As filed with the Securities and Exchange Commission on September 28, 2010

Registration No. 333-168496


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 


Amendment No. 1
to
FORM F-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 

OSSEN INNOVATION CO., LTD.
(Exact name of Registrant as specified in its charter)
 
British Virgin Islands
 
3312
 
Not Applicable
(State or other jurisdiction of
incorporation or organization)
 
(Primary standard industrial
classification code number)
 
(I.R.S. Employer
Identification Number)

518 Shangcheng Road, Floor 17, Shanghai, 200120, People’s Republic of China
+86 (21) 6888-8886

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8940
 
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Christopher S. Auguste
Bill Huo
Ari Edelman
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, NY 10036
Tel:  (212) 715-9100
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
 
If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered
   
Proposed Maximum Aggregate
Offering Price (1)(2)
   
Amount of
Registration Fee
 
Ordinary Shares, par value $0.01 per share
    $ 35,000,000     $ 2,845.50 (3)
 
(1)Includes [     ] ordinary shares that the underwriters have an option to purchase to cover over-allotments, if any.
(2)Estimated solely for the purposes of determining the registration fee pursuant to Rule 457(o) promulgated under the Securities Act.
(3) Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act  of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a), may determine.

 

 

The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission i s effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 2010

OSSEN INNOVATION CO., LTD.

     Ordinary Shares
 
This is the initial public offering of ordinary shares, par value $0.01 per share, of Ossen Innovation Co., Ltd.  Ossen Innovation Co., Ltd. is offering [     ] ordinary shares in this offering.
 
We expect the public offering price to be between $[    ] and $[    ] per ordinary share. Prior to this offering, there has been no public market for our ordinary shares.  We are in the process of applying to list our ordinary shares on the Nasdaq Global Market  under the symbol OSN .

 
Investing in our ordinary shares involves risks.
Please read the risks under the section captioned “Risk Factors” beginning on page 10 of this prospectus.
 
   
Per Ordinary
Share
   
Total
 
Initial public offering price
  $       $    
Underwriting discounts and commissions (1)
  $       $    
Proceeds, before expenses, to us (2)
  $       $    
 
(1) Does not includes a non-accountable expense allowance in the amount of [__]% of the gross proceeds of the offering, or $[     ]per share, payable to [______], the representative of the underwriters, or any shares sold in the over-allotment option.  See section entitled “Underwriting.”
 
(2) We estimate that the total expense of this offering, excluding the underwriters’ discount and the non-accountable expense allowance, will be approximately $[    ].
 
The underwriters have an option exercisable within [__] days from the date of this prospectus to purchase up to [     ] additional ordinary shares from us at the public offering price less the underwriting discount.
 
Neither the Securities and Exchange Commission nor any state securities commission or other relevant local authority has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver our ordinary shares to the purchasers on or about [      ], 2010.
 


The date of this prospectus is [                        ], 2010.

 

 

TABLE OF CONTENTS

 
Pages
   
Conventions Used in this Prospectus
ii
   
Prospectus Summary
1
   
Risk Factors
10
   
Special Note Regarding Forward-Looking Statements and Other Information
24
   
Use of Proceeds
25
   
Dividend Policy
26
   
Capitalization
27
   
Dilution
28
   
Exchange Rate Information
29
   
Enforceability of Civil Liabilities
30
   
Selected Historical Consolidated Financial Data
31
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
   
Corporate Structure and Organization
48
   
Business
51
   
PRC Government Regulations
68
   
Management
72
   
Beneficial Ownership
78
   
Certain Relationships and Related Party Transactions
79
   
Description of Share Capital
80
   
Shares Eligible for Future Sale
87
   
Taxation
88
   
Underwriting
93
   
Other Expenses of Issuance and Distribution
99
   
Legal Matters
100
   
Experts
101
   
Where You Can Find Additional Information
102
   
Index to Consolidated Financial Statements
F-1
 

 
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with any information or to make any representations about us, the securities being offered pursuant to this prospectus or any other matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us.
 
The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our ordinary shares. Neither the delivery of this prospectus nor any distribution of securities in accordance with this prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this prospectus. This prospectus will be updated and made available for delivery to the extent required by the federal securities laws.

 
i

 

CONVENTIONS USED IN THIS PROSPECTUS
 
Unless otherwise indicated or the context clearly implies otherwise, references to “we,” “us,” “our,” the “Company” and “Ossen” refer to Ossen Innovation Co., Ltd., formerly known as Ultra Glory International Ltd. or Ultra Glory, a company organized in the British Virgin Islands, and its subsidiaries, subsequent to the business combination referred to below. Unless the context indicates otherwise, all references to “Ossen Materials” refer to Ossen Innovation Materials Co., Ltd., a subsidiary of Ossen and one of the entities through which the operating business is held, all references to “Ossen Jiujiang” refer to Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., a subsidiary of Ossen Materials and one of the entities through which our operating business is held, and all references to “Ossen Materials Group” refer to Ossen Innovation Materials Group, Co., Ltd., our wholly-owned subsidiary, which is a holding company that indirectly owns Ossen Materials and Ossen Jiujiang. The “business combination” refers to the share exchange between Ultra Glory International Ltd., the sole shareholder of Ultra Glory, Ossen and the shareholders of Ossen, resulting in the acquisition of all of the outstanding securities of Ossen Materials Group by Ultra Glory, which was consummated on July 7, 2010.
 
In addition, unless the context otherwise requires, in this prospectus:
 
 
·
“shares” or “ordinary shares” refers to our ordinary shares, par value $0.01 per share;
 
 
·
“China” or “PRC” refers to the People’s Republic of China, excluding the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan;
 
 
·
“RMB” or “Renminbi” refers to Renminbi yuan, the legal currency of China; and
 
 
·
“$”, “US$” or “U.S. dollars” refers to the legal currency of the United States.
 
For convenience, certain amounts in Renminbi have been converted to US dollars at an exchange rate in effect at the date of the related financial statements or the related event.  Assets and liabilities are translated at the exchange rate as of the balance sheet date. Income and expenditures are translated at the average exchange rate of the relevant period.

 
ii

 


PROSPECTUS SUMMARY
 
This summary highlights information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in our ordinary shares. You should read the entire prospectus and the registration statement of which this prospectus forms a part in their entirety, carefully, including the section captioned “Risk Factors” and the more detailed information in our consolidated financial statements and related notes appearing elsewhere beginning on page F-1 in this prospectus.
 
Overview
 
We manufacture and sell an array of plain surface and rare earth galvanized prestressed steel materials, which we believe is the most comprehensive amongst our competitors in China.  Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province, in the People’s Republic of China. According to the PRC PC Strand Industry Investment and Market Operation Research Report, in 2008, our products were ranked third in sales in the PRC for rare earth coated prestressed concrete, or PC, strands and ranked first in export sales of these materials by Chinese prestressed steel manufacturers.
 
Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in the design, engineering, manufacture and sale of customized prestressed steel materials used in the construction of railways, highways, bridges and buildings in China.  Ossen is a member of the China Prestressed Association.  The primary characteristics that make our prestressed steel products suitable for this wide range of projects are their high strength and low relaxation rate.  Prestressed materials of high strength and low relaxation, which comprised approximately 80% of our revenues in 2009, are currently in high demand in major construction projects in China.  Since 2007, we believe that we have also been one of the leading Chinese exporters of customized prestressed steel materials to other countries, including the United States, Canada, Spain, Italy and South Asian countries.
 
Ossen’s product offerings incorporate proprietary designs and are known for their high level of reliability and performance. Our products are marketed under the “Ossen” brand name both domestically and internationally. Our management’s core strategy is to leverage our expertise in research and development of customized products by providing solutions to our customers’ unique needs, as evidenced by our continuous introduction of new product lines since our inception. We handle all aspects of market research, product design, engineering, manufacturing, sales and marketing.  We conduct our manufacturing operations in our ISO 9001 manufacturing facilities in Maanshan City and Jiujiang City, in the PRC.
 
Ossen Materials, our operating subsidiary, was founded in 2004.  In 2005, we expanded our manufacturing capabilities by acquiring a facility in Jiujiang City in the PRC and forming Ossen Jiujiang.  The founders of Ossen were among the first in China to introduce and promote the use of prestressed steel materials in construction projects. The founders of Ossen have been involved in producing prestressed materials since 1994 and have accumulated more than 15 years of experience in the prestressed materials industry.
 
Our Growth Strategy
 
Our goal is to expand our industry position while maximizing shareholder value and pursuing a growth strategy that includes the following:  
 
 
1

 

 
 
·
Increasing our production capacity and developing new higher margin products.
 
 
·
Strengthening our relationships with key customers and diversifying our customer base.
 
 
·
Pursuing strategic relationships and acquisition opportunities.
 
Competitive Advantages
 
We believe that the following competitive strengths contribute to our strong market position and will enable us to continue to improve our profitability and cash flow:
 
 
·
We are taking advantage of industry trends.
 
 
·
Leading provider of customized prestressed steel materials.
 
 
·
Strong in-house design capabilities.
 
 
·
Efficient proprietary production technology.
 
 
·
Strong recognition from domestic and international customers for building projects.
 
 
·
Rigorous quality control standards.
 
 
·
Experienced management and operational teams with domestic PRC market knowledge.
 
Our Risks and Challenges
 
We believe that the following are the most significant risks and uncertainties that may materially adversely affect our business, financial condition, results of operations and prospects:
 
 
·
Our revenues are highly dependent on a limited number of customers;
 
 
·
We have ceased doing business with some international customers because of anti-dumping duties;
 
 
·
We expect to experience increased needs to finance our working capital requirements;
 
 
·
We may need to establish a more diverse supplier network;
 
 
·
Our revenues could decrease if steel prices decline;
 
 
·
We face intense competition.
 
 
·
We may be unable to maintain sufficient levels of working capital.
 
 
·
We may be unable to protect our intellectual property.
 
 
·
Adverse changes in the economy of China may affect our business.
 
See “Risk Factors” beginning on page 10 and other information included in this prospectus for a detailed discussion of these risks, challenges and uncertainties.
 
 
2

 


Corporate Structure
 
Business Combination
 
On July 7, 2010, Ultra Glory and its sole shareholder entered into a share exchange agreement with Ossen Innovation Group, a British Virgin Islands limited liability company organized on April 30, 2010 under the BVI Business Companies Act, 2004, or the BVI Act, and the shareholders of Ossen Innovation Group. Pursuant to the share exchange agreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group all of the issued and outstanding shares of Ossen Innovation Group, in exchange for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra Glory to the shareholders of Ossen Innovation Group.  In addition, the sole shareholder of Ultra Glory sold all of the 5,000,000 ordinary shares of Ultra Glory that were issued and outstanding prior to the business combination, to the shareholders of Ossen Innovation Group for cash, at a price of $0.03 per share.  As a result, the individuals and entities that owned shares of Ossen Innovation Group prior to the business combination acquired 100% of the equity of Ultra Glory, and Ultra Glory acquired 100% of the equity of Ossen Innovation Group.  Ossen Innovation Group is now a wholly owned subsidiary of Ultra Glory.  In conjunction with the business combination, Ultra Glory filed an amended charter, pursuant to which Ultra Glory changed its name to Ossen Innovation Co., Ltd., changed its fiscal year end to December 31, changed the par value of its ordinary shares to $0.01 per share and increased its authorized shares to 100,000,000.  Upon the consummation of the business combination, we ceased to be a shell company.
 
Ossen Innovation Group, our wholly owned subsidiary, is the sole shareholder of two holding companies organized in the British Virgin Islands: Ossen Group (Asia) Co., Ltd., or Ossen Asia, and Topchina Development Group Ltd., or Topchina.  All of the equity of Ossen Asia and Topchina had been held by Dr. Tang, our Chairman, since inception.  In May 2010, Dr. Tang transferred these shares to Ossen Innovation Group in anticipation of the public listing of our company’s shares in the United States.
 
Ossen Asia is a British Virgin Islands limited liability company organized on February 7, 2002.  Ossen Asia has one direct operating subsidiary in China, Ossen Innovation Materials Co. Ltd., or Ossen Materials.  Ossen Asia owns 81% of the equity of Ossen Materials.
 
Topchina is a British Virgin Islands limited liability company organized on November 3, 2004.  Ossen Materials and Topchina directly own an operating subsidiary in China, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., or Ossen Jiujiang.  Ossen Materials owns 75% of the equity of Ossen Jiujiang and Topchina owns 25%.
 
Ossen Materials
 
Ossen Materials was formed in China on October 27, 2004 as a Sino-foreign joint venture limited liability company under the name Ossen (Ma’anshan) Steel Wire and Cable Co., Ltd.  On May 8, 2008, Ossen Materials was restructured from a Sino-foreign joint venture limited liability company to a corporation.  The name of the entity was changed at that time to Ossen Innovation Materials Co., Ltd.
 
Ossen Asia owns 81% of the equity of Ossen Materials.  The remaining 19% is held in the aggregate by four Chinese entities, two of which are controlled by Chinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a company whose shares are listed on the Shanghai Stock Exchange, and one of which is controlled by Chinese citizens.
 
Through Ossen Materials, we have manufactured and sold plain surface PC strands, galvanized PC steel wires and PC wires in our Maanshan City facility since 2004.  The primary products manufactured in this facility are our plain surface PC strands.  The primary markets for the products manufactured at our Maanshan facility are Anhui Province, Jiangsu Province, Zhejiang Province and Shanghai City, each in the PRC.
 
 
3

 


Ossen Jiujiang
 
On April 6, 2005, Ossen Shanghai Investment Co., Ltd., or Ossen Shanghai, acquired a portion of the bankruptcy assets of Jiujiang Tianlong Galvanized Prestressing Steel Strand LLC, including equipment, land use rights and inventory, for approximately $3.9 million.  Ossen Jiujiang was formed by Ossen Shanghai in the PRC as a Sino-foreign joint venture limited liability company on April 13, 2005.  Ossen Shanghai then transferred the newly acquired assets to Ossen Jiujiang. At its inception, Ossen Jiujiang was owned by two entities: 33.3% of its equity was held by Ossen Asia and 66.7% by Ossen Shanghai.  Ossen Shanghai is a Chinese company owned by five Chinese individuals, one of whom is a director of our subsidiary, Ossen Materials. In June 2005, Ossen Shanghai transferred its entire interest in Ossen Jiujiang to Topchina in exchange for approximately $2.9 million. In October 2007, Topchina transferred 41.7% of the equity in Ossen Jiujiang to Ossen Asia for no consideration. On December 17, 2007, Ossen Asia transferred all of its shares in Ossen Jiujiang to Ossen Materials for no consideration.  Since that date, 75% of the equity of Ossen Jiujiang has been held by Ossen Materials and 25% by Topchina.
 
Through Ossen Jiujiang, we manufacture galvanized PC wires, plain surface PC strands, galvanized PC strands, unbonded PC strands, helical rib PC wires, sleeper PC wires and indented PC wires.  The primary products manufactured in this facility are our galvanized PC wires.  The primary markets for the PC strands manufactured in our Jiujiang facility are Jiangxi Province, Wuhan Province, Hunan Province, Fujian Province and Sichuan Province, each in the PRC.
 
Our Shareholders
 
Dr. Tang, our chairman, owns 100% of the shares of Effectual Strength Enterprises Ltd., a British Virgin Islands company, which owned 79% of the shares of Ossen Innovation Group prior to the business combination, and owns 79% of our shares since the business combination.  The holders of the remaining 21% of our shares are investors that are residents of the PRC and are unaffiliated with Ossen.
 
 
4

 


Organizational Chart
 
The following chart reflects our organizational structure since the date of the business combination between Ultra Glory and the shareholders of Ossen Innovation Group:
 
 
Corporate Information
 
Our principal executive offices are located at Ossen Innovation Co., Ltd., Shangcheng Road, Floor 17, Shanghai, 200120, People’s Republic of China.  Our telephone number is +86 (21) 6888-8886 and our fax number is +86 (21) 6888-8666.

You should direct all inquiries to us at the address and telephone number of our principal executive offices set forth above. Our website is http://220.178.253.10/ossen/index.html .  Our agent for service of process in the United States is CT Corporation  System , 111 Eighth Avenue New York, New York 10011, (212) 894 - 8940 .
 
 
5

 

 
The Offering
 
Price per ordinary share
 
We currently estimate that the initial public offering price will be between $[    ] and $[    ] per share.
 
       
Ordinary shares being offered by us
 
[    ] Shares
 
       
Ordinary shares outstanding before this offering
 
[________] Shares
 
       
Ordinary shares to be outstanding immediately after this offering
 
[         ] Shares
 
       
Over-allotment option
 
We have granted to the underwriters an option, exercisable for [__] days from the date of this prospectus, to purchase up to an additional [     ]ordinary shares, at the initial public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions, solely for the purpose of covering over-allotments, if any.
 
       
Use of proceeds
 
We estimate that we will receive net proceeds of approximately $[__] million from this offering, assuming an initial public offering price of $[    ] per ordinary share.  For the purposes of estimating net proceeds, we are assuming an initial public offering price of $[    ] per ordinary share, the midpoint of the estimated range of the initial public offering price set forth on the cover of this prospectus.  We intend to use the net proceeds from this offering to increase our production capacity from 140,000 tons to 200,000 tons in the months following this offering.  The expected cost of this expansion is approximately $25 million.  The remainder of the proceeds will be used for working capital and other general corporate purposes. See the section entitled “Use of Proceeds.”
 
We currently have no plans, agreements or commitments with respect to any material acquisitions or investments in other companies.
 
       
Risk factors
 
See the section captioned “Risk Factors” and other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our ordinary shares.
 
