UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
ANNUAL
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
fiscal year ended December 31, 2007
OR
o
TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from ____________ to ____________
Commission
file number: 333-105903
GENERAL
STEEL HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
|
NEVADA
|
412079252
|
|
|
(State
or other jurisdiction
of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
Kuntai
International Mansion Building, Suite
2315
Yi
No. 12 Chaoyangmenwai Avenue, Chaoyang
District,
Beijing,
China
|
100020
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
Incorp
Services Inc.
3155
East
Patrick Lane
Suite
1,
Las Vegas, Nevada, 89120-3481
Tel:
(702) 866-2500
(Name,
address and telephone number for Agent for Service)
+86
(10)
5879-7346
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: none
Securities
registered pursuant to Section 12(g) of the Act:
|
Title
of each class
|
Name
of each exchange on which
registered
|
|
Common
Stock, $ .001 par value per
share
|
Not
applicable
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form
10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
As
of
March 25, 2008, the aggregate market value of the registrant's common stock
held
by non-affiliates of the registrant was $85,943,720 based on the $ 8.00 as
reported on the NYSE Arca.
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
Class
|
Outstanding
at March 31,
2008
|
|
Common
Stock, $ .001 par value per
share
|
34,861,365
shares
|
|
DOCUMENTS
INCORPORATED BY
REFERENCE
|
|
|
Document
|
Parts
Into Which
Incorporated
|
|
None
|
Not
applicable
|
TABLE
OF CONTENT
ITEM
1. BUSINESS
Overview
Our
company was initially incorporated as “American Construction Company” (“ACC”) on
August 5, 2002, in the State of Nevada.
On
October 14, 2004, ACC, Northwest Steel Company, a wholly-owned Nevada subsidiary
of ACC (“Merger Sub”), and General Steel Investment Co., Ltd., a British Virgin
Islands company (“General Steel Investment”) entered into an Agreement and Plan
of Merger pursuant to which ACC acquired General Steel Investment through a
merger between Merger Sub and General Steel Investment and then merger of Merger
Sub with ACC, and its 70% ownership in its subsidiary Tianjin Daqiuzhuang Metal
Sheet Co., Ltd., a PRC company of limited liability (“Daqiuzhuang Metal”) in
exchange for shares of ACC’s common stock.
On
May
18, 2007, General Steel entered into a Purchase Agreement with Victory New
Holdings Limited (“Victory New”), a British Virgin Islands registered company
under the control of the Company’s Chairman, CEO and majority shareholder,
Zuosheng Yu (aka Henry Yu), to acquire Victory New’s 30% interest in Daqiuzhuang
Metal. General Steel agreed to issue to Victory New an aggregate of 3,092,899
shares of its Series A Preferred Stock with a fair value of $8,374,000, and
these shares of Series A Preferred Stock carry a voting power of 30% of the
combined voting power of General Steel’s common and preferred stock while
outstanding. As a result of the acquisition, General Steel has increased its
equity interest in Daqiuzhuang Metal from 70% to 100%, and Daqiuzhuang Metal
is
a wholly owned subsidiary of the Company.
On
April
27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. ("Baotou
Steel") entered into an Amended and Restated Joint Venture Agreement (the
"Agreement"), amending the Joint Venture Agreement entered into on September
28,
2005 ("Original Joint Venture Agreement"). The Agreement increased Daqiuzhuang
Metal's ownership interest in the Joint Venture to 80%. The joint venture
company’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture
Company Limited a PRC company of limited liability (referred to as “Baotou Steel
Pipe Joint Venture”). Baotou Steel Pipe Joint Venture obtained its business
license from the PRC on May 25, 2007 and started its normal operation in July
2007.
On
May
18, 2007, Daqiuzhuang Metal established Yangpu Shengtong Investment Co., Ltd.
(“Yangpu Investment”) and injected registered capital totaling RMB100,000,000,
or approximately $13,030,000, into the investment. The total registered capital
of Yangpu Investment is RMB110,000,000, or approximately $14,333,000, and
Daqiuzhuang Metal has a 99.3% ownership interest in Yangpu Investment.
Qiu
Steel
Investment Co., Ltd. (“Qiu Steel Investment”) was founded on June 1, 2006. In
June 2007, Yangpu Investment agreed to invest RMB148,000,000, or approximately
$19,284,400, through a capital injection and equity transfer with former
shareholders. The total registered capital of Qiu Steel Investment is
RMB150,000,000, or approximately $19,545,000. As a result of the above mentioned
equity transaction, Yangpu Investment acquired 98.7% equity of Qiu Steel
Investment making Qiu Steel Investment a subsidiary of Yangpu Investment and
Daqiuzhuang Metal.
Yangpu
Investment and Qiu Steel Investment are Chinese registered limited liability
companies with a legal structure similar to a limited liability company
organized under state laws in the United States of America. Those two companies
were formed to acquire other businesses.
On
June
15, 2007, General Steel and Shaanxi Longmen Iron and Steel (Group) Co., Ltd.,
a
PRC company of limited liability (“Longmen Group”), signed an agreement to form
Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). The parties
agreed to make the effective date of the transaction June 1, 2007. General
Steel
contributed RMB300 million or approximately $39,450,000 through its
subsidiaries, Daqiuzhuang Metal and Qiu Steel Investment., to the Longmen Joint
Venture. General Steel and Longmen Group own a 60% and 40% ownership interest,
respectively, in Longmen Joint Venture. The Longmen Joint Venture obtained
its
business license from the PRC on June 22, 2007. The total registered capital
of
Longmen Joint Venture is RMB500 million or approximately $65.8 million. Pursuant
to the joint venture agreement, Longmen Group contributed land, buildings,
iron
making, steel making, and steel rolling facilities whereas General Steel
contributed cash through its subsidiaries Daqiuzhuang Metal and Qiu Steel
Investment to the Longmen Joint Venture.
In
the
Longmen Joint Venture, Longmen Group has a 40% ownership interest, Daqiuzhuang
Metal has a 32% ownership interest and Qiu Steel Investment has a 28% ownership
interest, respectively. In total, General Steel controls approximately 60%
of
the Lo
ngmen
Joint Venture through Daqiuzhuang Metal and Qiu Steel Investment.
On
September 24, 2007, Longmen Joint Venture further acquired 74.92% ownership
interest in Environmental Protection Industry Development Co., Ltd., a PRC
company of limited liability (“EPID”), for RMB18,080,930, approximately
$2,380,000, and a 36% equity interest in Hualong Fire Retardant Materials Co.,
Ltd., a PRC company of limited liability (“Hualong”), for RMB3,287,980,
approximately $430,000. The parties agreed to make the effective date of the
transaction July 1, 2007.
On
December 12, 2007, Longmen Joint Venture entered into an investment agreement
with Hancheng Tongxing Metallurgy Co., Ltd., a PRC company of limited liability
(“Tongxing””), to contribute 217,478.47 square meters of land use rights at an
appraised value of approximately RMB 30,227,333 or approximately $4.1million.
Pursuant to the agreement, the land will be converted into shares valued at
RMB
22,744,419 or approximately $3.1million, which will give Longmen Joint Venture
a
22.76% stake in Tongxing.
The
following table reflects the Company’s current organization structure:
Our
Operating Subsidiaries and Products
Daqiuzhuang
Metal
Daqiuzhuang
Metal started its operation in 1988 and was incorporated under its current
form
on August 18, 2000 in Jinghai county, Tianjin municipality, China. Daqiuzhuang
Metal is a Sino-foreign joint venture with an operating term that will expire
on
June 24, 2024, at which point we expect to file a request for an extension
of
the term permitted under the then applicable laws.
Daqiuzhuang
Metal’s core business is the manufacturing of high quality hot-rolled carbon and
silicon steel sheets which are mainly used in the production of tractors,
agricultural vehicles, shipping containers and in other specialty markets.
Daqiuzhuang Metal uses a traditional rolling mill production sequence, such
as
heating, rolling, cutting, annealing, and flattening to process coil into steel
sheets. The sheet sizes are approximately 2,000 mm (length) x 1,000 mm (width)
x
0.75 to 2.0 mm (thickness). Limited size adjustments can be made to meet order
requirements. “Qiu Steel” is the registered trademark under which we sell these
products.
Daqiuzhuang
Metal currently has ten steel sheet production lines processing approximately
400,000 tons of 0.75-2.0 mm hot-rolled carbon and silicon steel sheets per
year,
maintaining, by our estimates, an approximately 50% market share of all
hot-rolled steel sheets used in the production of light agricultural vehicles
in
China, out of which 150,000 tons of production capacity were added since
mid-March 2006. The raw materials we use to produce our hot-rolled sheets are
hot-rolled steel coils which we purchase from a variety of local sources. There
are many sources of hot-rolled steel coil in Tianjin and neighboring Hebei
province. There is little seasonality in the demand for the products
manufactured by Daqiuzhuang Metal; however, the first quarter typically shows
the least amount of demand attributable to the Chinese New Year holiday. In
2005, to comply with a Daqiuzhuang County environmental clean-up campaign,
we
invested $94,000 to remodel our industrial water recycling system. We do not
believe future costs to environmental compliance will be material to our
financial position. To maintain our market share, we allow some customers to
purchase on credit which contributes to our accounts receivable balance. For
the
hot-rolled steel coil which we purchase as the feedstock for our flat-rolled
sheets, we generally pay in arrears. However, when based on our experience
in
the market we feel that feedstock prices are at a low point, we will pre-pay
for
a large amount to lock-in the low price.
At
Daqiuzhuang Metal, steel shipments for the year ended December 31, 2007,
decreased 5.5% to 322,912 tons from 341,702 tons the prior year.
Until
2007, Daqiuzhuang Metal was our only production facility and accounted for
100%
of our operating revenue.
Baotou
Steel
Baotou
Steel Pipe Joint Venture is located at Kundulun District, Baotou city, Inner
Mongolia provin
ce,
China. It produces and sells spiral-weld steel pipes and primarily serves
customers in the oil, gas and petrochemical markets. The raw materials used
to
produce the pipes are hot-rolled carbon and low alloy steel coils and strips.
Pipes produced have a diameter ranging from 219-1240 mm; a wall thickness
ranging from 6-13mm; and a length ranging from 6-12 m. The facility has four
production lines with current annual production capacity of 100,000 tons.
Production capacity will increase to 600,000 tons by the end of 2009. We believe
there is only slight seasonality in the demand for products manufactured by
Baotou Steel Pipe Joint Venture. We believe the first quarter will likely show
the lightest demand owing to a slowing in construction projects due to weather
impairments and the Chinese New Year holiday.
At
Baotou
Steel Pipe Joint Venture, 13,489 tons of steel shipments were made during the
period of July 2007 through December 31, 2007, Baotou Steel Pipe Joint Venture
began sales efforts in July and this is the first year to include their revenue
in our yearly financial results.
Longmen
Joint Venture
Longmen
Joint Venture
is
located in Hancheng city, Shaanxi province. Longmen Joint Venture is the largest
inte
grated
steel producer in Shaanxi province, China. It uses iron ore and coke as primary
raw materials for steel production. Longmen Joint Venture has annual crude
steel
production capability of 2.5 million tons. It produces pig iron, crude steel,
reinforced bars (rebar) and high-speed wires
which
are
sold mostly in the domestic market
.
Approximately 90% of finished production is devoted to rebar. Rebar produced
has
a diameter range from 12-32mm and a length range of 6-12m. Overall, there is
little seasonality in the demand for the products manufactured by Longmen Joint
Venture. We follow the traditional industry pattern for demand of construction
products, whereby the third quarter typically shows greatest amount of demand
owing to favorable summer weather conditions for construction and the first
quarter typically shows least amount of demand owing to a slowing in
construction due to weather impairments and the Chinese New Year holiday. In
2005, our joint venture partner, the Longmen Group, received ISO 14001
certification for is overall environmental management system.
We
do not
believe future costs to environmental compliance will be material to our
financial position.
At
Longmen
Joint
Venture, 1,440,522 tons of steel
shipments were made during the period from June 2007 through December 31,
2007
.
Longmen
Jo
int
Venture is also engaged in other business activities, most of which are related
to steel manufacturing, such as the production of coke and iron ore pellets
from
taconite. Additional business activities include transportation services, real
estate services and hotel operations. These operations are all located in
Shaanxi province and primarily serve regional customers in the construction
industry.
The
purposes of the Longmen Joint Venture are, among others, to produce and sell
construction steel and to improve our product quality, production capacity
and
competitiveness by adopting advanced technology in the production of steel
products. The Longmen Joint Venture has an aggregate annual production capacity
of 2.5 million tons of crude steel. Approximately 90% of production capacity
is
devoted to producing construction steel products including re-bars and round
bars.
As
is
common practice in the construction steel products industry, most customers
pay
for products in advance. At Longmen Joint Venture, most customers pay
approximately 2 weeks in advance. This allows us to maintain a low accounts
receivable balance. Additionally, since we require our customers to place their
orders at the beginning of each month and there is little unpredicted volume
variance in these orders, we are able to keep a minimum amount of inventory
for
backlog. For the majority of our raw materials purchases, we generally pay
in
arrears.
Marketing
and Customers
We
sell
our products primarily to distributors. We typically collect payment from these
distributors in advance. Our marketing efforts are mainly directed toward those
customers who have exacting requirements for on-time delivery, customer support
and product quality. We believe that our enhanced product quality, delivery
capabilities, and our emphasis on customer support and product planning are
critical factors in our ability to serve this segment of the
market.
Our
products produced at Daqiuzhuang Metal including hot-rolled carbon and silicon
sheets are primarily used by domestic manufacturers of light agricultural
vehicles: small, motorized, 3-wheel vehicles with a payload from 1,650 to 4,400
lbs. (750 to 2,000 kgs), retailing between $1,200 and $1,800 (RMB10,000 to
15,000).
These
inexpensive agriculture vehicles are targeted to the low-income farming
populations in the rural areas of
China.
International non-government organizations estimate that approximately 60%-80%
of China’s population
of
1.3
billion people is comprised of low-income rural farmers.
Based
on
the production and sales figures supplied by our customers producing economy
agricultural vehicles, we estimate that we supply approximately 50% of the
nationwide demand for hot-rolled steel sheets used in this niche
market.
Our
products produced at Baotou Steel Pipe Joint Venture are spiral-weld steel
pipes
used in the energy sector to transport natural gas, oil and stream. Pipes
produced have a diameter ranging from 219-1240 mm; a wall thickness ranging
from
6-13mm; and a length ranging from 6-12 m. China’s western region is a
resource-rich area. Our products are used to transport oil and natural gas
extracted from this region to the coastal metropolitan areas.
Our
products produced at Longmen Joint Venture are
mainly
rebar and r
ound
bars
used in the construction industry and infrastructure. Shaanxi province has
been
designated by the central government as the bridgehead point for development
into China’s western region. Development of the western region is one of the top
five economic priorities of the central government, as indicated by the national
five-year economic plan. By our estimates, annual demand for steel in Shaanxi
province is 8 million tons. The majority of demand comes from the southern
part
of the province centered around Xi’an, the province capital. This demand is
principally driven by large construction and infrastructure projects, of which
our products are key building components. Due to our close proximity to Xi’an
(180 km) and lack of major a competitor within a 250 km radius, we estimate
we
have an approximate 70% market share in Xi’an and the surrounding area.
Competitors
We
compete with both SOEs and privately owned steel manufacturers. While we believe
that our price and quality are superior to other manufacturers. Many of our
competitors are better capitalized, more experienced, and have deeper ties
in
the Chinese marketplace. We consider there to be the following eight major
competitors of similar size, production capability and product line in the
market place competing against our three operating subsidiaries as
indicated:
·
Competitors of Daqiuzhuang Metal include:
Tianjin No. 1 Rolling Steel Plant, Tianjin Yinze Metal Sheet Plant and Tangshan
Fengrun Metal Sheet Plant;
·
Competitors of Longmen Joint Venture
include: Shanxi Haixin Iron and Steel Co., Ltd. and Gansu Jiuquan Iron and
Steel
Co., Ltd.; and
·
Competitors of Baotou Steel Pipe Joint
Venture include: Tianjin Bo Ai Steel Pipe Co., Hebei Cangzhou Zhong Yuan Steel
Pipe Co., Shanxi Taiyuan Guo Lian Steel Pipe Co.
Our
revenue is dependent, in large part, on significant contracts from a limited
number of customers. We have five major customers which represented
approximately 59% and 30% of our total sales for the fiscal year ended December
31, 2007 and 2006, respectively, and accounted for 0% of total account
receivables as of December 31, 2007. These customers are: Shaanxi Longmen Iron
and Steel Group Co., Ltd., China Mine Metals Corporation, Shaanxi Haiyan Coking
Co., Ltd., Shaanxi Longmen Iron and Steel Group Co., Ltd. Baoji Rolling Mill,
Xi’an Wanlong Materials Trading Co., Ltd. We believe that revenue derived from
current and future large customers will continue to represent a significant
portion of our total revenue.
Intellectual
Property Rights
“Qiu
Steel” is the registered trademark under which we sell hot-rolled carbon and
silicon steel sheets products produced at Daqiuzhuang Metal. The “Qiu Steel”
logo has been registered with the China National Trademark Bureau under No.
586433. “Qiu Steel” is registered under the GB 912-89 national quality standard,
and certified under the National Quality Assurance program.
“Baogang
Tongyong” is the trademark under which we sell spiral-weld steel pipes products
produced at Baotou Steel Pipe Joint Venture. This trademark is currently being
registered with China National Trademark Bureau.
“Yu
Long”
is the registered trademark under which we sell rebar and roundbar products.
The
trademark is registered under the ISO9001:2000 international quality
standard.
Employees
As
of
December 31, 2007, we had 6,250 employees on a full time basis. As of December
31, 2006, we had 1,250 employees on a full time basis. The increase in the
number of employees is due to the two joint ventures we consummated in 2007.
ITEM
1A. RISK FACTORS
Our
business, financial condition and results of operations are subject to various
risks, including those discussed below, which may affect the value of our
securities. The risks discussed below are those that we believe are
currently the most significant, although additional risks not presently known
to
us or that we currently deem less significant may also impact our business,
financial condition and results of operations, perhaps materially.
Risks
Related to Our Business
We
face substantial competition which, among other things, may lead to price
pressure and adversely affect our sales.
We
compete with other market players on the basis of product quality,
responsiveness to customer needs and price. There are two types of steel and
iron companies in China: State Owned Enterprises (“SOEs”), and privately owned
companies.
Criteria
important to our customers when selecting a steel supplier include:
·
Quality;
·
Price/cost competitiveness;
·
System
and product
performance;
·
Reliability and timeliness of
delivery;
·
New product and technology development
capability;
·
Excellence and flexibility in
operations;
·
Degree of global and local
presence;
·
Effectiveness of customer service;
and
·
Overall management capability.
We
compete with both SOEs and privately owned steel manufacturers. While we believe
that our price and quality are superior to other manufacturers, many of our
competitors are better capitalized, more experienced, and have deeper ties
in
the Chinese marketplace. We consider there to be the following eight major
competitors of similar size, production capability and product line in the
market place competing against our three operating subsidiaries as
indicated:
·
Competitors of Daqiuzhuang Metal include:
Tianjin No. 1 Rolling Steel Plant, Tianjin Yinze Metal Sheet Plant and Tangshan
Fengrun Metal Sheet Plant;
·
Competitors of Longmen Joint Venture
include: Shanxi Haixin Iron and Steel Co., Ltd. and Gansu Jiuquan Iron and
Steel
Co., Ltd.; and
·
Competitors of Baotou Steel Pipe Joint
Venture include: Tianjin Bo Ai Steel Pipe Co., Hebei Cangzhou Zhong Yuan Steel
Pipe Co., and Shanxi Taiyuan Guo Lian Steel Pipe Co.
In
addition, with China’s entry into the World Trade Organization and China’s
agreements to lift many of the barriers to foreign competition, we believe
that
competition will increase as a whole with the entry of foreign companies into
this market. This may limit our opportunities for growth, lead to price pressure
and reduce our profitability. We may not be able to compete favorably and this
increased competition may harm our business, our business prospects and results
of operations.
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.
Our
limited operating history may not provide a meaningful basis on which to
evaluate our business. Although our revenues have grown rapidly since inception,
we might not be able to maintain our profitability or we may incur net losses
in
the future. We expect that our operating expenses will increase as we expand.
Any significant failure to realize anticipated revenue growth could result
in
significant operating losses. We will continue to encounter risks and
difficulties frequently experienced by companies at a similar stage of
development, including our potential failure to:
·
Implement our business model and strategy
and adapt and modify them as needed;
·
Increase awareness of our brands, protect
our reputation and develop customer loyalty;
·
Manage
our expanding operations and
service offerings, including the integration of any future
acquisitions;
·
Maintain
adequate control of our
expenses;
·
Anticipate
and adapt to changing
conditions in the markets in which we operate as well as the impact of any
changes in government regulation; and
·
Anticipate
mergers and acquisitions,
technological developments and other significant competitive and market dynamics
involving our competitors. Our business, business prospects and results of
operations will be affected if we are not successful in addressing any or all
of
these risks and difficulties.
Our
inability to fund our capital expenditure requirements may adversely affect
our
growth and profitability.
Our
continued growth is dependent upon our ability to raise additional capital
from
outside sources. Our strategy is to grow through aggressive mergers, joint
ventures and acquisitions targeting SOE steel companies and selected entities
with outstanding potential. Our growth strategy will require us to obtain
additional financing through capital markets. In the future, we may be unable
to
obtain the necessary financing on a timely basis and on favorable terms, and
our
failure to do so may weaken our financial position, reduce our competitiveness,
limit our growth and reduce our profitability. Our ability to obtain acceptable
financing at any given time may depend on a number of factors,
including:
·
Our financial condition and results of
operations;
·
The condition of the PRC economy and the
industry sectors in which we operate; and
·
Conditions in relevant financial markets in
the U.S., the PRC and elsewhere in the world.
We
may not be able to effectively control and manage our
growth.
If
our
business and markets grow and develop, it will be necessary for us to finance
and manage such an expansion in an orderly fashion. This growth will lead to
an
increase in the responsibilities of existing personnel, the hiring of additional
personnel and expansion of our scope of operations. It is possible that we
may
not be able to obtain the required financing under terms that are acceptable
to
us or hire additional personnel to meet the needs of our expansion.
Our
business, revenues and profitability are dependent on a limited number of large
customers.
Our
revenue is dependent, in large part, on significant contracts with a limited
number of large customers. For the fiscal year ended December 31, 2007,
approximately 59% of our sales were to five customers and these customers
accounted for 0% of total account receivables
.
We
believe that revenue derived from our current and future large customers will
continue to represent a significant portion of our total revenue. Our inability
to continue to secure and maintain a sufficient number of large contracts or
the
loss of, or significant reduction in purchases by, one or more of our major
customers would have the effect of reducing our revenues and profitability.
Moreover,
our success will depend in part upon our ability to obtain orders from new
customers, as well as the financial condition and success of our customers
and
general economic conditions in China.
Steel
consumption is cyclical and worldwide overcapacity in the steel industry and
the
availability of alternative products have resulted in intense competition,
which
may have an adverse effect on profitability and cash flow.
Steel
consumption is highly cyclical and generally follows general economic and
industrial conditions both worldwide and in regional markets. The steel industry
has historically been characterized by excess world supply, which has led to
substantial price decreases during periods of economic weakness. Future economic
downturns could decrease the demand for our products. Substitute materials
are
increasingly available for many steel products, which further reduces demand
for
steel.
We
may not be able to pass on to customers the increases in the costs of our raw
materials, particularly iron-ore and steel.
The
major
raw materials that we purchase for production are iron-ore and steel coil.
The
price and availability of these raw materials are subject to market conditions
affecting supply and demand. Our financial condition or results of operations
may be impaired by further increases in raw material costs to the extent we
are
unable to pass those increases to our customers. In addition, if these materials
are not available on a timely basis or at all, we may not be able to produce
our
products and our sales may decline.
The
price of steel may decline due to an overproduction by Chinese steel
companies.
According
to the survey conducted by the China Iron and Steel Association, there are
more
than 1,100 steel companies in China. Among those, only 15 companies have over
5
million tons of production capacity. Each steel company has its own production
plan. The Chinese government posted this guidance on the steel industry to
encourage consolidation within the fragmented steel sector to mitigate problems
of low-end repetitive production and inefficient use of resources. The current
situation of overproduction may not be solved by these measures posted by the
Chinese government and result in consolidation within the fragmented steel
sector. If the current state of overproduction continues, our product shipments
could decline, our inventory could build up and eventually we may be required
to
decrease our sales price, which may eventually decrease our
profitability.
Disruptions
to our manufacturing processes could adversely affect our operations, customer
service levels and financial results.
Steel
manufacturing processes are dependent on critical steel-making equipment, such
as furnaces, continuous casters, rolling mills and electrical equipment (such
as
transformers), and such equipment may incur downtime as a result of
unanticipated failures or other events, such as fires or furnace breakdowns.
Although our manufacturing plants have not experienced plant shutdowns or
periods of reduced production as a result of such equipment failures or other
events, we may experience such problems in the future. To the extent that lost
production as a result of such a disruption could not be compensated for by
unaffected facilities, such disruptions could have an adverse effect on our
operations, customer service levels and financial results.
Because
we are a holding company with substantially all of our operations conducted
through our subsidiaries, our performance will be affected by the performance
of
our subsidiaries.
We
have
no operations independent of those of Daqiuzhuang Metal, Baotou Steel Pipe
Joint
Venture and Longmen Joint Venture, and our principal assets are our investments
in these subsidiaries. As a result, we are dependent upon the performance of
Daqiuzhuang Metal, Baotou Steel Pipe Joint Venture and Longmen Joint Venture
and
we will be subject to the financial, business and other factors affecting our
subsidiaries as well as general economic and financial conditions. As
substantially all of our operations are and will be conducted through our
subsidiaries, we will be dependent on the cash flow of our subsidiaries to
meet
our obligations.
Because
virtually all of our assets are and will be held by operating subsidiaries,
the
claims of our stockholders will be structurally subordinate to all existing
and
future liabilities and obligations, and trade payables of such subsidiaries.
In
the event of our bankruptcy, liquidation or reorganization, our assets and
those
of our subsidiaries will be available to satisfy the claims of our stockholders
only after all of our subsidiaries’ liabilities and obligations have been paid
in full.
We
depend on acquiring companies to fulfill our growth
plan.
An
important element of our planned growth strategy is the pursuit and acquisitions
of other businesses that increase our existing production capacity. However,
acquiring and integrating businesses involves a number of special risks,
including the possibility that management may be distracted from regular
business concerns by the need to integrate operations, unforeseen difficulties
in integrating operations and systems, problems relating to assimilating and
retaining employees of the acquired businesses, challenges in retaining
customers, and potential adverse short-term effects on operation results. If
we
are unable to successfully complete and integrate strategic acquisitions in
a
timely manner, our growth strategy may be adversely impacted.
We
depend on bank financing for our working capital
needs.
We
have
various financing facilities amounting to approximately US $142.1 million,
of
which all are due on demand or within one year
.
So
far,
we have not experienced any difficulties in repaying such financing facilities.
However, we may in the future encounter difficulties to repay or refinance
such
loans on time and may face severe difficulties in our operations and financial
position.
We
rely on Mr. Zuosheng Yu for important business
leadership.
We
depend, to a large extent, on the abilities and operations of our current
management team. However, we have a particular reliance upon Mr. Zuosheng Yu,
our Chairman, Chief Executive Officer and majority shareholder, for the
direction of our business and leadership in our growth effort. The loss of
the
services of Mr. Yu, for any reason, may have a material adverse effect on our
business and prospects. We cannot guarantee that Mr. Yu will continue to be
available to us, or that we will be able to find a suitable replacement for
Mr.
Yu on a timely basis.
