Company Quick10K Filing
Fuwei Films
20-F 2019-12-31 Filed 2020-04-28
20-F 2018-12-31 Filed 2019-04-29
20-F 2017-12-31 Filed 2018-04-23
20-F 2016-12-31 Filed 2017-04-06
20-F 2015-12-31 Filed 2016-04-07
20-F 2014-12-31 Filed 2015-04-09
20-F 2013-12-31 Filed 2014-04-11
20-F 2012-12-31 Filed 2013-04-11
20-F 2011-12-31 Filed 2012-04-12
20-F 2010-12-31 Filed 2011-03-25
20-F 2009-12-31 Filed 2010-04-21

FFHL 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4 A. Unsolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing.
Item 10. Additional Information.
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Default, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committee
Item 16E. Purchase of Equity Securities By The Issuer and Affiliated Purchasers
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits.
EX-4.19 v181536_ex4-19.htm
EX-4.20 v181536_ex4-20.htm
EX-4.21 v181536_ex4-21.htm
EX-4.22 v181536_ex4-22.htm
EX-12.1 v181536_ex12-1.htm
EX-12.2 v181536_ex12-2.htm
EX-13.1 v181536_ex13-1.htm

Fuwei Films Earnings 2009-12-31

Balance SheetIncome StatementCash Flow

20-F 1 v181536_20f.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
 
(Mark One)
 
¨
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ___________________
 
OR
 
¨
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report _______________
 
Commission file number: 001-33176
 
Fuwei Films (Holdings) Co., Ltd.
(Exact name of Registrant as specified in its charter)
 

(Translation of Registrant’s name into English)
 
Cayman Islands
(Jurisdiction of incorporation or organization)
 
No. 387 Dongming Road
Weifang Shandong
People’s Republic of China, Postal Code: 261061
(Address of principal executive offices)
 
Huang Meijuan
 
Tel: +86 10-68522612
 
fuweiir@fuweifilms.com
 
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class
Name of each exchange on which registered
   
Ordinary Shares
NASDAQ Global Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act.   None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.   None
 
As of December 31, 2009, there were 13,062,500 ordinary shares outstanding.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
¨ Yes   x No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
¨ Yes   x No
 
Note - Checking the box will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
x Yes   ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer   ¨     Accelerated filer   ¨      Non-accelerated filer   x
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP   
x
International Financial Reporting Standards as issued by
the International Accounting Standards Board
 ¨ 
Other
    o
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
 
¨ Item 17   ¨     Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
¨   Yes   x   No

 

 
 
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
 
This Annual Report contains many statements that are “forward-looking” and uses forward-looking terminology such as “anticipate,” “believe,” “expect,” “estimate,” “future,” “intend,” “may,” “ought to,” “plan,” “should,” “will,” negatives of such terms or other similar statements. You should not place undue reliance on any forward-looking statement due to its inherent risk and uncertainties, both general and specific. Although we believe the assumptions on which the forward-looking statements are based are reasonable and within the bounds of our knowledge of our business and operations as of the date of this annual report, any or all of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based on those assumptions could also be incorrect. The forward-looking statements in this Annual Report include, without limitation, statements relating to:
 
 
·
our goals and strategies;
 
 
·
our future business development, results of operations and financial condition;
 
 
·
our ability to protect our intellectual property rights;
 
 
·
expected growth of and changes in the PRC BOPET film industry and in the demand for BOPET film products;
 
 
·
projected revenues, profits, earnings and other estimated financial information;
 
 
·
our ability to maintain and strengthen our position as a leading provider of BOPET film products in China;
 
 
·
our ability to maintain strong relationships with our customers and suppliers;
 
 
·
our planned use of proceeds;
 
 
·
effect of competition in China and demand for and price of our products and services; and
 
 
·
PRC governmental policies regarding our industry.
 
The forward-looking statements included in this Annual Report are subject to risks, uncertainties and assumptions about our businesses and business environments. These statements reflect our current views with respect to future events and are not a guarantee of our future performance. Actual results of our operations may differ materially from information contained in the forward-looking statements as a result of risk factors some of which are described under “Risk Factors” and elsewhere in this Annual Report. Risks, uncertainties and assumptions include, among other things:
 
 
·
adverse effect on our business caused by the global financial crisis;
 
 
·
competition in the BOPET film industry;
 
 
·
growth of, and risks inherent in, the BOPET film industry in China;
 
 
·
uncertainty as to future profitability and our ability to obtain adequate financing for our planned capital expenditure requirements;
 
 
·
uncertainty in our ability as to obtain additional funding in order to complete the construction of the new production line (thick film) project and begin production;
 
 
·
uncertainty as to our ability to continuously develop new BOPET film products and keep up with changes in BOPET film technology;
 
 
·
risks associated with possible defects and errors in our products;

 
2

 
 
 
·
uncertainty as to our ability to protect and enforce our intellectual property rights;
 
 
·
uncertainty as to our ability to attract and retain qualified executives and personnel;
 
 
·
uncertainty in acquiring raw materials on time and on acceptable terms, particularly in view of the volatility in the prices of petroleum products in recent years;
 
 
·
adverse effect on our business caused by adjustment of economic structure regulations of the Chinese government; and
 
 
·
adverse effect on our business caused by extreme climate changes.
 
These risks, uncertainties and assumptions are not exhaustive. Other sections of this Annual Report include additional factors which could adversely impact our business and financial performance. The forward-looking statements contained in this Annual Report speak only as of the date of this annual report or, if obtained from third-party studies or reports, the date of the corresponding study or report, and are expressly qualified in their entirety by the cautionary statements in this Annual Report. Since we operate in an emerging and evolving environment and new risk factors and uncertainties emerge from time to time, you should not rely upon forward-looking statements as predictions of future events. Except as otherwise required by the securities laws of the United States, we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this Annual Report or to reflect the occurrence of unanticipated events.

 
3

 
 
Introduction
 
This annual report on Form 20-F includes our audited consolidated financial statements as of December 31, 2008 and 2009 and for the years ended December 31, 2007, 2008 and 2009.
 
Our ordinary shares are listed on the Nasdaq Global Market, or NASDAQ, under the symbol “FFHL.”
 
Except as otherwise required and for purposes of this Annual Report only:
 
 
·
“Fuwei”, “Company”, “us” or “we” refer to Fuwei Films (Holding) Co., Ltd. The term “you” refers to  holders of our ordinary shares.
 
 
·
“China” or “PRC” and the “Chinese government” refer to the People’s Republic of China and its government.
 
 
·
All references to “Renminbi,” or “RMB” are to the legal currency of China, all references to “U.S. dollars,” “dollars,” “$” or “US$” are to the legal currency of the United States and all references to “Hong Kong dollars” or “HK$” are to the legal currency of Hong Kong. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
 
 
·
“BOPET” refers to the Biaxially Oriented Polyester Film.

CURRENCIES AND EXCHANGE RATES

We publish our financial statements in Chinese Yuan (Renminbi).  In this annual report on Form 20-F, references to “U.S. dollars” or “$” are to the currency of the United States and references to “RMB” are to the currency of China.

Solely for your convenience, certain RMB amounts in this annual report have been translated into U.S. dollars. The rate of translation is based on the noon buying rate for Chinese Yuan in New York City as certified for customs purposes by the Federal Reserve Bank of New York on the various dates specified where the translations are set forth in this annual report.  References to the “noon buying rate” in this annual report refer to this rate. These translations should not be taken as assurances that the RMB amounts actually represent these U.S. dollar amounts or that they were or could have been converted in U.S. dollars at the rate indicated or at any other rate.  The noon buying rate was US $1.00 = RMB 6.8270.
 
The following table sets forth various information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this Annual Report or will use in the preparation of our other periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.

   
Average
   
High
   
Low
   
Period-end
 
   
(Rmb per U.S.$1.00)
 
2005 (1)
    8.1472       8.2765       8.0702       8.0709  
2006 (1)
    7.9723       8.0702       7.8041       7.8041  
2007 (1)
    7.6038       7.7881       7.2946       7.2946  
2008 (1)
    6.9623       7.2941       6.7480       6.8542  
2009 (1)
    6.8311       6.8368       6.8242       6.8270  
September 2009 (2)
    6.8283       6.8310       6.8258       6.8263  
October 2009 (2)
    6.8270       6.8296       6.8234       6.88275  
November 2009 (2)
    6.8274       6.8301       6.8259       6.8271  
December 2009 (2)
    6.8278       6.8300       6.8253       6.8253  
January 2010 (2)
    6.8271       6.8277       6.8264       6.8268  
February 2010 (2)
    6.8265       6.8346       6.8260       6.8260  
March 2010 (2) (3)
    6.8263       6.8271       6.8255       6.8259  

 
4

 
 
(1)
Annual averages are calculated by averaging the rates on the last business day of each month during the relevant period.
 
(2)
Monthly average is calculated by averaging the daily rates during the relevant period.
 
(3)
As of April   20 , 2010 , t he exchange rate was 6.8253 .
 
PART I
 
Item 1. Identity of Directors, Senior Management and Advisers
 
Not Applicable.
 
Item 2. Offer Statistics and Expected Timetable
 
Not Applicable.
 
Item 3. Key Information
 
A. Selected financial data.
 
The following selected financial data should be read in conjunction with Item 5 - the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements and Notes thereto included elsewhere in this Annual Report.
 
The following selected historical statement of income data for the years ended December 31, 2007, 2008 and 2009 and the selected historical balance sheet data as of December 31, 2008 and 2009 have been derived from the Company’s audited consolidated financial statements included in this Annual Report beginning on page F-1. The following selected historical statement of income data for the year ended December 31, 2005 and 2006, and the selected historical balance sheet data as of December 31, 2005, 2006 and 2007 have been derived from the Company’s audited financial statements not included in this Annual Report. The audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP.
 
Certain factors that affect the comparability of the information set forth in the following table are described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Financial Statements and related notes thereto included elsewhere in this Annual Report.
    
Year Ended 
December 31,
 
   
2005
   
2006
   
2007
   
2008
   
2009
 
(in thousands, except per share data)
 
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
US$
 
Statement of Operations Data:
                                   
Revenues
    346,205       436,884       449,373       447,255       320,731       46,980  
Gross profit
    87,115       102,543       99,842       70,332       24,612       3,605  
                                                 
Operating income
    65,999       78,017       64,266       24,604       (16,547 )     (2,424 )
Interest expense
    (13,747 )     (12,884 )     (13,233 )     (3,995 )     (6,540 )     (958 )
                                                 
Income before income taxes
    57,069       68,422       51,941       21,124       (23,024 )     (3,373 )
                                                 
Net income/(loss)
    57,128       67,665       47,260       18,157       (18,963 )     (2,776 )
Earnings per share
                                               
Basic
    74,096       61.46       3.62       1.39       (1.45 )     (0.21 )
Diluted
    74,096       61.37       3.62       1.39       (1.45 )     (0.21 )
Weighted average number ordinary shares, Basic and diluted
                                               
Basic
    771       1,101,031       13,062,500       13,062,500       13,062,500       13,062,500  
Diluted
    771       1,102,488       13,062,500       13,062,500       13,062,500       13,062,500  

 
5

 
 
   
As of December 31,
 
   
2005
   
2006
   
2007
   
2008
   
2009
 
(in thousands)
 
RMB
   
RMB
   
RMB
   
RMB
   
RMB
   
US$
 
Balance Sheet Data:
                                   
Cash
    7,427       249,939       30,909       15,823       26,804       3,926  
Accounts receivable, net
    46,129       75,530       58,195       38,579       28,785       4,216  
Inventories
    24,887       23,783       41,670       30,589       45,039       6,597  
Total current assets
    93,349       372,001       211,842       104,562       119,282       17,470  
Property, plant and equipment, net
    303,596       317,690       493,562       578,643       555,718       81,400  
Total assets
    440,361       738,082       738,975       739,904       735,509       107,733  
Short-term bank loans
    248,046       239,678       188,027       164,764       153,179       22,435  
Total current liabilities
    367,401       272,175       226,445       204,305       198,666       29,099  
Total shareholders’ equity
    72,960       465,907       512,530       530,599       511,567       74,932  

If our subsidiary, Fuwei Films (Shandong) Co. Ltd., or Shandong Fuwei, was not entitled to a reduced enterprise income tax, or EIT, rate of 0% for the year ended December 31, 2005 and 2006, and rate of 7.5% for the year ended December 31, 2007, it would have had an EIT rate of 15% for both of those years. Shandong Fuwei was entitled to preferential tax treatment at an EIT rate of 15% for the year ended December 31, 2008 and 2009 due to its status as a High-and-New Tech Enterprise since December 2008.  If Shandong Fuwei was no longer designated as such, it would have been subject to a standard enterprise income tax at a rate of 25%. Net income and basic and diluted earnings per share would be reduced by the following amounts, if Shandong Fuwei was not entitled to a reduced EIT rate for the years 2005, 2006, 2007, 2008 and 2009:
   
Years Ended December 31,
 
(In thousands, except per share data)
 
2005
   
2006
   
2007
   
2008
   
2009
 
   
(RMB)
   
(RMB)
   
(RMB)
   
(RMB)
   
(RMB)
   
(US$)
 
                                     
Net income/(loss)
   
(8,736)
     
(10,453)
     
(4,340)
     
(2,966)
     
-
     
-
 
                                                 
Earnings per share
                                               
-   basic
   
(11,331.00)
     
(9.50)
     
(0.33)
     
(0.23)
     
-
     
-
 
-   diluted
   
(11,331.00)
     
(9.48)
     
(0.33)
     
(0.23)
     
-
     
-
 
 
 
6

 
 
Exchange Rate Information
 
On July 21, 2005 the Chinese government changed its policy of pegging the value of the Renminbi to the U.S. dollar. This revaluation of the Renminbi was based on a conversion of Renminbi into United States dollars at an exchange rate of US$1.00=RMB8.11. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. In December 2009, this change in policy resulted in an approximately 15.8% appreciation in the value of the Renminbi against the U.S. dollar compared to 2005. Although the Company generates its revenue in the PRC in Renminbi which has become more valuable in U.S. dollars, the Company’s overseas sales and U.S. dollars cash deposits are subject to foreign currency translations which will impact net income (loss).
 
B.  Capitalization and indebtedness.
 
Not Applicable.
 
C. Reasons for the offer and use of proceeds.
 
Not Applicable.
 
D. Risk factors.
 
The following matters and other additional risks not presently known to us or that we deem immaterial, may have a material adverse effect on our business, financial condition, liquidity, results of operations or prospects or otherwise. Reference to a cautionary statement in the context of a forward-looking statement or statements shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements.
 
(a) Risks Associated with Our Business
 
Our business has been adversely affected by the global financial crisis since 2008. Although in the second half of 2009, the world economy showed signs of has been gradually recovery, in 2009 the Company’s operation were still adversely affected which due primarily to the deline of the market demand and sales price, and decrease of exports, and so on. If the economy does not continue to recover, our operation will continue to face such declines again.
 
Since the fourth quarter of 2008, our business has been significantly affected by the global financial crisis. The domestic market has experienced a drop in demand for our products, especially in the volume of high value-added special films, and our sales export markets declined significantly. Despite the remedial measures taken by the Company in 2009, such as reducing costs and decreasing expenses in order to strengthen our profitability and lessen the adverse effect on our business caused by the financial crisis, the Company continued to suffer the adverse effect of the global financial crisis due to the competition in the market place. In the event that the global economy does not continue to recover, our operation may continue to face such declines.
 