       
Payment and settlement
 
Our ordinary shares are expected to be delivered against payment on [        ], 2010.  The ordinary shares will be deposited with a custodian for, and registered in the name of a nominee of, The Depository Trust Company, or DTC, in New York, New York. In general, beneficial interests in our shares will be shown on, and transfers of these beneficial interests will be effected only through, records maintained by DTC and its direct and indirect participants.
 
       
Listing
 
We are in the process of applying to have our ordinary shares listed on the Nasdaq Global Market under the symbol OSN .
 
       
 
 
6

 


Unless stated otherwise, the information in this prospectus assumes:
 
 
·
an initial public offering price of $[     ] per ordinary share, the midpoint of the estimated range of the initial public offering price set forth on the cover of this prospectus; and
 
 
·
no exercise of the underwriters’ option to purchase up to [     ] additional ordinary shares from us to cover over-allotments.
 
 
7

 


Summary Consolidated Financial Data
 
The following selected financial information should be read in connection with, and is qualified by reference to, our consolidated financial statements and their related notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which is included elsewhere in this registration statement.  The consolidated statements of operations and comprehensive income data for the fiscal years ended December 31, 2008 and 2009 and the balance sheets data as of December 31, 2008 and 2009 are derived from the audited consolidated financial statements included elsewhere in this registration statement.  The consolidated statements of operations and comprehensive income data for the fiscal years ended December 31, 2005, 2006 and 2007 and the balance sheets data as of December 31, 2005, 2006 and 2007 have been derived from unaudited financial statements that are not included in this prospectus.  Our historical results for any of these periods are not necessarily indicative of results to be expected in any future period.
 
   
Year Ended December 31,
 
   
2009
(Audited)
   
2008
(Audited)
   
2007
(Unaudited)
   
2006
(Unaudited)
   
2005
(Unaudi ted)
 
                               
Revenues
  $ 101,087,796     $ 82,742,310     $ 71,909,873     $ 59,547,454       17,195,347  
Cost of goods sold
    87,659,925       70,532,733       63,340,890       56,853,946       15,216,951  
Gross profit
    13,427,871       12 ,209,577       8,568,983       2,693,508       1,978,395  
Selling and distribution expenses
    503,724       4,326,491       3,662,373       1,024,209       219,650  
General and administrative expenses
    1,143,672       1,316,606       571,49 8       340,847       255,270  
Total Operating Expenses
    1,647,396       5,643,097       4,288,796       1,410,056       501,920  
                                         
Income from operations
    11,780,475       6,566,480       4,280,187       1,283,451       1,476,475  
Interest expenses, net
    (1,496,712 )     (1,891,671 )     (1,189,027 )     (359,130 )     (22,920 )
Other income, net
    183,495       380,766       278 ,92 4       211,875       56,362  
Income before income taxes
    10,467,258       5,055,575       3,370,084       1,136,196       1,509,917  
Income taxes
    (740,053 )     (291,5 20 )     (233,674 )     -       -  
Net income
    9,727,205       4,764,055       3,136,41 0       1,136,196       1,509,917  
Less: Net Income
                                       
Attributable to non-controlling interest
    1,714,670       809,437       -       -       -  
Net income attributable to controlling interest
    8,012,535       3,954,618       3,136,41 0       1,136,196       1,509,917  
Other comprehensive income
                                       
Foreign currency translation gain, net of tax
    3 1,146       42 0,883       66,913       360,384       37,135  
Total Other comprehensive income, net of tax
    31,146       420,883       66,913       360,384       37,135  
Comprehensive Income
  $ 8,043,681     $ 4,375,501     $ 3,203,323       1,496,580       1,547,052  
 
 
8

 


Balance Sheets Data (at end of period)
 
December 31,
 
(in   U.S.   Dollars)
 
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Audited)
   
(Audited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Cash and cash equivalents
  $ 8,409,467     $ 3,761,315     $ 6,735,616     $ 7,828,750     $ 3,120,317  
Total current assets
    68,374,508       47,316,208       35,162,129       18,712,764       9,901,704  
Total long-term assets
    17 , 343 , 079       18 , 580 , 174       17 , 464 , 579       12 , 733 , 621       9 , 898 , 165  
Total assets
    85,717,587       65,896,382       52,626,708       31,436,385       19,799,869  
                                         
Total liabilities
    65,538,241       55,475,387       47,390,651       18,297,807       8,317,707  
Total shareholders’ equity
    20,179,346       10,420,995       5,236,057       13,138,578       11,482,162  
Total liabilities and shareholders’ equity
    85,717,587       65,896,382       52,626,708       31,436,385       19,799,869  
 
 
9

 

RISK FACTORS
 
You should carefully consider the risks described below in evaluating our business before investing in our ordinary shares. If any of the following risks were to occur, our business, results of operations and financial condition could be harmed. In that case, the trading price of our ordinary shares could decline and you might lose all or part of your investment in our ordinary shares. You should also refer to the other information set forth in this prospectus, including our consolidated financial statements and the related notes and the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before deciding whether to invest in our ordinary shares.
 
Risks Related to Our Business and Our Industry
 
Our revenues are highly dependent on a limited number of customers and the loss of any one of our major customers could materially and adversely affect our growth and our revenues.
 
During the years ended December 31, 2008 and 2009, our six largest customers contributed 81.0% and 86.7% of our total sales, respectively.  As a result of our reliance on a limited number of customers, we may face pricing and other competitive pressures, which may have a material adverse effect on our profits and our revenues. The volume of products sold for specific customers varies from year to year, especially since we are not the exclusive provider for any customers.  In addition, there are a number of factors, other than our performance, that could cause the loss of a customer or a substantial reduction in the products that we provide to any customer and that may not be predictable. For example, our customers may decide to reduce spending on our products or a customer may no longer need our products following the completion of a project. The loss of any one of our major customers, a decrease in the volume of sales to these customers or a decrease in the price at which we sell our products to them could materially adversely affect our profits and our revenues.
 
In addition, this customer concentration may subject us to perceived or actual leverage that our customers may have in negotiations with us, given their relative size and importance to us. If our customers seek to negotiate their agreements on terms less favorable to us and we accept such unfavorable terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and volume of business from our largest customers and the financial and operational success of these customers.
 
We have ceased doing business with some of our international customers because of anti-dumping duties imposed by foreign governments on our products.
 
In 2008, we sold approximately 32% of our products to customers in the United States and Europe.  The Crispin Corporation, a US company, and Ibercordones Pretensados S.L., a Spanish Company, were two of our top three customers in 2008.
 
However, in May 2009, the Council of the European Union imposed an anti-dumping duty on imports of certain prestressed wires and wire strands originating in China.  Dumping occurs when a foreign company sells a product at a price that is considered less than fair value in the country into which the product is imported.  Following an anti-dumping investigation initiated in February 2008, the Council concluded that imports of these products originating in China caused material injury to the European industry. The rate of the anti-dumping duty applicable to us has been set at 31.1% and the duty applicable to our competitors generally has been set at 46.2%.
 
On May 17, 2010, the U.S. Department of Commerce announced an affirmative final decision, imposing an anti-dumping rate of 193.55% for imports of certain prestressed concrete steel wire strands including the plain surface materials we had been selling to our U.S. customers, exported from China to the U.S.  The U.S. Customs and Border Protection have been instructed to collect a cash deposit or bond based on this rate.
 
In anticipation of these rulings, we discontinued sales to these regions at the end of 2008.  If these anti-dumping measures remain in place and we are unable to continue increasing our sales to customers in China or other regions in which we sell our products, these measures could have a negative impact on our business and results of operations.

 
10

 

We have recently experienced, and expect to continue to experience, increased needs to finance our working capital requirements, which may materially and adversely affect our financial position and results of operations.
 
Historically, we sold a significant portion of our products to international customers. In 2008, we collected approximately half of the revenues generated by international sales by letter of credit, enabling us to convert our accounts receivable into cash more quickly, prepay our suppliers and reduce the amount of funds that we needed to finance our working capital requirements. However, at the end of 2008, as a result of the global economic crisis and in anticipation of the anti-dumping measures ultimately imposed by the U.S. and the European Union, we had to exit some of these international markets entirely and turn to the domestic PRC customers, which generally pay approximately 40 days after receiving the materials at the construction site.  These longer payment terms have negatively impacted our short-term liquidity. Although we have been able to maintain adequate working capital primarily through short-term borrowing, any failure by our customers to settle outstanding accounts receivable in the future could materially and adversely affect our cash flow, financial condition and results of operations.
 
Some of the terms of the agreements between Ossen Materials and its affiliates may be less favorable to us than similar agreements negotiated between unaffiliated third parties.
 
Historically, we purchased a significant amount of our raw materials from Shanghai Zhengfangxing Steel Co., Ltd., or Shanghai ZFX, an affiliate of ours.  Specifically, Ossen Materials acquired 26.4% and 15.0%, and Ossen Jiujiang acquired 25.8% and 4.3%, of their raw materials from Shanghai ZFX in 2008 and 2009, respectively.  While we believe we benefit from these agreements, such agreements were negotiated between two affiliated companies, and therefore may not reflect the terms that would have been reached by two unaffiliated parties negotiating at arm’s length.  The transactions may be less favorable to us than would be the case if they were negotiated with unaffiliated third parties.
 
As we expand our operations, we may need to establish a more diverse supplier network for our raw materials.  The failure to secure a more diverse and reliable supplier network could have an adverse effect on our financial condition.
 
We currently purchase almost all of our raw materials from a small number of suppliers.  Purchases from our five largest suppliers amounted to 86.5% and 89.5% of our raw material purchases in 2008 and 2009, respectively.  As we increase the scale of our production, we may need to establish a more diverse supplier network, while attempting to continue to leverage our purchasing power to obtain favorable pricing and delivery terms.  However, in the event that we need to diversify our supplier network, we may not be able to procure a sufficient supply of raw materials at a competitive price, which could have an adverse effect on our results of operations, financial condition and cash flows.
 
Furthermore, despite our efforts to control our supply of raw materials and maintain good relationships with our existing suppliers, we could lose one or more of our existing suppliers at any time.  The loss of one or more key suppliers could increase our reliance on higher cost or lower quality supplies, which could negatively affect our profitability.  Any interruptions to, or decline in, the amount or quality of our raw materials supply could materially disrupt our production and adversely affect our business, financial condition and financial prospects.
 
Volatile steel prices can cause significant fluctuations in our operating results. Our revenues and operating income could decrease if steel prices decline or if we are unable to pass price increases on to our customers.
 
Our principal raw material is high carbon steel wire rods that we typically purchase from multiple primary steel producers. The steel industry as a whole is cyclical and, at times, pricing and availability of steel can be volatile due to numerous factors beyond our control, including general domestic and international economic conditions, labor costs, sales levels, competition, levels of inventory held by us and other steel service centers, consolidation of steel producers, higher raw material costs for steel producers, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us.

 
11

 

We, like many other steel manufactures, maintain substantial inventories of steel to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase steel are generally at prevailing market prices in effect at the time we place our orders. We have no long-term, fixed-price steel purchase contracts. When steel prices increase, as they did in 2008, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the revenues and profitability of our business could be adversely affected.
 
When steel prices decline, as they did in the fourth quarter of 2008 and through the first half of 2009, customer demands for lower prices and our competitors' responses to those demands could result in lower sale prices, lower margins and inventory valued at the lower of cost or market adjustments as we use existing steel inventory. Significant or rapid declines in steel prices or reductions in sales volumes could result in us incurring inventory or goodwill impairment charges. Therefore, changing steel prices could significantly impact our revenues, gross margins, operating income and net income.
 
We are subject to various risks and uncertainties that might affect our ability to procure quality raw materials.
 
Our performance depends on our ability to procure low cost, high quality raw materials on a timely basis from our suppliers.  Our supplies are subject to certain risks, including availability of raw materials, labor disputes, inclement weather, natural disasters, and general economic and political conditions, which might limit the ability of our suppliers to provide us with low cost, high quality merchandise on a timely basis.  Furthermore, for these or other reasons, one or more of our suppliers might not adhere to our quality control standards, and we might not identify the deficiency.  Our suppliers’ failure to supply quality materials at a reasonable cost on a timely basis could reduce our net sales, damage our reputation and have an adverse effect on our financial condition.
 
Our operations are cash intensive, and our business could be adversely affected if we fail to maintain sufficient levels of liquidity and working capital.
 
Historically, we have spent a significant amount of cash on our operational activities, principally to procure raw materials for our products.  We have financed our operations mainly through cash flows from our operations, short-term bank loans and proceeds from bank acceptance notes.  If we fail to continue to generate sufficient cash flow from these sources, we may not have sufficient liquidity to fund our operating costs and our business could be adversely affected.
 
Our short-term loans are from Chinese banks and are generally secured by our fixed assets, receivables and/or guarantees by third parties.  The term of almost all such loans is one year or less.  Historically, we have rolled over such loans on an annual basis.  However, we may not have sufficient funds available to pay all of our borrowings upon maturity in the future.  Failure to roll over our short-term borrowings at maturity or to service our debt could result in the imposition of penalties, including increases in interest rates, legal actions against us by our creditors, or even insolvency.
 
If available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans include considering pursuing alternative financing arrangements, reducing expenditures as necessary, or limiting our plans for expansion to meet our cash requirements.  However, there is no assurance that, if required, we will be able to raise additional capital, reduce discretionary spending or efficiently limit our expansion to provide the required liquidity.  Currently, the capital markets for small capitalization companies are extremely difficult and banking institutions have become stringent in their lending requirements.  Accordingly, we cannot be sure of the availability or terms of any third party financing.  If we are unable to raise additional financing, we may be unable to implement our long-term business plan, develop or enhance our products, take advantage of future opportunities or respond to competitive pressures on a timely basis.  In the alternative, if we raise capital by issuing equity or convertible debt securities, such issuances could result in substantial dilution to our shareholders.

 
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Our inability to manage our growth may have a material adverse effect on our business, results of operations and financial condition.
 
We have experienced significant growth since we began operations in 2004.  Our revenues have grown from approximately $17.2 million in 2005 to approximately $101.1 million in 2009.
 
We expect our growth to continue to place significant demands on both our management and our resources. This requires us to continuously evolve and improve our operational, financial and internal controls across our organization. In particular, continued expansion increases the challenges we face in:
 
 
·
recruiting, training and retaining sufficient skilled sales and management personnel;
 
·
adhering to our high quality and process execution standards;
 
·
maintaining high levels of customer satisfaction;
 
·
creating and managing economies of scale;
 
·
maintaining and managing costs to correspond with timeliness of revenue recognition; and
 
·
developing and improving our internal administrative infrastructure, including our financial, operational and communication systems, processes and controls.
 
Any inability to manage our growth may have a material adverse effect on our business, results of operations and financial condition.
 
We face intense competition, and if we are unable to compete effectively we may not be able to maintain profitability.
 
We compete with many other companies located in the PRC and internationally that manufacture materials similar to ours.  Many of our competitors are larger companies with greater financial resources than us.  In addition, we expect that as demand in the PRC and in other foreign countries for high quality, prestressed materials continues to grow, new competitors will enter the market.  Increased competition may adversely affect our future financial performance or reputation.  Moreover, increased competition may result in potential or actual litigation between us and our competitors relating to such activities as competitive sales practices, relationships with key suppliers and customers or other matters.
 
We may lose our competitive advantage, and our operations may suffer, if we fail to prevent the loss or misappropriation of, or disputes over, our intellectual property.
 
We rely on a combination of patents, trademarks, trade secrets and confidentiality agreements to protect our intellectual property rights. While we are not currently aware of any infringement on our intellectual property rights, our ability to compete successfully and to achieve future revenue growth will depend, in significant part, on our ability to protect our proprietary technology.  Despite many laws and regulations promulgated, and other efforts made, by China over the past several years in an attempt to protect intellectual property rights, intellectual property rights are not as certain in China as they would in many Western countries, including the United States.  Furthermore, enforcement of such laws and regulations in China has not been fully developed.  Neither the administrative agencies nor the court systems in China are as equipped as their counterparts in developed countries to deal with violations or handle the nuances and complexities between compliant technological innovation and non-compliant infringement.
 
Our competitors may independently develop proprietary methodologies similar to ours or duplicate our products, which could have a material adverse effect on our business, results of operations and financial condition. The misappropriation or duplication of our intellectual property could disrupt our ongoing business, distract our management and employees, reduce our revenues and increase our expenses. We may need to litigate to enforce our intellectual property rights. Any such litigation could be time consuming and costly and the outcome of any such litigation cannot be guaranteed.

 
13

 

Our revenues, expenses and profits are difficult to predict and can vary significantly from quarter to quarter. This could cause the trading price of our ordinary shares to decline.
 
Our operating results may vary significantly from quarter to quarter. Therefore, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of our future performance. It is possible that in the future some of our quarterly results of operations may be below the expectations of market analysts and our investors, which could lead to a significant decline in the trading price of our ordinary shares.
 
Factors which affect the fluctuation of our revenues, expenses and profits include:
 
 
·
changes in prices of our raw materials, with higher prices leading to reduced operating income;
 
·
variations, expected or unexpected, in the duration, size, timing and scope of purchase orders;
 
·
changes in our pricing policies or those of our competitors;
 
·
changes in compensation, which may reduce our gross profit for the quarter in which they are effected;
 
·
our inability to manage costs, including those related to our raw materials, personnel, infrastructure and facilities;
 
·
exchange rate fluctuations; and
 
·
general economic conditions.
 
A portion of our expenses, particularly those related to personnel and facilities, are generally fixed in advance of any particular quarter. As a result, unanticipated variations in the number and timing of our purchase orders or prices of our raw materials may cause significant variations in our operating results in any particular quarter.
 
We may undertake strategic acquisitions, joint ventures and alliances, which may prove to be difficult to integrate and manage or may not be successful, and may result in increased expenses or write-offs.
 