There
have been historical deficiencies with our internal controls and these remain
areas of our internal and disclosure controls that require improvements, and
we
are exposed to potential risks from legislation requiring companies to evaluate
controls under Section 404 of the Sarbanes-Oxley Act of 2002.
While
we
believe that we currently have adequate internal control procedures in place,
we
are still exposed to potential risks from legislation requiring companies to
evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Under
the
supervision and with the participation of our management, we have evaluated
our
internal controls systems in order to allow management to report on, and our
registered independent public accounting firm to attest to, our internal
controls, as required by Section 404 of the Sarbanes-Oxley Act. We have
performed the system and process evaluation and testing required in an effort
to
comply with the management certification and auditor attestation requirements
of
Section 404. As a result, we have incurred additional expenses and a diversion
of management’s time. If we are not able to continue to meet the requirements of
Section 404 in a timely manner or with adequate compliance, we might be subject
to sanctions or investigation by regulatory authorities, such as the SEC or
the
NYSE Market. Any such action could adversely affect our financial results and
the market price of our stock.
We
do not presently maintain product liability insurance in the PRC, and our
property and equipment insurance does not cover the full value of our property
and equipment, which leaves us with exposure in the event of loss or damage
to
our properties or claims filed against us.
We
currently do not carry any product liability or other similar insurance in
China. We cannot assure you that we would not face liability in the event of
the
failure of any of our products.
We
have
purchased automobile insurance with third party liability coverage for our
vehicles. In addition, we have purchased property insurance from China United
Property Insurance Company to cover real property and plant. Except for property
and automobile insurance, we do not have other insurance such as business
liability or disruption insurance coverage for our operations in the PRC. In
the
event of a significant product liability claim or other uninsured event, our
financial results and the price of our common stock may be adversely affected.
Risks
Related to Operating Our Business in China
We
face the risk that changes in the policies of the Chinese government could
have
significant impact upon the business we may be able to conduct in China and
the
profitability of such business.
The
economy of China is transitioning from a planned economy to a market oriented
economy subject to five-year and annual plans adopted by the government that
set
down national economic development goals. Policies of the Chinese government
can
have significant effects on the economic conditions of China. The Chinese
government has confirmed that economic development will follow a model of market
economy under socialism. Under this direction, we believe that the PRC will
continue to strengthen its economic and trading relationships with foreign
countries and business development in China will follow market forces. While
we
believe that this trend will continue, there can be no assurance that such
will
be the case. A change in policies by the Chinese government could adversely
affect our interests through, among other factors: changes in laws, regulations
or the interpretation thereof; confiscatory taxation; restrictions on currency
conversion, imports or sources of supplies; or the expropriation or
nationalization of private enterprises. Although the Chinese government has
been
pursuing economic reform policies for approximately two decades, the Chinese
government may significantly alter such policies, especially in the event of
a
change in leadership, social or political disruption, or other circumstances
affecting China’s political, economic and social life.
The
PRC laws and regulations governing our current business operations and
contractual arrangements are uncertain, and if we are found to be in violation,
we could be subject to sanctions. In addition, any changes in such PRC laws
and
regulations may have a material and adverse effect on our
business.
There
are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including but not limited to the laws and regulations
governing our business, or the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. Along with our subsidiaries, we are
considered foreign persons or foreign funded enterprises under PRC laws, and
as
a result, we are required to comply with PRC laws and regulations. These laws
and regulations are relatively new and may be subject to future changes, and
their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New
laws
and regulations that affect existing and proposed future businesses may also
be
applied retroactively. In addition, the PRC authorities retain broad discretion
in dealing with violations of laws and regulations, including levying fines,
revoking business licenses and requiring actions necessary for compliance.
In
particular, licenses, permits and beneficial treatment issued or granted to
us
by relevant governmental bodies may be revoked at a later time under contrary
findings of higher regulatory bodies. We cannot predict what effect the
interpretation of existing or new PRC laws or regulations may have on our
businesses. We may be subject to sanctions, including fines, and could be
required to restructure our operations. Such restructuring may not be effective
or result in similar or other difficulties. As a result of these substantial
uncertainties, there is a risk that we may be found in violation of any current
or future PRC laws or regulations.
A
slowdown or other adverse developments in the PRC economy may materially and
adversely affect our customers, demand for our services and our
business.
All
of
our operations are conducted in the PRC and all of our revenues are generated
from sales to businesses operating in the PRC. Although the PRC economy has
grown significantly in recent years, such growth may not continue. We do not
know how sensitive we are to a slowdown in economic growth or other adverse
changes in the PRC economy which may affect demand for agricultural equipment.
A
slowdown in overall economic growth, an economic downturn or recession or other
adverse economic developments in the PRC may materially reduce the demand for
our products and in turn adversely effect our results of operations and our
productivity.
Inflation
in China could negatively affect our profitability and
growth.
While
the
Chinese economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. If prices for our products rise at a rate that is insufficient to
compensate for the rise in the costs of supplies, it may have an adverse effect
on profitability. In order to control inflation in the past, the Chinese
government has imposed controls on bank credits, limits on loans for fixed
assets and restrictions on state bank lending. Such an austerity policy can
lead
to a slowing of economic growth. In October 2004, the People’s Bank of China,
China’s central bank, raised interest rates for the first time in nearly a
decade and indicated in a statement that the measure was prompted by
inflationary concerns in the Chinese economy. Repeated increases in interest
rates by the central bank will likely slow economic activity in China which
could, in turn, materially increase our costs and also reduce demand for our
products.
If
relations between the United States and China deteriorate, our stock price
may
decrease and we may experience difficulties accessing the U.S. capital
markets.
At
various times during recent years, the United States and China have had
disagreements over political and economic issues. Controversies may arise in
the
future between these two countries. Any political or trade controversies between
the United States and China could impact the market price of our common stock
and our ability to access U.S. capital markets.
The
Chinese Government could change its policies toward private enterprises, which
could result in the total loss of our investments in
China.
Our
business is subject to political and economic uncertainties in China and may
be
adversely affected by its political, economic and social developments. Over
the
past several years, the Chinese Government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. The Chinese Government may not continue to pursue these
policies or may alter them to our detriment from time to time. Conducting our
business might become more difficult or costly due to changes in policies,
laws
and regulations, or in their interpretation or the imposition of confiscatory
taxation, restrictions on currency conversion, restrictions or prohibitions
on
dividend payments to stockholders, devaluations of currency or the
nationalization or other expropriation of private enterprises. In addition,
nationalization or expropriation could result in the total loss of our
investments in China.
The
PRC State Administration of Foreign Exchange, or SAFE, requires PRC residents
to
register with, or obtain approval from SAFE regarding their direct or indirect
offshore investment activities.
PRC
State
Administration of Foreign Exchange Regulations regarding offshore financing
activities by PRC residents have undertaken continuous changes which may
increase the administrative burden we face and create regulatory uncertainties
that could adversely affect the implementation of our acquisition strategy,
and
a failure by our shareholders who are PRC residents to make any required
applications and filings pursuant to such regulations may prevent us from being
able to distribute profits and could expose us and our PRC resident shareholders
to liability under PRC law.
Our
business, results of operations and overall profitability are linked to the
economic, political and social conditions in China.
All
of
our business, assets and operations are located in China. The economy of China
differs from the economies of most developed countries in many respects,
including government involvement, level of development, growth rate, control
of
foreign exchange, and allocation of resources. The economy of China has been
transitioning from a planned economy to a more market-oriented economy. Although
the Chinese Government has implemented measures recently emphasizing the
utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the Chinese Government. In addition, the Chinese
Government continues to play a significant role in regulating industry by
imposing industrial policies. It also exercises significant control over China’s
economic growth through the allocation of resources, controlling payment of
foreign currency denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Therefore, the
Chinese Government’s involvement in the economy may negatively affect our
business operations, results of operations and our financial
condition.
Governmental
control of currency conversion may cause the value of your investment in our
common stock to decrease.
The
PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
We
receive substantially all of our revenues in Renminbi, which is currently not
a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency denominated obligations. Under existing
PRC foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies.
The
PRC
government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain of our expenses as they
come
due.
The
fluctuation of the Renminbi may cause the value of your investment in our common
stock to decrease.
The
value
of the Renminbi against the U.S. dollar and other currencies may fluctuate
and
is affected by, among other things, changes in the PRC’s political and economic
conditions. As we rely entirely on revenues earned in the PRC, our cash flows,
revenues and financial condition will be affected by any significant revaluation
of the Renminbi. For example, to the extent that we need to convert U.S. dollars
we receive from an offering of our securities into Renminbi for our operations,
if the Renminbi appreciates against the U.S. dollar, the Renminbi equivalent
of
the US dollar we convert would be reduced. Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of making payments for dividends
on our common shares or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi
we
convert would be reduced. To date, however, we have not engaged in transactions
of either type. In addition, the depreciation of significant U.S. dollar
denominated assets could result in a charge to our income statement and a
reduction in the value of these assets.
Since
1994 the PRC has pegged the value of the Renminbi to the U.S. dollar. We do
not
believe that this policy has affected our business. However, there have been
indications that the PRC government may be reconsidering its monetary policy
in
light of the overall devaluation of the U.S. dollar against the Euro and other
currencies during the last two years. In July 2005, the PRC government revalued
the Renminbi by 2.1% against the U.S. dollar, moving from Renminbi 8.28 to
Renminbi 8.11 per dollar. If the pegging of the Renminbi to the U.S. dollar
is
loosened, we anticipate that the value of the Renminbi will appreciate against
the dollar with the consequences discussed above. As of December 31, 2007,
the
exchange rate of the RMB to the U.S. dollar was 7.3.
We
are subject to environmental and safety regulations, which may increase our
compliance costs and reduce our overall
profitability.
We
are
subject to the requirements of environmental and occupational safety and health
laws and regulations in China. We may incur substantial costs or liabilities
in
connection with these requirements. Additionally, these regulations may become
stricter, which will increase our costs of compliance in a manner that could
reduce our overall profitability. The capital requirements and other
expenditures that may be necessary to comply with environmental requirements
could increase and become a significant expense linked to the conduct of our
business.
Our
operating subsidiary must comply with environmental protection laws that could
adversely affect our profitability.
We
are
required to comply with the environmental protection laws and regulations
promulgated by the national and local governments of the PRC. Yearly inspections
of waste treatment systems require the payment of a license fee which could
become a penalty fee if standards are not maintained. If we fail to comply
with
any of these environmental laws and regulations in the PRC, depending on the
types and seriousness of the violation, we may be subject to, among other
things, warning from relevant authorities, imposition of fines, specific
performance and/or criminal liability, forfeiture of profits made, being ordered
to close down our business operations and suspension of relevant permits.
Because
the Chinese legal system is not fully developed, our legal protections may
be
limited.
The
PRC
legal system is based upon written statutes. Prior court decisions may be cited
for reference but are not binding on subsequent cases and have limited value
as
precedents. Since 1979, the PRC legislative bodies have promulgated laws and
regulations dealing with economic matters such as foreign investment, corporate
organization and governance, commerce, taxation and trade. However, the PRC
has
not developed a fully integrated legal system and the array of new laws and
regulations may not be sufficient to cover all aspects of economic activities
in
the PRC. In particular, because these laws and regulations are relatively new,
and because of the limited volume of published decisions and their non-binding
nature, the interpretation and enforcement of these laws and regulations involve
uncertainties. In addition, published government policies and internal rules
may
have retroactive effects and, in some cases, the policies and rules are not
published at all. As a result, we may be unaware of our violation of these
policies and rules until some time later. The laws of the PRC govern our
contractual arrangements with our affiliated entities. The enforcement of these
contracts and the interpretation of the laws governing these relationships
are
subject to uncertainty. For the above reasons, legal compliance in China may
be
more difficult or expensive.
Risks
Related to Our Common Stock
Our
officers, directors and affiliates control us through their positions and stock
ownership and their interests may differ from other
stockholders.
Our
officers, directors and affiliates beneficially own approximately 70% of our
common stock. Mr. Zuosheng Yu our major shareholder, beneficially owns
approximately 69% of our common stock. Mr. Yu can effectively control us and
his
interests may differ from other stockholders.
All
our
subsidiaries are located in China and substantially all of our assets are
located outside the United States. It may therefore be difficult for investors
in the United States to enforce their legal rights based on the civil liability
provisions of the U.S. federal securities laws against us in the courts of
either the U.S. and the PRC and, even if civil judgments are obtained in U.S.
courts, such judgments may not be enforceable in PRC courts. All our directors
and officers reside outside of the United States. It is unclear if extradition
treaties now in effect between the United States and the PRC would permit
effective enforcement against us or our officers and directors of criminal
penalties under the U.S. federal securities laws or otherwise.
We
have never paid cash dividends and are not likely to do so in the foreseeable
future.
We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances
dictate.
Our
common stock is subject to price volatility unrelated to our
operations.
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other steel makers, trading volume in
our
common stock, changes in general conditions in the economy and the financial
markets or other developments affecting our competitors or us. In addition,
the
stock market is subject to extreme price and volume fluctuations. This
volatility has had a significant effect on the market price of securities issued
by many companies for reasons unrelated to their operating performance and
could
have the same effect on our common stock.
Investors
may experience dilution from any conversion of the senior convertible notes
and
the exercise of warrants we issued in December 2007.
We
are
registering the shares of our common stock issuable upon conversion
approximately $40,000,000 worth of senior convertible notes convertible into
4,170,009 shares of our common stock assuming a conversion price of $12.47
per
share and applicable interest rates and upon the exercise warrants to purchase
an additional aggregate amount of 1,154,958 shares of our common stock at an
exercise price of $13.51 per share that we issued in December 2007. The issuance
of shares of our common stock upon conversion of the notes and exercise of
the
warrants will dilute current shareholders’ holdings in our company. The senior
convertible notes have a five year term through December 12, 2012 and the
warrants are exercisable from May 13, 2008 to May 13, 2013.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
Applicable
ITEM
2. PROPERTIES
Daqiuzhuang
Metal
The
properties of Daqiuzhuang Metal consist of manufacturing sites and office
buildings located in the Jinghai county, about 20 miles (45 kilometers)
southwest of the Tianjin city center on a total of 17.81 acres (7.21 hectares)
of land, which includes 320,390 sq. ft. (29,667 sq. m.) of building space.
Under
Chinese law, all land in the PRC is owned by the government, which grants a
“land use right” to an individual or entity after a purchase price for such
“land use right” is paid to the government. The land use right allows the holder
the right to use the land for a specified long-term period of time and enjoy
all
the ownership incidents to the land. We are the registered owner of the land
use
rights for the parcels of land identified in the chart below.
|
Registered
Owner of Land use Right
|
Location
& Certificate of Land Use Right
|
Usage
|
Life
of Land Use Right
|
|||
|
Tianjin
Daqiuzhuang Metal Sheet Co., Ltd.
|
No.
6 West Gangtuan Road, Daqiuzhuang, Jinghai Country, Tianjin
|
Industrial
Use
|
50
years
|
|||
|
Tianjin
Daqiuzhuang Metal Sheet Co., Ltd.
|
No.
35 Baiyi Road, Daqiuzhuang, Jinghai County, Tianjin
|
Industrial
Use
|
50
years
|
|||
|
Tianjin
Daqiuzhuang Metal Sheet Co., Ltd.
|
Ying
Fong Road North, Daqiuzhouang, Jinghai country Tianjin
|
Commercial
Use
|
50
years
|
Baotou
Steel Pipe Joint Venture
The
properties of Baotou Steel Pipe Joint Venture consist of our production and
administrative sites located on the main production campus of the Baotou Steel
located in Baotou, Inner Mongolia Autonomous Region - a province in Northern
China. The land is rented from Baotou Steel, our strategic partner in the Baotou
Steel Pipe Joint Venture.
Longmen
Joint Venture
The
properties of Longmen Joint Venture consist of production and administrative
sites located in various throughout the southern half of Shaanxi province on
a
land collectively which totals approximately 300.2 acres (121.5 hectares).
Under
Chinese law, all land in the PRC is owned by the government, which grants a
“land use right” to an individual or entity after a purchase price for such
“land use right” is paid to the government. The land use right allows the holder
the right to use the land for a specified long-term period of time and enjoy
all
the ownership incidents to the land. We are the registered owner of the land
use
rights for the parcels of land identified in the chart below.
|
Registered
Owner of Land use Right
|
Location
& Certificate of Land Use Right
|
Usage
|
Life
of Land Use Right
|
|||
|
Shaanxi
Longmen Iron and Steel Co., Ltd
|
North
Huanyuan Road, Weiyang District, Xi'an, Shaanxi
|
Industrial
Use
|
50
Years
|
|||
|
Shaanxi
Longmen Iron and Steel Co., Ltd
|
Longmen
Town, Hancheng, Shaanxi
|
Industrial
Use
|
50
Years
|
|||
|
Shaanxi
Longmen Iron and Steel Co., Ltd
|
Sanping
Village, Shipo Town, Zhashui County, Shaanxi
|
Industrial
Use
|
50
Years
|
|||
|
Shaanxi
Longmen Iron and Steel Co., Ltd
|
Zhaikouhe
Village, Xunjian Town, Zhashui County, Shaanxi
|
Industrial
Use
|
50
Years
|
|||
|
Shaanxi
Longmen Iron and Steel Co., Ltd
|
East
Taishi Avenue, Xincheng District, Hancheng, Shaanxi
|
Commercial
Use
|
50
Years
|
ITEM
3. LEGAL PROCEEDINGS.
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART
II
|
1ST
QTR
|
2ND
QTR
|
3RD
QTR
|
4TH
QTR
|
||||||||||
|
2007
|
|||||||||||||
|
High
|
$
|
5.80
|
$
|
4.09
|
$
|
9.00
|
$
|
19.20
|
|||||
|
Low
|
$
|
1.12
|
$
|
2.76
|
$
|
5.05
|
$
|
7.76
|
|||||
|
2006
|
|||||||||||||
|
High
|
$
|
2.33
|
$
|
1.95
|
$
|
1.45
|
$
|
1.30
|
|||||
|
Low
|
$
|
1.30
|
$
|
1.05
|
$
|
1.10
|
$
|
0.90
|
|||||
As
of
February
29, 2008, there were approximately 3,700 holders of record of our common
stock.
Dividend
Policy
Our
board
of directors currently does not intend to declare dividends or make any other
distributions to our shareholders. Any determination to pay dividends in the
future will be at our board’s discretion and will depend upon our results of
operations, financial condition and prospects as well as other factors deemed
relevant by our board of directors.
Unregistered
Sale of Securities
On
May
18, 2007, the board of directors of General Steel Holdings, Inc. (“the Company”)
entered into a Purchase Agreement with Victory New Holdings Limited, a British
Virgin Islands registered company (“the Victory New”), whereby Victory New
agreed to sell to the Company and the Company agreed to acquire (the
“Acquisition”) Victory New’s 30% minority interest in Tianjin Daqiuzhuang Metal
Sheet Co., Ltd. (“Daqiuzhuang Metal”), a subsidiary of the Company.
Pursuant to the Purchase Agreement, as consideration for the Acquisition,
the
Company agreed to issue Victory New an aggregate of 3,092,899 shares of the
Company’s Series A Preferred Stock at a price of $2.00 per share, which have a
voting power of 30% of the combined voting power of the Company’s common and
preferred stocks for the entire life of the Company. The purchase price was
based on the book value of $6,185,797 instead of the appraised value of
$9,304,796. As a result of the Acquisition, the Company will increase its
equity
interest in Daqiuzhuang Metal from approximately 70% to 100% and Daqiuzhuang
Metal will become a wholly owned subsidiary of the Company. Daqiuzhaung Metal
is
currently the only revenue generating subsidiary of the
Company.
On
December 13, 2007, we entered into a Securities Purchase Agreement (the
“Agreement”) with certain institutional investors (the “Buyers”). Pursuant to
the Agreement, we agreed to sell to the Buyers (i) senior convertible notes
in
the aggregate principal amount of $40,000,000 (“Notes”) and (ii) warrants to
purchase an additional aggregate amount of 1,154,958 shares of our Common Stock
(the “Warrants”).
The
Notes
bear initial interest at 3% per annum, which will be increased each year as
specified in the Notes, payable semi-annually in cash or shares of our common
stock, par value $0.001 per share (the “Common Stock”). The Notes have a five
year term through December 12, 2012. They are convertible into shares of the
Common Stock, subject to customary anti-dilution adjustments. The initial
conversion price is $12.47. We may redeem the Notes at 100% of the principal
amount, plus any accrued and unpaid interest, beginning December 13, 2008,
provided the market price of the Common Stock is at least 150% of the then
applicable conversion price for 30 consecutive trading days prior to the
redemption. The Notes are secured by a first priority, perfected security
interest in certain shares of Common Stock of Zuosheng Yu, as evidenced by
the
pledge agreement (the “Pledge Agreement”). The Notes are subject to events of
default customary for convertible securities and for a secured financing.
The
Warrants grant the Buyers the right to acquire shares of Common Stock at $13.51
per share of Common Stock, subject to customary anti-dilution adjustments.
The
Warrants may be exercised to purchase Common Stock at any time or times on
or
after May 13, 2008, but not after May 13, 2013, the expiration date of the
Warrants.
In
connection with this transaction, the Buyers and we entered into a registration
rights agreement (the “Registration Rights Agreement”). Pursuant to the terms
and conditions of the Registration Rights Agreement, we have agreed to register
within 60 calendar days after closing shares of Common Stock issuable to the
Buyers for resale on a Form S-3 Registration Statement to be effective by 90
calendar days or 120 days if the registration statement is subject to a full
review by the U.S. Securities and Exchange Commission. We shall register an
amount of Common Stock for resale that equals at least 120% of the sum of shares
issuable upon conversion of the Notes, the exercise of the Warrants and the
payment of interest accrued on the Notes. The registration rights granted under
the Registration Rights Agreement are subject to customary exceptions and
qualifications and compliance with certain registration procedures.
ITEM
6. SELECTED FINANCIAL DATA
(USD
and
number of shares in thousands, except per share amounts)
|
Years
ended December 31
|
||||||||||||||||
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|||||
|
(Restated)
|
||||||||||||||||
|
Total
sales
|
$
|
772,439
|
$
|
139,495
|
$
|
89,740
|
$
|
87,832
|
$
|
57,306
|
||||||
|
Cost
of sales
|
715,750
|
135,324
|
81,166
|
81,613
|
52,804
|
|||||||||||
|
Selling,
general, and administrative expenses
|
16,164
|
2,421
|
2,781
|
2,317
|
1,532
|
|||||||||||
|
Income
from operations
|
40,525
|
1,749
|
5,793
|
3,902
|
2,969
|
|||||||||||
|
Net
income
|
$
|
22,426
|
$
|
1,033
|
$
|
2,740
|
$
|
915
|
$
|
1,091
|
||||||
|
Net
income per common share, basic and diluted
|
$
|
0.69
|
$
|
0.03
|
$
|
0.09
|
$
|
0.03
|
$
|
0.04
|
||||||
|
Basic
weighted average shares outstanding
|
32,425
|
31,250
|
31,250
|
30,260
|
30,000
|
|||||||||||
|
Diluted
weighted average shares outstanding
|
32,558
|
31,250
|
31,250
|
30,260
|
30,000
|
|||||||||||
(USD
in
thousands, except the ratio )
|
|
|
As
of December 31
|
|
|||||||||||||
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
||||||
|
(restated)
|
||||||||||||||||
|
Total
assets
|
$
|
478,407
|
$
|
73,822
|
$
|
58,993
|
$
|
52,969
|
$
|
37,432
|
||||||
|
Depreciation
and amortization
|
$
|
10,337
|
$
|
1,917
|
$
|
1,344
|
$
|
1,255
|
$
|
1,013
|
||||||
|
Current
Ratio
|
0.68
|
0.87
|
0.96
|
0.92
|
0.77
|
|||||||||||
|
|
|
Three
months ended December 31 (unaudited)
|
|
|||||||
|
|
|
2007
|
|
2006
|
|
2005
|
|
|||
|
|
|
(In
thousands, except share and per share
amounts)
|
||||||||
|
Statement
of Operations Data
|
|
|
|
|||||||
|
Sales
revenues
|
$
|
268,192
|
$
|
42,496
|
$
|
17,719
|
||||
|
Cost
of goods sold
|
247,239
|
42,838
|
17,509
|
|||||||
|
Gross
profit
|
20,953
|
-342
|
210
|
|||||||
|
Selling,
general, and administrative expenses
|
5,894
|
266
|
1,017
|
|||||||
|
Income
from operations
|
15,059
|
-607
|
-808
|
|||||||
|
Net
income (loss)
|
$
|
12,057
|
$
|
514
|
$
|
386
|
||||
|
Net
income per share
|
|
|
|
|||||||
|
Basic
|
$
|
0.36
|
$
|
0.01
|
$
|
0.01
|
||||
|
Diluted
|
$
|
0.36
|
$
|
0.01
|
$
|
0.01
|
||||
|
|
|
|
|
|||||||
|
Balance
Sheet Data
|
|
|
|
|||||||
|
Current
assets
|
$
|
236,173
|
$
|
44,670
|
$
|
37,017
|
||||
|
Total
assets
|
478,407
|
73,822
|
58,993
|
|||||||
|
Total
liabilities
|
382,974
|
53,575
|
41,256
|
|||||||
|
Minority
interest
|
42,044
|
6,186
|
5,387
|
|||||||
|
Total
Stockholder’s equity
|
$
|
53,389
|
$
|
14,060
|
$
|
12,350
|
||||
ITEM
7. MANAGEMENT DISCUSSION AND ANALYSIS
Forward-Looking
Statements:
The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The following discussion contains forward-looking statements.
General Steel Holdings, Inc. is referred to herein as “we” or “our.” The words
or phrases “would be,” “will allow,” “expect to”, “intends to,” “will likely
result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or
similar expressions are intended to identify forward-looking statements. Such
statements include those concerning our expected financial performance, our
corporate strategy and operational plans. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of risks and uncertainties, including: (a) those risks and uncertainties related
to general economic conditions in China, including regulatory factors that
may
affect such economic conditions; (b) whether we are able to manage our planned
growth efficiently and operate profitable operations, including whether our
management will be able to identify, hire, train, retain, motivate and manage
required personnel or that management will be able to successfully manage and
exploit existing and potential market opportunities; (c) whether we are able
to
generate sufficient revenues or obtain financing to sustain and grow our
operations; and (d) whether we are able to successfully fulfill our primary
requirements for cash which are explained below under “Liquidity and Capital
Resources. Unless otherwise required by applicable law, we do not undertake,
and
we specifically disclaim any obligation, to update any forward-looking
statements to reflect occurrences, developments, unanticipated events or
circumstances after the date of such statement.
Company
Overview
General
Steel Holdings, Inc. (“General Steel”), headquartered in Beijing China, operates
a diverse portfolio of Chinese steel companies. Our companies serve various
industries and produce a variety of steel products: reinforced bars (rebar),
hot-rolled carbon and silicon sheets and spiral weld pipes. Our aggregate
production capacity of steel products is 3 million tons, of which the majority
is rebar. Individual industry segments have unique demand drivers, such as
rural
income, infrastructure construction and energy consumption. Domestic economic
conditions are an overall driver for all our products.
Our
vision is to become one of the largest non-government owned steel companies
in
China.
Our
mission is to acquire Chinese steel companies and increase their profitability
and efficiencies with the infusion of applied western management practices,
advanced production technologies and capital resources.
Our
strategy is to grow through aggressive mergers, joint ventures and acquisitions
targeting state-owned enterprise steel companies and selected entities with
outstanding potential. We have executed this strategy and consummated
controlling interest positions in two joint ventures. We are actively pursuing
a
plan to acquire additional assets.