In addition, the financial crisis may affect our suppliers and customers. Such adverse effect on our supplies and customers may, in turn, adversely affect our business.
 
A sharp fluctuation in the demand for raw materials may have a negative impact on our operations if we are unable to pass on all increases in cost of raw materials to our customers on a timely basis.
 
The total cost of raw materials made up approximately76.0%, 78.6% and 73.3% of our cost of goods sold in 2007, 2008 and 2009 respectively. The main raw materials used in our production of BOPET film are polyethylene terephthalate (or PET) resin and additives, which respectively made up approximately 76.8% and 23.2% of our total cost of raw materials in the past three years on average.

 
7

 
 
Currently the PET resin is mainly used as a raw material in China’s textile industry. The market prices of PET resin may fluctuate due to changes in supply and demand conditions in that industry. Any sudden shortage of supply or significant increase in demand, of PET resin and additives may result in higher market prices and thereby increase our cost of sales. The prices of PET resin and additives are, to a certain extent, affected by the price movement of crude oil. The international market prices for crude oil increased in 2009 compared to the fourth quarter of 2008, which caused the price of raw materials to increase. In addition it is difficult to pass all the increase in cost of raw materials to customers, which in turn limits our profitability.
 
In 2010, if there is a significant increase in the cost of raw materials, as the the economy has not fully recovered, we may not be able to pass the increase in costs of raw materials to our customers on a timely basis. As a result, the fluctuation of the crude oil price will continue to have an adverse impact on our operation. Currently, we have no hedging transactions in place with respect to PET resin or any other petroleum product.
 
Entry of new BOPET producers and continuously expanded production capacity of current BOPET film manufacturers in the industry in the PRC may increase the supply of, and decrease the prices of, BOPET film in the industry, and hence lead to a decline in our profit margins.
 
We believe that we are currently one of the few producers of BOPET film in the PRC with research and development capability. Over time, there may be new investors into BOPET film industry, whether as a result of increased access to the production technology of BOPET film or increasing demand of BOPET films in the domestic market or otherwise. At the same time the current BOPET films manufacturers are expanding their productivity. Accordingly, we may experience increased competition which could result in more competitive pricing. In the event that we are unable to compete successfully or retain effective control over the pricing of our products, our profit margins will decrease and our revenues and net income may also continue to decrease.
 
In addition, China has gradually lowered import tariffs and relaxed foreign investment restrictions after its entry into the World Trade Organization in December 2001. This may lead to increased competition from foreign companies in our industry some of which are significantly larger and financially stronger than us. If we fail to compete effectively with these companies in the future, our current business and future growth potential would be adversely affected.
 
We maybe subject to inventory risks that would negatively impact our operating results.

The possible price decline of the inventory may adversely affect the Company’s operation.

To some extent, the price of raw materials and end-productions of our inventories are affected by the price of crude oil.  If the price of crude oil keeps increase it may lead to a higher cost of our raw material; to the contrary, the continue declining of the price of the crude oil may cause the price decrease of the end-productions, which will adversely affect our operation.
 
A significant portion of our revenue is derived from the flexible packaging industry in the PRC, our revenue might be adversely impacted if the flexible packaging industry is adversely affected.
 
A significant portion of our revenue is currently derived from the production and sale of BOPET film. Our BOPET film is largely used for the flexible packaging industry, such as relating to the processed food and tobacco packaging, cosmetics and alcoholic beverages. The demand for our BOPET film is therefore indirectly affected by the demand for flexible packaging.
 
Any decrease in the demand for our BOPET film will significantly affect our financial performance. The global financial crisis has caused a slowdown in the demand for growth in the PRC market and a decrease in demand in the overseas market for our products, which as a result, has led to the decline both in sales quantity or the sales price of our products.  If the economy slowdown continues, it could continue to have an adverse impact on our financial condition, business and operation.

 
8

 
 
We rely on key managerial and technical personnel and failure to attract or retain such personnel may compromise our ability to perform our strategies and then to develop new products and to effectively carry on our research and development and other efforts.
 
Our success to date has been largely attributable to the contributions of key management and experienced personnel, some with whom we have entered into service agreements. The loss of their services might impede the achievements of our strategies and development objectives and might damage the close business relationship we currently enjoy with some of our larger customers. Our continued success is dependent, to a large extent, on our ability to attract or retain the services of these key personnel. Except for Mr. Xiaoan He, we do not currently maintain any other key man insurance for our directors or officers.
 
Our R&D center is managed by Mr. Hanyong Lee. If he does not effectively lead the R&D team to research and develop new products and facilitate the marketing process, or we are unable to receive our R&D team’s services continuously, or we are unable to recruit outstanding R&D personnel as a replacement, this may have an adverse affect on our ability to progress and develop new products, and may adversely affect our business results and market competitiveness.
 
Marketability of any of our new products is uncertain and low acceptance levels of any of our new products will adversely affect our revenue and profitability.
 
The development of our products is based on complex technology, and requires significant time and expertise in order to meet industry standards and customers’ specifications. Although we have developed some products that meet customers’ requirements in the past, there is no assurance that any of our research and development efforts will necessarily lead to any new or enhanced products or generate sufficient market share to justify commercialization. We must continually improve our current products and develop competitive new products to address the requirements of our customers. If our new products are unable to gain market acceptance, we would not be able to generate future revenue from our investment in research and development. In such event, we would be unable to increase our market share and achieve and sustain profitability. Our failure to further refine our technology and develop and introduce new products attractive to the market could cause our products to become uncompetitive or obsolete, which could reduce our market share and cause our sales to decline.
 
We may not be able to complete our new production line (thick film) currently under construction and start production in the near future. This may have an adverse impact on us and cause losses due to potential claims that may be raised by the supplier of equipments.
 
The new production line (thick film) project, which is currently under construction, still has a shortage of funds of US$ 20 million to US$ 25 million out of the total expected investment required for this new production line of approximately US$ 40 million to US$ 45 million. Although our management has made its best efforts to obtain additional financing, it has not been successful due to various adverse factors, such as the shareholders case, general weak economy and our inability to obtain financing through issuing shares or bonds caused by the continuous decline in our share price. As a result, we may fail to make payments to suppliers on equipment. In the event that we are unable to obtain additional financing and pay our suppliers, we may encounter potential litigation from our suppliers or lost the ordered equipment. In the event that there is a claim for the breach of contract by our suppliers, we may endure a significant loss. In addition, although the plant has been completed and certain other equipment has been delivered, if we lost the production line or suppliers refuse to suply equipments to us, we cannot begin production without the main production line being completed. This may have a material adverse impact in the Company’s development of thick films industry.

 
9

 
 
The circumstances under which we acquired ownership of our main productive assets may jeopardize our ability to continue as an operating business.
 
Substantially all of our operating assets were acquired through two auction proceedings under relevant PRC law. We acquired the Brückner production line in 2003 as a result of a foreclosure proceeding enforcing an effective court judgment and the DMT production in 2004 as a result of a commercial auction from a consigner who obtained such assets through a bankruptcy proceeding. In the opinion of our PRC counsel, Concord & Partners, these proceedings are both valid under Chinese auction and bankruptcy law based on certain factual assumptions. Our PRC counsel’s opinion solely relates to the legal procedure of the auctions and is based upon certain factual assumptions, our written representations and written reports of the auction company and other related parties. There can be no assurance that relevant authorities or creditors of the predecessor owner of these assets will not challenge the effectiveness of these asset transfers based upon the facts and circumstances of these transfers, despite the existence of independent appraisals, and other facts and circumstances of the auctions that cannot be verified by our PRC counsel. Taking into consideration the facts known by our PRC counsel related to the auction of the Brückner production line and the significant difference in the price paid for the DMT production line at the two bankruptcy auctions involved in our purchase of that asset and, assuming the representations and reports received by our PRC counsel are true and correct in all material respects, our PRC counsel is of the opinion that the auctions of the Brückner and DMT production lines were valid under PRC law and the possibility of the creditors of Shandong Neo-Luck successfully exercising recourse or claiming repayment with respect to our assets purchased in the bankruptcy proceeding should be remote. However, should any such challenge be brought in China (or elsewhere) and prevail, we may incur substantial liabilities and be required to pay substantial damages as a result of acquiring these assets. Although we believe any such challenge is unlikely to lead to the forfeiture of the related assets, it could materially affect our ability to continue operations.
 
On June 25, 2007, we announced the investigation of three controlling shareholders, Mr. Jun Yin, Mr. Duo Wang, and Mr. Tongju Zhou, and on September 28, 2007, the three shareholders have been arrested, relating to the suspicion of the Crime of Irregularities for Favoritism and to sell state-owned assets at low prices.
 
On November 12, 2009, the company announced that it had become aware of the final verdict issued by the Supreme People's Court of Shandong Province, concerning the Company's three major shareholders, Mr. Jun Yin, Mr. Tongju Zhou and Mr. Duo Wang. The Supreme People's Court upheld the initial verdict issued by the Intermediate court in March 2009. The March 2009 initial verdict sentenced Mr. Yin to death, with a stay of execution for two years; the other two defendants, Mr. Zhou and Mr. Wang, each received life imprisonment; all of the personal property of the three individuals will be confiscated. The three individuals appealed the initial verdict to the Supreme People's Court of Shandong Province in March 2009. None of these individuals is involved in Fuwei's day-to-day operations. The final judgement aginst the three shareholders may cause uncertainty of the company’s operation.
 
We have, in the past, experienced and may, from time to time, experience negative working capital.  We also face risks associated with debt financing (including exposure to variation in interest rates).
 
Our total short-term loan as of December 31, 2009 was RMB 153.2 million (US$22.4 million), which excludes RMB 25 million (US$ 3.7 million) in long-term loans. We have pledged property, plant and equipment and lease prepayments as security for RMB 165.0 million (US$ 24.2 million) of the above outstanding indebtedness. In the event that we default on all expired indebtedness, our lenders could foreclose on our assets. In the event that our assets are foreclosed upon, we will not be able to continue to operate our business.
 
Our obligations under our existing loans have been mainly met through the cash flow from our operations and our financing activities. We are subject to risks normally associated with debt financing, including the risk of significant increases in interest rates and the risk that our cash flow will be insufficient to meet required payment of principal and interest. In the past, cash flows from operations have been sufficient to meet payment obligations. There is however, no assurance that we will be able to continue to do so in the future. We may also underestimate our capital requirements and other expenditures or overestimate our future cash flows. In such event, we may consider additional bank loans, issuing bonds, or other forms of financing to satisfy our capital requirements. If any of the aforesaid events occur and we are unable for any reason to raise additional capital, debt or other financing to meet our working capital requirements, our business, operating results, liquidity and financial position will be adversely affected. For example, if we fail to get appropriate financing, it will negatively impact the investment in the production of our third production line. In addition, if we do not obtain financing or have negative working capital, there is a possibility that we may not be able to perform our contracts with our suppliers as a result of our inability to pay them. All of these factors may cause a significant adverse effect on our operations.

 
10

 
 
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.
 
As of December 31, 2009, we have received four patents from, and have thirteen patent applications pending with the PRC authorities. All these patents are related to our products and production processes. We may not be able to successfully obtain the approvals of the PRC authorities for the pending patent applications. Furthermore, third parties may assert claims to our proprietary processes and technologies. These products, proprietary processes and technologies are important to our business as they allow us to maintain our competitive edge over our competitors.
 
Our ability to compete in our markets and to achieve future revenue growth will depend, to a certain extent, on our ability to protect our proprietary technology and operate without infringing upon the intellectual property rights of others. The legal regime in China for the protection of intellectual property rights is still at its early stage of development. Intellectual property protection became a national effort in China in 1979 when China adopted its first statute on the protection of trademarks. Since then, China has adopted its Patent Law, Trademark Law and Copyright Law and promulgated related regulations, such as the Regulation on Computer Software Protection, Regulation on the Protection of Layout Designs of Integrated Circuits and Regulation on Internet Domain Names. China has also acceded to various international treaties and conventions in this area, such as the Paris Convention for the Protection of Industrial Property, Patent Cooperation Treaty, Madrid Agreement and its Protocol Concerning the International Registration of Marks. In addition, when China became a party to the World Trade Organization in 2001, China amended many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights. Despite many laws and regulations promulgated and other efforts made by China over the years with a view to tightening up its regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many Western countries, including the United States, and enforcement of such laws and regulations in China have not achieved the levels reached in those countries. Both the administrative agencies and the court system in China are not well-equipped to deal with violations or handle the nuances and complexities between compliant technological innovation and non-compliant infringement.
 
We rely on trade secrets and registered patents and trademarks to protect our intellectual property. We have also entered into confidentiality agreements with our management and employees relating to our confidential proprietary information. However, the protection of our intellectual properties may be compromised as a result of:
 
 
·
departure of any of our management members or employees in possession of our confidential proprietary information;
 
 
·
breach by such departing management member or employee of his or her confidentiality and non-disclosure undertaking to us;
 
 
·
expiration of the protection period of our registered patents or trademarks;
 
 
·
infringement by others of our proprietary technology and intellectual property rights; or
 
 
·
refusal by relevant regulatory authorities to approve our patent or trademark applications.
 
Any of these events or occurrences may reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. There is no assurance that the measures that we have put into place to protect our intellectual property rights will be sufficient. As the number of patents, trademarks, copyrights and other intellectual property rights in our industry increases, and as the coverage of these rights and the functionality of the products in the market further overlap, we believe that business entities in our industry may face more frequent infringement claims. Litigation to enforce our intellectual property rights could result in substantial costs and may not be successful. If we are not able to successfully defend our intellectual property rights, we might lose the rights to technology that we need to conduct and develop our business. This may seriously harm our business, operating results and financial condition, and enable our competitors to use our intellectual property to compete against us.

 
11

 
 
Furthermore, if third parties claim that our products infringe their patents or other intellectual property rights, we might be required to devote substantial resources to defending against such claims. If we are unsuccessful in defending against such infringement claims, we may be required to pay damages, modify our products or suspend the production and sale of such products. We cannot guarantee that we will be able to modify our products on commercially reasonable terms.
 
We may incur capital expenditures in the future in connection with our growth plans and therefore may require additional financing.
 
To expand our business, we will need to increase our production variety and productivity which will require substantial capital expenditures. Such expenditures are likely to be incurred in advance of any increase in sales. We cannot assure you that our revenue will increase after such capital expenditures are incurred as this will depend on, among other factors, our ability to maintain or achieve high capacity utilization rates. Any failure to increase our revenue after incurring capital expenditures to expand production capacity will reduce our profitability.
 
In addition, we may need to obtain additional debt or equity financing to fund our capital expenditures. Additional equity financing may result in dilution to existing shareholders’ return. Additional debt financing may be required which, if obtained, may:
 
 
·
limit our ability to pay dividends or require us to seek consents for the payment of dividends;
 
 
·
increase our vulnerability to general adverse economic and industry conditions;
 
 
·
limit our ability to pursue our growth plan;
 
 
·
require us to dedicate a substantial portion of our cash flow from operations as payment for our debt, thereby reducing availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes;
 
 
·
limit our flexibility in planning for, or reacting to, changes in our business and our industry; and/or
 
 
·
We cannot assure you that we will be able to obtain the additional financing on terms that are acceptable to us, if at all.
 
