The accompanying notes are an integral part
of these unaudited condensed consolidated statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
NOTE 1 – BACKGROUND
Fuwei Films (Holdings) Co., Ltd. and its
subsidiaries (the “Company”) are principally engaged in the production and distribution of BOPET film, a high quality
plastic film widely used in packaging, imaging, electronics, electrical and magnetic products in the People’s Republic of
China (the “PRC”). The Company is a holding company incorporated in the Cayman Islands, established on August 9, 2004
under the Cayman Islands Companies Law as an exempted company with limited liability. The Company was established for the purpose
of acquiring shares in Fuwei (BVI) Co., Ltd. (“Fuwei (BVI)”), an intermediate holding company established for the purpose
of acquiring all of the ownership interest in Fuwei Films (Shandong) Co., Ltd. (“Shandong Fuwei”).
On August 20, 2004, the Company was allotted
and issued one ordinary share of US$1.00 in Fuwei (BVI) (being the entire issued share capital of Fuwei (BVI)), thereby establishing
Fuwei (BVI) as the intermediate investment holding company of the Company.
On April 23, 2009, Fuwei Films USA, LLC
was set up and co-invested by Fuwei Films (Holdings) Co., Ltd. and Newell Finance Management Co., Ltd. Fuwei Films USA, LLC
has a registered capital of US$10 and total investment amount of US$100. Fuwei Films (Holdings) Co., Ltd. and Newell Finance Management
Co., Ltd. own 60% and 40% of the total shares of Fuwei Films USA, LLC, respectively.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated
financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) as applicable to smaller reporting companies, and generally accepted accounting principles for
interim financial reporting. The information furnished herein reflects all adjustments (consisting of normal recurring accruals
and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective
periods. Certain information and footnote disclosures normally presented in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted
pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 20-F for
the year ended December 31, 2011. The results of the nine-month period ended September 30, 2012 are not necessarily indicative
of the results to be expected for the full year ended December 31, 2012.
Principles of Consolidation
The condensed consolidated financial statements
include the financial statements of the Company and its three subsidiaries. All significant inter-company balances and transactions
have been eliminated in consolidation.
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
Use of Estimates
The preparation of the consolidated financial
statements in accordance with U.S. GAAP requires management of the Company to make a number of estimates and assumptions relating
to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates. On an ongoing basis, management reviews its estimates and assumptions, including those related to the recoverability
of the carrying amount and the estimated useful lives of long-lived assets, valuation allowances for accounts receivable and realizable
values for inventories. Changes in facts and circumstances may result in revised estimates.
Foreign Currency Transactions
The Company’s reporting currency
is Chinese Yuan (Renminbi or “RMB”).
Fuwei Films (Holdings) Co., Ltd. and Fuwei
(BVI) operate in Hong Kong as investment holding companies and their financial records are maintained in Hong Kong dollars,
being the functional currency of these two entities. The financial records of Fuwei Films USA, LLC, a 60% owned subsidiary of the
Company, are maintained in US dollars. Assets and liabilities are translated into RMB at the exchange rates at the balance sheet
date, equity accounts are translated at historical exchange rates and income, expenses, and cash flow items are translated using
the average rate for the period. The translation adjustments are recorded in accumulated other comprehensive income in the statements
of equity. The changes in the translation adjustments for the current period were reported as the line items of other comprehensive
income in the consolidated statements of comprehensive income.
Transactions denominated in currencies
other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (the “PBOC”)
prevailing at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies are translated into
RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. The resulting exchange differences are recorded
in the consolidated statements of comprehensive income.
RMB is not fully convertible into foreign
currencies. All foreign exchange transactions involving RMB must take place either through the PBOC or other institutions authorized
to buy and sell foreign currency. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted
by the PBOC which are determined largely by supply and demand.
Commencing from July 21, 2005, the PRC
government moved the RMB into a managed floating exchange rate regime based on market supply and demand with reference to a basket
of currencies.
For the convenience of the readers, the
third quarter of 2012 RMB amounts included in the accompanying consolidated financial statements in our quarterly report have been
translated into U.S. dollars at the rate of US$1.00 = RMB6.2848, on the last trading day of third quarter of 2012 (September 28,
2012) as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts
could have been, or could be, converted into U.S. dollar at that rate or at any other certain rate on September 28, 2012, or at
any other date.
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
Cash and Cash Equivalents and Restricted
Cash
For statements of cash flow purposes, the
Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other
highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
Restricted cash refers to the cash balance
held by bank as deposit for Letters of Credit and Banker’s Acceptance Bill. The Company has restricted cash of RMB49,168
(US$7,823) and RMB102,212 as of September 30, 2012 and December 31, 2011, respectively.
Trade Accounts Receivable
Trade accounts receivable are recorded
at the invoiced amount after deduction of trade discounts, if any, and do not bear interest. The allowance for doubtful accounts
is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable.
The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions.
The Company reviews its allowance for doubtful
accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All
other balances are reviewed on a pooled basis by aging of such balances.
Account balances are charged off against
the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Inventories are stated at the lower of
cost or market value. Cost is determined using the method of moving weighted average basis. Cost of work in progress and finished
goods comprises of direct material, direct production cost and an allocated portion of production overheads based on normal operating
capacity. Any inventory impairment is recognized in the income statement as a component of cost of goods sold.
Property, Plant and Equipment
Property, plant and equipment are stated
at cost less accumulated depreciation and impairment. Depreciation on property, plant and equipment is calculated on the straight-line
method (after taking into account their respective estimated residual values) over the estimated useful lives of the assets. They
are as follows:
|
|
Years
|
|
Buildings and improvements
|
|
|
25 - 30
|
|
Plant and equipment
|
|
|
10 - 15
|
|
Computer equipment
|
|
|
5
|
|
Furniture and fixtures
|
|
|
5
|
|
Motor vehicles
|
|
|
5
|
|
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
Depreciation related to abnormal amounts
from idle capacity is charged to cost of goods sold for the period incurred.
Construction in progress represents capital
expenditures in respect to the new BOPET production line. No depreciation is provided in respect to construction in progress.