We
presently have controlling interest in three steel subsidiary
companies:
·
Tianjin
Daqiuzhuang Metal Sheet Co.,
Ltd. (Daqiuzhuang Metal);
·
Baotou
Steel - General Steel Special
Steel Pipe Joint Venture Co., Ltd. (Baotou Steel Pipe Joint
Venture);
·
Shaanxi
Longmen Iron and Steel Co., Ltd.
(Longmen Joint Venture).
Steel
Operating Companies
·
Tianjin
Daqiuzhuang Metal Sheet Co., Ltd. (“Daqiuzhuang Metal”)
Tianjin
Daqiuzhuang Metal Sheet Co., Ltd. (“Daqiuzhuang Metal”), started its operation
in 1988. Daqiuzhuang Metal’s core business is the manufacturing of high quality
hot-rolled carbon and silicon steel sheets which are mainly used in the
production of small agricultural vehicles and other specialty markets. In the
niche market for metal sheets used in small agricultural vehicles, we estimate
that Daqiuzhuang Metal currently maintains an approximate 50% market
share.
Daqiuzhuang
Metal has ten steel sheet production lines capable of processing approximately
400,000 tons of 0.75-2.0 mm hot-rolled carbon steel sheets per year, of which
150,000 tons has been added since mid-March 2006. Products are sold through
a
nation-wide network of 35 distributors and 3 regional sales
offices.
Daqiuzhuang
Metal uses a traditional rolling mill production sequence, such as heating,
rolling, cutting, annealing, and flattening to process cut coil segments into
steel sheets. The sheet sizes are approximately 2,000 mm (length) x 1,000 mm
(width) x 0.75 to 2.0 mm (thickness). Limited size adjustments can be made
to
meet order requirements. Products sell under the registered “Qiu Steel” brand
name.
On
May
22, 2007, we filed a current report on Form 8-K announcing we agreed to acquire
from Victory New Holdings, Ltd., a British Virgin Islands Company (“Victory
New”), the remaining 30% outstanding shares of Daqiuzhuang Metal. The mother of
Henry Yu, our Chairman and CEO, is the sole shareholder of Victory New. For
the
acquisition, we agreed to issue an aggregate of 3,092,899 shares of Series
A
Preferred Stock at $0.001 par value.
·
Baotou
Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd. (“Baotou Steel
Pipe Joint Venture”)
On
April
27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. ("Baotou
Steel") entered into an Amended and Restated Joint Venture Agreement (the
"Agreement"), amending the Joint Venture Agreement entered into on September
28,
2005 ("Original Joint Venture Agreement"). The Amended and Restated Joint
Venture Agreement has increased Daqiuzhuang Metal's ownership interest in the
Joint Venture to 80%. The joint venture company’s name is Baotou Steel - General
Steel Special Steel Pipe Joint Venture Company Limited (“Baotou Steel Pipe Joint
Venture”). Baotou Steel will initially contribute RMB 10,000,000, or
approximately $1,270,000 taking 20% ownership interest in the Baotou Steel
Pipe
Joint Venture. Daqiuzhuang Metal will initially contribute RMB 40,000,000,
or
approximately $5,130,000 taking 80% ownership interest in the Baotou Steel
Pipe
Joint Venture.
We
have
invested $1.56 million cash into this joint venture with the rest of the
required register capital to be invested within a year. The remainder of the
investment will come from the operating cash flow from Daqiuzhuang
Metal.
Baotou
Steel Pipe Joint Venture received its business license approval on May 25,
2007.
It has four production lines capable of producing 100,000 tons of double
spiral-weld pipes. These pipes are used in the energy sector to transport
natural gas, oil and steam. Pipes produced at the mill have a diameter ranging
from 219-1240 mm; a wall thickness ranging from 6-13 mm; and a length ranging
from 6-12 m. Final production capacity at the mill will reach 600,000 tons
in
2009. Additional products may also be added. Presently, Baotou Steel Pipe Joint
Venture sells its products using an internal sales force to customers in the
Inner Mongolia Autonomous Region and the northwest region of China.
This
joint venture started production and testing operations in the second quarter
2007 and began to generate revenue in the third quarter 2007.
·
Shaanxi
Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”)
On
June
15, 2007, through two subsidiaries, Daqiuzhuang Metal and Tianjin Qiu Steel
Investment Co., Ltd., we entered into a joint venture agreement with Shaanxi
Longmen Iron & Steel Group Co., Ltd. (“Long Steel Group”) to form Shaanxi
Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”). Through our two
subsidiaries, we invested approximately $39 million cash and collectively hold
approximately 60% of the new joint venture.
Long
Steel Group, located in Hancheng city, Shaanxi province, in China’s central
region, was founded in 1958 and incorporated in 2002. In 2006, its reported
sales revenue was 7.4 billion RMB (approximately $900 million). It is the
largest steel company in the province. It has a total annual production capacity
of 2.5 million tons. Last year, the Chinese National Statistics Bureau ranked
it
among the top 50 steel companies in China in terms of output.
Long
Steel Group operates as a fully-integrated steel production facility, which
means it is capable of taking iron-ore and other raw materials, processing
them
into crude steel and then processing the crude steel into finished steel
products. Less than 10% of steel companies in China have fully-integrated steel
production capacity.
Our
joint
venture, Longmen Joint Venture, assumes existing operating units of the Long
Steel Group. The Long Steel Group contributed most of its working assets to
the
joint venture. Key units of the joint venture include:
·
Shaanxi
Longmen Iron and Steel Group Co., Ltd., (“Base Steel Operations”): Includes 8
blast furnaces (total volume 1749 cubic meters), 4 converters (total load 150
tons) and 1 continuous casting mill;
·
Shaanxi
Longmen Iron and Steel Group
Co., Ltd., Xi’an Rolling Mill: Annual capacity is 700,000 tons of rebar -
includes 1 semi-continuous mill line;
·
Shaanxi
Longmen Iron and Steel Group
Co., Ltd., Mulonggou Mining Co.: An iron-ore mine with 150,000 tons annual
capacity;
·
Shaanxi
Longmen Iron and Steel Group
Co., Ltd., Changlong Transportation Co: A comprehensive transportation company
combining railroad transportation, loading and discharging, maintenance as
well
as finished oil products and components - daily throughput capacity exceeds
5000
tons;
·
Shaanxi
Longmen Iron and Steel Group
Co., Ltd., Hancheng Yulong Hotel: A
1
25
room
hotel and recreation complex catering to the regional construction and steel
support industries;
·
Shaanxi
Yuxin Commercial Trading Co.,
Ltd.; and
·
Shaanxi
Yuteng Commercial Trading Co.,
Ltd.
Longmen
Joint Venture employs approximately 5,000 full-time and 2,000 part-time
workers.
The
annual capacity at Longmen Joint Venture is 2.5 million tons of crude steel.
It
is the largest steel producer in Shaanxi province. In 2006, Long Steel Group
recorded a shipment volume of 2.2 million tons of finished product, of which
94%
was reinforced bar steel (rebar - a commodity grade steel used in construction
to reinforce concrete), with the remainder being roundbar, wire rod and related
products. These products are primarily used in building and infrastructure
construction.
Longmen
Joint Venture’s products are categorized within the steel industry as “longs”
(referencing their shape). They are generally considered regional products
because their size, weight and dimension make them ill-suited for cost-effective
long-haul ground transportation. By our estimates, the provincial market demand
for rebar is 6 - 8 million tons. Slightly more than half of the province demand
radiates from Xi’an, the province capital, located 180 km from the joint venture
main site. We estimate in Xi’an we have a 72% market share.
An
established regional network of 27 agents and 2 sales offices sell the joint
venture’s products. Agents account for approximately 66% of sales. All products
sell under the registered brand name of “Yulong” which enjoys strong regional
recognition and awareness. Rebar and billet products carry ISO 9001 and 9002
certification and many other products have won national quality awards. Products
produced at the facility have been used in the construction of the Yangtze
River
Three Gorges Dam, Xi’an International Airport, the Xi Han, Xi Tong and Xi Da
provincial expressways, and are currently being used in the construction of
the
Xi’an city subway system.
On
September 24, 2007, Longmen Joint Venture acquired controlling interest in
two
subsidiaries of the Long Steel Group.
The
Longmen Joint Venture entered into an equity transfer agreement with Long Steel
Group to acquire its 74.92% ownership interest in its subsidiary, Longmen Iron
and Steel Group Co., Ltd. Environmental Protection Industry Development Co.,
Ltd. (“EPID”). The Joint Venture paid RMB 18,080,930 (approximately $2,380,000)
in exchange for the ownership interest. The facility utilizes solid waste
generated from the steel making process to produce products such as construction
materials, building blocks, landscape tiles, curb tops, ornamental tiles,
etc.
At
the
same time, the Longmen Joint Venture also entered into a second equity agreement
with the Long Steel Group to acquire its 36% ownership interest in its
subsidiary, Longmen Iron and Steel Group Co., Ltd. Hualong Fire Retardant
Materials Co., Ltd. (“Hualong”). The Joint Venture paid RMB 3,287,980
(approximately $430,000) in exchange for the ownership interest. The Joint
Venture is the largest shareholder in the company. The facility produces
fire-retardant materials used in various processes in the production of
steel.
Summary
of Significant Growth and Change in 2007
|
As
of December 31, 2006
|
As
of December 31, 2007
|
|||
|
Number
of Main Subsidiaries
|
1
|
3
|
||
|
Production
Capacity (ton)
|
400,000
|
3
million
|
||
|
Main
Product Categories
|
1
|
3
|
||
|
Number
of Sales Offices
|
3
|
6
|
||
|
Number
of
Full-time
Employees
|
1,250
|
6,200
|
||
|
Exchange
Listing
|
OTCBB
|
AMEX*
|
*
On
March 6, 2008, we migrated to the NYSE Arca
Stock
listing
We
obtained listing approval from American Stock Exchange (AMEX) on September
28,
2007. The stock officially started to trade on AMEX on October 3, 2007 under
the
ticker symbol, “GSI”. On March 6, 2008, we migrated from the AMEX to the NYSE
Arca and officially started to trade under the same ticker symbol,
“GSI”.
Factors
affecting our operating results
Demand
for our products
Overall,
domestic economic growth is an important demand driver of our products.
According to estimates by Deutsche Bank, China’s economy will grow by
approximately 10% in 2008. Specifically, industry demand drivers for our
products include construction and infrastructure projects, rural income growth
and energy demand.
At
Longmen JV, growth in regional construction and infrastructure projects drives
demand for our products. According to the 11
th
Five
Year National Economic Plan (2006-2010), development of China’s western region
is one of the top-five economic priorities of the nation. Shaanxi, the province
where Longmen JV is located, has been designated as the bridgehead for
development into the western region, and Xi’an, the provincial capital has been
designated as the focal point for this development. Our Longmen Joint Venture
is
180 km from Xi’an and does not have another major competitor within a 250km
radius. According to a Shaanxi provincial government report issued January
16,
2008, there are 150 construction and infrastructure projects scheduled to begin
in 2008. Some of the major projects include: six new highways, one new airport,
expansion of the Xi’an airport, a new ring subway system and 3 new dams. We see
strong and demand for our products driven by these and many other construction
and infrastructure projects. We believe there will be sustained regional demand
for several years ahead as the government continues to drive western region
development efforts.
At
Daqiuzhuang Metal, rural income growth drives demand for our hot-rolled carbon
sheets. According to the Asian Development Bank statistics, well over 60% of
the
nations’ 1.3 billion total population is comprised of low-income, rural farmers.
Our steel sheets are used in the construction of light agricultural vehicles
targeted for sale to low-income, rural farmers. We believe are sheets are
lighter and of greater ductility than those of our competitors and are preferred
by manufacturers of light agricultural vehicles. According to the 11
th
Five
Year National Economic Plan (2006-2010), raising the level of rural income
is a
top economic and social goal for the country. Many government programs,
including removing agricultural taxes and special local product taxes, designed
to spur rural income development have been initiated. The government expects
annual rural income to grow between 5% and 10% through 2010. Transportation
asset growth only slightly lags the growth in rural net income, so we anticipate
demand for light agricultural vehicles to grow between 4.7% and 9.6% through
2010.
At
Baotou
Steel Pipe Joint Venture, energy sector growth for the need to transport oil,
natural gas and steam drive demand for spiral-weld steel pipe. The West-East
pipeline that will bring oil and natural gas from the Xinjiang Uyghur Autonomous
Region to large eastern seaboard cities will be the largest single demand driver
for our pipes. This pipeline starts in China’s far western Xinjiang Uyghur
Autonomous Region and stretches 4000km through ten regions, provinces and
municipalities before its point of termination in Zhejiang province. This
pipeline will commence construction in the first quarter of 2008. Presently,
demand is fueled by smaller pipeline projects and municipal energy
infrastructure projects.
Supply
of
raw materials
Our
primary raw materials consist of iron-ore and hot-rolled steel coil. Longmen
Joint Venture uses iron-ore as its main raw material; Daqiuzhuang Metal and
Baotou Steel Pipe Joint Venture use hot-rolled steel coil as their main raw
materials. Iron-ore is the main raw material used to produce hot-rolled steel
coil, so the price of iron-ore is the primary raw material costs driver for
our
products.
Longmen
Joint Venture produces 2.5 million tons of our aggregate 3 million tons annual
production. At Longmen Joint Venture, 90% of production costs are raw materials,
with iron-ore being the largest component.
Nationwide,
over the course of 2007, there has been an upward trend in the price of
iron-ore. From January to December, the average price per ton of iron-ore
increased from approximately RMB 1,300 per ton to RMB 1,700. We expect the
overall cost of iron-ore will continue to increase through the end of
2008.
According
to the China Iron and Steel Association, approximately, 60% of the China
domestic steel industry demand for iron-ore must be filled by imports. At
Longmen Joint Venture, we purchase iron-ore from four primary sources: the
Mulonggou mine (owned by the Joint Venture), the Daxigou mine (owned by our
joint venture partner), surrounding small local mines and from abroad. The
Daxigou mine has 300 million tons of proven iron-ore reserves, of which only
approximately 950,000 tons have been excavated. According to the terms of our
Joint Venture agreement with the strategic partner, we have first rights of
refusal for sales and development from this mine.
We
source
approximately 15% of our iron-ore from the Mulonggou and Daxigou mines, 70%-75%
from local mines and only 10-15% of our iron-ore from abroad. Sourcing from
the
Mulonggou and Daxigou mines is approximately 50% cheaper than sourcing from
the
spot market. In 2008, we aim to increase the percentage of iron ore sourced
from
Mulonggou and Daxigou mines from approximately 15% to 30%. We anticipate this
will increase our gross margin between 1.5% and 2.0%. We believe gaining greater
direct control over our key raw material inputs is important for both margin
protection and secured source protection.
Industry
Consolidation
In
2007,
the government held firm on its resolve to consolidate the highly fragmented
domestic steel industry through coerced mergers and heightened operating
requirements. In November 2007, the National Development and Reform Commission
(NDRC), the nation’s top economic planner, reported that to date 29.4 million
tons of outdated iron smelting capacity and 15.21 million tons of outdated
steel
smelting capacity had been eliminated. It also later announced obligation
contracts with 18 provinces, autonomous regions and municipalities to eliminate
49.31 million tons of outdated iron smelting capacity and 36.1 million tons
of
outdated steel smelting capacity. The obligation letters involved 573
enterprises. It is the government’s goal to consolidate 50% of domestic
production among the top 10 steel companies by 2010 with goal rising to 70%
by
2020.
We
believe the government will continue, and likely strengthen, its industry
consolidation effort. As capacity from weaker market players is removed,
capacity allotments are shifted to existing companies, such as our Longmen
Joint
Venture.
Operating
Results
Sales
Revenue and Gross Profit
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
Overall,
net sales for the year 2007 were approximately $772.4 million compared to $139.5
million in 2006, an increase of 454%. The sharp increase in net sales is a
result of our acquiring controlling interest position in the Longmen Joint
Venture in June, and to a lesser extent the starting of our Baotou Steel Pipe
Joint Venture which began sales in July 2007.
At
Daqiuzhuang Metal, shipments for the year 2007 decreased 5% to 322,912 tons
from
341,702 tons last year. In the third quarter we shifted our product mix to
produce a higher percentage of silicon sheets, which are higher value-added
products and command a higher selling price than our carbon sheets. Producing
silicon sheets requires a longer processing time than carbon sheets, thus
resulting in a lower total volume of shipped product from 2007 compared to
2006.
Average selling price per ton including sale of scrap for the year 2007
increased to $457 from $422 in 2006. The increase in average selling price
was
mainly due to higher selling price achievable from sales of silicon sheets
compared to carbon sheets.
At
our
Baotou Steel Pipe Joint Venture, shipments representing July through December
operations in 2007 were 13,489 tons. Average selling price per ton was
$474.
At
our
Longmen Joint Venture, shipments representing June through December operations
in the 2007 were 1,440,522 tons. Average selling price per ton was
$429.
The
following table displays sales and steel shipment data for General Steel by
operating unit for the years 2007 and 2006,
respectively.
|
Year
2007
|
Year
2006
|
||||||||||||
| Operating Unit |
Shipment
Volume
|
Sales
Amount
|
Shipment
Volume
|
Sales
Amount
|
|||||||||
|
(in
Tons)
|
(in
Tons)
|
||||||||||||
|
Daqiuzhuang
Metal
|
322,912
|
$
|
147,727,340
|
341,702
|
$
|
139,494,624
|
|||||||
|
Baotou
Steel Pipe Joint Venture
|
(e)
|
13,489
|
6,397,364
|
-
|
-
|
||||||||
|
Longmen
Joint Venture
|
(f)
|
1,440,522
|
618,314,461
|
-
|
-
|
||||||||
|
|
|
|
|
||||||||||
|
Totals
|
1,776,923
|
$
|
772,439,165
|
341,702
|
$
|
139,494,624
|
|||||||
(e)
Sales
and shipment data from Baotou Steel Pipe Joint Venture are for the months from
July through December only. Data reflects 100% of the Baotou Steel Pipe Joint
Venture. General Steel, through its subsidiary, owns 80% of the Baotou Steel
Pipe Joint Venture. The minority interest is removed after profits.
(f)
Sales
and shipment data from Longmen Joint Venture are for the months from June
through December only. Data reflects 100% of the Longmen Joint Venture. General
Steel, through its subsidiaries, owns 60% of the Longmen Joint Venture. The
minority interest is removed after profits.
Gross
profit for the year 2007 was approximately $56.7 million, an increase of 1259%
or $52.5 million from $4.2 million for last year. Gross profit margin increased
to 7% for the year 2007 from 3% for 2006.
The
following table displays gross profit and gross margin data for General Steel
by
operating unit for the years 2007 and 2006, respectively.
|
Year
2007
|
Year
2006
|
||||||||||||||
|
Operating
Unit
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
||||
|
Daqiuzhuang
Metal
|
$
|
5,210,410
|
3.53
|
%
|
$
|
4,170,434
|
2.99
|
%
|
|||||||
|
Baotou
Steel Pipe Joint Venture
|
(g)
|
|
386,249
|
6.04
|
%
|
-
|
-
|
||||||||
|
Longmen
Joint Venture
|
(h)
|
|
51,092,102
|
8.26
|
%
|
-
|
-
|
||||||||
|
|
|
||||||||||||||
|
Totals
|
$
|
56,688,761
|
7.34
|
%
|
$
|
4,170,434
|
2.99
|
%
|
|||||||
(g)
Gross
profit and gross margin data from Baotou Steel Pipe Joint Venture are for the
months from July through December only. Data reflects 100% of Baotou Steel
Pipe
Joint Venture. General Steel, through its subsidiary, owns 80% of the Baotou
Steel Pipe Joint Venture. The minority interest is removed after
profits.
(h)
Gross
profit and gross margin data from Longmen Joint Venture are for the months
from
June through December only. Data reflects 100% of the Longmen Joint Venture.
General Steel, through its subsidiaries, owns 60% of the Longmen Joint Venture.
The minority interest is removed after profits.
Fiscal
year ended December 31, 2006 compared to Fiscal year ended December 31,
2005
Net
sales
from operations increased from $89.7 million in 2005 to $139.5 million in 2006,
a 55% increase.
Shipment
volume increased from 203,422 tons in 2005 to 341,702 tons in 2006, a 68%
increase. In addition to the reasons cited above, this rise is also attributable
to the fact that we instituted in the second quarter a credit system for our
best customers. This allowed them to more easily purchase large quantities
of
product at a single time. Have larger quantities of inventory on hand made
it
easier for them to sell larger quantities.
The
following table displays sales and steel shipment data for General Steel by
operating unit for the years 2006 and 2005, respectively.
|
|
Year
2006
|
|
|
Year
2005
|
|
||||||||
|
Operating
Unit
|
|
|
Shipment
Volume
|
|
|
Sales
Amount
|
|
|
Shipment
Volume
|
|
|
Sales
Amount
|
|
|
(in
Tons)
|
|
|
|
|
|
(in
Tons)
|
|||||||
|
Daqiuzhuang
Metal
|
341,702
|
$
|
139,494,624
|
203,422
|
$
|
89,739,899
|
|||||||
|
|
|||||||||||||
|
Totals
|
341,702
|
$
|
139,494,624
|
203,422
|
$
|
89,739,899
|
|||||||
Gross
profit decreased from $8.6 million in 2005 to $4.2 million in 2006. In the
same
period gross profit margin decreased from 9.6% in 2005 to 3% in 2006,
representing a 6% decrease.
The
following table displays gross profit and gross margin data for General Steel
by
operating unit for the years 2006 and 2005, respectively.
|
Year
2006
|
Year
2005
|
||||||||||||
| Operating Unit |
Gross
Profit
|
|
|
Gross
Margin
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|||
|
Daqiuzhuang
Metal
|
$
|
4,170,434
|
2.99
|
%
|
$
|
8,574,049
|
9.55
|
%
|
|||||
|
|
|
|
|||||||||||
|
Totals
|
$
|
4,170,434
|
2.99
|
%
|
$
|
8,574,049
|
9.55
|
%
|
|||||
Cost
of Sales
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
Overall
cost of sales increased to $715.8 million for the year 2007 from $135.3 million
for the year 2006, an increase of 429%. The sharp increase in cost of sales
reflects our acquiring controlling interest position in the Longmen Joint
Venture in June, and to a lesser extent, the starting of our Baotou Steel Pipe
Joint Venture which began sales operations in July 2007.
At
Daqiuzhuang Metal, average cost per ton was $441 and $396, respectively for
the
years 2007 and 2006. Cost of sales went up mainly due to the price increase
in
raw materials. Overall, our raw material feedstock costs were driven up by
an
increase in iron-ore prices. Additionally, we shifted our product mix to include
a higher percentage of silicon sheets which have higher feedstock and processing
costs than carbon steel sheets.
At
our
Baotou Steel Pipe Joint Venture, average cost per ton was $446, representing
July through December operations in the year 2007.
At
our
Longmen Joint Venture, average cost per ton was $394, representing June through
December operations in the year 2007.
The
following table displays cost of sales and steel shipment data for General
Steel
by operating unit for the years 2007 and 2006, respectively.
|
Year
2007
|
|
|
Year
2006
|
|
||||||||||
|
Operating
Unit
|
|
|
|
Shipment
Volume
|
|
|
Cost
of Sales
|
|
|
Shipment
Volume
|
|
|
Cost
of Sales
|
|
|
(in
Tons)
|
(in
Tons)
|
|||||||||||||
|
Daqiuzhuang
Metal
|
322,912
|
$
|
142,516,930
|
341,702
|
$
|
135,324,190
|
||||||||
|
Baotou
Steel Pipe Joint Venture
|
(k)
|
13,489
|
6,011,115
|
-
|
-
|
|||||||||
|
Longmen
Joint Venture
|
(l)
|
1,440,522
|
567,222,359
|
-
|
-
|
|||||||||
|
|
|
|
|
|||||||||||
|
Totals
|
1,776,923
|
$
|
715,750,404
|
341,702
|
$
|
135,324,190
|
||||||||
(k)
Cost
of sales and shipment volume data from Baotou Steel Pipe Joint Venture are
for
the months from July through December only. Data reflects 100% of the Baotou
Steel Pipe Joint Venture. General Steel, through its subsidiary, owns 80% of
the
Baotou Steel Pipe Joint Venture. The minority interest is removed after
profits.
(l)
Cost
of sales and shipment volume data from Longmen Joint Venture are for the months
from June through December only. Data reflects 100% of the Longmen Joint
Venture. General Steel, through its subsidiaries, owns 60% of the Baotou Steel
Pipe Joint Venture. The minority interest is removed after profits.
Fiscal
year ended December 31, 2006 compare to Fiscal year ended December 31,
2005
Cost
of
sales principally consists of the cost of raw materials, labor, utilities,
manufacturing costs, manufacturing related depreciation and other fixed costs.
Overall cost of sales increased to $135.3 million in 2006, from $81.2 million
in
2005, a 67% increase. Cost of sales as a percentage of sales increased from
90%
in 2005 to 97% in 2006, a 7% increase. The increase mainly due to the price
increase in raw materials. Overall, our raw material feedstock costs were driven
up by an increase in iron-ore prices.
The
following table displays cost of sales and steel shipment data for General
Steel
by operating unit for the years 2006 and 2005, respectively.
|
|
|
|
Year
2006
|
|
|
Year
2005
|
|
||||||
|
Operating
Unit
|
|
Shipment
Volume
|
|
|
Cost
of Sales
|
Shipment
Volume
|
Cost
of Sales
|
||||||
|
(in
Tons)
|
(in
Tons)
|
||||||||||||
|
Daqiuzhuang
Metal
|
341,702
|
$
|
135,324,190
|
203,422
|
$
|
81,165,850
|
|||||||
|
|
|
|
|
||||||||||
|
Totals
|
341,702
|
$
|
135,324,190
|
203,422
|
$
|
81,165,850
|
|||||||
Selling,
General and Administrative Expenses
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
Selling,
general and administrative expenses were $16.2 million for the year 2007,
compared to $2.4 million for 2006. This increase is largely attributable to
the
operations of the Longmen Joint Venture, which began in June, and alone
accounted for approximately $11.7 million in SG&A expense since June
2007.
Fiscal
year ended December 31, 2006 compared with Fiscal year ended December 31,
2005
Selling,
general and administrative expenses were $2.4 million for 2006, compared to
$2.8
million for the same period of 2005, a 13% decrease. A large component of the
decrease was due to the reclassification of packaging expense back to cost
of
sales.
Other
income (expense)
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
Finance
and interest expenses were $9.3 million for the year 2007, a 296% increase
from
$2.4 million for 2006. The increase is traced to an increase in short term
borrowings largely associated with the Longmen Joint Venture
operations.
Income
from derivative instrument was $6.2 million for the year 2007, there was no
derivative instrument for the year 2006. See more detail information in our
footnote, Note 14 - Convertible notes.
Fiscal
year ended December 31, 2006 compared with Fiscal year ended December 31,
2005
Finance
and interest expense was $2.4 million for the fiscal year ended December 31,
2006, a 23% increase compared to $1.9 million in 2005. This increase was because
the outstanding bank loans increased to $30.3 million from $27.1 million as
of
December 31, 2006 and 2005, respectively. This increase in debt borrowing was
mainly used for financing our bulk purchases of raw materials and our credit
program to our main customers.
Net
income
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
Net
income was $22.4 million for the year 2007 compared to $1.0 million for the
same
period of 2006, an increase of 2,071%. The sharp increase is largely
attributable to the contributions from the Longmen Joint Venture which began
in
June 2007 and the income of $6.2 million recorded for the change in fair value
of the derivative instrument in connection with the issuance of the convertible
notes in 2007.