A disruption in the supply of utilities, fire or other calamity at our manufacturing plant would disrupt production of our products and adversely affect our sales.
 
Our BOPET films are manufactured solely at our production facility located in Weifang City in the PRC. Any disruption in the supply of utilities, in particular, electricity or power supply or any outbreak of fire, flood or other calamity resulting in significant damage at our facilities would severely affect our production of BOPET film and, as a result, we could incur substantial liabilities that could reduce or eliminate the funds available for product development or result in a loss of equipment and properties.
 
While we maintain insurance policies covering losses in respect of damage to our properties, machinery and inventories of raw materials and products, we cannot assure you that our insurance would be sufficient to cover all of our potential losses.
 
We have limited experience in operating outside mainland China, and failure to achieve our overseas expansion strategy may have an adverse effect on our business growth in the future.
 
Our future growth depends, to a considerable extent, on our ability to develop both the domestic and overseas markets. We are currently exploring new business opportunities outside mainland China for our BOPET film products. We have a limited number of customers outside China, mainly in South Korea, the United States and Europe. However, we have limited experience in operating outside mainland China, have limited experience with foreign regulatory environments and market practices, and cannot guarantee that we will be able to penetrate any overseas market. In connection with our initial efforts to expand overseas, we have encountered many obstacles, including cultural and linguistic differences, difficulties in keeping abreast of market, business and technical developments in foreign jurisdictions, and political and social disturbances. Failure in the development of overseas markets may have an adverse effect on our business growth in the future.

 
12

 
 
We have encountered anti-dumping investigations in South Korea and the United States. Although we received approvals for comparatively low anti-dumping tax rates in the final anti-dumping arbitration judgments in South Korea and the United States, our overseas expansion strategy in our future business growth may be adversely affected.
 
Since 2007, the manufacturers in China, India and other countries have encountered anti-dumping investigations conducted by South Korea and the United States. The Korean Trading Committee (KTC) announced the final results for anti-dumping investigations for enterprises in China and India on August 27, 2008. Although we finally received the anti-dumping duties (ADD) rate of 5.67% which is much lower than the average rate of 23.60% for other enterprises in China, our export to South Korea is still adversely affected by paying the ADD to a certain extent.
 
The US Department of Commerce conducted the anti-dumping investigation in October, 2007 covering exporters in China, Brazil, Thailand and the United Arab Emirates. 41 exporters in China were under investigation.  In October 2008, the anti-dumping judgments were announced. Although we received the lowest ADD rate of 3.49% among five exporters that received a duty, our export to the United States, to a certain extent, is still adversely affected by paying the ADD. On December 12, 2009, the US Department of Commerce will begin to review the results of anti-dumping investigation in 2008.  If we can not aquire a relatively low rate, it will not only have a significant impact on our export to the US market but also make us face the risk to repay the US anti-dumping duties for the last two years.
 
In addition, if other countries or regions, such as the European Union, take trade protection measures against China's BOPET film or downstream industries, our business may be adversely affected.
 
New governmental regulation relating to greenhouse gas emissions may subject us to significant new costs and restrictions on our operations.
 
Climate change is receiving increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. There are bills pending in Congress that would regulate greenhouse gas emissions through a cap-and-trade system under which emitters would be required to buy allowances to offset emissions of greenhouse gas. In addition, several states are considering various greenhouse gas registration and reduction programs. Certain of our manufacturing plants use significant amounts of energy, including electricity and gas, and emit amounts of greenhouse gas are likely to be affected by existing proposals. Greenhouse gas regulation could increase the price of the electricity we purchase, increase costs for our use of natural gas, potentially restrict access to or the use of natural gas, require us to purchase allowances to offset our own emissions or result in an overall increase in our costs of raw materials, any one of which could significantly increase our costs, reduce our competitiveness in a global economy or otherwise negatively affect our business, operations or financial results. While future emission regulation appears likely, it is too early to predict how this regulation will affect our business, operations or financial results.

 
13

 
 
Our primary source of funds for dividends and other distributions from our operating subsidiary in China is subject to various legal and contractual restrictions and uncertainties, and our ability to pay dividends or make other distributions to our shareholders are negatively affected by those restrictions and uncertainties.
 
We are a holding company established in the Cayman Islands and conduct our core business operations through our principal operating subsidiary, Shandong Fuwei, in China. As a result, our profits available for distribution to our shareholders are dependent on the profits available for distribution from Shandong Fuwei. If Shandong Fuwei incurs debt on its own behalf, the debt instruments may restrict its ability to pay dividends or make other distributions, which in turn would limit our ability to pay dividends on our ordinary shares. Under the current PRC laws, because we are incorporated in the Cayman Islands, our PRC subsidiary, Shandong Fuwei, is regarded as a wholly foreign-owned enterprise in China. Although dividends paid by foreign invested enterprises, such as wholly foreign-owned enterprises and Sino-foreign joint ventures, are not subject to any PRC corporate withholding tax, the PRC laws permit payment of dividends only out of net income as determined in accordance with PRC accounting standards and regulations. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant respects, such as the use of different principles for recognition of revenues and expenses. In addition, distribution of additional equity interests by our PRC subsidiary, Shandong Fuwei, to us (which is credited as fully paid through capitalizing its undistributed profits) requires additional approval of the PRC government due to an increase in our registered capital and total investment in Shandong Fuwei. Under the PRC laws, Shandong Fuwei, a wholly foreign-owned enterprise, is required to set aside a portion of its net income each year to fund designated statutory reserve funds. These reserves are not distributable as cash dividends. As a result, our primary internal source of funds of dividend payments from Shandong Fuwei is subject to these and other legal and contractual restrictions and uncertainties, which in turn may limit or impair our ability to pay dividends to our shareholders. Moreover, any transfer of funds from us to Shandong Fuwei, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by PRC governmental authorities. These limitations on the flow of funds between us and Shandong Fuwei could restrict our ability to act in response to changing market conditions.
 
Investor confidence and the market price of our shares may be adversely impacted if we or our independent registered public accountants are unable to issue an unqualified opinion on the adequacy of our internal controls over our financial reporting beginning as of December 31, 2010, as required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002.
 
As a public company, we are required by section 404 of the Sarbanes-Oxley Act 2002 to include a report by management on our internal controls over financial reporting that contains our management’s assessment of the effectiveness of our internal controls in our annual report on Form 20-F beginning with the fiscal year ended  December 31, 2010 and the report of our independent registered public accounting firm on our internal control over financial reporting in our annual report on Form 20-F beginning with the fiscal year ending December 31, 2010. We have documented, tested, and evaluated our internal controls as required. Our management has concluded that our internal controls over financial reporting are effective in 2009. Moreover, although our management does conclude that our internal controls over financial reporting are effective, if our independent registered public accountants are not satisfied with our internal control structure and procedures, the level at which our internal controls are documented, designed, operated or reviewed, or if the independent registered public accountants interpret the requirements, rules or regulations differently from us, they may conclude that our internal controls over financial reporting are not effective. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which could lead to a decline in the market price of our shares.
 
Risks Relating to Business Operations in China
 
Changes in China’s political and economic policies and conditions could cause a substantial decline in the demand for our products and services.
 
Currently, we derive substantially most of our revenues from mainland China. We anticipate that mainland China will continue to be our primary production and sales base in the near future.  In addition, currently, substantially all of our assets are located in China and most of our services are performed in China. In 2007, 2008 and 2009, sales to our customers in the PRC accounted for approximately 75.5%, 86.9% and 88.9%, respectively, of our total revenue. Accordingly, any significant slowdown in the PRC economy or decline in demand for our products from our customers in the PRC will have an adverse effect on our business, financial condition and results of our operations. Furthermore, any unfavorable changes in the social and political conditions of the PRC may also adversely affect our business and operations.
 
Since the adoption of the “open door policy” in 1978 and the “socialist market economy” in 1993, the PRC government has been reforming and is expected to continue to reform its economic and political systems. Any changes in the political and economic policy of the PRC government may lead to changes in the laws and regulations or the interpretation of the same, as well as changes in the foreign exchange regulations, taxation and import and export restrictions, which may in turn adversely affect our financial performance. While the current policy of the PRC government seems to be one of imposing economic reform policies to encourage foreign investments and greater economic decentralization, there is no assurance that such a policy will continue to prevail in the future. We cannot make any assurances that our operations would not be adversely affected should there be any policy changes.

 
14

 
 
Because of the global financial crisis, the Chinese government implemented policies to stimulate economic growth and to encourage investment, by reducing bank deposit and loan interest rates. However, from the fourth quarter of 2009, the Chinese government increased the bank deposit reserve ratio by double. Changes in these policies may adversely effect the Company's operations.
 
The discontinuation of any preferential tax treatments or other incentives currently available to us in the PRC could materially and adversely affect our business, financial condition and results of operations.
 
Our subsidiary, Shandong Fuwei, was converted into a wholly foreign owned enterprise in January 2005 and enjoys certain special or preferential tax treatments regarding enterprise income tax in accordance with the “Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises.” Accordingly, it is entitled to tax concessions whereby the profit for the first two financial years beginning with the first profit-making year (after setting off tax losses carried forward from prior years) is exempt from income tax in the PRC and the profit for each of the subsequent three financial years is taxed at 50% of the prevailing tax rates set by the relevant tax authorities. In addition, as a “High Technology Enterprise,” Shandong Fuwei currently enjoys enterprise income tax at an incentive rate of 15%. Although Shandong Fuwei was redesignated as a High-and-New Tech Enterprise in December 2008 and enjoys the favorable income tax rate, if there are any future changes in PRC tax laws, rules and regulations or Shandong Fuwei will not be designated as a High-and-New Tech Enterprise Shandong Fuwei will no longer enjoy the preferential tax treatment. If that were to occur, Shandong Fuwei would be subject to a 25% standard enterprise income tax rate which would significantly increase our effective tax rate and materially adversely affect our operating results.
 
On March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax Law of the People’s Republic of China, which law took effect on January 1, 2008. In accordance with the new law, a unified enterprise income tax rate of 25% and unified tax deduction standards were applied equally to both domestic-invested enterprises and foreign-invested enterprises such as Shandong Fuwei. Enterprises established prior to March 16, 2007 eligible for preferential tax treatment in accordance with the currently prevailing tax laws and administrative regulations would, under the regulations of the State Council, gradually become subject to the new tax rate over a five-year transition period starting from the date of effectiveness of the new law. We expect details of the transitional arrangement for the five-year period from January 1, 2008 to December 31, 2012 applicable to enterprises approved for establishment prior to March 16, 2007, such as Shandong Fuwei, to be set out in more detailed implementing rules to be adopted in the future. In addition, certain qualifying “High Technology Enterprises” may still benefit from a preferential tax rate of 15% under the new tax law if they meet the definition of “Government Developing High Technology Enterprise” to be set forth in the more detailed implementing rules when they become adopted. Shandong Fuwei was redesignated as a High-and-New Tech Enterprise in December, 2008 and enjoys the favorable income tax rate of 15% pursuant to the Enterprise Income Tax Law.
 
We are subject to environmental laws and regulations in the PRC.
 
We are subject to environmental laws and regulations in the PRC. Any failure by us to comply fully with such laws and regulations will result in us being subject to penalties and fines or being required to pay damages. Although we believe we are currently in compliance with the environmental regulations in all material respects, any change in the regulations may require us to acquire equipment or incur additional capital expenditure or costs in order to comply with such regulations. Our profits will be adversely affected if we are unable to pass on such additional costs to our customers.

 
15

 
 
Changes in foreign exchange regulations in China may affect our ability to pay dividends in foreign currencies.
 
We currently receive most of our operating revenues in Renminbi. Currently, Renminbi is not a freely convertible currency and the restrictions on currency exchanges in China may limit our ability to use revenues generated in Renminbi to fund our business activities outside China or to make dividends or other payments in U.S. dollars. The PRC government strictly regulates conversion of Renminbi into foreign currencies. Over the years, the PRC government has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade- and service-related foreign exchange transactions, foreign debt service and payment of dividends. In accordance with the existing foreign exchange regulations in China, our PRC subsidiary, Shandong Fuwei, is able to pay dividends in foreign currencies, without prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. The PRC government may, however, at its discretion, restrict access in the future to foreign currencies for current account transactions and prohibit us from converting our Renminbi-denominated earnings into foreign currencies. If this occurs, our PRC subsidiary may not be able to pay us dividends in foreign currency without prior approval from SAFE. In addition, conversion of Renminbi for most capital account items, including direct investments, is still subject to government approval in China and companies are required to open and maintain separate foreign exchange accounts for capital account items. This restriction may limit our ability to invest earnings of Shandong Fuwei.
 
Fluctuation in the value of Renminbi could adversely affect our overseas sales and import of raw materials and  the value of, and dividends payable on, our shares in foreign currency terms.
 
The value of Renminbi is subject to various factors and depends to a large extent on China’s domestic and international economic, financial and political developments, as well as the currency’s supply and demand in the local market. From 1994, the conversion of Renminbi into foreign currencies, including the U.S. dollar, was based on exchange rates set and published daily by the People’s Bank of China, the PRC central bank, based on the previous day’s interbank foreign exchange market rates in China and exchange rates on the world financial markets. The official exchange rate for the conversion of Renminbi into U.S. dollars remained stable until Renminbi was revalued in July 2005 and allowed to fluctuate by reference to a basket of foreign currencies, including the U.S. dollar. Under the new policy, Renminbi is permitted to fluctuate within a band against a basket of foreign currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of Renminbi against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a substantially more liberalized currency policy, which could result in a further and more significant appreciation in the value of Renminbi against the U.S. dollar. Further revaluations of Renminbi against the U.S. dollar may also occur in the future. Since our income and profits are denominated in Renminbi, fluctuation in the value of Renminbi could adversely affect our overseas sales and import of raw materials and further negtively affect our revenue and net income.  Any appreciation of Renminbi would increase the value of, and any dividends payable on, our shares in foreign currency terms. Conversely, any depreciation of Renminbi would decrease the value of, and any dividends payable on, our shares in foreign currency terms.
 
The uncertain legal environment in China could limit the legal protections available to you.
 
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, the civil law system is a system in which decided legal cases have little precedential value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Our PRC subsidiary, Shandong Fuwei, is a wholly foreign-owned enterprise and is subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to wholly foreign-owned enterprises in particular. China has made significant progress in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the promulgation of new laws, changes of existing laws and abrogation of local regulations by national laws may have a negative impact on our business and prospects. In addition, as these laws, regulations and legal requirements are relatively recent and because of the limited volume of published cases and their non-binding nature, the interpretation and enforcement of these laws, regulations and legal requirements involve significant uncertainties. These uncertainties could limit the legal protections available to foreign investors, including you. For example, it is not clear if a PRC court would enforce in China a foreign court decision brought by you against us in shareholders’ derivative actions. Moreover, the enforceability of contracts in China, especially with the government, is relatively uncertain. If counterparties repudiated our contracts or defaulted on their obligations, we might not have adequate remedies. Such uncertainties or inability to enforce our contracts could materially and adversely affect our revenues and earnings.

 
16

 
 
Outbreak of viruses such as SARS, H1N1 or other epidemics could materially and adversely affect our overall operations and results of operations.
 
