Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934

For June 30, 2010

Commission File No. 001-33176

Fuwei Films (Holdings) Co., Ltd.  

  
No. 387 Dongming Road
Weifang Shandong
People’s Republic of China, Postal Code: 261061 

  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES.)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F ¨Form 40-F ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule
101(b)(1): ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule
101(b)(7): ¨

Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ¨     No x
 
If “Yes” marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):
82-________
 
 
 

 

EXPLANATORY NOTE

This Report of Foreign Private Issuer on Form 6-K (this “Form 6-K”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the future financial performance of Fuwei Films (Holdings) Co., Ltd. (the “Company”). The Company has attempted to identify forward-looking statements by terminology, including, but not limited to, “anticipates”, “believes”, “expects”, “can”, “continue”, “could”, “estimates”, “intends”, “may”, “plans”, “potential”, “predicts”, “should” or “will” or the negative of these terms or other comparable terminology.

The forward-looking statements included in this Form 6-K are subject to risks, uncertainties and assumptions about the Company’s businesses and business environments. These statements reflect the Company’s current views with respect to future events and are not a guarantee of future results, operations, levels of activity, performance or achievements. Actual results of the Company’s results, operations, levels of activity, performance or achievements may differ materially from information contained in the forward-looking statements as a result of risk factors.  They include, among other things, competition in the BOPET film industry; growth of, and risks inherent in, the BOPET film industry in China; changes in the international market; the increase of the price of energy (mainly power) and the sometimes inadequate energy supply in the area where our wholly owned subsidiary, Fuwei Films (Shandong) Co., Ltd. ( “Fuwei Shandong”) is located, which may result in the increase of production cost, decrease of sales, and negatively influence the Company’s financial performance; uncertainty of various kinds of international barriers; uncertainty as to future profitability and its ability to obtain adequate financing for its planned capital expenditure requirements; uncertainty as to the Company’s ability to successfully obtain financing and consequently continue the operation of the third BOPET production line, the construction of which has already commenced; uncertainty as to the Company’s ability to continuously develop new BOPET film products and keep up with changes in BOPET film technology; instability of power and energy supply; risks associated with possible defects and errors in its products; uncertainty as to its ability to protect and enforce its intellectual property rights; uncertainty as to its ability to attract and retain qualified executives and personnel; and uncertainty in acquiring raw materials on time and on acceptable terms, particularly in light of the volatility in the prices of petroleum products in recent years and the potential impact resulting from the pending criminal litigation and related developments to the major shareholders; uncertainty in the adverse effect resulting from the pending shareholders class action suit filed in the United States District Court for the Southern District of New York.  The Company’s expectations are as of the date this Form 6-K is filed, and the Company does not intend to update any of the forward-looking statements after the date this Report on Form 6-K is filed to confirm these statements to actual results, unless required by law.
 

 
2

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2010 AND DECEMBER 31, 2009
(amounts in thousands except share and per share value)
(Unaudited)
 
         
June 30, 2010
   
December 31, 
2009
 
   
Notes
   
RMB
   
US$
   
RMB
 
ASSETS
                       
Current assets
       
 
   
 
   
 
 
Cash and cash equivalents
          50,615       7,464       26,804  
Restricted cash
          500       74       12,541  
Accounts and bills receivable, net
   3       37,289       5,499       28,785  
Inventories
   4       39,357       5,804       45,039  
Advance to suppliers
            6,626       977       3,956  
Prepayments and other receivables
            829       122       957  
Deferred tax assets - current
            1,198       177       1,198  
Total current assets
            136,414       20,117       119,282  
                                 
Plant, properties and equipment, net
   5       301,710       44,490       318,600  
Construction in progress
   6       236,004       34,801       237,118  
Lease prepayments, net
   7       21,286       3,139       21,548  
Advanced to suppliers - Long Term
            1,457       215       2,367  
Goodwill
            10,276       1,515       10,276  
Deposit
   8       21,000       3,097       21,000  
Deferred tax assets - non current
            5,341       788       5,318  
                                 
Total assets
            733,488       108,162       735,509  
                                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                               
Current liabilities
         
 
   
 
   
 
 
Short-term borrowings
   9       137,000       20,202       153,179  
Accounts payables
            21,750       3,207       25,898  
Advance from customers
            13,220       1,949       12,608  
Accrued expenses and other payables
            14,463       2,135       6,981  
 
            186,433       27,493       198,666  
                                 
 Long-term loan
   9       35,000       5,161       25,000  
                                 
Total liabilities
            221,433       32,654       223,666  
                                 
Commitments and contingencies
   13                          
                                 
Equity
                               
Shareholders’ equity
         
 
   
 
   
 
 
Registered capital(of US$0.129752 par value; 20,000,000 shares authorized; 13,062,500 issued and outstanding)
            13,323       1,965       13,323  
Additional paid-in capital
            311,907       45,994       311,907  
Statutory reserve
            29,338       4,326       29,338  
Retained earnings
            156,303       23,048       156,006  
Cumulative translation adjustment
            977       144       993  
Total shareholders’ equity
            511,849       75,477    
511,567 
 
Non-controlling interest
            207       31       276  
Total equity
            512,056       75,508    
511,843 
 
Total liabilities and equity
            733,488       108,162       735,509  
The accompanying notes are an integral part of these unaudited condensed consolidated statements.

 
3

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(amounts in thousands except share and per share value)
(UNAUDITED)
 
   
The Three Month
   
The Six Month
 
   
Period Ended June 30, 2010
   
Period Ended 
June 30, 2009
   
Period Ended June 30, 2010
   
Period Ended 
June 30, 2009
 
   
RMB
   
US$
   
RMB
   
RMB
   
US$
   
RMB
 
Net sales
    110,319       16,268       72,571       198,774       29,311       147,088  
Cost of sales
    (90,648 )     (13,367 )     (66,297 )     (166,337 )     (24,528 )     (140,741 )
 
 
 
   
 
   
 
   
 
   
 
   
 
 
Gross profit
    19,670       2,901       6,274       32,437       4,783       6,347  
 
                 
 
                   
 
 
Operating expenses
                                               
Selling expenses
    (4,159 )     (613 )     (2,734 )     (7,555 )     (1,114 )     (7,631 )
Administrative expenses
    (12,896 )     (1,902 )     (4,609 )     (20,425 )     (3,012 )     (16,071 )
Total operating expenses
    (17,055 )     (2,515 )     (7,343 )     (27,980 )     (4,126 )     (23,702 )
                                                 
Operating income/(loss)
    2,615       386       (1,069 )     4,457       657       (17,355 )
                                                 
Other income/(expense)
                 
 
                   
 
 
- Interest income
    157       23       41       171       25       143  
- Interest expense
    (2,669 )     (394 )     (4,119 )     (4,287 )     (632 )     (4,119 )
- Others income, net
    (180 )     (27 )     (3,437 )     (136 )     (20 )     (3,882 )
 
                 
 
                   
 
 
Total other income/(expense)
    (2,692 )     (397 )     (7,515 )     (4,251 )     (627 )     (7,858 )
 
                 
 
                   
 
 
Income/ (loss) before income tax benefit/(expense)
    (77 )     (11 )     (8,584 )     205       30       (25,213 )
Income tax benefit/(expense)
    42       6       1,210       23       3       3,704  
 
                 
 
                   
 
 
Net income/(loss)
    (35 )     (5.2 )     (7,374 )     228       34       (21,510 )
Net income/(loss) attributable to non-controlling interests
    (33 )     (4.8 )     -       (69 )     (10 )     -  
Net income/(loss) attributable to the Company
    (3 )     (0.4 )     (7,374 )     297       44       (21,510 )
 
                 
 
                   
 
 
Other comprehensive income
                                               
- Foreign currency translation adjustments
    -       -       (416 )     (16 )     (2 )     (428 )
Comprehensive income/ (loss)
    (3 )     (0.4 )     (7,790 )     281       41       (21,937 )
                                                 
Earnings/ (loss) per share, Basic and diluted
    (0.0002 )     (0.00003 )     (0.56 )     0.02       0.003       (1.65 )
Weighted average number ordinary shares, Basic and diluted
    13,062,500       13,062,500       13,062,500       13,062,500       13,062,500       13,062,500  
The accompanying notes are an integral part of these unaudited condensed consolidated statements.

