSs in Switzerland.
Norway. This
prospectus has not been approved or disapproved by, or registered with, the Oslo
Stock Exchange, the Norwegian Financial Supervisory Authority (Kredittilsynet)
nor the Norwegian Registry of Business Enterprises, and the ADSs are marketed
and sold in Norway on a private placement basis and under other applicable
exceptions from the offering prospectus requirements as provided for pursuant to
the Norwegian Securities Trading Act.
Botswana.
The Company hereby represents and warrants that it has not offered for sale or
sold, and will not offer or sell, directly or indirectly the ADSs to the public
in the Republic of Botswana, and confirms that the offering will not be subject
to any registration requirements as a prospectus pursuant to the requirements
and/or provisions of the Companies Act, 2003 or the Listing Requirements of the
Botswana Stock Exchange.
Hong
Kong. The ADSs may not be offered or sold by means of any
document other than (i) in circumstances which do not constitute an offer to the
public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong
Kong), or (ii) to “professional investors” within the meaning of the Securities
and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made
thereunder, or (iii) in other circumstances which do not result in the document
being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws
of Hong Kong), and no advertisement, invitation or document relating to the ADSs
may be issued or may be in the possession of any person for the purpose of issue
(in each case whether in Hong Kong or elsewhere), which is directed at, or the
contents of which are likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the laws of Hong Kong) other than with
respect to ADSs which are or are intended to be disposed of only to persons
outside Hong Kong or only to “professional investors” within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules
made thereunder.
France. The
securities offered by this prospectus may not be offered or sold, directly or
indirectly, to the public in France. This prospectus has not been or will not be
submitted to the clearance procedure of the Autorité des Marchés Financiers, or
the AMF, and may not be released or distributed to the public in France.
Investors in France may only purchase the securities offered by this prospectus
for their own account and in accordance with articles L. 411-1, L. 441-2 and L.
412-1 of the Code Monétaire et Financier and decree no. 98-880 dated October 1,
1998, provided they are “qualified investors” within the meaning of said decree.
Each French investor must represent in writing that it is a qualified investor
within the meaning of the aforesaid decree. Any resale, directly or indirectly,
to the public of the shares offered by this prospectus may be effected only in
compliance with the above mentioned regulations.
“Les
actions offertes par ce document d’information ne peuvent pas être, directement
ou indirectement, offertes ou vendues au public en France. Ce document
d’information n’a pas été ou ne sera pas soumis au visa de l’Autorité des
Marchés Financiers et ne peut être diffusé ou distribué au public en France. Les
investisseurs en France ne peuvent acheter les actions offertes par ce document
d’information que pour leur compte propre et conformément aux articles L. 411-1,
L. 441-2 et L. 412-1 du Code Monétaire et Financier et du décret no. 98-880 du 1
octobre 1998, sous réserve qu’ils soient des investisseurs qualifiés au sens du
décret susvisé. Chaque investisseur doit déclarer par écrit qu’il est un
investisseur qualifié au sens du décret susvisé. Toute revente, directe ou
indirecte, des actions offertes par ce document d’information au public ne peut
être effectuée que conformément à la réglementation susmentionnée.”
Denmark. This
prospectus has not been prepared in the context of a public offering of
securities in Denmark within the meaning of the Danish Securities Trading Act
No. 171 of 17 March 2005 as amended from time to time or any Executive Orders
issued on the basis thereof and has not been and will not be filed with or
approved by or filed with the Danish Financial Supervisory Authority or any
other public authorities in Denmark. The offering of securities will only be
made to persons pursuant to one or more of the exemptions set out in Executive
Order No. 306 of 28 April 2005 on Prospectuses for Securities Admitted for
Listing or Trade on a Regulated Market and on the First Public Offer of
Securities exceeding EUR 2,500,000 or Executive Order No. 307 of 28 April 2005
on Prospectuses for the First Public Offer of Certain Securities between EUR
100,000 and EUR 2,500,000, as applicable.
Costa
Rica. The securities described in this prospectus have not
been registered with the Superintendencia General de Valores de Costa Rica, nor
any other regulatory body of Costa Rica. This prospectus is intended to be for
your personal use only, and is not intended to be a Public Offering of
Securities, as defined under Costa Rican law.
Panama. The
ADSs have not been registered with the National Securities Commission, nor has
the offer, sale or transactions thereof been registered. The ADSs are not under
the supervision of the National Securities Commission.
Singapore. This
prospectus has not been registered as a prospectus with the Monetary Authority
of Singapore. Accordingly, this prospectus and any other document or material in
connection with the offer or sale, or invitation for subscription or purchase,
of the ADSs may not be circulated or distributed, nor may the Common Stock be
offered or sold, or be made the subject of an invitation for subscription or
purchase, whether directly or indirectly, to persons in Singapore other than (i)
to an institutional investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person, or any
person pursuant to Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in
accordance with the conditions of, any other applicable provision of the SFA.
Where the ADSs are subscribed or purchased under Section 275 by a relevant
person which is: (a) a corporation (which is not an accredited investor) the
sole business of which is to hold investments and the entire share capital of
which is owned by one or more individuals, each of whom is an accredited
investor; or (b) a trust (where the trustee is not an accredited investor) whose
sole purpose is to hold investments and each beneficiary is an accredited
investor, shares, debentures and units of shares and debentures of that
corporation or the beneficiaries’ rights and interest in that trust shall not be
transferable for 6 months after that corporation or that trust has acquired the
ADSs under Section 275 except: (i) to an institutional investor under Section
274 of the SFA or to a relevant person, or any person pursuant to Section
275(1A), and in accordance with the conditions, specified in Section 275 of the
SFA; (ii) where no consideration is given for the transfer or (iii) by operation
of law.
People’s Republic
of China. This prospectus has not been and will not be
circulated or distributed in the PRC, and ADSs may not be offered or sold, and
will not be offered or sold to any person for re-offering or resale, directly or
indirectly, to any resident of the PRC except pursuant to applicable laws and
regulations of the PRC. For the purpose of this paragraph only, the PRC does not
include Taiwan and the special administrative regions of Hong Kong and
Macau.
Israel. This
prospectus does not constitute an offer to sell the ADSs to the public in Israel
or a prospectus under the Israeli Securities Law, 5728-1968 and the regulations
promulgated thereunder, or the Israeli Securities Law, and has not been filed
with or approved by the Israel Securities Authority. In Israel, pursuant to an
exemption afforded under the Israeli Securities Law, this prospectus may be
distributed only to, and may be directed only at, investors listed in the first
addendum to the Israeli Securities Law, or the Addendum, consisting primarily of
certain mutual trust and provident funds, or management companies thereto,
banks, as defined under the Banking (Licensing) Law, 5741-1981, except for joint
service companies purchasing for their own account or for clients listed in the
Addendum, insurers, as defined under the Supervision of Financial Services Law
(Insurance), 5741-1981, portfolio managers purchasing for their own account or
for clients listed in the Addendum, investment advisers purchasing for their own
account, Tel Aviv Stock Exchange members purchasing for their own account or for
clients listed in the Addendum, underwriters purchasing for their own account,
venture capital funds, certain corporations which primarily engage in the
capital market and fully-owned by investors listed in the Addendum and
corporations whose equity exceeds NIS250 Million, collectively referred to as
institutional investors. Institutional investors may be required to submit
written confirmation that they fall within the scope of the
Addendum.
United Arab
Emirates. This document has not been reviewed, approved or
licensed by the Central Bank of the United Arab Emirates (the “UAE”), Emirates
Securities and Commodities Authority or any other relevant licensing authority
in the UAE including any licensing authority incorporated under the laws and
regulations of any of the free zones established and operating in the territory
of the UAE, in particular the Dubai International Financial Services Authority
(the “DFSA”), a regulatory authority of the Dubai International Financial Centre
(the “DIFC”). The issue of ADSs does not constitute a public offer of securities
in the UAE, DIFC and/or any other free zone in accordance with the Commercial
Companies Law, Federal Law No. 8 of 1984 (as amended), DFSA Offered Securities
Rules and the Dubai International Financial Exchange Listing Rules, accordingly,
or otherwise. The ADSs may not be offered to the public in the UAE and/or any of
the free zones including, in particular, the DIFC. The ADSs may be offered and
this document may be issued, only to a limited number of investors in the UAE or
any of its free zones (including, in particular, the DIFC) who qualify as
sophisticated investors under the relevant laws and regulations of the UAE or
the free zone concerned. Management of the Company, and the representatives
represent and warrant that the ADSs will not be offered, sold, transferred or
delivered to the public in the UAE or any of its free zones including, in
particular, the DIFC.
Oman. For
the attention of the residents of Oman:
The
information contained in this prospectus neither constitutes a public offer of
securities in the Sultanate of Oman (“Oman”) as contemplated by the Commercial
Companies Law of Oman (Sultani Decree 4/74) or the Capital Market Law of Oman
(Sultani Decree 80/98), nor does it constitute an offer to sell, or the
solicitation of any offer to buy non-Omani securities in Oman as contemplated by
Article 6 of the Executive Regulations to the Capital Market Law of Oman (issued
vide Ministerial Decision No 4/2001), and nor does it constitute a distribution
of non-Omani securities in Oman as contemplated under the Rules for Distribution
of Non-Omani Securities in Oman issued by the Capital Market Authority of Oman
(“CMA”). Additionally, this prospectus is not intended to lead to the conclusion
of any contract of whatsoever nature within the territory of Oman. This
prospectus has been sent at the request of the investor in Oman, and by
receiving this prospectus, the person or entity to whom it has been issued and
sent understands, acknowledges and agrees that this prospectus has not been
approved by the CMA or any other regulatory body or authority in Oman, nor has
any authorization, license or approval been received from the CMA or any other
regulatory authority in Oman, to market, offer, sell, or distribute the ADSs
within Oman. No marketing, offering, selling or distribution of any financial or
investment products or services has been or will be made from within Oman and no
subscription to any securities, products or financial services may or will be
consummated within Oman. The underwriters are neither companies licensed by the
CMA to provide investment advisory, brokerage, or portfolio management services
in Oman, nor banks licensed by the Central Bank of Oman to provide investment
banking services in Oman. The underwriters do not advise persons or entities
resident or based in Oman as to the appropriateness of investing in or
purchasing or selling securities or other financial products. Nothing contained
in this prospectus is intended to constitute Omani investment, legal, tax,
accounting or other professional advice. This prospectus is for your information
only, and nothing herein is intended to endorse or recommend a particular course
of action. You should consult with an appropriate professional for specific
advice on the basis of your situation. Any recipient of this prospectus and any
purchaser of the securities pursuant to this prospectus shall not market,
distribute, resell, or offer to resell such securities within Oman without
complying with the requirements of applicable Omani law, nor copy or otherwise
distribute this prospectus to others.
Resale
Restrictions
The
distribution of our securities in Canada is being made only on a private
placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of our securities are made. Any resale of our securities in Canada must
be made under applicable securities laws that will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of our securities.
Representations
of Purchasers
By
purchasing our securities in Canada and accepting a purchase confirmation a
purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
|
·
|
the
purchaser is entitled under applicable provincial securities laws to
purchase our securities without the benefit of a prospectus qualified
under those securities laws;
|
|
·
|
where
required by law, that the purchaser is purchasing as principal and not as
agent;
|
|
·
|
the
purchaser has reviewed the text above under Resale Restrictions;
and
|
|
·
|
the
purchaser acknowledges and consents to the provision of specified
information concerning its purchase of our securities to the regulatory
authority that by law is entitled to collect the
information.
|
Further
details concerning the legal authority for this information are available upon
request.
Rights
of Action — Ontario Purchasers Only
Under
Ontario securities legislation, certain purchasers who purchase a security
offered by this prospectus during the period of distribution will have a
statutory right of action for damages, or while still the owner of our
securities, for rescission against us in the event that this prospectus contains
a misrepresentation without regard to whether the purchaser relied on the
misrepresentation. The right of action for damages is exercisable not later than
the earlier of 180 days from the date the purchaser first had knowledge of the
facts giving rise to the cause of action and three years from the date on which
payment is made for our securities. The right of action for rescission is
exercisable not later than 180 days from the date on which payment is made for
our securities. If a purchaser elects to exercise the right of action for
rescission, the purchaser will have no right of action for damages against us.
In no case will the amount recoverable in any action exceed the price at which
our securities were offered to the purchaser and if the purchaser is shown to
have purchased the securities with knowledge of the misrepresentation, we will
have no liability. In the case of an action for damages, we will not be liable
for all or any portion of the damages that are proven to not represent the
depreciation in value of our securities as a result of the misrepresentation
relied upon. These rights are in addition to, and without derogation from, any
other rights or remedies available at law to an Ontario purchaser. The foregoing
is a summary of the rights available to an Ontario purchaser. Ontario purchasers
should refer to the complete text of the relevant statutory
provisions.
Enforcement
of Legal Rights
All
of our directors and officers as well as the experts named herein may be located
outside of Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon us or those persons.
All or a substantial portion of our assets and the assets of those persons may
be located outside of Canada and, as a result, it may not be possible to satisfy
a judgment against us or those persons in Canada or to enforce a judgment
obtained in Canadian courts against us or those persons outside of
Canada.
Taxation
and Eligibility for Investment
Canadian
purchasers of our securities should consult their own legal and tax advisors
with respect to the tax consequences of an investment in our securities in their
particular circumstances and about the eligibility of our securities for
investment by the purchaser under relevant Canadian legislation.
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
The
following table sets forth all expenses, other than underwriting discounts and
commissions, payable by us in connection with the sale of our ADSs being
registered. All amounts shown are estimates except for the SEC registration fee,
the Nasdaq Stock Market listing fee and the FINRA filing fee.
|
|
|
|
SEC
registration fee
|
|
$ |
5,235.84 |
|
FINRA
filing fee
|
|
$ |
6,940 |
|
Nasdaq
Stock Market listing fee
|
|
|
125,000 |
|
Printing
and engraving expenses
|
|
|
30,000 |
|
Legal
fees and expenses
|
|
|
700,000 |
|
Accounting
fees and expenses
|
|
|
225,000 |
|
Roadshow
expenses
|
|
|
50,000 |
|
Transfer
agent and registrar fees
|
|
|
0 |
|
Miscellaneous
fees and expenses
|
|
|
200,000 |
|
Total
|
|
$ |
1,342,175.80 |
|
LEGAL
MATTERS
The
validity of our ADSs offered by this prospectus will be passed upon for us by
Withers BVI, located at 3rd Floor,
Little Denmark, Main Street, Road Town, Tortola, British Virgin
Islands. Certain legal matters in connection with this offering will
be passed upon for us by Kramer Levin Naftalis & Frankel LLP, located at
1177 Avenue of the Americas, New York, New York 10036, and for the underwriters
by Pryor Cashman LLP, located at 7 Times Square, New York, New York
10036. Legal matters as to PRC law will be passed upon for us by
Grandall Legal Group, located at 31/F, Nanzheng Building, 580 Nanjing Road West,
Shanghai 200041, People’s Republic of China, and for the underwriters by Han Kun
Law Offices, located at Suite 5709, Tower 1 Plaza 66, 1266 Nanjing West Road
Shanghai 2000040, People’s Republic of China.
EXPERTS
Our
consolidated financial statements as of December 31, 2009, and 2008 and for the
fiscal years ended December 31, 2009, and 2008, included herein, have been
audited by Sherb & Co., LLP, independent registered public accounting firm,
as stated in their report appearing herein, and is included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing and their consent and authorization.
The
offices of Sherb & Co., LLP are located at 805 Third Avenue, New York, NY
10022.
We have
filed a registration statement on Form F-1 with the Securities and Exchange
Commission in connection with this offering. This prospectus does not contain
all of the information contained in the registration statement. The rules and
regulations of the Securities and Exchange Commission allow us to omit various
information from this prospectus that is included in the registration statement.
Statements made in this prospectus concerning the contents of any contract,
agreement or other document are summaries of all material information about the
documents summarized, but are not complete descriptions of all terms of these
documents. If we filed any of these documents as an exhibit to the registration
statement, you may read the document itself for a complete description of its
terms.
