UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








FORM 20-F




(Mark One)







o
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, 2010




OR







o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




OR







o
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:







For the transition period from              to





Commission File Number 1-14742








JINPAN INTERNATIONAL LIMITED


(Exact name of Registrant as specified in its charter)





British Virgin Islands


(Jurisdiction of incorporation or organization)





c/o Hainan Jinpan Electric Company, Ltd


No. 168 Nanhai Avenue (Building No. 7), Haikou Free Trade Zone


Haikou, Hainan


People’s Republic of China


(Address of principal executive offices)





Mark Du, Chief Financial Officer


390 Veterans Boulevard


Carlstadt, NJ 07072


Telephone: (201) 460-8778 (x140)


Facsimile: (201) 460-8775


mdu@jstusa.net


(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:





Common Shares, $0.0045 par value


(Title of Class)





NASDAQ


(Name of each exchange on which registered)





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.





Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 16,395,456Common Shares, par value $0.0045 per share





Indicate by check mark is the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes  o
No  x





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  o
No  x





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.





Yes  x
No  o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes  o
No  o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  (Check one):





Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o





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  o
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  o
Item 18  o





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  o
No  x











Table of Contents


FORWARD-LOOKING STATEMENTS


1PART IItem 1.
Identity of Directors, Senior Management and Advisors


2Item 2.
Offer Statistics and Expected Timetable


2Item 3.
Key Information


2Item 4.
Information on the Company


16Item 4A.
Unresolved Staff Comments


39Item 5.
Operating and Financial Review and Prospects


39Item 6.
Directors, Senior Management and Employees


49Item 7.
Major Shareholders and Related Party Transactions


52Item 8.
Financial Information


53Item 9.
The Offer and Listing


55Item 10
Additional Information


56Item 11.
Quantitative and Qualitative Disclosure of Market Risk


62Item 12.
Description of Securities Other than Equity Securities


62PART IIItem 13.
Defaults, Dividend Arrearages and Delinquencies


62Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds


62Item 15.
Controls and Procedures


62Item 16A.
Audit Committee Financial Expert


63Item 16B.
Code of Ethics


63Item 16C.
Principal Accountant Fees and Services


64Item 16D.
Exemptions from the Listing Standards for Audit Committees


64Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers


64Item 16F.
Change in Registrant’s Certifying Accountant


65Item 16G.
Corporate Governance


65PART IIIItem 17.
Financial Statements


65Item 18.
Financial Statements


65Item 19.
Exhibits


66SIGNATURES



68





Financial StatementsReports of Independent Registered Public Accounting Firm
F-1Consolidated Balance Sheets as of December 31, 20010 and 2009
F-4Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008
F-5Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2010, 2009 and 2008
F-6Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
F-7Notes to Consolidated Financial Statements
F-8








FORWARD-LOOKING STATEMENTS




All statements made in this Annual Report on Form 20-F other than purely historical information are “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements include statements regarding future plans and objectives. These statements may be preceded or followed by or otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “continues,” “plans,” “estimates,” “projects” or similar expressions or statements that events “will,” “should,” “could,” “might” or “may” occur. These statements are only our current expectations. These statements appear throughout this Annual Report on Form 20-F, including under “Item 3. Key Information – Risk Factors” and “Item 5 – Operating and Financial Review and Prospects.” They are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in this Annual Report and other risks, including:




·
our ability to successfully implement our business strategy;




·
the impact of existing and new competitors in the markets in which we compete, including competitors that may offer less expensive products and services, more desirable or innovative products or technological substitutes, or have more extensive resources or better financing;




·
the effects of rapid technological changes and vigorous competition in the markets in which we operate;




·
uncertainties about the future growth in electricity consumption and infrastructure development in the markets in which we operate;




·
other factors or trends affecting the industry generally and our financial condition in particular;




·
the effects of the higher degree of regulation or level of taxation in the markets in which we operate;




·
general economic and political conditions in the countries in which we operate or other countries which have an impact on our business activities or investments;




·
the monetary and interest rate policies of the countries in which we operate;




·
changes in competition and the pricing environments in the countries in which we operate; and




·
changes in exchange rates.







We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 20-F. Except as required by law, we are not under any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.