Lease Prepayments
Lease prepayments represent the costs of
land use rights in the PRC. Land use rights are carried at cost and charged to expense on a straight-line basis over the respective
periods of rights of 30 years. The current portion and non-current portion of lease prepayments have been reported in Prepayments
and other receivables, and Lease prepayments in the balance sheets, respectively.
Goodwill
Goodwill represents the excess of purchase
price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired.
Goodwill is not amortized but is tested for impairment annually, or more frequently when circumstances indicate a possible impairment
may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the
carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined
using a discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the
application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and
projections of realizations and costs to produce. Management considers historical experience and all available information at the
time the fair values of its reporting units are estimated.
Impairment of Long-lived Assets
The Company recognizes an impairment loss
when circumstances indicate that the carrying value of long-lived assets with finite lives may not be recoverable. Management’s
policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria
at an asset group level as well as qualitative measures. If an analysis is necessitated by the occurrence of a triggering event,
the Company uses assumptions, which are predominately identified from the Company’s strategic long-range plans, in determining
the impairment amount. In the calculation of the fair value of long-lived assets, the Company compares the carrying amount of the
asset group with the estimated future cash flows expected to result from the use of the assets. If the carrying amount of the asset
group exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing
the carrying amount of the asset group with their estimated fair value. We estimate the fair value of assets based on market prices
(i.e., the amount for which the asset could be bought by or sold to a third party), when available. When market prices are not
available, we estimate the fair value of the asset group using discounted expected future cash flows at the Company’s weighted-average
cost of capital. Management believes its policy is reasonable and is consistently applied. Future expected cash flows are based
upon estimates that, if not achieved, may result in significantly different results.
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
Revenue Recognition
Sales of plastic films are reported, net
of value added taxes (“VAT”), sales returns, and trade discounts. The standard terms and conditions under which the
Company generally delivers allow a customer the right to return product for refund only if the product does not conform to product
specifications; the non-conforming product is identified by the customer; and the customer rejects the non-conforming product and
notifies the Company within 30 days of receipt for both PRC and overseas customers. The Company recognizes revenue when products
are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive
evidence of an arrangement exists and the sales price is fixed or determinable.
In the PRC, VAT of 17% on the invoice amount
is collected in respect to the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company, instead,
the amount is recorded as a liability on the consolidated balance sheet until such VAT is paid to the authorities.
Income Taxes
Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date.
(Loss) earnings Per Share
Basic (loss) earnings per share is computed
by dividing net earnings by the weighted average number of ordinary shares outstanding during the year. Diluted (loss) earnings
per share is calculated by dividing net earnings by the weighted average number of ordinary and dilutive potential ordinary shares
outstanding during the year. Diluted potential ordinary shares consist of shares issuable pursuant to the Company’s stock
option plan.
Share-Based Payments
The Company accounts for share based payments
under the modified-prospective transition method, which requires companies to measure and recognize the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value.
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
Contingencies
In the normal course of business, the Company
is subject to contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of
matters, including among others, product liability. The Company recognizes a liability for such contingency if it determines it
is probable that a loss has occurred and a reasonable estimate of the loss can be made. The Company may consider many factors in
making these assessments including past history and the specifics of each matter. As of September 30, 2012 and December 31, 2011,
the balance of predicted liability was RMB830 (US$132) and RMB0, respectively, which was estimated liability related to our defective
products and included in accrued expenses and other payables as current liabilities on balance sheets.
Recently Issued Accounting Standards
In
July 2012, the FASB issued amended standards to simplify how entities test indefinite-lived intangible assets for impairment which
improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment
of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset
is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is
more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined
in the previously issued standards. These amended standards are effective for us beginning in the fourth quarter of 2012, however,
early adoption is permitted. We do not expect these new standards to significantly impact our consolidated condensed financial
statements.
In December 2011, the FASB issued guidance
on offsetting (netting) assets and liabilities. Entities are required to disclose both gross information and net information about
both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject
to an agreement similar to a master netting arrangement. The new guidance is effective for annual periods beginning after January
1, 2013. We do not expect the adoption will have a significant impact on our consolidated condensed financial statements.
In September 2011, the FASB issued guidance
on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity
determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify
potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any).
If an entity determines that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment
test is not required. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011, with early adoption permitted. We do not expect the adoption will have a significant impact
on our consolidated condensed financial statements.
In June 2011, the FASB issued guidance
on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and
its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement
of net income and other comprehensive income or in two separate but consecutive statements. The new guidance is effective for annual
periods beginning after December 15, 2011. In December 2011, the FASB issued a deferral of certain portion of this guidance. We
do not expect the adoption will have a significant impact on our consolidated condensed financial statements.
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
In May 2011, the FASB issued guidance to
amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure
to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit
risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new
guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions,
as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The
new guidance is effective for annual periods beginning after December 15, 2011. We do not expect the adoption will have a significant
impact on our consolidated condensed financial statements.
Reclassifications
For comparative purposes, the prior year’s
consolidated financial statements have been reclassified to conform with reporting classifications of the current year periods.
NOTE 3 - ACCOUNTS AND BILLS RECEIVABLES
Accounts and bills receivables consisted of
the following:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
Accounts receivable
|
|
|
17,465
|
|
|
|
2,779
|
|
|
|
16,213
|
|
Less: Allowance for doubtful accounts
|
|
|
(1,343
|
)
|
|
|
(214
|
)
|
|
|
(1,785
|
)
|
|
|
|
16,122
|
|
|
|
2,565
|
|
|
|
14,428
|
|
Bills receivable
|
|
|
1,737
|
|
|
|
277
|
|
|
|
38,029
|
|
|
|
|
17,859
|
|
|
|
2,842
|
|
|
|
52,457
|
|
Bill receivables are banker’s acceptance
bills, which are guaranteed by bank.