You may
read and copy the registration statement, including the related exhibits and
schedules, and any other documents we have filed with the Securities and
Exchange Commission without charge at the Securities and Exchange Commission’s
public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the public reference room. The Securities and Exchange Commission
also maintains an Internet site that contains reports and other information
regarding issuers that file electronically with the Securities and Exchange
Commission. Our filings with the Securities and Exchange Commission are also
available to the public through this website at http://www.sec.gov.
We are
not currently subject to the informational requirements of the Securities
Exchange Act of 1934. As a result of this offering, we will become subject to
the informational requirements of the Exchange Act applicable to foreign private
issuers and will fulfill the obligations of these requirements by filing reports
with the Securities and Exchange Commission. As a foreign private issuer, we
will be exempt from the rules under the Exchange Act relating to the furnishing
and content of proxy statements. Our executive officers, directors and principal
shareholders will be exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act.
We are a
“foreign private issuer” within the meaning of the rules promulgated under the
Securities Exchange Act of 1934 as amended, or the Exchange Act. As such, we are
exempt from certain provisions applicable to United States public companies
including:
|
·
|
the
rules under the Exchange Act requiring the filing with the SEC of
quarterly reports on Form 10-Q or current reports on Form
8-K;
|
|
·
|
the
sections of the Exchange Act regulating the solicitation of proxies,
consents or authorizations in respect of a security registered under the
Exchange Act;
|
|
·
|
the
provisions of Regulation FD aimed at preventing issuers from making
selective disclosures of material information;
and
|
|
·
|
the
sections of the Exchange Act requiring insiders to file public reports of
their stock ownership and trading activities and establishing insider
liability for profits realized from any “short-swing” trading transaction
(i.e., a purchase and sale, or sale and purchase, of the issuer’s equity
securities within less than six
months).
|
However,
we intend to file with the Securities and Exchange Commission, after the end of
each fiscal year, an annual report on Form 20-F containing financial statements
which will be examined and reported on, with an opinion expressed, by an
independent public accounting firm. In addition, we intend to publish
our results on a quarterly basis as press releases, distributed pursuant to the
rules and regulations of the stock exchanges on which our ordinary shares are
listed. Press releases relating to financial results and material
events will also be furnished to the SEC on Form 6-K.
OSSEN
INNOVATION MATERIALS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
CONTENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Financial Statements:
|
|
|
|
Consolidated
Balance Sheets
|
F-3
|
|
|
Consolidated
Statements of Operations
|
F-4
|
|
|
Consolidated
Statements of Shareholders’ Equity
|
F-5
|
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
to F-26
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders and Directors
Ossen
Innovation Co., Ltd. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Ossen Innovation Co.,
Ltd. and Subsidiaries as of December 31, 2009 and 2008 and the related
consolidated statements of operations, shareholders’ equity and cash flows for
the years ended December 31, 2009 and 2008. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ossen Innovation Co., Ltd.
as of December 31, 2009 and 2008 and the results of its operations and its cash
flows for the years ended December 31, 2009 and 2008 in conformity with
accounting principles generally accepted in the United States.
/s/ Sherb
& Co., LLP
Certified
Public Accountants
New York,
New York
July 7,
2010
See
accompanying notes to the consolidated financial statements
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
8,409,467 |
|
|
$ |
3,761,315 |
|
Restricted
cash
|
|
|
11,824,214 |
|
|
|
9,977,092 |
|
Note
receivable-bank
acceptance note
|
|
|
150,208 |
|
|
|
- |
|
Accounts
receivable, net of allowance for doubtful accounts of $42,487 and
$35,782 at December 31, 2009 and 2008
|
|
|
15,157,087 |
|
|
|
4,713,488 |
|
Inventories
|
|
|
10,206,861 |
|
|
|
9,300,261 |
|
Prepayments
|
|
|
19,833,561 |
|
|
|
19,270,693 |
|
Other
current assets
|
|
|
964,876 |
|
|
|
293,359 |
|
Notes
receivable from related party-bank acceptance notes
|
|
|
1,828,234 |
|
|
|
- |
|
Total
Current Assets
|
|
|
68,374,508 |
|
|
|
47,316,208 |
|
Long-term
Assets
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
13,088,809 |
|
|
|
14,246,542 |
|
Land
use rights, net
|
|
|
4,254,270 |
|
|
|
4,333,632 |
|
Total
Long-term Assets
|
|
|
17,343,079 |
|
|
|
18,580,174 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
85,717,587 |
|
|
$ |
65,896,382 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Notes
payable – bank acceptance notes
|
|
$ |
19,744,925 |
|
|
$ |
18,236,993 |
|
Short-term
bank loans
|
|
|
27,350,377 |
|
|
|
19,404,161 |
|
Accounts
payable
|
|
|
240,275 |
|
|
|
428,441 |
|
Customer
deposits
|
|
|
5,189,759 |
|
|
|
2,936,267 |
|
Taxes
payable
|
|
|
110,493 |
|
|
|
6,465 |
|
Other
payables and accrued expenses
|
|
|
32,473 |
|
|
|
1,475,472 |
|
Due
to related parties
|
|
|
12,869,939 |
|
|
|
12,987,588 |
|
Total
Current Liabilities
|
|
|
65,538,241 |
|
|
|
55,475,387 |
|
TOTAL
LIABILITIES
|
|
|
65,538,241 |
|
|
|
55,475,387 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, no par value, 50,000 shares authorized, 50,000 shares issued
and outstanding
|
|
|
500 |
|
|
|
500 |
|
Accumulated
other comprehensive income
|
|
|
543,036 |
|
|
|
511,890 |
|
Statutory
reserve
|
|
|
1,093,331 |
|
|
|
661,597 |
|
Retained
earnings
|
|
|
13,069,401 |
|
|
|
5,488,600 |
|
Non-controlling
interest
|
|
|
5,473,078 |
|
|
|
3,758,408 |
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
20,179,346 |
|
|
|
10,420,995 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
85,717,587 |
|
|
$ |
65,896,382 |
|
See
accompanying notes to the consolidated financial statements
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
REVEUNUES
|
|
$ |
101,087,796 |
|
|
$ |
82,742,310 |
|
COST
OF GOODS SOLD
|
|
|
87,659,925 |
|
|
|
70,532,733 |
|
GROSS
PROFIT
|
|
|
13,427,871 |
|
|
|
12,209,577 |
|
Selling
and distribution expenses
|
|
|
503,724 |
|
|
|
4,326,491 |
|
General
and administrative expenses
|
|
|
1,143,672 |
|
|
|
1,316,606 |
|
Total
Operating Expenses
|
|
|
1,647,396 |
|
|
|
5,643,097 |
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
11,780,475 |
|
|
|
6,566,480 |
|
Interest
expenses, net
|
|
|
(1,496,712 |
) |
|
|
(1,891,671 |
) |
Other
income, net
|
|
|
183,495 |
|
|
|
380,766 |
|
INCOME
BEFORE INCOME TAXES
|
|
|
10,467,258 |
|
|
|
5,055,575 |
|
INCOME
TAXES
|
|
|
(740,053 |
) |
|
|
(291,520 |
) |
NET
INCOME
|
|
|
9,727,205 |
|
|
|
4,764,055 |
|
LESS:
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST
|
|
|
1,714,670 |
|
|
|
809,437 |
|
NET
INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
|
|
|
8,012,535 |
|
|
|
3,954,618 |
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain, net of tax
|
|
|
31,146 |
|
|
|
420,883 |
|
TOTAL
OTHER COMPREHENSIVE INCOME, NET OF TAX
|
|
|
31,146 |
|
|
|
420,883 |
|
COMPREHENSIVE
INCOME
|
|
$ |
8,043,681 |
|
|
$ |
4,375,501 |
|
See
accompanying notes to the consolidated financial statements
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
Common
Stock
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Statutory
|
|
|
Retained
Earnings/
|
|
|
Non
Controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Reserve
|
|
|
(Accumulated
Deficit)
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
|
50,000 |
|
|
$ |
500 |
|
|
$ |
91,007 |
|
|
$ |
238,676 |
|
|
$ |
1,956,903 |
|
|
$ |
2,948,971 |
|
|
$ |
5,236,057 |
|
Net
income
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
3,954,618 |
|
|
|
809,437 |
|
|
|
4,764,055 |
|
Transfer
to statutory reserve
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
422,921 |
|
|
|
(422,921 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
420,883 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
420,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
50,000 |
|
|
|
500 |
|
|
|
511,890 |
|
|
|
661,597 |
|
|
|
5,488,600 |
|
|
|
3,758,408 |
|
|
|
10,420,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
8,012,535 |
|
|
|
1,714,670 |
|
|
|
9,727,205 |
|
Transfer
to statutory reserve
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
431,734 |
|
|
|
(431,734 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
31,146 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
31,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2009
|
|
|
50,000 |
|
|
$ |
500 |
|
|
$ |
543,036 |
|
|
$ |
1,093,331 |
|
|
$ |
13,069,401 |
|
|
$ |
5,473,078 |
|
|
$ |
20,179,346 |
|
See
accompanying notes to the consolidated financial statements
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,727,205 |
|
|
$ |
4,764,055 |
|
Adjustments
to reconcile net income to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,457,784 |
|
|
|
1,555,624 |
|
Deferred
taxes
|
|
|
(838 |
) |
|
|
(1,176 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
Decrease In:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(10,443,599 |
) |
|
|
1,002,464 |
|
Inventories
|
|
|
(906,600 |
) |
|
|
(2,112,944 |
) |
Prepayments
|
|
|
(562,867 |
) |
|
|
(12,408,746 |
) |
Due
from related party
|
|
|
- |
|
|
|
3,846,600 |
|
Note
receivable-bank acceptance note from unrelated party
|
|
|
(150,208 |
) |
|
|
- |
|
Notes
receivable from related party
|
|
|
(1,828,234 |
) |
|
|
- |
|
Other
current assets
|
|
|
(670,679 |
) |
|
|
10,680 |
|
Accounts
payable
|
|
|
(188,166 |
) |
|
|
(35,011 |
) |
Customer
deposits
|
|
|
2,253,492 |
|
|
|
2,749,301 |
|
Taxes
payable
|
|
|
104,028 |
|
|
|
(134,501 |
) |
Other
payables and accrued expenses
|
|
|
(1,442,999 |
) |
|
|
(1,616,329 |
) |
Due
to related parties
|
|
|
(117,649 |
) |
|
|
145,896 |
|
Net
cash used in operating activities
|
|
|
(2,769,330 |
) |
|
|
(2,234,087 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of plant and equipment
|
|
|
(209,511 |
) |
|
|
(2,287,268 |
) |
Purchases
of land use rights
|
|
|
- |
|
|
|
(379,397 |
) |
Net
cash used in investing activities
|
|
|
(209,511 |
) |
|
|
(2,666,665 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(1,847,122 |
) |
|
|
(5,465,258 |
) |
Proceeds
from short-term bank loans
|
|
|
35,687,123 |
|
|
|
22,322,080 |
|
Repayments
of short-term bank loans
|
|
|
(27,789,153 |
) |
|
|
(21,446,704 |
) |
Proceeds
from notes payable to unrelated parties
|
|
|
1,507,931 |
|
|
|
18,236,993 |
|
Repayment
of notes payable to related party
|
|
|
- |
|
|
|
(10,937,778 |
) |
Cash
dividend paid to a shareholder
|
|
|
- |
|
|
|
(2,364,274 |
) |
Net
cash provided by financing activities
|
|
|
7,558,779 |
|
|
|
345,059 |
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
4,579,938 |
|
|
|
(4,555,693 |
) |
Effect
of exchange rate changes on cash
|
|
|
68,214 |
|
|
|
1,581,392 |
|
Cash
and cash equivalents at beginning of year
|
|
|
3,761,315 |
|
|
|
6,735,616 |
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
|
$ |
8,409,467 |
|
|
$ |
3,761,315 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$ |
637,267 |
|
|
$ |
441,029 |
|
Interest
paid
|
|
$ |
1,492,404 |
|
|
$ |
1,514,114 |
|
See
accompanying notes to the consolidated financial statements
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Ossen
Innovation Co., Ltd., formerly known as Ultra Glory International, Ltd., or
Ultra Glory, is a British Virgin Islands limited liability company organized on
January 21, 2010 under the BVI Business Companies Act, 2004 (the “BVI
Act”). Ultra Glory was a blank check company formed for the purpose
of acquiring, through a share exchange, asset acquisition or other similar
business combination, an operating business.
Business
Combination
On July
7, 2010, Ultra Glory and its sole shareholder entered into a share exchange
agreement with Ossen Innovation Group, a British Virgin Islands limited
liability company organized on April 30, 2010 under the BVI Act and the
shareholders of Ossen Innovation Group. Pursuant to the share exchange
agreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group
all of the issued and outstanding shares of Ossen Innovation Group, in exchange
for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra
Glory to the shareholders of Ossen Innovation Group. In addition, the
sole shareholder of Ultra Glory sold all of the 5,000,000 ordinary shares of
Ultra Glory that were issued and outstanding prior to the business combination,
to the shareholders of Ossen Innovation Group for cash, at a price of $0.03 per
share. As a result, the individuals and entities that owned shares of Ossen
Innovation Group prior to the business combination acquired 100% of
the equity of Ultra Glory, and Ultra Glory acquired 100% of the equity of
Ossen Innovation Group. Ossen Innovation Group is now a wholly owned
subsidiary of Ultra Glory. In conjunction with the business
combination, Ultra Glory filed an amended charter, pursuant to which Ultra Glory
changed its name to Ossen Innovation Co., Ltd., changed its fiscal year end to
December 31 and increased its authorized shares to 100,000,000. Upon
the consummation of the business combination, the company ceased to be a shell
company.
The
Company’s Shareholders
Dr. Tang,
our chairman, owns 100% of the shares of Effectual Strength Enterprises Ltd., a
British Virgin Islands company, which owned 79% of the shares of Ossen
Innovation Group prior to the business combination, and owns 79% of our shares
since the business combination. The spouse of our chief executive
officer, Wei Hua, owns 100% of the shares of Fascinating Acme Development Ltd.,
which owned 4% of the shares of Ossen Innovation Group prior to the business
combination, and owns 4% of our shares since the business
combination. The spouse of the chief executive officer of Shanghai
ZFX, which is an affiliated company of ours that supplies us with raw materials,
owns 100% of the shares of Gross Inspiration Development Ltd., which owned 4% of
the shares of Ossen Innovation Group prior to the business combination, and owns
4% of our shares since the business combination. The holders of the
remaining 13% of our shares are investors that are residents of the PRC and are
unaffiliated with Ossen.
The
Company’s
Subsidiaries
British
Virgin Islands Companies
Ossen
Innovation Group, the company’s wholly owned subsidiary, is the sole shareholder
of two holding companies organized in the British Virgin Islands: Ossen Group
(Asia) Co., Ltd., or Ossen Asia, and Topchina Development Group Ltd., or
Topchina. All of the equity of Ossen Asia and Topchina had been held by Dr. Tang
since inception. In May 2010, Dr. Tang transferred these shares to
Ossen Innovation Group in anticipation of the public listing of our company’s
shares in the United States.
Ossen
Asia is a British Virgin Islands limited liability company organized on February
7, 2002. Ossen Asia has one direct operating subsidiary in China,
Ossen Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia
owns 81% of the equity of Ossen Materials.
Topchina
is a British Virgin Islands limited liability company organized on November 3,
2004. Ossen Materials and Topchina directly own an operating
subsidiary in China, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., or Ossen
Jiujiang. Ossen Materials owns 75% of the equity of Ossen Jiujiang
and Topchina owns 25%.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Ossen
Materials
Ossen
Materials was formed in China on October 27, 2004 as a Sino-foreign joint
venture limited liability company under the name Ossen (Ma’anshan) Steel Wire
and Cable Co., Ltd. On May 8, 2008, Ossen Materials was restructured
from a Sino-foreign joint venture limited liability company to a
corporation. The name of the entity was changed at that time to Ossen
Innovation Materials Co., Ltd.