 
4

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
 (amounts in thousands except share and per share value)
(UNAUDITED)
 
 
 
The Six Month Period
Ended June 30, 2010
   
The Six Month 
Period Ended 
June 30, 2009
 
   
RMB
   
US$
   
RMB
 
Cash flow from operating activities
 
 
   
 
   
 
 
Net income
    228       34       (21,510 )
Adjustments to reconcile net income to net cash
 
 
   
    
   
  
 
(used in)/provided by operating activities
                       
- Depreciation of property, plant and equipment
    18,158       2,678       16,048  
- Amortization of intangible assets
    227       33       227  
- Deferred income taxes
    (23 )     (3 )     (3,320 )
- Bad debt expense/(recovery)
    (2 )     (0.2 )     5,945  
- Accounts receivable
    (8,502 )     (1,254 )     13,948  
- Inventories
    5,682       838       1,567  
- Advance to suppliers
    (2,670 )     (394 )     2,504  
- Prepaid expenses and other current assets
    87       13       (5,842 )
- Accounts payable
    (4,147 )     (611 )     2,637  
- Accrued expenses and other payables
    5,922       899       (247 )
- Advance from customers
    613       90       3,383  
- Tax payable
    1,610       237       (3,042 )
                         
Net cash provided by operating activities
    17,184       2,560       12,298  
                         
Cash flow from investing activities
 
 
   
 
   
 
 
Purchases of property, plant and equipment
    (1,234 )     (182 )     (88,458 )
Restricted cash related to trade finance
    12,041       1,776       (644 )
Advanced to suppliers - non current
    910       134       -  
Addition to construction in progress
    1,114       164       78,953  
                         
Net cash used in investing activities
    12,832       1,892       (10,149 )
                         
Cash flow from financing activities
 
 
   
 
   
 
 
Principal payments of short-term bank loans
    (16,179 )     (2,386 )     (11,585 )
Proceeds from short-term bank loans
    10,000       1,475       10,000  
                         
Net cash (used in)/provided by financing activities
    (6,179 )     (911 )     (1,585 )
                         
Effect of foreign exchange rate changes
    (26 )     (3 )     (431 )
                         
Net increase (decrease) in cash and cash equivalent
    23,810       3,538       134  
                         
Cash and cash equivalent
 
 
   
 
   
 
 
At beginning of period
    26,804       3,926       15,823  
At end of period
    50,615       7,464       15,957  
                         
SUPPLEMENTARY DISCLOSURE:
                       
Interest paid
    4,441       655       3,901  
Income tax paid
    -       -    
- 
 

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

 
5

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 1 - BACKGROUND
 
Fuwei Films (Holdings) Co., Ltd. (the “Company”) and its subsidiaries (the “Group”) 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 Films (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 Group.

The Group was established by certain members of the former management team and employees (the “Group Founders”) of Shandong Neo-Luck Plastics Co., Ltd (“Shandong Neo-Luck”), a company owned 59% by a PRC state-owned enterprise. Prior to filing for bankruptcy protection on September 24, 2004, Shandong Neo-Luck was engaged in the business of BOPET film production. Certain production-related assets of Shandong Neo-Luck, which had previously been mortgaged to the Bank of China, Weifang City branch (the “Mortgagee Bank”) as security for several loans extended to Shandong Neo-Luck’s affiliates, were acquired through public auction by Shandong Fuwei on October 9, 2003 for RMB156,000 as a result of the borrower’s default on various bank loans. Shandong Fuwei, established in the PRC on January 28, 2003 as a limited liability company, commenced its operations in July 2003. The principal activities of Shandong Fuwei are those relating to the design, production and distribution of plastic films. Shandong Neo-Luck was subsequently declared bankrupt by the Weifang Municipal People’s Court in the PRC on September 24, 2004.

Through its intermediate holding company, Fuwei (BVI), the Company acquired a 100% ownership interest in Shandong Fuwei on October 27, 2004 for a purchase price of RMB91,093. Shandong Fuwei thereafter became a wholly-owned subsidiary of Fuwei (BVI) effective October 27, 2004. On December 25, 2004, Shandong Fuwei acquired additional production-related assets that were formerly owned by Shandong Neo-Luck for RMB119,280 through a public auction. Shandong Fuwei converted into a wholly-foreign owned enterprise in the PRC on January 5, 2005, with a registered capital of US$11,000 which increased to US$42,700 on December 31, 2006.

On April 23, 2009, Fuwei Films USA, LLC was set up in South Carolina 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. account own 60% and 40% of the total shares of Fuwei Films USA, LLC, respectively.

 
6

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Unaudited Interim Financial Information
 
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 for the period ended June 30, 2010 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, 2009. The results of the six month period ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010.
 
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.

Use of Estimates

The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management of the Group 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 Group’s reporting currency is the Renminbi (“RMB”).

The Company 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. Fuwei Films USA, LLC, the wholly owned subsidiary of the Company, has its records 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 shareholders’ equity and comprehensive income.

 
7

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 
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 statements of 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.

Exchange Rate Information

Foreign Currency - The Company’s principal country of operations is in the People’s Republic of China. The financial position and results of operations of the Company are determined using the local currency (“Renminbi”) as the functional currency. The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period.

Unless otherwise noted, all translations from Renminbi to U.S. dollars in reporting of assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the market rate of exchange prevailing on that date. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“US Dollars”) are dealt with as a separate component within shareholders’ equity. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated above, or at all.

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. The Company has restricted cash of RMB500 (US$74) and RMB12,541(US$1,837) as of June 30, 2010 and December 31, 2009, respectively.

 
8

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 Group’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable. The Group determines the allowance based on historical write-off experience, customer specific facts and economic conditions.

The Group 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. The Group does not have any off-balance-sheet credit exposure related to its customers.

The Group has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. These receivables are due within 7 to 60 days from the date of billing. Normally, the Group does not obtain collateral from customers.

Inventories 

Inventories are stated at the lower of cost or market value. Cost is determined using the average- weighted cost method. 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. 

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. There are as follows:
 
   
Years
Buildings and improvements
 
25 - 30
Plant and equipment
 
10 - 15
Computer equipment
 
5
Furniture and fixtures
 
5
Motor vehicles
 
5

Depreciation of property, plant and equipment attributable to manufacturing activities is capitalized as part of the inventory, and expensed to cost of goods sold when inventory is sold. Depreciation related to abnormal amounts from idle capacity is charged to cost of goods sold for the period incurred.

 
9

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)
 
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Construction in progress represents capital expenditures in respect of the third BOPET production line. No depreciation is provided in respect of 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 of lease prepayments has been included in prepayments and other receivables in the balance sheet.

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 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 

Long-lived assets, other than goodwill, including property, plant, and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount in which the carrying amount of the asset exceeds the fair value of the asset.

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 Group 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 Group within 7 days and 30 days of receipt for sales to customers in the PRC and overseas, respectively. The Group 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.