NOTE 4-INVENTORIES
Inventories consisted of the following:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
Raw materials
|
|
|
17,025
|
|
|
|
2,709
|
|
|
|
16,174
|
|
Work-in-progress
|
|
|
2,501
|
|
|
|
398
|
|
|
|
2,727
|
|
Finished goods
|
|
|
25,662
|
|
|
|
4,083
|
|
|
|
28,150
|
|
Consumables and spare parts
|
|
|
834
|
|
|
|
133
|
|
|
|
834
|
|
Inventory--impairment
|
|
|
(6,111
|
)
|
|
|
(973
|
)
|
|
|
(6,111
|
)
|
|
|
|
39,911
|
|
|
|
6,350
|
|
|
|
41,774
|
|
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
NOTE 5-PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted
of the following:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
Buildings
|
|
|
46,045
|
|
|
|
7,326
|
|
|
|
45,339
|
|
Plant and equipment
|
|
|
454,456
|
|
|
|
72,310
|
|
|
|
450,442
|
|
Computer equipment
|
|
|
2,202
|
|
|
|
350
|
|
|
|
2,170
|
|
Furniture and fixtures
|
|
|
8,498
|
|
|
|
1,352
|
|
|
|
8,247
|
|
Motor vehicles
|
|
|
2,093
|
|
|
|
333
|
|
|
|
2,358
|
|
|
|
|
513,294
|
|
|
|
81,671
|
|
|
|
508,556
|
|
Less: accumulated depreciation
|
|
|
(267,522
|
)
|
|
|
(42,565
|
)
|
|
|
(231,437
|
)
|
|
|
|
245,772
|
|
|
|
39,106
|
|
|
|
277,119
|
|
Total depreciation for the nine-month periods
ended September 30, 2012 and 2011 was RMB36,537 (US$5,814) and RMB31,013, respectively. For the three-month periods ended September
30, 2012 and 2011, depreciation expenses were RMB12,191 (US$1,940) and RMB12,145, respectively.
NOTE 6 - CONSTRUCTION IN PROGRESS
Construction-in-progress represents capital
expenditure in respect to the BOPET production line. Construction in progress was RMB277,320 (US$44,126) ended September 30, 2012,
and RMB119,647 ended December 31, 2011, respectively.
NOTE 7 - LEASE PREPAYMENTS
Lease prepayments represent the costs of
land use rights in the PRC. Land use rights are carried at cost and charged to expense on a straight-line basis over the respective
periods of rights of 30 years. The current portion of lease prepayments has been included in prepayments and other receivables
in the balance sheet.
Lease prepayments consisted of the following:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
Lease prepayment - non current
|
|
|
19,654
|
|
|
|
3,127
|
|
|
|
20,047
|
|
Lease prepayment - current
|
|
|
454
|
|
|
|
72
|
|
|
|
454
|
|
|
|
|
20,108
|
|
|
|
3,199
|
|
|
|
20,501
|
|
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
Amortization of land use rights for the
nine months ended September 30, 2012 and 2011 was RMB340 (US$54) and RMB340, respectively. Amortization of land use rights for
the three months ended September 30, 2012 and 2011 was RMB113 (US$18) and RMB113, respectively.
Estimated amortization expenses for the
next five years after September 30, 2012 are as follows:
|
|
RMB
|
|
|
US$
|
|
1 year after
|
|
|
454
|
|
|
|
72
|
|
2 years after
|
|
|
454
|
|
|
|
72
|
|
3 years after
|
|
|
454
|
|
|
|
72
|
|
4 years after
|
|
|
454
|
|
|
|
72
|
|
5 years after
|
|
|
454
|
|
|
|
72
|
|
Thereafter
|
|
|
17,838
|
|
|
|
2,839
|
|
NOTE 8 – LONG-TERM DEPOSIT
On January 20, 2008, Shandong Fuwei signed
a “Letter of Intent of Joyinn Capital Increase and Share Expansion” (“LOI”) with Joyinn Hotel Investment
& Management Co., Ltd. (“Joyinn”) and the Shareholder of Joyinn. Joyinn is a legal company of limited liability
that registered on May 19, 2006 in Beijing, with registered capital of RMB50,000.
Pursuant to the terms of the LOI, Shandong
Fuwei deposited RMB26,000 (half of the would-be added register capital of RMB52,000), to Joyinn as a prepayment as of June 30,
2008. The prepayment to Joyinn would be regarded as investment payment after all parties entered into the final capital increase
and shares expansion agreement during the effective term of the LOI. A share pledging agreement was entered into subsequently on
April 9, 2008 between Shandong Fuwei and Shandong Xinmeng Investment Co., Ltd. (“Pledger”), which holds 97.6% shares
of Joyinn. The Pledger agreed to pledge its 52% interest in Joyinn, as a guarantee to the prepayment on the newly increased register
capital made by Shandong Fuwei to Joyinn. Based on the mutual supplementary agreement signed in June 2008, the prepayment was decreased
by RMB5,000 and returned to the Company on June 18, 2008.
On June 23, 2009, Shandong Fuwei and the
Pledger, the major shareholder of Joyinn, agreed that the Pledger would pledge another 19% of its interest in Joyinn in addition
to the previous pledge of 52% interest in Joyinn as a guarantee to the prepayment on the newly increased register capital made
by Shandong Fuwei to Joyinn. As a result, the Pledger’s percentage of pledged interest in Joyinn increased from 52% to 71%.
In the year 2010, the Company impaired the deposit amount by RMB4,240 (US$673). The impairment was determined based on an independent
evaluation. As of September 30, 2012 and December 31, 2011 the total amount of the deposit was RMB16,760 (US$2,667) and RMB16,760,
respectively.
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
On July 14, 2009, Shandong Fuwei and Joyinn
entered into a “Supplementary Agreement of Letter of Intent of Joyinn Capital Increase and Share Expansion” (the “Supplementary
Agreement”), which extended the duration of the former agreement to two (2) years granting Shandong Fuwei the option to determine
whether to continue or withdraw the investment prior to January 14, 2010, the expiration date of the Supplementary Agreement.
Upon the expiration of the Supplementary
Agreement on January 14, 2010, Shandong Fuwei and the Pledger entered into an agreement pursuant to which the Pledger agreed to
transfer a 71% interest in Joyinn to Shandong Fuwei. The transaction is subject to the approval of the authority body of both parties.
On March 9, 2012, Shandong Fuwei and the Pledger
agreed that prior to the approval of the foregoing share transfer, all the related agreements and share pledge terms and conditions
will remain in full force and effect.