All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and the “Risk Factors” section under Item 3. Key Information.




1


PART I




Unless specifically referenced, the following entities are collectively referred in this annual report as “we,” “us” or “our”:




(1)
Jinpan International Limited (“Jinpan International”), a British Virgin Islands business company;(2)
Jinpan International (USA) Limited (“Jinpan USA”), a New York corporation and wholly owned subsidiary of Jinpan International;(3)
Jinpan Realty Group, LLC (“Jinpan Realty”), a New Jersey limited liability company and wholly owned subsidiary of Jinpan International;(4)
Jinpan Electric (China) Company Limited (“Jinpan China”), a foreign funded PRC limited liability company and wholly owned subsidiary of Jinpan International;(5)
Hainan Jinpan Electric Company Limited (“Hainan Jinpan”), a sino-foreign cooperative venture owned by Jinpan International and Wuhan Jinpan Electric Company Ltd.;(6)
Hainan Jinpan R&D Company Limited (“Hainan Jinpan R&D”). a Chinese enterprise wholly-owned by Hainan Jinpan;(7)
Wuhan Jinpan Electric Company Limited (“Wuhan Jinpan”), a Chinese enterprise owned by Jinpan China and Hainan Jinpan;(8)
Shanghai Jinpan Electric (Group) Company Limited (“Shanghai Jinpan”), a Chinese enterprise owned by Jinpan China and Hainan Jinpan;(9)
Jinpan Electric Group Alternative Energy Equipment (Shanghai) Co. Ltd. (“Jinpan Alternative Energy”), a Chinese enterprise wholly owned by Shanghai Jinpan;(10)
Jinpan Electric Group Transmission and Distribution Automation Equipment (Shanghai) Co. Ltd. (“Jinpan T&D”), a Chinese enterprise wholly owned by Shanghai Jinpan;(11)
Jinpan Electric Group International Trading (Shanghai) Co. Ltd.  (“Jinpan Trading”), a Chinese enterprise wholly owned by Shanghai Jinpan; and(12)
Shanghai Pan-Ding Investment Co. Ltd. (“Shanghai Panding”), a Chinese enterprise wholly owned by Shanghai Jinpan.(13)
Guilin Jun Tai Fu Construction and Development Co. Ltd. (“Guilin JTF”), a Chinese enterprise wholly owned by Hainan Jinpan.





Item 1. Identity of Directors, Senior Management and Advisors




Not Applicable.




Item 2. Offer Statistics and Expected Timetable




Not Applicable.




Item 3. Key Information






2


A.        Selected Financial Data




The following selected financial data should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the consolidated financial statements and notes included in this Annual Report on Form 20-F.




We prepare our historical consolidated financial statements in accordance with generally accepted accounting principles in the United States (U.S. GAAP). The following selected financial data have been derived from our audited consolidated financial statements for each of the years from 2006 to 2010. The selected consolidated statement of income data for the years 2008, 2009, and 2010, and the selected consolidated balance sheet data at December 31, 2009 and 2010, have been derived from our audited consolidated financial statements set forth in “Item 18. Financial Statements.” The selected consolidated statement of income data for the years 2006 and 2007, and the selected consolidated balance sheet data at December 31, 2006, 2007 and 2008, has been derived from our previously published audited consolidated financial statements, which are not included in this report. These selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto and are qualified entirely by reference to such consolidated financial statements.







3


All of the Earnings per share, Number of shares outstanding and Dividends per share below have been adjusted to reflect the two-for-one stock split of our common shares, effective February 6, 2010, as if such reverse split had been in effect during the periods indicated.