Ossen
Asia owns 81% of the equity of Ossen Materials. The remaining 19% is
held in the aggregate by four Chinese entities, two of which are controlled by
Chinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a
company whose shares are listed on the Shanghai Stock Exchange, and one of which
is controlled by Chinese citizens.
Through
Ossen Materials, we have manufactured and sold plain surface PC strands, zinc
coated PC steel wires and PC wires in our Maanshan City facility since
2004. The primary markets for the products manufactured at our
Maanshan facility are Anhui Province, Jiangsu Province, Zhejiang Province and
Shanghai City, each in the PRC.
Ossen
Jiujiang
On April
6, 2005, Shanghai Ossen Investment Holdings (Group) Co., Ltd., or Ossen
Shanghai, acquired a portion of the bankruptcy assets of Jiujiang Steel &
Iron Company, including equipment, land use rights and inventory for
approximately RMB 20,000,000 (approximately $2.9 million). Ossen
Jiujiang was formed by Ossen Shanghai in the PRC as a Sino-foreign joint venture
limited liability company on April 13, 2005. Ossen Shanghai then
transferred the newly acquired assets to Ossen Jiujiang. At its inception, Ossen
Jiujiang was owned by two entities: 33.3% of its equity was held by Ossen Asia
and 66.7% by Ossen Shanghai. In June 2005, Ossen Shanghai transferred
its entire interest in Ossen Jiujiang to Topchina in exchange for approximately
$2.9 million. In October 2007, Topchina transferred 41.7% of the equity in Ossen
Jiujiang to Ossen Asia for no consideration. On December 17, 2007, Ossen Asia
transferred all of its shares in Ossen Jiujiang to Ossen Materials,
resulting in 75% of the equity of Ossen Jiujiang being held by Ossen Materials
and 25% by Topchina.
Through
Ossen Jiujiang, we manufacture zinc coated PC wires and strands, plain surface
PC strands, unbonded PC strands, helical rib PC wires, sleeper PC wires and
indented PC wires. The primary markets for the PC strands
manufactured in our Jiujiang facility are Jiangxi Province, Wuhan Province,
Hunan Province, Fujian Province and Sichuan Province, each in the
PRC.
At
December 31, 2009, the subsidiaries of Ossen Innovation Group were as
follows:
Name
|
|
Domicile and Date
of Incorporation
|
|
Paid-in Capital
|
|
Percentage
of
Effective Ownership
|
|
Principal
Activities
|
|
|
|
|
|
|
|
|
|
|
Ossen
Group (Asia) Co., Ltd. ("Ossen Asia")
|
|
BVI
February
7, 2002
|
|
USD
|
-
|
|
100
|
%
|
Investments
holdings
|
|
|
|
|
|
|
|
|
|
|
Topchina
Development Group Ltd. ("Topchina")
|
|
BVI
November
3, 2004
|
|
USD
|
-
|
|
100
|
% |
Investments
holdings
|
|
|
|
|
|
|
|
|
|
|
Ossen
Innovation Materials Co., Ltd. ("Ossen Materials")
|
|
The
PRC
October
27, 2004
|
|
RMB
|
75,000,000
|
|
81
|
%
|
Design,
engineering, manufacture and sale
of
customized prestressed steel materials
|
|
|
|
|
|
|
|
|
|
|
Ossen
(Jiujiang) Steel Wire & Cable Co., Ltd. ("Ossen
Jiujiang")
|
|
The
PRC
April
13, 2005
|
|
RMB
|
50,000,000
|
|
85.75
|
%
|
Design,
engineering, manufacture and sale
of customized
prestressed steel
materials
|
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of OSSEN Innovation
Materials Co., and its subsidiaries. Intercompany accounts and transactions have
been eliminated upon consolidation.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made. Actual results could differ from those
estimates.
Revenue
Recognition
Revenues
represent the invoiced value of goods sold recognized upon
delivery. Revenues
are recognized when all of the following criteria are met:
|
·
|
Persuasive
evidence of an arrangement exists,
|
|
·
|
Delivery
has occurred or services have been
rendered,
|
|
·
|
The
seller’s price to the buyer is fixed or determinable,
and
|
|
·
|
Collectability
is reasonable assured.
|
Research
and Development
Research
and development costs are expensed as incurred and totaled approximately
$1,100,000 and $1,500,000 for years ended December 31, 2009 and 2008,
respectively, and are included in cost of goods sold in the accompanying
statements of operations. Research and development costs are incurred on a
project specific basis.
Retirement
Benefits
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to operations as incurred.
Retirement benefits amounting to $65,710 and $30,131 were charged to operations
for the years ended December 31, 2009 and 2008.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequence
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences are
expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statement of income in the period that
includes the enactment date. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before the
Company is able to realize their benefits, or that future deductibility is
uncertain. See Note 10.
Foreign
Currency Translation
The
accompanying consolidated financial statements are presented in United States
dollars (“US$). The functional currency of the Company is Renminbi (“RMB”). The
consolidated financial statements are translated into United States dollars from
RMB at year-end exchange rates as to assets and liabilities and average exchange
rates as to revenues and expenses. Capital accounts are translated at their
historical exchange rates when the capital transactions occurred. The resulting
transaction adjustments are recorded as a component of shareholders’ equity.
Gains and losses from foreign currency transactions are included in net
income.
|
|
|
|
|
|
|
Year
ended RMB: US$ exchange rate
|
|
|
6.8372 |
|
|
|
6.8542 |
|
Average
yearly RMB: US$ exchange rate
|
|
|
6.8409 |
|
|
|
6.9623 |
|
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
the rates used in translation.
Comprehensive
Income
Comprehensive
income is defined as the change in equity during the year from transactions and
other events, excluding the changes resulting from investments by owners and
distributions to owners, and is not included in the computation of income tax
expense or benefit. Accumulated comprehensive income consists of changes in
unrealized gains and losses on foreign currency translation.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash
and Cash Equivalents
For
financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturity of three months or less to be cash
equivalents. The Company maintains no bank account in the United States of
America. The Company maintains its bank accounts in China. Balances
at financial institutions or state-owned banks within the PRC are not covered by
insurance. However, the Company has not experienced any losses in
such accounts and believes it is not exposed to any significant risks on its
cash in bank accounts.
Restricted
Cash
Restricted
cash represents amounts held by a bank as security for bank acceptance notes and
therefore is not available for the Company’s use until such time as the bank
acceptance notes have been fulfilled or expired, normally within 12 month
period.
Accounts
Receivable
Accounts
receivable are carried at net realizable value. An allowance for
doubtful accounts is recorded in the period when loss is probable based on an
assessment of specific evidence indicating troubled collection, historical
experience, accounts aging and other factors. An account receivable
is written off after all collection effort has ceased.
Fair
Value of Financial Instruments
FASB ASC
820 (formerly SFAS No. 157 Fair Value Measurements) establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value.
The hierarchy prioritizes the inputs into three levels based on the extent to
which inputs used in measuring fair value are observable in the
market
These
tiers include:
|
•
|
Level
1—defined as observable inputs such as quoted prices in active
markets;
|
|
•
|
Level
2—defined as inputs other than quoted prices in active markets that are
either directly or indirectly observable;
and
|
|
•
|
Level
3—defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own
assumptions.
|
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The
company’s financial instruments primarily consist of cash and cash equivalents,
accounts receivable, restricted assets, accounts payable, other payables and
accruals, short-term bank loans, other current liabilities.
Cash and
cash equivalents include money market securities and commercial paper that are
considered to be highly liquid and easily tradable. These securities are valued
using inputs observable in active markets for identical securities and are
therefore classified as Level 1 within the fair value hierarchy.
As of the
balance sheet dates, the estimated fair values of financial instruments were not
materially different from their carrying value as presented due to the short
maturities of these instruments and that the interest rates on the borrowing
approximate those that would have been available for loans of similar remaining
maturity and risk profile at respective year ends.
Accounts
Receivable
Accounts
receivable are carried at net realizable value. The Company reviews
its accounts receivables on a periodic basis and makes general and specific
allowances when there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable
balances, the Company considers many factors, including the age of the balance,
customer’s historical payment history, its current credit-worthiness and current
economic trends. Accounts are written off after exhaustive efforts at
collection. If accounts receivable are to be provided for, or written
off, they would be recognized in the consolidated statement of operations within
operating expenses. Balance of allowance of doubtful accounts was
$42,487 and $35,782 at December 31, 2009 and 2008, respectively. In
addition the Company has not provided for, or written off, accounts receivable
for the years ended December 31, 2009 and 2008. Among the accounts
receivable balance of $15,157,087, the aging of $10,583,532 was within 60 days,
$4,372,855 was between 60-90 days and $243,188 was over 90 days. The
balance of accounts receivable was $15,157,087 at December 31, 2009, of which
$15,069,143 was collected subsequently.
Inventories
Inventories
are stated at the lower of cost or market, which is based on estimated selling
prices less any further costs expected to be incurred for completion and
disposal. Cost of raw materials is calculated using the weighted average method.
Finished goods costs are determined using the weighted average method and
comprise direct materials, direct labor and an appropriate proportion of
overhead. At December 31, 2009 and 2008, the Company has no reserve for
inventories. See Note 5.
Prepayments
Prepayments
represent cash paid in advance to suppliers for purchases of raw
materials. The balance of prepayments was $19,833,561 and $19,270,693
at December 31, 2009 and 2008, respectively. Among the balance of
$19,833,561, the aging of $19,787,733 was within 60 days, $2,218 was between
60-90 days and $43,610 was over 90 days. No allowance was provided
for the prepayments balance at December 31, 2009.
Customer
Deposits
Customer
deposits consist of amounts paid to the Company in advance for the sale of
products in the PRC. The Company receives these amounts and recognizes them as a
current liability until the revenue can be recognized upon the delivery of
goods. The balance of customer deposits was $5,189,759 and $2,936,267 at
December 31, 2009 and 2008, respectively.
Property,
Plant, and Equipment (“PPE”)
PPE are
stated at cost less accumulated depreciation, and include expenditure that
substantially increases the useful lives of existing assets.
Transportation
charges
Transportation
charges represent costs to deliver the Company’s inventory to point of sale.
Transportation costs are expensed and charged to cost of sales as incurred.
Transportation charges represent costs to deliver the Company’s inventory to
point of sale. Transportation costs are expensed and charged to selling expense
as incurred.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation
is provided over their estimated useful lives, using the straight-line
method. Estimated useful lives are as follows:
Buildings
and improvements
|
5 ~
20 years
|
Machinery
and equipment
|
5 ~
20 years
|
Motor
vehicles
|
5
years
|
Office
Equipment
|
5 ~
10 years
|
When
assets are sold or retired, their costs and accumulated depreciation are
eliminated from the consolidated financial statements and any gain or loss
resulting from their disposal is recognized in the period of disposition as an
element of other income. The cost of maintenance and repairs is
charged to income as incurred, whereas significant renewals and betterments are
capitalized. See Note 7.
Land
Use Rights
According
to PRC laws, the government owns all the land in the PRC. Companies or
individuals are authorized to possess and use the land only through land use
rights granted by the Chinese government. The land use rights granted
to the Company, located at Jiu Jiang and Ma’anshan, are being
amortized using the straight-line method over the lease term of fifty
years. See Note 8.
Impairment
of Long-Lived Assets
Long-term
assets of the Company are reviewed annually as to whether their carrying value
has become impaired, pursuant to the guidelines established in FASB ASC 360
(formerly SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets). The Company considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from the related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. There were no impairments
for the years ended December 31, 2009 and 2008.
Economic
and Political Risks
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others,
the political, economic and legal environment and foreign currency
exchange. The Company’s results may be adversely affected by changes
in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion, remittances abroad, and rates and methods of
taxation, among other things.
Exchange
risk
The
Company cannot guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of PRC Renminbi
(RMB) converted to U.S. dollars on the date. The exchange rate could fluctuate
depending on changes in the political and economic environments without
notice.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently
Issued Accounting Pronouncements
On April
1, 2009, the FASB approved ASC 805 (formerly FSP FAS 141R-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies), which amends Statement 141R and eliminates the distinction
between contractual and non-contractual contingencies. Under ASC 805,
an acquirer is required to recognize at fair value an asset acquired or
liability assumed in a business combination that arises from a contingency if
the acquisition-date fair value of that asset or liability can be determined
during the measurement period. If the acquisition-date fair value cannot be
determined, the acquirer applies the recognition criteria in SFAS No. 5,
Accounting for Contingencies and Interpretation 14, “Reasonable Estimation of
the Amount of a Loss – and interpretation of FASB Statement No. 5,” to determine
whether the contingency should be recognized as of the acquisition date or after
it. The adoption of ASC 805 has not had a material effect on the
Company’s consolidated financial statements.
ASC
320-10 (formerly FSP FAS 115-2 and FAS 124-2) amends the other-than-temporary
impairment guidance in U.S. GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. It did not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. We
are required to adopt ASC 320-10 for our interim and annual reporting periods
ending after June 15, 2009. ASC 320-10 does not require disclosures
for periods presented for comparative purposes at initial
adoption. ASC 320-10 requires comparative disclosures only for
periods ending after initial adoption. The adoption of ASC 320-10 has
not had a material effect on the Company’s consolidated financial
statements.
On April
9, 2009, the FASB also approved ASC 825-10 (formerly FSP FAS 107-1 and APB
28-1, Interim
Disclosures about Fair
Value of Financial Instruments ) to require disclosures
about fair value of financial instruments in interim period financial statements
of publicly traded companies and in summarized financial information required by
APB Opinion No. 28,
Interim Financial
Reporting. We are required to adopt ASC 825-10 for our interim
and annual reporting periods ending after June 15, 2009. ASC 825-10
does not require disclosures for periods presented for comparative purposes at
initial adoption. ASC 825-10 requires comparative disclosures only for periods
ending after initial adoption. The adoption of ASC 825-10 has not had
a material effect on the Company’s consolidated financial
statements.
In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” as incorporated into FASB ASC
820, “Fair Value Measurements and Disclosures”. The guidance relates to
determining fair values when there is no active market or where the price inputs
being used represent distressed sales. It reaffirms what FASB ASC 820
states is the objective of fair value measurement—to reflect how much an asset
would be sold for in an orderly transaction (as opposed to a distressed or
forced transaction) at the date of the financial statements under current market
conditions. Specifically, it reaffirms the need to use judgment to
ascertain if a formerly active market has become inactive and in determining
fair values when markets have become inactive. This guidance is
effective for interim and annual periods ended after June 15, 2009, but entities
may early adopt this guidance for the interim and annual periods ended after
March 15, 2009. The adoption of such standard has not had a material impact
on the Company’s consolidated financial statements.
In August 2009, the FASB
issued FASB ASU 2009-05, “Measuring Liabilities at Fair Value”. FASB ASU 2009-05
amends FASB ASC 820, “Fair Value Measurements”. Specifically, FASB
ASU 2009-05 provides clarification that in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following
methods: 1) a valuation technique that uses a) the quoted price of the identical
liability when traded as an asset or b) quoted prices for similar liabilities or
similar liabilities when traded as assets and/or 2) a valuation technique that
is consistent with the principles of FASB ASC 820 of the Accounting Standards
Codification (e.g. an income approach or market approach). FASB ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to adjust to include inputs relating to the
existence of transfer restrictions
on that liability. The adoption of such standard has not had a
material impact on the Company’s consolidated financial
statements.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events”, (FASB ASC 855-10”)
which establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial
statements. The statement is effective for interim and annual periods
ended after June 15, 2009. The standard was subsequently amended by
FASB ASU 2010-09 which exempts an entity that is an SEC filer from the
requirement to disclose the date through which subsequent events have been
evaluated.
In
September 2009, the Emerging Issues Task Force reached final consensus on FASB
ASU 2009-13, “Revenue Arrangements with Multiple Deliverables”. FASB
ASU 2009-13 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting, and how the arrangement
consideration should be allocated among the separate units of
accounting. This ASU will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. The adoption of
such standard has not had a material impact on the Company’s consolidated
financial statements.