We may over time pursue strategic acquisitions, joint ventures and alliances to enhance our capabilities and expand our industry expertise and geographic coverage. It is possible that we may not identify suitable acquisition candidates, alliances or joint venture partners, or if we do identify suitable candidates or partners, we may not complete those transactions on terms commercially acceptable to us or at all. The inability to identify suitable acquisition targets, joint ventures or alliances, or our inability to complete such transactions on terms commercially acceptable to us or at all, may adversely affect our ability to compete and grow.
 
These types of transactions involve numerous risks, including:
 
 
·
difficulties in integrating operations, systems, technologies, accounting methods and personnel;
 
·
difficulties in supporting and transitioning clients of our acquired companies or strategic partners;
 
·
disruption of our ongoing business;
 
·
diversion of financial and management resources from existing operations;
 
·
risks of entering new markets;
 
·
potential loss of key employees; and
 
·
inability to generate sufficient revenue to offset transaction costs and expenses.  

Furthermore, any such transaction that we attempt, whether or not completed, or any media reports or rumors with respect to any such transactions, may materially and adversely affect the value of our ordinary shares.
 
We may finance future transactions through debt financing or the issuance of our equity securities or a combination of the foregoing. Acquisitions financed with the issuance of our equity securities or convertible debt securities could be dilutive, which could affect the market price of our ordinary shares. Acquisitions financed with debt could require us to dedicate a substantial portion of our cash flow to principal and interest payments and could subject us to restrictive covenants. Acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential impairments in the future that could harm our financial results.  Moreover, if we fail to properly evaluate acquisitions, alliances or investments, we may not achieve the anticipated benefits of those transactions, and we may incur costs in excess of what we had anticipated.

 
14

 

Our success depends in large part upon our senior management and key personnel. Our inability to attract and retain these individuals could materially and adversely affect our business, results of operations and financial condition.
 
We are highly dependent on our senior management and other key employees, including our Chairman, Dr. Tang, Mr. Hua and Mr. Gu.  Our future performance will be dependent upon the continued service of members of our senior management and key employees. We do not maintain key man life insurance for any of the members of our management team or other key personnel. Competition for senior management in our industry is intense, and we may not be able to retain our senior management and key personnel or attract and retain new senior management and key personnel in the future, which could materially and adversely affect our business, results of operations and financial condition.
 
We have limited insurance coverage and may incur losses resulting from product liability claims, business interruption or natural disasters.
 
We are exposed to risks associated with product liability claims in the event that the use of our products results in property damage or personal injury. Since our products are ultimately incorporated into bridges, buildings, railways and other large structures, it is possible that users of these structures or people installing our products could be injured or killed by such structures, whether as a result of defects, improper installation or other causes. Because we continue to expand our customer base, we are unable to predict whether product liability claims will be brought against us in the future or to predict the impact of any resulting adverse publicity on our business. The successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. We do not carry product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against us. As the insurance industry in China is still in its early stages of development, even the insurance that we currently carry offers limited coverage compared with that offered in many other countries. Any business interruption or natural disaster could result in substantial losses and diversion of our resources and materially and adversely affect our business, financial condition and results of operations.
 
One shareholder will own a large percentage of our outstanding stock after this offering and could significantly influence the outcome of our corporate matters.
 
Following this offering, Dr. Tang will own approximately [___]% of our outstanding ordinary shares, thereby retaining a majority equity interest in our company.  Currently, Dr. Tang, our chairman, beneficially owns approximately 79% of our outstanding ordinary shares.  As our majority shareholder, Dr. Tang is, and will continue to be, able to exercise significant influence over all matters that require shareholder approval, including the election of directors to our board and approval of significant corporate transactions that we may consider, such as a merger or other sale of our company or its assets.  This concentration of ownership in our shares by Dr. Tang will limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.  In addition, sales of significant amounts of ordinary shares held by Dr. Tang, or the prospect of these sales, could adversely affect the market price of our ordinary shares.
 
If we are unable to maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, and cause investors to lose confidence in our reported financial information.
 
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud.

 
15

 

As a public company, we have significant requirements for enhanced financial reporting and internal controls. We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and, for many companies, a report by the independent registered public accounting firm addressing these assessments. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.
 
We cannot assure you that we will not in the future identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to comply with Sarbanes-Oxley and meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, and cause investors to lose confidence in our reported financial information.
 
We will incur increased costs as a result of being a public company.
 
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We expect the rules and regulations to which public companies are subject, including the Sarbanes-Oxley Act of 2002, to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements.
 
Risks Related to Doing Business in China
 
Changes in China’s political or economic situation could harm us and our operating results.
 
Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability. Some of the things that could have this effect are:
 
 
·
Level of government involvement in the economy;
 
 
·
Control of foreign exchange;
 
 
·
Methods of allocating resources;
 
 
·
Balance of payments position;
 
 
·
International trade restrictions; and
 
 
·
International conflict.
 
The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. For example, state-owned enterprises still constitute a large portion of the Chinese economy, and weak corporate governance and the lack of a flexible currency exchange policy still prevail in China. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy was similar to those of the OECD member countries.

 
16

 

The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
 
The PRC government has exercised, and continues to exercise, substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.  Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof.
 
Future inflation in China may inhibit our ability to conduct business in China.
 
In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as (0.8)%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.
 
You may have difficulty enforcing judgments against us.
 
Our assets are located, and our operations are conducted, in the PRC. In addition, all of our directors and officers are nationals and residents of the PRC and a substantial portion of their assets is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts because China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest.
 
Most of our revenues are denominated in Renminbi, which is not freely convertible for capital account transactions and may be subject to exchange rate volatility.
 
We are exposed to the risks associated with foreign exchange controls and restrictions in China, as our revenues are primarily denominated in Renminbi, which is currently not freely exchangeable. The PRC government imposes control over the convertibility between Renminbi and foreign currencies. Under the PRC foreign exchange regulations, payments for “current account” transactions, including remittance of foreign currencies for payment of dividends, profit distributions, interest and operation-related expenditures, may be made without prior approval but are subject to procedural requirements. Strict foreign exchange control continues to apply to “capital account” transactions, such as direct foreign investment and foreign currency loans. These capital account transactions must be approved by, or registered with, the PRC State Administration of Foreign Exchange, or SAFE. Further, capital contribution by an offshore shareholder to its PRC subsidiaries may require approval by the Ministry of Commerce in China or its local counterparts. We cannot assure you that we are able to meet all of our foreign currency obligations to remit profits out of China or to fund operations in China.
 
On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 142, to regulate the conversion by foreign invested enterprises, or FIEs, of foreign currency into Renminbi by restricting how the converted Renminbi may be used. Circular 142 requires that Renminbi converted from the foreign currency-dominated capital of a FIE may be used only for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC unless specifically provided. In addition, SAFE strengthened its oversight over the flow and use of Renminbi funds converted from the foreign currency-dominated capital of a FIE. The use of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used. Compliance with Circular 142 may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business.

 
17

 

Fluctuation in the value of the Renminbi and of the U.S. dollar may have a material adverse effect on investments in our ordinary shares.
 
Any significant revaluation of the Renminbi may have a material adverse effect on the U.S. dollar equivalent amount of our revenues and financial condition as well as on the value of, and any dividends payable on, our ordinary shares in foreign currency terms. For instance, a decrease in the value of Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our ordinary shares and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices of our common shares. A significant portion of our revenues are denominated in Renminbi. Any further appreciation of Renminbi against U.S. dollars may result in significant exchange losses.
 
Prior to 1994, the Renminbi experienced a significant net devaluation against most major currencies, and there was significant volatility in the exchange rate during certain periods. Upon the execution of the unitary managed floating rate system in 1994, the Renminbi was devalued by 50% against the U.S. dollar. Since 1994, the Renminbi to U.S. dollar exchange rate has largely stabilized. On July 21, 2005, the People’s Bank of China announced that the exchange rate of U.S. dollar to Renminbi would be adjusted from $1 to RMB8.27 to $1 to RMB8.11, and it ceased to peg the Renminbi to the U.S. dollar. Instead, the Renminbi would be pegged to a basket of currencies, whose components would be adjusted based on changes in market supply and demand under a set of systematic principles. On September 23, 2005, the PRC government widened the daily trading band for Renminbi against non-U.S. dollar currencies from 1.5% to 3.0% to improve the flexibility of the new foreign exchange system. Since the adoption of these measures, the value of Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow ranges, but overall has further strengthened against the U.S. dollar. In June 2010, the Chinese government announced its intention to allow the Renminbi to fluctuate within the June 2005 parameters.  There remains significant international pressure on the PRC government to further liberalize its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar. The Renminbi may be revalued further against the U.S. dollar or other currencies, or may be permitted to enter into a full or limited free float, which may result in an appreciation or depreciation in the value of the Renminbi against the U.S. dollar or other currencies.
 
China’s legal system is different from those in some other countries.
 
China is a civil law jurisdiction. Under the civil law system, prior court decisions may be cited as persuasive authority but do not have binding precedential effect. Although progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade, China’s legal system remains less developed than the legal systems in many other countries. Furthermore, because many laws, regulations and legal requirements have been recently adopted, their interpretation and enforcement by the courts and administrative agencies may involve uncertainties. Sometimes, different government departments may have different interpretations. Licenses and permits issued or granted by one government authority may be revoked by a higher government authority at a later time. Government authorities may decline to take action against unlicensed operators which may work to the disadvantage of licensed operators, including us. The PRC legal system is based in part on government policies and internal rules that may have a retroactive effect. We may not be aware of our violation of these policies and rules until some time after the violation. Changes in China’s legal and regulatory framework, the promulgation of new laws and possible conflicts between national and provincial regulations could adversely affect our financial condition and results of operations. In addition, any litigation in China may result in substantial costs and diversion of resources and management attention.
 
Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Ossen Materials constitutes a round-trip investment without MOFCOM approval.
 
On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A Rule, which became effective on September 8, 2006. According to the 2006 M&A Rule, a “round-trip investment” is defined as having taken place when a PRC business that is owned by PRC individuals is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individuals. Under the 2006 M&A Rules, any round-trip investment must be approved by MOFCOM, and any indirect arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of PRC law.

 
18

 

The direct shareholders of Ossen Materials, Ossen Asia and Topchina, are British Virgin Islands limited liability companies that were owned by Ossen Materials Group, a British Virgin Islands limited liability company that was controlled by Dr. Tang prior to our business combination.  Topchina also holds shares in Ossen Jiujiang.  We have been advised that we are not required to obtain MOFCOM approval because the relevant transactions occurred prior to the effectiveness of the 2006 M&A Rule.
 
However, the PRC regulatory authorities may take the view that the acquisition of shares in our PRC operating subsidiaries by Ossen Asia and Topchina, and the share exchange between Ultra Glory and Ossen Materials Group, are part of an overall series of arrangements which constitute a round-trip investment. If the PRC regulatory authorities take this view, we cannot assure you we may be able to obtain the approval required from MOFCOM. It is also possible that the PRC regulatory authorities could invalidate our acquisition and ownership of our Chinese subsidiaries, and that these transactions require the prior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is obtained.
 
If these regulatory actions occur, we cannot assure you that we will be able to re-establish control of our Chinese subsidiaries’ business operations, that any such contractual arrangements will be protected by PRC law, or that we would receive as complete or effective an economic benefit and control of our Chinese subsidiaries’ business as if we had direct ownership of our Chinese subsidiaries.
 
Under the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.
 
China passed a New Enterprise Income Tax Law, or the New EIT Law, which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with de facto management bodies within China is considered a resident enterprise, meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. In addition, a circular issued by the State Administration of Taxation on April 22, 2009 clarified that dividends and other income paid by such resident enterprises will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such resident enterprises to various reporting requirements with the PRC tax authorities.
 
Although substantially all of our management is currently located in the PRC, it remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as tax-exempt income, we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new resident enterprise classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.

 
19

 

Restrictions under PRC law on our PRC subsidiaries' ability to pay dividends and make other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.
 
Our revenues are generated by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to pay dividends and make other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can be used only for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
 
Any failure to comply with PRC environmental laws may require us to incur significant costs.
 
We carry on our business in an industry that is subject to PRC environmental protection laws and regulations.  These laws and regulations require enterprises engaged in manufacturing and construction that may cause environmental waste to adopt effective measures to control such waste.  In addition, such enterprises are required to pay fines, or to cease operations entirely under extreme circumstances, should they discharge waste substances.  The Chinese government may also change the existing laws or regulations or impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditures, which we may be unable to pass on to our customers through higher prices for our products.
 
We must comply with the Foreign Corrupt Practices Act.
 
We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from making prohibited payments to foreign officials for the purpose of obtaining or retaining business.  Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in mainland China.  If any of our non-U.S. listed competitors that are not subject to the Foreign Corrupt Practices Act engage in these practices, they may receive preferential treatment and secure business from government officials in a way that is unavailable to us.  Furthermore, although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in illegal conduct for which we might be held responsible under U.S. law.  If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.
 
Because our funds are held in banks that do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue our business operations.
 
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue our business operations.
 
If relations between the United States and China worsen, investors may be unwilling to hold or buy our ordinary shares and our share price may decrease.
 
At various times during recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China, whether or not directly related to our business, could reduce the price of our ordinary shares.

 
20

 

Risks Related to Our Ordinary Shares and This Offering
 
The market price for our ordinary shares may be volatile.
 
The market price for our ordinary shares is likely to be highly volatile and subject to wide fluctuations in response to various factors, including the following:
 
 
·
actual or anticipated fluctuations in our quarterly operating results and revisions to our expected results;
 
 
·
changes in financial estimates by securities research analysts;
 
 
·
conditions in the markets for our products;
 
 
·
changes in the economic performance or market valuations of companies specializing in our industry or our customers or their industries;
 
 
·
announcements by us or our competitors of new products, acquisitions, strategic relationships, joint ventures or capital commitments;
 
 
·
addition or departure of our senior management and key personnel;
 
 
·
fluctuations of exchange rates between the Renminbi and the U.S. dollar;
 
 
·
litigation related to our intellectual property;
 
 
·
release or expiry of transfer restrictions on our outstanding ordinary shares; and
 
 
·
sales or perceived potential sales of our ordinary shares.
 
In addition, the securities market has from time to time, and to an even greater degree since the last quarter of 2007, experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ordinary shares.  Furthermore, in the past, following periods of volatility in the market price of a public company’s securities, shareholders have frequently instituted securities class action litigation against that company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.
 
The sale or availability for sale of substantial amounts of our ordinary shares could adversely affect their market price.
 
Sales of substantial amounts of our ordinary shares in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ordinary shares and could materially impair our future ability to raise capital through offerings of our ordinary shares.
 
Your ability to bring an action against us or against our directors and executive officers, or to enforce a judgment against us or them, will be limited.
 
We are not incorporated in the United States. We conduct our business outside the United States, and substantially all of our assets are located outside the United States. Most of our directors and executive officers are non-U.S. citizens and residents, and substantially all of the assets of those persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under U.S. securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the British Virgin Islands or the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and executive officers. For more information regarding the relevant laws of the British Virgin Islands and the PRC, see “Enforceability of Civil Liabilities.”

 
21

 

We may not pay any dividends on our ordinary shares.
 
Under British Virgin Islands law, we may pay dividends if the directors declare that the company is able to satisfy the provisions of Section 57 of the BVI Act.  Pursuant to this provision, the company, immediately after the distribution, must satisfy the solvency test, in so far as its assets exceeds its liabilities, and the company must be able to pay its debts as they become due. Our ability to pay dividends will therefore depend on our ability to generate sufficient profits. Even if we are able to pay dividends, we cannot give any assurance that we will declare dividends of any amounts, at any rate or at all in the future. We have not paid any dividends in the past. Future dividends, if any, will be at the discretion of our board of directors, subject to the approval of our shareholders, and will depend upon our results of operations, our cash flows, our financial condition, the payment of our subsidiaries of cash dividends to us, our capital needs, future prospects and other factors that our directors may deem appropriate.  We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
 
As the public offering price is substantially higher than the pro forma net tangible book value per share, you will incur immediate and substantial dilution.
 
If you purchase ordinary shares in this offering, you will pay more for your ordinary shares than the amount paid by existing shareholders for their ordinary shares on a per ordinary share basis. As a result, you will experience immediate and substantial dilution of approximately [         ] per ordinary share, representing the difference between our pro forma net tangible book value per ordinary share as of [          ], after giving effect to this offering and the assumed public offering price of [        ] per ordinary share. See “Dilution” for a more complete description of how the value of your investment in our ordinary shares will be diluted upon the completion of this offering.
 
We may use the net proceeds in ways with which you may not agree.
 
We intend to use the net proceeds from this offering to increase our production capacity and for working capital and other general corporate purposes.  However, our management will have considerable discretion in the application of the proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our profitability or increase our ordinary share price. The net proceeds from this offering may also be placed in investments that do not produce income or lose value.
 
There has been no public market for our ordinary shares prior to this offering, and you may not be able to resell our ordinary shares at or above the price you paid, or at all.
 
Prior to this initial public offering, there has been no public market for our ordinary shares. We expect our ordinary shares to be approved for listing on the Nasdaq Global Market. If an active trading market for our ordinary shares does not develop after this offering, the market price and liquidity of our ordinary shares will be materially and adversely affected and you may not be able to resell our ordinary shares at or above the price you paid, or at all. The initial public offering price for our ordinary shares will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ordinary shares after this initial public offering. An active trading market for our ordinary shares may not develop in a timely manner or at all, and the market price of our ordinary shares may decline below the initial public offering price. If the price at which our ordinary shares are traded after this offering declines below the initial public offering price, you will experience a decrease in the value of your ordinary shares regardless of our operating performance or prospects.

 
22

 

If we are classified as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences.
 