 
10

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In the PRC, VAT of 17% on invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Group; instead, the amount is recorded as a liability on the consolidated balance sheet until such VAT is paid to the authorities.

Government Grants

Government grants are recognized in the consolidated balance sheet initially as deferred income when they have been received. Grants that compensate the Group for expenses incurred are recognized as a reduction of expenses in the consolidated statement of income in the same period in which the related expenses are incurred.

Retirement and Other Post-retirement Benefits

Contributions to retirement schemes (which are defined contribution plans) are charged to expense as and when the related employee service is provided.

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.

Earnings Per Share 

Basic earnings per share are computed by dividing net earnings by the weighted average number of ordinary shares outstanding during the year. Diluted 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 stock option plan.

Contingencies

In the normal course of business, the Group 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 Group 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 Group may consider many factors in making these assessments including past history and the specifics of each matter. As the Group has not become aware of any product liability claim since operations commenced, the Group has not recognized a liability for any product liability claims.

 
11

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently Issued Accounting Standards

In January 2010, the FASB issued an amendment to ASC 505, Equity, where entities that declare dividends to shareholders that may be paid in cash or shares at the election of the shareholders are considered to be a share issuance that is reflected prospectively in EPS, and is not accounted for as a stock dividend. This standard is effective for interim and annual periods ending on or after December 15, 2009 and is to be applied on a retrospective basis. The adoption of this standard does not have a significant impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued an amendment to ASC 820, Fair Value Measurements and Disclosure, to require reporting entities to separately disclose the amounts and business rationale for significant transfers in and out of Level 1 and Level 2 fair value measurements and separately present information regarding purchase, sale, issuance, and settlement of Level 3 fair value measures on a gross basis. This standard is effective for interim and annual reporting periods beginning after December 15, 2009 with the exception of disclosures regarding the purchase, sale, issuance, and settlement of Level 3 fair value measures which are effective for fiscal years beginning after December 15, 2010. The adoption of this standard does not have a significant impact on the Company’s consolidated financial statements.

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its consolidated financial statements.

NOTE 3 - ACCOUNTS RECEIVABLES, NET

Accounts receivables at June 30, 2010 and December 31, 2009 consist of the following:

   
June 30, 2010
   
December 31, 
2009
 
   
RMB
   
US$
   
RMB
 
   
(Unaudited)
       
Accounts receivable
    29,367       4,330       22,289  
Less: Allowance for doubtful accounts
 
(2,257
 
(333
 
(2,259
      27,109       3,997       20,030  
Bills receivable
    10,180       1,501       8,755  
                         
      37,289       5,499       28,785  
Bill receivables are bank’s acceptance bills, which are guaranteed by bank.


 
12

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

 NOTE 4-INVENTORIES 
 
Inventories at June 30, 2010 and December 31, 2009 consist of the following:
 
   
June 30, 2010
   
December 31, 
2009
 
   
RMB
   
US$
   
RMB
 
   
(Unaudited)
       
Raw materials
    23,413       3,453       28,756  
Work-in-progress
    1,509       223       2,274  
Finished goods
    18,038       2,660       17,617  
Consumables and spare parts
    639       93       633  
Inventory—impairment
    (4,242 )     (625 )     (4,242 )
 
 
 
   
 
   
 
 
      39,357       5,804       45,038  

NOTE 5-PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following: 
 
   
June 30, 2010
   
December 31, 
2009
 
   
RMB
   
US$
   
RMB
 
   
(Unaudited)
       
Buildings
    43,903       6,474       43,273  
Plant and equipment
    417,328       61,539       416,143  
Computer equipment
    1,558       230       1,421  
Furniture and fixtures
    5,929       874       5,929  
Motor vehicles
    1,654       244       1,739  
 
    470,372       69,361       468,505  
Less: accumulated depreciation
    (168,662 )     (24,871 )     (149,905 )
 
    301,710       44,490       318,600  

Total depreciation for the six month periods ended June 30, 2010 and 2009 was RMB18,756 (US$2,766) and RMB16,048 (US$2,349), respectively. For the three month periods ended June 30, 2010 and 2009, depreciation expenses were RMB8,887 (US$1,310) and RMB8,764 (US$1,283), respectively.

NOTE 6 - CONSTRUCTION IN PROGRESS 

Construction-in-progress represents capital expenditure in respect of the third BOPET production line. Construction in progress was RMB 236,004 (US$ 34,801) ended June 30, 2010, and RMB237,118 (US$34,732) ended December 31, 2009, respectively.

NOTE 7 - LEASE PREPAYMENTS

As of June 30, 2010 and December 31, 2009, lease prepayments, net of amortization were RMB 21,286 (US$3,139) and RMB 21,548 (US$3,156), respectively. 

Amortization of land use rights for the six month periods ended June 30, 2010 and 2009 were RMB227 (US$33) and RMB 227(US$33), respectively. Amortization of land use rights for the three months ended June 30, 2010 and 2009 was RMB 113 (US$ 17) and RMB 113 (US$ 17), respectively.

 
13

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 7 - LEASE PREPAYMENTS (continued)

Amortization expenses for the next five years after June 30, 2010 are as follows: 
 
   
RMB
 
US$
1 year after
   
454
 
67
2 year after
   
454
 
67
3 year after
   
454
 
67
4 year after
   
454
 
67
5 year after
   
454
 
67

NOTE 8 – 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 RMB 50,000. In order to grow, Joyinn plans to increase its registered capital by RMB 52,000 to a total of RMB 102,000, and plans to accept Shandong Fuwei as a new shareholder to invest and buy its shares.

Pursuant to the LOI, Shandong Fuwei deposited RMB 26,000 (half of the would-be added register capital of RMB 52,000), to Joyinn as the prepayment as of June 30, 2008. The prepayment to Joyinn will be regarded as investment payment after all parties enter into the final capital increase and shares expansion agreement during the effective term of this LOI. A share pledging agreement was entered into subsequently on April 9, 2008 (“Share Pledging Agreement”) 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 RMB 5,000 and returned to the Company on June 18, 2008.

On June 30, 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%.

On July 14, 2009, Shandong Fuwei and Joyinn entered into a “Supplementary Agreement of Letter of Intent of Joyinn Capital Increase and Share Expansion” which extended the duration of former agreement to two (2) years that is, the expiration date of the agreement extended to January 14, 2010. On May 23, 2010, the Pledger and Shandong Fuwei signed a second Supplementary Agreement to the Share Pledging Agreement which provides that the Share Pledging Agreement will stay effective until the share transfer documents and all stipulated processes are all completed. The transaction remains subject to the approval of the board of directors and shareholders of Joyinn. As of June 30, 2010, the total amount of the deposit was RMB 21,000 (US$3,097).

 
14

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 9 - SHORT-TERM AND LONG-TERM BANK LOANS
 
     
Interest rate
   
June 30, 2010
   
December 31, 2009
 
Lender
 
per annum
   
RMB
   
US$
   
RMB
 
SHORT-TERM LOANS
                       
Bank of Communications Co., Ltd.
 