In
December 2009, the FASB issued FASB ASU 2009-17, Consolidation (“FASB ASC 810):
Improvements to Financial Reporting by Enterprises involved with Variable
Interest Entities. This ASU amends the FASB Accounting Standards
Codification for statement No.167. In June 2009, the FASB issued SFAS
No.167, Amendments to FASB Interpretation No. 46(R), which requires an
enterprise to perform an analysis and ongoing reassessments to determine whether
the enterprises variable interest or interests give it a controlling financial
interest in a variable interest entity and amends certain guidance for
determining whether an entity is a variable interest entity. It also requires
enhanced disclosures that will provide users of financial statements with more
transparent information about an enterprises involvement in a variable interest
entity. SFAS No.167 is effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009 and for all interim reporting periods after that, with early application
prohibited. The adoption of this standard has not had a material
impact on the Company’s consolidated financial statements.
In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,
which will require companies to make new disclosures about recurring or
nonrecurring fair value measurements including significant transfers into and
out of Level 1 and Level 2 fair value hierarchies and information on purchases,
sales, issuance and settlements on a gross basis in the reconciliation of Level
3 fair value measurements. The ASU is effective
prospectively for financial statements issued for fiscal years and interim
periods beginning after December 15, 2009. The new disclosures about
purchases, sales, issuance and settlements on a gross basis in the
reconciliation of Level 3 fair value measurements is effective for interim and
annual reporting periods beginning after December 15, 2010. The
Company expects that the adoption of ASU 2010-06 will not have a material impact
on its consolidated financial statements.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
3 – CONCENTRATION RISK
Concentration
of Major Customers and Suppliers:
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Major
customers with revenues of more than 10% of the Company’s sales
|
|
|
|
|
|
|
Sales
to major customers
|
|
$
|
72,040,540 |
|
|
$
|
58,216,143 |
|
Percentage
of sales
|
|
|
71 |
%
|
|
|
70 |
%
|
Number
of customers
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Major
suppliers with purchases of more than 10% of the Company’s purchases
|
|
|
|
|
|
|
|
|
Purchases
from major suppliers
|
|
$
|
74,621,428 |
|
|
$
|
54,738,995 |
|
Percentage
of purchases
|
|
|
89 |
%
|
|
|
72 |
%
|
Number
of suppliers
|
|
|
4 |
|
|
|
3 |
|
The sales
of the two major customers with revenues of more than 10% of the Company’s sales
were $54,353,402, or 54% of the total sales, and $17,687,138, or 17% of the
total sales, for the year ended December 31, 2009. The sales of
the three major customers with revenues of more than 10% of the Company’s sales
were $29,652,632, or 36% of the total sales, $15,566,989, or 19% of the total
sales and $12,996,522, or 15% of the total sales, for the year ended December
31, 2008.
Accounts
receivable related to the Company’s major customer comprised 36% and 28% of all
accounts receivable as of December 31, 2009 and 2008, respectively.
Accounts
payable related to the Company’s major suppliers comprised 38% and 33% of all
accounts payable as of December 31, 2009 and 2008, respectively.
NOTE
4 – ACCOUNTS RECEIVABLE
Accounts
receivable is net of allowance for doubtful accounts as follows:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Accounts
receivable
|
|
$ |
15,199,574 |
|
|
$ |
4,749,270 |
|
Less:
allowance for doubtful accounts
|
|
|
(42,487 |
) |
|
|
(35,782 |
) |
Net
Accounts receivable
|
|
$ |
15,157,087 |
|
|
$ |
4,713,488 |
|
Accounts
receivable is net of allowance for doubtful accounts. Changes in the
allowance for doubtful accounts are as follows:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
$ |
35,782 |
|
|
$ |
13,672 |
|
Allowance
for doubtful accounts
|
|
|
6,705 |
|
|
|
22,110 |
|
Written
– offs
|
|
|
- |
|
|
|
- |
|
Ending
balance
|
|
$ |
42,487 |
|
|
$ |
35,782 |
|
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
5 – INVENTORIES
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Raw
materials
|
|
$ |
5,584,313 |
|
|
$ |
5,200,622 |
|
Work-in-progress
|
|
|
237,422 |
|
|
|
292,997 |
|
Finished
goods
|
|
|
4,385,126 |
|
|
|
3,806,642 |
|
|
|
|
10,206,861 |
|
|
|
9,300,261 |
|
Less:
Provision for slow-moving inventories
|
|
|
- |
|
|
|
- |
|
Inventories,
net
|
|
$ |
10,206,861 |
|
|
$ |
9,300,261 |
|
NOTE
6 – OTHER CURRENT ASSETS
Other
current assets consist of the following:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Security
deposits
|
|
$ |
410,255 |
|
|
$ |
51,064 |
|
VAT
receivable
|
|
|
535,824 |
|
|
|
232,745 |
|
Other
|
|
|
18,797 |
|
|
|
9,550 |
|
Total
other current assets
|
|
$ |
964,876 |
|
|
$ |
293,359 |
|
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
7 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
At
cost:
|
|
|
|
|
|
|
Buildings
|
|
$ |
3,899,669 |
|
|
$ |
3,878,091 |
|
Machinery
and equipment
|
|
|
13,801,699 |
|
|
|
13,635,258 |
|
Motor
vehicles
|
|
|
247,926 |
|
|
|
230,046 |
|
Office
equipment
|
|
|
97,266 |
|
|
|
93,654 |
|
|
|
|
18,046,560 |
|
|
|
17,837,049 |
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
(684,755 |
) |
|
|
(442,383 |
) |
Machinery
and equipment
|
|
|
(4,036,209 |
) |
|
|
(2,974,065 |
) |
Motor
vehicles
|
|
|
(163,593 |
) |
|
|
(118,814 |
) |
Office
equipment
|
|
|
(73,194 |
) |
|
|
(55,245 |
) |
|
|
|
(4,957,751 |
) |
|
|
(3,590,507 |
) |
Property,
plant and equipment, net
|
|
$ |
13,088,809 |
|
|
$ |
14,246,542 |
|
Depreciation
expense for the years ended December 31, 2009 and 2008 was $1,367,244 and
$1,461,337, respectively.
The net
book value of property, plant and equipment pledged as collateral for bank loans
was $1,923,204 and $1,918,434 at December 31, 2009 and 2008. See Note
9.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
8 – LAND USE RIGHTS
Land use
rights consist of the following:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cost
of land use rights
|
|
$ |
4,506,975 |
|
|
$ |
4,495,797 |
|
Less:
Accumulated amortization
|
|
|
(252,705 |
) |
|
|
(162,165 |
) |
Land
use rights, net
|
|
$ |
4,254,270 |
|
|
$ |
4,333,632 |
|
The land
use rights, located at Jiu Jiang and Ma’anshan, are commenced through 2005
to 2007 with the lease term of fifty years
Amortization
expense for the years ended December 31, 2009 and 2008 was $79,361 and $89,733,
respectively.
Amortization
expense for the next five years and thereafter is as follows:
2010
|
|
$ |
90,140 |
|
2011
|
|
|
90,140 |
|
2012
|
|
|
90,140 |
|
2013
|
|
|
90,140 |
|
2014
|
|
|
90,140 |
|
Thereafter
|
|
|
3,803,570 |
|
Total
|
|
$ |
4,254,270 |
|
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
9 – RELATED PARTY TRANSACTIONS
(a)
|
Names
and Relationship of Related
Parties:
|
|
Existing Relationship with the
Company
|
Mr.
Tang
|
|
Director
and controlling shareholder of the Company
|
Shanghai
Zhengfangxing Steel Co., Ltd. (“SZS”)
|
|
Under
common control of Mr. Tang
|
Shanghai
Ossen Investment Co., Ltd. (“SOI”)
|
|
Under
common control of Mr.
Tang
|
(b)
|
Summary
of Balances with Related Party:
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Due
from related party:
|
|
|
|
|
|
|
SZS
|
|
$ |
- |
|
|
$ |
- |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Due
to related party:
|
|
|
|
|
|
|
SZS
|
|
$ |
- |
|
|
$ |
145,896 |
|
|
|
$ |
- |
|
|
$ |
145,896 |
|
SZS is a
supplier of the Company. For the years ended December 31, 2009 and
2008, the Company purchased $11,487,206 and $20,482,023 of raw materials from
SZS, respectively. The balance of due from related party represents bank
acceptance from SZS for the sales of the products to SZS.
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Notes
receivable from related party:
|
|
|
|
|
|
|
SZS,
due June 11, 2010
|
|
$ |
804,423 |
|
|
$ |
- |
|
SZS,
due March 25, 2010
|
|
|
1,023,811 |
|
|
|
- |
|
|
|
$ |
1,828,234 |
|
|
$ |
- |
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Due
to shareholder:
|
|
|
|
|
|
|
Mr.
Tang
|
|
$ |
12,869,939 |
|
|
$ |
12,841,692 |
|
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
9 – RELATED PARTY TRANSACTIONS (CONTINUED)
(c)
|
Summary
of Related Party Transactions:
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
Note
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
SZS
|
SZS
provided guarantee for the short-term bank loans borrowed by the
Company
|
|
12
|
|
|
$ |
8,775,521 |
|
|
$ |
6,857,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SZS
sold raw materials to the Company
|
|
8
|
|
|
$ |
11,487,206 |
|
|
$ |
20,482,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOI
|
SOI
provided guarantee for the short-term bank loans borrowed by the
Company
|
|
12
|
|
|
$ |
5,411,572 |
|
|
$ |
5,398,150 |
|
NOTE
10 – OTHER PAYABLES AND ACCRUED LIABILITIES
Other
payables and accrued liabilities consist of the following:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Deferred
government grant
|
|
$ |
- |
|
|
$ |
1,327,653 |
|
Others
|
|
|
32,473 |
|
|
|
147,819 |
|
Total
|
|
$ |
32,473 |
|
|
$ |
1,475,472 |
|
The
deferred government grants represent the wide variety of subsidies from
local government of Ma’anshan and are all received by the
Company.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
11 – NOTES PAYABLE
Bank
acceptance notes:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Due
June 10, 2009 (subsequently repaid on its due date)
|
|
$ |
- |
|
|
$ |
2,188,439 |
|
Due
March 7, 2009 (subsequently repaid on its due date)
|
|
|
- |
|
|
|
1,458,959 |
|
Due
April 7, 2009 (subsequently repaid on its due date)
|
|
|
- |
|
|
|
1,458,959 |
|
Due
May 28, 2009 (subsequently repaid on its due date)
|
|
|
- |
|
|
|
2,917,919 |
|
Due
April 24, 2009 (subsequently repaid on its due date)
|
|
|
- |
|
|
|
1,458,959 |
|
Due
May 26, 2009 (subsequently repaid on its due date)
|
|
|
- |
|
|
|
1,458,959 |
|
Due
May 12, 2009 (subsequently repaid on its due date)
|
|
|
- |
|
|
|
1,458,959 |
|
Due
March 12, 2009 (subsequently repaid on its due date)
|
|
|
- |
|
|
|
2,917,920 |
|
Due
March 26, 2009 (subsequently repaid on its due date)
|
|
|
- |
|
|
|
2,917,920 |
|
Due
March 15, 2010 (subsequently repaid on its due date)
|
|
|
1,462,587 |
|
|
|
- |
|
Due
March 26, 2010 (subsequently repaid on its due date)
|
|
|
1,462,587 |
|
|
|
- |
|
Due
March 23, 2010 (subsequently repaid on its due date)
|
|
|
1,462,587 |
|
|
|
- |
|
Due
March 10, 2010 (subsequently repaid on its due date)
|
|
|
2,925,173 |
|
|
|
- |
|
Due
March 15, 2010 (subsequently repaid on its due date)
|
|
|
2,925,173 |
|
|
|
- |
|
Due
April 29, 2010 (subsequently repaid on its due date)
|
|
|
1,462,587 |
|
|
|
- |
|
Due
May 5, 2010 (subsequently repaid on its due date)
|
|
|
1,170,070 |
|
|
|
- |
|
Due
May 18, 2010 (subsequently repaid on its due date)
|
|
|
1,170,070 |
|
|
|
- |
|
Due
May 27, 2010 (subsequently repaid on its due date)
|
|
|
1,170,070 |
|
|
|
- |
|
Due
June 10, 2010 (subsequently repaid on its due date)
|
|
|
1,170,070 |
|
|
|
- |
|
Due
June 8, 2010 (subsequently repaid on its due date)
|
|
|
1,170,070 |
|
|
|
- |
|
Due
June 15, 2010 (subsequently repaid on its due date)
|
|
|
2,193,881 |
|
|
|
- |
|
Total
|
|
$ |
19,744,925 |
|
|
$ |
18,236,993 |
|
The
interest-free notes payable are secured by $11,824,214 and $9,977,092
restricted cash as of December 31, 2009 and 2008.
All the
notes payable are subject to bank charges of 0.05% of the principal amount as
commission on each loan transaction. Bank charges for notes payable,
included in interest expenses under the statements of operations, were $155,536
and $146,863 for the years ended December 31, 2009 and 2008,
respectively.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
12 – SHORT TERM BANK LOANS
Short-term
loans are summarized as follows:
|
|
Interest rate
per annum
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Due
January 6, 2010, guaranteed by SZS, subsequently repaid on due
date
|
|
|
5.31 |
% |
|
$ |
2,925,173 |
|
|
$ |
- |
|
Due
January 14, 2010, subsequently repaid on due date
|
|
|
5.35 |
% |
|
|
731,294 |
|
|
|
- |
|
Due
January 15, 2010, subsequently repaid on due date
|
|
|
5.35 |
% |
|
|
1,462,587 |
|
|
|
- |
|
Due
February 20, 2010, subsequently repaid on due date
|
|
|
5.84 |
% |
|
|
2,925,174 |
|
|
|
- |
|
Due
February 27, 2010, subsequently repaid on due date
|
|
|
5.31 |
% |
|
|
731,294 |
|
|
|
- |
|
Due
March 4, 2010 , subsequently repaid on due date
|
|
|
5.31 |
% |
|
|
2,340,139 |
|
|
|
- |
|
Due
March 8, 2010, subsequently repaid on due date
|
|
|
5.31 |
% |
|
|
731,294 |
|
|
|
- |
|
Due
March 12, 2010, subsequently repaid on due date
|
|
|
5.84 |
% |
|
|
1,462,587 |
|
|
|
- |
|
Due
March 27, 2010 subsequently repaid on due date
|
|
|
5.84 |
% |
|
|
1,462,587 |
|
|
|
- |
|
Due
March 30, 2010 guaranteed by SZS
|
|
|
5.84 |
% |
|
|
1,462,587 |
|
|
|
- |
|
Due
May 13, 2010 subsequently repaid on due date
|
|
|
5.31 |
% |
|
|
1,316,328 |
|
|
|
- |
|
Due
May 30, 2010 , guaranteed by SOI, subsequently repaid on due
date
|
|
|
5.31 |
% |
|
|
1,462,587 |
|
|
|
- |
|
Due
June 2, 2010 , guaranteed by SOI, subsequently repaid on due
date
|
|
|
5.31 |
% |
|
|
1,462,587 |
|
|
|
- |
|
Due
September 8, 2010 guaranteed by SZS
|
|
|
5.31 |
% |
|
|
3,948,985 |
|
|
|
- |
|
Due
September 9, 2010 guaranteed by SZS
|
|
|
5.31 |
% |
|
|
438,776 |
|
|
|
- |
|
Due
November 6, 2010 guaranteed by SOI
|
|
|
5.84 |
% |
|
|
1,316,328 |
|
|
|
- |
|
Due
November 9, 2010, guaranteed by SOI
|
|
|
5.84 |
% |
|
|
1,170,070 |
|
|
|
- |
|
Due
January 8, 2009, guaranteed by SZS, subsequently repaid on due
date
|
|
|
7.28 |
% |
|
|
- |
|
|
|
2,917,919 |
|
Due
January 17, 2009 guaranteed by SOI, subsequently repaid on due
date
|
|
|
5.58 |
% |
|
|
- |
|
|
|
1,313,064 |
|
Due
January 30, 2009, subsequently repaid on due date
|
|
|
5.54 |
% |
|
|
- |
|
|
|
1,458,959 |
|
Due
January 30, 2009, subsequently repaid on due date
|
|
|
5.54 |
% |
|
|
- |
|
|
|
1,458,959 |
|
Due
March 3, 2009, subsequently repaid on due date
|
|
|
7.47 |
% |
|
|
- |
|
|
|
729,480 |
|
Due
March 5, 2009, subsequently repaid on due date
|
|
|
7.47 |
% |
|
|
- |
|
|
|
2,188,439 |
|
Due
April 1, 2009, guaranteed by SOI, subsequently repaid on due
date
|
|
|
5.58 |
% |
|
|
- |
|
|
|
1,167,168 |
|
Due
May 8, 2009, subsequently repaid on due date
|
|
|
7.47 |
% |
|
|
- |
|
|
|
1,313,064 |
|
Due
July 17, 2009 , guaranteed by SOI, subsequently repaid on due
date
|
|
|
5.58 |
% |
|
|
- |
|
|
|
1,458,959 |
|
Due
July 17, 2009 , guaranteed by SOI, subsequently repaid on due
date
|
|
|
5.58 |
% |
|
|
- |
|
|
|
1,458,959 |
|
Due
September 18, 2009 guaranteed by SZS, subsequently repaid on due
date
|
|
|
7.56 |
% |
|
|
- |
|
|
|
3,939,191 |
|
Totals
|
|
|
|
|
|
$ |
27,350,377 |
|
|
$ |
19,404,161 |
|
Short
term bank loans are obtained from local banks in China. All the short-term bank
loans are repayable within one year and are secured by property, plant and
equipment and land use rights owned by the Company. See Notes
6.