Generally, if for any taxable year, after applying certain look-through rules, 75% or more of our gross income is passive income, or at least 50% of our assets (generally based on average value determined on a quarterly basis) are held for the production of, or produce, passive income, we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences to our shareholders who are U.S. taxpayers, including gain realized on the disposition of our ordinary shares being treated as ordinary income rather than capital gain and in punitive interest charges being applied to such sales proceeds. Rules similar to those applicable to dispositions apply to amounts treated as “excess distributions.”
 
We do not believe that we will be a PFIC for our 2010 taxable year based upon our estimates of income, the expected composition of our assets and the expected value of our assets as determined based on our anticipated market capitalization after this offering. However, because PFIC status is based on the composition of our income and assets for the entire taxable year, it is not possible at this time to determine whether we will become a PFIC for our 2010 taxable year until after the close of the taxable year. Therefore, we may become a PFIC for our 2010 taxable year or in any future taxable year. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares if we were to become a PFIC. See “Taxation — U.S. Federal Income Taxation — Tax Consequences if We Are a Passive Foreign Investment Company.”
 
If equity research analysts do not publish research or reports about our company or if they issue unfavorable commentary or downgrade our ordinary shares, the price of our ordinary shares could decline.
 
The trading market for our ordinary shares will rely in part on the research and reports that equity research analysts publish about us and our company. We do not control these analysts. The price of our ordinary shares could decline if one or more equity analysts downgrade our ordinary shares or if they issue other unfavorable commentary, or cease publishing reports, about us or our company.

 
23

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
 
We make “forward-looking statements” in the “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections and elsewhere throughout this prospectus. Whenever you read a statement that is not simply a statement of historical fact (such as when we describe what we “believe,” “expect” or “anticipate” will occur, and other similar statements), you must remember that our expectations may not be correct, even though we believe that they are reasonable. We do not guarantee that the transactions and events described in this prospectus will happen as described or that they will happen at all. You should read this prospectus completely and with the understanding that actual future results may be materially different from what we expect. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. Except for events or circumstances which occur up to the date of our prospectus, we undertake no obligation, beyond that required by law, to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made in this prospectus, even though our situation will change in the future. Forward-looking statements include statements about:
 
 
·
our ability to attract and retain customers;
 
 
·
the anticipated benefits and risks associated with our business strategy, including those relating to our current and future product offerings;
 
 
·
our future operating results;
 
 
·
the anticipated benefits and risks of our key strategic customer relationships and strategic acquisitions, joint ventures and alliances; and
 
 
·
the anticipated size or trends of the markets in which we compete and the anticipated competition in those markets.
 
Whether actual results will conform with our expectations and predictions is subject to a number of risks and uncertainties, many of which are beyond our control, and reflect future business decisions that are subject to change. Some of the assumptions, future results and levels of performance expressed or implied in the forward-looking statements we make inevitably will not materialize, and unanticipated events may occur which will affect our results. The “Risk Factors” section of this prospectus describes the principal contingencies and uncertainties to which we believe we are subject, which include the following risks:
 
 
·
Our revenues are highly dependent on a limited number of customers;
 
 
·
We have ceased doing business with some international customers because of anti-dumping duties;
 
 
·
We expect to experience increased needs to finance our working capital requirements;
 
 
·
We may need to establish a more diverse supplier network;
 
 
·
Our revenues could decrease if steel prices decline;
 
 
·
We face intense competition;
 
 
·
We may be unable to maintain sufficient levels of working capital;
 
 
·
We may be unable to protect our intellectual property; and
 
 
·
Adverse changes in the economy of China may affect our business.
 
Except as required by law, we undertake no obligation to publicly update any forward-looking statements for any reason following the date of this prospectus to conform these statements to actual results or to changes in our expectations or to publicly release the result of any revisions to these forward-looking statements which we may make to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

 
24

 

USE OF PROCEEDS
 
We estimate that we will receive net proceeds of approximately $[__] million from this offering, or approximately $ [ __ ] million assuming the underwriters exercise their option to purchase additional ordinary shares in full, after deducting estimated underwriting discounts, commissions and estimated offering expenses payable by us. For the purposes of estimating net proceeds, we are assuming an initial public offering price of $[    ] per ordinary share, the midpoint of the estimated range of the initial public offering price set forth on the cover of this prospectus. A $1.00 increase (decrease) in the assumed public offering price of $[    ] per ordinary share would increase (decrease) the net proceeds to us from this offering by $[    ] million.
 
We intend to use the net proceeds from this offering to increase our production capacity from 140,000 tons to 200,000 tons in the months following this offering.  Our plan is to construct a new building on empty land located in our Maanshan facility and to install eight new production lines which will be used for the production of an aggregate of approximately 60,000 tons of higher margin coated prestressed materials, including coated wires.  The expected cost of this expansion is approximately $25 million.  The remainder of the proceeds will be used for working capital and other general corporate purposes.  We currently have no plans, agreements or commitments with respect to any material acquisitions or investments in other companies.
 
The amounts and timing of these expenditures may vary depending on our ability to expand our business, the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. Accordingly, our management will have significant discretion in the allocation of the net proceeds we will receive for this offering. Depending on future events and other changes in the business climate, we may determine at a later time to use the net proceeds for different purposes.
 
Pending the use of the net proceeds, we intend to invest the net proceeds in a variety of capital preservation instruments, including short-term, investment-grade, interest-bearing instruments.

 
25

 

DIVIDEND POLICY
 
We do not currently have any plans to pay any cash dividends in the foreseeable future on our ordinary shares being sold in this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
 
We are a holding company incorporated in the British Virgin Islands. Our revenues are generated by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to pay dividends and make other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can be used only for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. The board of directors of each of our PRC subsidiaries, each of which is a wholly foreign owned enterprise, has the discretion to allocate a portion of its after-tax profits to its staff welfare and bonus funds, which is likewise not distributable to its equity owners except in the event of a liquidation of the foreign-invested enterprise.  If we decide to pay dividends in the future, these restrictions may impede our ability to pay dividends.  In addition, if any of these Chinese entities incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.
 
Our Board of Directors has complete discretion on whether to pay dividends.  Even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. Any dividend we declare will be paid to the holders of our ordinary shares, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 
26

 

CAPITALIZATION
 
The following table sets forth our capitalization as of December 31, 2009:
 
 
·
on an actual basis; and
 
 
·
on a pro forma as adjusted basis to give effect to the issuance and sale of [    ] of our ordinary shares by us in this offering, assuming an initial public offering price of $[    ] per ordinary share, the midpoint of the estimated range of the initial public offering price set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us of approximately $[     ], assuming that the underwriters do not exercise their over-allotment option and there is no other change to the number of ordinary shares sold by us as set forth on the cover page of this prospectus.
 
You should read this table together with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.
 
As   of   December   31,   2009
 
Actual
   
Pro forma as
adjusted
 
Cash:
           
Cash and cash equivalents
  $ 8,409,467       [• ]
Restricted cash (1)
    11,824,214       [• ]
                 
Debt:
               
Notes payable - bank acceptance notes (1)
    19,744,925       [• ]
Short-term bank loans (2)
    27,350,377       [• ]
                 
Shareholders’ equity:
               
Common shares, no par value
    500       [• ]
Accumulated other comprehensive income
    543,036       [• ]
Statutory Reserve
    1,093,331       [• ]
Retained earnings
    13,069,401       [• ]
Non-controlling interest
    5,473,078       [• ]
Total shareholders’ equity
  $ 20,179,346       [• ]
 
(1)       Restricted cash represents amounts held by a bank as security for bank acceptance notes and therefore is not available for our use until such time as the bank acceptance notes have been fulfilled or expired, normally within a twelve month period.  All the notes payable are subject to bank charges of 0.05% of the principal amount as commission on each loan transaction.
 
(2)       Short-term bank loans are obtained from local banks in China. All the short-term bank loans are repayable within one year and are secured by property, plant and equipment and land use rights owned by us, as well as by guarantees made by our affiliates.

A $1.00 increase (decrease) in the assumed initial public offering price of $[    ] per ordinary share would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents and total shareholders’ equity by $[    ], assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and our estimated offering expenses of approximately $[     ].

 
27

 

DILUTION
 
If you invest in our ordinary shares, your interest will be diluted to the extent of the difference between the initial public offering price per ordinary share and our net tangible book value per ordinary share after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.
 
Our net tangible book value as of December 31, 2009 was $[    ] million, or $[    ] per ordinary share. Net tangible book value represents the amount of our total consolidated tangible assets, minus the amount of our total consolidated liabilities. Without taking into account any other changes in such net tangible book value after [        ], other than to give effect to the issuance and sale of [    ] ordinary shares by us in this offering, at the initial public offering price of $[    ] per ordinary share and after deduction of the underwriting discounts and commissions and estimated offering expenses of this offering payable by us, our adjusted net tangible book value as of [      ] would have increased to $[    ] million or $[    ] per ordinary share. This represents an immediate decrease in net tangible book value of $[    ] per ordinary share to our existing shareholders and an immediate dilution in net tangible book value of $[    ] per ordinary share to investors purchasing shares in this offering.  In the event that the closing date of this offering deviates from that assumed in this prospectus, we will include the adjusted ordinary share number in our final prospectus relating to this offering. The following table illustrates such per share dilution:
 
Assumed initial public offering price per ordinary share
  $ [    ]
Net tangible book value per ordinary share as of December 31, 2009
  $ [    ]
Increase in adjusted net tangible book value per ordinary share attributable
to this offering
  $ [    ]
Amount of dilution in net tangible book value per ordinary share issued to new investors in this offering
  $ [    ]
Adjusted net tangible book value per ordinary share after this offering
  $ [    ]
 
A $1.00 increase (decrease) in the assumed public offering price of $[    ] per ordinary share would increase (decrease) our pro forma net tangible book value after giving effect to the offering by $[    ] million, the pro forma net tangible book value per ordinary share after giving effect to this offering by $[    ] per ordinary share and the dilution pro forma net tangible book value per ordinary share to new investors in this offering by $[    ] per ordinary share, assuming no change to the number of ordinary shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ordinary shares and other terms of this offering determined at pricing.
 
The following table summarizes, on a pro forma basis as of December 31, 2009, the differences between existing shareholders and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include ordinary shares issuable upon the exercise of the over-allotment option granted to the underwriters.
 
   
Ordinary
Shares Purchased
   
Total Consideration
   
Average
Price Per
Ordinary
 
   
Number
 
Percent
   
Amount
   
Percent
   
Share
 
Existing shareholders
 
              
      %   $           %   $    
New investors
 
              
                               
Total
 
              
    100 %             100 %        

A $1.00 increase (decrease) in the assumed initial public offering price of $[    ] per ordinary share would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and the average price per ordinary share paid by all shareholders by $[    ] million, $[    ] million and $[    ], respectively, assuming no change in the number of ordinary shares sold by us as set forth on the cover page of this prospectus and without deducting underwriting discounts and commissions and other offering expenses.

 
28

 

EXCHANGE RATE INFORMATION
 
The financial records of our consolidated entities are maintained in RMB, which is our functional currency.  Capital accounts of our consolidated financial statements are translated into U.S. dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rate as of the balance sheet date. Income and expenditures are translated at the average exchange rate of the relevant period. RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation. 
 
The exchange rates used to translate amounts in RMB and HK$ into U.S. Dollars for the purposes of preparing the consolidated financial statements are as follows:

   
Six months ended March 31,
 
Year ended
 
September 30,
 
   
2010
 
2009
 
2009
 
2008
 
Balance sheet items, except for equity accounts
 
RMB6.8361=$1
HK$7.7335=$1
 
RMB6.8456=$1
 
 
RMB6.8290=$1
HK$7.7805=$1
 
RMB6.8183=$1
 
 
Items in statements of income and cash flows
 
RMB6.8360=$1
HK$7.7275=$1
 
RMB6.8499=$1
 
 
RMB6.83055=$1
HK$7.7890=$1
 
RMB7.1643=$1
    
 

There is no assurance that the RMB and HK$ amounts could have been, or could be, converted into U.S. dollars at the above rates.
 
 
29

 

ENFORCEABILITY OF CIVIL LIABILITIES
 
Ossen Innovation Co., Ltd. is a British Virgin Islands company and most of its executive officers and directors are located outside of the United States. In addition, a substantial portion of its assets and the assets of its directors and officers are located outside of the United States. As a result, you may have difficulty serving legal process within the United States upon Ossen Innovation Co., Ltd. or any of these persons. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against Ossen Innovation Co., Ltd. or these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws.
 
Furthermore, there is substantial doubt that the courts of the British Virgin Islands or the People’s Republic of China would enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws.

 
30

 

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
The following selected financial information should be read in connection with, and is qualified by reference to, our consolidated financial statements and their related notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which is included elsewhere in this registration statement.  The consolidated statements of operations and comprehensive income data for the fiscal years ended December 31, 2008 and 2009 and the balance sheets data as of December 31, 2008 and 2009 are derived from the audited consolidated financial statements included elsewhere in this registration statement.  The consolidated statements of operations and comprehensive income data for the fiscal years ended December 31, 2005, 2006 and 2007 and the balance sheets data as of December 31, 2005, 2006 and 2007 have been derived from unaudited financial statements that are not included in this prospectus.  Our historical results for any of these periods are not necessarily indicative of results to be expected in any future period.

   
Year  Ended  December  31,
 
   
2009
(Audited)
   
2008
(Audited)
   
2007
(Unaudited)
   
2006
(Unaudited)
   
2005
(Unaudited)
 
                               
Revenues
  $ 101,087,796     $ 82,742,310     $ 71,909,873     $ 59,547,454       17,195,347  
Cost of goods sold
    87,659,925       70,532,733       63,340,890       56,853,946       15,216,951  
Gross profit
    13,427,871       12 ,209,577       8,568,983       2,693,508       1,978,395  
Selling and distribution expenses
    503,724       4,326,491       3,662,373       1,024,209       219,650  
General and administrative expenses
    1,143,672       1,316,606       571,49 8       340,847       255,270  
Total Operating Expenses
    1,647,396       5,643,097       4,288,796       1,410,056       501,920  
                                         
Income from operations
    11,780,475       6,566,480       4,280,187       1,283,451       1,476,475  
Interest expenses, net
    (1,496,712 )     (1,891,671 )     (1,189,027 )     (359,130 )     (22,920 )
Other income, net
    183,495       380,766       278,92 4       211,875       56,362  
Income before income taxes
    10,467,258       5,055,575       3,370,084       1,136,196       1,509,917  
Income taxes
    (740,053 )     (291,5 20 )     (233,674 )     -       -  
Net income
    9,727,205       4,764,055       3,136,41 0       1,136,196       1,509,917  
Less: Net Income
                                       
Attributable to non-controlling interest
    1,714,670       809,437       -       -       -  
Net income attributable to controlling interest
    8,012,535       3,954,618       3,136,41 0       1,136,196       1,509,917  
Other comprehensive income
                                       
Foreign currency translation gain, net of tax
    3 1,146       42 0,883       66,913       360,384       37,135  
Total Other comprehensive income, net of tax
    31,146       420,883       66,913       360,384       37,135  
Comprehensive Income
  $ 8,043,681     $ 4,375,501     $ 3,203,323       1,496,580       1,547,052  
 
 
31

 
 
Balance Sheets Data (at end of period)
 
December 31,
 
(in   U.S.   Dollars)
 
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Audited)
   
(A udited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Cash and cash equivalents
  $ 8,409,467     $ 3,761,315     $ 6,735,616     $ 7,828,750     $ 3,120,317  
Total current assets
    68,374,508       47,316,208       35,162,129       18,712,764       9,901,704  
Total long-term assets
    17 , 343 , 079       18 , 58 0 , 174       17 , 464 , 579       12 , 733 , 621       9 , 898 , 165  
Total assets
    85,717,587       65,896,382       52,626,708       31,436,385       19,799,869  
                                         
Total liabilities
    65,538,241       55,475,387       47,390,651       18,297,807       8,317,707  
Total shareholders’ equity
    20,179,346       10,420,995       5,236,057       13,138,578       11,482,162  
Total liabilities and shareholders’ equity
    85,717,587       65,896,382       52,626,708       31,436,385       19,799,869  

 
32

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following management’s discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this prospectus.  In addition to historical information, the following discussion contains certain forward-looking statements.  These statements relate to our future plans, objectives, expectations and intentions.  These statements may be identified by the use of words such as “may”, “will”, “could”, “expect”, “anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, “project” and similar terms or terminology, or the negative of such terms or other comparable terminology.  Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements.  Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this prospectus and our other filings with the Securities and Exchange Commission.  We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.
 
Our financial statements are prepared in U.S. dollars and in accordance with accounting principles generally accepted in the United States. See “Exchange Rate Information” above for information concerning the exchange rates at which Renminbi have been translated into U.S. dollars at various pertinent dates and for pertinent periods.
 
Overview
 
General
 
Ossen is one of the largest producers of prestressed steel materials in China.  Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province, in the People’s Republic of China. We manufacture and sell an array of plain surface and rare earth galvanized prestressed steel materials, which we believe is the most comprehensive amongst our competitors in China.  According to the PRC PC Strand Industry Investment and Market Operation Research Report, in 2008, our high strength, low relaxation products were ranked third in sales in the PRC for rare earth coated PC strands and ranked first in export sales by Chinese prestressed steel manufacturers.
 