NOTE 9 - BANK LOANS
|
|
Interest rate per
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Lender
|
|
annum
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHORT-TERM LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of Communications Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
- May 25, 2011 to May 7, 2012
|
|
|
7.87%
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
- May 25, 2011 to May 14, 2012
|
|
|
7.87%
|
|
|
-
|
|
|
|
-
|
|
|
|
35,000
|
|
- May 25, 2011 to May 21, 2012
|
|
|
7.87%
|
|
|
-
|
|
|
|
-
|
|
|
|
35,000
|
|
- May 30, 2011 to April 17, 2012
|
|
|
7.87%
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
- April 26, 2011 to April 25, 2012
|
|
|
4.27%
|
|
|
-
|
|
|
|
-
|
|
|
|
18,501
|
|
- May 11, 2012 to December 26, 2012
|
|
|
7.87%
|
|
|
10,000
|
|
|
|
1,591
|
|
|
|
-
|
|
- May 11, 2012 to May 7, 2013
|
|
|
7.87%
|
|
|
10,000
|
|
|
|
1,591
|
|
|
|
-
|
|
- May 8, 2012 to April 5, 2013
|
|
|
7.87%
|
|
|
30,000
|
|
|
|
4,774
|
|
|
|
-
|
|
- May 9, 2012 to April 15, 2013
|
|
|
7.87%
|
|
|
35,000
|
|
|
|
5,569
|
|
|
|
-
|
|
- May 9, 2012 to April 26, 2013
|
|
|
7.87%
|
|
|
35,000
|
|
|
|
5,569
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of Weifang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- January 16, 2009 to January 12, 2012
|
|
|
0.00%
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
- January 13, 2010 to January 12, 2012
|
|
|
0.00%
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weifang Dongfang State-owned Assets Management Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- October 19, 2009 to October 18, 2017
|
|
|
6.35%
|
|
|
10,000
|
|
|
|
1,591
|
|
|
|
10,000
|
|
|
|
|
|
|
|
130,000
|
|
|
|
20,685
|
|
|
|
178,501
|
|
Less: amounts classified as short-term
|
|
|
|
|
|
(120,000
|
)
|
|
|
(19,094
|
)
|
|
|
(168,501
|
)
|
|
|
|
|
|
|
10,000
|
|
|
|
1,591
|
|
|
|
10,000
|
|
The Company has entered into several loan
agreements with commercial banks with terms ranging from one year to eight years to finance its working capital, R&D investment
and construction. The weighted average interest rate of short-term bank loans outstanding as of September 30, 2012 and December
31, 2011 was 7.66% and 5.77% per annum, respectively.
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
The principal amounts of the above short-term
loans are repayable at the end of the loan period, and are secured by property, plant and equipment, and lease prepayments.
The Company obtained five short-term loans
from Bank of Communications Co., Ltd. on May 8, 2012, May 9, 2012 and May 11, 2012, for a total amount of RMB120,000 (US$19,094),
including: (i) RMB30,000 (US$4,774) on May 8, 2012, maturing on April 5, 2013; (ii) two bank loans each for the amount of RMB35,000
(US$5,569) on May 9, 2012, maturing on April 15, 2013 and April 26, 2013, respectively; and (iii) two bank loans each for the amount
of RMB10,000 (US$1,591) on May 11, 2012, maturing on December 26, 2012 and May 7, 2013, respectively.
The annual interest
rate of the new bank loans has increased by 20% compared with the benchmark interest rate announced by the People’s Bank
of China on the date when the loan was credited to the Company’s bank account. As of September 30, 2012, the new loan annual
interest rate is 7.87%. The Company made two payments, each for the amount of RMB30,000 (US$4,764) and RMB18,501 (US$2,937) to
the Bank of Communications in April, 2012. The Company paid off three short-term loans to the Bank of Communications in May, 2012,
each for the amount of RMB30,000 (US$4,764), RMB35,000 (US$5,558) and RMB35,000 (US$5,558), respectively.
On April 26, 2011, pursuant to a contract
between Shandong Fuwei and Lindauer Dornier GmbH (“Dornier”), Shandong Fuwei wired a prepayment of 2,006
Euros (RMB18,501) to Dornier through Bank of Communications, and Shandong Fuwei made a deposit of RMB 18,501 to Bank of Communications.
In addition, in order to save the foreign exchange charges, Bank of Communications provided a one-year loan of 2,006 Euros (RMB18,501)
to Shandong Fuwei, with a term starting on April 26, 2011 to April 25, 2012 with an annual interest of 4.27%. The Company paid
off the bank loan on April 25, 2012.
On November 20, 2009, we signed a long-term
loan agreement of RMB10,000 (US$1,591) with Weifang Dongfang State-owned Assets Management Co., Ltd., with an eight-year loan term,
which became effective on October 19, 2009 and will expire on October 18, 2017. From 2015 to 2016, the Company will make principal
installment payments of RMB3,350 (US$533) per year with the remaining principal balance of RMB3,300 (US$525) due in 2017.
The annual interest rate for the loan is the benchmark interest rate for over five-year loans announced by the People’s Bank
of China reduced by 10% and the applicable annual interest rate for the period ended September 30, 2012 is 6.35%. The loan is guaranteed
by Shandong Deqin Investment& Guarantee Co., Ltd. and is used for our projects.
Long-term bank loans maturity for the next
five years after September 30, 2012 are as follows:
|
|
RMB
|
|
|
US$
|
|
1 year after
|
|
|
-
|
|
|
|
-
|
|
2 years after
|
|
|
-
|
|
|
|
-
|
|
3 years after
|
|
|
3,350
|
|
|
|
533
|
|
4 years after
|
|
|
3,350
|
|
|
|
533
|
|
5 years after
|
|
|
3,300
|
|
|
|
525
|
|
FUWEI FILMS (HOLDINGS) CO., LTD. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands except share and per
share value)
(Unaudited)
NOTE 10 - NOTES PAYABLE
As of September 30, 2012, Shandong Fuwei
had banker’s acceptances opened with a maturity of six months totaling RMB62,459 (US$9,938) for payment in connection with
raw materials on a total deposits of RMB44,682 (US$7,110) at SPD Bank, Bank of Communications, and Bank of China.