The
weighted average annual interest rate of the short-term bank loans was 5.5% and
6.42% as of December 31, 2009 and 2008, respectively. Interest
expense was $1,429,729 and $1,514,114 for the years ended December 31, 2009 and
2008, respectively. The short term bank loans did not have financial
covenants at December 31, 2009 and 2008.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
13 – TAXES
(a)
Corporation Income Tax (“CIT”)
On March
16, 2007, the National People’s Congress of China approved the new Corporate
Income Tax Law of the People’s Republic of China (the “New CIT Law”), which is
effective from January 1, 2008.
Prior to
January 1, 2008, the CIT rate applicable to our subsidiaries in the PRC is
33%. After January 1, 2008, under the New CIT Law, the corporate
income tax rate applicable to our subsidiaries is 25%. The New CIT
Law has an impact on the deferred tax assets and liabilities of the
Company. The Company adjusted deferred tax balances as of December
31, 2009 based on their best estimate and will continue to assess the impact of
such new law in the future. The effects arising from the enforcement
of the New CIT Law have been reflected in the accounts.
According
to the relevant laws and regulations in the PRC, foreign invested enterprises
established prior to January 1, 2008 are entitled to full exemption from income
tax for two years beginning with the first year in which such enterprise is
profitable and a 50% income tax reduction for the subsequent three
years. Ossen Materials was entitled to an EIT exemption during the
two years ended December 31, 2006 and was subject to a 50% income tax reduction
during the three years ended December 31, 2009. Ossen Jiujiang was
entitled to the EIT exemption during the two years ended December 31, 2008, was
subject to a 50% income tax reduction during the year ended December 31, 2009
and will be subject to a 50% income tax reduction during the years ended
December 31, 2010 and 2011. As our income tax obligations increase
over time, our net income will be affected. Part of the Company’s
income has been exempted from income taxes, which has been approved by the local
tax bureau due to its outstanding contribution to the local
economy. The amount of exempted income may vary each year based on
the fluctuation of the local economy.
In
accordance with the New CIT Law, enterprises established under the laws of
foreign countries or regions and whose “place of effective management” is
located within the PRC territory are considered PRC resident enterprises and
subject to the PRC income tax at the rate of 25% on worldwide
income. The definition of “place of effective management" refers to
an establishment that exercises, in substance, overall management and control
over the production and business, personnel, accounting, properties, etc.
of an enterprise. As of December 31, 2009, no detailed interpretation or
guidance has been issued to define “place of effective management”. Furthermore,
as of December 31, 2009, the administrative practice associated with
interpreting and applying the concept of “place of effective management” is
unclear. If the Company’s non-PRC incorporated entities are deemed PRC tax
residents, such entities would be subject to PRC tax under the New CIT
Law. The Company has analyzed the applicability of this law, as
of December 31, 2009, and the Company has not accrued for PRC tax on such
basis. The Company will continue to monitor changes in the
interpretation or guidance of this law.
The New
CIT Law also imposes a 10% withholding income tax, subject to reduction based on
tax treaty where applicable, for dividends distributed by a foreign invested
enterprise to its immediate holding company outside China. Such
dividends were exempted from PRC tax under the previous income tax law and
regulations. The foreign invested enterprise is subject to the
withholding tax starting from January 1, 2008. There were no
dividends distributed in the year ended December 31, 2009 or 2008.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
13 – TAXES (CONTINUED)
Income
tax expenses consist of the following:
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Current
tax expenses
|
|
$ |
740,880 |
|
|
$ |
292,460 |
|
Deferred
taxes
|
|
|
(827 |
) |
|
|
(940 |
) |
Income
tax expenses
|
|
$ |
740,053
|
|
|
$ |
291,520 |
|
Reconciliation
from the expected income tax expenses calculated with reference to the statutory
tax rate in the PRC of 25% for 2009 and 2008 is as follows:
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Computed
"expected" income tax expenses
|
|
$ |
2,616,815 |
|
|
$ |
1,394,103 |
|
Effect
on tax incentive / holiday
|
|
|
(1,308,407 |
) |
|
|
(1,102,583 |
) |
Permanent
difference – tax exempted income
|
|
|
(568,355 |
) |
|
|
- |
|
Income
tax expenses
|
|
$ |
740,053 |
|
|
$ |
291,520 |
|
Components
of net deferred tax assets are as follows:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Current
portion:
|
|
|
|
|
|
|
Provision
of doubtful accounts
|
|
$ |
5,311
|
|
|
$ |
4,473
|
|
The
deferred tax assets balance of $5,311 and $4,473 at December 31, 2009 and 2008,
respectively are included in Other Current Assets in the consolidated balance
sheets.
The
Company uses FASB ASC 740 (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”)). – AN INTERPRETATION OF FASB STATEMENT NO. 109,
ACCOUNTING FOR INCOME TAXES. The Interpretation addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN 48,
we may recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on recognition,
classification, interest and penalties on income taxes, accounting in interim
periods and requires increased disclosures. As of December 31, 2009,
the Company does not have a liability for unrecognized tax
provisions.
NOTE
13 – TAXES (CONTINUED)
(b) Value
Added tax (“VAT”)
Enterprises
or individuals, who sell commodities, engage in repair and maintenance or import
or export goods in the PRC are subject to a value added tax in accordance with
Chinese Laws. The VAT standard rate is 17% of the gross sale
price. A credit is available whereby VAT paid on the purchases of
semi-finished products or raw materials used in the production of the Company’s
finished products can be used to offset the VAT due on the sales of the finished
products.
On
January 1, 2002, the export policy of VAT "Exemption, Credit and Refund" began
to apply to all exports by manufacture-based enterprises. In accordance with
this policy, exported goods are exempted from output VAT and the input VAT
charged for purchases of the raw materials, components and power consumed for
the production of the exported goods may be refunded. The refund
rates of strand products applicable to Ossen Ma An Shan and Ossen Jiujiang was
5%.
The VAT
refundable balance of $535,824 and $66,252 at December 31, 2009 and 2008,
respectively are included in Other Current Assets in the accompanying
consolidated balance sheets.
NOTE
14 – GEOGRAPHICAL SALES AND SEGMENTS
Information
for the Company’s sales by geographical area for the years ended December 31,
2009, 2008 and 2007 are as follows:
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Domestic
Sales
|
|
$ |
97,361,596 |
|
|
$ |
51,611,646 |
|
International
Sales
|
|
|
3,726,200 |
|
|
|
31,130,664 |
|
|
|
$ |
101,087,796 |
|
|
$ |
82,742,310 |
|
The
Company operates in one business segment for the years ended December 31, 2009
and 2008.
NOTE
15 – SUBSEQUENT EVENTS
We have
evaluated all events or transactions that occurred after December 31, 2009 up
through the date we issued the consolidated financial
statements.
OSSEN
INNOVATION MATERIALS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
June
30, 2010 AND 2009
CONTENTS
Condensed
Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and June 30,
2009
|
Q-2
to Q-3
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income for the Six
Months Ended June 30, 2010 and 2009 (Unaudited)
|
Q-4
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2010 and 2009 (Unaudited)
|
Q-5
to Q6
|
|
|
Notes
to Condensed Consolidated Financial Statements for the Six Months Ended
June 30, 2010 and 2009 (Unaudited)
|
Q-7
to Q-30
|
OSSEN
INNOVATION CO., LTD
CONSOLIDATED
BALANCE SHEETS
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
3,460,341 |
|
|
$ |
8,409,467 |
|
Restricted
cash
|
|
|
12,149,706 |
|
|
|
11,824,214 |
|
Notes
receivable – bank acceptance notes
|
|
|
- |
|
|
|
150,208 |
|
Accounts
receivable, net of allowance for doubtful accounts of $34,868 and $42,487
at June 30, 2010 and December 31, 2009
|
|
|
33,781,820 |
|
|
|
15,157,087 |
|
Inventories
|
|
|
15,103,091 |
|
|
|
10,206,861 |
|
Advance
to suppliers
|
|
|
17,942,685 |
|
|
|
19,833,561 |
|
Other
current assets
|
|
|
666,440 |
|
|
|
964,876 |
|
Notes
receivable from related party – bank acceptance notes
|
|
|
- |
|
|
|
1,828,234 |
|
Due
from and advance to related party
|
|
|
8,311,343 |
|
|
|
- |
|
Total
Current Assets
|
|
|
91,415,426 |
|
|
|
68,374,508 |
|
Non-current
Assets
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
12,485,490 |
|
|
|
13,088,809 |
|
Land
use rights, net
|
|
|
4,226,883 |
|
|
|
4,254,270 |
|
Total
Non-current Assets
|
|
|
16,712,373 |
|
|
|
17,343,079 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
108,127,799 |
|
|
$ |
85,717,587 |
|
See
accompanying notes to the consolidated financial statements
OSSEN
INNOVATION CO., LTD
CONSOLIDATED
BALANCE SHEETS
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Notes
payable – bank acceptance notes
|
|
$ |
22,030,961 |
|
|
$
|
19,744,925 |
|
Bank
Loans-short term
|
|
|
36,277,649 |
|
|
|
27,350,377 |
|
Accounts
payable
|
|
|
730,819 |
|
|
|
240,275 |
|
Customer
deposits
|
|
|
6,430,833 |
|
|
|
5,189,759 |
|
Income
taxes payable
|
|
|
888,379 |
|
|
|
110,493 |
|
Other
payables and accrued expenses
|
|
|
12,742 |
|
|
|
32,473 |
|
Due
to shareholder
|
|
|
12,924,000 |
|
|
|
12,869,939 |
|
Total
Current Liabilities
|
|
|
79,295,383 |
|
|
|
65,538,241 |
|
TOTAL
LIABILITIES
|
|
|
79,295,383 |
|
|
|
65,538,241 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, no par value, 50,000 shares authorized, 50,000 shares issued and
outstanding
|
|
|
500 |
|
|
|
500 |
|
Accumulated
other comprehensive income
|
|
|
660,571 |
|
|
|
543,036 |
|
Statutory
reserve
|
|
|
2,049,085 |
|
|
|
1,093,331 |
|
Retained
earnings
|
|
|
19,219,153 |
|
|
|
13,069,401 |
|
Non-controlling
interest
|
|
|
6,903,107 |
|
|
|
5,473,078 |
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
28,832,416 |
|
|
|
20,179,346 |
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
108,127,799 |
|
|
$
|
85,717,587 |
|
See
accompanying notes to the consolidated financial statements
OSSEN
INNOVATION CO., LTD
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
|
|
FOR THE THREE MONTHS
ENDED JUNE 30,
|
|
|
FOR THE SIX MONTHS
ENDED JUNE 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$ |
30,030,450 |
|
|
$ |
24,159,615 |
|
|
$ |
58,708,775 |
|
|
$ |
40,416,407 |
|
COST
OF GOODS SOLD
|
|
|
23,836,150 |
|
|
|
20,293,727 |
|
|
|
47,101,721 |
|
|
|
35,741,095 |
|
GROSS
PROFIT
|
|
|
6,194,300
|
|
|
|
3,865,888 |
|
|
|
11,607,054 |
|
|
|
4,675,312 |
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and distribution expenses
|
|
|
102,663 |
|
|
|
172,546 |
|
|
|
195,706 |
|
|
|
241,880 |
|
General
and administrative expenses
|
|
|
280,860 |
|
|
|
379,450 |
|
|
|
532,276 |
|
|
|
638,499 |
|
Total
Operating Expenses
|
|
|
383,523 |
|
|
|
551,996 |
|
|
|
727,982 |
|
|
|
880,379 |
|
INCOME
FROM OPERATIONS
|
|
|
5,810,777 |
|
|
|
3,313,892 |
|
|
|
10,879,072 |
|
|
|
3,794,933 |
|
Other
Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expenses, net
|
|
|
(537,532 |
) |
|
|
(369,457 |
) |
|
|
(1,069,659 |
) |
|
|
(730,104 |
) |
Other
income, net
|
|
|
68,849 |
|
|
|
8,743 |
|
|
|
96,720 |
|
|
|
14,583 |
|
Total
Other Expenses
|
|
|
(468,683 |
) |
|
|
(360,714 |
) |
|
|
(972,939 |
) |
|
|
(715,521 |
) |
INCOME
BEFORE INCOME TAXES
|
|
|
5,342,094 |
|
|
|
2,953,178 |
|
|
|
9,906,133 |
|
|
|
3,079,412 |
|
INCOME
TAXES
|
|
|
(771,167 |
) |
|
|
(332,724 |
) |
|
|
(1,370,598 |
) |
|
|
(348,394 |
) |
NET
INCOME
|
|
|
4,570,927 |
|
|
|
2,620,454 |
|
|
|
8,535,535 |
|
|
|
2,731,018 |
|
LESS:
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
|
|
|
818,357 |
|
|
|
463,540 |
|
|
|
1,430,029 |
|
|
|
484,515 |
|
NET
INCOME ATTRIBUTABLE TO OSSEN INNOVATION CO.,LTD AND
SUBSIDIARIES
|
|
|
3,752,570 |
|
|
|
2,156,914 |
|
|
|
7,105,506 |
|
|
|
2,246,503 |
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain, net of tax
|
|
|
113,679 |
|
|
|
(12,788 |
) |
|
|
117,535 |
|
|
|
13,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$ |
3,866,249 |
|
|
$ |
2,144,126 |
|
|
$ |
7,223,041 |
|
|
$ |
2,260,187 |
|
See
accompanying notes to the consolidated financial statements
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
FOR THE SIX MONTHS
ENDED JUNE 30,
|
|
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
8,535,535 |
|
|
$ |
2,731,018 |
|
Adjustments
to reconcile net income to net cash provided by/ (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
727,593 |
|
|
|
717,087 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
Decrease In:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(18,624,733 |
) |
|
|
(6,862,266 |
) |
Inventories
|
|
|
(4,896,230 |
) |
|
|
(1,816,163 |
) |
Advance
to suppliers
|
|
|
1,890,876 |
|
|
|
(1,663,504 |
) |
Due
from and advance to related party
|
|
|
(8,311,343 |
) |
|
|
- |
|
Other
current assets
|
|
|
298,436 |
|
|
|
(423,414 |
) |
Notes
receivable - bank acceptance notes
|
|
|
150,208 |
|
|
|
- |
|
Notes
receivable from related party - bank acceptance notes
|
|
|
1,828,234 |
|
|
|
- |
|
Increase
(Decrease) In:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
490,544
|
|
|
|
1,128,356 |
|
Customer
deposits
|
|
|
1,241,074 |
|
|
|
(364,453 |
) |
Income
taxes payable
|
|
|
777,886
|
|
|
|
266,614 |
|
Other
payables and accrued expenses
|
|
|
(19,731 |
) |
|
|
(731,119 |
) |
Due
to related shareholder
|
|
|
- |
|
|
|
732,471 |
|
Net
cash used in operating activities
|
|
$ |
(15,911,651 |
) |
|
$ |
(6,285,373 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of plant and equipment
|
|
$ |
(96,887 |
) |
|
$ |
(129,876 |
) |
See
accompanying notes to the consolidated financial statements
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
FOR THE SIX MONTHS
ENDED JUNE 30,
|
|
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
$ |
(325,492 |
) |
|
$ |
(14,425,269 |
) |
Proceeds
from bank loans
|
|
|
29,815,234 |
|
|
|
22,206,639 |
|
Repayments
of bank loans
|
|
|
(20,887,962 |
) |
|
|
(15,459,561 |
) |
Proceeds
from notes payable-bank acceptance notes
|
|
|
22,030,961 |
|
|
|
30,388,032 |
|
Repayment
of notes payable-bank acceptance notes
|
|
|
(19,744,925 |
) |
|
|
(18,236,993 |
) |
Net
cash provided by financing activities
|
|
$ |
10,887,816 |
|
|
$ |
4,472,848 |
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
(5,120,722 |
) |
|
|
(1,942,401 |
) |
Effect
of exchange rate changes on cash
|
|
|
171,596
|
|
|
|
(114,575 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
8,409,467 |
|
|
|
3,761,315 |
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$ |
3,460,341 |
|
|
$ |
1,704,339 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid during the periods:
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$ |
792,774 |
|
|
$ |
81,728 |
|
Interest
paid
|
|
$ |
846,614 |
|
|
$ |
702,821 |
|
See
accompanying notes to the consolidated financial statements
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Ultra
Glory International, Ltd., or Ultra Glory, or the Company, is a British Virgin
Islands limited liability company organized on January 21, 2010 under the BVI
Business Companies Act, 2004 (the “BVI Act”). Ultra Glory was a blank
check company formed for the purpose of acquiring, through a share exchange,
asset acquisition or other similar business combination, an operating
business.