On July 7, 2010, Ultra Glory and its sole shareholder entered into a share exchange agreement with Ossen Innovation Materials Group Co., Ltd., or Ossen Innovation Group, a British Virgin Islands limited liability company organized on April 30, 2010 under the BVI Act and the shareholders of Ossen Innovation Group. Pursuant to the share exchange agreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group all of the issued and outstanding shares of Ossen Innovation Group, in exchange for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra Glory to the shareholders of Ossen Innovation Group.  In addition, the sole shareholder of Ultra Glory sold all of the 5,000,000 ordinary shares of Ultra Glory that were issued and outstanding prior to the business combination, to the shareholders of Ossen Innovation Group for cash, at a price of $0.03 per share.  As a result, the individuals and entities that owned shares of Ossen Innovation Group prior to the business combination acquired 100% of the equity of Ultra Glory, and Ultra Glory acquired 100% of the equity of Ossen Innovation Group.  Ossen Innovation Group is now a wholly owned subsidiary of Ultra Glory.  In conjunction with the business combination, Ultra Glory filed an amended charter, pursuant to which Ultra Glory changed its name to Ossen Innovation Co., Ltd, changed its fiscal year end to December 31, changed the par value of its ordinary shares to $0.01 per share and increased its authorized shares to 100,000,000.  Upon the consummation of the business combination, we ceased to be a shell company.

 
33

 

Important Factors Affecting our Results of Operations and Existing Trends
 
International sales and product mix
 
Our results of operations depend in part on the proportion of international sales to domestic sales that we attain during a particular financial reporting period.  Sales to international customers generally generate higher profit margins for us.  In addition, we have historically collected a significant percentage of revenues generated by international sales by letter of credit, which enables us to convert accounts receivable into cash more quickly.  Our domestic customers generally pay approximately 40 days after receiving the materials at the construction site.  In 2008, we sold 37.6% of our products to international customers.  However, in 2009, we sold only 3.7% of our products to international customers, as a result of the global economic and financial crisis and the imposition of anti-dumping duties by the U.S. and the European Union.
 
Our results of operations also depend on the product mix that we attain during a particular financial reporting period.  We produce and sell products according to customer orders.  The prices of our rare earth coated products are higher than the prices of our plain surface products because of their antiseptic property and the long service life of the finished products constructed with these materials, such as buildings and bridges.  Since the increase in our expenses in developing and selling coated materials is less than the increased sales prices, these products generate higher revenues than our plain surface materials.
 
To counter the adverse impacts brought by the global financial and economic crisis in 2009, we adjusted our strategy by increasing sales to PRC customers in an attempt to take advantage of the RMB 4 trillion stimulus package announced by the Chinese government to stimulate the domestic PRC economy.  In 2009, we sold many of our products for use in numerous infrastructure construction projects in the PRC, including bridges, inter-city high speed railways and expressways.  These projects generally required our rare earth coated materials.  As a percentage of overall sales, sales of our rare earth coated products increased from 4.8% in 2008 to 25.4% in 2009, as discussed under “—Results of Operations” below.  Our plan is to continue to increase sales of our rare earth coated products, both in the PRC and internationally, in order to increase our revenues and profits.  We intend to sell these products in the U.S. in future periods as well, since rare earth galvanized products are not subject to the anti-dumping measures imposed by the U.S.
 
Favorable price and terms for supply of principal raw materials
 
Our principal raw material is high carbon steel wire rods that we typically purchase from multiple primary steel producers. The steel industry as a whole is cyclical and, at times, pricing and availability of steel can be volatile due to numerous factors beyond our control, including general domestic and international economic conditions, labor costs, sales levels, competition, levels of inventory held by us and other steel service centers, consolidation of steel producers, higher raw material costs for steel producers, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us.
 
We, like many other steel service centers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase steel are generally at prevailing market prices in effect at the time we place our orders. We have no long-term, fixed-price steel purchase contracts. When steel prices increase, as they did in 2008, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the net sales and profitability of our business could be adversely affected.
 
When steel prices decline, as they did in the fourth quarter of 2008 and through the first half of 2009, customer demands for lower prices and our competitors' responses to those demands could result in lower sale prices and, consequently, lower margins. Significant or rapid declines in steel prices or reductions in sales volumes could result in us incurring inventory or goodwill impairment charges. Changing steel prices therefore could significantly impact our net sales, gross margins, operating income and net income.
 
We currently purchase almost all of our new materials from a very small number of suppliers.  Purchases from our five largest suppliers amounted to 86.5% and 89.5% of our total raw material purchases in 2008 and 2009, respectively.  To date, we have been able to obtain favorable pricing and delivery terms from these suppliers.  However, as we continue to increase the scale of our production, we may need to further diversify our supplier network and, as a result, may not be able to obtain favorable pricing and delivery terms from new suppliers.

 
34

 

Production capacity
 
In order to capture additional market share for our products, we have expanded over the past several years, and plan to continue to expand, our production capacity.  We are currently producing at nearly full capacity.  Increased capacity has had, and could continue to have, a significant effect on our results of operations, by allowing us to produce and sell more products to generate higher revenues and profits.
 
Growth of the Chinese economy
 
We operate our manufacturing facilities in China and derive the majority of our revenues from sales to customers in China. As such, economic conditions in China affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials and our other expenses. According to the National Bureau of Statistics of China, China has experienced significant economic growth, achieving a Compound Annual Growth Rate of 12.1% in gross domestic product from 1997 through 2007. Domestic demand for, and consumption of, prestressed steel products has increased substantially as a result of this growth. We anticipate that the demand for our materials in China will continue to increase as the Chinese government carries out its stimulus plan and other plans to further develop the transportation infrastructure in the PRC. However, any adverse changes in economic conditions or regulatory environment in China may have a material adverse effect on our future performances.
 
Level of income tax and preferential tax treatment
 
Our net income is affected by the income tax that we pay and any preferential tax treatment that we are able to receive.  Our operating subsidiaries are subject to the PRC enterprise income tax, or EIT.  According to the relevant laws and regulations in the PRC, foreign invested enterprises established prior to January 1, 2008 are entitled to full exemption from income tax for two years beginning with the first year in which such enterprise is profitable and a 50% income tax reduction for the subsequent three years.  Ossen Materials was entitled to an EIT exemption during the two years ended December 31, 2006 and was subject to a 50% income tax reduction during the three years ended December 31, 2009.  Ossen Jiujiang was entitled to the EIT exemption during the two years ended December 31, 2008, was subject to a 50% income tax reduction during the year ended December 31, 2009 and will be subject to a 50% income tax reduction during the period from January 1, 2010 to December 31, 2011.  As our income tax obligations increase over time, our net income will be affected.
 
Costs of being a public company
 
Prior to the business combination, Ossen did not operate as a public company. Ossen has incurred significant accounting, legal and other expenses in connection with the business combination since its year ended December 31, 2009, and it expects that compliance with its obligations as a public company will require significant management time and continued increases in general administrative expenses, including insurance, legal and financial compliance costs.
 
Foreign currency translation
 
Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiaries is RMB. Our results of operations are translated at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at the unified exchange rate at the end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.
 
Description of Selected Income Statement Items
 
Revenues .  We generate revenue from sales of our prestressed steel products, including plain surface products and rare earth coated products.

 
35

 

Cost of goods sold .  Cost of goods sold consists of costs directly attributable to production, including the cost of raw materials, salaries for staff engaged in production activity, electricity, depreciation, packing materials, and related expenses.
 
Selling and distribution expenses.   Selling and distribution expenses consist of sales commissions, payroll, traveling expenses, transportation expenses and advertising expenses.  We pay our distribution customers a commission ranging from 0.6% to 1.4% of invoiced amounts (including VAT) actually paid to us.
 
General and administrative expenses.   General and administrative expenses consist primarily of employee remuneration, payroll taxes and benefits, general office expenses and depreciation.  We expect administrative expenses to continue to increase as we incur additional expenses related to costs of compliance with securities laws and other regulations, including increased audit and legal fees and investor relations expenses.
 
Interest expenses.   Interest expenses consist of interest expense on bank loans.
 
Other Income .  Our other income consisted of government grants and revenue from sales of scrap materials in 2008 and 2009.
 
Income Taxes .  The PRC Enterprise Income Tax Law imposed a unified income tax rate of 33% prior to and including 2007 and of 25% beginning in 2008 for enterprises registered in the PRC.  Both Ossen Materials and Ossen Jiujiang were designated by the local tax authority as a foreign-invested enterprise engaged in manufacturing activities.  As a result, Ossen Materials was entitled to an EIT exemption during the two years ended December 31, 2006 and was subject to a 50% income tax reduction during the three years ended December 31, 2009.  Ossen Jiujiang was entitled to the EIT exemption during the two years ended December 31, 2008, was subject to 50% income tax reduction during the year ended December 31, 2009, and will be subject to 50% income tax reduction during the period from January 1, 2010 to December 31, 2011.  As our income tax obligations increase over time, our net income will be affected.
 
Results of Operations
 
The following table sets forth the key components of our results of operations for the periods indicated, in dollars and as a percentage of revenue.

 
36

 

(All amounts in U.S. dollars, except for percentages)
   
For Year Ended December 31,
 
   
2009
   
2008
 
   
(Audited)
   
(Audited)
 
   
USD
   
% of
Revenue
   
USD
   
% of Revenue
 
Revenues
  $ 101,087,796       100 %   $ 82,742,310       100 %
Cost of Goods Sold
    87,659,925       86.7 %     70,532,733       85.2 %
Gross profit
    13,427,871       13.2 %     12,209,577       14.8 %
Selling and distribution expenses
    503,724       0.5 %     4,326,491       5.2 %
General and administrative expenses
    1,143,672               1,316,606          
Total operating expenses
    1,647,396       1.6 %     5,643,097       6.8 %
Income from operation
    11,780,475       11.1 %     6,566,480       7.9 %
Interest expenses, net
    (1,496,712 )     1.5 %     (1,891,671 )     2.3 %
Other income, net
    183,495       0.2 %     380,766       0.5 %
Income before income taxes
    10,467,258       10.4 %     5,055,575       6.1 %
Income Taxes
    (740,053 )     0.8 %     (291,520 )     0.4 %
Net Income
    9,727,205       9.6 %     4,764,055       5.7 %
Less: net income attributable to non-controlling interest
    1,714,670       1.7 %     809,437       1.0 %
Net income attributable to controlling interest
    8,012,535       7.9 %     3,954,618       4.7 %
Other comprehensive income-Foreign currency translation gain, net of tax
    31,146       -       420,883       0.5 %
Total other comprehensive income, net of tax
    31,146       -       420,883       0.5 %
Comprehensive Income
    8,043,681       7.9 %     4,375,501       5.3 %
 
Net Revenues .  During the year ended December 31, 2009, we had revenues of approximately $101.1 million as compared to revenues of approximately $82.7 million during year ended December 31, 2008, an increase of approximately $18.3 million, or 22.2%.   The growth in our revenues during the year ended December 31, 2009 was attributable to a significant increase of volume sold during such period as compared to the year ended December 31, 2008.
 
The following table provides a breakdown of our revenues during the years ended December 31, 2009 and 2008:

 
37

 

   
Year ended December 31,
       
   
2009
   
2008
       
   
% of total revenue
   
% of total revenue
   
Change
from 2008
to 2009
 
Products:
                 
Plain surface PC strands
    32 %     60 %     (36.2 )%
Rare earth galvanized PC wires and PC strands
    2 %     4 %     (35.1 )%
Stabilized PC wires
    51 %     36 %     69.3 %
Other rare earth coated PC wires and PC strands
    15 %     -       -  
 
The reasons for the change in our product mix from 2008 to 2009, with sales of plain surface products decreasing significantly and sales of galvanized products, including stabilized PC wires, increasing significantly, are twofold.  One, as a result of an overall decrease in demand in international markets for our products due to the global financial and economic crisis and the anti-dumping duties imposed by the U.S. and the European Union, we had to decrease our international sales, which were comprised primarily of plain surface materials in 2008.  Two, we increased sales of our higher margin rare earth galvanized products and other coated products, including stabilized PC wires and other rare earth coated PC wires and PC strands, primarily in the domestic PRC market in 2009 to take advantage of the growth and stimulus measures existing in the PRC.
 
Cost of Goods Sold .  Cost of goods sold was approximately $87.7 million during the year ended December 31, 2009, as compared to approximately $70.5 million during the year ended December 31, 2008, representing an increase of 24.3%, or approximately $17.2 million. As a percentage of net sales, cost of sales increased from 85.2% to 86.7% during the year ended December 31, 2009.  This increase resulted from the increase in purchases of zinc in order to product greater quantities of our galvanized materials, of which zinc is a crucial element.
 
Gross Profit and Gross Margin.  Our gross profit is equal to the difference between our revenues and our cost of goods sold.  Our gross profit increased 10.0% to approximately $13.4 million during the year ended December 31, 2009, from approximately $12.2 million for the same period in 2008.  The increase was primarily attributable to increased sales volume.
 
For the years ended December 31, 2009 and 2008, our gross margin was 13.2% and 14.8%, respectively.  The reason for this decrease in gross margin is that we decreased our international sales, which generally generate higher margins than domestic sales, as a result of the global economic crisis and anti-dumping duties imposed by the U.S. and the European Union.
 
General and Administrative Exp enses.   General and administrative expenses totaled approximately $1.1 million for the year ended December 31, 2009, as compared to approximately $1.3 million for the year ended December 31, 2008, representing a decrease of 17.6%. This decrease was primarily attributable to costs incurred in connection with a potential financing transaction in 2008.
 
Selling and Distribution Expenses .  Selling and distribution expenses totaled $0.5 million for the year ended December 31, 2009, as compared to $4.3 million for the year ended December 31, 2008, a decrease of 88.4%.  This decrease was attributable primarily to a significant decrease in our freight costs and other costs related to international sales as a result of the significant decrease in international sales in 2009.
 
Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2009 was approximately $11.8 million, an increase of 78.8% as compared to approximately $6.6 million for the same period in 2008.  As a percentage of net sales, operating income increased from 7.9% to 11.1% during the year ended December 31, 2009.

 
38

 

Other Income. Our other income for the year ended December 31, 2009 totaled $0.2 million, compared to other income of $0.4 million for the previous year, a decrease of 51.8%.  This decrease was attributable to the receipt of a government subsidy in 2008 in recognition of our high level of exports, which grant was not made in 2009.
 
Income Taxes . We incurred income tax expenses of $740,053 and $291,520 in fiscal years ended December 31, 2009 and 2008, respectively.
 
Net Income . As a result of the foregoing, our net income totaled approximately $9.7 million for the year ended December 31, 2009, as compared to approximately $4.8 million for the year ended December 31, 2008, an increase of 106%.
 
Net Income Attributable to Non-controlling Interest.   We own 81% of our operating subsidiaries.  Net income attributable to non-controlling interest represents the net income attributable to the holders of the remaining 19%.
 
Foreign Currency Translation. Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Our results of operations are translated at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at the unified exchange rate at the end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.
 
Critical Accounting Policies and Estimates

Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our financial statements reflect the selection and application of accounting policies, which require management to make significant estimates and judgments. See Note 1 to our consolidated financial statements, “Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the most critical accounting policies that currently affect our financial condition and results of operations.
 
Revenue Recognition

Revenues represent the invoiced value of goods sold recognized upon the shipment of goods to customers.  Revenues are recognized when all of the following criteria are met:

 
·
Persuasive evidence of an arrangement exists,
 
 
·
Delivery has occurred or services have been rendered,
 
 
·
The seller’s price to the buyer is fixed or determinable, and
 
 
·
Collectability is reasonable assured.
 
Accounts Receivable
 
Accounts receivable are carried at net realizable value.  We review our accounts receivable on a periodic basis and make general and specific allowances when there is doubt as to the collectability of individual balances.  In evaluating the collectability of individual receivable balances, we consider many factors, including the age of the balance, customer’s historical payment history, its current credit-worthiness and current economic trends.  Accounts are written off after exhaustive efforts at collection.  If accounts receivable are to be provided for, or written off, they would be recognized in the consolidated statement of operations within operating expenses.  Balance of allowance of doubtful accounts was $42,487 and $35,782 at December 31, 2009 and 2008, respectively.  In addition, we have not provided for, or written off, accounts receivable for the years ended December 31, 2009 and 2008.  Among the accounts receivable balance of $15,157,087, the aging of $10,583,532 was within 60 days, $4,372,855 was between 60-90 days and $243,188 was over 90 days.  The balance of accounts receivable was $15,157,087 at December 31, 2009, $15,069,143 of which was subsequently collected.

 
39

 

Prepayments
 
Prepayments represent cash paid in advance to suppliers for purchases of raw materials.  The balance of prepayments was $19,833,561 and $19,270,693 at December 31, 2009 and 2008, respectively.  Among the balance of $19,833,561, the aging of $19,787,733 was within 60 days, $2,218 was between 60-90 days and $43,610 was over 90 days.  No allowance was provided for the prepayments balance at December 31, 2009.
 
Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

Foreign Currency Translation
 
The accompanying consolidated financial statements are presented in United States dollars (“US$). The functional currency of the Company is Renminbi (“RMB”). The consolidated financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The resulting transaction adjustments are recorded as a component of shareholders’ equity. Gains and losses from foreign currency transactions are included in net income.

   
2009
   
2008
 
Year ended RMB: US$ exchange rate
 
6.8372
   
6.8542
 
Average yearly RMB: US$ exchange rate
 
6.8409
   
6.9623
 

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

Fair Value of Financial Instruments
 
FASB ASC 820 (formerly SFAS No. 157 Fair Value Measurements) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market

These tiers include:

 
·
Level 1—defined as observable inputs such as quoted prices in active markets;

 
·
Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

 
·
Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 
40

 
 
The assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of December 31, 2009 are as follows:

         
Fair Value Measurements at Reporting Date Using
 
   
Carrying value
as of
December 31,
2009
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable Inputs
(Level 3)
 
Cash and cash equivalents
  $ 8,409,467     $ 8,409,467       -       -  
Restricted cash
  $ 11,824,214     $ 11,824,214       -       -  

Property, Plant, and Equipment
 
Property, plant and equipment are stated at cost less accumulated depreciation, and include expenditure that substantially increases the useful lives of existing assets.