From March to July 2003, mainland China, Hong Kong, Singapore, Taiwan and some other areas in Asia experienced an outbreak of a new and contagious form of atypical pneumonia known as severe acute respiratory syndrome, or SARS. A recurrent outbreak, or an outbreak of a similarly contagious disease, such as the H1N1 avian flu, could potentially disrupt our operations to the extent that any one of our employees is suspected of having the infection or that any of our facilities is identified as a possible source of spreading the virus or disease. We may be required to quarantine employees who are suspected of having an infection. We may also be required to disinfect our facilities and therefore suffer a suspension of production of indefinite duration. Any quarantine or suspension of production at any of our facilities will adversely affect our overall operations. In the recent two years, infectious disease like H1N1 has occurred in high frequency worldwide, which would have adverse effect on the consumption on packaged foods, and have influence on our products sales. In addition, any such outbreak will likely restrict the level of economic activities in the affected areas, which could lead to a substantial decrease in our revenues accompanied by an increase in our costs.
 
Regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and adversely affect our business and prospects.
 
In October 2005, SAFE issued a circular (SAFE circular 75) concerning foreign exchange regulation on investments by PRC residents in China through special purpose companies incorporated overseas. The circular states that, if PRC residents use assets or equity interests in their domestic entities as capital contribution to establish offshore companies or inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas, such PRC residents must register with local SAFE branches in advance with respect to their overseas investments in offshore companies and must also file amendments to their registrations within 30 days upon the generation of material events if their offshore companies experience material events, such as changes in share capital, share transfer, mergers and acquisitions, spin-off transactions or use of assets in China to guarantee offshore obligations which are not involved with return investment. Our existing shareholders prior to our initial public offering the offering have completed the relevant SAFE registration procedures as currently required by SAFE circular 75.
 
On May 29, 2007, SAFE issued the operative measures of SAFE circular 75 (SAFE circular 106), which specified the registration and approval procedures of SAFE circular 75.
 
 As it is uncertain how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities, we cannot predict how this circular and other SAFE circulars will affect our business operations or future strategies. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign currency-denominated borrowings, which may adversely affect our ability to provide funds to us to pay dividends on our ordinary shares.
 
Item 4. Information on the Company
 
Overview
 
We were formed as a Cayman Islands corporation in August 2004 under the name “Fuwei Films (Holding) Co., Ltd.” Our corporate headquarters, principal place of business, production and ancillary facilities occupy an area of approximately 74,251 square meters at No. 387 Dongming Road, Weifang Shandong, People’s Republic of China, 261061. Our agent for service in the United States is CT Corporation System located at 111 Eighth Avenue, NY, NY 10011.

 
17

 
 
We develop, manufacture and distribute high quality plastic film using the Biaxially oriented stretch technique, otherwise known as BOPET film (Biaxially oriented polyethylene terephthalate). The film is light-weight, non-toxic, odorless, transparent, glossy, temperature and moisture-resistant, and retains high barrier resistance, making it suitable for many forms of flexible packaging, printing, laminating, aluminum-plating and other applications. In addition, it retains high dielectric strength and volume resistance even at high temperatures, which are essential qualities for electrical and electronic uses. Our BOPET film is widely used in consumer based packaging (such as the food, pharmaceutical, cosmetics, tobacco and alcohol industries), imaging (such as printing plates and microfilms), electronics and electrical industries (such as wire and cable wrap, capacitors and motor insulation), as well as in magnetic products (such as audio and video tapes). We market our products under our brand name “Fuwei Films.” We sale our products to packaging customers and distributors mainly in Chinese market and also export to South Korea, the United States, Europe and others. The principal products we produce are namely:
 
 
·
Printing base film used in printing and lamination;
 
 
·
Stamping foil base film and transfer base fims used for packaging of luxury items of cigarettes and alcohol to increase the aesthetic presentation of the item and improving environmental performance;
 
 
·
Metallization film or aluminum plating base film used for vacuum aluminum plating for paper or flexible plastic lamination;
 
 
·
High-gloss film used for aesthetically enhanced packaging purposes;
 
 
·
Heat-sealable film and Transfer base film used for construction, printing and making heat sealable bags;
 
 
·
Laser holographic base film used as anti-counterfeit film for food, medicine, cosmetics, cigarettes and alcohol packaging; and
 
 
·
Dry film generally used in circuit boards (PCB & FPC) production, and sometimes used for nameplate and crafts etching. It is not only the most widely used mask film for PCB graphic but also indispensable image material for manufacturing excessive circuit.
 
Since our establishment, all of our revenues have been derived from the sales of BOPET film, particularly our printing film, stamping film, metallization film, transfer film, high-gloss film and heat sealable films.
 
We currently operate two production lines. The first line is a Brückner 6.3 m (in width) production line with an annual designed production capacity of 13,000 metric tons of BOPET film. The second line is a DMT production line which is three-layer co-extruded with 6.7 m (in width), and has an annual designed production capacity of 16,100 metric tons of BOPET film. The total annual production capacity of the two production lines is 29,100 metric tons.  At the beginning of 2009, we closed the leased production line which has an 8,000 metric tons’ production capacity. In 2008 we built a trial production line which has an annual designed production capacity of 1,500 metric tons  As of December 31, 2009, our manufacturing operations had a total annual designed production capacity of 30,600 metric tons based upon 7,200 production hours per annum.
 
We sell most of our BOPET film products to customers in the flexible packaging industry in the PRC in the coastal region of China. Our top five customers over the three years ended December 31, 2008 were Dongguan Klaser Technologies Co., Ltd., Jiangyin Teruida Packaging Technology Co., Ltd., Dare Technical Co., Ltd. Danyang Advance Packaging Material Subsidiary Company, Southeast Films Technology Co.,Ltd.,and Holotek Technology Co., Ltd . None of our customers accounted for more than 10% of our total revenues in any such year. In addition, we expect to continue to expand our product portfolio to exploit opportunities in different market sectors, such as electronics industries. The BOPET products for high-end and special usage used by these industries are currently imported and are costly. In 2007, 2008 and 2009 our sales to our overseas customers constituted approximately 24.5%, 13.1% and 11.1%, respectively, of our total revenue.

On April 23, 2009, Fuwei Films USA, LLC was set up in South Carolina and co-invested by Fuwei Films (Holdings) Co., Ltd. and Newell Finance Management Co., Ltd..  Fuwei Films USA, LLC has a registered capital of US$10,000 and total investment amount of US$100,000. Fuwei Films (Holdings) Co., Ltd. and Newell Finance Management Co., Ltd. own 60% and 40% of the total shares of Fuwei Films USA, LLC, respectively. As of December 31, 2009, the sale revenue of the Fuwei Films USA, LLC was $449,830.

 
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Competitive Strengths
 
We believe that our competitive strengths have enabled us over the years to meet the needs of our customers and become a leading provider of BOPET film products in China. We also believe that our strengths will continue to help us grow in the BOPET film industry in both China and internationally. Our principal strengths include the following:
 
We have the capability to expand our product range and markets by introducing new products required by customers
 
We believe that our experience in the industry and personnel will enable us to continue to provide new BOPET film products required by customers. While other companies in our industry have also made significant advances in BOPET technology and production, we have introduced a variety of BOPET film products by developing and formulating our own material fomula, production processing and equipmemt adjusting used in the production of BOPET film. Our research and development team comprised of fourteen research personnel in total.
 
We have an established brand name and are recognized for our product quality in the PRC
 
Although our operating history is relatively short and our market presence is primarily in the PRC, our products are marketed under our brand name, “Fuwei Films.” We believe that this brand name is well known in the BOPET film market in the PRC and, although our selling prices sometimes exceed those of our competitors, our products have achieved significant market acceptance because of its high quality and our superior customer service.
 
We manufacture high quality products that can be customized for our clients
 
We implement and enforce stringent quality controls on our production process and products. As part of our production process, we formulate different blends of PET resins and additives to produce film with specific properties for our customers based on their requirements. In addition, we have developed a special production process and we believe using these formulas will produce products that will meet our customers’ requirements in quality.
 
We have an experienced management team with extensive industry experience
 
Our management team is led by our Chairman and Chief Executive Officer, Mr. Xiaoan He who has more than ten years of related experience in the plastics and packaging industries. He has been instrumental in our operations and strategies, contributing his knowledge and experience in the industry. Each member of our management team has many years of experience in industries related to the manufacturing and development of products.
 
Since January 2008, our R&D center has been managed by Mr. Hanyong Lee. Mr. Hanyong Lee has more than 20 years management and research experience in the BOPET industry.
 
Our technical expertise are advanced in the PRC
 
We consider our technical expertise to be highly advanced with respect to the BOPET film industry in the PRC. Our first production line was German made and manufactured by Brückner. It is a 6.3 m (in width) production line with an annual designed production capacity of 13,000 metric tons of BOPET film. Our second production line was manufactured in France by DMT. It is a 6.7 m (in width) production line that has an annual designed production capacity of 16,100 metric tons of BOPET film. We believe that our experts have sufficient experience to manage and operate the production lines and with their guidance our production lines are able to provide high quality products and to compete effectively with our competitors.

 
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Awards and Certifications
 
Our subsidiary, Shandong Fuwei, has received the following awards and certificates, each of which, we believe, is an indication of our achievements, the quality of our products and makes us more attractive to our potential customers and therefore a more competitive company both in the local and international markets:
 
Date
 
Award/Certificate
 
Issuing Authority
         
September 2004 (1)
 
ISO 9001:2000 Certificate
 
China Certification Center for Quality Mark
         
June 2009 (2)
 
ISO 14001 Certificate
 
SGS
         
December 2007 (3)
 
Key High-Tech Enterprise of the National Torch Program
 
Ministry of Science and Technology
         
July 2008 (4)
 
Designated as an A-Category taxpayer by the National Taxation Bureau and the Local Taxation Bureau of Shandong Province.
 
the National Taxation Bureau and   the Local Taxation Bureau of Shandong Province
         
  
December 2008 (5)
 
Redesignated as a High-and-New Tech Enterprise by Shandong Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, as well as from the Shandong Province Financial Bureau
 
Shandong Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, and Shandong Province Financial Bureau
         
May 2009
 
Designated as “Advanced Enterprise of Chinese plastic industry”
 
China Plastic and Packaging Assositaion
         
   
Technological Innovation Award
   
August 2009
       
   
Mr.Lee was awarded as “Leader of Technological Innovation in Shandong Province”
 
Shandong Province enterprise technological innovation promotion association
 
 (1)
ISO 9000 certification has become an international reference for quality management requirements in business-to-business dealings. This certification enables us to compete on many more markets around the world and provides our customers with assurances about our quality, safety and reliability.
 
 (2)
After strict examination and approval by China Environment United (Beijing) Certification Center Co., Ltd (Environment Conformity Assessment Center of State Environment Protection Bureau), Fuwei Films (Shandong) Co., Ltd. has successfully passed the ISO14001 Environmental Administration System in July 2006, and passed the review by SGS in June 2009.
 
(3)
Fuwei Shandong was awarded as Key High-Tech Enterprise of the National Torch Program in December 2007.
 
(4)
The A-Category is the top of the four ratings for corporate taxpayers in China. Candidates eligible for the category are reviewed and designated by the authorities every two years.
 
(5) 
Because of China’s new Enterprise Income Tax Law which became effective on January 1, 2008, the status Fuwei Shandong as an HNTE had to be renewed. On December 2008, Fuwei Shandong was re-designated High-and-New Tech Enterprises by Shandong Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, as well as from the Shandong Province Financial Bureau.

 
20

 
 
Business Prospects
 
The financial crisis which began in the second half of 2008, has had significant adverse impact on the global economy, including China. The world’s economy, as well as the Chinese economy has been recovering gradually upon measures taken by each government to stipulate the economy. If the stipulated policy adopted by the Chinese government does not change, the Chinese economy is expected to continue to grow in 2010 and as a result, will lead to the market demand of our products.
 
We have identified thick BOPET film (typically with a thickness of between 50 to 250 microns), which is mainly used in the electrical and electronics industries, as a key market segment for potential growth. With the expansion of the electrical and electronics industries in China, the market for thick BOPET film, used particularly in the manufacturing of thin film transistor-liquid crystal display (or TFT-LCD base film, solar battery base film) screens, is also anticipated to increase significantly. Although there are BOPET manufacturers in the PRC that are able to produce BOPET film of such thickness, we believe that generally their product quality is not able to meet requirements for high-end usage such as TFT-LCD screens and solar battery. As a result, manufacturers of TFT-LCD and solar battery screens requiring thick BOPET film generally obtain their supply from overseas.
 
Business Development Strategies
 
We believe we have the ability to increase our sales and expand our markets. To strengthen our market position, we intend to improve our product offerings. As manufacturers based in the PRC strive to reduce their costs in the face of competition, we believe that there will be greater demand for locally-produced BOPET film products. We will also explore suitable opportunities to look for new customers and markets in the PRC and overseas.
 
Our future plans include:
 
 
·
Continue d construction of the new BOPET produ ction line
 
We have commenced construction of a new production line capable of producing BOPET film that is between 50 to 250 microns thick in our current premises at Weifang City, PRC. The BOPET film production using this new production line is targeted at industrial use, including TFT-LCD screen films. We expect to penetrate into the electrical and electronics industry with such new product offerings. Such industries for high-end and special usage currently rely on expensive imports. The construction of the new BOPET production line has been postponed due to a shortage of funds. However, we will continue to make efforts to obtain the required funds to complete new BOPET production line. The total investment for this new production line is expected to be approximately US$40 million to US$ 45 million.
 
 
·
Expansion into overseas markets and promotion of our products in the PRC
 
We believe that the overseas markets hold significant potential for future growth. We believe that our venture into the overseas markets which began in 2004 has been successful. Although we are not focused on any particular overseas market, we have identified North America as an area of potential growth. We would also like to expand our European and Japanese market. In 2008, our overseas sales were significantly affected by the anti-dumping investigations conducted by South Korea and the United States against BOPET exporters in China, India and other countries and the appreciation of Renminbi. Although we have overcome many difficulties and received the lowest rates in the anti-dumping investigations, we experienced a significant decrease in our overseas market demand, such as in the United States, Europe and South Korea, due to the global financial crisis and, as a result, our overseas sales significantly decreased in 2008 and 2009. With our low manufacturing and labor costs compared to overseas manufacturers and with high quality products and competitive prices, we believe that we can capture certain market share in the overseas market. As we believe that the domestic market for BOPET products has significant potential for growth, we also intend to engage in promotional activities in this area and further develop our customer relationships. In 2007, 2008 and 2009, sales to our customers in the PRC accounted for approximately 75.5%, 86.9% and 88.9%, respectively, of our total revenue, while the remainder was sold overseas   in US dollars.

 
21

 
 
 
·
Investment in research and development
 
As we have a strong focus on research and development, we plan to continue to invest substantially in this area. We have constructed a small-scale production line for the purpose of conducting research and development. Such a production line may also produce small batches of high value-added products. This trial production line will enable us to save experimental costs and reduce waste during the process of development, particularly during test production. We also intend to expand our research and development team by hiring additional advanced research personnel either from China or overseas.
 
In 2006, the Weifang government established the Hi & New Technology Project Industrial Development Fund (“IDF”) for the purpose of enhancing independent innovation and technical R&D ability of local enterprises in order to support the development of local Hi & New Technology enterprises. On January 31, 2007, we obtained the first installment of a loan from the industrial development fund from our local government. Our subsidiary, Shandong Fuwei used all of these funds for the construction of the Fuwei technology center trial production line project mentioned above. In 2008, Shandong Fuwei received a second IDF loans to continue supporting our R&D. These funds made a significant contribution to the development of our R&D for new products.
 