Business
Combination
On July
7, 2010, Ultra Glory and its sole shareholder entered into a share exchange
agreement with Ossen Innovation Group, a British Virgin Islands limited
liability company organized on April 30, 2010 under the BVI Act and the
shareholders of Ossen Innovation Group. Pursuant to the share exchange
agreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group
all of the issued and outstanding shares of Ossen Innovation Group, in exchange
for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra
Glory to the shareholders of Ossen Innovation Group. In addition, the
sole shareholder of Ultra Glory sold all of the 5,000,000 ordinary shares
of Ultra Glory that were issued and outstanding prior to the business
combination, to the shareholders of Ossen Innovation Group for cash, at a price
of $0.03 per share. As a result, the individuals and entities that owned
shares of Ossen Innovation Group prior to the business combination acquired
100% of the equity of Ultra Glory, and Ultra Glory acquired 100% of the equity
of Ossen Innovation Group. Ossen Innovation Group is now a wholly
owned subsidiary of Ultra Glory. In conjunction with the business
combination, Ultra Glory filed an amended charter, pursuant to which Ultra Glory
changed its name to Ossen Innovation Co., Ltd., changed its fiscal year end to
December 31 and increased its authorized shares to
100,000,000. Upon the consummation of the business combination,
the company ceased to be a shell company.
The
Company’s Shareholders
Dr. Tang,
the Company’s chairman, owns 100% of the shares of Effectual Strength
Enterprises Ltd., a British Virgin Islands company, which owned 79% of the
shares of Ossen Innovation Group prior to the business combination, and owns 79%
of the Company’s shares since the business combination. The spouse of
the Company’s chief executive officer, Wei Hua, owns 100% of the shares of
Fascinating Acme Development Ltd., a British Virgin Islands company, which owned
4% of the shares of Ossen Innovation Group prior to the business combination,
and owns 4% of the Company’s shares since the business
combination. The spouse of the chief executive officer of Shanghai
ZFX, which is an affiliated company of the Company’s that supplies the Company
with raw materials, owns 100% of the shares of Gross Inspiration Development
Ltd., which owned 4% of the shares of Ossen Innovation Group prior to the
business combination, and owns 4% of the Company’s shares since the business
combination. The holders of the remaining 13% of the Company’s shares
are investors that are residents of the PRC and are unaffiliated with
Ossen.
The
Company’s
Subsidiaries
British
Virgin Islands Companies
Ossen
Innovation Group, the company’s wholly owned subsidiary, is the sole shareholder
of two holding companies organized in the British Virgin Islands: Ossen Group
(Asia) Co., Ltd., or Ossen Asia, and Topchina Development Group Ltd., or
Topchina. All of the equity of Ossen Asia and Topchina had been held by Dr. Tang
since inception. In May 2010, Dr. Tang transferred these shares to
Ossen Innovation Group in anticipation of the public listing of our company’s
shares in the United States.
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
Ossen
Asia is a British Virgin Islands limited liability company organized on February
7, 2002. Ossen Asia has one direct operating subsidiary in China,
Ossen Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia
owns 81% of the equity of Ossen Materials.
Topchina
is a British Virgin Islands limited liability company organized on November 3,
2004. Ossen Materials and Topchina directly own an operating
subsidiary in China, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., or Ossen
Jiujiang. Ossen Materials owns 75% of the equity of Ossen Jiujiang
and Topchina owns 25%.
Ossen
Materials
Ossen
Materials was formed in China on October 27, 2004 as a Sino-foreign joint
venture limited liability company under the name Ossen (Ma’anshan) Steel Wire
and Cable Co., Ltd. On May 8, 2008, Ossen Materials was restructured
from a Sino-foreign joint venture limited liability company to a
corporation. The name of the entity was changed at that time to Ossen
Innovation Materials Co., Ltd.
Ossen
Asia owns 81% of the equity of Ossen Materials. The remaining 19% is
held in the aggregate by four Chinese entities, two of which are controlled by
Chinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a
company whose shares are listed on the Shanghai Stock Exchange, and one of which
is controlled by Chinese citizens.
Through
Ossen Materials, the company has manufactured and sold plain surface PC strands,
zinc coated PC steel wires and PC wires in the company’s Maanshan City, PRC,
facility since 2004. The primary products manufactured in this
facility are the company’s plain surface PC strands. The primary
markets for the products manufactured at the company’s Maanshan facility are
Anhui Province, Jiangsu Province, Zhejiang Province and Shanghai City, each in
the PRC.
Ossen
Jiujiang
On April
6, 2005, Shanghai Ossen Investment Holdings (Group) Co., Ltd., or Ossen
Shanghai, acquired a portion of the bankruptcy assets of Jiujiang Steel &
Iron Company, including equipment, land use rights and inventory for
approximately RMB 20,000,000 (approximately
$2.9 million). Ossen Jiujiang was formed by Ossen Shanghai in
the PRC as a Sino-foreign joint venture limited liability company on April 13,
2005. Ossen Shanghai then transferred the newly acquired assets to
Ossen Jiujiang. At its inception, Ossen Jiujiang was owned by two entities:
33.3% of its equity was held by Ossen Asia and 66.7% by Ossen
Shanghai. In June 2005, Ossen Shanghai transferred its entire
interest in Ossen Jiujiang to Topchina in exchange for approximately $2.9
million. In October 2007, Topchina transferred 41.7% of the equity in Ossen
Jiujiang to Ossen Asia for no consideration. On December 17, 2007, Ossen Asia
transferred all of its shares in Ossen Jiujiang to Ossen Materials for no
consideration, resulting in 75% of the equity of Ossen Jiujiang being held by
Ossen Materials and 25% by Topchina.
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
Through
Ossen Jiujiang, the company manufactures zinc coated PC wires, plain surface PC
strands, zinc coated PC strands, unbonded PC strands, helical rib PC wires,
sleeper PC wires and indented PC wires. The primary products
manufactured in this facility are the company’s zinc coated PC
wires. The primary markets for the PC strands manufactured in the
company’s Jiujiang facility are Jiangxi Province, Wuhan Province, Hunan
Province, Fujian Province and Sichuan Province, each in the PRC.
At June
30, 2010, the subsidiaries of Ossen Innovation Group were as
follows:
Name
|
|
Domicile and Date
of Incorporation
|
|
Paid-in Capital
|
|
|
Percentage
of
Effective Ownership
|
|
|
Principal
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Ossen
Group (Asia) Co., Ltd. ("Ossen Asia")
|
|
BVI
February
7, 2002
|
|
USD
|
- |
|
|
|
100 |
% |
|
Investments
holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Topchina
Development Group Ltd. ("Topchina")
|
|
BVI
November
3, 2004
|
|
USD
|
- |
|
|
|
100 |
% |
|
Investments
holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ossen
Innovation Materials Co., Ltd. ("Ossen Materials")
|
|
The
PRC
October
27, 2004
|
|
RMB
|
75,000,000 |
|
|
|
81 |
% |
|
Design,
engeneering, manufacture and sale of
customized prestressed steel materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ossen
(Jiujiang) Steel Wire & Cable Co., Ltd. ("Ossen
Jiujiang")
|
|
The
PRC
April
13, 2005
|
|
RMB
|
50,000,000 |
|
|
|
85.75 |
% |
|
Design,
engeneering, manufacture and sale of customized
prestressed steel
materials
|
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Preparation of Financial Statements
The
unaudited consolidated financial statements of Ossen Innovation Co., Inc. and
subsidiaries (the “Company”) have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information and
in accordance with Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. However, the information included in these interim
financial statements reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for
the fair presentation of the consolidated financial position and the
consolidated results of operations. Results shown for interim periods
are not necessarily indicative of the results to be obtained for a full
year. The consolidated balance sheet as of December 31, 2009 has been
derived from the audited consolidated financial statements included Form F-1, as
filed by the Company. These interim financial statements should be
read in conjunction with those financial statements.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Ossen Innovation Co.,
Ltd. and its subsidiaries. Intercompany accounts and transactions have
been eliminated upon consolidation.
Use
of Estimates
The
preparation of the consolidated and combined financial statements in conformity
with generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at
the time the estimates are made. Actual results could differ from those
estimates.
Non-controlling
Interest
Non-controlling
interests in the Company’s subsidiaries are recorded in accordance with the
provisions of FASB Accounting Standards Codification 810 Consolidation (“ASC
810”) and are reported as a component of equity, separate from the parent’s
equity. Purchase or sale of equity interests that do not result in a
change of control are accounted for as equity transactions. Results of
operations attributable to the non-controlling interest are included in our
consolidated results of operations and, upon loss of control, the interest sold,
as well as interest retained, if any, will be reported at fair value with any
gain or loss recognized in earnings.
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign
Currency Translation
The
accompanying consolidated financial statements are presented in United States
dollars (“US$” or “$”). The functional currency of the Company is Renminbi
(“RMB”). The consolidated financial statements are translated into United
States dollars from RMB at year-end exchange rates as to assets and liabilities
and average exchange rates as to revenues and expenses. Capital accounts
are translated at their historical exchange rates when the capital transactions
occurred. The resulting transaction adjustments are recorded as a component of
shareholders’ equity. Gains and losses from foreign currency
transactions are included in net income.
|
|
For the Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Period
ended RMB: US$ exchange rate
|
|
|
6.8086 |
|
|
|
6.8448 |
|
Average
six month ended RMB: US$ exchange rate
|
|
|
6.8347 |
|
|
|
6.8432 |
|
|
|
For the Three
Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Period
ended RMB: US$ exchange rate
|
|
|
6.8086
|
|
|
|
6.8448 |
|
Average
three month ended RMB: US$ exchange rate
|
|
|
6.8335
|
|
|
|
6.8399 |
|
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
the rates used in translation.
Revenue
Recognition
Revenues
represent the invoiced value of goods sold recognized upon delivery.
Revenues are recognized when all of the following criteria are met:
|
l
|
Persuasive
evidence of an arrangement exists,
|
|
l
|
Delivery
has occurred or services have been
rendered,
|
|
l
|
The
seller’s price to the buyer is fixed or determinable,
and
|
|
l
|
Collectability
is reasonable assured.
|
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research
and Development
Research
and development costs are expensed as incurred and totaled approximately $11,918
and $12,366 for three months ended June 30, 2010 and 2009, respectively and
approximately $24,144 and $24,229 for six months ended June 30, 2010 and 2009,
respectively. Research and development costs are included in cost of
goods sold in the accompanying statements of operations. Research and
development costs are incurred on a project specific basis.
Retirement
Benefits
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to operations as incurred.
Retirement benefits of $25,922 and $24,136 were charged to operations
for the three months ended June 30, 2010 and 2009, respectively and of $53,928
and $51,396 were charged to operations for the six months ended June 30,
2010 and 2009, respectively.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequence
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences are
expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statement of income in the period that
includes the enactment date. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before the
Company is able to realize their benefits, or that future deductibility is
uncertain.
Comprehensive
Income
Comprehensive
income is defined as the change in equity during the year from transactions and
other events, excluding the changes resulting from investments by owners and
distributions to owners, and is not included in the computation of income tax
expense or benefit. Accumulated comprehensive income consists of changes in
unrealized gains and losses on foreign currency translation.
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash
and Cash Equivalents
For
financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturity of three months or less to be cash
equivalents. The Company maintains no bank account in the United States of
America. The Company maintains its bank accounts in China. Balances
at financial institutions or state-owned banks within the PRC are not covered by
insurance. However, the Company has not experienced any losses in
such accounts and believes it is not exposed to any significant risks on its
cash in bank accounts.
Restricted
Cash
Restricted
cash represents amounts held by a bank as security for bank acceptance notes and
therefore is not available for the Company’s use until such time as the bank
acceptance notes have been fulfilled or expired, normally within twelve month
period.
Accounts
Receivable
Accounts
receivable are carried at net realizable value. An allowance for
doubtful accounts is recorded in the period when loss is probable based on an
assessment of specific evidence indicating troubled collection, historical
experience, accounts aging and other factors. Delinquent accounts are
written off when it is determined that the amounts are
uncollectible. At June 30, 2010 and December 31, 2009, allowances for
doubtful accounts were $34,868 and $42,487, respectively.
Fair
Value of Financial Instruments
FASB ASC
820 (formerly SFAS No. 157 Fair Value Measurements) establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value.
The hierarchy prioritizes the inputs into three levels based on the extent to
which inputs used in measuring fair value are observable in the
market
These
tiers include:
|
•
|
Level
1—defined as observable inputs such as quoted prices in active
markets;
|
|
•
|
Level
2—defined as inputs other than quoted prices in active markets that are
either directly or indirectly observable;
and
|
|
•
|
Level
3—defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own
assumptions.
|
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The
company’s financial instruments primarily consist of cash and cash equivalents,
accounts receivable, restricted assets, accounts payable, other payables and
accruals, short-term bank loans, other current liabilities.
Cash and
cash equivalents include money market securities and commercial paper that are
considered to be highly liquid and easily tradable. These securities are valued
using inputs observable in active markets for identical securities and are
therefore classified as Level 1 within the fair value hierarchy.
As of the
balance sheet dates, the estimated fair values of financial instruments were not
materially different from their carrying value as presented due to the short
maturities of these instruments and that the interest rates on the borrowing
approximate those that would have been available for loans of similar remaining
maturity and risk profile at respective quarter end.
Inventories
Inventories
are stated at the lower of cost or net realizable value, which is based on
estimated selling prices less any further costs expected to be incurred for
completion and disposal. Cost of raw materials is calculated using the
weighted average method. Finished goods costs are determined using the
weighted average method and comprise direct materials, direct labor and an
appropriate proportion of overhead. At June 30, 2010 and December 31,
2009, the Company has no reserve for inventories.