Depreciation is provided over their estimated useful lives, using the straight-line method.  Estimated useful lives are as follows:

Buildings and improvements
5 ~ 20 years
Machinery and equipment
5 ~ 20 years
Motor vehicles
5 years
Office Equipment
5 ~ 10 years

When assets are sold or retired, their costs and accumulated depreciation are eliminated from the consolidated financial statements and any gain or loss resulting from their disposal is recognized in the period of disposition as an element of other income.  The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
 
Recently Issued Accounting Pronouncements

In June 2009, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, the FASB ASC and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162).  ASC 105-10 establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied in preparation of financial statements in conformity with generally accepted accounting principles in the United States of America.  The adoption of this standard has no impact on our consolidated financial statements.  However, reference to specific accounting standards have been changed to refer to appropriate section of the ASC.  Subsequent revisions to GAAP by the FASB will be incorporated into ASC through issuance of Accounting Standards Updates (“ASU”).

Effective January 1, 2009, we adopted ASC 805 (formerly SFAS No. 141 R, Business Combinations).  ASC 805 requires an acquirer to measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired.  The adoption of ASC 805 did not have any effect on our consolidated financial statements.

Effective January 1, 2009, we adopted ASC 810-10 (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements).  This Statement establishes accounting and reporting standards that require the ownership interests in subsidiaries’ non-parent owners be clearly presented in the equity section of the balance sheet; requires the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of income; requires that changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; requires that when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value and the gain or loss on the deconsolidation of the subsidiary be measured using the fair value of any non-controlling equity; requires that entities provide disclosures that clearly identify the interests of the parent and the interests of the non-controlling owners.  The adoption of ASC 810-10 has not had a significant effect on our consolidated financial statements.

 
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On April 1, 2009, the FASB approved ASC 805 (formerly FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies), which amends Statement 141R and eliminates the distinction between contractual and non-contractual contingencies.  Under ASC 805, an acquirer is required to recognize at fair value an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the acquirer applies the recognition criteria in SFAS No. 5, Accounting for Contingencies and Interpretation 14, “Reasonable Estimation of the Amount of a Loss – and interpretation of FASB Statement No. 5,” to determine whether the contingency should be recognized as of the acquisition date or after it.  The adoption of ASC 805 has not had a material effect on our consolidated financial statements.

ASC 320-10 (formerly FSP FAS 115-2 and FAS 124-2) amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  It did not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. We are required to adopt ASC 320-10 for our interim and annual reporting periods ending after June 15, 2009.  ASC 320-10 does not require disclosures for periods presented for comparative purposes at initial adoption.  ASC 320-10 requires comparative disclosures only for periods ending after initial adoption.  The adoption of ASC 320-10 has not had a material effect on our consolidated financial statements.

On April 9, 2009, the FASB also approved ASC 825-10 (formerly FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments )   to require disclosures about fair value of financial instruments in interim period financial statements of publicly traded companies and in summarized financial information required by APB Opinion No. 28, Interim Financial Reporting .  We are required to adopt ASC 825-10 for our interim and annual reporting periods ending after June 15, 2009.  ASC 825-10 does not require disclosures for periods presented for comparative purposes at initial adoption. ASC 825-10 requires comparative disclosures only for periods ending after initial adoption.  The adoption of ASC 825-10 has not had a material effect on our consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” as incorporated into FASB ASC 820, “Fair Value Measurements and Disclosures”. The guidance relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales.  It reaffirms what FASB ASC 820 states is the objective of fair value measurement—to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions.  Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.  This guidance is effective for interim and annual periods ended after June 15, 2009, but entities may early adopt this guidance for the interim and annual periods ended after March 15, 2009. The adoption of such standard has not had a material impact on our consolidated financial statements.

In August 2009, the FASB issued FASB ASU 2009-05, “Measuring Liabilities at Fair Value”. FASB ASU 2009-05 amends FASB ASC 820, “Fair Value Measurements”.  Specifically, FASB ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses a) the quoted price of the identical liability when traded as an asset or b) quoted prices for similar liabilities or similar liabilities when traded as assets and/or 2) a valuation technique that is consistent with the principles of FASB ASC 820 of the Accounting Standards Codification (e.g. an income approach or market approach).  FASB ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability.  The adoption of such standard has not had a material impact on our consolidated financial statements.

 
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In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, (FASB ASC 855-10”) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements.  The statement is effective for interim and annual periods ended after June 15, 2009.  The standard was subsequently amended by FASB ASU 2010-09 which exempts an entity that is an SEC filer from the requirement to disclose the date through which subsequent events have been evaluated.

In September 2009, the Emerging Issues Task Force reached final consensus on FASB ASU 2009-13, “Revenue Arrangements with Multiple Deliverables”.  FASB ASU 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting.  This ASU will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Early adoption is permitted. The adoption of such standard has not had a material impact on our consolidated financial statements.

In December 2009, the FASB issued FASB ASU 2009-17, Consolidation (“FASB ASC 810): Improvements to Financial Reporting by Enterprises involved with Variable Interest Entities.  This ASU amends the FASB Accounting Standards Codification for statement No.167.  In June 2009, the FASB issued SFAS No.167, Amendments to FASB Interpretation No. 46(R), which requires an enterprise to perform an analysis and ongoing reassessments to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity and amends certain guidance for determining whether an entity is a variable interest entity. It also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprises involvement in a variable interest entity.  SFAS No.167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 and for all interim reporting periods after that, with early application prohibited.  The adoption of this standard has not had a material impact on our consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which will require companies to make new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value hierarchies and information on purchases, sales, issuance and settlements on a gross basis in the reconciliation of Level 3 fair value measurements.  The ASU is effective prospectively for financial statements issued for fiscal years and interim periods beginning after December 15, 2009.  The new disclosures about purchases, sales, issuance and settlements on a gross basis in the reconciliation of Level 3 fair value measurements is effective for interim and annual reporting periods beginning after December 15, 2010.  We expect that the adoption of ASU 2010-06 will not have a material impact on its consolidated financial statements.
 
Liquidity and Capital Resources

The major sources of our liquidity for fiscal year 2008 and 2009 were cash generated from operations and short-term borrowings, including short-term loans from banks and bank acceptance notes.  We expect to continue to finance our operations and working capital needs in the near future from cash generated from operations and short-term borrowings.
 
Our cash and cash equivalents which are denominated in RMB, were approximately $8.4 million at December 31, 2009, as compared to $3.8 million at December 31, 2008, which increase was mainly due to increasing customer deposits and net proceeds from short-term bank loans.  We believe that our cash reserves, together with expected cash flow from operations and short-term loans, are sufficient to allow us to continue to operate for the next 12 months.  However, we are issuing equity in this offering in order to enhance our liquidity position or to increase our cash reserves for future expansion.
 
We intend to use the net proceeds from this offering to increase our production capacity from 140,000 tons to 200,000 tons in the months following this offering.  Our plan is to construct a new building on empty land located in our Maanshan facility and to install eight new production lines which will be used for the production of an aggregate of approximately 60,000 tons of higher margin coated prestressed materials, including coated wires.  The expected cost of this expansion is approximately $25 million.

 
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Accounts Receivable
 
International sales accounted for 37.6% of our revenues in 2008 but only 3.7% in 2009 as a result of the global financial and economic crisis and the anti-dumping tariffs imposed by the European Union and the U.S.  In 2008, we collected approximately half of the revenues generated by international sales by letter of credit, enabling us to convert our accounts receivable into cash more quickly, prepay our suppliers and reduce the amount of funds that we needed to finance our working capital requirements.  Our domestic customers generally pay approximately 40 days after receiving the materials at their construction site.  As a result, our accounts receivable increased significantly in 2009 as compared to 2008.  We have collected more than 99% of the $15.2 million of accounts receivable outstanding as of December 31, 2009 in cash.  See note 4 to our financial statements provided elsewhere in this prospectus for a schedule of our valuation account.  We do not expect our accounts receivable to decrease to 2008 levels until we are able to significantly increase our international sales.  We intend to sell our coated products in the U.S. in future periods, since these products are not subject to the anti-dumping measures imposed by the U.S.
 
Major Customers
 
During the years ended December 31, 2008 and 2009, our six largest customers contributed 81.0% and 86.7% of our total sales, respectively.  See “Business—Our Customers” below.  As a result of our reliance on a limited number of customers, we may face pricing and other competitive pressures, which may have a material adverse effect on our profits and our revenues. The volume of products sold for specific customers varies from year to year, especially since we are not the exclusive provider for any customers.  In addition, there are a number of factors, other than our performance, that could cause the loss of a customer or a substantial reduction in the products that we provide to any customer and that may not be predictable. For example, our customers may decide to reduce spending on our products or a customer may no longer need our products following the completion of a project. The loss of any one of our major customers, a decrease in the volume of sales to these customers or a decrease in the price at which we sell our products to them could materially adversely affect our profits and our revenues.
 
In addition, this customer concentration may subject us to perceived or actual leverage that our customers may have in negotiations with us, given their relative size and importance to us. If our customers seek to negotiate their agreements on terms less favorable to us and we accept such unfavorable terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and volume of business from our largest customers and the financial and operational success of these customers.
 
Bank Loans
 
At December 31, 2009, we had approximately $27.4 million of short-term bank loans and $19.7 million of bank acceptance notes outstanding, as compared to $19.4 million and $18.2 million at December 31, 2008, respectively.
 
Short-term bank loans are obtained from local banks in China. All short-term bank loans are repayable within one year and are secured by property, plant and equipment and land use rights owned by us.  None of our short-term bank loans have financial covenants.  However, each loan contains a covenant restricting our use of the funds received to either purchases of raw materials or working capital.
 
The weighted average annual interest rate of our short-term bank loans was 5.5% and 6.42% as of December 31, 2009 and 2008, respectively.  Interest expense was $1.5 and $1.9 million for the years ended December 31, 2009 and 2008, respectively.
 
We have not experienced any difficulties in the acquisition and rollover of the short-term bank loans that we use to fund our daily operations.  We anticipate rollovers of all current facilities that are set to mature in the 2010 and do not anticipate a reduction in the availability of short-term bank loans to fund our operations and meet our growth objectives.

 
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Working Capital
 
Our working capital was approximately $2.8 million at December 31, 2009 as compared to $(8.2 million) at December 31, 2008, which increase was due primarily to a $4.6 million increase in cash and cash equivalents, a $10.4 million increase in accounts receivable, a $1.8 million note receivable from a related party and a $0.9 million increase in inventories, offset by a $9.5 million increase in short-term bank loans and bank acceptance notes and a $2.3 million increase in customer deposits.
 
Note Payable
 
We borrow money from our chairman, Dr. Tang, from time to time, in order to assist with our working capital needs.  As of December 31, 2009, the amount outstanding from such loans was approximately $12.8 million.
 
Cash Flows
 
The following table sets forth a summary of our net cash flow information for the periods indicated:
 
(All amounts in U.S. dollars)
 
   
Year Ended December 31,
 
   
2009
   
2008
 
   
(Audited)
   
(Audited)
 
Net cash used in operating activities
  $ (2,769,330 )   $ (2,234,087 )
Net cash used in investing activities
    (209,511 )     (2,666,665 )
Net cash provided by financing activities
    7,558,779       345,059  

Operating Activities
 
Net cash used in operating activities was approximately $2.8 million in 2009, as compared to $2.2 million in 2008.  This increase in cash used in operating activities was primarily attributable to a $10.4 million increase in accounts receivable in 2009 as compared to a $1.0 million decrease in 2008 due to a shift in sales, with sales to international customers decreasing significantly in 2009, and $1.8 million in notes receivable from a related party in 2009.  This increase in cash used was offset by an increase in our net income for the reasons discussed above under “Results of Operations,” a smaller increase in inventories in 2009 as compared to 2008 because we increased inventories significantly in 2008 in anticipation of the increase in steel prices at the end of 2008, and a smaller increase in prepayments in 2009 as compared to 2008 as a result of required prepayments to a new customer in 2008.
 
Investing Activities
 
Net cash used in investing activities was approximately $0.2 million in 2009, as compared to $2.7 million in 2008.  This decrease in cash used in investing activities was attributable to a smaller increase in purchases of plant and equipment in 2009.  Specifically, in 2008 we incurred approximately $2.3 million of expenditures in connection with the purchase of equipment for a new production line.
 
Financing Activities
 
Net cash provided by financing activities for the year ended December 31, 2009 was approximately $7.6 million, as compared to approximately $0.3 million in 2008.  The increase in cash provided by financing activities was primarily due to increased proceeds from short-term bank loans, which were used to purchase raw materials and other working capital requirements, a smaller increase in restricted cash, representing amounts held by banks as security for bank acceptance notes, a decrease in repayments of notes payable to a related party and cash dividends in 2009, offset by an increase in repayments of short-term bank loans and a decrease in proceeds from notes payable.  In 2008, Ossen Materials and Ossen Jiujiang paid an aggregate of $2.4 million in cash dividends to their shareholders, which dividends were declared in 2007.

 
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Capital Expenditures
 
Our capital expenditures consist primarily of expenditures on property, plant and equipment. Capital expenditures on property, plant and equipment were $2.9 million in 2007, $2.3 million in 2008 and $0.2 million in 2009. We financed our capital expenditure requirements from the cash flows generated by our operating activities and from short-term bank loans.  We have no current commitments for capital expenditures.
 
Contractual Obligations
 
Our contractual obligations consist of short-term debt obligations.  The following table sets forth a breakdown of our contractual obligations as of December 31, 2009:
 
   
Payments due by period (in thousands of dollars)
 
Contractual Obligations
 
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
   
($US in Thousands)
 
Short-term debt obligations (1)
    47,095,302       47,095,302       -       -       -  
 

(1) Attributable to short-term bank loans.

Quantitative and Qualitative Disclosures about Market Risk
 
Financial instruments that expose us to concentrations of credit risk primarily consist of cash and accounts receivables. The maximum amount of loss due to credit risk in the event of other parties failing to perform their obligations is represented by the carrying amount of each financial asset as stated in our consolidated balance sheets.
 
As of December 31, 2009 and 2008, substantially all of our cash included bank deposits in accounts maintained within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, we have not experienced any losses in such accounts and we believe we are not exposed to any significant risks on our cash in bank accounts.
 
We are exposed to various types of market risks, including changes in foreign exchange rates, commodity prices and inflation in the normal course of business.
 
Interest rate risk
 
We are subject to risks resulting from fluctuations in interest rates on our bank balances. A substantial portion of our cash is held in China in interest bearing bank deposits and denominated in RMB. To the extent that we may need to raise debt financing in the future, upward fluctuations in interest rates would increase the cost of new debt. We do not currently use any derivative instruments to manage our interest rate risk.
 
Commodity price risk
 
Certain raw materials used by us are subject to price volatility caused by supply conditions, political and economic variables and other unpredictable factors. The primary purpose of our commodity price management activities is to manage the volatility associated with purchases of commodities in the normal course of business. We do not speculate on commodity prices.

 
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Foreign exchange risk
 
The RMB is not a freely convertible currency. The PRC government may take actions that could cause future exchange rates to vary significantly from current or historical exchange rates. Fluctuations in exchange rates may adversely affect the value of any dividends we declare.
 
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations.  To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
 
Inflation risk
 
In recent years, China has not experienced significant inflation or deflation and thus inflation and deflation have not had a significant effect on our business during the past three years. Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results.  A high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase proportionately with these increased costs.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.
 
Change in Accountants
 
On July 7, 2010, our board of directors approved the engagement of Sherb & Co., LLP as our independent registered public accounting firm for the year ending December 31, 2009. The board determined not to renew the engagement of Li & Company, PC as our independent registered public accounting firm.
 
The Board determined to engage Sherb & Co., LLP in order to realize economies and efficiencies, since Sherb & Co., LLP acted as the independent registered public accounting firm for Ossen prior to the business combination.
 
The report of Li & Company, PC on the financial statements of the Company as of February 28, 2010 did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.
 
In connection with the audit of our financial statements for the period ended February 28, 2010, there were no disagreements with Li & Company, PC on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Li & Company, PC, would have caused Li & Company, PC to make reference to the matter of such disagreements in their reports.
 
We engaged Sherb & Co., LLP as our new independent registered public accounting firm as of July 7, 2010. During our two most recent fiscal years neither our company nor anyone on its behalf has consulted with Sherb & Co., LLP regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements, and neither a written report was provided to us nor oral advice was provided by Sherb & Co. that was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement, as that term is defined by SEC regulations, or a reportable event, as that term is defined by SEC regulations.

 
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CORPORATE STRUCTURE AND ORGANIZATION
 
We are a British Virgin Islands limited liability company organized on January 21, 2010 under the BVI Act under the name Ultra Glory International Ltd., or Ultra Glory, as a blank check company for the purpose of acquiring, through a share exchange, asset acquisition or other similar business combination, an operating business.
 
Business Combination
 
On July 7, 2010, Ultra Glory and its sole shareholder entered into a share exchange agreement with Ossen Innovation Group, a British Virgin Islands limited liability company organized on April 30, 2010 under the BVI Act and the shareholders of Ossen Innovation Group. Pursuant to the share exchange agreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group all of the issued and outstanding shares of Ossen Innovation Group, in exchange for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra Glory to the shareholders of Ossen Innovation Group.  In addition, the sole shareholder of Ultra Glory sold all of the 5,000,000 ordinary shares of Ultra Glory that were issued and outstanding prior to the business combination, to the shareholders of Ossen Innovation Group for cash, at a price of $0.03 per share.  As a result, the individuals and entities that owned shares of Ossen Innovation Group prior to the business combination acquired 100% of the equity of Ultra Glory, and Ultra Glory acquired 100% of the equity of Ossen Innovation Group.  Ossen Innovation Group is now a wholly owned subsidiary of Ultra Glory.  In conjunction with the business combination, Ultra Glory filed an amended charter, pursuant to which Ultra Glory changed its name to Ossen Innovation Co., Ltd., changed its fiscal year end to December 31, changed the par value of its ordinary shares to $0.01 per share and increased its authorized shares to 100,000,000.  Upon the consummation of the business combination, we ceased to be a shell company.
 