  
   
  
   
  
          
- June 9, 2009 to June 8, 2010
    5.84 %     -       -       70,000  
- June 9, 2009 to June 8, 2010
 
5.84
 
-
   
-
      70,000  
- June 8, 2010 to June 7, 2011
    5.84 %     67,000       9,880       -  
- June 7, 2010 to June 6, 2011
 
5.84
    70,000       10,322    
-
 
                                 
Bank of Weifang
 
  
   
  
   
  
   
  
 
- January 13, 2009 to January 12, 2010
    0.00 %     -       -       10,000  
   
 
  
   
  
   
   
   
   
 
Bank of China
                               
- March 13, 2008 to March 13, 2009
 
5.45
 
-
   
-
      (80 )
- June 4, 2009 to June 4, 2010
    1.38 %     -       -       3,259  
  
 
  
   
  
   
  
   
  
 
LONG-TERM LOANS
                               
Bank of Weifang
 
  
   
  
   
  
   
  
 
- December 2, 2008 to December 2, 2011
    0.00 %     5,000       737       5,000  
- January 16, 2009 to January 12, 2012
 
0.00
    10,000       1,475       10,000  
- January 13, 2010 to January 12, 2012
    0.00 %     10,000       1,475       -  
  
 
  
   
   
   
   
   
  
 
Weifang Dongfang State-owned Assets Management Co., Ltd.
                               
- October 19, 2009 to October 18, 2017
 
5.346
    10,000       1,475       10,000  
   
            172,000       25,363       178,179  

Notes: 
During the period ended June 30, 2010 and the year ended December 31, 2009, the Company 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, construction, and foreign trade. None of the loan agreements requires the Company to comply with financial covenants. The weighted average interest rate of short-term bank loans outstanding as of June 30, 2010 and December 31, 2009 was 5.64% per annum.

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, lease prepayments and receivable.

The Company obtained two short-term loans on June 7, 2010 and June 8, 2010 for RMB70,000 (US$10,322) and RMB67,000(US$9,880) from Bank of Communications Co., Ltd., respectively, which replaced the two short-term loans amount of RMB 70,000 from Bank of Communications Co., Ltd. that matured on June 8, 2010, respectively.   The annual interest rate is up by 10% based on the fixed benchmark interest rate 5.31% determined by the People’s Bank of China. As of June 30, 2010, the effective interest rate is 5.841%.

 
15

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 9 - SHORT-TERM AND LONG-TERM BANK LOANS (continued)

In addition, we entered into three interests free Loan Contracts with Bank of Weifang (formerly known as Weifang City Commercial Bank) for the amount of (i) RMB 10,000 (US$1,475), effective January 13, 2010, with a maturity date of January 12, 2012; (ii) RMB10,000 (US$1,475), effective January 16, 2009, with a maturity date of January 12, 2012 ; and (iii) RMB 5,000 (US$737), effective December 2, 2008, with a maturity date of December 2, 2011. All the loans above are interest-free loans from the local government who entrust the Bank of Weifang to provide to enterprises which is called the industrial development fund loan administrated by the local government of Shandong Province, for the local high-and–new tech enterprises, with the purpose of enhancing their independent ability of innovation and technical research and development so as to support their development. All proceeded from these loans has been invested in the construction of the trial production line for the R&D center, the assets of which secure theses loans.

On June 4, 2009, Shandong Fuwei entered into a one-year foreign currency loan agreement with Bank of China Weifang Branch for US$477 which is secured by a deposit of RMB 3,259 with an interest rate of 1.38375%, 0.2% down float by trading day’s LIBOR interest, in order to reduce the currency translation cost of Shandong Fuwei. Proceed of the loan of US$477 was paid off on June 4, 2010.

On November 20, 2009, we signed a long-term loan contracts of RMB10,000 (US$1,475) with Weifang Dongfang State-owned Assets Management Co., Ltd., with 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$494) per year with the remaining principal balance of RMB3,300 (US$487) paid in 2017. The annual interest rate is 5.346% which is up by 10% compared with the fixed benchmark of 5-year interest rate announced by the People’s Bank of China. The loan is guaranteed by Shandong Deqin Investment& Guarantee Co., Ltd. and is used for the Company's key projects.

Long-term bank loans maturity for the next three years after June 30, 2010 are as follows: 
 
 
 
RMB
   
US$
 
2 year after
    25,000       3,687  
8 year after
    10,000       1,475  

NOTE 10-INCOME TAX  
 
The Company is registered in Cayman Islands and has operations primarily in two tax jurisdictions, the PRC and Cayman Islands.

The provision for income taxes from operations consists of the following for the three month periods ended June 30, 2010 and 2009:

 
16

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 10-INCOME TAX (continued)  

   
June 30, 2010
   
June 30, 
2009
 
   
RMB
   
US$
   
RMB
 
Cayman Islands Current Income Tax (Expense)Benefit
                -  
                     
PRC Current Income (Expense)Benefit
                -  
Deferred Tax (Expense)Benefit
    23       3       3,704  
 
                       
Total Provision for Income Tax
    23       3       3,704  

The following is a reconciliation of the provision for income taxes at the respective income tax rate to the income reflected in the Statement of Operations:
 
   
June 30, 
2010
   
June 30, 
2009
 
Tax expense (credit) – Cayman Islands
    0 %     0 %
Foreign income tax – PRC
    15 %     15 %
Exempt from income tax due to tax holidays
    (0 )%     (0 )%
Tax expense at actual rate
    15 %     15 %

Cayman Islands Tax

Under the current law of Cayman Islands, the Company is not subject to tax on income or capital gain. In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax is imposed.

United States Tax

The Company’s subsidiary Fuwei Films USA, LLC located in South Carolina, which was established on April 23, 2009, did not record any income tax expenses due to net losses during the period ended June 30, 2010.

The actual tax benefit differs from the expected tax benefit computed by applying the United States corporate tax rate of 39% to loss before income taxes as follows for the period ended June 30, 2010 and 2009: 

   
June 30, 
2010
   
June 30, 
2009
 
Expected tax benefit
    34 %     34 %
State income taxes, net of federal benefit
    5 %     5 %
Changes in valuation allowance
    (39 )%     (39 )%
Total
    -       -  
The Company recorded an allowance of 100% for its net operating loss carry-forward due to the uncertainty of its realization.
 
 
17

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 10-INCOME TAX (continued)  

PRC Tax

Pursuant to the acquisition by Fuwei (BVI), Shandong Fuwei became a wholly foreign-owned enterprise under the laws of the PRC on January 5, 2005. Accordingly, Shandong Fuwei is entitled to a new 2-year exemption and the 3-year 50% reduction for Foreign Enterprise Income Tax holiday whereby the profit for the first two financial years beginning with the first profit-making year (after setting off tax losses carried forward from prior years) is exempted from income tax in the PRC and the profit for each of the subsequent three financial years is taxed at 50% of the prevailing tax rates set by the relevant tax authorities. The tax holiday of Shandong Fuwei commenced from 2005. Shandong Fuwei was exempted from PRC income tax for the period from January 28, 2003 to December 31, 2006, and 50% reduction in tax rate for the year ended December 31, 2007.

According to the New Tax Law, from January 1, 2008, the standard corporate income tax rates for enterprises in the PRC will be reduced from 33% to 25%. However, an “encouraged hi-tech enterprise” will continue to be entitled a reduced corporate income tax rate of 15%.
 
Shandong Fuwei was redesignated as a High-and-New Tech Enterprise in December 2008 and is enjoying the favorable income tax rate of 15% pursuant to the Enterprise Income Tax Law. Accordingly, the deferred taxes as of December 31, 2008, have been calculated employing the statutory rate of the Shandong Fuwei of 15%.

Income tax benefit reported in the consolidated statements of income differs from the income tax expense amount computed by applying the PRC income tax rate (the statutory tax rate of the Company’s principal subsidiary). The effective income tax rate for the periods ended June 30, 2010 and 2009 were 15.0% and 12.5%, respectively, the effective income tax rate 12.5% for the period ended June 30, 2009 as the transitional tax rate before periods ended December 31, 2009.

Tax effects of temporary differences that give rise to significant portions of the deferred tax assets/(liabilities) as of June 30, 2010 and December 31, 2009 are presented below.