Advance
to Suppliers
Advance
to Suppliers represents cash paid in advance to suppliers for purchases of raw
materials. The balance of advance to suppliers was $17,942,685 and
$19,833,561 at June 30, 2010 and December 31, 2009, respectively.
Customer
Deposits
Customer
deposits consist of amounts paid to the Company in advance for the sale of
products in the PRC. The Company receives these amounts and
recognizes them as a current liability until the revenue can be recognized upon
the delivery of goods. The balance of customer deposits was
$6,430,833 and $5,189,759 at June 30, 2010 and December 31, 2009,
respectively.
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property,
Plant, and Equipment
Property,
Plant, and Equipment are stated at cost less accumulated depreciation, and
include expenditure that substantially increases the useful lives of existing
assets.
Depreciation
is provided over their estimated useful lives, using the straight-line
method. Estimated useful lives are as follows:
Buildings
and improvements
|
5 ~
20 years
|
Machinery
and equipment
|
5 ~
20 years
|
Motor
vehicles
|
5
years
|
Office
Equipment
|
5 ~
10
years
|
When
assets are sold or retired, their costs and accumulated depreciation are
eliminated from the consolidated financial statements and any gain or loss
resulting from their disposal is recognized in the period of disposition as an
element of other income. The cost of maintenance and repairs is
charged to income as incurred, whereas significant renewals and betterments are
capitalized.
Land
Use Rights
According
to the PRC laws, the government owns all the land in the PRC. Companies or
individuals are authorized to possess and use the land only through land use
rights granted by the Chinese government. The land use rights granted to
the Company are being amortized using the straight-line method over the lease
term of fifty years.
Impairment
of Long-Lived Assets
Long-lived
assets of the Company are reviewed annually as to whether their carrying value
has become impaired, pursuant to the guidelines established in FASB ASC 360
(formerly SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets). The Company considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from the related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. We did not record any
impairment charges during the six months ended June 30, 2010 and
2009.
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Related
Party
In
general, related parties exist when there is a relationship that offers the
potential for transactions at less than arm’s-length, favorable treatment, or
the ability to influence the outcome of events different from that which might
result in the absence of that relationship. A related party may be
any of the followings: a) affiliate, a party that directly or indirectly
controls, is controlled by, or is under common control with another party; b)
principle owner, the owner of record or known beneficial owner of more than 10%
of the voting interest of an entity; c) management, persons having
responsibility for achieving objectives of the entity and requisite authority to
make decision; d) immediate family of management or principal owners; e) a
parent company and its subsidiaries; d) other parties that has ability to
significant influence the management or operating policies of the
entity. This item is discussed in further detail in Note 8 – Related
Party Transactions.
Economic
and Political Risks
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange.
The Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
Exchange
Risk
The
Company cannot guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of PRC Renminbi
(RMB) converted to U.S. dollars on the date. The exchange rate could fluctuate
depending on changes in the political and economic environments without
notice.
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently
Issued Accounting Pronouncements
In
January 2010, the FASB issued Accounting Standards Update 2010-05 (ASU 2010-05),
“Compensation – Stock Compensation (Topic 718)”. This standard
codifies EITF Topic D-110 Escrowed Share Arrangements and the Presumption of
Compensation and is effective immediately. The provisions of ASU 2010-05 did not
have a material effect on the Company’s consolidated financial statements and is
effective immediately.
In
January 2010, the FASB issued Accounting Standards Update 2010-06 (ASU 2010-06),
“Fair Value Measurements and Disclosures (Topic 820)”: Improving Disclosures
about Fair Value Measurements. This amendment to Topic 820 has
improved disclosures about fair value measurements on the basis of input
received from the users of financial statements. This is effective
for interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. Early adoption is permitted. The provisions of ASU
2010-06 did not have a material effect on the Company’s consolidated financial
statements.
In
February 2010, the FASB issued Accounting Standards Update 2010-09 (ASU
2010-09), "Subsequent Events (Topic 855)." The amendments remove the
requirements for an SEC filer to disclose a date, in both issued and revised
financial statements, through which subsequent events have been
reviewed. Revised financial statements include financial statements
revised as a result of either correction of an error or retrospective
application of U.S. GAAP. ASU 2010-09 is effective for interim or
annual financial periods ending after June 15, 2010. The provisions
of ASU 2010-09 did not have a material effect on the Company’s consolidated
financial statements.
In
February 2010, the FASB issued Accounting Standards Update 2010-10 (ASU
2010-10), "Consolidation (Topic 810)." The amendments to the
consolidation requirements of Topic 810 resulting from the issuance of Statement
167 are deferred for a reporting entity's interest in an entity (1) that has all
the attributes of an investment company or (2) for which it is industry practice
to apply measurement principles for financial reporting purposes that are
consistent with those followed by investment companies. An entity
that qualifies for the deferral will continue to be assessed under the overall
guidance on the consolidation of variable interest entities in Subtopic 810-10
(before the Statement 167 amendments) or other applicable consolidation
guidance, such as the guidance for the consolidation of partnerships in Subtopic
810-20. The deferral is primarily the result of differing
consolidation conclusions reached by the International Accounting Standards
Board ("IASB") for certain investment funds when compared with the conclusions
reached under Statement 167. The deferral is effective as of the
beginning of a reporting entity's first annual period that begins after November
15, 2009, and for interim periods within that first annual reporting period,
which coincides with the effective date of Statement 167. Early
application is not permitted. The provisions of ASU 2010-10 are
effective for the Company beginning in 2010. The adoption of ASU
2010-10 did not have a material impact on the Company’s consolidated financial
statements.
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The FASB
issued Accounting Standards Update (ASU) No. 2010-20. Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses, on July 21,
2010, requiring companies to improve their disclosures about the credit quality of their
financing receivables and the credit reserves held against them. The extra
disclosures for financing receivables include aging of past due
receivables, credit quality indicators, and the modifications of financing
receivables. This guidance is effective for interim and annual periods ending on
or after December 15, 2010. We do not expect the adoption of this
update to have a material impact on our consolidated financial position, results
of operations or cash flows.
NOTE
3 – CONCENTRATION
Concentration
of major customers and suppliers
|
|
For the Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
Major
customer with revenues of more
than 10% of the Company’s sales
|
|
|
|
|
|
|
Sales
to major customer
|
|
$
|
40,425,687
|
|
|
$
|
31,160,268
|
|
Percentage
of sales
|
|
|
69
|
%
|
|
|
77
|
%
|
Number
|
|
|
3 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Major
suppliers with purchases of more
than 10% of the Company's purchases
|
|
|
|
|
|
|
|
|
Purchases
from major suppliers
|
|
$
|
42,800,059
|
|
|
$
|
34,294,884
|
|
Percentage
of purchase
|
|
|
87
|
%
|
|
|
81
|
%
|
Number
|
|
|
2 |
|
|
|
1 |
|
|
|
For the Three Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
Major
customer with revenues of more
than 10% of the Company’s sales
|
|
|
|
|
|
|
Sales
to major customer
|
|
$ |
22,178,153
|
|
|
$ |
18,603,183 |
|
Percentage
of sales
|
|
|
74
|
% |
|
|
77 |
% |
Number
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Major
suppliers with purchases of more
than 10% of the Company's purchases
|
|
|
|
|
|
|
|
|
Purchases
from major suppliers
|
|
$ |
26,816,705 |
|
|
$ |
16,431,052 |
|
Percentage
of purchase
|
|
|
85 |
% |
|
|
77 |
% |
Number
|
|
|
2 |
|
|
|
1 |
|
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE 3 – CONCENTRATION (CONTINUED)
Accounts
receivable related to the Company’s major customer comprised 66% and 36% of all
accounts receivable as of June 30, 2010 and December 31, 2009,
respectively.
Accounts
payable related to the Company’s major suppliers comprised 54% and 38% of all
accounts payable as of June 30, 2010 and December 31, 2009,
respectively.
NOTE
4 – ACCOUNTS RECEIVABLE
Accounts
receivable is net of allowance for doubtful accounts.
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Accounts
receivable
|
|
$ |
33,816,688
|
|
|
$ |
15,199,574 |
|
Less:
allowance for doubtful accounts
|
|
|
34,868
|
|
|
|
42,487 |
|
|
|
$ |
33,781,820 |
|
|
$ |
15,157,087 |
|
Changes
in the allowance for doubtful accounts are as follows:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning
balance
|
|
$ |
42,487
|
|
|
$ |
35,782
|
|
Allowance
for doubtful accounts
|
|
|
(7,619
|
)
|
|
|
6,705
|
|
Written
- offs
|
|
|
- |
|
|
|
- |
|
|
|
$ |
34,868 |
|
|
$ |
42,487 |
|
NOTE
5 – INVENTORIES
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Raw
materials
|
|
$ |
7,865,073 |
|
|
$ |
5,584,313 |
|
Work-in-progress
|
|
|
247,051 |
|
|
|
237,422 |
|
Finished
goods
|
|
|
6,990,967 |
|
|
|
4,385,126 |
|
|
|
|
15,103,091 |
|
|
|
10,206,861 |
|
Less:
provision for slow-moving inventories
|
|
|
- |
|
|
|
- |
|
|
|
$ |
15,103,091 |
|
|
$ |
10,206,861 |
|
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
6 – OTHER CURRENT ASSETS
Other
current assets consist of the following:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Security
deposits
|
|
$ |
599,005 |
|
|
$ |
410,255 |
|
VAT
deductible
|
|
|
54,434 |
|
|
|
535,824 |
|
Other
receivables
|
|
|
13,001 |
|
|
|
18,797 |
|
|
|
$ |
666,440 |
|
|
$ |
964,876 |
|
NOTE
7 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Buildings
|
|
$ |
3,919,868 |
|
|
$ |
3,899,669 |
|
Machinery
and equipment
|
|
|
13,876,164 |
|
|
|
13,801,699 |
|
Motor
vehicles
|
|
|
248,967 |
|
|
|
247,926 |
|
Office
equipment
|
|
|
98,447 |
|
|
|
97,266 |
|
|
|
|
18,143,447 |
|
|
|
18,046,560 |
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
(808,935 |
) |
|
|
(684,755 |
) |
Machinery
and equipment
|
|
|
(4,586,919 |
) |
|
|
(4,036,209 |
) |
Motor
vehicles
|
|
|
(181,401 |
) |
|
|
(163,593 |
) |
Office
equipment
|
|
|
(80,702 |
) |
|
|
(73,194 |
) |
|
|
|
(5,657,957 |
) |
|
|
(4,957,751 |
) |
|
|
$ |
12,485,490 |
|
|
$ |
13,088,809 |
|
Depreciation
expense for the three months ended June 30, 2010 and 2009 was $336,589 and
$338,298, respectively. Depreciation expense for the six months ended
June 30, 2010 and 2009 was $682,509 and $672,058, respectively.
The net
book value of property, plant and equipment pledged as collateral for bank loans
was $660,929 and $1,923,204 at June 30, 2010 and December 31, 2009,
respectively.
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
8 – LAND USE RIGHTS
Land use
rights consist of the following:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Cost
of land use rights
|
|
$ |
4,525,907 |
|
|
$ |
4,506,975 |
|
Less:
Accumulated amortization
|
|
|
(299,024 |
) |
|
|
(252,705 |
) |
|
|
$ |
4,226,883 |
|
|
$ |
4,254,270 |
|
Amortization
expense for the three months ended June 30, 2010 and 2009 was $22,546 and
$22,525, respectively. Amortization expense for the six months ended
June 30, 2010 and 2009 was $45,084 and $45,029, respectively.
Amortization
expense for the next five years and thereafter is as follows:
2010
|
|
$ |
45,261 |
|
2011
|
|
|
90,518 |
|
2012
|
|
|
90,518 |
|
2013
|
|
|
90,518 |
|
2014
|
|
|
90,518 |
|
Thereafter
|
|
|
3,819,550 |
|
Total
|
|
$ |
4,226,883 |
|
OSSEN
INNOVATION CO., LTD AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
9 – RELATED PARTY TRANSACTIONS
(a)
|
Names
and Relationship of Related
Parties:
|
|
Existing Relationship with the Company
|
Mr.
Tang
|
Director
and controlling shareholder of the Company
|
Shanghai
Zhengfangxing Steel Co., Ltd. (“SZS”)
|
Under
common control of Mr. Tang
|
Shanghai
Ossen Investment Co., Ltd. (“SOI”)
|
Under
common control of Mr.
Tang
|
(b)
|
Summary
of Balances with Related Party:
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Due
from and advance to related party:
|
|
|
|
|
|
|
SZS
|
|
$ |
8,311,343 |
|
|
$ |
- |
|
SZS is a
supplier of the Company. For the six months ended June 30 2010 and
2009, the Company purchased $2,623,518 and nil of raw materials from SZS,
respectively. The balance $8,311,343 of due from related party at
June 30, 2010 represents $1,018,348 prepayments to SZS for the purchase of raw
materials and $7,292,995 advances to SZS to assist with their working capital
need, which is interest free and due on demand.
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Notes
receivable from related party:
|
|
|
|
|
|
|
SZS,
due June 11, 2010
|
|
$ |
- |
|
|
$ |
804,423 |
|
SZS,
due March 25, 2010
|
|
|
- |
|
|
|
1,023,811 |
|
|
|
$ |
- |
|
|
$ |
1,828,234 |
|
The
interest-free, unsecured notes were provided to a related party to assist with
their working capital need.
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
Due
to shareholder:
|
|
(unaudited)
|
|
|
|
|
Mr.
Tang
|
|
$ |
12,924,000 |
|
|
$ |
12,869,939 |
|
Dr. Tang provided a
one-time interest-free loan to Topchina and Ossen Asia in connection with an
investment in Ossen Materials by such companies, which were wholly owned by Dr.
Tang at that time. As of June 30, 2010, the amount outstanding from
such loans was approximately $12.8
million.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
10 – OTHER PAYABLES AND ACCRUED LIABILITIES
Other
payables and accrued liabilities consist of the following:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued
welfare
|
|
$ |
12,354 |
|
|
$ |
- |
|
Others
|
|
|
388 |
|
|
|
32,473 |
|
|
|
$ |
12,742 |
|
|
$ |
32,473 |
|
NOTE
11 – NOTES PAYABLE
Bank acceptance notes:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Due
December 18,2010
|
|
$ |
587,492 |
|
|
$ |
- |
|
Due
December 18,2010
|
|
|
587,492 |
|
|
|
- |
|
Due
December 2,2010
|
|
|
587,492 |
|
|
|
- |
|
Due
December 2,2010
|
|
|
587,492 |
|
|
|
- |
|
Due
November 28,2010
|
|
|
587,492 |
|
|
|
- |
|
Due
November 28,2010
|
|
|
587,492 |
|
|
|
- |
|
Due
November 19,2010
|
|
|
587,492 |
|
|
|
- |
|
Due
November 19,2010
|
|
|
587,492 |
|
|
|
- |
|
Due
November 7,2010
|
|
|
587,492 |
|
|
|
- |
|
Due
November 7,2010
|
|
|
587,492 |
|
|
|
- |
|
Due
October 30,2010
|
|
|
734,365 |
|
|
|
- |
|
Due
October 30,2010
|
|
|
734,365 |
|
|
|
- |
|
Due
October 8,2010
|
|
|
1,468,731 |
|
|
|
- |
|
Due
October 8,2010
|
|
|
1,468,731 |
|
|
|
- |
|
Due
September 26,2010, subsequently repaid on due date
|
|
|
1,468,731 |
|
|
|
- |
|
Due
September 24,2010, subsequently repaid on due date
|
|
|
5,874,927 |
|
|
|
- |
|
Due
August 8,2010, subsequently repaid on due date
|
|
|
734,365 |
|
|
|
- |
|
Due
August 8,2010, subsequently repaid on due date
|
|
|
734,365 |
|
|
|
- |
|
Due
August 8,2010, subsequently repaid on due date
|
|
|
734,365 |
|
|
|
- |
|
Due
August 8,2010, subsequently repaid on due date
|
|
|
734,365 |
|
|
|
- |
|
Due
July 19,2010, subsequently repaid on due date
|
|
|
1,468,731 |
|
|
|
- |
|
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
11 – NOTES PAYABLE (CONTINUED)
Bank acceptance notes:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Due
June 15, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
2,193,881 |
|
Due
June 10, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
1,170,070 |
|
Due
June 8, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
1,170,070 |
|
Due
May 27, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
1,170,070 |
|
Due
May 18, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
1,170,070 |
|
Due
May 5, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
1,170,070 |
|
Due
April 29, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
1,462,587 |
|
Due
March 26, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
1,462,587 |
|
Due
March 23, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
1,462,587 |
|
Due
March 15, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
1,462,587 |
|
Due
March 15, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
2,925,173 |
|
Due
March 10, 2010, subsequently repaid on due date
|
|
|
- |
|
|
|
2,925,173 |
|
Total
|
|
$ |
22,030,961 |
|
|
$ |
19,744,925 |
|
All the
notes payable are subject to bank charges of 0.05% of the principal amount as
commission on each loan transaction. Bank charges for notes payable
were $4,536 and $5,480 for the three months ended June 30, 2010 and 2009,
respectively. Bank charges for notes payable were $10,238 and $15,198
for the six months ended June 30, 2010 and 2009, respectively included in
interest expense in the statement of operations.