Year ended December 31,2010
2010
2009
2008
2007
2006US$(1)
RMB
RMB
RMB
RMB
RMB(In thousands, except per share and share data)Income Statement Data:Net sales
143,807
967,074
1,084,303
1,086,875
903,361
653,208Costs of goods sold
(87,971)
(591,591)
(625,817)
(741,887)
(588,941)
(471,403)Gross profit
55,836
375,483
458,486
344,988
314,420
181,805Selling and administrative expenses
(40,673)
(273,518)
(245,956)
(185,055)
(173,434)
(104,200)Income from operations
15,163
101,965
212,530
159,933
140,986
77,605Interest expense
(309)
(2,078)
(1,446)
(8,433)
(3,515)
(2,231)Non operating income
2,443
16,431
7,069
11,919
3,124
5,052Income before income taxes
17,297
116,318
218,153
163,419
140,595
80,426Income taxes
(3,913)
(26,314)
(20,428)
(23,742)
(16,809)
(10,891)Income before minority interest
13,384
90,004
197,725
139,677
123,786
69,535Minority interest
-
-
-
-
-
(9,876)Net income
13,384
90,004
197,725
139,677
123,786
59,659Earnings per share:Basic
0.83
5.57
12.33
8.74
7.76
4.50Diluted
0.81
5.46
12.15
8.59
7.65
4.44Number of shares outstanding:(2)Basic
16,159,893
16,159,893
16,028,152
15,970,160
15,953,510
13,251,452Diluted
16,457,462
16,457,462
16,269,440
16,261,196
16,181,260
13,457,830Dividends per share
US$ 0.14
RMB 0.92
US$ 0.14
US$ 0.12
US$ 0.12
US$ 0.12Balance Sheet Data:Cash and cash equivalents
27,527
182,300
161,554
105,120
114,565
256,320Total assets
226,589
1,500,633
1,244,298
1,108,283
884,627
707,870Net assets
151,493
1,003,294
928,054
731,282
603,574
490,219Long term liabilities
2,485
16,458
17,410
1,090
10,766
3,962Minority interest
-
-
-
-
-
8,358Equity
151,493
1,003,294
928,054
731,282
603,574
490,219Cash Flows DataDepreciation
3,636.00
24,449.00
25,512.00
11,725.00
9,615.00
6,834.00Capital expenditures:(3)
8,397.00
56,468.00
54,717.00
132,032.00
51,296.00
21,231.00Ratio of earnings to fixed charges(4)
1.76%
1.76%
0.66%
4.91%
2.44%
2.70%





____________________


(1)
Our assets and liabilities are translated into United States dollars at the period-end exchange rate which is RMB 6.6227 to 1 US dollar as of December 31, 2010. Revenues and expenses are translated into United Stated dollars at weighted average exchange rates which was RMB 6.7248 to 1 US dollar for the period from January 1, 2010 to December 31, 2010. Equity transactions are translated using historical rates.


(2)
There are 40,000,000 common shares authorized and 2,000,000 shares of preferred shares authorized as of December 31, 2010.




(3)
Capital expenditures are comprised of the purchase of equipment, payment for construction-in-progress, and acquisition of land use rights.




(4)
Earnings consist of income (loss) from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expenses and amortization of deferred financing fees.




4


Exchange Rate Information




As used in this Annual Report, the term “Noon Buying Rate” refers to the rate of exchange for Renminbi Yuan, referred to in the financial statements as “RMB” or “Renminbi,” expressed in U.S. dollars per Renminbi, using the noon buying rate in The City of New York City cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. Renminbi is the lawful currency of the People’s Republic of China or the PRC. The Noon Buying Rate certified by the New York Federal Reserve Bank for RMB on June 14, 2010 was US$1 = RMB 6.4822




The following tables describe, for the periods and dates indicated, information concerning the Noon Buying Rate for RMB. Amounts are expressed in RMB per US dollar 1.00.




Noon Buying RatePeriod
Period End
Average(1)
Low
High(RMB per US$1.00)2006
7.8041
7. 9579
8.0702
7.80412007
7.2946
7.5906
7.7714
7.29462008
6.8225
6.9193
6.7800
7.29462009
6.8270
6.8408
6.8226
6.85332010
6.6227
6.7696
6.6200
6.8328December 2010
6.6227
6.6497
6.6200
6.6745January 2011
6.6017
6.5964
6.5814
6.6364February 2011
6.5713
6.5761
6.5713
6.5937March 2011
6.5483
6.5645
6.5483
6.5743April 2011
6.4990
6.5292
6.4990
6.5527May 2011
6.4845
6.4988
6.4845
6.5089June 2011 (through June 14, 2011)
6.4482
6.4842
6.4795
6.4886





(1)
Annual averages are calculated using the noon buying rate on the last business day of each month during the period indicated. Monthly averages are calculated using the average of the daily rates during the relevant period.