   
June 30, 2010
   
December 31, 
2009
 
   
RMB
   
US$
   
RMB
 
Current
             
 
 
Accounts receivable
    (353 )     (52 )     (353 )
Other receivables
    914       135       914  
Inventory impairment
    636       94       636  
 
    1,198       177       1,198  
                       
Non-current
                     
     
 
Property, plant and equipment, principally due to differences in depreciation and capitalized interest
    2,205       325       2,134  
Construction in progress, principally due to capitalized interest
    161       24       161  
Lease prepayments, principally due to differences in charges
    (436 )     (64 )     (431 )
Net operating loss carryforward
    3,411       503       3,454  
 
    5,341       788       5,318  
                         
Net deferred income tax assets
    6,539       964       6,516  

 
18

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 10-INCOME TAX (continued)  

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, Shandong Fuwei will need to generate future taxable income of approximately RMB6,507(US$960) prior to 2031. Shandong Fuwei was under tax concession period for the period from January 28, 2003 to December 31, 2006. The profit before taxation for Shandong Fuwei for the years ended December 31, 2007 and 2008 was RMB51,941 (US$7,120) and RMB 21,124 (US$ 3,082), respectively. Based upon the level of historical performance of Shandong Fuwei, management believes the deferred tax assets are realizable.

Effect of Adoption of FASB Interpretation No. 48 (Fin 48), “Accounting for Uncertainly in Income Taxes

In 2006, the Financial Accounting Standards Board (FASB) issued FIN 48, which clarifies the application of SFAS 109 by defining a criterion that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure and transition. In accordance with the transition provisions, the Company adopted FIN 48, effective January 1, 2007.

The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the state. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current state officials.

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of June 30, 2010 is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of June 30, 2010, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

NOTE 11- EARNINGS PER SHARE

The Company adopted New FASB issued ASC 260 "Earnings per Share" (previously SFAS 128). ASC 260 requires the presentation of earnings per share (EPS) as Basic EPS and Diluted EPS.

Basic earnings per share are computed by dividing net earnings by the weighted average number of ordinary shares outstanding during the year. Diluted 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 stock option plan.

 
19

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 11- EARNINGS PER SHARE (continued)

The weighted average number of shares used to calculate EPS was 13,062,500 for the six month periods ended June 30, 2010 and 2009 respectively, and reflect only the shares outstanding for those periods.

The Company uses the treasury stock method to compute dilution related to outstanding stock options. Because the option price exceeded the market price for common stock at June 30, 2010, the options were anti-dilutive and were not included when computing diluted earning per share.

Basic and diluted earnings per share were RMB0.02 (US$0.003) for the six month period ended June 30, 2010 and basic and diluted net loss per share were RMB 1.65 (US$0.24) for the six month period ended 2009.
 
Basic and diluted net loss per share were RMB0.0002 (US$0.00003) and RMB 0.56 (US$0.08) for the three month periods ended June 30, 2010 and 2009.

NOTE 12 - STOCK OPTION PLAN

On December 22, 2006, the Company granted 187,500 stock options to Maxim Group LLC as part of the compensation for the provision of services relating to the initial public offering, or IPO, of the Company. The stock option is exercisable at an exercise price equal to US$10.35 per ordinary shares and expires on December 22, 2011. The stock option and ordinary shares underlying the stock option may not be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective disposition thereof by any person for a period of six months from the effective date. The fair value of each option award is estimated on the date of grant using the Black-Scholes pricing model based on the following assumptions: 
 
Fair value of shares on measurement date
 
US$ 8.28 
per share
 
Expected volatility
    57.26 %
Expected dividends
    0.00 %
Expected term (in years)
    5  
Risk-free rate
    4.56 %

The fair value of the Company’s shares was estimated based on the IPO price of US$8.28 per share. The expected volatility is estimated by reference to the historical volatility of comparable companies listed on the Nasdaq Global Market. The risk-free rate for periods within the contractual life of the options is based on the U.S. government bond in effect at the time of grant. Expected dividend yields are based on historical dividends. Changes in these subjective input assumptions could materially affect the fair value estimates.

As of June 30, 2010, there was no unrecognized compensation costs related to unvested stock options.

 
20

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 12 - STOCK OPTION PLAN (continued)

Following is a summary of the stock option activity:
   
Options 
outstanding
   
Weighted 
Average 
Exercise Price
   
Aggregate 
Intrinsic 
Value
 
Outstanding, December 31, 2009
    187,500     $ 10.35     $ -  
Granted
    -       -       -  
Forfeited
    -       -       -  
Exercised
    -       -       -  
Outstanding, June 30,2010
    187,500     $ 10.35          

Following is a summary of the status of options outstanding at June 30, 2010:
 
Outstanding Options
  
Exercisable Options
  
Exercise Price
 
Number
 
Average Remaining 
Contractual Life
  
Average 
Exercise 
Price
  
Number
  
Average 
Exercise
 Price
 
10.35
 
187,500
 
1.50
 
$
10.35
 
187,500
 
$
10.35
 

The Company adopted ASC 718 & 505 (previously SFAS No. 123 (Revised 2004)), Share Based Payment ("SFAS No. 123R"), under the modified-prospective transition method on January 1, 2006. SFAS No. 123R 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. Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all share-based payments granted prior to and not yet vested as of January 1, 2006 and share-based compensation based on the grant-date fair-value determined in accordance with SFAS No. 123R for all share-based payments granted after January 1, 2006. SFAS No. 123R eliminates the ability to account for the award of these instruments under the intrinsic value method proscribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and allowed under the original provisions of SFAS No. 123.

NOTE 13 - COMMITMENTS AND CONTINGENCIES

Commitments

On March 2010, Fuwei Shandong had a meeting with Dornier discussing about the execution of the equipment contract in Shanghai.  Due to the fund shortage of Fuwei Shandong, Dornier terminated the contract with Fuwei Shandong and asked for compensation for interests, storage costs, equipment modification costs and other costs which aggregated to 4.2 million Euros.  Fuwei Shandong is working with the Dornier on the specific implementation of the contract.

 
21

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 13 - COMMITMENTS AND CONTINGENCIES (continued)

Contingencies

DMT Arbitration

In 2006, Shandong Fuwei received correspondence relating to an arbitration proceeding initiated by DMT S. A. (“DMT”) against Shandong Neo-Luck in the ICC International Court of Arbitration (the “ICC”) in which DMT sought monetary damages against Shandong Neo-Luck of approximately US$1,250 plus interest relating to a claim of partial non-payment for the DMT production line, which Shandong Fuwei acquired from Beijing Baorui in 2005. In early 2007, the ICC determined that despite arguments made to the ICC that the Company should not be a party to the proceeding, the arbitration should proceed with Fuwei as the respondent pending adjudication of issues relating to jurisdiction and liability.

A hearing was held by the ICC in November 2007. Subsequent to the hearing, at the invitation of Weifang Neoluck (Group) Co., Ltd (“Neoluck Group”), the original majority shareholder of Shandong Neo-Luck, the Neoluck Group and DMT engaged in efforts to achieve a settlement of the pending arbitration on January 18, 2008. Shandong Fuwei joined these discussions later as an interested party and in order to support a resolution of the pending dispute and to achieve resolution of certain outstanding service and spare part issues.

After several weeks of negotiations among the parties, in March 2008, the parties entered into two agreements, a Service and Technical Assistance Agreement (the “Service Agreement”), between DMT and Shandong Fuwei, and a Settlement Agreement (the “Settlement Agreement”) between DMT and the Neoluck Group. Under the Service Agreement, Shandong Fuwei would pay an amount of US$180 in two installments with respect to service and spare parts. The Company made its first payment in April 2008.  As of June 30, 2010, Shandong Fuwei has paid US$135 and US$45 remained unpaid.