Notes payable consisted of the following:
|
|
September 30, 2012
|
|
December 31, 2011
|
|
Issuing bank
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
SPD Bank
|
|
|
20,000
|
|
|
|
3,182
|
|
|
|
-
|
|
Bank of Communications
|
|
|
38,249
|
|
|
|
6,086
|
|
|
|
-
|
|
Bank of China
|
|
|
4,210
|
|
|
|
670
|
|
|
|
-
|
|
|
|
|
62,459
|
|
|
|
9,938
|
|
|
|
-
|
|
NOTE 11- INCOME TAX
Our effective tax rates were approximately
negative 0.3% and positive 18.0% for the nine months ended September 30, 2012 and 2011, respectively. Our effective tax rate
was lower than the U.S. federal statutory rate due to the fact that our operations are carried out in foreign jurisdictions, which
are subject to lower income tax rates.
NOTE 12- (LOSS) EARNINGS PER SHARE
Basic and diluted loss per share was RMB3.21
(US$0.51) for the nine-month period ended September 30, 2012, and basic and diluted earnings per share was RMB1.90 for the nine-month
period ended September 30, 2011.
Basic and diluted loss per share was RMB1.14
(US$0.18) for the three-month period ended September 30, 2012, and basic and diluted loss per share was RMB0.38 for the three-month
period ended September 30, 2011.
NOTE 13 - MAJOR CUSTOMERS AND VENDORS
There were no major customers who accounted
for more than 10% of the total net revenue for the nine-month periods ended September 30, 2012 and 2011.
Three vendors provided approximately 69.8%
of the Company’s purchasing amounts for the nine months ended September 30, 2012 with each vendor accounting for about 34.9%,
24.3% and 10.6%, respectively. The Company had RMB7,277 advance to the vendors as of September 30, 2012. One vendor provided approximately
44.0% of the Company’s purchasing amounts for the nine months ended September 30, 2011. The Company had RMB2,276 advance
to the vendors as of September 30, 2011.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References to "dollars" and "US$"
are to United States Dollars. References to "we", "us", the "Company" or "Fuwei Films"
include Fuwei Films (Holdings) Co., Ltd. and its subsidiaries, except where the context requires otherwise.
Since the beginning of 2012,
the global BOPET films capacity has continued to increase, particularly in China, creating stronger competition in the
industry. This caused supply to be higher than demand and a significant decrease in sale prices in the market. In addition,
the deterioration of European Sovereign’s debt crisis, the slow recovery of the world’s major economies and more
stringent trade protection measures in place, such as antidumping investigations and imposing antidumping duties conducted by
several countries against BOPET films originated from China, adversely affected our exports. The foregoing factors have
resulted in significant reduce in profit for the first nine months of 2012, compared to the same period in 2011.
We believe that
in the fourth quarter of 2012, there will be growing capacity of BOPET films in China and stronger competition in the market. In
a
ddition, the prices of raw materials remain high and o
ur ability to pass on all increases in
cost of raw materials to our customers on a timely basis is limited. In the event that we are unable to compete successfully or
retain effective control over the pricing of our products, our profit margin may decrease.
Results of operations for the nine-month
periods ended September 30, 2012 compared to September 30, 2011
The table below sets forth certain line items
from our Statement of Income as a percentage of revenue:
|
|
Nine-Month
Period Ended
|
|
|
Nine-Month
Period Ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
(as % of Revenue)
|
|
Gross profit
|
|
|
(0.1
|
)
|
|
|
18.2
|
|
Operating expenses
|
|
|
13.2
|
|
|
|
9.8
|
|
Operating income (loss)
|
|
|
(13.3
|
)
|
|
|
8.4
|
|
Other income (expense)
|
|
|
(2.0
|
)
|
|
|
(1.3
|
)
|
Income tax benefit (expense)
|
|
|
(0.05
|
)
|
|
|
(1.3
|
)
|
Net income (loss)
|
|
|
(15.4
|
)
|
|
|
5.8
|
|
Revenue
Our revenue is primarily derived from the
manufacture and sale of plastic films.
Net sales during the nine-month period
ended September 30, 2012 were RMB272.2 million (US$43.3 million), compared to RMB428.4 million during the same period in 2011,
representing RMB156.2 million or 36.5% decrease, mainly due to the reduction of average sales prices by 33.4% and total sales
volumes by 4.6%.
The sales of specialty films during the
nine-month period ended September 30, 2012 were RMB64.9 million (US$10.3 million), reflected 23.9% of total net sales as compared
to RMB108.4 million and 25.3 % in the same period of 2011, which was a decrease of RMB43.5 million or 40.1% with respect to specialty
sales compared to the same period last year. The decrease was largely attributable to the decrease in demand and sales prices for
films in electronics and high-end packaging.
The following is a breakdown of commodity
and specialty film sales (amounts in thousands):
|
|
Nine-Month Period Ended
September 30, 2012
|
|
|
% of
Total
|
|
|
Nine-Month Period Ended
September 30, 2011
|
|
|
% of
Total
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
RMB
|
|
|
|
|
Stamping and transfer film
|
|
|
147,595
|
|
|
|
23,484
|
|
|
|
54.2
|
%
|
|
|
233,949
|
|
|
|
54.6
|
%
|
Printing film
|
|
|
33,828
|
|
|
|
5,383
|
|
|
|
12.4
|
%
|
|
|
43,494
|
|
|
|
10.1
|
%
|
Metallization film
|
|
|
14,366
|
|
|
|
2,286
|
|
|
|
5.3
|
%
|
|
|
24,776
|
|
|
|
5.8
|
%
|
Specialty film
|
|
|
64,934
|
|
|
|
10,332
|
|
|
|
23.9
|
%
|
|
|
108,415
|
|
|
|
25.3
|
%
|
Base film for other applications
|
|
|
11,473
|
|
|
|
1,825
|
|
|
|
4.2
|
%
|
|
|
17,799
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272,196
|
|
|
|
43,310
|
|
|
|
100.0
|
%
|
|
|
428,433
|
|
|
|
100.0
|
%
|
Overseas sales during the nine months ended
September 30, 2012 were RMB56.0 million (US$8.9 million), which accounted for 20.6% of our total net revenues, as compared with
RMB130.3 million and 30.4% in the same period in 2011, which was RMB74.4 million or 57.1% lower with respect to sales compared
to the same period last year. The decrease in overseas sales was mainly due to the decrease in orders from the overseas market
and the large decrease of the sales prices compared to the same period of 2011.