Earnings
per share
Earnings
per share was $0.69 for the year 2007. Earnings per share are calculated as
follows:
|
2007
|
2006
|
||||||
|
Income
attributable to holders of common shares
|
$
|
22,425,921
|
$
|
1,033,208
|
|||
|
Basic
weighted average number of common shares outstanding
|
32,424,652
|
31,250,000
|
|||||
|
Add:
dilution effect of warrants
|
133,698
|
-
|
|||||
|
Diluted
weighted average number of common shares outstanding
|
32,558,350
|
31,250,000
|
|||||
|
Earnings
per share
|
|||||||
|
Basic
|
$
|
0.69
|
$
|
0.03
|
|||
|
Diluted
|
$
|
0.69
|
$
|
0.03
|
|||
Fiscal
year ended December 31, 2006 compared with Fiscal year ended December 31,
2005
Net
income was $1.0 million for the year 2006 compared to $2.7 million for the
same
period of 2005, a decrease of 62%.
Earnings
per share are calculated as follows:
|
|
2006
|
2005
|
|||||
|
Net
income
|
$
|
1,033,208
|
$
|
2,740,219
|
|||
|
|
|
|
|||||
|
Weighted-average
of
common stock o/s
|
31,250,000
|
31,250,000
|
|||||
|
|
|
|
|||||
|
Earnings
per share
|
$
|
0.03
|
$
|
0.09
|
|||
Income
taxes
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
The
Company did not carry on any business and did not maintain any branch office
in
the United States during the year 2007 and 2006. Therefore, no provision for
withholding or U.S. federal income taxes or tax benefits on the undistributed
earnings and/or losses of the Company has been made.
Pursuant
to the relevant laws and regulations in the People's Republic of China,
Daqiuzhuang Metal, as a foreign owned enterprise in the People's Republic of
China, is entitled to an exemption from the PRC enterprise income tax for two
years commencing from its first profitable year. Daqiuzhuang Metal has been
approved for this tax benefit and will be exempt from income tax for the years
ended December 31, 2005 and 2006 and 50% income tax reduction for the years
ended December 31, 2007, 2008 and 2009. The current effective income tax rate
is
12%.
The
effective income tax rate at our Baotou Steel Pipe Joint Venture is
33%.
Our
Longmen Joint Venture is located in the mid-west region of China. The National
Development and Reform Commission (NDRC) granted it qualification approval
to
attain the “Go West” special tax treatment. This national tax treatment rewards
companies contributing to the economic development of the Western Region by
lowering their effective corporate tax rate from 33 percent to 15 percent.
This
change is effective July first and is reflected from our year-end financial
results.
For
the
year 2007, we had a tax expense of $4.8 million.
Fiscal
year ended December 31, 2006 compared with Fiscal year ended December 31,
2005
We
did
not carry on any business and did not maintain any branch office in the United
States during the years ended December 31, 2006 and 2005. Therefore, no
provision for withholding or U.S. federal income taxes or tax benefits on our
undistributed earnings and/or losses has been made.
Pursuant
to the relevant laws and regulations in the People’s Republic of China,
Daqiuzhuang Metal, as a Sino-foreign joint venture in the People’s Republic of
China, is entitled to an exemption from the PRC enterprise income tax for two
years commencing from its first profitable year. We are approved for this tax
benefit and are exempt from income tax for the years ended December 31, 2005
and
2006. We are entitled to a 50% income tax reduction for the years ended December
31, 2007, 2008 and 2009.
Minority
Interest
Minority
interest mainly represents Long Steel Group’s 40% interest in Longmen Joint
Venture and Baotou Iron and Steel Group’s 20% interest in Baotou Steel Pipe
Joint Venture, both of which we control.
Accounts
Receivable
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
Accounts
receivable and accounts receivable-related party were $11.8 million as of
December 31, 2007 compared to $17.1 million on December 31, 2006.
We
recognize the revenue when we ship out products and pass the titles of the
products to our customers and distributors. At Daqiuzhuang Metal, we extended
short-term credit to our customers and distributors with good reputations and
long-term business relationships. We have not experienced any bad debt in these
accounts. Also we review our accounts receivable on a regular basis to determine
if the bad debt allowance is adequate and adjust the allowance amount if needed.
We believe the accounts receivable amount is collectible. Never-the-less, to
be
conservative and prudent in our management practice, as of December 31, 2007,
we
reserved $148,224 for bad debt allowance based on our reasonable
estimate.
Fiscal
year ended December 31, 2006 compared with Fiscal year ended December 31,
2005
Accounts
receivable were $17.1 million as of December 31, 2006 compared to $993,417
at
December 31, 2005. This increase in accounts receivable is mainly due to a
change in the company’s collection approach. Starting in the second quarter of
2006, we have gone with a different collection methodology. We implemented
a
credit sales program for our main customers with whom we have a long-standing
business relationship. We now have four new production lines in operation.
The
management is now taking measures to secure the existing customer base and
attract new customers. One of the approaches is to extend credit sales to our
major customers and distributors as incentives for buying our products.
Extending credit to our major customers and distributors is also in line with
a
growing industrial trend in this competitive market.
We
recognize the revenue when we ship out products and passed the titles of the
products to our customers and distributors. We have increased production
capacity since April this year. To enhance sales, we extended short-term credit
to our customers and distributors with good reputations and long-term business
relationships. We have not experienced any bad debt in these accounts. Also
we
review our accounts receivable on a regular basis to determine if the bad debt
allowance is adequate and we adjust the allowance amount if needed. We believe
the accounts receivable are collectible. Never-the-less, to be conservative
and
prudent in our management practice, as of December 31, 2006, we have decided
to
reserve $137,132 for bad debts based on our reasonable estimate.
Liquidity
and capital resources
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
Due
to
the strong market demand for our products and our new Longmen Joint Venture,
we
plan to maintain a higher-than-average debt to equity ratio to better position
ourselves in this fast growing market. The bank loans are considered short
term
for the purpose of the preparation of the financial statements though they
are
renewable with the banks every year. Cash balance including restricted cash
amounted to $52.1 million and $11.1 million as of December 31, 2007 and December
31, 2006, respectively.
Fiscal
year ended December 31, 2006 compared with Fiscal year ended December 31,
2005
Due
to
the strong market demand for our products, we increased production capacity
by
adding four new production lines. We plan to maintain a higher-than-average
debt
to equity ratio to better position itself in this fast growing market. The
bank
loans are considered short term for the purpose of the preparation of the
financial statements because they are renewable with the banks every year.
Due
to the recent joint venture agreement with Baotou Iron and Steel (Group) Co.,
Ltd., we are reserving cash for the first 30% of its capital contribution,
approximately $3.7 million, which needs to be paid when the business license
for
the joint venture is issued. Cash balance including restricted cash amounted
to
$11.1 million and $11.4 million as of December 31, 2006 and 2005.
Operating
activities
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
Net
cash
provided by operating activities for the year 2007 was $39.0 million compared
to
$0.9 million used in 2006. This change was mainly due to the combination of
the
following factors:
Net
cash
generated in 2007 was primarily attributable to net income of $22.4 million
adjusted by depreciation and amortization, minority interest and gain on
derivative instrument, total of $16.1 million. Cash collected from accounts
receivable and accounts receivable-related party was $16.2 million in 2007
compared a negative amount of $15.9 million in 2006. Notes receivable and other
receivable in total had a cash outflow of $12.1 million in 2007 compared to
$1.5
million in 2006. Increase in inventory and advances on inventory purchases
resulted in a cash outflow of $63.4 million compared to an inflow of $7.2
million in 2006.
Accounts
payable, other payables, accrued liabilities, customer deposits and tax payable
went up by $60.7 million compared to $4.9 million in 2006.
Changes
in these accounts were mainly resulted from the acquisitions of the Boutou
Steel
Pipe Joint Venture and Longmen Joint Venture. The increased operating capacity
helped the company generate positive cash flows from operating
activities.
Fiscal
year ended December 31, 2006 compared with Fiscal year ended December 31,
2005
Net
cash
used in operating activities for the fiscal year ended December 31, 2006 was
$0.9 million compared to $10.0 million provided by operating activities in
2005. This change was mainly due to an increase in accounts receivable and
offset by a decrease in advances on inventory purchases. Accounts receivable
increased by $15.9 million compared to December 31, 2005. The increase is due
to
the credit sales we extended to our major customers and distributors as
incentives starting from the second quarter of 2006. As the new production
lines
are now in full operation, approximately 13,000 tons of additional products
are
now being produced monthly.
Investing
activities
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
Net
cash
used by investing activities was $15.1 million for the year 2007 compared to
$5.9 million used in 2006. This increase in cash used in investing activities
mainly resulted from a $21.5 million on equipment purchase.
Fiscal
year ended December 31, 2006 compared with Fiscal year ended December 31,
2005
Net
cash
used in investing activities was $5.9 million for the fiscal year ended December
31, 2006 compared to $7.9 million used in investing activities in the previous
year. The cash has been spent on the construction of the new plant.
Financing
activities
Fiscal
year ended December 31, 2007 compared with Fiscal year ended December 31,
2006
Net
cash
provided by financing activities was $12.8 million for the year 2007 compared
to
$4.7 million in 2006. This was mainly due to $40 million in convertible notes
issued in 2007 offset by payoffs of various short term loans and notes
payable.
Fiscal
year ended December 31, 2006 compared with Fiscal year ended December 31,
2005
Net
cash
provided by financing activities was $4.7 million for the year ended December
31, 2006 compared to $0.8 million provided by investing activities of the
previous year. We signed a borrowing agreement with Shenzhen Development Bank
to
borrow $5,1 in the first quarter. The proceeds were mainly used to pay for
inventory purchases and the construction of the new plant.
Impact
of inflation
We
are
subject to commodity price risks arising from price fluctuations in the market
prices of the raw materials. We have generally been able to pass on cost
increases through price adjustments. However, the ability to pass on these
increases depends on market conditions driven by the overall economic conditions
in China. We manage our price risks through productivity improvements and
cost-containment measures. We do not believe that inflation risk is material
to
our business or our financial position, results of operations or cash
flows.
Compliance
with environmental laws and regulations
Longmen
Joint Venture:
Since
2002, our joint venture partner, Long Steel Group, has invested RMB 580 million
(approximate $76 million) in a series of comprehensive projects to reduce its
waste emissions of coal gas, water, and solid waste. In 2005 it received ISO
14001 certification for its overall environmental management system. Long Steel
Group has received several awards from the Shaanxi provincial government for
its
increasing effort in environmental protection.
Long
Steel Group has spent more than RMB 33 million (approximately $4.3 million)
on a
comprehensive waste water recycling and water treatment system. The 2,000m3/h
treatment capacity system was implemented at the end of 2005. In 2007, new
water
consumption per ton of steel produced was 0.7 ton.
Long
Steel Group has built one 10,000m3 coke-oven gas tank and one 50,000m3 blast
furnace coal gas tank to collect the residual coal gas produced from its own
facility and that of surrounding enterprises. Long Steel Group also built a
thermal power plant with two 25 KW dynamos that uses the residual coal gas
from
the blast furnaces and converters as fuel to generate power.
Long
Steel Group also has built several plants to further process solid waste
generated from the steel making process into useful products such as
construction materials, building blocks, porcelain tiles, curb tops, ornamental
tiles, etc. The plants are capable of processing 400,000 tons of solid waste
and
generate revenue of more than RMB20 million (approximately $2.6 million) each
year.
Daqiuzhuang
Metal:
Based
on
the equipment, technologies and measures adopted, Daqiuzhuang Metal is not
considered a high-pollution factory in China. The production process does not
need much water and produces only a minimal amount of chemical waste.
Daqiuzhuang Metal uses gas-fired reheat furnaces recommended by the State
Environmental Protection Agency to heat raw materials and semi-finished
products.
In
2005,
Daqiuzhuang County ordered an environmental clean-up campaign and required
harmless waste water discharge to be reduced. In order to meet these
requirements, we invested $94,190 to remodel our industrial water recycling
system to reduce new water consumption and industrial water
discharge.
This
wastewater recycling system is able to process 350 tons of wastewater daily.
We
can realize approximately $10,000 savings per year using this
system.
We
believe that future costs relating to environmental compliance will not have
a
materially adverse effect on the Company’s financial position. There is always
the possibility, however, that unforeseen changes, such as new laws or
enforcement policies, could result in materially adverse costs.
Off-balance
sheet arrangements
On
January 14, 2008, the Company through Longmen Joint Venture completed its
acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co.,
Ltd.
(“Tongxing”). Longmen Joint Venture entered into an agreement with Tongxing to
contribute its own land of 217,487 square meters (approximately 53 acres) at
the
appraised value of RMB 30,227,333 (approximately $4.1 million). Pursuant to
the
agreement, the land will be converted into shares valued at approximately RMB
22,744,419 (approximately $3.1 million), providing Longmen Joint Venture with
a
stake of 22.76% in Tongxing and making it Tongxing’s largest and controlling
shareholder.
The
business license of Tongxing was obtained on December 27,.
Management’s
discussion and analysis of its financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
We
believe that the following reflect the more critical accounting policies that
currently affect our financial condition and results of operations.
Revenue
recognition
The
Company's revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist
and collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer deposits.
Sales revenue represents the invoiced value of goods, net of value-added tax
(VAT). All of the Company’s products sold in the PRC are subject to a Chinese
value-added tax at a rate of 13% to 17% of the gross sales price. This VAT may
be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing the finished product.
Use
of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Significant accounting estimates reflected
in
the Company’s financial statements include the useful lives of and impairment
for property, plant and equipment, potential losses on uncollectible receivables
and convertible notes. Actual results could differ from these
estimates.
Derivative
Instrument
The
Company entered into a Securities Purchase Agreement (the “Agreement”) with
certain institutional investors (the “Buyers”). Pursuant to the Agreement, the
Company agreed to sell to the Buyers (i) senior convertible notes in the
aggregate principal amount of $40,000,000 (“Notes”) and (ii) warrants to
purchase an additional aggregate amount of 1,154,958 shares of Common Stock
of
the Company (the “Warrants”). Both the Warrants and the conversion option
embedded in the Notes meet the definition of a derivative instrument in SFAS
133, Accounting for Derivative Instruments and Hedging Activities. Therefore
these instruments are accounted for as derivative liabilities and periodically
marked-to-market. The change in the value of the derivative liabilities is
charged against or credited to income.
Financial
instruments
Statement
of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
Value of Financial Instruments” requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value
of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties.
The
Company considers the carrying amount of cash, accounts receivable, other
receivables, accounts payable, accrued liabilities, and long term debts to
approximate their fair values because of the short period of time between the
origination of such instruments and their expected realization and their current
market rate of interest.
The
Company also analyzes all financial instruments with features of both
liabilities and equity under SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” The convertible preferred shares issued in
2005 and the convertible note issued in 2007 did not require bifurcation or
result in liability accounting. Additionally, the Company analyzes registration
rights agreements associated with any equity instruments issued to determine
if
penalties triggered for late filing should be accrued under FSP EITF 00-19-2,
“Accounting for Registration Payment Arrangements.”
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value under accounting principles generally accepted in the United States
(GAAP) and expands disclosures about fair value measurements. Fair value is
defined under SFAS 157 as the exchange price that would be received for an
asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires the Company to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The effective date of this pronouncement is for all full fiscal and interim
periods beginning after November 15, 2008. The Company does not expect the
adoption of SFAS 157 to have a material impact on the Company’s financial
position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. The objective of FAS 159 is to provide
opportunities to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply hedge
accounting provisions. FAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 will be effective in the first quarter of fiscal 2009. The Company
is
evaluating the impact that this statement will have on its consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary
is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between
the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
has not determined the effect that the application of SFAS 160 will have on
its
consolidated financial statements.
In
December 2007, Statement of Financial Accounting Standards No. 141(R), Business
Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business
Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that
the acquisition method of accounting (which SFAS 141 called the purchase method)
be used for all business combinations and for an acquirer to be identified
for
each business combination. SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in
the
acquiree at the acquisition date, measured at their fair values as of that
date,
with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values. SFAS
141R
also requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the noncontrolling interest in the acquiree,
at the full amounts of their fair values (or other amounts determined in
accordance with SFAS 141R). SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008. An entity
may not apply it before that date. The Company is currently evaluating the
impact that adopting SFAS No. 141R will have on its financial
statements.
In
March
2008,
the
FASB
issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities - an amendment of FASB Statement No. 133” (“SFAS 161”), which changes
the disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why
an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company has not
determined the effect that the application of SFAS 161 will have on its
consolidated financial statements.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
management, including our chief executive officer, or CEO, and our principal
financial officer, or CFO, are responsible for establishing and maintaining
our
disclosure controls and procedures (within the meaning of Rule 13a-15(e) of
the
Exchange Act). These controls and procedures were designed to ensure that
information required to be disclosed in the reports that we file or submit
under
the Exchange Act, is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC and that such
information was accumulated and communicated to our management, including our
CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure. We evaluated these disclosure controls and procedures under the
supervision of our CEO and CFO as of December 31, 2007. Based upon that
evaluation, our management, including our CEO and CFO, concluded that our
disclosure controls and procedures are effective.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We
performed an evaluation of the effectiveness of our internal control over
financial reporting that is designed by, or under the supervision of, our
principal executive and principal financial officers, and effected by our board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP and includes
those policies and procedures that:
| · |
pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of the assets of
the
Company;
|
| · |
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
Company
are being made only in accordance with authorizations of management
and
directors of the Company; and
|
| · |
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2007. Based on such evaluation, our management, including
the
CEO and CFO, has concluded that the Company’s internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934, as amended) as of December 31, 2007 is effective.
Notwithstanding the foregoing, there can be no assurance that the Company’s
internal control over financial reporting will detect or uncover all failures
of
persons within the Company to comply with these procedures.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this annual report.
There
were no changes in the Company’s internal control over financial reporting that
occurred during the year ended December 31, 2007 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
Contractual
obligations and commercial commitments
We
have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
The
following tables summarize our contractual obligations as of December 31, 2007,
and the effect these obligations are expected to have on our liquidity and
cash
flows in future periods.
|
|
Payment
due by period
|
||||||||||||
|
Contractual
obligations
|
Total
|
Less
than 1 year
|
1-3
years
|
|
3-5
years
|
||||||||
|
|
Dollars
amounts in thousands
|
||||||||||||
|
Bank
loans (1)
|
$
|
119,493
|
$
|
119,493
|
$
|
$
|
|||||||
|
Notes
payable
|
15,163
|
15,163
|
|
|
|||||||||
|
Deposits
due to customers and sales representatives
|
47,084
|
47,084
|
|
|
|||||||||
|
Convertible
notes ( Principal plus Interest )
|
54,000
|
1,200
|
4,800
|
48,000
|
|||||||||
|
Total
|
$
|
235,740
|
$
|
182,940
|
$
|
4,800
|
$
|
48,000
|
|||||
(1)
Bank
loans in China are due on demand or normally within one year. These loans can
be
renewed with the banks. This amount includes estimated interest payments as
well
as debt maturities.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In
the
normal course of our business, we are exposed to market risk or price
fluctuations related to the purchase, production or sale of steel products
over
which we have little or no control. We do not use any derivative commodity
instruments to manage the price risk. Our market risk strategy has generally
been to obtain competitive prices for our products and allow operating results
to reflect market price movements dictated by supply and demand. Based upon
an
assumed 2007, annual production capacity of
2
million
tons of steel, a $1 change in the annual average price would change annual
pre-tax profits by approximately $2 million.
Interest
Rate Risk
We
are
subject to interest rate risk since our outstanding debts are short-term and
bear interest at variable interest rates. The future interest expense would
fluctuate in case of any change in the borrowing rates. We do not use swaps
or
other interest rate protection agreements to hedge this risk. We believe our
exposure to interest rate risk is not material.
Foreign
Currency Exchange Rate Risk
Our
operating units, Daqiuzhuang Metal, Longmen Joint Venture and Baotou Steel
Pipe
Joint Venture, are all located in China. They produce and sell all
of
their
products domestically in the P.R.C.. They
are
subject to the foreign currency exchange rate risks due to the effects of
fluctuations in the Chinese Renminbi on revenues and operating costs and
existing assets or liabilities. We have not generally used derivative
instruments to manage this risk. A ten percent (10%) decrease in the
200
7
average
Renminbi exchange rate would result in a
$1,800,000
charge
to income.
ITEM
8. FINANCIAL STATEMENTMENTS AND SUPPLEMENTARY DATA
The
consolidated financial statements
of General Steel Holdings, Inc., including consolidated balance sheets as of
December 31, 2007 and 2006, and consolidated statements of income and other
comprehensive income, stockholders’ equity and cash flows for the years ended
December 31, 2007, 2006 and 2005 and notes to the consolidated financial
statements, together with a report thereon of Moore Stephens Wurth Frazer and
Torbet, LLP, dated March 31, 2008, are attached hereto as pages F-1 through
F-34.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
General
Steel Holdings Inc.
We
have
audited the accompanying consolidated balance sheets of General Steel Holdings
Inc. and subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of income and other comprehensive income, shareholders’
equity, and cash flows for each of the years in the three-year period ended
December 31, 2007. General Steel Holdings, Inc.’s management is responsible for
these financial statements. Our responsibility is to express an opinion on
these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required
to
have, nor were we engaged to perform, an audit of their internal control
over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of General Steel Holdings
Inc.
and subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
/S/
MOORE
STEPHENS WURTH FRAZER AND TORBET, LLP
Walnut,
California
March
28,
2008
GENERAL
STEEL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF
DECEMBER 31, 2007 AND 2006
|
|
|
2007
|
|
2006
|
|||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
|
$
|
43,713,346
|
$
|
6,831,549
|
|||
|
Restricted
cash
|
8,391,873
|
4,231,523
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts of
$148,224
|
|||||||
|
and
$137,132 as of December 31, 2007 and December 31, 2006,
respectively
|
11,225,678
|
17,095,718
|
|||||
|
Accounts
receivable - related parties
|
565,631
|
-
|
|||||
|
Notes
receivable
|
4,216,678
|
537,946
|
|||||
|
Notes
receivable - Restricted
|
12,514,659
|
-
|
|||||
|
Short
term loan receivable - Related Party
|
1,233,900
|
-
|
|||||
|
Other
receivables
|
1,280,853
|
268,784
|
|||||
|
Other
receivables - related parties
|
1,913,448
|
850,400
|
|||||
|
Inventories
|
77,928,925
|
12,489,290
|
|||||
|
Advances
on inventory purchases
|
58,170,474
|
2,318,344
|
|||||
|
Advances
on inventory purchases - related parties
|
9,944,012
|
-
|
|||||
|
Prepaid
expenses - current
|
1,059,866
|
46,152
|
|||||
|
Prepaid
expenses related party - current
|
49,356
|
-
|
|||||
|
Deferred
tax assets
|
399,751
|
-
|
|||||
|
Deferred
notes issuance cost
|
3,564,546
|
-
|
|||||
|
Total
current assets
|
236,172,996
|
44,669,706
|
|||||
|
PLANT
AND EQUIPMENT, net
|
218,263,367
|
26,606,594
|
|||||
|
OTHER
ASSETS:
|
|||||||
|
Advances
on equipment purchases
|
742,061
|
-
|
|||||
|
Long
term investment
|
822,600
|
-
|
|||||
|
Prepaid
expenses - non current
|
506,880
|
740,868
|
|||||
|
Prepaid
expenses related party - non current
|
142,467
|
-
|
|||||
|
Intangible
assets, net of accumulated amortization
|
21,756,709
|
1,804,440
|
|||||
|
Total
other assets
|
23,970,717
|
2,545,308
|
|||||
|
Total
assets
|
$
|
478,407,080
|
$
|
73,821,608
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable
|
$
|
102,241,708
|
$
|
3,001,775
|
|||
|
Accounts
payable - related parties
|
14,302,738
|
-
|
|||||
|
Short
term loans - bank
|
93,019,608
|
30,284,686
|
|||||
|
Short
term loans - others
|
19,156,070
|
-
|
|||||
|
Short
term loans - related parties
|
7,317,027
|
-
|
|||||
|
Short
term notes payable
|
15,163,260
|
8,153,520
|
|||||
|
Other
payables
|
3,343,684
|
355,142
|
|||||
|
Other
payable - related parties
|
2,126,383
|
-
|
|||||
|
Accrued
liabilities
|
5,248,863
|
1,064,012
|
|||||
|
Customer
deposits
|
37,872,698
|
1,093,602
|
|||||
|
Customer
deposits - related parties
|
9,211,736
|
-
|
|||||
|
Deposits
due to sales representatives
|
3,068,298
|
2,051,200
|
|||||
|
Taxes
payable
|
27,576,240
|
5,391,602
|
|||||
|
Investment
payable
|
6,580,800
|
-
|
|||||
|
Distribution
payable to minority shareholder
|
2,820,803
|
-
|
|||||
|
Shares
subject to mandatory redemption
|
-
|
2,179,779
|
|||||
|
Total
current liabilities
|
349,049,916
|
53,575,318
|
|||||
|
NOTES
PAYABLE, net of debt discount $34,559,584
|
5,440,416
|
-
|
|||||
|
DERIVATIVE LIABILITIES
|
28,483,308
|
-
|
|||||
|
Total
liabilities
|
382,973,640
|
53,575,318
|
|||||
|
MINORITY
INTEREST
|
42,044,266
|
6,185,797
|
|||||
|
SHAREHOLDERS'
EQUITY:
|
|||||||
|
Preferred
stock, $0.001 par value, 50,000,000 shares authorized, 3,092,899
and 0
shares
|
|||||||
|
issued
and outstanding as of December 31, 2007 and December 31, 2006,
respectively
|
3,093
|
-
|
|||||
|
Common
Stock, $0.001 par value, 200,000,000 shares authorized, 34,634,765
and
|
|||||||
|
32,426,665
shares (including 1,176,665 redeemable shares) issued and outstanding
|
|||||||
|
as
of December 31, 2007 and December 31, 2006,
respectively
|
34,635
|
31,250
|
|||||
|
Paid-in-capital
|
23,429,153
|
6,871,358
|
|||||
|
Retained
earnings
|
22,686,590
|
4,974,187
|
|||||
|
Statutory
reserves
|
3,632,325
|
1,107,010
|
|||||
|
Contribution
receivable
|
(959,700
|
)
|
-
|
||||
|
Accumulated
other comprehensive income
|
4,563,078
|
1,076,688
|
|||||
|
Total
shareholders' equity
|
53,389,174
|
14,060,493
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
478,407,080
|
$
|
73,821,608
|
|||
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these statements.
GENERAL
STEEL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these statements.