Under the Settlement Agreement, the Neoluck Group was obligated to pay an amount equal to US$900 in RMB by delivery of a bank draft to DMT. In late April, the Neoluck Group had not performed its obligation under the Settlement Agreement, and the Neoluck Group and DMT entered into a Supplemental Agreement pursuant to which the Neoluck Group would pay the amount owed to DMT in two installments. The Neoluck Group paid the first installment equal to US$ 450 in April 2008. As agreed between Neoluck Group and DMT, the remaining US$450 was to be paid in installments by the end of December 2008. As of June 30, 2010, Neoluck Group has paid US$ 320 and still has US$130 outstanding to DMT.

In the event the arbitration proceedings continue as a result of non-performance of the payment obligation, it is possible for the arbitral tribunal for the ICC International Court of Arbitration to rule in favor of DMT, which might result in a liability for Shandong Fuwei for the amount claimed plus interest. However, any possible liability regarding DMT’s claim should be reduced by the amount previously paid to DMT in connection with the above-described settlement. It should be noted further in such event that Fuwei might have sustainable claims for damages as against the Neoluck Group for its failure to perform its obligations under the Settlement Agreement.
 
Subsequent to year-end, on January 18, 2010 we were advised by the Secretary of The International Court of Arbitration of International Chamber of Commerce (ICC), the arbitration was withdrew due to DMT’s failure to pay the balance of the advance on costs.

 
22

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)
 
NOTE 13 - COMMITMENTS AND CONTINGENCIES (continued)
 
Class Action

On October 19, 2007, the Company became aware that a class action lawsuit had been filed in the United States District Court for the Southern District of New York, on behalf of all purchasers of the Company’s stock from the date of the Company’s IPO on December 19, 2006 through October 16, 2007. The complaint alleged that the Company and certain of its present and former officers, directors, and shareholders violated the Securities Act of 1933. 

On November 21, 2007, the Company was given notice that a second class action lawsuit had been filed in the United States District Court for the Southern District of New York, commenced on behalf of all purchasers of the Company’s stock pursuant or traceable to the Registration Statement and Prospectus issued in connection with the Company’s IPO, during the period from December 19, 2006 through November 12, 2007. The complaint alleged that the Company, its underwriters, and certain of its executives violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 by misrepresenting or omitting material information regarding the Company and its business operations.  

On January 24, 2008, the Court consolidated into a single action the putative securities class actions pending against the Company and certain of its officers, directors, and shareholders.  The Court appointed Ninyat Tonyaz as lead plaintiff, appointed the Rosen Law Firm, P.A. as lead counsel, and granted plaintiffs leave to file a consolidated amended class action complaint.  The consolidated action is styled, In re Fuwei Films Securities Litigation, Case No. 07-CV-9416 (RJS). 

On March 14, 2008, plaintiffs filed a consolidated amended class action complaint (the "Amended Complaint") naming as defendants the Company, Xiaoan He, Mark Stulga, Jun Yin, Tongju Zhou, Duo Wang, and the Company's IPO underwriters (the “Underwriter Defendants”) — Maxim Group LLC, WR Hambrecht + Co., and Chardan Capital Markets, LLC.  The Amended Complaint asserts claims for violation of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. 

On May 14, 2008, the Company and Messrs. He and Stulga filed a motion to dismiss the Amended Complaint in its entirety.  The Underwriter Defendants separately moved to dismiss the Amended Complaint. 

On November 3, 2008, Plaintiffs filed proofs of service with the Court, indicating that Messrs. Yin, Wang, and Zhou had been served with the Amended Complaint on or about August 14, 2008, and that they had 90 days after such date to serve an answer to the Amended Complaint or a motion pursuant to Rule 12 of the Federal Rules of Civil Procedure.

By letter dated March 17, 2009, Plaintiffs apprised the Court of Fuwei’s March 10, 2009 Press Release disclosing the initial verdict against Messrs. Yin, Wang, and Zhou, and requested that the Court take judicial notice of this press release in adjudicating the pending motions to dismiss.

 
23

 

FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except share and per share value)

NOTE 13 - COMMITMENTS AND CONTINGENCIES (continued)

By the Court’s Memorandum and Order dated July 10, 2009, the motions to dismiss of the Company, Messrs. He and Stulga, and the Underwriter Defendants were granted in part and denied in part. In ruling on the motion to dismiss, the
Court was required to assume that the facts alleged by the plaintiffs are true and to draw all reasonable inferences in the plaintiffs’ favor.  Applying that standard, the Court dismissed plaintiffs’ claims to the extent they were based upon Fuwei’s alleged failure to disclose the DMT arbitration proceeding.  The Court also dismissed certain of plaintiffs’ claims to the extent they were brought on behalf of shareholders who did not purchase their shares directly in the IPO.

The Court sustained plaintiffs’ remaining claims.  However, the Court noted that defendants may be able to assert affirmative defenses provided by the federal securities laws in a motion for summary judgment, which could resolve the case before trial.
 
On September 9, 2009, the Company and Messrs. He and Stulga filed their answer to the Amended Complaint. On October 2, 2009, the Court entered a case management plan and scheduling order, which set deadlines relating to pre-trial discovery, mediation, and dispositive motions. Discovery thereafter proceeded.
 
On March 26, 2010, Fuwei, Messrs. He and Stulga, the Underwriter Defendants, and Plaintiffs, through their respective attorneys, engaged in a mediation aimed at resolving the litigation.  On June 24, 2010, the parties reached a settlement in principle.  Subject to the Court’s approval, Plaintiffs have agreed to accept US$2.15 million in full and final settlement of all claims they have or may have against the Company, Messrs. He and Stulga, the Underwriter Defendants, and Messrs. Yin, Wang, and Zhou.  Fuwei has agreed to contribute US$1 million towards the settlement.  The settlement papers are in the process of being drafted, and are expected to be submitted to the Court for approval on September 9, 2010.
 
The Company’s management continues to believe that plaintiffs’ allegations are without merit. However, in recognition of the attendant risks and costs of continued litigation, and the benefits of resolving the same, the Board of Directors has unanimously consented to settle this case.  As of June 30, 2010, the Company accrued US$1 million liability in connection with this litigation except for the defense expenses.
 
NOTE 14 - MAJOR CUSTOMERS AND VENDORS
 
There were no major customers which accounted over 10% of the total net revenue for the six month periods ended June 30, 2010 and 2009.

One vendor provided approximately 43.0% of the Company’s raw materials for the six months ended June 30, 2010. The Company had RMB2,104 (US$310) advance to the vendor as of June 30, 2010. Two vendors provided approximately 58.0% of the Company’s raw materials for the six months ended June 30, 2009 with each vendor accounting for about 50.0%, and 8.0%, respectively.

 
24

 

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" include Fuwei Films (Holdings) Co., Ltd. and its subsidiaries, except where the context requires otherwise.

Results of operations for the six month period ended June 30, 2010compared to June 30, 2009

In the first half of 2010, the demand in the domestic market including demand for high value-added specialty films and export of the products has gradually increased. In addition, the sales price have increased.  Although there has been significant competition in the domestic BOPET film market, we still received sufficient orders which resulted in increase of our revenue and gross profit.  We adopted measures to increase profitability since 2009 such as adjusting the product structure, strictly controlling the production and quality inspection as well as cost control which resulted in revenue increase and operation cost decrease. At the same time, we had sufficient export orders which lead to increase of overseas sales.  However, due to the Company’s pending class action litigation, the net income and EPS were relatively low.