The following is a breakdown of PRC domestic
and overseas sales (amounts in thousands):
|
|
Nine-Month Period Ended
September 30, 2012
|
|
|
|
|
|
Nine-Month Period Ended
September 30, 2011
|
|
|
|
|
|
|
RMB
|
|
|
US$
|
|
|
% of Total
|
|
|
RMB
|
|
|
% of Total
|
|
Sales in China
|
|
|
216,219
|
|
|
|
34,403
|
|
|
|
79.4
|
%
|
|
|
298,089
|
|
|
|
69.6
|
%
|
Sales in other countries
|
|
|
55,977
|
|
|
|
8,907
|
|
|
|
20.6
|
%
|
|
|
130,344
|
|
|
|
30.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272,196
|
|
|
|
43,310
|
|
|
|
100.0
|
%
|
|
|
428,433
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
Our cost of goods sold comprises mainly
of material costs, factory overhead, power, packaging materials and direct labor. The breakdown of our cost of goods sold in percentage
is as follows:
|
|
Nine-Month Period Ended
September 30, 2012
|
|
Nine-Month Period Ended
September 30, 2011
|
|
|
% of total
|
|
% of total
|
Materials costs
|
|
|
73.7
|
%
|
|
|
79.6
|
%
|
Factory overhead
|
|
|
13.2
|
%
|
|
|
9.7
|
%
|
Energy expense
|
|
|
8.3
|
%
|
|
|
6.8
|
%
|
Packaging materials
|
|
|
3.0
|
%
|
|
|
2.6
|
%
|
Direct labor
|
|
|
1.8
|
%
|
|
|
1.3
|
%
|
Cost of goods sold during the first nine
months of 2012 totaled RMB272.5 million (US$43.4 million) as compared to RMB350.4 million for the same period in the prior year.
This was RMB77.9 million or 22.2% lower than the same period in 2011, mainly due to the decreased price of raw materials in the
first nine months of 2012 compared to the same period in 2011.
Gross Profit (Loss)
Our gross loss was RMB0.3 million (US$0.05
million) for the first nine months of 2012, representing a gross margin of (0.1)%, as compared to a gross margin of 18.2% from
the same period in 2011. Gross margin decreased by 18.3% compared to the same period in 2011.
Our average
unit sales price decreased by 33.4% compared to the same period last year due to the excess capacity and stronger competition in
the market. In addition, the main raw materials used in our production of BOPET film, polyethylene terephthalate (or PET) resin
and additives, comprised approximately 73.7% of our total costs of goods sold and their prices were greatly influenced by price
fluctuation in crude oil. Our raw materials costs were reduced by 19.9% compared to the same period last year. Consequently, the
decrease in product sales price largely exceeded that in raw material costs during the first nine months of 2012 compared with
the same period in 2011, which contributed to the significant decrease in our gross profit.
Operating Expenses
Operating expenses for the nine months
ended September 30, 2012 were RMB35.9 million (US$5.7 million), compared to RMB42.0 million in the same period in 2011, which was
RMB6.1 million or 14.5% lower than the same period in 2011. This decrease is mainly due to reduced R
&D
expenditure for the first nine months of 2012.
Other Expense
Total other expense is a combination result
of interest income, interest expense and others income (expense). Total other expense during the first nine months of 2012 was
RMB5.6 million (US$0.9 million), RMB0.1 million lower than the same period in 2011, which mainly attributed to other income from
disposal of asset. Among the total other expenses, interest expense totaled RMB8.6 million (US$1.4 million) during the first nine
months of 2012, RMB1.1 million or 14.7% higher than the same period of 2011. The increase is mainly due to higher interest rates
on our bank loans.
Provision for Income Taxes
The provision for income taxes during the
first nine months of 2012 was RMB0.1 million (US$0.02 million) compared to a recorded provision for income taxes of RMB5.5 million
during the same period in 2011, which was RMB5.4 million or 98.2% lower than the same period in 2011.This decrease was due to loss
in the first nine months of 2012.
Net (Loss) Income
Net loss attributable to the Company during
the first nine months of 2012 was RMB41.9 million (US$6.7 million) compared to net income attributable to the Company of RMB24.8
million during the same period in 2011, representing a decrease in net income of RMB66.7 million from the same period in 2011 due
to the factors described above.
Results of operations for the three-month
periods ended September 30, 2012 compared to September 30, 2011
The table below sets forth certain line items
from our Statement of Income as a percentage of revenue:
|
Three-Month Period Ended
|
|
Three-Month Period Ended
|
September 30, 2012
|
September 30, 2011
|
|
(as % of Revenue)
|
Gross profit
|
1.0
|
|
8.9
|
Operating expenses
|
15.1
|
|
12.0
|
Operating income (loss)
|
(14.1)
|
|
(3.1)
|
Other income (expense)
|
(2.7)
|
|
(1.6)
|
Income tax benefit (expense)
|
(0.01)
|
|
0.5
|
Net income (loss)
|
(16.7)
|
|
(4.2)
|
Revenue
Net sales during the third quarter ended
September 30, 2012 were RMB88.8 million (US$14.1 million), compared to RMB117.0 million during the same period in 2011, representing
RMB28.2 million or 24.1% decrease, mainly due to the decrease of average sales price by 21.1% and total sales volumes by 3.9%,
compared to the same period in 2011.
The sales of specialty films during the
third quarter ended September 30, 2012 were RMB25.8 million (US$4.1 million), reflected 29.0% of total net sales as compared to
RMB28.9 million and 24.7 % in the same period of 2011, which was a decrease of RMB3.1 million or 10.7% with respect to specialty
sales compared to the same period last year. The decrease was largely attributable to the decrease in sales prices
of specialty films.