Since 2008, the Chinese government has adopted a series of plans to stimulate the economy casued as a result of the global financial crisis. In October 2009, the Company received a RMB10 million financial support after completing the necessary procedures with the local Chinese government. Shandong Fuwei is planning to use this project fund in accordance with the needs of the Company. This financial support is an eight year long-term loan.
 
Our Products and Services
 
We are principally engaged in the manufacture and distribution of BOPET film. We currently produce BOPET films from the three production lines, with an aggregate annual designed production capacity of 30,600 metric tons with thicknesses varying between 8 - 125 microns.
 
BOPET is a high quality plastic film manufactured using the Biaxially oriented stretch (transverse and machine direction) technique. Our advanced production process improves the physical properties of the plastic film such as its tensile strength, resistance to impact, resistance to tearing and malleability. The high dimensional stability of the film over a wide range of humidity and temperature fulfills the basic requirements for flexible packaging. The film is light-weight, non-toxic, odorless, transparent, glossy, moisture-resistant, and retains high barrier resistance, making it suitable for many forms of flexible packaging, printing, laminating, aluminum-plating and other processes. In addition, it retains high dielectric strength and volume resistance even at high temperatures, which are essential qualities for electrical and electronic uses. The three-layer co-extruded structure enables us to develop high quality BOPET products.
 
BOPET film has been widely used in the packaging (such as food, pharmaceutical, cosmetics, cigarettes, and alcoholic beveridges), imaging (such as printing plates and microfilms), electronics and electrical (such as wire and cable wrap, capacitors and motor insulation) and industries. Due to its unique qualities, it has become a popular choice as a flexible packaging material in these industries in recent years.
 
We market our products under our brand name “Fuwei Films.” Our operations are based primarily in Shandong Province, PRC, where we manufacture our products for sale to customers engaged in flexible packaging businesses in the PRC, in particular the coastal region. We also export our products to packaging customers and distributors mainly in South Korea, the United States, Europe and others.
 
Our BOPET film is mainly used in the flexible packaging industry for consumer products such as those relating to processed foods, pharmaceutical products, cosmetics, tobacco and alcohol. Our products may be sub-divided into five main categories constituting the following percentages of our total revenue for each of the twelve months ended 2007, 2008 and 2009.

 
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Category
 
2007
   
2008
   
2009
 
Printing film
    18.6 %  
12.6
 
11.0
Stamping foil film
    21.0 %     31.2 %     54.4 %
Metallization film
    6.8 %     10.1 %     10.9 %
Special film
    37.8 %     24.0 %     10.6 %
Base film for other applications
    15.8 %     22.0 %     13.1 %
 
The above categorizes BOPET film products by application.
 
Printing film
 
This is a high transparency film that is corona treated on one side to provide excellent adhesion to ink. This is primarily used in printing and lamination.
 
Stamping foil film
 
This is a film that displays excellent thermal stability and tensile strength and is used in metallized film and laser stamping foil and transfer.
 
Metallization film
 
This is an aluminum plating base film that displays good thermal stability and tensile strength and provides good adhesion between film and aluminum layer. This is mainly used for vacuum aluminum plating for paper or flexible plastic lamination.
 
Special film
 
We mainly produce the following types of special film:
 
 
·
High-gloss film: Film with high levels of reflection approaching a mirror-like surface, used for aesthetically-enhanced packaging purposes.
 
 
·
Heat-sealable film: Film with a three layer structure. The heat-sealable film is primarily sold for use in construction, printing and making heat sealable bags.
 
 
·
Laser holographic base film: A directly embossable film with high transparency, used as anti-counterfeit film and for aesthetics for food, medicine, cosmetics, cigarette and alcoholic packaging.
 
 
·
Dry film: Generally used in circuit boards (PCB & FPC) production, and sometimes used for nameplate and crafts etching. It is not only the most widely used mask film for PCB graphic but also indispensable image material for manufacturing excessive circuit.
 
Base film for other applications
 
Base films for other application are ordinary commodity polyester films with applications other than for the usages mentioned above.
 
Production
 
Our operating subsidiary, Shandong Fuwei, currently operates three production lines. The first is a Brückner 6.3 m (in width) production line with an annual designed production capacity of 13,000 metric tons of BOPET film. The second is a DMT 6.7 m (in width) production line, which could produce three layers co-extruded production with annual designed production capacity of 16,100 metric tons of BOPET film. The total annual production capacity of the two production lines is 29,100 metric tons. In addition, we closed our leased production line in the beginning of 2009. Designed production capacity of the trial production line that we built in 2009 is 1,500 metric tons. As of December 31, 2009, the total production capacity of Shandong Fuwei was 30,600 metric tons.

 
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BOPET film is manufactured from polyethylene terephthalate (PET) resin, which is a petrochemical product. BOPET film is produced by melting the granulated PET resin and extruding it into a flat sheet. This sheet is stretched to 3.0 to 3.6 times its original length, and then horizontally from 3.0 to 3.6 times its width, before being heat-set and finally wound into reels. The orientation process (stretching during the application of heat) gives the film its mechanical strength, barrier and optical properties (clarity and gloss). Our Brückner production line comprises a single extruder which can produce single-layer BOPET film, whereas our DMT production line comprises one main extruder and two co-extruders which can produce BOPET film comprising three layers, of which the core layer and the outer co-polymer layers are made of different materials. Depending on the additives used, the films produced have varying physical and chemical properties. The main steps of our manufacturing process involve:
 
Dosing and Mixing
 
PET resin is dosed and mixed with relevant additives to give it its desired characteristics. In the case of the production three-layer co-extruded BOPET film, the materials are dosed and mixed separately for each of the core and outer layers.
 
Extrusion/Co-extrusion
 
The mixed material is melted and plasticized to achieve the required homogenous state with the requisite characteristics and then it is filtered and transported to the die unit. Our DMT production line has one main extruder and two auxiliary extruders to allow us to produce multiple-layer co-extruded BOPET film.
 
Die Casting
 
The respective mixed materials are extruded from the die unit which produces a flat layered cast sheet and casted on the chill roll which is cooled by the pinning system.
 
Machine Direction Orientation (vertical stretching)
 
The cast sheet is then heated and stretched by machine direction before annealing the cast sheet, which is a process of heat-setting so as to control the shrinkage of the sheet after the vertical stretching.
 
Transversal Direction Orientation (horizontal stretching)
 
After the machine direction stretching, the cast sheet is horizontally stretched before annealing again.
 
Pull Roll Station
 
The stretched sheet is trimmed and measured for thickness. For the production of base film for printing, the surface is treated by corona treatment. Corona treatment is the process which enables the BOPET film to become receptive to printing. At the pull roll station, continuous feedback on the thickness of the BOPET film is also relayed back to the die unit which therefore ensures consistency in the thickness of the BOPET film.
 
Winder
 
The final BOPET film is then wound up into metal rolls in the mill roll by the winder.
 
Slitter
 
The wound BOPET film is then unwound from the metal rolls, divided to the requisite width and length, and wound again into paper core for delivery to customers.

 
24

 
 
Inventory Management
 
Our warehousing facilities are located in the Shandong Province, PRC. Our warehouses are guarded by security personnel and loss of our inventory is covered under our insurance policies. As of December 31, 2009, our total inventories amounted to approximately RMB 45 million and our raw materials, work-in-progress, finished goods and consumables and spare parts made up approximately 58.7%, 4.6%, 35.4% and 1.3% of our inventories, respectively.
 
To ensure an accurate inventory record and to monitor our inventory aging, we conduct monthly stock counts. We usually maintain raw materials whcichcan be used for one week of production. In the second half of 2009, we stored some materials based on the orders from our customers. Typically, we start manufacturing such goods upon receipt of orders from our customers.
 
Our inventory turnover periods (in days) for 2007, 2008 and 2009 were 34.2, 34.9 and 45.9, respectively. Inventory turnover is calculated as 365 days times inventory at period/year end date divided by cost of sales in respect of the financial period/year.
 
There were no provisions for inventory obsolescence, inventory written off or inventory written down to net realizable value in 2008. In 2009, the Company prepared RMB 4.2 million provisions for inventory impairment.
 
Manufacturing Facilities and Utilization Rates
 
As of December 31, 2009 we have the following production lines:

Production Line
 
Designed Production Capacity
 
Estimated Remaining Life Span
Brückner Production Line
 
13,000 metric tons per annum
 
Approximately 9 years
DMT Production Line
 
16,100 metric tons per annum
 
Approximately 16 years
Trial Production Line
 
1,500 metric tons per annum
 
Approximately 10 years
 
The designed production capacity as given by the manufacturer is determined based on the assumption of the production of a specific mix of BOPET films of varying thicknesses. Our Brückner and DMT production lines and the trial production line have been in use since 1996, 2003 and 2009, respectively. The production lines are depreciated on the straight-line method over their respective estimated useful lives.
 
Our approximate annual production volumes and the average annual utilization rates for our facilities for 2007, 2008 and 2009, based on our estimated operational production capacities were as follows.
 
   
Approximate  Annual  Production  Volume
(tons)
   
Average  Annual  Uti lization  Rate  (%)
 
Production Line
 
2007
   
2008
   
2009
   
2007
   
2008
   
2009
 
Brückner Production Line
    12,299       12,092       11,823       94.6 %     93.0 %     90.9 %
DMT Production Line
    12,378       13,769       13,822       76.9 %     85.5 %     85.8 %
 
There are currently no regulatory requirements that may materially affect the utilization rates of our property, plant and equipment. However, certain of the fixed assets relating to our production lines have been mortgaged in respect of certain of our bank loans as described under “Properties” for further details.
 
Quality Control
 
The quality and reliability of our products are essential for our continued success. We adopt strict measures for quality control in the entire production process of all our products, from the purchase and selection of raw materials, to each stage of the manufacturing processes and to the final inspection of the end products. Our quality control procedures were certified for ISO 9001:2000 compliance in September 2004.

 
25

 
 
As of December 31, 2009, our product inspection and quality control department comprised of nineteen employees. We have one manager, one deputy manager, one purchase inspector, seven process inspectors and seven end-product inspectors and two after-sale personnel. Members of our quality control departments have had relevant training in the area of quality control in accordance with ISO 9001:2000 procedures. Our product inspection and quality control department ensures that our production process, raw materials and end products are of the quality to our customers’ satisfaction. Only products which have been endorsed with our certified quality marks are delivered to our customers.
 
Raw Materials
 
We adopt and adhere to a set of quality inspection procedures and internal controls for the procurement, selection and quality checks of raw materials. Different types of checks are utilized for different categories of raw materials. Our suppliers are also required to meet our internal qualification criteria such as the quality and pricing of their suppliers, their ability to meet our requirements and timely delivery. We conduct batch inspections for raw materials delivered to us before they are accepted and stored in our warehouses. Defective materials are returned to our suppliers for necessary corrective action to ensure that such defects are not repeated. The raw materials are inspected again prior to selection for use in the production process.
 
Production Process
 
We have established standard operational procedures and implementation rules for each stage of the production process to ensure that our products comply with and adhere to our stringent quality control standards and that our productivity is optimized. We only permit employees who have undergone and completed the relevant training to work on our production lines. At each stage of the production process, our inspectors check and ensure that our production process complies with our quality standards, while our quality control department monitors and ensures that our products-in-process and final products comply with our internal and international standards of quality control by carrying out random sampling of the products.
 
End Products
 
To ensure that our products fulfill our quality criteria established by our product inspection and quality control department, our products undergo final quality inspection upon production, labeling and packaging. Our product inspection and quality control department continues to monitor and ensure that our products are properly handled and stored in our warehouses. Prior to delivery to our customers, our products are inspected one final time to ensure that they are in good condition and not damaged.
 
Maintenance
 
Our maintenance engineers regularly maintain and repair our machinery and equipment to ensure that they are in good working order and functioning properly. We also conduct periodic maintenance of all our machinery on a rotation basis. On an average basis, we replace our filters every 25-35 days and this replacement process takes about six to eight hours. We believe that because of our stringent maintenance policies, we can maintain sustainable production. Our monthly average downtime for 2009 (primarily for maintenance) was less than 1.5% of our monthly production time.
 
For 2009, the rejection rates of our products were generally less than 0.9% of our total production volume. Defective or inferior products that do not fulfill our customers’ control standards are recycled. We ensure that these recycled products meet our customers’ quality standards and requirements before selling them to our customers.
 
New Products
 
Through years of R&D endeavors, we have introduced a variety of BOPET film products. The following are some of the new products for which commercial production has begun:

 
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Product
 
 
Achievement
Laser holographic base film
 
Our laser holographic base film is a directly embossable BOPET film, ideal for holographic applications. This film eliminates the need to coat and prepare substrates for holographic embossing, thus reducing costs for our customers. It can be used for anti-counterfeit purposes and in packaging to help enhance the aesthetic perception of food, medicine, cosmetics, cigarettes and alcohol.
     
Single/double surface matte film
 
Our matte film is mainly used for aesthetically-enhanced packaging purposes. Our ability to produce single-sided matte films offers significant cost savings for our customers as the non-matte side of the film may be used for other applications without further processing.
     
Anti-counterfeit film
 
Our anti-counterfeit film changes color under ultraviolet rays. Accordingly, it is used for packaging branded products for anti-counterfeit purposes.
     
Chemical pretreated film
 
Our film is pretreated in-line and coated, which results in a strong adhesion to ink and aluminum.
     
Heat-sealable film
 
Heat-sealable film is a three layers co-extruded Biaxially oriented polyester film with an amorphous polyester heat seal layer. Available with corona treatment on the non-seal side to give improved adhesion to typical packaging inks and metallizing. It not only can provide permanent seals to PET, but also can seals to APET, CPET, PETG and others. Heat-sealable film can be aluminized, printed and composite with other films. It is microwave ovenable film for packaging refrigerated and frozen foods.
     
Heat sealable film for steel
 
 
To improve the heat-sealable strength between the film and steel and adjust the stretchable capability so as to be more suitable for steel’s heat sealing. Mainly used for protection and decoration of colorful armor plate for home appliances.
     
High-gloss film
 
By using special raw chips and process, provides very high gloss, uniform thickness, good mechanical properties, and surface smoothness. It can be used under -70~200°C for packaging food, cigarettes, alcohol and laser embossing, holographic anti-fake and metallic yarn and others.
     
White film
 
To be used for print, composite, coating and others, such as advertising lamp house, release film and reflector film.
     
DFR base film
 
Generally used in circuit boards (PCB & FPC) production, sometimes used for nameplate and crafts etching. This is not only the most widely used mask film for PCB graphic, but also an indispensable image material for manufacturing excessive circuit.
     
Hot shrink film
  
To change the hot shrinkage rate by enlarging the draw ratio.  It is mainly used for PET beverage bottle shrinkable tags. Hot shrink film uses PET structure which is the substitute of PVC shrinkable tags, which is also in line with the requirements of environmental protection and recyclable.
 
 
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New Product Development
 
We have also begun working on the following projects which are currently in the test production phase:
Product
 
Objectives   and Applications
 
Commercialization Date
Expected
         
Metal-adhesion improved film
 
To improve the peel strength after be metalized sealing. Mainly used for liquid packages.
 