GENERAL
STEEL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR
THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
|
Preferred
stock
|
Common
Stock
|
|||||||||||||||
|
Number
|
Par
|
Number
|
Par
|
Paid-in
|
||||||||||||
|
of
shares
|
Value
|
of
shares
|
Value
|
capital
|
||||||||||||
|
BALANCE,
January 1, 2005 (restated)
|
-
|
$
|
-
|
31,250,000
|
$
|
31,250
|
$
|
6,871,358
|
||||||||
|
Net
income
|
||||||||||||||||
|
Adjustment
to statutory reserve
|
||||||||||||||||
|
Foreign
currency translation gain
|
||||||||||||||||
|
BALANCE,
December 31, 2005 (restated)
|
-
|
$
|
-
|
31,250,000
|
$
|
31,250
|
$
|
6,871,358
|
||||||||
|
Net
income
|
||||||||||||||||
|
Adjustment
to statutory reserve
|
||||||||||||||||
|
Foreign
currency translation gain
|
||||||||||||||||
|
BALANCE,
December 31, 2006
|
-
|
$
|
-
|
31,250,000
|
$
|
31,250
|
$
|
6,871,358
|
||||||||
|
Net
income
|
||||||||||||||||
|
Adjustment
to statutory reserve
|
||||||||||||||||
|
Registered
Capital to be received from
|
||||||||||||||||
|
Baotou
Steel by 05/21/09
|
||||||||||||||||
|
Common
stock issued for service, $1.32
|
18,000
|
18
|
23,742
|
|||||||||||||
|
Preferred
stock issued for acquisition net of dividend distribution to
Tianjin
Victory New
|
3,092,899
|
3,093
|
8,370,907
|
|||||||||||||
|
Conversion
of redeemable stock, $1.95
|
1,176,665
|
1,177
|
2,293,320
|
|||||||||||||
|
Conversion
of warrants, $2.50
|
2,120,000
|
2,120
|
5,297,880
|
|||||||||||||
|
Common
stock issued for compensation, $8.16
|
70,100
|
70
|
571,946
|
|||||||||||||
|
Foreign
currency translation gain
|
||||||||||||||||
|
BALANCE,
December 31, 2007
|
3,092,899
|
$
|
3,093
|
34,634,765
|
$
|
34,635
|
$
|
23,429,153
|
||||||||
|
Retained
Earnings
|
Accumulated
other
|
|||||||||||||||
|
Statutory
|
Subscriptions
|
comprehensive
|
||||||||||||||
|
reserves
|
Unrestricted
|
receivable
|
income
|
Totals
|
||||||||||||
|
BALANCE,
January 1, 2005 (restated)
|
$
|
154,794
|
$
|
2,152,976
|
$
|
-
|
$
|
-
|
$
|
9,210,378
|
||||||
|
Net
income
|
2,740,219
|
2,740,219
|
||||||||||||||
|
Adjustment
to statutory reserve
|
685,959
|
(685,959
|
)
|
-
|
||||||||||||
|
Foreign
currency translation gain
|
399,188
|
399,188
|
||||||||||||||
|
BALANCE,
December 31, 2005 (restated)
|
$
|
840,753
|
$
|
4,207,236
|
$
|
-
|
$
|
399,188
|
$
|
12,349,785
|
||||||
|
Net
income
|
1,033,208
|
1,033,208
|
||||||||||||||
|
Adjustment
to statutory reserve
|
266,257
|
(266,257
|
)
|
-
|
||||||||||||
|
Foreign
currency translation gain
|
677,500
|
677,500
|
||||||||||||||
|
BALANCE,
December 31, 2006
|
$
|
1,107,010
|
$
|
4,974,187
|
$
|
-
|
$
|
1,076,688
|
$
|
14,060,493
|
||||||
|
Net
income
|
22,425,921
|
22,425,921
|
||||||||||||||
|
Adjustment
to statutory reserve
|
2,525,315
|
(2,525,315
|
)
|
-
|
||||||||||||
|
Registered
Capital to be received from Baotou Steel by 05/21/09
|
(959,700
|
)
|
(959,700
|
)
|
||||||||||||
|
Common
stock issued for service, $1.32
|
23,760
|
|||||||||||||||
|
Preferred
stock issued for acquisition net of dividend distribution to
Tianjin
Victory New
|
(2,188,203
|
)
|
6,185,797
|
|||||||||||||
|
Conversion
of redeemable stock, $1.95
|
2,294,497
|
|||||||||||||||
|
Conversion
of warrants, $2.50
|
5,300,000
|
|||||||||||||||
|
Common
stock issued for compensation, $8.16
|
572,016
|
|||||||||||||||
|
Foreign
currency translation gain
|
3,486,390
|
3,486,390
|
||||||||||||||
|
|
||||||||||||||||
|
BALANCE,
December 31, 2007
|
$
|
3,632,325
|
$
|
22,686,590
|
$
|
(959,700
|
)
|
$
|
4,563,078
|
$
|
53,389,174
|
|||||
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these statements.
GENERAL
STEEL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
|
2007
|
|
2006
|
|
2005
|
||||||
|
(Restated)
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||
|
Net
income
|
$
|
22,425,921
|
$
|
1,033,208
|
$
|
2,740,219
|
||||
|
Adjustments
to reconcile net income to cash
|
||||||||||
|
provided
by (used in) operating activities:
|
||||||||||
|
Minority
Interest
|
12,000,870
|
798,771
|
1,371,918
|
|||||||
|
Depreciation
|
9,740,317
|
1,619,267
|
1,053,976
|
|||||||
|
Amortization
|
596,538
|
297,933
|
289,938
|
|||||||
|
Loss
on disposal of equipment
|
10,404
|
28,137
|
25,992
|
|||||||
|
Deferred
tax assets
|
(383,918
|
)
|
-
|
-
|
||||||
|
Stock
issued for services and compensation
|
595,776
|
-
|
-
|
|||||||
|
Interest
expense accrued on mandatory redeemable stock
|
114,135
|
458,904
|
114,724
|
|||||||
|
Amortization
of deferred note issuance cost
|
29,954
|
-
|
-
|
|||||||
|
Amortization
of discount on convertible notes
|
159,478
|
-
|
-
|
|||||||
|
Change
in fair value of derivative instrument
|
(6,235,754
|
)
|
-
|
-
|
||||||
|
Allowance
for bad debt
|
1,510
|
132,895
|
-
|
|||||||
|
(Increase)
decrease in assets:
|
||||||||||
|
Accounts
receivable
|
16,247,520
|
(15,871,902
|
)
|
(451,095
|
)
|
|||||
|
Accounts
receivable - related parties
|
(543,228
|
)
|
-
|
-
|
||||||
|
Notes
receivable
|
(9,491,608
|
)
|
(521,888
|
)
|
373,785
|
|||||
|
Other
receivables
|
(453,072
|
)
|
(152,111
|
)
|
108,860
|
|||||
|
Other
receivables - related parties
|
(990,037
|
)
|
(850,400
|
)
|
-
|
|||||
|
Loan
receivable
|
(1,185,030
|
)
|
-
|
-
|
||||||
|
Inventories
|
(8,853,823
|
)
|
(1,366,266
|
)
|
2,378,597
|
|||||
|
Advances
on inventory purchases
|
(45,012,751
|
)
|
8,581,191
|
3,042,837
|
||||||
|
Advances
on inventory purchases - related parties
|
(9,550,168
|
)
|
-
|
-
|
||||||
|
Prepaid
expense - current
|
(949,243
|
)
|
-
|
(63,709
|
)
|
|||||
|
Prepaid
expense - non current
|
252,872
|
44,559
|
(659,742
|
)
|
||||||
|
Prepaid
expense - current - related parties
|
(47,401
|
)
|
-
|
-
|
||||||
|
Prepaid
expense - non current - related parties
|
(136,825
|
)
|
-
|
-
|
||||||
|
Increase
(decrease) in liabilities:
|
||||||||||
|
Accounts
payable
|
88,355,643
|
2,106,005
|
523,624
|
|||||||
|
Accounts
payable - related parties
|
13,736,262
|
-
|
-
|
|||||||
|
Other
payables
|
823,345
|
135,275
|
(364,090
|
)
|
||||||
|
Other
payable - related party
|
(76,863,715
|
)
|
(980,000
|
)
|
(10,000
|
)
|
||||
|
Accrued
liabilities
|
2,440,134
|
259,000
|
506,214
|
|||||||
|
Customer
deposits
|
2,559,598
|
(221,532
|
)
|
(771,235
|
)
|
|||||
|
Customer
deposits - related parties
|
8,846,895
|
-
|
-
|
|||||||
|
Taxes
payable
|
20,799,845
|
3,577,364
|
(240,347
|
)
|
||||||
|
Net
cash (used in) provided by operating activities
|
39,040,444
|
(891,590
|
)
|
9,970,466
|
||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||
|
Cash
acquired from subsidiary
|
508,906
|
-
|
-
|
|||||||
|
Restricted
cash
|
236,655
|
(1,374,495
|
)
|
861,897
|
||||||
|
Notes
receivable - related party
|
-
|
3,013,680
|
(2,932,800
|
)
|
||||||
|
Proceeds
from short term investment
|
-
|
37,671
|
-
|
|||||||
|
Acquire
long term investment
|
(790,020
|
)
|
-
|
-
|
||||||
|
Deposits
due to sales representatives
|
840,055
|
732,073
|
(1,222
|
)
|
||||||
|
Advance
on equipment purchases
|
(712,671
|
)
|
1,066,504
|
(1,037,881
|
)
|
|||||
|
Prepayments
for land use rights
|
-
|
(72,031
|
)
|
-
|
||||||
|
Equipment
purchases
|
(21,523,962
|
)
|
(2,401,860
|
)
|
(627,941
|
)
|
||||
|
Construction
in progress
|
-
|
(6,865,560
|
)
|
(4,169,895
|
)
|
|||||
|
Cash
proceeds from sale of equipment
|
63,422
|
-
|
8,552
|
|||||||
|
Increase
in investment payable
|
6,320,160
|
|||||||||
|
Net
cash used in investing activities
|
(15,057,455
|
)
|
(5,864,018
|
)
|
(7,899,290
|
)
|
||||
|
CASH
FLOWS FINANCING ACTIVITIES:
|
||||||||||
|
Borrowings
on short term loans - bank
|
56,812,972
|
29,663,401
|
31,967,520
|
|||||||
|
Payments
on short term loans - bank
|
(53,111,728
|
)
|
(27,462,159
|
)
|
(31,246,540
|
)
|
||||
|
Payments
on short term loans - related parties
|
(17,117
|
)
|
-
|
-
|
||||||
|
Borrowings
on short term loans - others
|
5,230,372
|
-
|
-
|
|||||||
|
Payments
on short term loans - others
|
(12,640,320
|
)
|
-
|
-
|
||||||
|
Borrowings
on short term notes payable
|
14,562,702
|
7,986,252
|
11,266,840
|
|||||||
|
Payments
on short term notes payable
|
(38,210,634
|
)
|
(5,474,852
|
)
|
(12,782,120
|
)
|
||||
|
Cash
received from issuance of convertible note
|
36,855,500
|
-
|
-
|
|||||||
|
Contribution
received from minority shareholders
|
790,020
|
-
|
-
|
|||||||
|
Payment
to original shareholders
|
(2,813,644
|
)
|
-
|
-
|
||||||
|
Cash
received from warrants converted to common stock
|
5,300,000
|
-
|
-
|
|||||||
|
Cash
received on issuance of mandatory redeemable stock
|
-
|
-
|
1,606,151
|
|||||||
|
Net
cash provided by financing activities
|
12,758,123
|
4,712,642
|
811,851
|
|||||||
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
140,685
|
226,142
|
217,536
|
|||||||
|
INCREASE
(DECREASE) IN CASH
|
36,881,797
|
(1,816,824
|
)
|
3,100,563
|
||||||
|
CASH,
beginning of year
|
6,831,549
|
8,648,373
|
5,547,810
|
|||||||
|
CASH,
end of year
|
$
|
43,713,346
|
$
|
6,831,549
|
$
|
8,648,373
|
||||
See report of independent registered public accounting firm.The accompanying notes are an integral part of these statements.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
1 - Background
General
Steel Holdings, Inc. was incorporated on August 5, 2002 in the state of Nevada
under the name of American Construction Company (“ACC”). On October 14, 2004,
ACC, Northwest Steel Company, a wholly-owned Nevada subsidiary of ACC, and
General Steel Investment Co., Ltd., a British Virgin
I
slands
company (“General Steel Investment”), entered into an Agreement and Plan of
Merger pursuant to which ACC acquired General Steel Investment, and its 70%
ownership in its subsidiary Tianjin Daqiuzhuang Metal Sheet Co., Ltd., a
PRC
limited liability company (“Daqiuzhuang Metal”) in exchange for shares of ACC’s
common stock. Effective March 7, 2005, ACC changed its name to “General Steel
Holdings, Inc.” (the “Company” or “General Steel”).
The
Company through its 100% owned subsidiary, General Steel Investment operates
a
portfolio of Chinese steel companies serving various industries. The Company
presently has three production subsidiaries: Daqiuzhuang Metal, Baotou Steel
-
General Steel Special Steel Pipe Joint Venture Co., Ltd., (“Baotou Steel Pipe
Joint Venture”) and Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint
Venture”). The Company’s main products include rebar, hot-rolled carbon and
silicon sheets and spiral-weld pipes.
The
following table reflects the Company’s current organization structure:
On
April
27, 2007, Daqiuzhuang Metal and Baotou Iron and Steel Group Co., Ltd. ("Baotou
Steel") entered into an Amended and Restated Joint Venture Agreement (the
"Agreement"), amending the September 28, 2005 Joint Venture Agreement ("Original
Joint Venture Agreement") which established Baotou Steel Pipe Joint Venture,
a
PRC limited liability company. The Agreement increased Daqiuzhuang Metal's
ownership interest in the Joint Venture to 80%. Baotou Steel Pipe Joint Venture
obtained its business license from the PRC on May 25, 2007 and started its
normal operation in July 2007. See more discussion in Note 19 - Business
combinations.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Baotou
Steel Pipe Joint Venture is located in Kundulun District, Baotou city, Inner
Mongolia, China. It produces and sells spiral welded steel pipes and primarily
serves customers in the oil, gas and petrochemical markets.
On
May
18, 2007, General Steel entered into a Purchase Agreement with Victory New
Holdings Limited (“Victory New”), a British Virgin Islands registered company
under the control of the Company’s Chairman, CEO and majority shareholder,
Zuosheng Yu (aka Henry Yu), to acquire Victory New’s 30% interest in Tianjin
Daqiuzhuang Metal Sheet Co. Ltd. (“Daqiuzhuang Metal”) General Steel agreed to
issue to Victory New an aggregate of 3,092,899 shares of Series A Preferred
Stock with a fair value of $8,374,000, and voting power of 30% of the combined
voting power of General Steel’s common and preferred stock while outstanding. As
a result of the acquisition, Daqiuzhuang Metal is a wholly owned subsidiary
of
the Company. See details in Note 19 - Business combinations.
On
May
18, 2007, Daqiuzhuang Metal established Yangpu Shengtong Investment Co.,
Ltd.
(“Yangpu Investment”) and injected registered capital totaling RMB100,000,000,
or approximately $13,030,000, into the investment. The total registered capital
of Yangpu Investment is RMB110,000,000, or approximately $14,333,000, and
Daqiuzhuang Metal has a 99.1% ownership interest in Yangpu Investment. The
rest
of Yangpu Investment is indirectly owned by Zuosheng Yu, our Chairman and
CEO.
Qiu
Steel
Investment Co., Ltd. (“Qiu Steel Investment”) was founded on June 1, 2006. In
June 2007, Yangpu Investment agreed to invest RMB148,000,000, or approximately
$19,284,400, through a capital injection and equity transfer with former
shareholders. The total registered capital of Qiu Steel Investment is
RMB150,000,000, or approximately $19,545,000. As a result of the above mentioned
equity transaction, Yangpu Investment acquired 98.7% equity of Qiu Steel
Investment making Qiu Steel Investment a subsidiary of Yangpu Investment
and
Daqiuzhuang Metal. The rest of Qiu Steel Investment is indirectly owned by
Zuosheng Yu, our Chairman and CEO.
Yangpu
Investment and Qiu Steel Investment are Chinese registered limited liability
companies formed to acquire other businesses.
On
June
15, 2007, General Steel and Shaanxi Longmen Iron and Steel (Group) Co., Ltd.,
a
PRC limited liability company (“Longmen Group”), signed an agreement to form
Longmen Joint Venture. The parties agreed to make the effective date of the
transaction June 1, 2007. General Steel contributed RMB300 million or
approximately $39,450,000 through its subsidiaries, Daqiuzhuang Metal and
Qiu
Steel Investment, to the Longmen Joint Venture. General Steel and Longmen
Group
own a 60% and 40% ownership interest, respectively, in Longmen Joint Venture.
The Longmen Joint Venture obtained its business license from the PRC on June
22,
2007. See more discussion in Note 19 - Business combinations.
Longmen
Joint Venture is located in Hancheng city, Shaanxi province, China. Longmen
Joint Venture is the largest integrated steel producer in Shaanxi province,
that
uses iron ore and coke as primary raw materials for steel production. Longmen
Joint Venture produces pig iron, crude steel, reinforced bars and high-speed
wire. Longmen Joint Venture is also engaged in several other business
activities, most of which are related to steel manufacturing. These include
the
production of coke and the production of iron ore pellets from taconite,
transportation services and real estate and hotel operations. These operations
are all located in Hancheng city and primarily serve regional customers in
the
construction industry.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
On
September 24, 2007, Longmen Joint Venture further acquired 74.92% ownership
interest in Environmental Protection Industry Development Co., Ltd., a PRC
limited liability company (“EPID”) engaging in recycling steel production waste,
for RMB18,080,930, approximately $2,380,000, and a 36% equity interest in
Hualong Fire Retardant Materials Co., Ltd., a PRC limited liability company
(“Hualong”) engaging in producing fire retardant material for steel production,
for RMB3,287,980, approximately $430,000. The parties agreed to make the
effective date of the transaction July 1, 2007.
Note
2 - Summary of significant accounting policies
Basis
of presentation
The
consolidated financial statements of the Company reflect the activities of
the
following directly and indirectly owned subsidiaries:
|
Percentage
|
|||||||
|
Subsidiary
|
Of
Ownership
|
||||||
|
General
Steel Investment Co., Ltd.
|
British
Virgin Islands
|
100.0
|
%
|
||||
|
Tianjin
Daqiuzhuang Metal Sheet Co., Ltd
|
P.R.C.
|
100.0
|
%
|
||||
|
Baotou
Steel - General Steel Special Steel Pipe Joint Venture Co.,
Ltd.
|
P.R.C.
|
80.0
|
%
|
||||
|
Yangpu
Shengtong Investment Co., Ltd.
|
P.R.C.
|
99.1
|
%
|
||||
|
Qiu
Steel Investment Co., Ltd.
|
P.R.C.
|
98.7
|
%
|
||||
|
Shaanxi
Longmen Iron and Steel Co. Ltd.
|
P.R.C.
|
60.0
|
%
|
||||
The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements include the accounts of all
direct and indirectly owned subsidiaries listed above. All material intercompany
transactions and balances have been eliminated in the consolidation. The
Longmen
Joint Venture financial data from June 1, 2007, the effective date of the
acquisition, to December 31, 2007 is included in the accompanying consolidated
financial statements. The financial data of EPID and Hualong are included
in the
accompanying consolidated financial statements from July 1 to December 31,
2007.
Use
of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management
to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Significant accounting estimates reflected
in
the Company’s financial statements include the useful lives of and impairment
for property, plant and equipment, potential losses on uncollectible receivables
and the fair value of the conversion feature and warrants associated with
the
note payable. Actual results could differ from these estimates.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Concentration
of risks
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced
by the
political, economic and legal environment in the PRC, and by the general
state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. The Company's results may
be
adversely affected by changes in governmental policies with respect to laws
and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
Cash
includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People’s Republic of China and Hong Kong. Total cash
(including restricted cash balances) in these banks on December 31, 2007
and
2006 amounted to $53,817,485 and $11,058,636, respectively, of which no deposits
are covered by insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any risks on its cash in bank
accounts.
The
Company had five major customers, all distributors, which represented
approximately 59%, 30% and 37% of the Company’s total sales for the years ended
December 31, 2007, 2006 and 2005, respectively. Five customers accounted
for 0%,
62% and 51% of total accounts receivable as of December 31, 2007, 2006 and
2005,
respectively.
For
the
years ended December 31, 2007, 2006 and 2005, the Company purchased
approximately 40%, 82% and 85%, respectively, of their raw materials from
four
major suppliers. Five vendors accounted for 11%, 0%, and 0% of total accounts
payable as of December 31, 2007, 2006 and 2005, respectively.
Revenue
recognition
The
Company's revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist
and collectability is reasonably assured. Payments received before all of
the
relevant criteria for revenue recognition are recorded as customer deposits.
Sales revenue represents the invoiced value of goods, net of value-added
tax
(VAT). All of the Company’s products sold in the PRC are subject to a Chinese
value-added tax at a rate of 13% to 17% of the gross sales price. This VAT
may
be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing the finished product.
Foreign
currency translation and other comprehensive income
The
reporting currency of the Company is the US dollar. The Company uses the
local
currency, Renminbi (RMB), as its functional currency. Assets and liabilities
are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in the statement of
shareholders’ equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the consolidated statement of shareholders' equity
and
amounted to $4,563,078, $1,076,688 and $399,188 as of December 31, 2007,
2006
and 2005, respectively. The balance sheet amounts, with the exception of
equity
at December 31, 2007 and 2006, were translated at 7.30 RMB and 7.8 RMB to
$1.00
USD, respectively. The equity accounts were stated at their historical rate.
The
average translation rates applied to income statement accounts for the years
ended December 31, 2007, 2006 and 2005 were 7.59 RMB, 7.96 RMB and 8.18RMB,
respectively. Cash flows are also translated at average translation rates
for
the period, therefore, amounts reported on the statement of cash flows will
not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Financial
instruments
Statement
of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
Value of Financial Instruments” requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value
of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties.
The
Company considers the carrying amount of cash, accounts receivable, other
receivables, accounts payable, accrued liabilities, and long term debts to
approximate their fair values because of the short period of time between
the
origination of such instruments and their expected realization and their
current
market rate of interest.
The
Company also analyzes all financial instruments with features of both
liabilities and equity under SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” The convertible preferred shares issued in
2005 and the convertible note issued in 2007 did not require bifurcation
or
result in liability accounting. Additionally, the Company analyzes registration
rights agreements associated with any equity instruments issued to determine
if
penalties triggered for late filing should be accrued under FSP EITF 00-19-2,
“Accounting for Registration Payment Arrangements.”
Derivative
instrument
In
December 2007, the Company issued convertible notes totaling $40,000,000
(“Notes”) and 1,154,958 warrants. Both the warrants and the conversion option
embedded in the Notes meet the definition of a derivative instrument in SFAS
133, “Accounting for Derivative Instruments and Hedging Activities.” Therefore
these instruments are accounted for as derivative liabilities and
marked-to-market each reporting period. The change in the value of the
derivative liabilities is charged against or credited to income.
Cash
and cash equivalents
Cash
and
cash equivalents include cash on hand and demand deposits in banks with
maturities of less than three months.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Restricted
cash
The
Company has notes payable outstanding with various banks and is required
to keep
certain amounts on deposit that are subject to withdrawal
restrictions.
Accounts
receivable and allowance for doubtful accounts
The
Company conducts its business operations in the People’s Republic of China.
Accounts receivable include trade accounts due from the customers. An allowance
for doubtful account is established and recorded based on managements’
assessment of the credit history and relationship with the customers. Management
reviews its accounts receivable on a regular basis to determine if the bad
debt
allowance is adequate and adjusts the allowance when necessary.
Notes
receivable
Notes
receivable represents trade accounts receivable due from various customers
where
the customers’ banks have guaranteed the payment of the receivables. This amount
is non-interest bearing and is normally paid within three to six months.
The
Company has the ability to submit request for payment to the customer’s bank
earlier than the scheduled payment date, but will incur an interest charge
and a
processing fee when it submits the early payment request. The Company had
$4,216,678 and $537,946 outstanding as of December 31, 2007 and 2006,
respectively.
Restricted
notes receivable represents notes pledged as collaterals of short term loans
from banks. AS of December 31, 2007 and 2006, restricted notes receivable
amounted to $12,514,659 and $0, respectively.
Inventories
Inventories
are stated at the lower of cost or market using weighted average
method.
Intangible
assets
All
land
in the People’s Republic of China is owned by the government and cannot be sold
to any individual or company. However, the government grants the user a “land
use right” to use the land.
Daqiuzhuang
Metal acquired land use rights during the years ended 2000 and 2003 for a
total
amount of $3,167,483. These land use rights are for 50 years and expire in
2050
and 2053. However, Daqiuzhuang Metal's initial business license had a ten-year
term. Therefore, management elected to amortize the land use rights over
the
ten-year business term. Daqiuzhuang Metal became a Sino-Foreign Joint Venture
in
2004, and obtained a new business license for twenty years; however, the
Company
decided to continue amortizing the land use rights over the original ten-year
business term.
Longmen
Group contributed land use rights for a total amount of $19,823,885 to the
Longmen Joint Venture. The land use rights are for 50 years and expire in
2048
to 2052.
Intangible
assets of the Company are reviewed annually to determine whether their carrying
value has become impaired. The Company considers assets to be impaired if
the
carrying value exceeds the future projected cash flows from related operations.
The Company also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of December 31, 2007, the Company expects these assets to be fully
recoverable.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Plant
and equipment, net
Plant
and
equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using the straight-line method over the estimated useful lives of
the
assets with 3%-5% residual value.
Construction
in progress represents the costs incurred in connection with the construction
of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and are placed into service. Maintenance, repairs and minor renewals
are charged directly to expense as incurred. Major additions and betterment
to
buildings and equipment are capitalized. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed
as
incurred.
Long-term
investments
Investee
companies over which the Company has the ability to exercise significant
influence, but does not have a controlling interest is accounted for using
the
equity method. Significant influence is generally considered to exist when
the
Company has an ownership interest in the voting stock of the investee of
between
20% and 50%, and other factors, such as representation on the investee's
Board
of Directors, voting rights and the impact of commercial arrangements, are
considered in determining whether the equity method of accounting is
appropriate. In December 2007, the Company acquired 27% of ownership interest
in
Xian Delong Powder Engineering Materials Co., Ltd., through its 74.92% owned
subsidiary, Environmental Protection Industry Development Co., Ltd., with
a
consideration of $822,600. This investment is accounted for by the equity
method.
Short-term
notes payable
Short-term
notes payable are lines of credit extended by banks. When purchasing raw
materials, the Company often issues a short-term note payable to the vendor.
This short-term note payable is guaranteed by the bank for its complete face
value. The banks usually require the Company to deposit a certain amount
of cash
at the bank as a guarantee deposit which is classified on the balance sheet
as
restricted cash. The total outstanding amounts of short-term notes payable
were
$15,163,260 and $8,153,520 as of December 31, 2007 and December 31, 2006,
respectively.
Shares
subject to mandatory redemption
The
Company adopted Statement of Financial Accounting Standards No. 150, “Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and
Equity”. FAS 150 established classification and measurement standards for three
types of freestanding financial instruments that have characteristics of
both
liabilities and equity. Instruments within the scope of FAS 150 must be
classified as liabilities within the Company’s Consolidated Financial Statements
and be reported at settlement date value. The Company issued redeemable stock
in
September 2005.
The
amount was presented as a liability on the balance sheet at the fair market
value on the date of issuance plus accrued interest at the balance sheet
date.
As of December 31, 2007, redemption fe
ature
on
all the shares issued was expired and subsequently the shares were reclassified
from liability to equity. See note 13 for details.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Earnings
per share
The
Company reports earnings per share in accordance with the provisions of SFAS
No.
128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share.
Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
Income
taxes
Deferred
income taxes are recognized for temporary differences between the tax bases
of
assets and liabilities and their reported amounts in the financial statements,
net operating loss carry forwards and credits, by applying enacted statutory
tax
rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not
that
some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws of the relevant
taxing
authorities.
The
Company adopted Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (SFAS 109). SFAS 109 requires the recognition of deferred
income tax liabilities and assets for the expected future tax consequences
of
temporary differences between income tax basis and financial reporting basis
of
assets and liabilities. Provision for income taxes consists of taxes currently
due plus deferred taxes. The Company adopted FASB Interpretation 48, “Accounting
for Uncertainty in Income Taxes” (“FIN 48”), as of January 1, 2007. A tax
position is recognized as a benefit only if it is “more likely than not” that
the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination.
For
tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no effect on the Company’s financial statements.
The
charge for taxation is based on the results for the year as adjusted for
items,
which are non-assessable or disallowed. It is calculated using tax rates
that
have been enacted or substantively enacted by the balance sheet
date.