Our Shareholders
 
Dr. Tang, our chairman, owns 100% of the shares of Effectual Strength Enterprises Ltd., a British Virgin Islands company, which owned 79% of the shares of Ossen Innovation Group prior to the business combination, and owns 79% of our shares since the business combination.  The holders of the remaining 21% of our shares are investors that are residents of the PRC and are unaffiliated with Ossen.
 
Our Subsidiaries
 
British Virgin Islands Companies
 
Ossen Innovation Group, our wholly owned subsidiary, is the sole shareholder of two holding companies organized in the British Virgin Islands: Ossen Group (Asia) Co., Ltd., or Ossen Asia, and Topchina Development Group Ltd., or Topchina.  All of the equity of Ossen Asia and Topchina had been held by Dr. Tang, our Chairman, since inception.  In May 2010, Dr. Tang transferred these shares to Ossen Innovation Group in anticipation of the public listing of our company’s shares in the United States.
 
Ossen Asia is a British Virgin Islands limited liability company organized on February 7, 2002.  Ossen Asia has one direct operating subsidiary in China, Ossen Innovation Materials Co. Ltd., or Ossen Materials.  Ossen Asia owns 81% of the equity of Ossen Materials.
 
Topchina is a British Virgin Islands limited liability company organized on November 3, 2004.  Ossen Materials and Topchina directly own an operating subsidiary in China, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., or Ossen Jiujiang.  Ossen Materials owns 75% of the equity of Ossen Jiujiang and Topchina owns 25%.
 
Ossen Materials
 
Ossen Materials was formed in China on October 27, 2004 as a Sino-foreign joint venture limited liability company under the name Ossen (Ma’anshan) Steel Wire and Cable Co., Ltd.  On May 8, 2008, Ossen Materials was restructured from a Sino-foreign joint venture limited liability company to a corporation.  The name of the entity was changed at that time to Ossen Innovation Materials Co., Ltd.

 
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Ossen Asia owns 81% of the equity of Ossen Materials.  The remaining 19% is held in the aggregate by four Chinese entities, two of which are controlled by Chinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a company whose shares are listed on the Shanghai Stock Exchange, and one of which is controlled by Chinese citizens.
 
Through Ossen Materials, we have manufactured and sold plain surface PC strands, galvanized PC steel wires and PC wires in our Maanshan City facility since 2004.  The primary products manufactured in this facility are our plain surface PC strands.  The primary markets for the products manufactured at our Maanshan facility are Anhui Province, Jiangsu Province, Zhejiang Province and Shanghai City, each in the PRC.
 
Ossen Jiujiang
 
On April 6, 2005, Ossen Shanghai Investment Co., Ltd., or Ossen Shanghai, acquired a portion of the bankruptcy assets of Jiujiang Tianlong Galvanized Prestressing Steel Strand LLC, including equipment, land use rights and inventory, for approximately $3.9 million.  Ossen Jiujiang was formed by Ossen Shanghai in the PRC as a Sino-foreign joint venture limited liability company on April 13, 2005.  Ossen Shanghai then transferred the newly acquired assets to Ossen Jiujiang. At its inception, Ossen Jiujiang was owned by two entities: 33.3% of its equity was held by Ossen Asia and 66.7% by Ossen Shanghai.  Ossen Shanghai is a Chinese company owned by five Chinese individuals, one of whom is a director of our subsidiary, Ossen Materials. In June 2005, Ossen Shanghai transferred its entire interest in Ossen Jiujiang to Topchina in exchange for approximately $2.9 million. In October 2007, Topchina transferred 41.7% of the equity in Ossen Jiujiang to Ossen Asia for no consideration. On December 17, 2007, Ossen Asia transferred all of its shares in Ossen Jiujiang to Ossen Materials for no consideration.  Since that date, 75% of the equity of Ossen Jiujiang has been held by Ossen Materials and 25% by Topchina.
 
Through Ossen Jiujiang, we manufacture galvanized PC wires, plain surface PC strands, galvanized PC strands, unbonded PC strands, helical rib PC wires, sleeper PC wires and indented PC wires.  The primary products manufactured in this facility are our galvanized PC wires.  The primary markets for the PC strands manufactured in our Jiujiang facility are Jiangxi Province, Wuhan Province, Hunan Province, Fujian Province and Sichuan Province, each in the PRC.

 
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Organizational Structure Chart
 
The following chart reflects our organizational structure since the date of the business combination between Ultra Glory and the shareholders of Ossen Innovation Group:



 
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BUSINESS
 
Overview
 
We manufacture and sell an array of plain surface and rare earth galvanized prestressed steel materials, which we believe is the most comprehensive amongst our competitors in China.  Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province, in the People’s Republic of China. According to the PRC PC Strand Industry Investment and Market Operation Research Report, in 2008, our products were ranked third in sales in the PRC for rare earth coated prestressed concrete, or PC, strands and ranked first in export sales of these materials by Chinese prestressed steel manufacturers.
 
Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in the design, engineering, manufacture and sale of customized prestressed steel materials used in the construction of railways, highways, bridges and buildings in China.  Ossen is a member of the China Prestressed Association.  The primary characteristics that make our prestressed steel products suitable for this wide range of projects are their high strength and low relaxation rate.  Prestressed materials of high strength and low relaxation, which comprised approximately 80% of our revenues in 2009, are currently in high demand in major construction projects in China.  Since 2007, we believe that we have also been one of the leading Chinese exporters of customized prestressed steel materials to other countries, including the United States, Canada, Spain, Italy and South Asian countries.
 
Ossen’s product offerings incorporate proprietary designs and are known for their high level of reliability and performance. Our products are marketed under the “Ossen” brand name both domestically and internationally. Our management’s core strategy is to leverage our expertise in research and development of customized products by providing solutions to our customers’ unique needs, as evidenced by our continuous introduction of new product lines since our inception. We handle all aspects of market research, product design, engineering, manufacturing, sales and marketing.  We conduct our manufacturing operations in our ISO 9001 manufacturing facilities in Maanshan City and Jiujiang City, in the PRC.
 
Our facilities are strategically located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province, in the People’s Republic of China.  Maanshan is the steel capital of the PRC.  In addition, Maanshan and Jiujianh are located on the Changjiang River, which enables us to obtain supply shipments and to deliver products by shipping raw materials and products across the river.  We currently utilize a dock in Jiujiang for many of our shipments.
 
Ossen Materials, our operating subsidiary, was founded in 2004.  In 2005, we expanded our manufacturing capabilities by acquiring a facility in Jiujiang City in the PRC and forming Ossen Jiujiang.  The founders of Ossen were among the first in China to introduce and promote the use of prestressed steel materials in construction projects. The founders of Ossen have been involved in producing prestressed materials since 1994 and have accumulated more than 15 years of experience in the prestressed materials industry.
 
We are affiliated with the Ossen Group, which is a Chinese conglomerate controlled by our Chairman, Dr. Tang. The Ossen Group’s core businesses include steel manufacturing, real estate and other investments.  There is no active business relationship between our company and any of the other entities that comprise the Ossen Group other than what we have disclosed under the heading “Certain Relationships and Related Party Transactions” below.
 
Our Growth Strategy
 
We intend to expand our industry position while maximizing shareholder value and pursuing a growth strategy that includes increasing our production capacity and strengthening our relationships with key customers, diversifying our customer base and pursuing strategic relationships and acquisition opportunities.

 
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Increasing our production capacity and developing new higher margin products.
 
We intend to increase our production capacity from 140,000 tons to 200,000 tons in the months following this offering.  We intend to construct a new building on empty land located in our Maanshan facility and to install eight new production lines which will be used for the production of an aggregate of approximately 60,000 tons of higher margin coated prestressed materials, including coated wires.  The expected cost of this expansion is approximately $25 million.
 
We believe that the expansion of our production capacity will enable us to benefit from the continued growth in overall demand for prestressed steel materials in China.  We intend to sell the added products to new and existing customers in China. In addition, if we are successful in securing orders, we could sell to customers in the United States because the anti-dumping measures recently imposed by the U.S. on Chinese steel exporters do not cover these coated materials.
 
Strengthening our relationships with key customers and diversifying our customer base.
 
We intend to strengthen our relationships with key customers while further expanding our customer base. We plan to continue providing high-quality and cost-competitive products to our existing customers and to use our existing customer network and strong industry reputation to expand into new regions within the PRC, beyond the local regions in which we currently sell our products, and internationally.  We intend to continue to use customer feedback to improve the quality of our products and technical after-sales services and to strengthen our long-term base of domestic and international customers.
 
Pursuing strategic relationships and acquisition opportunities
 
We intend to evaluate and pursue acquisition opportunities and strategic partner relationships which could enhance our product offerings, customer base or geographic reach, or which could allow us to achieve economies of scale and operating efficiencies.  We currently have no plans, agreements or commitments with respect to any material acquisitions or strategic relationships.
 
Competitive Advantages
 
Our management believes that the following competitive strengths differentiate us from other domestic and international competitors and are the key factors to our success:
 
We are Taking Advantage of Industry Trends
 
Due to the demand for prestressed materials in infrastructure construction and the domestic PRC market, we believe that our industry will grow significantly for at least the next five years. Specifically, we expect the market for premium rare earth products, including rare earth galvanized prestressed steel strands and wires, which are used in the construction of bridges and highways, to grow in the PRC during this period.
 
Many reports indicate that our industry will experience significant growth in the coming years. For example, based on the 11th five-year plan for highway and waterway transportation by the Ministry of Transportation of the PRC, the government plans to invest $730 billion in the national highway network from 2009 to 2013, which drives huge demand for prestressed materials.  Similarly, the Railway Network Plan issued by the Ministry of Railways of the PRC has indicated that $290 billion will be invested in railway construction from 2009 to 2013, which further drives the demands for prestressed materials. From now until 2020, we believe that 200 new bridges will be built on dozens of rivers in the PRC, including the Yangtze River, Yellow River, Songhua River, Jiangxi River, Xiangjiang River, Han River, Minjiang River and Pearl River. The bridge projects will require approximately 6 million tons of rare earth galvanized prestressed materials in the aggregate.
 
In addition, over the next decade, China is expected to build four cross-sea bridges and tunnels, such as the Bohai Bay Cross-Sea Bridge, the Hong Kong-Zhuhai-Macao Cross-Sea Bridge, the Qiongzhou Strait Bridge and the Taiwan Strait Tunnel. These projects are expected to require approximately 8 million tons of rare earth galvanized prestressed materials.

 
52

 

The China National Nuclear Industry Group has estimated that the PRC government will invest approximately $60 billion by 2020 for nuclear power construction, which would require approximately two million tons of prestressed materials. Further, the ongoing building of a large number of rural roads, highways and buildings should continue to generate significant demands for prestressed materials.
 
Leading Provider of Customized Prestressed Steel Materials
 
Based on our extensive experience in the industry, we believe that Ossen is one of the leading providers in the design, engineering, manufacture and sale of customized prestressed steel materials used in the construction of railways, highways, bridges and buildings in China and exported from China. Based on our estimates, we believe that in 2008, Ossen held a market share of approximately 30% in China for certain of its coated prestressed steel products and 58.9% in export sales of these materials from China. China is investing heavily in transportation infrastructure, including railways and highways. Our management anticipates a growing demand for these materials.
 
Strong In-House Design Capabilities
 
Our design and engineering team consists of members educated in top universities in China, and our management team has fifteen years of industry experience on average. We have built a recognized brand name in the industry by introducing innovative solutions to the prestressed steel industry in China and internationally. Our engineering team works closely with our customers in order to understand their requirements. We have been able to introduce new equipment to enhance cost saving and time reduction in the construction of bridges, highways, railways and buildings, as well as numerous other projects.
 
Efficient Proprietary Production Technology
 
We continually pursue technological improvements to our manufacturing processes via our strong in-house development teams. We have been granted ten patents by the State Intellectual Property Office of the PRC, including one invention patent and nine utility model patents. In addition, we have applied for an additional thirteen invention patents and seven utility model patents, which are currently pending. These patents and patent applications are intended to protect our technologies, including production processes of various wire ropes, pickling methods for steel wire materials and devices designed for the production of steel wire. Our research and development efforts have generated technological improvements that have been instrumental in controlling our production costs and increasing our operational efficiency.
 
Strong Recognition from Domestic and International Customers for Building Projects
 
The solid reputation that our management team has developed over the past 15 years in the prestressed material industry in China and in other countries such as Canada, the United States, South Korea, Italy and Spain, including an established track record for consistently providing quality products at competitive prices, has enabled us to develop a strong customer base and to be involved in major building projects.  Some of our recent projects are listed below under the heading “Recent Projects.”
 
Rigorous Quality Control Standards
 
Consistent with our continuing commitment to quality, we impose rigorous quality control standards at various stages of our production process.  We strictly comply with various national and international quality standards with respect to the manufacture of prestressed materials. Our certifications and accreditations include the United Kingdom Accreditation Service (UKAS), the British Standards Institution (BSI) certification, the Korean Standards Association (KS) certification from South Korea, the Market Access certification from the Spanish Ministry of Industry and an ISO 9001 certification.  We believe that these certifications, together with the numerous national awards that we have been awarded demonstrate our commitment to producing high-quality products as well as providing us with a competitive advantage over some of our competitors in certain international markets and in China.

 
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Experienced Management and Operational Teams with Domestic PRC Market Knowledge
 
Our senior management team and key operating personnel have extensive management skills, relevant operating experience and industry knowledge.  In particular, Dr. Tang, our Chairman, is a Doctor of Economics, Senior Engineer and Professor of Finance and Statistics at the School of East China Normal University, and has extensive experience managing and operating companies in the prestressed steel industry.  We believe our management team’s experience and in depth knowledge of the market in China will enable us to continue to successfully execute our expansion strategies. In addition, we believe our management team’s strong track record will enable us to continue to take advantage of market opportunities that may arise.
 
Our Products
 
Our prestressed steel materials are categorized as plain surface products and rare earth coated products.
 
Plain Surface Products
 
Our plain surface products are characterized as follows:
 
 
Plain surface prestressed concrete, or PC, strands.  These products consist of PC wires that are twisted into a bundle and used as precast concrete plates on the riding surface of bridges.  These products are categorized based on size, strength and structure.  Sizes range from 9.3mm to 17.8mm.  Strength level ranges from 1570MPa (megapascal) to 2000MPa.  The number of strands in the products varies between 3 and 7.
 
 
Unbonded plain surface PC strands.  These products consist of plain surface PC strands that are coated with grease and extruded with high-density polyethylene. These products are used primarily in the construction of bridges and buildings.
 
 
PC wires.  These products are further divided among the following three categories:
 
 
§
Plain surface PC wires.  This product consists of an individual round wire used in the construction of buildings.
 
 
§
Indented PC wires.  This product consists of an individual round wire that contains an indentation used in the construction of buildings.
 
 
§
Helical (spiral) rib PC wires.  This product consists of an individual round wire whose surface is pulled out into a helical rib pattern used in the construction of railway ties, or sleepers, and buildings.
 
PC wires are categorized based on size, strength and structure.  Sizes range from 4.0mm to 9.0mm.  Strength level ranges from 1570MPa to 2000MPa.  The number of strands in the products varies between 3 and 7.
 
Rare Earth Coated Prestressed Products
 
Our rare earth coated prestressed products are characterized as follows:
 
Rare earth coated PC wires.  These products are further divided as follows:
 
 
§
Ф5.0 Series, used for suspension bridges.
 
§
Ф7.0 Series, used for cable-stayed bridges.
 
 
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Rare earth coated PC strands, used for bridges and buildings.
 
Rare earth coated products are plain surface materials that are galvanized, or coated, with a rare earth zinc-plating protective layer so as to produce materials that are more corrosion-resistant and long-lasting. The purpose of galvanizing is to generate a surface layer to protect the materials from erosion, abrasion and oxidization, without changing the elements of the basic materials or weakening the basic material’s strength or other functionality through any techniques that utilize physical chemistry or electrochemistry.  The coating process can cause loss of strength in regular steel materials, but the loss of strength in galvanized prestressed products is minimal.
 
Customers that purchase our prestressed materials also purchase other supporting products, such as anchorage devices and ripple tubes, to complement our materials. These supplementary products are produced by anchorage manufacturing factories that are unaffiliated with us.
 
Competition

China is one of the world’s largest producers and markets for prestressed steel materials. In 2009, our sales were predominantly to customers located in the PRC, and as a result, our primary competitors were PRC domestic companies. To a lesser degree, we faced competition from international companies.  However, as our sales to international markets increase from 2009 levels, we expect to face increasing competition from international companies in those markets.
 
We believe that being located in China provides us with a number of competitive factors within our industry, including the following:
 
 
·
Pricing.   Flexibility to control pricing of products and the ability to use economies of scale to secure competitive pricing advantages;
 
 
·
Technology.   Ability to manufacture products efficiently, utilize low-cost raw materials, and to achieve better production quality; and
 
 
·
Barriers to entry.   Technical knowledge, access to capital, local market knowledge and established relationships with suppliers and customers to support the development of commercially viable production facilities and products.
 
Competition among manufacturers of plain surface steel products in China can be characterized as fragmented, with many large and small companies competing with each other.  Our primary competitors for these products are Jiangyin Foster, Jiangxi Xinhua, Baosteel Group Shanghai Ergang Co. Ltd. and Jiangyin Wabin Steel Cable Co. Ltd.
 