B.        Capitalization and indebtedness




Not applicable.




C.        Reasons for the offer and use of proceeds




Not applicable.




D.        Risk Factors




Our business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occurs, our business and financial performance could be harmed, our actual results could differ materially from our expectations and the market value of our securities could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may harm our business and financial performance.




5


Risks Related to Our Business




Our operating results are substantially dependent on one product.




In 2010, revenue derived from the sale of cast resin transformers accounted for 76.6% of our net sales, or RMB 741.1 million. Going forward, we expect a significant portion of our revenue to continue to come from the sale of cast resin transformers. Accordingly, our future operating results will depend on the demand for this product. We cannot assure you that the market will continue to demand our current product or that we will be successful in marketing any new or enhanced products. If our competitors produce new products that are superior to our cast resin transformers in performance or price, demand for our product may decline. A decline in demand for our cast resin transformers as a result of competition, technological change, economic conditions in China, restrictions on our ability to market this product, or other factors would reduce our total revenues and harm our ability to maintain profitability.




Our operating revenues would decline significantly if we lost one or more of our largest customers, which could have a material adverse impact on our business.




A significant portion of our operating revenues are concentrated among our largest customers. Sales to our five largest customers in the aggregate for the fiscal years ended December 31, 2008, 2009 and 2010, accounted 26.5%, 27.0%, and 18.1%, respectively, of our net sales. Sales to our largest customer for those same periods accounted for 18.4%, 17.7%, and 9.1 %, respectively, of our net sales. We cannot assure you that any of our principal customers will maintain their volume of business with us or that a similar volume of business will be forthcoming from new or existing customers to replace any lost business. The loss of one or more of these existing principal customers without replacement by a customer of similar volume could have a material adverse effect on our business and financial condition.




We sell most of our reactors to one large original equipment manufacturer, or OEM, and any significant decrease of sales of reactors to this large OEM would have a negative effect on the revenues we receive from the sale of reactors.




In 2010, revenue derived from the sale of reactors accounted for 7.3% of our net sales, or RMB 70.5 million. Presently, we sell most of our reactors to one large OEM. This is in contrast to a more diversified customer base for our cast resin transformers. Any significant decrease in the sale of reactors to this large OEM could have a material adverse effect on revenue derived from the sale of reactors. In addition, if we fail to collect accounts receivable from this large OEM, we could be subject to significant financial exposure.




If we lose our key personnel, our ability to operate our company and our results of operations may suffer.




Our future growth and success will depend in part on our ability to retain key members of our management who are familiar with our business and our potential markets.  If we lose their services or the services of other key personnel, our financial results or business prospects may be harmed. We do not have “key man” or similar insurance on any of these individuals. Additionally, our future growth and success will depend in part on our ability to attract, train and retain sales, marketing, and management personnel. We cannot be certain that we will be able to attract and retain the personnel necessary to manage our operations effectively. Competition for experienced executives from numerous companies may limit our ability to hire or retain personnel on acceptable terms. In addition, many of the companies with which we compete for experienced personnel have greater financial and other resources than we do. Moreover, the employment of non-citizens may be restricted by applicable immigration laws.




The current economic and financial recovery in the world’s major economies remains fragile and uneven which may have a material adverse effect on our results.




Recovery in the world’s largest economies remains fragile.  The pace of the recovery varies among regions and countries.   Uncertainties about the recovery may result in a reduction in demand in some or all of our products and downward




6


pressure on pricing of our products, which could adversely affect our business, results of operations and financial condition. The economic and financial situation may result in: (i) our customers experiencing a deterioration of their businesses, cash flow shortages and difficulty obtaining financing pursuant to which existing or potential customers may delay or cancel plans to purchase our products and could negatively impact our ability to collect accounts receivable, (ii) suppliers experiencing similar conditions, which could impact their ability to fulfill their obligations to us, (iii) a lower return on our financialinvestments and a lower value on some of our assets, and (iv) an increase in the cost or (v) our inability to finance future projects.   Continuing uncertainties about the recovery also make it increasingly difficult for us to predict our revenues and earnings into the future.