Deferred
tax is accounted for using the balance sheet liability method in respect
of
temporary differences arising from differences between the carrying amount
of
assets and liabilities in the financial statements and the corresponding
tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probable that
taxable profit will be available against which deductible temporary differences
can be utilized. Deferred tax is calculated using tax rates that are expected
to
apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when
it is
related to items credited or charged directly to equity, in which case the
deferred tax is also dealt with in equity. Deferred tax assets and liabilities
are offset when they relate to income taxes levied by the same taxation
authority and the Company intends to settle its current tax assets and
liabilities on a net basis.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Share-based
compensation
The
Company records stock-based compensation pursuant to Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payments,"
("FAS123R"), which established standards for the accounting for transactions
in
which an entity exchanges its equity instruments for goods or services. This
statement requires companies to measure the cost of services received in
exchange for an award of equity instruments based on the grant-date fair
value
of the award. The cost will be recognized over the period of services
rendered.
Shipping
and handling
Shipping
and Handling for raw materials purchased are included in cost of goods sold.
Shipping and handling cost incurred for shipping of finished products to
customers are included in selling expenses. Shipping and handling expenses
for
purchases of material and sales of finished goods for the years ended December
31, 2007, 2006, and 2005 amounted to $2,806,599, $165,666, and $77,075,
respectively.
Minority
interest
Minority
interest consists of the interest of minority shareholders in the subsidiaries
of the Company. As of December 31, 2007 and 2006, minority interest amounted
to
$42,044,266 and $6,185,797, respectively.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.
Recently
issued accounting pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements”
(“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value under accounting principles generally accepted in the United States
(GAAP)
and expands disclosures about fair value measurements. Fair value is defined
under SFAS 157 as the exchange price that would be received for an asset
or paid
to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. SFAS 157 also establishes a fair value
hierarchy which requires the Company to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. The
effective date of this pronouncement is for all full fiscal and interim periods
beginning after November 15, 2008. The Company does not expect the adoption
of
SFAS 157 to have a material impact on the Company’s financial position or
results of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value that
are
not
currently required to be measured at fair value. The objective of FAS 159
is to
provide opportunities to mitigate volatility in reported earnings caused
by
measuring
related assets and liabilities differently without having to apply hedge
accounting provisions. FAS 159 also establishes presentation and
disclosure
requirements
designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities.
SFAS
159
will
be effective in the first quarter of fiscal 2009. The Company is evaluating
the
impact that this statement will have on its consolidated financial
statements.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary
is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between
the
interests of the parent and the interests of the non-controlling owners.
SFAS
160 is effective for fiscal years beginning after December 15, 2008. The
Company
has not determined the effect that the application of SFAS 160 will have
on its
consolidated financial statements.
In
December 2007, Statement of Financial Accounting Standards No. 141(R),
Business
Combinations
,
was
issued. SFAS No. 141R replaces SFAS No. 141,
Business
Combinations.
SFAS
141R
retains the fundamental requirements in SFAS 141 that the acquisition method
of
accounting (which SFAS 141 called the
purchase
method
)
be used
for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141R requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that
date,
with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values. SFAS
141R
also requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the noncontrolling interest in the acquiree,
at the full amounts of their fair values (or other amounts determined in
accordance with SFAS 141R). SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or after December 15, 2008. An
entity
may not apply it before that date. The Company is currently evaluating the
impact that adopting SFAS No. 141R will have on its financial
statements.
In
March
2008,
the
FASB
issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities - an amendment of FASB Statement No. 133” (“SFAS 161”), which changes
the disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why
an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company has not
determined the effect that the application of SFAS 161 will have on its
consolidated financial statements.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
3 - Accounts receivable and allowance for doubtful
accounts
Accounts
receivable, net of allowance for doubtful accounts consist of the
following:
|
December
31,
2007
|
December
31,
2006
|
||||||
|
Accounts
receivable
|
$
|
11,373,902
|
$
|
17,232,850
|
|||
|
Less:
allowance for doubtful accounts
|
148,224
|
137,132
|
|||||
|
Net
accounts receivable
|
$
|
11,225,678
|
$
|
17,095,718
|
|||
Movement
of allowance for doubtful accounts is as follows:
|
December
31,
2007
|
December
31,
2006
|
||||||
|
Beginning
balance
|
$
|
137,132
|
$
|
1,371
|
|||
|
Charge
to expense
|
751
|
135,761
|
|||||
|
Written-off
|
-
|
-
|
|||||
|
Exchange
rate effect
|
10,341
|
-
|
|||||
|
Ending
balance
|
$
|
148,224
|
$
|
137,132
|
|||
Note
4 - Inventory
Inventory
consists of the following:
|
December
31,
2007
|
December
31, 2006
|
||||||
|
Supplies
|
$
|
1,829,551
|
$
|
1,061,773
|
|||
|
Raw
materials
|
42,919,783
|
2,827,127
|
|||||
|
Work
in process
|
82,439
|
-
|
|||||
|
Finished
goods
|
33,097,152
|
8,600,390
|
|||||
|
Total
|
$
|
77,928,925
|
$
|
12,489,290
|
|||
Raw
materials consist primarily of iron ore and coke at Long Men Joint Venture
and
steel strip at Daqiuzhuang Metal.
Work
in
process primarily consists of pig iron and other semi-finished products.
The
cost of finished goods includes direct costs of raw materials as well as
direct
labor used in production. Indirect production costs such as utilities and
indirect labor related to production such as assembling, shipping and handling
costs are also included in the cost of inventory. The Company reviews its
inventory periodically for possible obsolete goods and to determine if any
reserves are necessary for potential obsolescence. As of December 31, 2007
and
2006, the Company believes no reserves are necessary.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
5 - Advances on inventory purchases
Advances
on inventory purchases are monies deposited or advanced to outside vendors
or
related parties on future inventory purchases. Due to the high shortage of
steel
in China, most of the Company’s vendors require a certain amount of money to be
deposited with them as a guarantee that the Company will receive its purchases
on a timely basis.
This
amount is refundable and bears no interest. The Company has legally binding
contracts with its vendors, which required the deposit to be returned to
the
Company at the end of the contract. The inventory is normally delivered within
one month after the monies have been advanced. The total outstanding amount,
including advances to related parties, was $68,114,486 and $2,318,344 as
of
December 31, 2007 and December 31, 2006, respectively.
Note
6 - Plant and equipment, net
Plant
and
equipment consist of the following at:
|
December
31, 2007
|
December
31, 2006
|
||||||
|
Buildings
and improvements
|
$
|
71,265,004
|
$
|
9,338,865
|
|||
|
Machinery
|
134,716,437
|
22,675,357
|
|||||
|
Transportation
equipment
|
4,232,556
|
1,019,698
|
|||||
|
Other
equipment
|
1,310,489
|
-
|
|||||
|
Construction
in process
|
24,574,027
|
-
|
|||||
|
Totals
|
236,098,513
|
33,033,920
|
|||||
|
Less
accumulated depreciation
|
(17,835,146
|
)
|
(
6,427,326
|
)
|
|||
|
Totals
|
$
|
218,263,367
|
$
|
26,606,594
|
|||
The
depreciation expense for the years ended December 31, 2007, 2006 and 2005
amounted to $9,740,317, $1,619,267 and $1,053,976, respectively.
For
the
years ended December 31, 2007, 2006 and 2005, the Company capitalized interest
of $1,037,793, $186,432 and $57,844, respectively.
Note
7 - Intangible assets
The
Company’s intangible assets are as follows:
|
December
31, 2007
|
December
31, 2006
|
||||||
|
Land
use right
|
$
|
23,629,059
|
$
|
3,041,733
|
|||
|
Software
|
71,978
|
-
|
|||||
|
Accumulated
Amortization
|
(1,944,328
|
)
|
(1,237,293
|
)
|
|||
|
Total
|
$
|
21,756,709
|
$
|
1,804,440
|
|||
Total
amortization expense for the years ended December 31, 2007, 2006, and 2005,
amounted to $596,538 and $297,933, and $289,938, respectively.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
8 - Debt
Short
term loans
Short
term loans represent amounts due to various banks, other companies and
individuals, normally due within one year. The loans due to banks can be
renewed
with the banks. The Company had short term loans from related parties totaling
$7,317,027 as of December 31, 2007. No short term loans from related parties
were outstanding as of December 31, 2006.
The
loans
due to banks consisted of the following:
|
DAQIUZHUANG
METAL
|
|||||||
|
December
31, 2007
|
December
31, 2006
|
||||||
|
Loan
from China Bank, JingHai Branch, due
September
2008. Quarterly interest only payment at
7.29%
per annum, secured by equipment
|
$
|
959,700
|
$
|
1,153,800
|
|||
|
|
|||||||
|
Loans
from Agriculture Bank, DaQiuZhuang Branch, due
various
dates from March to September 2008.
Quarterly
interest only payments ranging from
7.344%
to 8.424% per annum, guaranteed by an
related
third party and secured by equipment
|
10,293,468
|
9,625,256
|
|||||
|
Loan
from Construction Bank of China, JinHai Branch, due
August
2008. Monthly interest only payment at 8.55%
per
annum, guaranteed by an unrelated third party and
secured
by equipment
|
1,508,100
|
1,557,630
|
|||||
|
Loans
from ShangHai PuFa Bank, due various dates from
March
to July 2008. Quarterly interest only payments
ranging
from 6.435% to 6.732% per annum, guaranteed
by
an unrelated third party
|
4,113,000
|
5,128,000
|
|||||
|
Loan
from China Merchants Bank, due
November
2008. Quarterly interest only payments
at
floating interest rate,105% of People's Bank base rate
of
7.29% to 7.85%, guaranteed by an unrelated third party.
|
8,226,000
|
7,692,000
|
|||||
|
Loan
from ShenZhen Development Bank, due various
dates
in March 2008. Monthly interest only payment
at
6.426% to 6.710% per annum, secured by
inventory
and guaranteed by CEO of the Company.
|
6,855,000
|
5,128,000
|
|||||
|
Totals
- Daqiuzhuang Metal
|
$
|
31,955,268
|
$
|
30,284,686
|
|||
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
LONG
MEN JOINT VENTURE
|
|||||||
|
December
31, 2007
|
December
31, 2006
|
||||||
|
Loans
from Construction Bank, due various
dates
from March
to
October 2008.Monthly interest only
payments
ranging from 7.22% to 8.02% per annum,
guaranteed
by equipment and Bankers’ Acceptance Bill.
|
$
|
20,633,550
|
$ | ||||
|
Loans
from Agriculture Bank, due various
dates
from March 2008 to May 2008. Monthly interest only
payments
ranging from 7.12% to 8.31%, guaranteed
by
equipment and Bankers’ Acceptance Bill.
|
3,989,610
|
||||||
|
Loans
from Bank of China,HanCheng Branch, due various
dates
from May 2008 to July 2008. Monthly interest
payments
ranging from 6.71% to 6.90% per annum,
guaranteed
by unrelated third parties.
|
9,597,000
|
-
|
|||||
|
Loans
from Credit Cooperatives, due various dates
from
March 2008 to July 2008. Monthly interest
payments
by 11.02% per annum, guaranteed
by
an unrelated third party.
|
2,742,000
|
||||||
|
Loans
from HuaXia Bank, due various dates from January
to
November 2008. Monthly interest payment ranging from
5.83%
to 8.74% per annum, guaranteed by
equipment
and Bankers’s Acceptance Bill.
|
13,819,680
|
||||||
|
Loan
from Communication Bank, due October 2008, Quarterly
interest
only payments, annual interest rate of 8.02%,
guaranteed
by equipment.
|
3,427,500
|
-
|
|||||
|
Loan
from China Merchants Bank, due September 2008,
Monthly
interest payments, annual interest rate of 9.13%,
guaranteed
by an unrelated third party and secured by land use rights
and
buildings.
|
6,855,000
|
-
|
|||||
|
Totals-Long
Men Joint Venture
|
$
|
61,064,340
|
$
|
-
|
|||
|
Grand
totals
|
$
|
93,019,608
|
$
|
30,284,686
|
|||
Long
Men
Joint Venture also has various loans from unrelated companies and individuals
which are due within one year. The loans are unsecured, annual interest rates
ranging from 8% to 12%. As of December 31, 2007, these loans outstanding
amounted to $19,156,070.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Short
term notes payable
Short-term
notes payable are lines of credit extended by the banks. When purchasing
raw
materials, the Company often issues a short term note payable to the vendor
funded with draws on the lines of credit. This short term note payable is
guaranteed by the bank for its complete face value. The banks usually do
not
charge interest on these notes but require the Company to deposit a certain
amount of cash at the bank as a guarantee deposit which is classified on
the
balance sheet as restricted cash.
The
Company had the following short term notes payable outstanding as of December
31, 2007 and December 31, 2006:
|
DAQIUZHUANG
METAL
|
|||||||
|
December
31, 2007
|
December
31, 2006
|
||||||
|
China
Bank, Jing Hai Branch, due March 2008,
restricted
cash required of 50%
of
loan amount, guaranteed by the Company
|
$
|
1,588,040
|
$
|
1,487,120
|
|||
|
Agricultural
Bank of China, various amounts, due March 2008,
restricted
cash required of 60% of loan amount,
guaranteed
by the Company and an unrelated third party
|
1,232,100
|
1,538,400
|
|||||
|
ShangHai
PuFa Bank, various amounts,
due
date ranging between April and May 2008,
restricted
cash required of 50% of loan balance,
guaranteed
by an unrelated third party
|
5,488,120
|
5,128,000
|
|||||
|
Totals
-Daqiuzhuang Metal
|
$ |
8,308,260
|
$ |
8,153,520
|
|||
| LONG MEN JOINT VENTURE | |||||||
|
ShangHai
Pudong Development Bank, various amounts, due dates
ranging
between January to May 2008,
restricted
cash required of 60% of loan amount,
paid
by Long Men Steel Group,
guaranteed
by equipment.
|
6,855,000
|
- | |||||
|
Totals-Long
Men Joint Venture
|
6,855,000
|
- | |||||
| Grand totals |
$
|
15,163,260
|
$
|
8,153,520
|
|||
Total
interest expense for the years ended December 31, 2007, 2006 and 2005 on
the
debt listed above amounted to $6,589,382, $2,065,237 and $1,719,351,
respectively. Capitalized interest amounted to $1,037,793, $186,432 and $57,844
for the years ended December 31, 2007, 2006 and 2005, respectively.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
9 - Customer deposits
Customer
deposits represent amounts advanced by customers on product orders. The product
normally is shipped within six months after receipt of the advance payment
and
the related sale is recognized in accordance with the Company’s revenue
recognition policy. As of December 31, 2007 and December 31, 2006, customer
deposits amounted to $47,084,434 including related parties deposits $9,211,736,
and $1,093,602, respectively.
Note
10 - Deposits due to sales representatives
Daqiuzhuang
Metal and one of Longmen Joint Venture’s subsidiaries, Yuxin Trading, entered
into agreements with various entities to act as the Company’s exclusive sales
agent in a specified area. These exclusive sales agents must meet certain
criteria and are required to deposit a certain amount of money with the Company.
In return the sales agents receive exclusive sales rights to a specified
area
and discounted prices on products they order. These deposits bear no interest
and are required to be returned to the sales agent once the agreement has
been
terminated. The Company had $3,068,298 and $2,051,200 in deposits due to
sales
representatives outstanding as of December 31, 2007 and December 31, 2006,
respectively.
Note
11 - Investment payable
In
June
2007, Yangpu Investment and the former shareholders of Qiu Steel Investment
entered into an agreement. Pursuant to this agreement, Yangpu Investment
received 98.7% of the total equity of Qiu Steel Investment for RMB148,000,000
or
approximately $19,462,000. As of December 31, 2007, Yangpu Investment had
payable amounted to RMB48,000,000 or approximately $6,580,800.
Note
12 - Distribution payable to minority shareholder
Distribution
payable of $2,820,803 represents dividends owed to the minority owners of
EPID
and Hualong for retained earnings prior to the acquisition date.
Note
13 - Private offering of redeemable stock
On
September 18, 2005, the Company entered into a subscription agreement with
certain investors to sell a total of 1,176,665 shares of common stock at
$1.50
per share for gross proceeds of $1,765,000, commissions totaled $158,849,
leaving net proceeds of $1,606,151. In addition, two warrants are attached
to
each share of common stock giving the warrant holders the right to purchase
2,353,330 shares of common stock. The warrants can be exercised on the second
anniversary of the subscription date at $2.50 per share and through the third
anniversary date at $5.00 per share. At the option of the holder, the Company
may be required to repurchase the 1,176,665 shares of common stock 18 months
after the closing date at a per share price of $1.95.
In
accordance with SFAS 150, The Company recorded this stock issuance as a
liability due to the mandatory redemption provision. The shares were recorded
at
fair value on the date of issuance, which was the net cash proceeds, plus
any
accrued interest up to March 31, 2007. The difference between the net proceeds,
$1,606,151, and the redemption amount, $2,294,497, totaling $688,346, was
accrued and amortized as interest expense.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
As
of
December 31, 2007, the put option on all the redeemable shares had expired
and
all the shares were reclassified into equity.
Note
14 - Convertible notes
On
December 13, 2007, the Company entered into a Securities Purchase Agreement
(the
“Agreement”) with certain institutional investors (the “Buyers”).
Pursuant
to the Agreement, the Company agreed to sell to the Buyers (i) senior
convertible notes in the aggregate principal amount of $40,000,000 (“Notes”) and
(ii) warrants to purchase 1,154,958 shares of common stock of the Company
(the
“Warrants”).
The
Notes
bear initial interest at 3% per annum, which will be increased each year
as
specified in the Notes, payable semi-annually in cash or shares of the Company’s
common stock. The Notes have a five year term through December 12, 2012.
They
are convertible into shares of the common stock, subject to customary
anti-dilution adjustments. The initial conversion price is $12.47. The Company
may redeem the Notes at 100% of the principal amount, plus any accrued and
unpaid interest, beginning December 13, 2008, provided the market price of
the
common stock is at least 150% of the then applicable conversion price for
30
consecutive trading days prior to the redemption.
The
Notes
are secured by a first priority, perfected security interest in certain shares
of common stock of Zuo Sheng Yu, as evidenced by the pledge agreement. The
Notes
are subject to events of default customary for convertible securities and
for a
secured financing.
The
Warrants grant the Buyers the right to acquire shares of common stock at
$13.51
per share, subject to customary anti-dilution adjustments. The Warrants may
be
exercised at any time on or after May 13, 2008, but not after May 13, 2013,
the
expiration date of the Warrants.
In
connection with this transaction, the Company and the Buyers entered into
a
registration rights agreement (the “Registration Rights Agreement”). Pursuant to
the terms and conditions of the Registration Rights Agreement, the Company
has
agreed to register within 60 calendar days common stock issuable to the Buyers
for resale on a registration statement to be effective by 90 calendar days
or
120 days if the registration statement is subject to a full review by the
U.S.
Securities and Exchange Commission. The Company shall register at least 120%
of
the sum of shares issuable upon conversion of the Notes, the exercise of
the
Warrants and the payment of interest accrued on the Notes. The registration
rights granted under the Registration Rights Agreement are subject to customary
exceptions and qualifications and compliance with certain registration
procedures.
In
addition, certain management members of the Company also entered into a lock-up
agreement with the Company pursuant to which each person agreed not to sell
any
personally owned shares one year after the initial effective date of the
resale
registration statement described above.
Pursuant
to the Registration Rights Agreement, the Company was required to file the
registration statement on February 11, 2008. The Company filed the registration
statement on February 13, 2008, which was two days after the required filing
date. As of the date of this report, the Company reached an agreement with
all
note holders to waive the related penalty of $427,000.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Pursuant
to APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants, the Company discounted the Notes equal to the fair value of the
warrants. The Notes were further discounted for the fair value of the conversion
option. The combined discount is being amortized to interest expense over
the
life of the Notes using the effective interest method.
The
fair
value of conversion option and the warrants were calculated using the Binomial
model based on the following variables:
| · |
Expected
volatility of 105% calculated using the Company’s historical price of its
common stock
|
| · |
Expected
dividend yield of 0%
|
| · |
Risk-free
interest rate of 3.54% and 3.61%, for the conversion option and the
warrants, respectively
|
| · |
Expected
lives of five years
|
| · |
Market
price at issuance date of $10.43
|
| · |
Strike
price of $12.47 and $13.51, for the conversion option and the warrants,
respectively
|
Pursuant
to SFAS 133 and EITF 00-19, the Company determined that both the warrants
and
the conversion option embedded in the Notes meet the definition of a derivative
instrument and must be carried as a liability and marked to market each
reporting period.
On
December 13, 2007, the Company recorded $34,719,062 as derivative liability,
including $9,298,044 for the fair value of the warrants and $25,421,018 for
fair
value of the conversion option. The initial carrying value of the Notes was
$5,280,938. The financing cost of $3,594,500 was recorded as deferred note
issuance cost and is being amortized to interest expense over the term of
the
Notes using the effective interest method.
On
December 31, 2007, in accordance with SFAS 133, the fair value of derivative
liabilities was recalculated and decreased $6,235,754, including $1,659,583
for
the decrease in fair value of the warrants and $4,576,171 for the decrease
in
fair value of the conversion option. The decrease was recorded as a gain
and
included in other income, net.
As
of
December 31, 2007, the balance of derivative liabilities was $28,483,308,
which
consisted of $7,638,461 for the warrants and $20,844,847 for the conversion
option, and the carrying value of the Notes was $5,440,416. Amortization
of the
debt discount totaled $159,478 was recorded as interest expense for the year
ended December 31, 2007. The unamortized financing cost was $3,564,546 as
of
December 31, 2007 and $29,954 was amortized to interest expense for the
period.
Note
15 -
Other
expenses and income, net
Other
income and expense for the years ended December 31, 2007, 2006 and 2005 consist
of the following:
|
December
31,
2007
|
December
31,
2006
|
December
31,
2005
|
||||||||
|
(Restated)
|
||||||||||
|
Finance/interest
expense
|
$
|
(9,296,601
|
)
|
$
|
(2,345,031
|
)
|
$
|
(1,905,104
|
)
|
|
|
Interest
income
|
871,221
|
182,780
|
230,103
|
|||||||
|
Change
in fair value of derivative liabilities
|
6,235,754
|
-
|
-
|
|||||||
|
Other
non-operating income
|
1,484,342
|
2,348,526
|
12,494
|
|||||||
|
Other
non-operating expense
|
(556,533
|
)
|
(103,445
|
)
|
(18,335
|
)
|
||||
|
Total
other (expense) income
|
$
|
(1,261,817
|
)
|
$
|
82,830
|
$
|
(1,680,842
|
)
|
||
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
16 -
Taxes
Income
taxes
Significant
components of the provision for income taxes on earnings from operation for
the
years ended December 21, 2007, 2006 and 2005 are as follows:
|
December
31,
2007
|
December
31,
2006
|
December
31,
2005
|
||||||||
|
Provision
for income taxes:
|
||||||||||
|
Current
|
$
|
5,224,722
|
$
|
-
|
$
|
-
|
||||
|
Deferred
|
(388,525
|
)
|
-
|
-
|
||||||
|
Total
provision for income taxes
|
$
|
4,836,197
|
$
|
-
|
$
|
-
|
||||
The
principal component of the deferred income tax assets is as
follows:
|
December
31,
2007
|
December
31,
2006
|
December
31,
2005
|
||||||||
|
Net
operating loss carry-forward
|
$
|
1,554,101
|
$
|
-
|
$
|
-
|
||||
|
Effective
tax rate
|
25.0
|
%
|
-
|
-
|
||||||
|
Deferred
tax asset
|
$
|
399,751
|
$
|
-
|
$
|
-
|
||||
According
to Chinese tax regulations, the net operating loss can be carried forward
to
offset with operating income for the next five years. Management believes
the
deferred tax asset is fully realizable.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 21, 2007, 2006 and 2005 as
follows:
|
December
31,
2007
|
December
31,
2006
|
December
31,
2005
|
||||||||
|
U.S.
Statutory rates
|
34.00
|
%
|
34
|
%
|
34
|
%
|
||||
|
Foreign
income not recognized in USA
|
-34.00
|
%
|
-34
|
%
|
-34
|
%
|
||||
|
China
income taxes
|
33.00
|
%
|
-
|
-
|
||||||
|
Tax
effect of income not taxable for tax purpose
|
-3.39
|
%
|
-
|
-
|
||||||
|
Effect
of different tax rate of subsidiaries operating in other
jurisdictions
|
-17.29
|
%
|
-
|
-
|
||||||
|
Total
provision for income taxes
|
12.32
|
%
|
-
|
-
|
||||||
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Under
the
Income Tax Laws of PRC, the Company’s subsidiary, Daqiuzhuang Metal, is
generally subject to an income tax at an effective rate of 33% (30% state
income
taxes plus 3% local income taxes) on income reported in the statutory financial
statements after appropriate tax adjustments, unless the enterprise is located
in a specially designated region where it allows foreign enterprises a two-year
income tax exemption and a 50% income tax reduction for the following three
years.
The
Company
’s
subsidiary, Daqiuzhuang Metal, became a Chinese Sino-foreign joint venture
at
the time of the merger on October 14, 2004 and it became eligible for the
tax
benefit. Daqiuzhuang Metal
is
located in
Tianjin
Costal Economic Development Zone
and
under
the
Income Tax Laws of Tianjin City of PRC, it i
s
eligible for an income tax rate of 24%. Therefore,
Daqiuzhuang
Metal
is
exempt from income taxes for the years ended December 31, 2005 and 2006 and
is
entitled to 50% income tax reduction of the special income tax rate of 24%,
which is a rate of 12% for the years ended December 31, 2007, 2008 and 2009.
The
Company’s subsidiary, Longmen Joint Venture, is located in the mid-west region
of China. It qualifies for the “Go-West” tax rebate of 15% tax rate promulgated
by the government; therefore income tax is accrued at 15%.
Baotou
Steel Pipe Joint Venture is located in Inner Mongolia, is
subject
to an income tax at an effective rate of 33% (30% state income taxes plus
3%
local income taxes).
For
the
years ended December 31, 2007, 2006 and 2005, the tax savings resulted from
the
tax holidays and special tax benefits granted by the China tax authority
amounted to $8,120,589, $604,553, and $1,357,005, respectively. The tax savings
increased the earnings per share by $0.25, $0.02, and $0.04, respectively,
for
year 2007, 2006 and 2005.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES and FIEs. The two-year tax exemption and three-year
50%
tax reduction tax holiday for production-oriented FIEs will not be
eliminated.
Value
added Tax
Enterprises
or individuals who sell commodities, engage in repair and maintenance or
import
and export goods in the PRC are subject to a value added tax in accordance
with
Chinese laws. The value added tax standard rate is 17% of the gross sales
price.
A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s finished
products can be used to offset the VAT due on sales of the finished product.
VAT
on
sales and VAT on purchases amounted to $189,739,668 and $159,078,937 for
the
year ended December 31, 2007, $19,698,345 and $18,560,573 for the year ended
2006 and $14,972,461 and $12,684,237 for the year ended December 31, 2005,
respectively. Sales and purchases are recorded net of VAT collected and paid
as
the Company acts as an agent for the government. VAT taxes are not impacted
by
the income tax holiday.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Taxes
payable consisted of the following:
|
December
31,
|
December
31,
|
||||||
|
2007
|
2006
|
||||||
|
VAT
taxes payable
|
$
|
20,320,241
|
$
|
5,317,466
|
|||
|
Income
taxes payable
|
5,112,876
|
||||||
|
Misc
taxes
|
2,143,123
|
74,136
|
|||||
|
Totals
|
$
|
27,576,240
|
$
|
5,391,602
|
|||
Note
17 -
Earnings per share
The
calculation of earnings per share is as follows:
|
December
31,
2007
|
December
31,
2006
|
December
31,
2005
|
||||||||
|
Income
attributable to holders of common shares
|
$
|
22,425,921
|
$
|
1,033,208
|
$
|
2,740,219
|
||||
|
Basic
weighted average number of common shares outstanding
|
32,424,652
|
31,250,000
|
31,250,000
|
|||||||
|
Add:
dilution effect of warrants
|
133,698
|
-
|
-
|
|||||||
|
Diluted
weighted average number of common shares outstanding
|
32,558,350
|
31,250,000
|
31,250,000
|
|||||||
|
|
||||||||||
|
Net
income per share
|
||||||||||
|
Basic
|
$
|
0.69
|
$
|
0.03
|
$
|
0.09
|
||||
|
Diluted
|
$
|
0.69
|
$
|
0.03
|
$
|
0.09
|
||||
Under
SFAS 128 "
Earnings
per Share", paragraph 24,
mandatory
redeemable shares are excluded from the shares outstanding for both basic
and
diluted earnings per share. Thus, the 1,176,665 shares described in Note
13 have
been excluded from the earnings per share calculation for the basic and diluted
EPS as of December 31, 2006 and 2005. In connection to the redeemable preferred
stocks, the Company issued 2,353,330 warrants to the shareholders. As of
December 31, 2007, the number of unexercised warrants was 233,330, which
the
dilution effect was calculated to be 133,698 shares by using the treasury
method.