July 2010
         
Window film
 
To be used in automobile window application and building window
 
September 2010
         
Positioning Transfer base film
  
For high value-added packaging, such as tobacco and alcohol, increasing the apparence of the products
  
December 2010
 
We have applied for patents with respect to some of our new processes and technologies used in our business.  Currently there are pending approvals from the relevant PRC authorities. We do not believe that the denial of any of these applications will affect our ability to continue to manufacture our products on a competitive basis. As our operations expand internationally, we plan to evaluate the benefits of seeking international protection of our intellectual property in relevant markets. In addition to our patent applications, we protect our proprietary know-how by subjecting our employees to confidentiality, non-compete and non-solicitation obligations through our labor contracts with them and restricting access to our research and development center and access to technology know-how to authorized personnel.
 
Our expenditure on research and development, excluding staff salaries and related expenses, in 2007, 2008 and 2009 were as follows (in thousands):
   
Year  Ended
Dec. 31,  2007
   
Year  Ended
Dec. 31,  2008
   
Year  Ended  Dec. 31,  2009
 
   
RMB
   
RMB
   
RMB
   
US$
 
Research and Development Expenses
    1,596
(1)
    2,631
(2)
    1,264
(3)
    185  
 
Note:(1)&(2)&(3) In addition to the above-mentioned Expenses in 2007, 2008 and 2009 of RMB 1.6 million, RMB 2.6 million and RMB1.3 million, respectively, the R&D capital expenditure is RMB 48.8 million, RMB3.2 million and RMB5.5million, respectively.
 
We view research and development as an essential part of our business. In the face of increasing competition, we increased our expenditure on research and development from 2007 to 2009, as we believe that higher investment in the equipment of our R&D center and in the development of new products and upgrading of existing products will enhance our ability to compete.
 
Sales, Marketing and Key Customers
 
As of December 31, 2009, our sales department comprised of 15 employees in the domestic sales division and 2 employees in the over sales division. Our marketing department comprised of two employees. Our sales department is responsible for our market penetration, such as cultivating new customers and businesses, and market development such as developing existing accounts through better service support and customer relationship. Our marketing department is responsible for market research, development and promotion. Our management is actively involved in overseeing and supervising our marketing activities and often visits our clients together with our sales personnel. They have established and maintained close business relationship with our key customers.

 
28

 
 
 
Customers and Markets
 
Over the past years, we have established good working relationships with our customers in the flexible packaging industry. Our products are mainly used in the packaging of consumer products such as those relating to processed foods, pharmaceutical products, cosmetics, tobacco and alcohol. In addition, we entered into dry films market and mantain good relationship with major dry films customers.
 
The majority of our domestic customers are located in the coastal region of the PRC. Our overseas customers are mostly based in South Korea, the United States, Europe and others. In 2009, sales from our domestic and overseas customers constituted approximately 88.9% and 11.1%, respectively, of our annual revenue.
 
The following are our top five customers and their respective percentages of contribution to our total revenue for each of the years ended December 31, 2007, 2008 and 2009:
 
   
Percentage of Total Revenue (%)
 
   
2007
   
2008
   
2009
 
Dongguan Klaser Technologies Co.,Ltd.
    0.9       4.9       7.2  
Jiangyin Teruida Packaging Technology Co.,Ltd.
    2.3       2.5       5.1  
Dare Technical Co., Ltd. Danyang Advance Packaging Material Subsidiary Company
    3.1       3.4       5.0  
Southeast Films Technology Co.,Ltd.
    0.8       1.8       3.9  
Holotek Technology Co., Ltd.
    0.9       2.7       2.9  
 
None of our customers accounted for more than 10% of our total revenue in any of the previous three years.
 
None of our directors or principal shareholders or any of their affiliates has any interest, direct or indirect, in any of our customers listed above.
 
Sales
 
Because of our broad range of product offerings and customers, our sales and marketing efforts are generally specific to particular types of products, customer or geographic region. Most of our products are sold by our own direct sales force. These salespeople, including our management, maintain close relationships with our customers by paying visits to our customers from time to time to understand their needs, and to obtain their feedback and suggestions. Our sales personnel provide technical support to our customers when required. We also regularly invite our existing and potential customers to our manufacturing facilities for visits as we believe that such visits enable our customers to better understand our production processes and operations and also enhance our customers’ confidence in us.
 
We adopt a risk assessment model to our customer credit management system, and we offer different credit terms to our customers based on criteria such as working relationship, payment history, creditworthiness and their financial position. We offer our domestic customers credit terms of up to 30 - 45 days. Our international sales are settled through telegraphic transfer and letters of credit, which generally have payment terms of between 30 and 60 days.
 
We offer a basic salary and commission package for our sales personnel. The scale for the commission payable is dependent on a number of factors such as sales completion targets, debt collection, and credit rating of our customers, customer service rendered, customer feedback and development of new customers.
 
Customer Service
 
We place great emphasis on good, fast and effective pre-sales and after-sales customer support services. As such, all our sales personnel have undergone stringent training and have sufficient knowledge and understanding of our products. Our sales personnel are responsible for coordinating and providing after-sales services which include following through with our customers’ orders, maintaining relationships with our customers, handling complaints effectively, ensuring that our customers’ needs are met and understanding the future needs of our customers. Our quality department gives support to our customer service, and is responsible for explaining questions related to our products usage from customers. If there are complaints as to our product quality, they are responsible for receiving and settling complaints on our customers’ site.

 
29

 
 
Marketing
 
We have the following marketing channels:
 
 
·
we regularly attend trade fairs and exhibitions as we believe that they serve as a good platform for us to exhibit our new products and expand our sales network. In addition, participation in seminars, fairs and exhibitions provides us with opportunities to network with our potential and existing customers and allows us to obtain up-to-date information on new products, market trends and consumer demand;
 
 
·
referrals from existing customers as well as business associates to generate sales opportunities; and
 
 
·
promotion through our corporate website. Information on our products and services are also found on our corporate website which allows us to reach out to potential domestic and overseas customers.
 
Our marketing personnel also conduct PRC domestic and overseas market surveys and research. The statistics, findings and information obtained from such surveys and research are then passed on to our management and production department for their analysis on the demand for and supply of our products, which allows them to make adjustments to our production and sales targets as well as our marketing strategies.
 
Suppliers and Raw Materials
 
Suppliers
 
We purchase raw materials according to the relevant technical specifications and production requirements. We select our suppliers based on the following considerations and/or methods:
 
 
·
the consistency of the quality of raw materials supplied and any relevant certifications;
 
 
·
our inspection of the supplier’s quality control system;
 
 
·
positive feedback from the supplier’s other customers;
 
 
·
pricing of raw materials;
 
 
·
timely delivery of raw materials;
 
 
·
the supplier’s financial position and viability;
 
 
·
the service provided by the supplier;
 
 
·
qualifying suppliers by sample testing and batch purchasing of their raw materials; and
 
 
·
annual evaluation and review of our suppliers.
 
The following are the suppliers that supplied 10% or more of our purchases of raw materials for each of the years ended December 31, 2007, 2008 and 2009:
 
       
Percentage of total purchases (%)
 
   
Supply
 
2007
   
2008
   
2009
 
Sinopec Yizheng Chemical Fibre Company Limited
 
PET resin and Additives
    46.4       44.8       45.8  
Jiangyin Huaxing Hecheng Co., Ltd.
 
PET resin
    12.3       9.7       12.5  

 
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We purchase the majority of our PET resin from Sinopec Yizheng as the quality of its supply of PET resin consistently meets our requirements. We currently have an annual supply agreement with Sinopec Yizheng pursuant to which Sinopec Yizheng has agreed to supply us fixed quantities of PET resin monthly at the prevailing market prices.  Such supply agreement is renewable annually. We have not entered into any long-term supply contracts with any other supplier. Our purchases of raw materials are on a cash basis. While we believe that there are only a limited number of suppliers of PET resin that can consistently meet our quality and quantity requirements on a timely basis, there are several PET resin suppliers in the PRC or overseas market from whom we may easily obtain PET resin, on a short-term basis, if necessary.
 
None of our directors or principal shareholders or any of their affiliates has any interest, direct or indirect, in any of our major suppliers mentioned above.
 
Raw Materials
 
The main raw materials that we purchase from our suppliers are as follows:

   
Percentage of Total Purchases (%)
   
Raw Material
 
2007
   
2008
   
2009
 
Country
PET resin
    78.0       77.2       76.0  
PRC and Korea
Additives
    22.1       22.8       24.0  
PRC
 
The market prices of PET resin and additives may fluctuate due to changes in supply and demand conditions. Any sudden shortage of supply or significant increase in demand, of PET resin and additives may result in higher market prices and thereby increase our costs of sales. The prices of PET resin and additives are, to a certain extent, affected by the price movement of crude oil. Since September 2008, the intense fluctuation of the crude oil price has significantly affected the price of raw materials. In 2009, the oil price continued to increase, especially at the end of 2009, which the price increased by 90%. Therefore, the price for raw materials continued to increase and at the end of 2009 it increased by 43%.
 
As we are unable to predict the price movements of such raw materials and to minimize the impact of such price fluctuations on our cost, we generally purchase such raw materials in quantities sufficient for our production process for approximately one week. In the second half of 2009 along with the economy recovery and based on the orders from our customers we stored some raw marterials. This way we saved some purchase costs. We may also adjust the prices of our end products, when appropriate, and pass portion of cost increases to our customers.
 
Competition
 
We face intense competition in the PRC plastic film industry. We believe that there are currently many plastic film manufacturers in the PRC and we expect further entrants into this market in the future. Among the flexible packaging industries, in particular those involving packaging of processed food and pharmaceutical products, the primary types of plastic films in the packaging products include BOPET, Biaxially oriented polyester (BOPP); and Biaxially oriented polyamide (BOPA).
 
The following table gives a general comparison of the key differences in the technical specifications and usage of the above types of plastic films.

 
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Comparison of BOPP Film, BOPET Film and BOPA Film (1)
 
Features
 
BOPP
 
BOPET
 
BOPA
Water vapor barrie
 
Excellent
 
Fair
 
Poor
             
Gas barrier properties
 
Poor
 
Excellent
 
Excellent
             
Break down voltage
 
Poor
 
Excellent
 
Excellent
             
Machine-ability
 
Fair
 
Excellent
 
Excellent
             
Print-ability
 
Fair
 
Excellent
 
Fair
             
Suitability for Metallizing
 
Poor
 
Excellent
 
Fair
             
Density (gm/cc)
 
Low (0.91)
 
High (1.39)
 
Medium (1.15)
             
Tensile strength
  
Poor
  
Excellent
  
Excellent
 
(1)
This comparison is based on the book of Biaxially Oriented Plastics Film, edited by Yanping Yin and published by China Chemical Press in August 1999.   The Company did not notice updated technical specifications subsequently as of December 31, 2009.
 
The production of BOPET film requires a large capital investment. We believe that we are one of the few BOPET film manufacturers in the PRC with research and development capabilities.
 
We believe that the major competitive factors in our industry include:
 
 
·
research and development capability;
 
 
·
quality and reliability of products;
 
 
·
technical/manufacturing capability;
 
 
·
industrial reputation; and
 
 
·
production cost and sale prices.
 
We believe that our major competitors in BOPET manufacturing are currently:
 
 
·
Dupont Hongji Films Foshan Co., Ltd;
 
 
·
Yihua Toray Polyester Film Co., Ltd.; and
 
 
·
Ningbo Shunsu Film Co., Ltd.
 
We believe that we have established a good reputation and management track record as a manufacturer of BOPET film and are able to offer quality products.
 
C. Organizational structure.
 
The following table set forth the details of our subsidiaries as at the date of this Annual Report:
 
Name
 
Country of Incorporation
 
Ownerships Interests
 
Direct Parent
Fuwei Films (Shandong) Co., Ltd.
 
Weifang Shandong, China
 
100% wholly owned by Direct Parent
 
Fuwei Films (BVI) Co. Ltd.
             
Fuwei Films (BVI) Co., Ltd.
 
British Virgin Islands,UK
 
100% wholly owned by Direct Parent
 
Fuwei Films (Holdings) Co. Ltd.
             
Fuwei Films USA LLC
  
South Carolina, USA
  
60% owned by Direct Parent (1)
  
Fuwei Films (Holdings) Co. Ltd.
 
(1) Fuwei Films (Holdings) Co., Ltd. and Newell Finance Management Co., Ltd. own 60% and 40% of the total shares of Fuwei Films USA, LLC, respectively.

 
32

 
 
D. Property, plant and equipment.
 
Our corporate headquarters and production and ancillary facilities occupy an area of approximately 74,251 square meters in Weifang City, Shandong Province. The land at our facilities is covered by land use rights held by us. The land use rights for the land upon which our buildings and facilities are located have terms of 50 years, the earliest of which expires in November 2050. All of our research and development, manufacturing, warehousing and administrative functions are conducted at our corporate headquarters. The total gross floor area of production and other facilities owned by us is approximately 29,808 square meters. We own all the buildings and facilities on the premises. Most of our land use rights, office buildings and two facilities in operation have been mortgaged to a bank in the PRC for loans totaling RMB 165 million. Additionally, in April 2009, we stopped to rent the workshop area of leased production line which was about 9,310 square meters (including the warehouse).
 
We are in the process of constructing our new production line located in Weifang Hi & New Technology Development Zone. We anticipate that this new production line will produce BOPET film that is between 50 to 250 microns thick. The BOPET film produced using this new production line is targeted at industrial use, including TFT-LCD screen base films, solar battery base films. The construction of the plants has already been completed.  We initially planned to obtain additional funding during the first half of 2008 and complete the production line construction at the end of 2008. Due to various reasons, such as the general weakened economy and our inability to obtain financing through issuing shares or bonds caused by the continuous decline in our share price, we could not fulfill the financing plan as expected. However, we are still making great efforts to obtain additional funding to complete the project. If the project financing is further postponed, there may be contract disputes between us and the suppliers of the project and we will not be able to aquire the equipment we ordered, which will significantly impact our operations and our development in the thick films industry.
 
Item 4 A. Unsolved Staff Comments
 
None.
 
Item 5. Operating and Financial Review and Prospects
 
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements included in this Annual Report beginning on page F-1. The consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties.
 
Overview
 
We develop, manufacture and distribute high quality plastic film using the Biaxially oriented stretch technique, otherwise known as BOPET film. Since the establishment of our predecessor company in 2003, all of our revenues have been derived from the sales of BOPET film. We sell most of our BOPET film products to domestic customers in China in the flexible packaging industry. We established an overseas sales division in June 2004 and have been selling our products into overseas markets, most notably South Korea, the United States Europe and others.
 
Our Operating History and Corporate Structure
 
The diagram below illustrates our corporate structure:


 
33

 
 
Shandong Fuwei, our PRC operating subsidiary, was formed on January 28, 2003, as a Sino-foreign equity joint venture under the name Weifang Fuwei Plastic Co., Ltd. In July 2003, this company began production of BOPET film, initially renting the necessary fixed assets from Shandong Neo-Luck, a company involved in BOPET film production for which Mr. Xiaoming Wang, our current executive officer, served as executive officer at the time.
 