The following is a breakdown of commodity
and specialty film sales (amounts in thousands):
|
|
Three-Month Period Ended
September 30, 2012
|
|
|
% of
Total
|
|
|
Three-Month Period Ended
September 30, 2011
|
|
|
% of
Total
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
RMB
|
|
|
|
|
Stamping and transfer film
|
|
|
46,242
|
|
|
|
7,358
|
|
|
|
52.1
|
%
|
|
|
63,614
|
|
|
|
54.4
|
%
|
Printing film
|
|
|
9,242
|
|
|
|
1,471
|
|
|
|
10.4
|
%
|
|
|
13,075
|
|
|
|
11.2
|
%
|
Metallization film
|
|
|
3,726
|
|
|
|
593
|
|
|
|
4.2
|
%
|
|
|
7,618
|
|
|
|
6.5
|
%
|
Specialty film
|
|
|
25,785
|
|
|
|
4,103
|
|
|
|
29.0
|
%
|
|
|
28,875
|
|
|
|
24.7
|
%
|
Base film for other application
|
|
|
3,766
|
|
|
|
598
|
|
|
|
4.2
|
%
|
|
|
3,781
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,761
|
|
|
|
14,123
|
|
|
|
100.0
|
%
|
|
|
116,963
|
|
|
|
100.0
|
%
|
Overseas sales during the third quarter
ended September 30, 2012 were RMB19.5 million (US$3.1 million), which accounted for 22.0% of our total net revenues, as compared
with RMB22.4 million, and 19.2% in the same period in 2011, which was RMB2.9 million or 12.9% lower in terms of sales compared
to the same period last year. The decrease in overseas sales was mainly due to decrease of sales price.
The following is a breakdown of PRC domestic
and overseas sales (amounts in thousands):
|
|
Three-Month Period Ended
September 30, 2012
|
|
|
% of Total
|
|
|
Three-Month Period Ended
September 30, 2011
|
|
|
% of Total
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
RMB
|
|
|
|
|
Sales in China
|
|
|
69,240
|
|
|
|
11,017
|
|
|
|
78.0
|
%
|
|
|
94,533
|
|
|
|
80.8
|
%
|
Sales in other countries
|
|
|
19,521
|
|
|
|
3,106
|
|
|
|
22.0
|
%
|
|
|
22,430
|
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,761
|
|
|
|
14,123
|
|
|
|
100.0
|
%
|
|
|
116,963
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
Our cost of goods sold comprises mainly
of material costs, factory overhead, power, packaging materials and direct labor. The breakdown of our cost of goods sold in percentage
is as follows:
|
|
Three-Month Period Ended
September 30, 2012
|
|
|
Three-Month Period Ended
September 30, 2011
|
|
|
|
% of total
|
|
|
% of total
|
|
Materials costs
|
|
|
72.0
|
%
|
|
|
75.6
|
%
|
Factory overhead
|
|
|
14.3
|
%
|
|
|
11.9
|
%
|
Energy expense
|
|
|
8.9
|
%
|
|
|
8.2
|
%
|
Packaging materials
|
|
|
3.1
|
%
|
|
|
2.8
|
%
|
Direct labor
|
|
|
1.7
|
%
|
|
|
1.5
|
%
|
Cost of goods sold during the third quarter
ended September 30, 2012 totaled RMB87.9 million (US$14.0 million) as compared to RMB106.6 million for the same period in the prior
year. This was RMB18.7 million or 17.5% lower than the same period in 2011, mainly due to the decrease in the price of the raw
materials in the third quarter ended September 30, 2012 compared to the same period in 2011.
Gross Profit
Our gross profit was RMB0.9 million (US$0.1
million) for the third quarter ended September 30, 2012, representing a gross margin of 1.0%, as compared to a gross margin of
8.9% from the same period in 2011. Gross margin was decreased by 7.9% compared to the same period in 2011.
Our
average unit sales price decreased by 21.1% compared to the same period last year due to the excess capacity and stronger competition
in the market. In addition, the main raw materials used in our production of BOPET film, polyethylene terephthalate (or PET) resin
and additives, comprised approximately 72.0% of our total costs of goods sold and their prices were greatly influenced by price
fluctuation in crude oil. Our raw materials costs were reduced by 16.5% compared to the same period last year. Consequently, the
decrease in product sales price exceeded that in raw material costs during
the third quarter ended September 30,
2012 compared with the same period in 2011, which contributed to the significant decrease in our gross profit.
Operating Expenses
Operating expenses for the third quarter
ended September 30, 2012 were RMB13.4 million (US$2.1 million), compared to RMB14.0 million in the same period in 2011, which was
RMB0.6 million, or 4.3% lower than the same period in 2011.
Other Expense
Total other expense is a combination result
of interest income, interest expense and others income (expense). Total other expense during the third quarter ended September
30, 2012 was RMB2.4 million (US$0.4 million), RMB0.6 million higher than the same period in 2011, which mainly attributed to the
decrease in other income from government grants. Among the total other expenses, interest expense totaled RMB2.6 million (US$0.4
million) during the third quarter ended September 30, 2012, RMB0.1 million or 3.7% lower than the same period of 2011. The decrease
is mainly due to decreased principal of bank loans compared to the same period in 2011.
Provision for Income Tax (Expense) Benefit
The provision for income tax expense was
RMB0.01 million (US$0.002 million) during the third quarter ended September 30, 2012, compared to income tax benefit RMB0.6 million
during the same period in 2011, which was RMB0.61 million higher than the same period in 2011.This increase was due to no recognized
income tax benefit in the third quarter of 2012.
Net Loss
Net loss attributable
to the Company during the
third quarter ended September 30,
2012 was RMB14.9 million (US$2.4
million) compared to net loss attributable to the Company of RMB4.9 million during the same period in 2011, representing an increase
in net loss of RMB10.0 million from the same period in 2011 due to the factors described above.
Liquidity and Capital Resources
Since inception, our sources of cash were
mainly from cash generated from our operations and borrowings from financial institutions and capital contributed by our shareholders.
From January 1, 2011 to September 30, 2012,
our capital expenditures were financed primarily from cash generated from our operations and borrowings from financial institutions.
The interest rates of borrowings from financial institutions during the periods from third quarter of 2011 to the third quarter
of 2012 ranged from 0% to 7.87%.