As
described in Note 1, the Company issued
Victory
New an aggregate of 3,092,899 shares of the Company’s Series A Preferred
Stock
to
purchase 30% minority ownership of Daqiuzhuang Metal. The preferred stock
can
not be converted to common stock. Thus, the 3,092,899 shares of Series A
Preferred Stock have been excluded from the earnings per share calculation.
On
December 13, 2007, the Company issued $40 million of convertible notes,
convertible into 3,207,698 shares of common stock, and warrants to purchase
1,154,958 shares of common stock. Since the note conversion price of $12.47
and
the warrant exercise price of $13.51 were higher than $9.47, the weighted
average market price of the common stock for the period from the issuance
date
to December 31, 2007, the convertible notes and warrants were determined
to be
anti dilutive, and thus have been excluded from the earnings per share
calculation.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
18 -
Related party balances and transactions
The
Company has advances to and from Golden Glister Holdings Limited (“Golden
Glister”) for short term cash flow purposes. Golden Glister is incorporated in
the territory of the British Virgin Islands. The Company’s Chairman, CEO and
majority shareholder, Yu Zuo Sheng (aka Henry Yu) is the majority shareholder
of
Golden Glister. The Company had a receivable from Golden Glister of $850,400
at
December 31, 2006 and the Company was repaid in 2007.
The
Company subleased a portion of its land use rights to Tianjin Jing Qiu Steel
Market Company, a related party under common control. The Company’s Chairman,
CEO and majority shareholder, Yu Zuo Sheng (aka Henry Yu), is the chairman
and
the largest shareholder of Jing Qiu Steel Market Company. Total rental income
for the years ended December 31, 2007, 2006, and 2005 was $1,587,995,
$1,439,121, and $0, respectively.
The
Company’s short term loan of $6,855,000 from Shenzhen Development Bank is
personally guaranteed by the Company’s Chairman, CEO, and majority shareholder
Yu Zuo Sheng (aka Henry Yu).
Tianjin
Dazhan Industry Co., Ltd. (“Dazhan”) and Tianjin Hengying Trading Co., Ltd.
(“Hengying”) are steel trading companies controlled by the Company’s Chairman,
CEO and majority shareholder, Yu Zuo Sheng (aka Henry Yu). Dazhan and Hengying
acted as trading agents of the Company to make purchases and sales for the
Company. For the years ended December 31, 2007 and 2006, through Dazhan and
Hengying, the Company purchased total of $92,584,791 and $81,888,671 of material
from these entities, and sold $32,743,626 and $78,849,439 of finished products
to these entities, respectively.
The
Long
Men Joint Venture did not obtain the VAT invoices from the local tax bureau
until late July 2007. Before obtaining VAT invoices, all the sales and purchases
made by the joint venture were carried out through the Company’s joint venture
partner, Long Men Group. In addition to the VAT status issue, the Long Men
Joint
Venture also made sales through Long Men Group for outstanding sales contracts
signed before June 2007. Also some sales through Long Men Group were made
due to
the established market share and its long term relationship with the customers.
All the sales proceeds and purchase payments were recorded as receivables
from
or payables to Long Men Group. The total receivable from Long Men Group is
$67,803,956 and the total payable to Long Men Group is $75,758,145. The net
amount is a payable of $7,954,189 to Long Men Group.
Total
related party sales amounted to $355,538,568 for the year ended December
31,
2007.
All
transactions with related parties are for normal business activities and
are
short term in nature. Settlements for the balances are usually in cash. The
following charts summarize the related party transactions as of the years
ended
December 31, 2007 and 2006:
| a. |
Accounts
receivable -related parties
|
As
of
December 31, 2007, the Company had a receivable balance of $565,631 due from
Tianjin Jing Qiu Steel Market Co., Ltd. The Company’s Chairman, CEO and majority
shareholder, Yu Zuo Sheng (aka Henry Yu) is a shareholder of Tianjin Jing
Qiu.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
| b. |
Short
term loan receivable - related parties
|
AS
of
December 31, 2007, the Company had a short term loan receivable from Tianjin
Jing Qiu amounted to $1,233,900. This loan was made for short term cash flow
needs and will be repaid upon request.
| c. |
Other
receivables - related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Golden
Glister
|
$
|
-
|
$
|
850,400
|
|||
|
Beijing
Wendlar
|
1,033,713
|
-
|
|||||
|
Yang
Pu Capital Automobile
|
616,950
|
-
|
|||||
|
Tianjin
Jin Qiu Steel Market
|
137,100
|
-
|
|||||
|
Tong
Xin Ye Jin
|
48,830
|
-
|
|||||
|
Yang
Pu Sheng Xin
|
74,113
|
-
|
|||||
|
Yang
Pu Sheng Hua
|
2,742
|
-
|
|||||
|
$
|
1,913,448
|
$
|
850,400
|
||||
| d. |
Advances
on inventory purchases - related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Hengying
|
$
|
8,014,211
|
$
|
-
|
|||
|
Dazhan
|
1,929,801
|
-
|
|||||
|
$
|
9,944,012
|
$
|
-
|
||||
| e. |
Prepaid
expenses - related parties
|
During
2007, the Company prepaid rental fee for employee dormitory to a related
party,
Beijing Wendlar, a company controlled by Mr. Yu Zuo Sheng (aka Henry Yu).
As of
December 31, 2007, the Company had a balance of the prepayment of $191,823,
in
which $49,356 was current and $142,467 was classified as non current.
| f. |
Accounts
payable due to related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Long
Men Group
|
$
|
7,954,189
|
$
|
-
|
|||
|
Dazhan
|
4,249,395
|
-
|
|||||
|
Henan
Xinmi Kanghua
|
356,567
|
-
|
|||||
|
Zhengzhou
Shenglong
|
269,917
|
-
|
|||||
|
Baotou
Shengda Steel Pipe
|
1,472,670
|
-
|
|||||
|
$
|
14,302,738
|
$
|
-
|
||||
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
| g. |
Short
term loan due to related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
HanCheng
TongXing
|
$
|
7,317,027
|
$
|
-
|
|||
| h. |
Other
payables due to related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Beijing
Wandler
|
$
|
34,275
|
$
|
-
|
|||
|
Tianjin
Jin Qiu Steel Market
|
1,487,600
|
-
|
|||||
|
Hengying
|
563,816
|
-
|
|||||
|
Baotou
Shengda Steel Pipe
|
31,095
|
-
|
|||||
|
Baogang
Jian An
|
9,597
|
-
|
|||||
|
$
|
2,126,383
|
$
|
-
|
||||
| i. |
Customer
deposits - related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Hengying
|
$
|
6,855,000
|
$
|
-
|
|||
|
Haiyan
|
2,356,736
|
-
|
|||||
|
$
|
9,211,736
|
$
|
-
|
||||
Transactions
with related parties are as follows:
| (a) |
Sales
of goods
|
|
Name
of related parties
|
Year
ended December 31,
2007
|
Year
ended December 31,
2006
|
Year
ended December 31,
2005
|
|||||||
|
Shaanxi
Longmen Steel Group
|
$
|
355,538,568
|
$
|
-
|
$
|
-
|
||||
|
$
|
355,538,568
|
$
|
-
|
$
|
-
|
|||||
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
| (b) |
Purchase
of goods
|
|
Name
of related parties
|
Year
ended December 31,
2007
|
Year
ended December 31,
2006
|
Year
ended December 31,
2005
|
|||||||
|
Shaanxi
Longmen Iron and Steel Group Co., Ltd.
|
$
|
175,380,794
|
$
|
-
|
$
|
-
|
||||
|
$
|
175,380,794
|
$
|
-
|
$
|
-
|
|||||
| (c) |
Rental
income
|
|
Name
of related parties
|
Year
ended December 31,
2007
|
Year
ended December 31,
2006
|
Year
ended December 31,
2005
|
|||||||
|
Tianjin
Jing Qiu Steel Market Co., Ltd.
|
$
|
1,580,040
|
$
|
1,439,121
|
$
|
-
|
||||
|
$
|
1,580,040
|
$
|
1,439,121
|
$
|
-
|
|||||
Note
19 -
Business
combinations
a.
Acquisition of 30% minority interest of Daqiuzhuang Metal
As
previously described in Note 1,
on
May
18, 2007, General Steel entered into a Purchase Agreement with Victory New
Holdings to acquire the remaining 30% interest in Daqiuzhuang Metal. General
Steel agreed to issue Victory New 3,092,899 shares of Series A Preferred
Stock
which have a voting power of 30% of the combined voting power of the Company’s
common and preferred stock for the life of the Company. As a result of the
acquisition, the Company increased its equity interest in Daqiuzhuang Metal
from
70% to 100%. On May 23, 2007, the Company transferred its 30% interest in
Daqiuzhuang Metal to General Steel Investment (BVI). As a result of this
transfer, General Steel Investment (BVI) holds 100% of equity interest of
Daqiuzhuang Metal.
Victory
New Holdings Ltd. is a newly formed entity under the control of the Company’s
Chairman, CEO and majority shareholder Zuosheng Yu (aka Henry Yu). Victory
New
was legally owned by Mrs. Yang, Baoyin, Mr. Yu’s mother. Therefore, General
Steel and Victory New were under common control. According to
FASB
Statement No. 141, "Business Combinations", a
cquisition
of minority interests from entities under common control should be accounted
for
using the purchase method.
The
Company engaged a third party to determine the fair value of
transaction
,
which
was $8,374,000. The premium over book value of $2,188,203 was accounted for
as
dividend distribution to the shareholder of Victory New.
b.
Joint venture agreement with Baotou Steel
As
Mentioned in Note 1, on April 27, 2007, Daqiuzhuang Metal, a wholly owned
subsidiary of the Company, and Baotou Iron and Steel Group Co., Ltd. (“Baotou
Steel”) entered into an Amended and Restated Joint Venture Agreement (the
“Amended agreement”), amending the Joint Venture Agreement entered into on
September 28, 2005 (“Original Joint Venture Agreement”). The Amended agreement
increased Daqiuzhuang Metal's ownership interest in the Joint Venture from
20%
to 80%.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
The
Amended agreement states that the initial capital of the joint venture company
will be approximately $6,400,000, equal to the registered capital. Baotou
Steel
will contribute RMB10,000,000, or approximately $1,270,000, and Daqiuzhuang
Metal will contribute RMB40,000,000, or approximately $5,130,000. Daqiuzhuang
Metal and Baotou Steel each contributed 30% of their portion of the registered
capital to commence the business. This joint venture obtained its business
license on
May
25,
2007. Operations began in the third quarter of 2007.
The
joint
venture’s name is Baotou Steel - General Steel Special Steel Pipe Joint Venture
Company Limited, a limited liability company formed under the laws of the
PRC.
Baotou Steel Pipe Joint Venture is located at Kundulun District, Baotou city,
Inner Mongolia, China. It produces and sells spiral-weld steel
pipes.
The
ownership is as follows:
|
%
Ownership
|
|||||
|
Baotou
Iron and Steel (Group) Co., Ltd.
|
20%
|
||||
|
Daqiuzhuang
Metal Sheet Co., Ltd
|
80%
|
||||
c.
Shaanxi Longmen Iron and Steel Co., Ltd
Joint Venture
As
described in Note 1, on June 15, 2007, General Steel Holdings Inc. and Shaanxi
Longmen Iron and Steel (Group) Co., Ltd. (”Longmen Group”) signed an agreement
to form Shaanxi Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”).
Longmen Group contributed the operating facility and corresponding debt with
an
appraised net asset value of RMB200 million. General Steel Holdings, Inc.
contributed RMB300 million to the Longmen Joint Venture through its subsidiaries
Daqiuzhuang Metal and Qiu Steel Investment. Daqiuzhuang Metal and Qiu Steel
Investment contributed RMB160,000,000 and RMB140,000,000 in cash, respectively,
and hold 32% and 28% ownership, respectively, or 60% collectively. Longmen
Group
owns 40% of the Longmen Joint Venture. The Longmen Joint Venture obtained
the
business license on June 22, 2007.
Assets
acquired and debts assumed in the transaction are listed as below:
|
Item
|
Fair
Value
|
Acquired
/ Assumed by Longmen Joint Venture
|
|||||
|
Current
assets
|
$
|
317,744,960
|
$
|
98,530,222
|
|||
|
Property,
plant, and equipment
|
186,915,879
|
164,811,374
|
|||||
|
Intangible
assets
|
20,128,972
|
19,543,875
|
|||||
|
Other
assets
|
99,604,841
|
||||||
|
Total
assets
|
624,394,652
|
282,885,471
|
|||||
|
Current
liability
|
473,168,746
|
223,776,221
|
|||||
|
Long
term liability
|
38,246,111
|
32,809,250
|
|||||
|
Total
liabilities
|
511,414,857
|
256,585,471
|
|||||
|
Net
assets
|
$
|
112,979,795
|
$
|
26,300,000
|
|||
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
On
September 24, 2007, Longmen Joint Venture acquired 74.92% ownership interest
in
Environmental Protection Industry Development Co., Ltd. (“EPID)” for RMB18.0
million or $2.4 million and a 36% equity interest in Hualong Fire Retardant
Materials Co., Ltd., (“Hualong”) for RMB3.3 million or $0.4 million. The parties
agreed to make the effective date of the transaction July 1, 2007. Due to
EPID,
Hualong, and Longmen Joint Venture being under common management control,
this
transaction was recorded at the book value as of the effective date.
Assets
acquired and debts assumed in the transaction are listed as below:
|
EPID
|
Fair
Value
|
Acquired
/ Assumed by
Longmen
Joint Venture (74.92%)
|
|||||
|
Current
assets
|
$
|
2,609,601
|
$
|
1,955,113
|
|||
|
Property,
plant, and equipment
|
5,619,646
|
4,210,239
|
|||||
|
Total
assets
|
8,229,247
|
6,165,352
|
|||||
|
Total
liabilities
|
5,055,550
|
3,787,618
|
|||||
|
Net
assets
|
$
|
3,173,697
|
$
|
2,377,734
|
|||
|
Hualong
|
Fair
Value
|
Acquired
/ Assumed by
Longmen
Joint Venture (36%)
|
|||||
|
Current
assets
|
$
|
3,905,068
|
$
|
1,405,824
|
|||
|
Property,
plant, and equipment
|
1,653,693
|
595,330
|
|||||
|
Total
assets
|
5,558,761
|
2,001,154
|
|||||
|
Total
liabilities
|
4,357,736
|
1,568,785
|
|||||
|
Net
assets
|
$
|
1,201,025
|
$
|
432,369
|
|||
d.
Pro Forma
The
following unaudited pro forma condensed income statements for the years ended
December 31, 2007 and 2006 were prepared under generally accepted accounting
principles as if the Longmen Joint Venture transactions had occurred on January
1, 2006. The pro forma information may not be indicative of the results that
would have occurred if the acquisition had been in effect from and on the
dates
indicated or which may be obtained in the future.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Pro
Forma
Condensed Income Statements:
|
For
the year
|
For
the year
|
||||||
|
ended
|
ended
|
||||||
|
December
31, 2007
|
December
31, 2006
|
||||||
|
(In
Million $)
|
(In
million $)
|
||||||
|
Sales
|
$
|
1,278.47
|
$
|
842.94
|
|||
|
Cost
of sales
|
1,170.87
|
796.34
|
|||||
|
Gross
Profit
|
107.60
|
46.60
|
|||||
|
SG&A
expenses
|
28.19
|
16.40
|
|||||
|
Other
expense
|
14.90
|
5.98
|
|||||
|
Income
before income tax and minority interest
|
64.51
|
24.22
|
|||||
|
Income
tax
|
6.37
|
2.99
|
|||||
|
Net
income before minority interest
|
58.14
|
21.23
|
|||||
|
Minority
interest
|
19.52
|
7.73
|
|||||
|
Net
income
|
$
|
38.62
|
$
|
13.50
|
|||
Note
20 - Supplemental disclosure of cash flow information
I
nterest
paid amounted to $6,404,834, $2,065,237 and $1,785,558 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Income
tax payments amounted to $183,984, $0, and $490,431 for
the
years ended December 31, 2007, 2006 and 2005, respectively.
In
May
2007, the Company issued 3,092,899 shares of preferred stock with a fair
value
of $8,374,000 to the shareholders of Victory New Holdings Inc. to purchase
the
30% the minority ownership of Daqiuzhuang Metal.
On
March
1, 2007 and September 1, 2007, 176,665 and 1,000,000 shares of redeemable
stock
were converted at $1.95 resulting in a reclassification of the shares from
liabilities to equity,
Note
21- Shareholder’s equity
On
February 12, 2007, the Company issued to Aurelius Consulting Group, Inc.
(also
known as RedChip Companies, Inc.) 18,000 shares of common stock in the amount
of
$23,742 as a portion of its compensation for investor relations services
rendered. Those shares were valued at the market price at the date of the
agreement.
On
March
1, 2007, as discussed in Note 14, 1,176,665 shares of redeemable stock were
reclassified from liabilities to common stock upon expiration of the redemption
feature.
2,120,000
warrants were converted to common stock at $2.50 per share in September,
2007
for total proceed of $5,300,000 in cash.
On
October 01, 2007, the Company issued senior management and directors 70,100
shares of common stock at $8.16 per share, as compensation. The shares were
valued at the market price on the date granted. The Company recorded
compensation expense of $572,016 for the year ended December 31,
2007.
Note
22 - Retirement plan
Regulations
in the People’s Republic of China require the Company to contribute to a defined
contribution retirement plan for all employees. All Joint Venture employees
are
entitled to a retirement pension amount calculated based upon their salary
at
their date of retirement and their length of service in accordance with a
government managed pension plan. The PRC government is responsible for the
pension liability to the retired staff. It was the first year the Company
was
required to make contributions to the state retirement plan. The Company
is
required to contribute 20% of the employees’ monthly salary. Employees are
required to contribute 7% of their salary to the plan. Total pension expense
incurred by the Company amounted to $1,624,935, $346,385 and
$236,730
for the years ended
December
31, 2007
,
2006
and
2005, respectively.
GENERAL
STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
23 - Statutory reserves
The
laws
and regulations of the People’s Republic of China require that before an
enterprise distributes profits to its partners, it must first satisfy all
tax
liabilities, provide for losses in previous years, and make allocations,
in
proportions determined at the discretion of the board of directors, to the
statutory reserves. The statutory reserves include the surplus reserve funds
and
the enterprise fund and t
hese
statutory reserves represent restricted retained earnings.
Surplus
reserve fund
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory
surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
transfer to this reserve must be made before distribution of any dividend
to
shareholders.
For
the
years ended December 31, 2007, 2006
and
2005,
the Company transferred $2,525,315, $266,257, and $685,959 to this reserve.
The
surplus reserve fund is non-distributable other than during liquidation and
can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par
value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Note
24 - Commitment and contingencies
The
Company is obligated to contribute RMB40,000,000, or approximately $5,130,000,
as registered capital to Baotou Steel Pipe Joint Venture. The Company has
already made a capital contribution of approximately $1,734,200 through December
31, 2007, and the balance will be contributed in 2008, from the operating
cash
flow of Daqiuzhuang Metal.
Daqiuzhuang
Metal provides dormitory facilities for its employees under a 10 year rental
contract. The agreement began January 2006 and required full prepayment for
the
10 year period totaling $466,200.
Total
rental expense for the years ended December 31, 2007 and 2006 amounted to
$47,639 and $45,343, respectively.
Daqiuzhuang
Metal rented land for 50 years starting September 2005. The agreement called
for
Daqiuzhuang Metal to pay the first three years’ rent payments upon signing the
agreement. The balance due for the remaining 47 years payment is due in
September 2008, after the lessor has assisted Daqiuzhuang Metal in obtaining
the
appropriate land use rights. Total amount of the rent over the 50 years period
is approximately $1,044,728 (or RMB8,067,400).
At
December 31, 2007, total future minimum lease payments for the unpaid portion
under an operating lease were as follows:
|
For
the year ended December 31,
|
Amount
|
|||
|
2008
|
424,909
|
|||
|
Thereafter
|
$
|
-
|
||
Total
rental expense of the land use right for the years ended December 31, 2007
and
2006 amounted to $21,351, $20,260 and $19,879, respectively.
Note
25 - Subsequent events
On
January 14th, 2008, the Company through Longmen Joint Venture, completed
its
acquisition of a controlling interest in Hancheng Tongxing Metallurgy Co.,
Ltd.
(“Tongxing”). Tongxing contributed its land use right of 217,487 square meters
(approximately 53 acres) with an the appraised value of approximately $4.1
million (or RMB30,227,333). Pursuant to the agreement, the land will be
converted into shares valued at approximately $3.1 million (RMB22,744,419),
providing the Joint Venture stake of 22.76% ownership in Tongxing and making
it
Tongxing’s largest and controlling shareholder. Tongxing has two core operating
areas: coking coal production and rebar processing. Its coking coal operations
have an annual production capacity of 250,000 tons. Its rebar processing
facility has an annualized rolling capacity of 300,000 tons.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.
Not
applicable.
Item
9A(T). CONTROLS AND PROCEDURES.
Disclosure
Controls and Procedures
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2007. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that
it
files or submits under the Exchange Act is recorded, processed, summarized
and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of December 31, 2007,
our chief executive officer and chief financial officer concluded that, as
of
such date, our disclosure controls and procedures were effective at the
reasonable assurance level.
Internal
Control Over Financial Reporting
Management’s
Annual Report on Internal Control Over Financial Reporting
The
management of the company is responsible for establishing and maintaining
adequate internal control over financial reporting for the company. Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process designed
by,
or under the supervision of, the company’s principal executive and principal
financial officers and effected by the company’s board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principals and
includes those policies and procedures that:
·
Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the company;
·
Provide
reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that
receipts and expenditures of the company are being made only in accordance
with
authorizations of management and directors of the company; and
·
Provide
reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The
company’s management assessed the effectiveness of the company’s internal
control over financial reporting as of December 31, 2007. In making this
assessment, the company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.
Based
on
our assessment, management concluded that, as of December 31, 2007, our internal
control over financial reporting is effective.
This
annual report does not include an attestation report of the company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the company to
provide only management’s report in this annual report.
Changes
in Internal Control Over Financial Reporting
The
Baotou Steel Pipe JV and Longmen JV formed during the year ended 12/31/2007
increased the burden of employing adequate controls over financial reporting.
We
believe that the controls over financial reporting in place at the two acquired
operations at the time of acquisition were and remained adequate. Management
has
reviewed these controls and believes that there was no condition with the
Company’s internal control over financial reporting that materially affected, or
was reasonably likely to materially affect, this control.
ITEM
9B. OTHER INFORMATION.
Not
applicable
PART
III
ITEM
10.
DIRECTORS
AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and executive officers
The
following table sets forth the names and ages of our current directors and
executive officers, their principal offices and positions and the date each
such
person became our director or executive officer. Our executive officers are
elected annually by the board of directors. Our directors serve one-year terms
until they are re-elected or their successors are elected. The executive
officers serve by election of the board of directors for one year terms or
until
their death, resignation, removal or renewal by the board of directors. Other
than described below, there are no family relationships between any of the
directors and executive officers. In addition, there was no arrangement or
understanding between any executive officer and any other person pursuant to
which any person was selected as an executive officer.
The
executive officers are all full time employees of General Steel Holdings,
Inc.
The
directors and executive officers of General Steel Holdings, Inc. are as
follows:
|
Name
|
|
Age
|
|
Position
|
|
Date
of
appointment
|
|
Zuosheng
Yu
|
|
43
|
|
Chairman
of the Board of Directors and Chief Executive Officer
|
|
10/14/04
|
|
John
Chen
|
|
36
|
|
Director
/ Chief Financial Officer
|
|
3/07/05
|
|
Danli
Zhang
|
|
53
|
|
Director,
General Manager of Longmen Joint Venture
|
|
8/28/07
|
|
Ross
Warner
|
|
44
|
|
Director
|
|
8/24/05
|
|
John
Wong
|
|
41
|
|
Independent
Director
|
|
8/24/05
|
|
Qinghai
Du
|
|
70
|
|
Independent
Director
|
|
8/28/07
|
|
Zhongkui
Cao
|
|
58
|
|
Independent
Director
|
|
4/13/07
|
|
Chris
Wang
|
|
37
|
|
Independent
Director
|
|
11/13/07
|
|
Fred
Hsu
|
|
44
|
|
Independent
Director
|
|
8/28/07
|
Our
directors are generally elected until the next annual meeting of shareholders
and until their successors are elected and qualified, or until their earlier
resignation or removal. Each director’s term of office is one year.
Audit
Committee
Our
audit
committee consists of John Wong, Fred Hsu and Zhongkui Cao. John Wong is the
chairman of the audit committee. The audit committee held four meetings
during fiscal year 2007.
The
primary responsibilities of the audit committee are to review the results of
the
annual audit and to discuss the financial statements, including the independent
auditors’ judgment about the quality of accounting principles, the
reasonableness of significant judgments, and the clarity of the disclosures
in
the financial statements. Additionally, the audit committee meets with our
independent auditors to review the interim financial statements prior to the
filing of our Quarterly Reports on Form 10-Q, recommends to our board of
directors the independent auditors to be retained by us, oversees the
independence of the independent auditors, evaluates the independent auditors’
performance, receives and considers the independent auditors’ comments as to
controls, adequacy of staff and management performance and procedures in
connection with audit and financial controls, including our system to monitor
and manage business risks and legal and ethical compliance programs audit and
non-audit services provided to us by our independent auditors, considers
conflicts of interest involving executive officers or board members. Our board
of directors has determined that Mr. Wong is an “audit committee financial
expert” as defined by the SEC, and that each member of the audit committee is
independent.
To
the
best of our knowledge, none of the following ever occurred to any of our
directors and officers.
(1)
Any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
(2)
Any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
(3)
Being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities;
or
(4)
Being found by a court of competent jurisdiction (in a civil action), the
SEC or the Commodity Futures Trading Commission to have violated a federal
or
state securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.
Biographical
information
Mr.
Zuosheng Yu Chief Executive Officer and Chairman
,
joined
us in October 2004 and became a Chairman of the Board at that time. From April
1986 to February 1992, he was President of Daqiuzhuang Metal Sheets Factory,
Tianjin, China. From February 1992 to December 1999, he was General Manager
of
Sheng Da Industrial Company, Tianjin, China. From November 1999 to March 2001,
he was President and Chairman of Board of Directors of Sheng Da Machinery
Manufactory, Tianjin, China. Since February 2001, he is President and Chairman
of Board of Directors of Beijing Wendlar Investment Management Group, Beijing,
China. Since March 2001, he is President and Chairman of Board of Directors
of
Baotou Sheng Da Steel Pipe Limited, Inner Mongolia, China and Chairman of Board
of Directors of Sheng Da Steel and Iron Mill, Hebei province, China. Since
April
2001, he is President and Chairman of Sheng Da Industrial Park Real Estate
Development Limited. Since December 2001, Mr. Yu has been President
and Chairman of Beijing Shou Lun Real Estate Development Company, Beijing,
China.