Shandong Fuwei subsequently acquired these fixed assets through two auction proceedings, the first in October of 2003 and the second in December 2004. At the first auction proceeding in October 2003, Shandong Fuwei acquired assets related to the Brückner production line that it had been renting from Shandong Neo-Luck. This line had been previously mortgaged by Shandong Neo-Luck to the Bank of China, Weifang city branch as security for several loans extended to Shandong Neo-Luck’s affiliates. When these loans went into default, the Bank of China brought a series of legal actions in Weifang Municipal People’s Court that resulted in the assets securing the loans being sold at a public auction. Following its successful bid at an auction on October 9, 2003, Shandong Fuwei acquired the Brückner production line and facilities (with an appraised value of approximately RMB 169 million) for RMB 156 million.
 
In November 2003, Shandong Fuwei’s shares were sold to Shenghong Group Co., Ltd. (“Shenghong Group”) and Shandong Baorui for an aggregate consideration of RMB 98.2 million. Tongju Zhou, a former director of the Company, and Duo Wang each indirectly own 50% of Easebright Investments Limited (“Easebright”), one of our principal shareholders, and are both officers and directors of Shandong Baorui. Jun Yin and Duo Wang own 17.5% and 4.6%, respectively, of Shandong Baorui. In 2004, Messrs. Zhou and Wang, along with Jun Yin established several offshore holding companies in the British Virgin Islands and the Cayman Islands to acquire and hold these shares. In October 2004, Fuwei (BVI) entered into a sale and purchase agreement with Shenghong Group and Shandong Baorui pursuant to which Fuwei (BVI) acquired the respective equity interest of Shenghong Group and Shandong Baorui in Shandong Fuwei for an aggregate consideration of RMB 91 million. Shandong Fuwei thereafter became a wholly-owned subsidiary of Fuwei (BVI) and was converted into a wholly-foreign owned enterprise pursuant to PRC law.
 
As a result of its ongoing financial difficulties, Shandong Neo-Luck was declared bankrupt by the Weifang Municipal People’s Court in the PRC on September 24, 2004. Prior to the bankruptcy, Shandong Neo-Luck’s then major operating asset, the DMT production line, had been pledged by Shandong Neo-Luck to Weifang City Commercial Bank. When Shandong Neo-Luck was declared bankrupt, the Shandong Branch of the Bank of China seized the production line by order of the Qingdao Intermediate People’s Court and the Qingdao Southern District People’s Court while the Weifang Branch of Bank of Communications did so through Weifang Intermediate People’s Court. As such, the effectiveness of the pledge in favor of Weifang City Commercial Bank was under dispute. Subsequently, pursuant to the decision from Weifang Intermediate People’s Court, Weifang City Commercial Bank ranked senior in terms of the right of claims.
 
The pledged DMT production line was put up for public auction by the Shandong Neo-Luck liquidation committee on October 22, 2004. In view of the above complexities, the auction was deemed to be tremendously risky at that time, and therefore, our PRC operating subsidiary did not directly participate in the first auction, which began with a bid price of approximately RMB 53 million by reference to an independent valuation performed on a forced sale basis. However, due to the potential tremendous risk involved, the auction had been withdrawn twice and the starting bid price had been further reduced to approximately RMB 34 million and was finally purchased by Beijing Baorui, a company indirectly controlled by Shandong Baorui. When the DMT production line was put for public auction by Beijing Baorui three months later, our PRC operating subsidiary purchased it for approximately RMB 119 million, which was supported by an independent valuation performed on a going concern basis. We understood that acquiring the DMT production line from Beijing Baorui through the first auction would be an effective way to minimize the risk associated with the uncertainties arising from the bankruptcy of Shandong Neo-Luck. The price difference of approximately RMB 85 million represented a risk premium paid to Beijing Baorui, which bore the ultimate risks of recourse from creditors of Shandong Neo-Luck.

 
34

 
 
Subsequent to the auction for several years, the PRC government conducted an investigation into the conduct of certain individuals in connection with such transactions.  In March 2009 Messrs Yin, Wang and Zhou committed the crime of corruption by verdict of the Jinan Intermediate People’s Court in the city of Jinan, Shandong Province. In Novernber 2009 the Company became aware of the final verdict issued by the Supreme People's Court of Shandong Province.   The Supreme People’s Court upheld the initial verdict issued by the Intermediate court in March 2009. The March 2009 initial verdict sentenced Mr. Yin to death, with a stay of execution for two years; the other two defendants, Mr. Zhou and Mr. Wang, each received life imprisonment; all of the personal property of the three individuals will be confiscated.
 
At the time of the Company’s initial public offering, we had obtained an opinion of PRC counsel with respect to the validity of the auction proceedings under PRC law, although you should read the description of the opinion and the subsequent development in March 2009 described under the title “Risk Factors — The circumstances under which we acquired ownership of our main productive assets may jeopardize our ability to continue as an operating business.” Certain of the assumptions relied upon in providing that opinion have been called into question by the verdict referred to above.
 
Key Factors Affecting Our Results of Operations
 
The following are key factors that affect our financial condition and results of operations and we believe them to be important to the understanding of our business:
 
Raw Material Prices
 
During the period for the years ended 2007, 2008 and 2009, the total cost of raw materials made up approximately 76.0%, 78.6% and 73.3% of our cost of goods sold, respectively. The primary raw materials used in our production of BOPET film are polyethylene terephthalate (or PET) resin and additives, which made up approximately 76.2% and 23.8%, respectively, of our total cost of raw materials in 2009. PET resin trades as a commodity and its market price is influenced significantly by global energy prices, including the price of crude oil. In addition, PET resin is also largely used in the textile industry and accordingly the demand from that industry will also affect the price of PET resin.
 
Although we try to pass on all increases in our raw material costs to our customers, and have generally been able to pass partial increases in recent years on to them, we are occasionally constrained partially in this regard by industry practice and preexisting obligations. We obtain a significant amount of the PET resin used at our facilities from one supplier, who has agreed to supply us fixed quantities of PET resin monthly at the prevailing market price. We have not engaged in any hedging transactions to limit our exposure to fluctuations in the market prices of these raw materials or their components.
 
Prices of Our Products
 
Our BOPET film products generally fall into two categories: commodity products and specialty products. The price of commodity products, such as our printing, stamping film and metallization films, is typically driven by supply and demand conditions in the market. We have more control over setting the prices for our specialty products, such as our high-gloss films and heat sealable film.

 
35

 
 
As selling prices are generally higher for those types of BOPET film products which require higher technical expertise, our revenue will be affected, to certain extent, by our product mix. Our product mix is dependent on, among other things, our production facilities, R&D abilities and new products commercialization. Presently, our Brückner production line is capable of producing single-layer BOPET film while our DMT production line is capable of producing both single-layer and three-layer BOPET films.
 
Demand for Our Products
 
We have been able to expand our product range and markets by introducing new products required by customers. We believe that our technical expertise is important in introducing products that are in demand.
 
Our BOPET film products are mostly sold to customers in the flexible packaging industry for consumer products such as processed foods, pharmaceutical products, cosmetics, tobacco and alcohol. In the fiscal years ended December 31, 2007, 2008 and 2009, approximately 75.5%, 86.9% and 88.9%, respectively, of our total revenue was derived from the PRC. The demand for our products is therefore, to a large extent, affected by the general economic conditions in the PRC. A significant improvement in the economic environment in the PRC will likely improve consumer spending, increase the demand for our customers’ products and consequently increase the demand for our BOPET film. However, the economic downturn of the PRC market will impact our customers’ demand and will decrease the demand for our products. The global financial crisis, which began in the fourth quarter of 2008, not only impacted the international market but also impacted the domestic market which resulted in a significant effect on the demand of our products.
 
Production Capacity and Utilization Rates
 
Our sales volume is limited by our operational annual production capacity.
 
As we grow our business in the future, our ability to fulfill more and larger orders will be dependent on our ability to increase our production capacity. As our business is capital-intensive, our ability to expand our production capacity will depend on, inter alia , the availability of capital to meet our needs of expansion or upgrading of production lines.
 
Competition
 
We believe that we are currently one of the few producers of BOPET film in the PRC with research and development capability for new BOPET film production. Our past financial performance is attributable to our market position in the industry. Over time, there may be new investors into our industry, and the current BOPET film manufacturers may expand their production capacity. We believe that currently our major competitors in the BOPET manufacturing market in the PRC include Dupont Hongji Films Foshan Co., Ltd, Yihua Toray Polyester Film Co., Ltd, and Ningbo Shunsu Film Co., Ltd.
 
Our ability to enhance existing products, introduce new products to meet customers’ demand, deliver quality products to our customers and maintain our established industry reputation will affect our competitiveness and our market position.
 
Our ability to compete against new and existing competitors to maintain or improve our market position and secure orders will affect our revenue and financial performance.
 
Description of Certain Statements of Income Line Items
 
Revenues
 
Revenue from the sale of our domestic BOPET film products is recognized when significant risks and rewards of ownership have been transferred to the buyer. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods, or when the amount of revenue and costs incurred or to be incurred in respect of the transaction cannot be measured reliably. In respect of our overseas sales, we ship directly to the destinations of our overseas customers and our revenue is recognized at the time when we receive customs clearance of our exports. Most of our overseas sales were conducted on a Cost, Insurance and Freight (or “CIF”) basis, meaning that we pay the costs and freight necessary to get the products to the port of destination, and the risk of loss is transferred from us to the buyer when the goods pass the ship’s rail at the port of destination. In addition, we have to procure marine insurance against the buyer’s risk of loss of damage to the goods during the carriage. Most of our sales invoices are denominated in the Renminbi Yuan, although certain of our overseas sales are denominated in US dollars.

 
36

 
 
Cost of Goods Sold
 
Our cost of goods sold comprises mainly of materials costs, factory overheads, packaging materials and direct labor. The breakdown of our cost of goods sold in percentage is as follows:
 
   
Year Ended
Dec. 31, 2007
   
Year Ended
Dec. 31, 2008
   
Year Ended
Dec. 31, 2009
 
Materials costs
    80.9 %     78.6 %     73.3 %
Energy expense
 
6.9
%     8.2 %     9.0 %
Factory overhead
    8.6 %     9.0 %     13.1 %
Packaging materials
    2.7 %     2.9 %     3.0 %
Direct labor
    0.9 %     1.3 %     1.6 %
 
Material Costs
 
As noted above, the raw materials used in our BOPET film production are PET resin and additives, which made up approximately 76.2% and 23.8%, respectively of our total materials costs in 2009.
 
Energy expense
 
Energy expense includes water, electricity and gas costs, in which electricity is the main energy consumed.
 
Factory Overhead
 
Factory overhead comprises primarily of depreciation, electricity and water charges, and repair and maintenance of our machinery and equipment, etc. In 2009, the repair and maintenance of our machinery and equipment were RMB 7.8 million, accounting for 2.6% of Cost of Goods Sold, including overhaul repairs of the equipment.
 
Packaging Materials
 
Our packaging materials comprise of, among other things, packaging pallets and carton boxes, used for the packaging of our BOPET film products for delivery to customers. Generally, our unit cost of packaging materials does not fluctuate significantly and our total costs for packaging materials typically vary in line with our sales volume.
 
Direct Labor
 
Direct labor cost includes salaries, wages, bonuses and other payments to our employees in the PRC who are involved in the production of our products. The main factors affecting our direct labor cost are the demands and supply of skilled labor and the implementation or changes of any new government policies or laws relating to employment such as defined contribution plans stipulated by the PRC municipal government.
 
Operating Expenses
 
Our operating expenses comprise of administrative expenses, distribution expenses and other operating expense.
 
Our administrative expenses comprise mainly of allowance for doubtful trade receivables, administrative staff salaries and related welfare costs, entertainment expenses, depreciation charges of office equipment, furniture and fixtures, amortization charges relating to our trademark and land use rights, professional fees, government duties and fees, insurance expenses, rental expenses, travel expenses, office expenses, research and development expenses, and other miscellaneous expenses.

 
37

 
 
Our distribution expenses comprise mainly of freight costs, travel expenses, selling and promotion expenses as well as salaries, allowances and welfare benefits paid to our sales and marketing personnel.
 
Other operating expenses comprise mainly of loss on disposal of property, plant and equipment and other miscellaneous expenses.
 
Finance Costs
 
Finance costs comprise mainly of interest expense relating to our loans exchange deficit, and bank charge.
 
Income Tax Expense
 
For the period from January 28, 2003 to December 31, 2004, Shandong Fuwei was granted certain tax relief under which it was exempted from PRC income tax. As of January 2005, Shandong Fuwei has been a wholly foreign-owned enterprise under the laws of the PRC. Accordingly, Shandong Fuwei is entitled to tax concessions whereby the profit for the first two financial years beginning with the first profit-making year (after setting off tax losses carried forward from prior years) is exempt from income tax in the PRC and the profit for each of the subsequent three financial years is taxed at 50% of the prevailing tax rates set by the relevant tax authorities.
 
On March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax Law of the People’s Republic of China, which law took effect on January 1, 2008 (the “New Tax Law”). Under the New Tax Law, domestic enterprises and foreign-invested enterprises will generally become subject to a unified enterprise income tax rate of 25%, except that enterprises incorporated prior to March 16, 2007 may continue to enjoy existing preferential tax treatments until January 1, 2013. In addition, certain qualifying “High Technology Enterprises” may still benefit from a preferential tax rate of 15% under the New Tax Law if they meet the definition of “Government Developing High Technology Enterprise” to be set forth in the more detailed implementing rules when they become adopted. Shandong Fuwei was redesignated as a High-and-New Tech Enterprise in December 2008 and enjoyed the favorable income tax rate of 15% pursuant to the New Tax Law in 2008 and 2009.  In accordance with New Tax Law, during the transitional period we enjoy 12.5% income tax rate, which is 50% of 25% income tax.
 
The US entity, Fuwei Films USA, LLC, is headquartered in South Carolina. As of December 31, 2009, the income tax rate is 39%, including 34% of federal income tax rate and 5% of state income tax rate.
 
Inflation
 
According to the National Bureau of Statistics of China, the change in the consumer price index in China was 4.8%, 5.9% and 1.9% in 2007, 2008 and 2009, respectively.  Inflation in the PRC has not had any material impact on our business operations.
 
Critical Accounting Policies
 
The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates. We prepare our financial statements in accordance with the U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities, to disclose contingent assets and liabilities on the date of the financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. We continue to evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application assists management in making their business decisions.

 
38

 
 
Goodwill Impairment. Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired.  Goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist.  Impairment testing is performed at a reporting unit level.  An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis.  A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce.  Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.
 
Collectibility of Accounts Receivable. Our management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. Generally, we offer our customers in the PRC credit terms of up to 30-45 days. Our international sales are settled through telegraphic transfer and letters of credit, which generally have payment terms of between 30 and 60 days.
 
We adopt a risk assessment model to our customer credit management system, and we offer different credit terms to our customers based on criteria such as working relationship, payment history, creditworthiness and their financial position. All credit terms are to be approved by our finance department, in consultation with our sales and marketing department. For extension of larger credit limits, approvals have to be sought from our credit committee which is made up of members from our finance department, sales department and CFO. Our finance department and sales department review our outstanding debt account on a monthly basis and follow up with customers when payments are due. We do not impose interest charges on overdue account receivable.
 
As of December 31, 2009 our largest trade debtor was Dongguan Klaser Technologies Co., Ltd, a company based in China. The trade receivables from Dongguan Klaser Technologies Co., Ltd. amounted to approximately RMB3.9 million as of December 31, 2009.
 