The
interest-free notes payable are secured by $12,149,706 and $11,824,214
restricted cash as of June 30, 2010 and December 31, 2009.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
12 – SHORT TERM BANK LOANS
Short-term
bank loans are summarized as follows:
|
|
Bank Name
|
|
Interest rate
per annum
|
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Due
May 26,2011, guaranteed
by SZS and SOI
|
|
Bank
of Communications (“BOC”) Ma An Shan Branch
|
|
|
5.58 |
% |
|
|
|
1,468,731 |
|
|
|
- |
|
Due
May 24,2011, guaranteed
by SZS and SOI
|
|
BOC
Ma An Shan Branch
|
|
|
5.31 |
% |
|
|
|
1,468,731 |
|
|
|
- |
|
Due
May 13,2011, guaranteed by SZS
|
|
CCB
Ma An Shan Branch
|
|
|
5.31 |
% |
|
|
|
1,321,858 |
|
|
|
- |
|
Due
March 25,2011 guaranteed by SZS
|
|
CCB
Ma An Shan Branch
|
|
|
4.78 |
% |
|
|
|
1,468,731 |
|
|
|
- |
|
Due
March 18,2011 guaranteed by SZS
|
|
CCB
Ma An Shan Branch
|
|
|
4.78 |
% |
|
|
|
1,615,604 |
|
|
|
- |
|
Due
March 11,2011, guaranteed by SZS
|
|
CCB
Ma An Shan Branch
|
|
|
4.78 |
% |
|
|
|
1,468,731 |
|
|
|
- |
|
Due
February 1,2011, guaranteed by SOI,
|
|
Anhui
Rural Commercial Bank (“ARCB”)
Yu
Shan Branch
|
|
|
5.84 |
% |
|
|
|
2,937,461 |
|
|
|
- |
|
Due
January 12 ,2011, guaranteed by SZS
|
|
Agricultural
Bank of China (“ABC”) Jiu Long Branch
|
|
|
5.84 |
% |
|
|
|
1,468,731 |
|
|
|
- |
|
Due
January 7,2011, guaranteed by SZS
|
|
China
Everbright Bank
Wu
Hu Banch
|
|
|
5.31 |
% |
|
|
|
4,406,192 |
|
|
|
- |
|
Due
January 7,2011, guaranteed by SZS
|
|
ABC
Jiu Long Branch
|
|
|
5.84 |
% |
|
|
|
2,937,461 |
|
|
|
- |
|
Due
December 29,2010, guaranteed by SZS
|
|
China
Construction Bank (“CCB”) Ma An Shan Branch
|
|
|
4.37 |
% |
|
|
|
1,468,731 |
|
|
|
|
|
Due
November 9, 2010, guaranteed by SOI and SZS
|
|
Anhui
Commercial Bank (“ACB”) Fei Cui Yuan Branch
|
|
|
5.84 |
% |
|
|
|
1,174,985 |
|
|
|
1,170,070 |
|
Due
November 6, 2010 guaranteed by SOI and SZS
|
|
ACB
Fei Cui Yuan Branch
|
|
|
5.84 |
% |
|
|
|
1,321,858 |
|
|
|
1,316,328 |
|
Due
November 3 ,2010, guaranteed by SZS
|
|
Bank
of China (“BOC”)
Jiu
Jiang Branch
|
|
|
5.31 |
% |
|
|
|
440,619 |
|
|
|
- |
|
Due
October 27,2010, guaranteed by SOI
|
|
ARCB
Yu Shan Branch
|
|
|
5.84 |
% |
|
|
|
2,937,461 |
|
|
|
- |
|
Due
September 9,2010, guaranteed by SZS, subsequently
repaid on due date
|
|
CCB
Jiu Jiang Branch
|
|
|
5.31 |
% |
|
|
|
440,619 |
|
|
|
438,776 |
|
Due
September 8, 2010 guaranteed by SZS, subsequently
repaid on due date
|
|
CCB
Jiu Jiang Branch
|
|
|
5.31 |
% |
|
|
|
3,965,573 |
|
|
|
3,948,985 |
|
Due
September 7,2010, guaranteed by SZS, subsequently
repaid on due date
|
|
BOC
Jiu Jiang Branch
|
|
|
5.31 |
% |
|
|
|
734,365 |
|
|
|
- |
|
Due
August 27,2010, guaranteed by SZS, subsequently
repaid on due date
|
|
BOC
Jiu Jiang Branch
|
|
|
5.31 |
% |
|
|
|
293,746 |
|
|
|
- |
|
Due
July 6,2010, guaranteed by SOI, subsequently
repaid on due date
|
|
Industrial
and Commercial Bank of China (“ICBC”) Hui Tong Branch
|
|
|
4.86 |
% |
|
|
$ |
2,937,461 |
|
|
$ |
- |
|
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
12 – SHORT TERM BANK LOANS (CONTINUED)
|
|
Bank Name
|
|
Interest rate
per annum
|
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Due
June 2, 2010, guaranteed by SOI, subsequently
repaid on due date
|
|
BOC
Ma An Shan Branch
|
|
|
5.31
|
%
|
|
|
|
-
|
|
|
|
1,462,587
|
|
Due
May 30, 2010, guaranteed by SOI, subsequently
repaid on due date
|
|
BOC
Ma An Shan Branch
|
|
|
5.31
|
%
|
|
|
|
-
|
|
|
|
1,462,587
|
|
Due
May 13, 2010, subsequently repaid on due date
|
|
CCB
Ma An Shan Branch
|
|
|
5.31
|
%
|
|
|
|
-
|
|
|
|
1,316,328
|
|
Due
March 30, 2010 guaranteed by SZS, subsequently
repaid on due date
|
|
ABC
Jiu Long Branch
|
|
|
5.84
|
%
|
|
|
|
-
|
|
|
|
1,462,587
|
|
Due
March 27, 2010, subsequently repaid on due date
|
|
ARCB
Yu Shan Branch
|
|
|
5.84
|
%
|
|
|
|
-
|
|
|
|
1,462,587
|
|
Due
March 12, 2010, subsequently repaid on due date
|
|
ARCB
Yu Shan Branch
|
|
|
5.84
|
%
|
|
|
|
-
|
|
|
|
1,462,587
|
|
Due
March 8, 2010, subsequently repaid on due date
|
|
CCB
Ma An Shan Branch
|
|
|
5.31
|
%
|
|
|
|
-
|
|
|
|
731,294
|
|
Due
March 4, 2010 , subsequently repaid on due date
|
|
CCB
Ma An Shan Branch
|
|
|
5.31
|
%
|
|
|
|
-
|
|
|
|
2,340,139
|
|
Due
February 27, 2010, subsequently repaid on due date
|
|
BOC
Jiu Jiang Branch
|
|
|
5.31
|
%
|
|
|
|
-
|
|
|
|
731,294
|
|
Due
February 20, 2010, subsequently repaid on due date
|
|
ARCB
Yu Shan Branch
|
|
|
5.84
|
%
|
|
|
|
-
|
|
|
|
2,925,174
|
|
Due
January 15, 2010, subsequently repaid on due date
|
|
ICBC
Hui Tong Branch
|
|
|
5.35
|
%
|
|
|
|
-
|
|
|
|
1,462,587
|
|
Due
January 14, 2010, subsequently repaid on due date
|
|
ICBC
Hui Tong Branch
|
|
|
5.35
|
%
|
|
|
|
-
|
|
|
|
731,294
|
|
Due
January 6, 2010, guaranteed by SZS, subsequently
repaid on due date
|
|
ABC
Jiu Long Branch
|
|
|
5.31
|
%
|
|
|
|
- |
|
|
|
2,925,173 |
|
Total
|
|
|
|
|
|
|
|
|
$
|
36,277,649
|
|
|
$
|
27,350,377
|
|
Bank
loans are obtained from local banks in China. All the bank loans are secured by
property, plant and equipment and land use rights owned by the
Company.
The
weighted average annual interest rate of the bank loans was 5.33% and 5.5% as of
June 30, 2010 and December 31, 2009, respectively. Interest expense
was $448,850 and $375,994 for the three months ended June 30, 2010 and
2009. Interest expense was $846,614 and $702,820 for the six
months ended June 30, 2010 and 2009, respectively. The Company was in
compliance of their financial covenants at June 30, 2010 and December 31,
2009.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
13 – TAXES
(a)
Corporation Income Tax (“CIT”)
On March
16, 2007, the National People’s Congress of China approved the new Corporate
Income Tax Law of the People’s Republic of China (the “New CIT Law”), which is
effective from January 1, 2008.
Prior to
January 1, 2008, the CIT rate applicable to our subsidiaries in the PRC is
33%. After January 1, 2008, under the New CIT Law, the corporate
income tax rate applicable to our subsidiaries is 25%. The New CIT
Law has an impact on the deferred tax assets and liabilities of the
Company. The Company adjusted deferred tax balances as of December
31, 2009 based on their best estimate and will continue to assess the impact of
such new law in the future. The effects arising from the enforcement
of the New CIT Law have been reflected in the consolidated financial
statements.
According
to the relevant laws and regulations in the PRC, foreign invested enterprises
established prior to January 1, 2008 are entitled to full exemption from income
tax for two years beginning with the first year in which such enterprise is
profitable and a 50% income tax reduction for the subsequent three
years. Ossen Materials was entitled to a CIT exemption during the two
years ended December 31, 2006 and was subject to a 50% income tax reduction
during the three years ended December 31, 2009. Starting from January
1, 2010, Ossen Materials enjoys a tax rate of 15% as it is considered as a High
and New Technology Enterprise by the PRC government. Ossen Jiujiang
was entitled to the CIT exemption during the two years ended December 31, 2008,
was subject to a 50% income tax reduction during the year ended December 31,
2009 and will be subject to a 50% income tax reduction during the period from
January 1, 2010 to December 31, 2011.
In
accordance with the New CIT Law, enterprises established under the laws of
foreign countries or regions and whose “place of effective management” is
located within the PRC territory are considered PRC resident enterprises and
subject to the PRC income tax at the rate of 25% on worldwide income. The
definition of “place of effective management" refers to an establishment that
exercises, in substance, overall management and control over the production and
business, personnel, accounting, properties, etc. of an enterprise. As of
December 31, 2009, no detailed interpretation or guidance has been issued to
define “place of effective management”. Furthermore, as of December 31, 2009,
the administrative practice associated with interpreting and applying the
concept of “place of effective management” is unclear. If the Company’s non-PRC
incorporated entities are deemed PRC tax residents, such entities would be
subject to PRC tax under the New CIT Law. The Company has analyzed the
applicability of this law, as of June 30, 2010, and the Company has not accrued
for PRC tax on such basis. The Company will continue to monitor changes in
the interpretation or guidance of this law.
The New
CIT Law also imposes a 10% withholding income tax, subject to reduction based on
tax treaty where applicable, for dividends distributed by a foreign invested
enterprise to its immediate holding company outside China. Such dividends
were exempted from PRC tax under the previous income tax law and regulations.
The foreign invested enterprise is subject to the withholding tax starting
from January 1, 2008. There were no dividends distributed in the six
months ended June 30, 2010 and 2009.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
13 – TAXES (CONTINUED)
Income
tax expenses consist of the following:
|
|
For the Six Months Ended June 30,
|
|
|
|
(unaudited)
|
|
|
|
2010
|
|
|
2009
|
|
Current
tax expenses
|
|
$ |
1,370,287 |
|
|
$ |
348,394 |
|
Deferred
taxes
|
|
|
311 |
|
|
|
- |
|
Income
tax expenses
|
|
$ |
1,370,598 |
|
|
$ |
348,394 |
|
Reconciliation
from the expected income tax expenses calculated with reference to the statutory
tax rate in the PRC of 25% is as follows:
|
|
For the Six Months Ended June 30,
|
|
|
|
(unaudited)
|
|
|
|
2010
|
|
|
2009
|
|
Computed
"expected" income tax expenses
|
|
$ |
2,476,533 |
|
|
$ |
769,853 |
|
Effect
on tax incentive / holiday
|
|
|
(1,105,935 |
) |
|
|
(384,927 |
) |
Non-deductable
expense/tax exempted income
|
|
|
- |
|
|
|
(36,532 |
) |
Income
tax expenses
|
|
$ |
1,370,598 |
|
|
$ |
348,394 |
|
Components
of net deferred tax assets are as follows:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Current
portion:
|
|
|
|
|
|
|
Provision
of doubtful accounts
|
|
$ |
5,022 |
|
|
$ |
5,311 |
|
The
deferred tax assets balance of $5,022 and $5,311 at June 30, 2010 and December
31, 2009, respectively are included in Other Current Assets in the accompanying
condensed consolidated balance sheets.
OSSEN
INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(UNAUDITED)
NOTE
13 – TAXES (CONTINUED)
The
Company uses FASB ASC 740 (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”)). – AN INTERPRETATION OF FASB STATEMENT NO. 109,
ACCOUNTING FOR INCOME TAXES. The Interpretation addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN 48, we
may recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. FIN 48 also
provides guidance on recognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased
disclosures. As of June 30, 2010, the Company did not have a
liability for unrecognized tax benefits.
(b) Value
Added tax (“VAT”)
Enterprises
or individuals, who sell commodities, engage in repair and maintenance or import
or export goods in the PRC are subject to a value added tax in accordance with
Chinese Laws. The VAT standard rate is 17% of the gross sale price.
A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on the sales of the finished
products.
On
January 1, 2002, the export policy of VAT "Exemption, Credit and Refund" began
to apply to all exports by manufacture-based enterprises. In accordance with
this policy, exported goods are exempted from output VAT and the input VAT
charged for purchases of the raw materials, components and power consumed for
the production of the exported goods may be refunded. The refund
rates of strand products applicable to Ossen Ma An Shan and Ossen
Jiujiang was 5%.
The VAT
deductible balance of $54,434 and $535,824 at June 30, 2010 and December 31,
2009, respectively are included in Other Current Assets in the accompanying
consolidated balance sheets.
NOTE
14 – GEOGRAPHICAL SALES AND SEGMENTS
Information
for the Company’s sales by geographical area for the three and six months ended
June 30, 2010 and 2009 are as follows:
|
|
For the Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
Domestic
Sales
|
|
$ |
56,911,895 |
|
|
$ |
38,452,797 |
|
International
Sales
|
|
|
1,796,880 |
|
|
|
1,963,610 |
|
|
|
$ |
58,708,775 |
|
|
$ |
40,416,407 |
|
The
Company operates one business segment for the three and six months ended June
30, 2010 and 2009.
NOTE
15 – SUBSEQUENT EVENTS
We have
evaluated all events or transactions that occurred after June 30, 2010 up
through the date we issued the consolidated financial
statements.
5,000,000
American Depositary Shares
Ossen
Innovation Co., Ltd.
PROSPECTUS
Global
Hunter Securities
|
Knight
|
Ladenburg
Thalmann & Co. Inc.
The
date of this prospectus is December 21, 2010.