Our growth may be slowed if demand for electric power slows declines or if there is a decline in fixed asset investment in China.




Our products are used for the distribution of electricity.  Demand for our products is linked closely to increased demand for electrical power in China. According to the China Electricity Council (“CEC”), China consumed 4.1923 trillion kilowatt hour (“KWH”) of electricity in 2010, up 13.88% over 2009 during which China consumed 3.6812 trillion KWH of electricity. While demand for electricity has been strong over the past several years, we cannot assure that demand for electricity will continue to grow at 2010 rates. Any material decline in the consumption of electricity in China is likely to have an adverse impact on our business.




Our products are used by utilities in building electric grids and infrastructure, industrial manufacturing facilities, and commercial and residential buildings.  Demand for our products is affected by the level of investment in fixed assets.  According to the National Bureau of Statistics of China (“NBS”), the completed investment in fixed assets of the country in 2010 was RMB 27.8140 trillion, up 23.8% over the previous year.  While investment in fixed assets in China has experienced strong growth over the past several years, we cannot assure that the level of investment would continue at 2010 rates.  Any material decline in fixed asset investment in China is likely to have an adverse impact on our business.




Our growth may be slowed if there is a decline in investment in wind energy.




We supply power distribution equipment for wind towers.  In 2010, the sale of wind energy products accounted for approximately 11% of our revenue or RMB 106.4 million.  The majority of the wind energy products we sold in 2010 were delivered to Europe and North America.    Any material decline of investment in wind energy in the principal markets we serve is likely to have an adverse impact on our business.




Increase in cost, disruption of supply or shortage raw materials could harm our business.




The principal raw materials we require for our business are (1) silicon steel, which forms the core of our transformers, (2) copper and aluminum foil and wire, which wind around the core to form the coil, and (3) cast resin and electric isolation material, which serve as the insulation medium between coils. Prevailing prices for such commodities are subject to fluctuations due to changes in supply and demand and a variety of additional factors beyond our control, such as global political and economic conditions. Historically, prices for some of these raw materials have been volatile and unpredictable, and such volatility is expected to continue.  In the event of unexpected increases in raw material costs, we may be unable to increase our prices to offset these increased costs without suffering reduced volume, revenue or operating income. Furthermore, sustained declines in raw materials prices may also put downward pressure on the unit price of our products and increase competition and thereby reduce revenue.  Currently, we do not hedge against changes in commodity prices.




We maintain at least two suppliers for each of the principal raw materials in order to enhance our ability to obtain an adequate supply of high quality, competitively-priced raw materials. We usually keep a two




7







or three month supply of these raw materials in our inventory. However, we cannot guarantee that we will be able to maintain favorable arrangements and relationships with these suppliers. Also, if our suppliers fail to supply these raw materials to us for any reason, including due to adverse financial developments affecting the supplier, and/or due to unexpected demand, labor shortages or disputes, it could have a material adverse effect on our results of operations.




Increased competition may result in reduced prices and loss of market share.




The market for cast resin transformers in China is highly competitive and we expect increased competition in the future. We primarily compete with several large transformer manufacturers as well as a number of small transformer manufacturers. Most of our major competitors in China are partially government owned or private entities. Our future success will largely depend on our marketing efforts and ability to adapt our product to more applications.




In addition, increased competition may result in price reductions or loss of market share, which could adversely affect our business, results of operations or financial condition.




We may face potential foreign competition in China from firms such as ABB, Siemens, and Alstom. These and other potential competitors in China have greater financial and other resources than we do. Increased domestic competition in China and foreign participation may also have a material adverse effect on our financial condition and results of operations as well as our business and prospects. In addition, we may not be able to compete successfully in the future with existing or new competitors.




We may face claims or lawsuits for losses due to the failure of our products that may result in costly litigation and divert attention of our management.




Our business exposes us to liability risks that are inherent in the manufacturing and marketing of electric equipment.  Any failure of our products could result in direct and consequential losses to our customers, which could result in our customers filing claims or lawsuits against us for losses resulting from the failure of our products. If a litigant were successful against us, it could have an adverse effect on our business, financial condition, results of operations and liquidity. Additionally, a well-publicized actual or perceived problem could adversely affect our market reputation, which could result in a decline in demand for our products. Although we have purchased product liability insurance, our insurance coverage may not be sufficient to cover all our losses.