Competition among manufacturers of coated steel products in China is limited to a small group of companies.  Our main competitors for these products are Baosteel Group Shanghai Ergang Co. Ltd. and Jiangyin Wabin Steel Cable Co. Ltd.  We believe that we differentiate ourselves because we have built a recognized brand name in the industry and because we offer superior product quality, timely delivery and high value. We believe that we have the following advantages over many of our competitors:
 
 
·
the performance and cost effectiveness of our products;
 
 
·
our ability to manufacture and deliver products in required volumes, on a timely basis, and at competitive prices;
 
 
·
superior quality and reliability of our products;
 
 
·
our after-sale support capabilities, from both an engineering and an operational perspective;
 
 
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·
effectiveness of customer service and our ability to send experienced operators and engineers as well as a seasoned sales force to assist our customers; and
 
 
·
overall management capability.

Seasonality
 
Demand for our products remains fairly consistent throughout the year.
 
Our Raw Materials and Supply
 
Raw Materials
 
High carbon steel wire rods are the primary raw material required to manufacture prestressed steel materials. The quality and cost of the rods we purchase differ between our plain surface products and our coated products. Coated products require higher-priced rods that are higher in purity and durability.  The price for certain rods needed for coated products is approximately $150 per ton higher than rods needed for plain surface products.  B87 MnQL, a type of high carbon steel wire rod, is the most expensive material that we purchase from Chinese suppliers, costing as much as approximately $1,000 per ton.  DLP, a type of high carbon steel wire rod that we import from Japan, is the most expensive material that we purchase overall, costing as much as approximately $1,500 per ton.
 
Our Supply Sources
 
We select our suppliers by assessing criteria such as the quality of materials supplied, the duration of the supplier’s business relationship with us, pricing, delivery reliability and response time to orders placed by us.  To minimize purchasing costs, we use a limited number of suppliers.  Because we purchase substantial quantities from these suppliers, we are often able to procure these products at competitive prices.  We usually enter into a one-year purchase agreement with each supplier and then order on a spot basis for each delivery.  We negotiate pricing with our suppliers on an arm’s length basis prior to the delivery of these supplies to us, based upon the prevailing market prices at such time.  As we increase the scale of our production, we may need to establish a more diverse supplier network while attempting to continue to leverage our purchasing power to obtain favorable pricing and delivery and payment terms.
 
Historically, we purchased a significant percentage of our raw materials from an affiliated entity, Shanghai Z.F.X. Steel Co., Ltd., or Shanghai ZFX, a supplier of steel wire rods, which is controlled by our chairman, Dr. Tang.  In 2008 and 2009, we purchased approximately 26.2% and 12.8% of our raw materials from Shanghai ZFX, respectively.  We expect that we will continue to purchase the bulk of our supplies from unaffiliated suppliers in the future, as we did in 2009.
 
The three suppliers that are unaffiliated with us that supplied us with a significant percentage of our raw materials in 2008 or 2009 were Zhangjiagang Free Trade Zone JinDe Trading Co., Ltd., Jiangsu Shagang and LiaoNing TongDa Building Material Industrial, all based in China.  
 
Purchases from our five largest suppliers amounted to 86.5% and 89.5% of our raw material purchases in 2008 and 2009, respectively.
 
We are not dependent on any one of our suppliers, as we are able to source raw materials from alternative vendors should the need arise.  We have not experienced significant production disruptions due to a supply shortage from our suppliers, nor have we had any major dispute with a material supplier.
 
Volatility of Price of Raw Materials
 
We have no long-term, fixed-price steel purchase contracts.  When steel prices increase, as they did in 2008, competitive conditions will influence how much of the price increase we can pass on to our customers.  When steel prices decline, as they did in the fourth quarter of 2008 and through the first half of 2009, customer demands for lower prices and our competitors' responses to those demands could result in lower sale prices, lower margins and inventory valued at lower of cost or market adjustments as we use existing steel inventory.

 
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Manufacturing Process
 
Equipment
 
Our production facilities use innovative equipment and machinery imported from France and Italy and is of the highest quality in metal wire drawing, wire stranding, zinc plating and finishing. Our production lines produce prestressed steel materials that meet quality standards mandated by numerous countries, including Spain, the United Kingdom and South Korea.
 
We own cutting edge technologies in over 20 high-tech fields, including oil-immersion preservation technology, new coating production technology, skin pass coating technology, coating stabilization technology, rare earth alloy plating technology, new high-temperature phosphorization heating technology, new material traction technology, rare earth alloy technology, new fixed scoring technology, new high-temperature low-speed thread stripping technology, and double coating stabilization, among others.  We believe that we are the leading company in our industry with respect to the implementation of innovative technologies in the manufacture of prestressed steel materials.
 
Production Process
 
The production of our products involves various steps, including inspection, pickling, washing, rinsing, phosphatizing, boronizing, surface treatment, plating, baking, coating, cooling, polishing, inspection and packaging.  The technology and procedures used in the above processes vary among the different products that we manufacture and depend upon the product specifications prescribed by a particular customer.
 
Generally, the manufacturing process involves the following:
 
 
·
Cleaning steel wire rods or other similar raw materials by chemical pickling, mechanical de-scaling or a similar process.  The materials are then cold drawn and reduced until the desired diameter and resistance characteristics are achieved. This process is what provides the material with its strength.
 
 
·
In the production of strands, the individual wires (either 3 or 7 wires) are braided together to form a strand.
 
 
·
The final step is to subject the steel material to a thermo-chemical process which endows the material with mechanical properties, such as low relaxation, which enable the material to last over time.
 
Production Lines
 
We currently have 18 production lines, consisting of the following:
 
 
·
Two surface treatment production lines, one located in our Maanshan facility and one in our Jiujiang facility, each composed of an acid pickling bath, rinsing bath, high pressure water rinsing bath, phosphating bath, saponification (boronizing) bath and cleaning bath.
 
 
·
Seven wire drawing production lines, four located in our Maanshan facility and three in our Jiujiang facility, each composed of a pay-off machine, drawn can and take-up machine. Each of our half-finished products is processed on a wire drawing production line.
 
 
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·
Three PC strand stabilization treatment production lines, two located in our Maanshan facility and one in our Jiujiang facility, each composed of stranding machines, straightening wheels, jockey wheels, medium frequency furnace, cooling tank, take-up and pay-off machines, a wire arraying machine and a layer winding machine.  The PC strand stabilization product lines in our Jiujiang facility produce plain surface PC strands and galvanized PC strands of various specifications.
 
 
·
One zinc galvanization production line, located in our Jiujiang facility, composed of a pay-off machine, degreasing furnace, acid rinsing pickling tank, assistant plating tank, drying furnace, galvanizing furnace, drawing tower and take-up machine. Half-finished products needed for different series of rare earth galvanized PC wires and strands are produced on this line.
 
 
·
Two surface finishing production lines, both located in our Jiujiang facility, each composed of a pay-off machine, a finishing machine and a take-up machine. These production lines are used to produce half-finished products of rare earth galvanized PC wires and strands.
 
 
·
Two PC wire stabilization treatment production lines, both located in our Jiujiang facility, each composed of a pay-off machine, jockey wheel, straightening machine, indent marking machine, medium frequency furnace, cooling tank, towing machine, shearing machine and take-up machine. Zinc galvanized PC wires, round PC wires, indented PC wires and helical rib PC wires are produced on these production lines.
 
 
·
One unbonded PC strand production line, located in our Jiujiang facility, composed of a pay-off machine, oiling machine, high-density polyethylene plastic injection machine, water tank, towing machine and take-up machine. This production line is used to produce different series of unbonded plain surface PC strands and unbonded galvanized PC strands.
 
Quality Control
 
Consistent with our continuing commitment to quality, we impose rigorous quality control standards at various stages in the production process.  In addition, our facilities are equipped with first-class testing equipment, such as a tensile strength tester and a relaxation tester, which guarantee the high quality and safety of our products.
 
We strictly comply with various national and international quality standards with respect to the manufacture of pre-stressed materials. Our certifications and accreditations include the United Kingdom Accreditation Service (UKAS), the British Standards Institution (BSI) certification, the Korean Standards Association (KS) certification from South Korea, Market Access certification from the Spanish Ministry of Industry and an ISO 9001 certification.
 
Our procedure when discovering any product quality problem in the production process includes immediate shut down for inspection. Once the problem is solved, we continue with production.  If a problem occurs with a product, the product inspector stamps a nonconformity seal and hangs a nonconformity label on the problematical product. The nonconforming product is moved to a separate area and is not transferred to the next procedure. We do not deliver nonconforming products to users.
 
Facilities
 
Under PRC law, land is owned by the state.  “Land use rights” are granted to an individual or entity after payment of a land use right fee is made to the applicable state or rural collective economic organization. Land use rights allow the holder the right to use the land for a specified long-term period.
 
We have land-use rights for facilities at two locations in the PRC, one in Maanshan City, Anhui Province and one in Jiujiang City, Jiangxi Province, which are utilized for production, research and development and employee living quarters.  We have paid all amounts relating to these properties. The land-use rights for our Maanshan facility expires in 2058 and the rights for our Jiujiang facilities expire at different intervals, ranging from 2055 to 2057.  Our facilities cover an aggregate of approximately 106,136 square meters.

 
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As of December 31, 2009, our production facility in Maanshan City had a total gross floor area of approximately 47,356 square meters and we employed 63 production personnel at that facility. Our Maanshan facility contained seven production lines with an annual production capacity of approximately 80,392 tons in 2009.  As of December 31, 2009, our production facility in Jiujiang City had a total gross floor area of approximately 58,780 square meters and we employed 65 production personnel at that facility. Our Jiujiang facility contained eleven production lines with an annual production capacity of approximately 46,495 tons in 2009. Historically, we have not experienced any form of disruption in our production facilities.
 
We believe that our current property rights are sufficient for our current operations. However, to continue growth, we expect to expand our production capacity in the future.
 
Sales, Marketing and Distribution
 
Sales and Marketing
 
We have been successful to date in maintaining long-term relationships with numerous customers by satisfying their commercial needs. In addition, our marketing team monitors the market and responds accordingly in order to increase our customer base. We have a dedicated marketing and sales team of 11 employees that proactively follows up on new sales leads.
 
Our marketing team develops strategies for the short-term and long-term by obtaining first-hand information about our products’ market positioning, monitoring national macro-economic policies, inquiring about current and future markets needs, following the progress of existing projects and the satisfaction of existing customers.  In addition, our technicians and marketing specialists regularly visit governmental departments, construction development companies, design institutes, supervision institutions, national construction quality inspection institutions and builders to promote new products.  We have also joined the PRC national bridge exhibition for marketing purposes.
 
Bidding Process
 
Many of the projects in our industry are awarded through a competitive bidding process among qualified bidders. The evaluation of proposals is undertaken objectively, consistently and without bias towards particular bidders. Qualified bidders are evaluated against a predetermined set of criteria, and contracts are almost never awarded on the basis of price alone. A contract is awarded to the bidder or bidders that provide what is considered a proposal that offers the best value to the purchaser, as determined by the predetermined criteria set by the purchaser. The criteria vary depending on the type of contract. Examples of criteria include price, technical merit, flexibility to future changes to requirements, speed of project delivery, sustainability and quality.  During the bid evaluation process, our marketing team and members of our management respond to various inquiries and our company undergoes various assessments, including compliance, technical, commercial bid and qualification assessments.
 
Distribution
 
Both of our manufacturing plants are equipped with facilities for cargo lifting, shipment and distribution. Products for domestic customers are distributed to the destination designated by our customers. Products for international customers are delivered either to carriers at various ports of exit in China or delivered to a designated destination overseas.
 
Technical After-Sales Services
 
Our team of experienced engineers and technicians provides after-sales services to our customers.  After the delivery of our materials, our engineers train our customers to install and identify and address safety and maintenance concerns.  After a sale of our product, we introduce and advertise the company brand position, distribute a guide application method process, issue regulation manuals, and explain and solve general and difficult problems.

 
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Our Customers

We sell the majority of our products domestically in China.  Since our inception, we have also exported our products to foreign countries, including the United States, Spain, South Korea and Saudi Arabia, among others.  Our customers are diverse in nature, as we sell our products directly to end users, to other manufacturers and to distributors, in each case depending on the nature of the product and the utilization of the product.
 
The six customers whose purchases comprised a significant percentage of our sales in 2008 or 2009 were Shanghai Zhaoyang New Metal Material (China), the Crispin Corporation (United States), Ibercordones Pretensados (Spain), National Metal Manufacturing and Casting Co. (Saudi Arabia), Zhangjiagang Ruifeng Iron and Steel Co. (China) and Hada Railway Passenger Dedicated Lines (China).  
 
While we value our relationship with each of our customers, we believe that generally the loss of any particular customer, including our largest customers, would not materially impact our business in the long-term.  Many of our customer contracts relate to designated infrastructure projects which are performed during a defined period of time, and are not necessarily long-term in nature.  Accordingly, if any of our customers were to discontinue purchasing our products, we would actively seek new customers, which we have been successful doing in the past.  However, we currently consider our newly established relationship with Zhangjiagang Ruifeng Iron and Steel Co., Ltd. to be important to our business.  In addition, one of our customers, whose sales did not amount to 10% or more of our overall revenues in 2008 or 2009, has been a long-term strategic partner of ours.
 
In anticipation of the imposition of anti-dumping rates by the U.S. and the European Union, which were ultimately implemented in 2009, we discontinued sales of our plain surface materials to Crispin, Ibercordones and our other customers in those regions at the end of 2008.
 
In 2008 and 2009, sales to our six largest customers, in the aggregate, accounted for approximately 81.0%   and 86.7% of our total sales, respectively. The following table provides the name of each customer that contributed to 10% of our revenues in each of 2008 and 2009 and the revenues generated from such customer during these periods.
 
Name of Customer
2008 Revenues
(%)
2009 Revenues
(%)
     
Shanghai Zhaoyang New Metal Material Co., Ltd.
35.8
53.8
     
Crispin Corporation
18.8
*
     
Ibercordones Pretensados S.L.
15.7
*
     
Zhangjiagang Ruifeng Iron and Steel Co., Ltd.
*
17.5

* Less than 10% of our annual revenues.
 
The following table describes the breakdown of our sales in 2008 and 2009 between our domestic and international customers.
 
   
Year   ended   December   31,
 
   
2009
   
2008
 
Domestic Sales
  $ 97,361,596     $ 51,611,646  
International Sales
    3,726,200       31,130,664  
Total Sales
  $ 101,087,796     $ 82,742,310  
 
Recent Projects
 
The following list is a sample of some of the recent projects in which our prestressed steel materials were used in both the domestic and the international markets:

 
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Nanchang New Bayi Bridge, PRC
 
Jiujiang-Lushan Railway Project, PRC
 
Hefei-Bangbu Passenger Dedicated Line, PRC
 
Beijing-Shanghai Express Rail, PRC
             
Shenzhan Bay Bridge, PRC
 
Boyang Lake Railway Bridge, PRC
 
Wenfu Railway, PRC
 
Wuhan-Guangzhou Railway, PRC
             
Pantian Highway, PRC
 
Shanghai No. 6 Subway, PRC
 
Nanjing-Hangzhou Passenger Dedicated Line, PRC
 
Yunnan Shi-Suo Expressway, PRC
             
Alameda Corridor  Turnpike, Alameda, California, U.S.A.
 
MGM Grand Parking, Las Vegas, Nevada, U.S.A.
 
Dallas Center of Performing Arts, Dallas, Texas, U.S.A.
 
Trois Rivieres Grand Anchors, Canada
             
Nam Chang Bridge, South Korea
 
Parking Apron in the Cadiz Airport, Spain
 
Grand Hyatt San Antonio, Texas, U.S.A.
 
Trump Tower, Las Vegas, Nevada, U.S.A.
 
Research and Development

Our research and development efforts are focused on three objectives:
 
 
·
Superior product safety and quality;
 
 
·
Reduction of operating costs; and
 
 
·
Sustaining growth through the development of new products.
 
We have a research and development staff at each of our facilities.  In total, nineteen employees are dedicated to research and development.  We spent $1.1 million, $1.5 million and $1.7 million in 2009, 2008 and 2007, respectively on our research and development activities.
 
We regularly train the members of our research and development department in order to consistently enhance our research and development capabilities in the field of coating technology. We have developed a business model that involves a very close interrelationship between our research and development department and our product development and marketing departments. As a result, we focus our research and development activities on projects that would enable us to branch out our products into new desired markets.  In addition, we conduct research and development activities that enable us to increase our market share in existing markets in the PRC and internationally.  We also focus certain of our research and development activities on higher margin products that can be sold to customers in international markets.
 
Specifically, we have entered into cooperation agreements with Jiujiang Institute pursuant to which the institute assists us in our efforts to improve the comprehensive function and manufacturing technique of our high strength, anti-erosion galvanized prestressed strands.  These high strength products, which have high endurance against erosion, are sold domestically and internationally.  In addition, we are cooperating with other steel manufacturers in research efforts regarding galvanized PC wires, which serve as raw materials for our galvanized PC strands, indented PC wires and helical rib PC wires with high performance and are designed for our international customers.
 
We have also entered into an agreement with the Shanghai Machinery Manufacturing Technology Research Institute.  Pursuant to this agreement, the institute designs high strength, indented PC wire and galvanized PC wire for us according to our specifications.

 
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We believe that our research and development activities and production technology for rare-earth galvanized materials have contributed significantly to our growth.  By using rare earth zinc-plating technology, we are able to lower the temperature for the stabilizing treatment during the production process and thereby minimize the loss of strength during the stabilizing process.  As a result, this technology reduces the level of strength required of our raw materials under circumstances of unvaried finished product strength requirement and enables us to produce materials with greater strength under circumstances in which the strength of raw materials remains firm.  We believe that we are the only enterprise which can produce rare-earth galvanized pre-stressing materials of 1,860 megapascal and 15.20 mm in the world, as a result of our rare earth zinc-plating technology.