We obtained five short-term loans from
Bank of Communications Co., Ltd. on May 8, 2012, May 9, 2012 and May 11, 2012, for a total amount of RMB120.0 million (US$19.1
million), including: (i) RMB30.0 million (US$4.8 million) on May 8, 2012, maturing on April 5, 2013; (ii) two bank loans each for
the amount of RMB35.0 million (US$5.6 million) on May 9, 2012, maturing on April 15, 2013 and April 26, 2013, respectively; and
(iii) two bank loans each for the amount of RMB10.0 million (US$1.6 million) on May 11, 2012, maturing on December 26, 2012 and
May 7, 2013, respectively.
The annual interest rate of the new bank loans has increased by 20% compared with the benchmark
interest rate announced by the People’s Bank of China on the date when the loan was credited to the Company’s bank
account. As of September 30, 2012, the new loan annual interest rate is 7.87%. The Company made two payments, each for the amount
of RMB30.0 million (US$4.8 million) and RMB18.5 million (US$2.9 million) to the Bank of Communications in April, 2012. The Company
paid off three short-term loans to the Bank of Communications in May, 2012, each for the amount of RMB30.0 million (US$4.8 million),
RMB35.0 million (US$5.6 million) and RMB35.0 million (US$5.6 million), respectively.
On April 26, 2011, pursuant to a contract
between Shandong Fuwei and Lindauer Dornier GmbH (“Dornier”), Shandong Fuwei wired a prepayment of 2.006
million Euros (RMB18.5 million) to Dornier through Bank of Communications, and Shandong Fuwei made a deposit of RMB 18.5 million
to Bank of Communications. In addition, in order to save the foreign exchange charges, Bank of Communications provided a one-year
loan of 2.006 million Euros (RMB18.5 million) to Shandong Fuwei, with a term starting on April 26, 2011 to April 25, 2012 with
an annual interest of 4.27%. The Company paid off the bank loan on April 25, 2012.
On November 20, 2009, we signed a long-term
loan agreement of RMB10.0 million (US$1.6 million) with Weifang Dongfang State-owned Assets Management Co., Ltd., with an eight-year
loan term, which became effective on October 19, 2009 and will expire on October 18, 2017. From 2015 to 2016, the Company will
make principal installment payments of RMB3.4 million (US$0.5 million) per year with the remaining principal balance of RMB3.3
million (US$0.5 million) due in 2017. The annual interest rate for the loan is the benchmark interest rate for over five-year loans
announced by the People’s Bank of China reduced by 10% and the applicable annual interest rate for the period ended September
30, 2012 is 6.35%. The loan is guaranteed by Shandong Deqin Investment& Guarantee Co., Ltd. and is used for our projects.
We believe that, after taking into consideration
our present and future banking facilities, existing cash and the expected cash flows to be generated from our operations, we have
adequate sources of liquidity for our short-term obligations and our working capital.
Operating Activities
Net cash flows provided by operating activities
for the nine months ended September 30, 2012 was RMB104.7 million (US$16.7 million) compared to net cash flows provided in operating
activities of RMB17.1 million for the nine months ended September 30, 2011, which is an increase of RMB87.6 million (US$13.9 million).
This increase in cash flows from operating activities was attributable primarily to the decrease in accounts receivables and increase
in notes payable. In the first nine months of this year, we took actions to collect overdue from our customers and started to utilize
notes payable for the payment to our suppliers, which resulted in an increase in cash flows.
Investing Activities
Net cash flows used in investing activities
for the nine months ended September 30, 2012 was RMB84.6 million (US$13.5 million) compared to net cash flows used in investing
activities of RMB113.3 million for the nine months ended September 30, 2011, which is a decrease of RMB28.7 million (US$4.6 million).
This decrease in cash flows used in investing activities was attributable primarily to the decreased restricted cash resulting
from returned deposit upon the expiration of the letters of credit in the third quarter of 2012, which resulted in a decrease in
cash flows used in investing activities for the first nine months of 2012 compared to the same period of 2011.
Financing Activities
Net cash flows used in financing activities
for the nine months ended September 30, 2012 was RMB48.5 million (US$7.7 million) compared to net cash flows provided by financing
activities of RMB11.5 million for the nine months ended September 30, 2011, which is a decrease of RMB60.0 million (US$9.5 million).
This decrease in cash flows provided by financing activities was attributable primarily to repayment to banks for short-term loans
in April and May, 2012.
Working Capital
As of September 30, 2012 and December 31,
2011, we had working capital of RMB(66.1) million ( US$(10.5) million) and RMB76.4 million, respectively. Working capital decreased
RMB142.5 million (US$22.7 million), or 186.5% compared to that at the end of prior year. We have short-term bank loans RMB120.0
million (US$19.1 million) reported within current liabilities. We intend to repay RMB10.0 million (US$1.6 million) of
short-term loans at maturity date on December 26, 2012, RMB100.0 million (US$15.9 million) and RMB10.0 million (US$1.6 million)
at maturity in April and May 2013, respectively.
We anticipate that we will be in deficit
with working capital in the foreseeable future. However, we may wish to borrow additional capital or sell our common stock for
financing in the expanded business.
Update on the Construction of Third Production
Line
We have made significant progress
in the construction of our third production line (for thick films) since the beginning of this year. The equipment arrived
at Fuwei Films in May of 2012 as scheduled and as of the end of July 2012, all the equipment has arrived and the
installation has commenced. If the construction plan is implemented as planned and we can obtain additional funding, we
expect to start trial operation
of the line by the end of 2012 or early 2013. In addition, we have started the R&D for our thick films to be
manufactured by this production line including high-performance electric insulation film, base film for solar backsheet and
TFT-LCD optical film. However, due to the intense competition in the market, we believe that upon commencing production, the
third production line may not be profitable in a short term.
Contractual Obligations
The following table is a summary of our contractual
obligations as of September 30, 2012 (in thousands RMB):
|
|
Payments due by period
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
Contractual obligations
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental obligations
|
|
|
269
|
|
|
|
269
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchase commitment
|
|
|
42,822
|
|
|
|
42,822
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
43,091
|
|
|
|
43,091
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exhibit Index
Exhibit No.
|
|
Description
|
99.1
|
|
Press Release dated November 27, 2012.
|
|
|
|