With the increase in the market demand, we may be faced with more competition as our peer may be expanding their production capacities. This will have an adverse effect on our operation.  Additionally, currently, some countries and regions resort trade protection against Chinese manufacturing, such as anti-dumping investigation, imposing anti-dumping taxes in US and Europe which may continue to adversely affect our exports.

The table below sets forth certain line items from our Statement of Income as a percentage of revenue:
 
   
Six Month 
Period Ended
June 30, 2010
   
Six Month 
Period Ended
June 30, 2009
 
   
(as % of Revenue)
 
Gross profit
    16.3       4.4  
Operating expenses
 
(31.6
    (16.1 )
Operating income/(loss)
    5.0       (11.8 )
Other income/(expense)
    (4.8 )     (5.3 )
Income tax benefit/(expense)
    (0.01 )     2.5  
Net income/(loss)
    0.2       (14.6 )

Revenue 

The Company’s revenue is primarily derived from the manufacture and sale of plastic films.

Net sales during the six month period ended June 30, 2010 were RMB198.8 million (US$29.3 million), compared to RMB 147.1 million (US$21.5 million) during the same period in 2009, representing a 35.1% increase.

The sales of specialty films during the six months period ended June 30, 2010 were RMB 24.8 million (US$ 3.7 million), reflected 12.5% of total net sales as compared to 7.3% in the same period of 2009, an increase of 132.3% compared to the same period last year. The increase was largely attributable to the increase in demand for luxurious packaging.

 
25

 

The following is a breakdown of commodity and specialty film sales (amounts in thousands):
 
   
Six Month Period Ended
 June 30, 2010
       
Six Month
Period Ended
June 30, 2009
     
   
RMB
   
US$
   
% of Total
   
RMB
   
% of Total
 
                               
Printing film
    28,087       4,142       14.1 %     16,632    
11.3
Stamping film
    122,580       18,076       61.7 %     68,422       46.5 %
Metallization film
    12,683       1,870       6.4 %     20,403       13.9 %
Special film
    24,780       3,653       12.5 %     10,669       7.3 %
Base film for other applications 
    10,644       1,570       5.4 %     30,962       21.0 %
                                         
 
    198,774       29,311       100.0 %     147,088       100.0 %
 
Overseas sales during the six month ended June 30, 2010 were RMB 36.7 million (US$5.4 million), which accounted for 18.5% of our total net revenues, as compared with RMB 18.4 million (US$2.7million) and 12.5% in the same period in 2009, which was 99.5% higher than the same period last year. The increase in export sales was mainly due to the increase in the overseas market demand, especially the increase of demand in the Europe, North America and Southeast Asia regions.

The following is a breakdown of PRC domestic and overseas sales (amounts in thousands):
 
   
Six Month Period 
Ended June 30, 2010
         
Six Month 
Period Ended 
June 30, 2009
       
    
RMB
   
US$
   
% of Total
   
RMB
   
% of Total
 
Sales in China
    162,084       23,901       81.5 %     128,666       87.5 %
Sales in other countries
    36,690       5,410       18.5 %     18,422       12.5 %
                                         
        198,774       29,311       100.0 %     147,088       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:
 
   
Six Month 
Period Ended
June 30, 2010
   
Six Month 
Period Ended
June 30, 2009
 
    
% of total
   
% of total
 
Materials costs
    76.2       71.3  
Factory overhead
    11.7       13.3  
Power
    7.8       10.3  
Packaging materials 
    3.0       3.1  
Direct labor
    1.3       2.0  

Cost of goods sold during the first six months of 2010 totaled RMB 166.3 million (US$24.5 million) as compared to RMB 140.7 million (US$20.6 million) for the same period in the prior year. This was 18.2% higher than the same period in 2009, mainly due to the increased price of raw materials in the first six months of 2010 compared to the same period in 2009.

 
26

 
 
Gross Profit

Our gross profit was RMB 32.4 million (US$4.8 million) for the first six months of 2010, representing a gross margin of 16.3%, as compared to a gross margin of 4.3% from the same period in 2009, an increase of 12.0%. This was mainly due to an increase in average sales price of our products during the first six months of 2010 compared with the same period in 2009.

Operating expenses 
 
Operating expenses for the six months ended June 30, 2010 were RMB 28.0 million (US$4.1 million), which was RMB 23.7 million (US$3.5 million) in the same period in 2009, or 18.1% higher than the same period in 2009. This increase was mainly due to accrued compensation expense for the class action litigation and related legal fees.

Interest Expense
 
Interest expense totaled RMB4.3 million (US$0.6 million) during the six months of 2010, 4.1% higher than the same period of 2009. The increase is mainly due to the increased interest bank loan for RMB 7.0 million (US$ 1.0 million).

Other Income (Expense)

Our total other expense during the period ended June 30, 2010 amounted to RMB4.3 million (US$ 0.6 million). It decreased 45.9% compared to the corresponding period of 2009, mainly due to the decrease for the inventory impairment.

Income Tax Benefit/(expense)

During the first six months of 2010, the Company recorded deferred income tax benefit of RMB23,000 (US$3,000) compared to a recorded income tax benefit of RMB 3.7 million (US$0.3 million) during the same period in 2009. This decrease was due to increased earnings in the first half year of 2010 and decreased bad debt allowances.

Net Income/(Loss)
 
Net income during the first six months of 2010 was RMB 297,000 (US$ 44,000) compared to net loss of RMB 21.5 million (US$ 3.1 million) during the same period in 2009, representing an increase of RMB 21.8 million (US$3.2 million). The increase was mainly due to the increased revenue and gross margin, at the same time the decreased selling expense.

 
27

 

Results of operations for the three month period ended June 30, 2010 compared to June 30, 2009

The table below sets forth certain line items from our Statement of Income as a percentage of revenue:
 
   
Three Month 
Period Ended
June 30, 2010
   
Three Month 
Period Ended
June 30, 2009
 
   
(as % of Revenue)
 
Gross profit
    17.8       8.6  
Operating expenses
 
(19.3
    (10.1 )
Operating income/(loss)
    3.0       (1.5 )
Other income/(expense)
 
(3.0
    (10.4 )
Income tax benefit/(expense)
    0.04       1.7  
Net income/(loss)
 
(0.002
    (10.2 )

Revenue 

Net sales during the second quarter ended June 30, 2010 were RMB 110.3 million (US$16.3 million), compared to RMB 72.6 million (US$10.6 million), during the same period in 2009, representing a 52.0% increase.

The sales of specialty films during the second quarter ended June 30, 2010 were RMB 16.2 million (US$ 2.4 million), reflected 14.7% of total net sales as compared to 9.0% in the same period of 2009, an increase of 149.2% compared to the same period last year. The increase was largely attributable to the increase in demand for luxurious packaging.

The following is a breakdown of commodity and specialty film sales (amounts in thousands):
 
   
Three Month 
Period Ended
 June 30, 2010
         
Three Month 
Period Ended
June 30, 2009
       
   
RMB
   
US$
   
% of Total
   
RMB
   
% of Total
 
                               
Printing film
    18,801       2,772       17.0 %     9,503       13.1 %
Stamping film
    64,897       9,570       58.8 %     37,235       51.3 %
Metallization film
    4,978       734       4.5 %     8,131       11.2 %
Special film
    16,248       2,396       14.7 %     6,521       9.0 %
Base film for other applications 
    5,395       796       4.9 %     11,181       15.4 %
                                         
 
    110,319       16,268       100.0 %     72,571       100.0 %
 
Overseas sales during the second quarter ended June 30, 2010 were RMB 25.4 million (US$3.7 million), which accounted for 23.0% of our total net revenues, as compared with RMB 7.9 million (US$1.2million), and10.9% in the same period in 2009, which is 221.5% higher than the same period last year. The increase in export sales was mainly due to the recovery of overseas market demand, especially the increase of demand in the Europe, North America and Southeast Asia regions.