We may be subject to infringement claims by third parties that could subject us to financial liability or limit our product offerings, and our competitive position could be harmed if we are unable to protect our intellectual property.




We registered the trademark “JST” with the Trademark Bureau of the State Administration of Industry and Commerce in China. We believe that much of our success in growing sales and market share is due to our focus on providing high quality products and services. Achieving greater customer recognition of our trademark is also important to our marketing and expansion efforts. However, with regard to our current trademark or any future trademarks, we cannot be sure that any one or all of the following scenarios has not occurred or will not occur, any one of which could have a material adverse effect upon us:




·
we are unable to register other names or service marks that we may consider important;




·
our currently registered trademark or any future registered trademark currently does or will violate the proprietary rights of others;




·
our trademarks are not upheld by the Chinese government or its judicial system if challenged;




·
we are prevented from using our trademarks; or




·
because enforcing our proprietary rights or defending against the ownership claims of others may be extremely costly, we may not have the financial resources necessary to enforce or defend our trademarks.


8




We have not registered our intellectual property rights outside of China and we cannot be certain that the laws of other countries will protect proprietary rights to the same extent as do the laws of China.




We may be subject to patent infringement claims by third parties that could subject us to financial liability or limit our product offerings.




We own the rights to various utility, invention and design patents which have been granted or are pending. The patents cover aspects of our cast resin transformer technology. All of our patents have been issued by the Chinese government. To date, we have not filed for patent protection outside of China. Consequently, our patents provide some protection of our technology in China, but they do not provide protection elsewhere.




We currently hold a license, granted by Schneider Electric (China) Investment Co. Ltd., for the manufacture of circuit breakers. We manufacture low and medium voltage switchgear products under license from Schneider. We also hold two licenses, granted by Hitran Corporation, for the manufacture of line reactors with varnish impregnated and dry type insulation used in wind towers. If our arrangements with these licensors terminate, or expire without renewal, we could be prohibited from manufacturing and selling these products. We may not be able to enter into other license agreements, or enter into such agreements on commercially reasonable terms, to continue to manufacture switchgears and reactors. Furthermore, we may not be able to redesign our product to avoid infringement. Any required modification of our products or development of new products could also harm our business.




Risks Related to Our Chinese Operations




We are subject to government regulation and our operating results could be affected by changes in those regulations.




Our operations and assets in China are subject to significant political uncertainty. Our business, results of operations and financial condition could be adversely affected by policy changes made by the Chinese government to any of the following:




·
laws and regulations, or their interpretation and enforcement thereof,




·
confiscatory or increased taxation,




·
restrictions on currency conversion and currency devaluations,




·
imports, import duties, and sources of supply, or




·
the expropriation of private enterprise.






9


Under its current governmental leadership, China has been pursuing economic reform policies, including the encouragement of private economic activity and greater economic decentralization. Although China has been pursuing such policies, the Chinese government may not continue to pursue these policies in the future, these policies may not be successful if pursued or may be significantly altered without notice, or business operations may become subject to the risk of nationalization, which could result in the total loss of any investment in China.
  Our economic development in China may also be limited by the following:




·
governmental imposition of restrictive measures intended to reduce inflation, increase taxes, or reform unprofitable state-owned enterprises,




·
the inadequate development of China’s infrastructure,




·
the unavailability of adequate power, water supplies, raw materials, and parts, and




·
limited transportation and communications capabilities.




Under the Chinese government’s program of privatizing many state-owned enterprises, the Chinese government has attempted to grow its revenues by increased tax collection. Presently, most of our subsidiaries enjoy some form of preferential tax treatment in China. See Item 4 – Business Overview – Doing Business in China - China’s Corporate Income Tax. Although we expect the Chinese government to continue to offer preferential tax treatment to our Chinese subsidiaries, we cannot assure that such policies will continue. Changes in tax law or its application may subject us to increased taxation that could adversely affect our profitability.