Mr.
Yu
graduated in 1985 graduated from Sciences and Engineering Institute, Tianjin,
China. In July 1994, he received Bachelor degree from Institute of Business
Management for Officers. Mr. Yu received the title of “Senior Economist” from
the Committee of Science and Technology of Tianjin City in 1994. In July 1997,
he received a MBA degree from the Graduate School of Tianjin Party University.
Since April 2003, Mr. Yu has held a position as a member of China’s APEC (Asia
Pacific Economic Co-operation) Development Council.
Mr.
John Chen, Director and Chief Financial Officer
.
Mr.
John Chen joined us in May 2004. He is the Chief Financial Officer and a
Director. From August 1997 to July 2003, he was senior accountant at Moore
Stephens Wurth Frazer and Torbet, LLP, Los Angeles, California, USA. He
graduated from Norman Bethune University of Medical Science, Changchun city,
Jilin province, China in September 1992. He received B.S. degree in accounting
from California State Polytechnic University, Pomona, California, USA in July
1997.
Mr.
Ross Warner, Director.
Mr.
Warner was elected as a director in March 2005. From July 2003 to October 2006,
he was the Chief of Operations at OCDF. From July 2002 to June 2003, he was
the
country manager for English First in charge of China and Vietnam. From April
2001 to July 2002, he was the non-technical training manager at TTI-China.
From
July 1998 to December 2000, he worked as the consultant at Info Technology
Group, Inc.-Beijing Office. Mr. Warner obtained an MBA from Thunderbird Graduate
School in 1988.
Mr.
Danli Zhang, Director and General Manager of Longmen Joint
Venture.
Mr.
Zhang joined us in August 2007. He is currently the General Manager of Shaanxi
Longmen Iron and Steel Co., Ltd. For more than 30 years, Mr. Zhang has been
working at Shaanxi Longmen Iron and Steel Group in various positions. Mr. Zhang
received his bachelor’s degree from the Xi’an University of Technology and
Architecture in 1982.
Mr.
Qinghai Du, Independent Director.
Mr. Du
joined us in August 2007. Mr. Du is currently the General Engineer for Beijing
Industrial Design and Research Institute. During the past forty years, he as
served as the Chief Engineer and Section Chief at both Baotou Design and
Research Institute of Iron and Steel, and the Design Institute of Capital Iron
and Steel. Mr. Du received his bachelor degree in Iron and Steel Metallurgy
from
the Beijing University of Science and Technology, formerly known as Beijing
University of Iron and Steel Technology, in 1963.
Mr.
Zhongkui Cao, Independent Director.
Mr. Cao
joined us in April 2007. He is currently the Chairman of Baogang United Steel,
the Shanghai Stock Exchange publicly traded subsidiary of Baotou Iron and Steel
Group. Previously, Mr. Cao was President and Chairman of the Board at Baotou
Metallurgy Machinery State-owned Asset Management Co. Mr. Cao graduated from
Baotou Institute of Iron and Steel in 1974.
Mr.
John Wong, Independent Director.
Mr. Wong
was elected as the independent director in August 2005. From June 2003 to
present, he is the managing partner of Vantage & Associates. From January
2000 to March 2003, he was the director at Deloitte Touche Corporate Finance,
Shanghai. From July 1998 to December 1999, he was director of Amrex Capitals.
From July 1996 to June 1998, he worked as senior audit manager at Ernest &
Young, Hong Kong. Mr. Wong graduated from Melbourne University in 1989. He
obtained Independent Directorship Certificate in 2002.
Mr.
Chris Wang, Independent Director.
Mr.
Wang
was elected as the independent director in November 2007. He is currently the
President and Chief Financial Officer of Fushi Copperweld, Inc., a NASDAQ listed
company. From November 2004 to March 2005, Mr. Wang was Executive Vice President
at Redwood Capital. From September 2002 through November 2004, Mr. Wang was
an
assistant Vice President in the portfolio management department at Century
Investment Corporation and before that, in 2001, was a summer associate with
the
Credit Suisse First Boston investment banking team in Hong Kong. Mr. Wang
received a degree in English from Beijing University of Science and Technology
in 1994 and a MBA in Finance and Corporate Accounting from the University of
Rochester in New York in 2002.
Mr.
Fred Hsu, Independent Director
.
Mr. Hsu
joined us in August 2007. He is currently the Managing Director of Sagem
Communications China, a division of Safran Inc., a global 500 company based
in
Paris, France. From 1998 to 2003 he was General Manager for Philips Electronics
Wired Telecommunications Business Unit. From 1993 to 1998, he was the Chief
Financial Officer for Wella Cosmetics, China. Mr. Hsu received a BBA degree
in
International Trade and Finance from Louisiana State University in 1987. Mr.
Hsu
obtained an MBA from Thunderbird Graduate School in 1988.
Indemnification
Our
articles of incorporation limit the liability of directors to the maximum extent
permitted by Nevada law. This limitation of liability is subject to exceptions
including intentional misconduct, obtaining an improper personal benefit and
abdication or reckless disregard of director duties. Our articles of
incorporation and bylaws provide that we may indemnify our directors, officer,
employees and other agents to the fullest extent permitted by law. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws would permit indemnification. We
currently do not have such an insurance policy.
Code
of
Ethics and Business Conduct
Our
Code
of Ethics and Corporate Governance Guidelines is available on our website at
the
following address:
http://www.gshi-steel.com/gshi2/NewsCenter.php?ID=33&nID=112
. Our
Code of Ethics and Corporate Governance Guidelines provides information:
|
|
·
|
To
guide employees so that their business conduct is consistent with
our
ethical standards;
|
|
|
·
|
To
improve the understanding of our ethical standards among customers,
suppliers and others outside the Company.
|
Our
Code
of Ethics and Corporate Governance Guidelines may also be obtained free of
charge by contacting Ross Warner at
ross@gshi-steel.com
or
by
phone: 86-10-5879-7346
ITEM
11. EXECUTIVE COMPENSATION
Compensation
Discussion and Analysis
Compensation
Philosophy
At
this
point in our growth, we compensate our CEO, CFO and senior management through
salary and fully-vested unregistered shares of our common stock. We do not
currently provide a bonus program, severance benefit program, retirement plan
or
change in control benefits program. We have engaged a human resources consultant
to advise us in developing our compensation philosophy and practice and
anticipate implementing many of their recommendations during 2008.
The
competition for senior management among Chinese companies listed on a US stock
exchange is fierce. We compete against companies that are much larger and have
greater financial resources with which to attract and retain managers. We do
not
try to compete for senior management with other companies on the basis
compensation. Instead, we seek to attract and retain qualified candidates who
embrace our vision, realize our long-term potential and are motivated by being
pioneers in the field of State Owned Enterprise (SOE) privatization.
We
spend
a great deal of effort and time communicating our vision to those considering
working for us. It is vitally important that everyone working for us be
committed to our vision and understands our commitment to growing the company.
Our CEO plays an integral role in instilling this vision on an on-going basis
with all our staff. Our work culture is very much like that of an
entrepreneurial company characterized by high trust, high loyalty and a high
personal sacrifice to current financial reward ratio.
We
have
been successful in recruiting and retaining senior management using our
compensation philosophy. Since 2004 when the company became listed on the OTCBB,
we have not had any staff resignations among our senior management team. We
view
this as a validation that we have followed the correct compensation philosophy
for this stage in our company’s development.
Current
Status
We
understand the salary and stock award amounts may be generally less than those
earned by senior managers at other Chinese companies listed on US stock
exchanges, and are also likely significantly less than the amounts paid to
senior managers of other publicly traded US companies. In determining ranges
for
these salaries and stock award amounts, we followed the principal that we are
a
developing company pursuing a goal to rapidly become a significantly larger
company. As such, at this stage of development, we believe it is in our
stockholders’ best interest to reinvest as much profit as possible back into the
company. However, we also feel that notwithstanding these lower salaries and
stock awards, our CEO and CFO remain properly incentivized, through a
combination of their non-compensatory stock holdings and the possibility of
higher compensation in the future, to grow the Company and build stockholder
value.
Compensation
Elements and Procedure
The
salary amounts for our CEO and the CFO are determined through individual
negotiations: our CFO negotiates his salary with our CEO, and our CEO negotiates
his salary with our Compensation Committee. We have not used any industry
benchmarking studies to determine these amounts. The CEO and CFO salaries are
paid in full, in RMB, in monthly installments and receive the standard salary
tax recording treatment. The stock award amounts are determined by our
Compensation Committee. We believe the amounts of these salaries and stock
awards adequately reward our CEO and CFO for their yearly total contributions
to
the company. We are not currently party to employment agreements with our CEO
and CFO and as such we do not have any obligations relating to the termination
of these employees or changes in control provisions.
The
CEO
annually reviews the work performance of the CFO and lower level managers.
In
general, the CEO subjectively evaluates the work performance of our CFO and
other senior management based on the job function the executive is expected
to
fulfill in the management of the company. During 2007, our CEO had final
authority on decisions relating to salary amounts and adjustments, except his
own, which the Board of Directors must approve. Going forward, the Compensation
Committee will have the final authority on decisions relating to compensation
for all of our management including our CEO.
Desiring
to reinvest as much profit as possible back into the company, our CEO has not
taken a pay increase since 2003 and our CFO’s salary was not increased from the
salary paid to him in 2006. In 2007, we granted fully-vested unregistered shares
of our common stock to our CEO and CFO for the first time in an effort to
further align of their interests with those of our shareholders. During 2007,
we
granted fully-vested unregistered shares to our directors and senior management
during the fourth quarter. The grants were not made as part of an equity
compensation plan and are intended as an interim-measure until a more
fully-developed compensation philosophy and practice can be adopted. We expect
this to happen during 2008 as we have engaged a human resources consultant
to
advise us on development and practice of a compensation philosophy and
anticipate adopting many of their recommendations.
Compensation
Committee Report
The
Compensation Committee of the Board of Directors has reviewed the Compensation
Discussion and Analysis and based this review recommends that it be included
in
the annual report on Form-10K for the fiscal year ended December 31, 2007.
Respectfully
submitted
General
Steel Holdings, Inc. Board of Directors Compensation Committee
Fred
Hsu
John
Wong
Zhongkui
Cao
Summary
Compensation Table
The
table
below sets forth all compensation awarded to, earned by or paid to our Chief
Executive Officer, Chief Financial Officer for the indicated fiscal year. No
other executive officers received more than $100,000 in total compensation.
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All
Other Compensation
($)
|
Total
($)
|
|||||||||||||
|
Zuosheng
Yu,
Chief
Executive Officer
|
2007
2006
|
79,002
75,342
|
81,600
|
0
|
0
|
160,602
75,342
|
|||||||||||||
|
John
Chen,
Chief
Financial Officer
|
2007
2006
|
23,701
22,603
|
81,600
|
0
|
0
|
105,301
22,603
|
|||||||||||||
During
2007, we granted fully-vested unregistered shares of our common stock to our
directors and senior management in the fourth quarter. We made the grant as
an
interim incentive measure until we more fully develop a compensation philosophy
and practice. We are currently working with a human resources consultant and
expect to implement a more comprehensive compensation policy during
2008.
Director
Compensation
The
table
set forth below sets forth information regarding compensation earned by
directors, other than our CEO and CFO, as compensation for their service to
our
company during the year ended December 31, 2007.
|
Name
|
Stock
Awards
($)
|
Total
($)
|
|||||
|
Ross
Warner
|
40,800
|
40,800
|
|||||
|
John
Wong
|
20,400
|
20,400
|
|||||
|
Qinghai
Du
|
4,080
|
4,080
|
|||||
|
Zhongkui
Cao
|
4,080
|
4,080
|
|||||
|
Chris
Wang
|
0
|
0
|
|||||
|
Danli
Zhang
|
40,800
|
40,800
|
|||||
|
Fred
Hsu
|
20,400
|
20,400
|
|||||
Currently,
we do not pay annual fees to our directors. During 2007, we granted fully-vested
unregistered shares to our directors in the fourth quarter.
We made
the grant as an interim incentive measure until we more fully develop a
compensation philosophy and practice. We determined these amounts based on
level
of involvement, responsibility and length of service. We are currently working
with a human resources consultant and expect to implement a more comprehensive
compensation policy during 2008.
During
the fiscal year ended December 31, 2007, the members of the Compensation
Committee were: its Chairman, Fred Hsu, John Wong and Zhongkui Cao. In fiscal
2007, none of the members of the Compensation Committee was an officer or
employee of ours or any of our subsidiaries.
The
following table sets forth certain information regarding beneficial ownership
of
common stock as of March 31, 2008, by:
|
·
|
Each
person known to us to own beneficially more than 5%, in the aggregate,
of
the outstanding shares of our common
stock;
|
|
|
·
|
Each
of our directors;
|
|
·
|
Each
of our Chairman and Chief Executive Officer and our other four most
highly
compensated executive officers; and
|
|
|
·
|
All
of our executive officers and directors as a
group.
|
The
number of shares beneficially owned and the percent of shares outstanding are
based on 34,861,365 shares outstanding as of March 31, 2008. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities.
|
Name
and address
|
Principal
Position Held
|
|
Shares
Owned
|
|
Percentage
|
|||||
|
|
|
|
|
|||||||
|
Zuosheng
Yu
C/o
General Steel Holdings, Inc.
Kuntai International Mansion Building, Suite 2315
Yi
No. 12 Chaoyangmenwai Avenue
Chaoyang
District, Beijing 100020
|
Chief
Executive
Officer
and
Chairman
|
23,928,900
|
68.6
|
%
|
||||||
|
|
||||||||||
|
Qiang
Chen
C/o
General Steel Holdings, Inc.
Kuntai International Mansion Building, Suite 2315
Yi
No. 12 Chaoyangmenwai Avenue
Chaoyang
District, Beijing 100020
|
Chief
Financial
Officer
and Director
|
150,000
|
*
|
|||||||
|
|
||||||||||
|
Ross
Warner
C/o
General Steel Holdings, Inc.
Kuntai International Mansion Building, Suite 2315
Yi
No. 12 Chaoyangmenwai Avenue
Chaoyang
District, Beijing 100020
|
Director
|
15,000
|
*
|
|||||||
|
|
||||||||||
|
Danli
Zhang
C/o
General Steel Holdings, Inc.
Kuntai International Mansion Building, Suite 2315
Yi
No. 12 Chaoyangmenwai Avenue
Chaoyang
District, Beijing 100020
|
Director
|
|
10,000
|
*
|
||||||
|
|
|
|||||||||
|
John
Wong
C/o
General Steel Holdings, Inc.
Kuntai International Mansion Building, Suite 2315
Yi
No. 12 Chaoyangmenwai Avenue
Chaoyang
District, Beijing 100020
|
Director
|
|
5,000
|
*
|
||||||
|
|
|
|||||||||
|
Fred
Hsu
C/o
General Steel Holdings, Inc.
Kuntai International Mansion Building, Suite 2315
Yi
No. 12 Chaoyangmenwai Avenue
Chaoyang
District, Beijing 100020
|
Director
|
5,000
|
*
|
|||||||
|
|
||||||||||
|
Wenbing
Wang
C/o
General Steel Holdings, Inc.
Kuntai International Mansion Building, Suite 2315
Yi
No. 12 Chaoyangmenwai Avenue
Chaoyang
District, Beijing 100020
|
Director
|
|
2,500
|
*
|
||||||
|
|
|
|||||||||
|
Qinghai
Du
C/o
General Steel Holdings, Inc.
Kuntai International Mansion Building, Suite 2315
Yi
No. 12 Chaoyangmenwai Avenue
Chaoyang
District, Beijing 100020
|
Director
|
|
1,000
|
*
|
||||||
|
|
|
|||||||||
|
Zhongkui
Cao
C/o
General Steel Holdings, Inc.
Kuntai International Mansion Building, Suite 2315
Yi
No. 12 Chaoyangmenwai Avenue
Chaoyang
District, Beijing 100020
|
Director
|
1,000
|
*
|
|||||||
|
|
||||||||||
|
Directors
& Executive Officers as Group
|
24,118,400
|
69.2
|
%
|
|||||||
(1)
Beneficial ownership is determined in accordance with Rule 13d-3 under
the Exchange Act securities and includes securities that are convertible into
common stock at the owner’s option within 60 days.
*
indicates percentages that are below 1%.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
Company has advances to and from Golden Glister Holdings Limited (“Golden
Glister”) for short term cash flow purposes. Golden Glister is incorporated in
the territory of the British Virgin Islands. The Company’s Chairman, CEO and
majority shareholder, Zuosheng Yu (aka Henry Yu) is the majority shareholder
of
Golden Glister. The Company had a receivable from Golden Glister of $850,400
at
December 31, 2006 and the Company was repaid in 2007.
The
Company subleased a portion of its land use rights to Tianjin Jing Qiu Steel
Market Company, a related party under common control. The Company’s Chairman,
CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), is the chairman and
the largest shareholder of Jing Qiu Steel Market Company. Total rental income
for the years ended December 31, 2007, 2006, and 2005 was $1,587,995,
$1,439,121, and $0, respectively.
The
Company’s short term loan of $6,855,000 from Shenzhen Development Bank is
personally guaranteed by the Company’s Chairman, CEO, and majority
shareholder Zuosheng Yu (aka Henry Yu).
Tianjin
Dazhan Industry Co., Ltd. (“Dazhan”) and Tianjin Hengying Trading Co., Ltd.
(“Hengying”) are steel trading companies controlled by the Company’s Chairman,
CEO and majority shareholder, Zuosheng Yu (aka Henry Yu). Dazhan and Hengying
acted as trading agents of the Company to make purchases and sales for the
Company. For the years ended December 31, 2007 and 2006, through Dazhan and
Hengying, the Company purchased total of $92,584,791 and $81,888,671 of material
from these entities, and sold $32,743,626 and $78,849,439 of finished products
to these entities, respectively.
The
Longmen Joint Venture did not obtain the VAT invoices from the local tax bureau
until late July 2007. Before obtaining VAT invoices, all the sales and purchases
made by the joint venture were carried out through the Company’s joint venture
partner, Longmen Group. In addition to the VAT status issue, the Longmen Joint
Venture also made sales through Longmen Group for outstanding sales contracts
signed before June 2007. Also some sales through Longmen Group were made due
to
the established market share and its long term relationship with the customers.
All the sales proceeds and purchase payments were recorded as receivables from
or payables to Longmen Group. The total receivable from Longmen Group is
$67,803,956 and the total payable to Longmen Group is $75,758,145. The net
amount is a payable of $7,954,189 to Longmen Group.
Total
related party sales amounted to $355,538,568 for the year ended December 31,
2007.
All
transactions with related parties are for normal business activities and are
short term in nature. Settlements for the balances are usually in cash. The
following charts summarize the related party transactions as of the years ended
December 31, 2007 and 2006:
|
a.
|
Accounts
receivable -related parties
|
As
of
December 31, 2007, the Company had a receivable balance of $565,631 due from
Tianjin Jing Qiu Steel Market Co., Ltd. The Company’s Chairman, CEO and majority
shareholder, Zuosheng Yu (aka Henry Yu) is a shareholder of Tianjin Jing
Qiu.
|
b.
|
Short
term loan receivable - related
parties
|
AS
of
December 31, 2007, the Company had a short term loan receivable from Tianjin
Jing Qiu amounted to $1,233,900. This loan was made for short term cash flow
needs and will be repaid upon request.
|
c.
|
Other
receivables - related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Golden
Glister
|
$
|
-
|
$
|
850,400
|
|||
|
Beijing
Wendlar
|
1,033,713
|
-
|
|||||
|
Yang
Pu Capital Automobile
|
616,950
|
-
|
|||||
|
Tianjin
Jin Qiu Steel Market
|
137,100
|
-
|
|||||
|
Tong
Xin Ye Jin
|
48,830
|
-
|
|||||
|
Yang
Pu Sheng Xin
|
74,113
|
-
|
|||||
|
Yang
Pu Sheng Hua
|
2,742
|
-
|
|||||
|
$
|
1,913,448
|
$
|
850,400
|
||||
|
d.
|
Advances
on inventory purchases - related
parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Hengying
|
$
|
8,014,211
|
$
|
-
|
|||
|
Dazhan
|
1,929,801
|
-
|
|||||
|
$
|
9,944,012
|
$
|
-
|
||||
|
e.
|
Prepaid
expenses - related parties
|
During
2007, the Company prepaid rental fee for employee dormitory to a related party,
Beijing Wendlar, a company controlled by Mr. Zuosheng Yu (aka Henry Yu). As
of
December 31, 2007, the Company had a balance of the prepayment of $191,823,
in
which $49,356 was current and $142,467 was classified as non current.
|
f.
|
Accounts
payable due to related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Longmen
Group
|
$
|
7,954,189
|
$
|
-
|
|||
|
Dazhan
|
4,249,395
|
-
|
|||||
|
Henan
Xinmi Kanghua
|
356,567
|
-
|
|||||
|
Zhengzhou
Shenglong
|
269,917
|
-
|
|||||
|
Baotou
Shengda Steel Pipe
|
1,472,670
|
-
|
|||||
|
$
|
14,302,738
|
$
|
-
|
||||
|
g.
|
Short
term loan due to related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
HanCheng
TongXing
|
$
|
7,317,027
|
$
|
-
|
|||
|
h.
|
Other
payables due to related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Beijing
Wandlar
|
$
|
34,275
|
$
|
-
|
|||
|
Tianjin
Jin Qiu Steel Market
|
1,487,600
|
-
|
|||||
|
Hengying
|
563,816
|
-
|
|||||
|
Baotou
Shengda Steel Pipe
|
31,095
|
-
|
|||||
|
Baogang
Jian An
|
9,597
|
-
|
|||||
|
$
|
2,126,383
|
$
|
-
|
||||
|
i.
|
Customer
deposits - related parties
|
|
Name
of related parties
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Hengying
|
$
|
6,855,000
|
$
|
-
|
|||
|
Haiyan
|
2,356,736
|
-
|
|||||
|
$
|
9,211,736
|
$
|
-
|
||||
Transactions
with related parties are as follows:
|
(a)
|
Sales
of goods
|
|
Name
of related parties
|
Year
ended
December
31,
2007
|
Year
ended
December
31,
2006
|
Year
ended
December
31,
2005
|
|||||||
|
Shaanxi
Longmen Steel Group
|
$
|
355,538,568
|
$
|
-
|
$
|
-
|
||||
|
$
|
355,538,568
|
$
|
-
|
$
|
-
|
|||||
|
(b)
|
Purcha
se
of goods
|
|
Name
of related parties
|
Year
ended
December
31,
2007
|
Year
ended
December
31,
2006
|
Year
ended
December
31,
2005
|
|||||||
|
Shaanxi
Longmen Iron and Steel Group Co., Ltd.
|
$
|
175,380,794
|
$
|
-
|
$
|
-
|
||||
|
$
|
175,380,794
|
$
|
-
|
$
|
-
|
|||||
|
(c)
|
Rental
income
|
|
Name
of related parties
|
Year
ended
December
31,
2007
|
|
Year
ended
December
31,
2006
|
|
Year
ended
December
31,
2005
|
|
||||
|
Tianjin
Jing Qiu Steel Market Co., Ltd.
|
$
|
1,580,040
|
$
|
1,439,121
|
$
|
-
|
||||
|
$
|
1,580,040
|
$
|
1,439,121
|
$
|
-
|
|||||
ITEM
14. Principal Accounting Fees and Services.
The
Board
has reappointed Moore Stephens Wurth Frazer and Torbet, LLP as the Company's
independent auditors for the year ended December 31, 2008.
|
2007
|
2006
|
||||||
|
Audit
fees
|
$
|
805,000
|
$
|
180,000
|
|||
|
Audit
related fees
|
$
|
-
|
$
|
-
|
|||
|
Tax
fees
|
$
|
5,000
|
$
|
7,000
|
|||
|
All
other fees
|
$
|
-
|
$
|
-
|
|||
Audit
fees were for professional services rendered by Moore Stephens Wurth Frazer
and
Torbet, LLP during 2007 and 2006 for the audit of our annual financial
statements and the review of our financial statements included in our quarterly
reports form 10-Q and services that are normally provided by Moore Stephens
Wurth Frazer and Torbet, LLP in the connection with the statutory and regulatory
filings. Tax fees involved the preparation of our consolidated tax
returns.
PART
IV
ITEM
15. EXHIBITS
1.1
Baotou
Steel - GSHI Special Steel Joint Venture Agreement dated as of September 28,
2005 by and between Baotou Iron & Steel (Group) Co., Ltd., General Steel
Investment Co., Ltd. and Daqiuzhuang Metal Sheet Co., Ltd. (Incorporated by
reference to the current report on Form 8-K, filed with the Commission on
October 31, 2005)
2.1
Agreement
and Plan of Merger dated as of October 14, 2004 by and among American
Construction Company, General Steel Investment Co., Ltd. and Northwest Steel
Company, a Nevada corporation (Incorporated by reference to the current report
on Form 8-K/A, filed with the Commission on October 19, 2004)
3.1
Articles
of Incorporation of General Steel Holdings, Inc. (Incorporated by reference
to
the registration statement on Form SB-2, filed with the Commission on June
6,
2003)
4.1
Subscription
Agreement (Incorporated by reference to the registration statement on Form
SB-2/A, filed with the Commission on September 12, 2003)
10.1
Form
of
Securities Purchase Agreement (Incorporated by reference to the registration
statement on Form 8-K/A, filed with the Commission on December 14,
2007)
10.2
Form
of
Registration Rights Agreement (Incorporated by reference to the registration
statement on Form 8-K/A, filed with the Commission on December 14,
2007)
10.3
Form
of
Warrant (Incorporated by reference to the registration statement on Form 8-K/A,
filed with the Commission on December 14, 2007)
10.4
Form
of
Convertible Note (Incorporated by reference to the registration statement on
Form 8-K, filed with the Commission on December 14, 2007)
10.5
Form
DEF 14C (Incorporated by reference to the registration statement on Form
DEF
14C, filed with the Commission on June 25, 2007).
10.6
Certificate of Designation dated August 15, 2007.
21.01
Subsidiaries of the registrant
31.1
Certification of Chief Executive Officer;
31.2
Certification of Chief Financial Officer;
32.1
Certification of Chief Executive Officer; and
32.2
Certification of Chief Financial Officer.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
| GENERAL STEEL HOLDINGS, INC | ||
|
|
|
|
| By: | /s/ Zuosheng Yu | |
|
Name: Zuosheng Yu
Title:
Chief Executive Officer and Chairman
Date:
March 31, 2008
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
/s/
Zuosheng Yu
|
Chief
Executive Officer and Chairman
|
March
31, 2008
|
||
|
Zuosheng
Yu
|
||||
|
/s/
John Chen
|
Director
and Chief Financial Officer
|
March
31, 2008
|
||
|
John
Chen
|
||||
|
/s/
Zhongkui Cao
|
Director
|
March
31, 2008
|
||
|
Zhongkui
Cao
|
||||
|
/s/
Qinghai Du
|
Director
|
March
31, 2008
|
||
|
Qinghai
Du
|
||||
|
/s/
Fred Hsu
|
Director
|
March
31, 2008
|
||
|
Fred
Hsu
|
||||
|
/s/
Ross Warner
|
Director
|
March
31, 2008
|
||
|
Ross
Warner
|
||||
|
/s/
Chris Wang
|
Director
|
March
31, 2008
|
||
|
Chris
Wang
|
||||
|
/s/
John Wong
|
Director
|
March
31, 2008
|
||
|
John
Wong
|
||||
|
/s/
Danli Zhang
|
Director
|
March
31, 2008
|
||
47