We make specific allowance for doubtful trade receivables when our management takes the view (taking into account the aging of trade receivables and in consultation with our sales department) that we will not be able to collect the amounts due. Our customers pay by installments, creating long accounts receivable cycles. We provide for an allowance for doubtful accounts based on our best estimate of the amount of losses that could result from the inability or intention of our existing customers not to make the required payments. We generally review the allowance by taking into account factors such as historical experience, age of the accounts receivable balances and economic conditions.
 
Specific write-off of trade receivables is made when the outstanding trade receivables have been due for more than two years.
 
The analysis of the allowance for doubtful amounts for 2007, 2008 and 2009 is as follows (in thousands):
 
   
2007
   
2008
   
2009
 
   
RMB
   
RMB
   
RMB
   
US$
 
Balance at beginning of year
    872       2,644       4,074       597  
Bad debt (recovery) / expense
    1,772       1,430       (1,713 )  
( 251
)
Write-offs
    -       -    
( 102
)  
( 15
)
                             
Balance at end of year
    2,644       4,074       2,259       331  
 
39

 
Impairment of Long-lived Assets. We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. We measure the recoverability of assets that will continue to be used in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows. If an asset grouping’s carrying value is not recoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is measured by comparing the difference between the asset grouping’s carrying value and its fair value. We estimate the fair value of an asset group based on market prices (i.e., the amount for which the asset could be bought by or sold to a third party), when available. When market prices are not available, we estimate the fair value of the asset group using the income approach and/or the market approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, approved business plans, expected growth rates and cost of capital, among others. We also make certain assumptions about the level of demand for our products in the marketplace, our cost levels, future economic conditions, interest rates, and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.
 
Impairments of long-lived assets are determined for groups of assets related to the lowest level of identifiable independent cash flows. Our operating subsidiary, Shandong Fuwei, currently operates three production lines. Since our products are capable of being produced, and are produced, on multiple lines, each production line cannot produce cash flow separately resulting from the combined administrative expense, R & D, market and sales, etc. Therefore, the Company considers whole assets as an asset group. The estimated undiscounted net cash flow was higher than the net carrying amount of asset as of December 31, 2008 and 2009, hence there was no impairment of long-lived assets recognized for the year ended December 31, 2008 and 2009.
 
Results of Operations
 
The following discussion of our results of operations is based upon our audited consolidated financial statements beginning on page F-1 of this Annual Report.
 
The table below sets forth certain line items from our Statement of Income as a percentage of revenues:
 
   
Year Ended Dec.
31, 2007
   
Year Ended Dec.
31, 2008
   
Year Ended Dec.
31, 2009
 
   
(% of Total Revenue)
 
Gross Profit
    22.2       15.7       7.7  
Operating expenses
    (7.9 )     (10.2 )     (12.8 )
Other expense
    (2.7 )     (0.8 )     (2.0 )
Income tax benefit
    (1.0 )     (0.7 )     1.3  
Net income/ (loss)
    10.6       4.1       (5.9 )

 
40

 
 
Fiscal year ended 2009 compared to fiscal year ended 2008
 
Revenue
 
Our revenue can be analyzed as follows (in thousands):
 
   
December 31, 2009
         
December 31, 2008
       
   
RMB
   
US$
   
% of Total
   
RMB
   
% of Total
 
                               
Printing film
    35231       5,161       11.0 %     56,607       12.7 %
Stamping film
    174,356       25,539       54.4 %     139,571       31.2 %
Metallization film
    35,138       5,147       10.9 %     45,148       10.1 %
Specialty film
    34,004       4,981       10.6 %     107,404       24.0 %
Base film for other applications
    42,002       6,152       13.1 %     98,526       22.0 %
                                         
  Total
    320,731       46,980       100.0 %     447,255       100 %
 
During the fiscal year ended December 31, 2009, our revenues were RMB 320.7 million, which is a decrease of RMB 126.5 million or 28.3%, as compared to the same period for 2008. The decrease in sales is mainly because the decrease of average unit sales price and the closing of leased production line , which caused the revenue to decrease RMB 74.8 million and RMB 51.7 million respectively compared to the same period in 2008.
 
In 2009, sales of special films were RMB 34.0 million and 10.6% of our total revenues as compared to RMB 107.4 million and 24.0% in 2008, which is a decrease of RMB 73.4 million, or 68.3%, as compared to the same period in 2008. The decrease was attributable to the decreased demand for high value-added packaging caused by financial crisis which further caused the decreased demand for specialty films. Furthermore, we adjusted the composition of products portfolio, reducing sales of some specitay films, such as matte films. In 2009, the sales of specialty films such as dry films increased.
 
Cost of Goods Sold
 
Our cost of goods sold was RMB 296.1million for the year ended December 31, 2009, which is a decrease of RMB 80.8 million, or 21.4%, as compared to the same period for 2008. The decrease resulted from the decreased unit sales price and the closing of the leased production line , which caused the total cost of goods sold to decrease RMB 35.1 million and RMB 45.7 million respectively compared to the same period in 2008.
 
Gross Profit
 
Our gross profit during the year ended December 31, 2009 was RMB 24.6 million representing a gross margin of 7.7%, compared to RMB 70.3 million or 15.7% for the year ended December 31, 2008. The decrease in gross profit margin was mainly due to the decline in sales quantity of specialty films which further lead to a sharp decline in average unit sale prices.
 
Operating Expenses
 
Our operating expenses during the year ended December 31, 2009 was RMB 41.2 million, which is an decrease of RMB 4.6 million, or 10.0%, as compared to the same period for 2008. The decrease was mainly due to decline of the maintainance expenses as a public company. 
 
Other Expense
 
Our other expenses during the year ended December 31, 2009 was RMB 6.5 million, which is a increase of RMB 3.0 million, or 86.1%, as compared to the same period for 2008. The increase was mainly due to the decrease of capitalized expenditure of interest by RMB 6 million.
 
Income Tax Benefit / (Expense)
 
The effective tax rate was 17.7% and 14.0% in 2009 and 2008 respectively. The higer effective tax rate in 2009 was primarily due to the net loss for the period ended 2009, hence, no income tax was incurred only deferred tax benefit.

 
41

 
 
Fiscal year ended 2008 compared to fiscal year ended 2007
 
Revenue  
 
Our revenue can be analyzed as follows (in thousands):
 
   
December  31,  2007
   
December  31,  2008
 
   
(RMB in thousands)
   
% of Total
   
(RMB in thousands)
   
% of Total
 
Printing film
   
83,453
     
18.6
     
56,607
     
12.7
 
Stamping film
   
94,366
     
21
     
139,571
     
31.2
 
Metallization film
   
30,668
     
6.8
     
45,148
     
10.1
 
Special film
   
169,961
     
37.8
     
107,404
     
24.0
 
Base film for other applications
   
70,925
     
15.8
     
98,526
     
22.0
 
     
449,373
     
100
     
447,255
     
100
 
 
During the fiscal year ended December 31, 2008, our revenues were RMB 447.3 million, which is a decrease of,RMB 2.1 million, or 0.5%, as compared to the same period for 2007. In 2008, sales of special films were RMB 107.4 million and 24.0% of our total revenues as compared to RMB 170.0 million and 37.8% in 2007, which is a decrease of RMB 62.6 million, or 36.8%, as compared to the same period in 2007. The decrease, in the first three quarters of 2008, was largely attributable to the change in demand for luxurious packaging caused by the change in regulations in the packaging design of tobaccos, which require a large quantity of our laser holographic base film and matte film, as well as others. In addition, the global financial crisis, which began in the second half of 2008, has caused a further decline in the demand for specialty film.
 
Cost of Goods Sold
 
Our cost of goods sold was RMB376.9 million for the year ended December 31, 2008, which is an increase of RMB 27.4 million or 7.8%, as compared to the same period for 2007. The increase resulted from the increased sales quantity in 2008 by 3,508 tons, or 12.7 %.

Gross Profit
 
Our gross profit during the year ended December 31, 2008 was RMB 70.3 million representing a gross margin of 15.7%, compared to 22.2% for the year ended December 31, 2007.  The decrease in gross profit margin was mainly due to the decline in sales quantity of specialty films and a sharp decline in sale prices as a result of the global financial crisis.
 
Operating Expenses
 
Our operating expenses during the year ended December 31, 2008 was RMB 45.7 million, which is an increase of RMB 10.2 million or 28.5%, as compared to the same period for 2007. The increase was mainly a result of increases in the costs of professional service fees related to being a public company and increased delivery fees caused by expanded sales quantity and the allowances for doubtfull account receivable and other receivables.
   
Other Expense
 
Our other expenses during the year ended December 31, 2008 was RMB 3.5 million, which is a decrease of RMB 8.8 million, or 71.8%, as compared to the same period for 2007.  The decrease was mainly due to the decreased expenditure of interest by RMB 1.1 million and capitalized expenditure of interest by RMB 7.7 million.
 
Income Tax Expense
 
The effective tax rate was 14.0% in 2008 and 8.7% in 2007. The higher effective tax rates were primarily attributable to the fact that our operating subsidiary, Shandong Fuwei, was subject to the 15.0% income tax rate in 2008 pursuant to the prevailing PRC income Tax Law, while such rate was 7.5% in 2007.
 
Liquidity and Capital Resources
 
Since inception, our sources of cash were mainly from cash generated from our operations and borrowings from financial institutions and capital contributed by our shareholders.

 
42

 
 
Our capital expenditures in 2009 have been primarily financed through short-term borrowings from financial institutions. The interest rates of short-term borrowings from financial institutions during the three year period from 2007 to 2009 ranged from 0% to 6.73%, and these borrowings may not be prepaid prior to maturity.
 
Since our inception, we have utilized significant amounts of secured short-term financing to fund our acquisition of the Brückner and DMT production lines and our working capital needs. At December 31, 2009, we had borrowings of RMB 153.2 million including four different loan agreements with four financial institutions in the PRC. In June 2009, we signed an extension for our RMB10 million loan agreement, which will expire in June 2010. During 2008, we received interest-free loan of RMB 25 million from the Bank of Weifang entrusted by the Weifang City Hi & New Technology Project Industrial Development Fund. Each of the related loan agreements contains provisions regarding collateral, covenants prohibiting us from engaging in certain activities (including selling, mortgaging or otherwise disposing of or encumbering all or substantially all of our assets or before any merger, acquisition, spin-off, or other transaction resulting in a change in our corporate structure) without the lenders consent and acceleration (and setoff) provisions in the event of default in payment or failure to comply with such covenants. Because of appreciation in the exchange rate of RMB compared to the US dollars, the estimated total investment of our thick film project is US$40 million to US$ 45 million. As a result, we will need an additional US$20 million to US$25 million to complete this project. The management is currently seeking sources of financing in order to recommence this project soon.

We obtained new short-term loans on June 9, 2009 for RMB 140 million maturing on June 8, 2010.  The annual interest rate is up by 10% compared with the fixed benchmark interest rate of 5.31% announced by the People’s Bank of China. As of December 31, 2009, the interest rate in effect was 5.841%.

We entered into three interest free loan agreements with the Bank of Weifang for the amount of (i) RMB10 million, effective January 13, 2009, with a maturity date of January 12, 2010. On January 12, 2010, we obtain an extension for this loan for an additional two years, which will expire on January 12, 2012. (ii) RMB10 million effective January 16, 2009, with the maturity date of January 12, 2012; and (iii) RMB5 million effective December 2, 2008, with a maturity date of December 2, 2011. All of the above loans are interest-free loans.  These are industrial development fund loans administrated by the local government of Shandong Province, and made through the Bank of Weifang, to be provided to local high-and–new tech enterprises for the purpose of enhancing innovation and technical research and development and to support their development. The proceeds of these loans have been used for the construction of the trial production line and for research and development.

On June 4, 2009, Shandong Fuwei entered into a one-year foreign currency loan agreement with Bank of China Weifang Branch for US$ 477,000 which is secured by a deposit of RMB3,259,000. The lending rate is 0.2% down by trading day’s LIBOR interest, which is 1.38375%, in order to reduce the currency translation cost of Shandong Fuwei.

On November 20, 2009, we signed a long-term loan contract of RMB10 million with Weifang Dongfang State-owned Assets Management Co., Ltd., for a term of eight-year effective as of October 19, 2009, which will expire on October 18, 2017.  From 2015 to 2016, we will make equal payments of RMB3.35 million per year and in 2017 we should repay the remaining RMB3.3 million. The annual interest rate is 5.346% which is up by 10% compared to the fixed benchmark of 5-year interest rate announced by the People’s Bank of China. The loan is guaranteed by Shandong Deqin Investment& Guarantee Co., Ltd. with a guarantee expense of RMB 0.6 million for 8 years and is used for the Company's key projects.
 
We are of the opinion that, after taking into consideration our present banking facilities, existing cash and the expected cash flows to be generated from our operations, we have adequate sources of liquidity to meet our short-term obligations, and our working capital. However, in order to be able to put the third production line into operation we still need US$20 to US$25 million.

 
43

 
 
A summary of our cash flows for 2007, 2008 and 2009 is as follows (in thousands):
 
   
Year Ended December 31,
2007
   
Year Ended December 31,
2008
   
Year Ended December 31,
2009
 
   
RMB
   
RMB
   
RMB
   
US$
 
Net cash generated from operating activities
    82,856       80,027       9,929       1,453  
Net cash used in investing activities
    (246,787 )     (76,750 )     (7,599 )     (1,112 )
Net cash (used in)/generated from financing activities
    (51,651 )     (18,262 )     8,415       1,233  
Effect of foreign exchange rate change
    (3,448 )     (104 )     236       44   
Net increase/(decrease) in cash and cash equivalents
    (219,030 )     (15,086 )     10,981       1,618  
Cash as at the beginning of the year
    249,939       30,909       15,823       2,308  
Cash as at the end of the year
    30,909       15,823       26,804       3,926  
 
Operating Activities
 
Net cash from operating activities was RMB 9.9 million for the year ended December 31, 2009 as compared to RMB 80.0 million for the year ended December 31, 2008. The decrease was mainly due to the decline of net income and increased inventories.

Net cash from operating activities was RMB 80.0 million for the year ended December 31, 2008 as compared to RMB 82.9 million for the year ended December 31, 2007. The decrease was mainly due to the decline of net income which resulted from the financial crisis in the fourth quarter that caused the inventory cost to be higher than the sales price.

Net cash from operating activities was RMB 82.9 million for the year ended December 31, 2007. We implemented better controls over the collection of accounts receivable from customers and resulted in a smaller balance of accounts receivable as of December 31, 2007.  In addition, we had more inventories stored at the end of 2007.
 
Investing Activities
 
Net cash used in investing activities was RMB 7.6 million in 2009 which is mainly used in equipment purchase and payment for constructions.
 
Net cash used in investing activities was RMB 76.8 million in 2008 which is mainly used in rebuilding the equipment of the second production line, expenditures related to the third production line and the equipment for trial production line.
 
Net cash used in investing activities was RMB 246.8 million in 2007, which was mainly used for construction of the plant for the third production line and purchase equipment for the third production line as well as the expenditures related to the trial production line.
 
Financing Activities
 
Net cash generated from financing activities was RMB 8.4 million for the year ended December 31, 2009, which was mainly from bank loans.