The following is a breakdown of PRC domestic and overseas sales (amounts in thousands):

 
28

 

   
Three Month 
Period Ended 
June 30, 2010
         
Three Month 
Period Ended 
June 30, 2009
       
   
RMB
   
US$
   
% of Total
   
RMB
   
% of Total
 
Sales in China
    84,959       12,529       77.0 %     64,632       89.1 %
Sales in other countries
    25,360       3,739       23.0 %     7,939       10.9 %
 
                                       
      110,319       16,268       100.0 %     72,571       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
June 30, 2010
   
Three Month
Period Ended
June 30, 2009
 
   
% of total
   
% of total
 
Materials costs
    75.9       83.3  
Factory overhead
    12.0       8.9  
Power
    7.7       5.1  
Packaging materials 
    3.1       1.7  
Direct labor
    1.3       1.0  

Cost of goods sold during the second quarter ended June 30, 2010 totaled RMB 90.6 million (US$ 13.4 million) as compared to RMB 65.6 million (US$ 9.6 million) for the same period in the prior year. This was 38.1% higher than the same period in 2009, mainly due to the increase in the price of the raw materials in the second quarter ended June 30, 2010 compared to the same period in 2009.

Gross Profit

Our gross profit was RMB 19.7 million (US$ 2.9 million) for the second quarter ended June 30, 2010, representing a gross margin of 17.8%, as compared to a gross margin of 8.6% from the same period in 2009, an increase of 9.2%. This was mainly due to an increase in average sales price of our products during the second quarter ended June 30, 2010 compared with the same period in 2009.

Operating expenses 
 
Operating expenses for the second quarter ended June 30, 2009 were RMB17.1 million (US$2.5 million), which was RMB7.3 million (US$1.1 million) the same period in 2009, or 134.2% higher than the same period in 2009. This increase was mainly due to accrued compensation expense for class action litigation and related legal fees.

Interest Expense
 
Interest expense totaled RMB 2.7million (US$ 0.4 million) during the second quarter ended of 2010, 35.2% lower than the same period of 2009. The decrease is mainly due to the interest capitalization in the first quarter ended of 2009, which resulted in an increased interest expense for the second quarter ended of 2009, and interest expense for the second quarter ended of 2010 lower than the same period of 2009.

 
29

 

Other Income (Expense)

Total other expense during the second quarter ended of June 30, 2010 were RMB2.7 million (US$ 0.4 million), RMB4.8 million lower than the same period in 2009, the decrease is primarily due to the declined interest expense in the period ending June 30, 2010.

Income Tax Benefit/(expense)

During the second quarter ended of 2010, the Company recorded an income tax benefit of RMB 42,000 (US$ 6,000) compared to RMB 1.2 million (US$ 0.2 million) during the same period in 2009. This decrease was due to increased earnings in the second quarter of 2010.

Net Income/(Loss)
 
Net loss during the second quarter ended of 2010 was RMB 3,000 (US$400) compared to net loss of RMB 7.4 million (US$ 1.1 million) during the same period in 2009, representing an increase of RMB 7.4 million (US$1.1 million) from the same period in 2009. The increase was mainly due to the increase of revenue and gross margin.

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 2009 to June 30, 2010, our capital expenditures have been primarily financed through short-term borrowings from financial institutions. The interest rates of short-term borrowings from financial institutions during the periods from second quarter of 2009 to June 30, 2010 ranged from 0% to 5.841%.

We obtained two new short-term loans on June 7, 2010 and June 8, 2010, for RMB 70,000 maturing on June 6, 2011, and for RMB 67,000 maturing on June 7, 2011, respectively.  The annual interest rate is up by 10% compared with the fixed benchmark interest rate 5.31% announced by the People’s Bank of China. As of June 30, 2010, the interest rate in effect is 5.841%.

We entered into three interests free Loan Contracts with Bank of Weifang (formerly known as Weifang City Commercial Bank) for the amount of (i) RMB 10,000, effective January 13, 2010, with a maturity date of January 12, 2012; (ii) RMB 10, 000, effective January 16, 2009, with a maturity date of January 12, 2012; and (iii) RMB 5,000, effective December 2, 2008, with a maturity date of December 2, 2011.

On June 4, 2009, Shandong Fuwei entered into a one-year foreign currency loan agreement with Bank of China Weifang Branch for US$477 which is secured by a deposit of RMB 3,259 with an interest rate of 1.38375%, 0.2% down float by trading day’s LIBOR interest, in order to reduce the currency translation cost of Shandong Fuwei. Proceed of the loan of US$477 was paid off on June 4, 2010.

 
30

 

On November 20, 2009, we signed a long-term loan contracts of RMB10,000 with Weifang Dongfang State-owned Assets Management Co., Ltd., with eight-year loan term which became effective on October 19, 2009 and will expire on October 18, 2017. From 2015 to 2016, we will make principal installment payments of RMB3,350 per year with the remaining principal balance of RMB3,300 paid in 2017. The annual interest rate is 5.346% which is up by 10% compared with the fixed benchmark of 5-year interest rate announced by the People’s Bank of China. The loan is guaranteed by Shandong Deqin Investment & Guarantee Co., Ltd. and is used for our key projects.

We believe that, after taking into consideration our present banking facilities, existing cash and the expected cash flows to be generated from our operations, we have adequate sources of liquidity to meet our short-term obligations and our working capital.

Operating Activities

Net cash flows provided by operating activities for the six months ended June 30, 2010, was RMB 17.2 million (US$ 2.6 million) compared to net cash flows provided by operating activities of RMB 12.3 million (US$ 1.8 million) for the six months ended June 30, 2009, which is an increase of RMB 5.0 million (US$0.7 million). This increase in cash flows from operating activities was attributable primarily to the increased earnings, decrease of inventories, increase of accrued expense and other payable.

Working Capital

As of June 30, 2010 and December 31, 2009, we had negative working capital of RMB 50.0 million (US$7.4 million) and RMB 79.4 million (US$11.6 million), respectively.  Working capital increased RMB 29.4 million (US$4.3 million), or 37.0% compared to the same period in the prior year. Although we have material negative working capital, the short-term current liability is mainly due to the short-term bank loans, which amounted to RMB137.0 million (US$20.2 million).  We have entered into negotiations with our lenders to extend the maturity date of these loans.

We anticipate that we will have adequate working capital in the foreseeable future. However, we may wish to borrow additional capital or sell our common stock to realize additional funds in order to expand and grow our operations.

Contractual Obligations

The following table is a summary of the Company's contractual obligations as of June 30, 2010 (in thousands RMB): 
 
   
Payments due by period
 
          
Less than
1
   
1-3
   
3-5
   
More than
 5
 
Contractual obligations
 
Total
   
year
   
Years
   
Years
   
years
 
                               
Rental obligations
    193       193       -       -       -  
Purchase obligations
    149,430       149,430       -       -       -  
                                         
Total
    149,623       149,623       -       -       -  
     
 
31

 


Exhibit Index
 
Exhibit
No.
 
Description 
4.1
 
Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communication, dated June 7, 2010.
4.2
 
Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communication, dated June 7, 2010.
4.3
 
Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communication, dated June 8, 2010.
 
 
32

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
Fuwei Films (Holdings) Co., Ltd.
     
 
By:
/s/ Xiaoan He
 
Name: Xiaoan He
 
Title: Chairman, Chief Executive Officer         

Dated August 16, 2010

 
33