The Chinese government regulates the import into China of various raw materials and also taxes certain types of imported capital equipment, which may affect our operations. The approval of imports by the Chinese government is based to some extent on the lack of qualified domestically-produced products and on its strategic plans for the development of local Chinese industries. We can provide no assurance that China’s policies will continue to allow raw materials needed by our operations to be imported into China or will not impose import fees, which may raise the cost of raw materials or capital equipment used in our operations. The imposition of any of these costs could have a material adverse effect on our business, results of operations, and financial condition.




Despite recent reforms, we may be adversely affected by China’s undeveloped legal system and it may be difficult to enforce our legal rights under Chinese law or for third parties to enforce the laws of the United States or any other state in China.




China’s legal system is a civil law system, which is based on written statutes and case law has little  value as precedent. China does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion in individual cases. As China’s legal system develops, we, like other foreign business entities, may be adversely affected by new laws, changes to existing laws (or new interpretations of the laws) and preemption of provincial or local laws by national laws. In addition, in circumstances where adequate laws do exist, it still may not be possible for us to obtain swift and equitable enforcement of those legal rights under Chinese law.




Moreover, because certain directors and officers are non-residents of the United States, it may be difficult for investors to affect service of process upon these non-residents in the United States or to enforce United States judgments against them in China’s courts. There is uncertainty as to whether China’s courts would enforce:




·
Judgments of U.S. courts obtained against us or these non-resident directors and officers based on the civil liability provisions of the securities laws of the United States or any state; or




·
In original actions brought in the People’s Republic of China, liabilities against us or these non-resident directors and officers predicated upon the securities laws of the United States or any state.




Also, since a majority of our assets are located in China, it may be difficult for an investor who obtains a judgment in the United States or another state to enforce such foreign judgment in China. Such judgment may be further limited by applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or similar laws relating to or affecting creditors' rights generally and will be subject to a statutory limitation of time within which proceedings may be brought.




Any failure by us to control the use or adequately restrict the discharge of hazardous substances or to obtain work safety and professional health approvals, could subject us to potentially significant monetary damages and fines or suspension of our business operations.
  We utilize toxic, volatile and otherwise hazardous chemicals and wastes in our research and development and production processes, and we are subject to regulations and periodic monitoring by local environmental protection and work safety authorities. In addition, we are required to comply with all PRC national and local environmental protection and work safety laws and regulations. If we fail to comply with relevant environmental work safety and professional health laws, regulations and/or administrative rules relating to hazardous materials and chemicals in the future, we may be required to pay fines, suspend production


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or cease our business operations. In addition, if more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be substantial. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspension of our business operations.




The expansion of our operations internationally may be adversely affected by economic, political, legal and other uncertainties of some foreign countries.




Although we sell products to customers based principally in China, we are doing business in the U.S. and seek to do business in other countries as well. In the future, our international operations and sales may be affected by the following risks, which may adversely affect Chinese companies doing business internationally:




·
political and economic risks, including political instability,




·
currency controls and exchange rate fluctuations,




·
changes in import/export regulations, tariff and freight rates, and




·
various forms of protectionist trade legislation that currently exist or have been proposed in some foreign countries.




The Renminbi may experience volatility in its exchange rates to certain foreign currencies that could result in foreign currency exchange risks and may adversely affect our financial performance.




We receive most of our revenues in Renminbi. The Chinese government imposes control over our foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign currency and through restrictions on foreign imports. The Renminbi is not freely convertible into foreign currencies. The Renminbi exchange rate to some other currencies can also be volatile. Yet, we are required to meet foreign currency obligations such as for future purchases of certain equipment and raw materials from Germany. As a result, we face two risks: first, where our revenues, assets, and declared dividends are translated into other currencies, the translated values may reflect volatility due to exchange rates; and second, we may face higher than anticipated costs for purchases that are required to be made in other currencies.




Since 1996, Renminbi has become fully convertible into foreign currency for payments relating to all "current account transactions,” which include, among other things, dividend payments and payments for the import of goods and services, by complying with certain procedural requirements. Foreign currency, which is required for current account transactions, can be bought freely at authorized Chinese banks, so long as the procedural requirements prescribed by law are met. Our PRC subsidiaries may retain foreign exchange in their respective current account bank accounts, subject to a maximum limit set by State Administration of Foreign Exchange (“SAFE”), or its local counterpart, for use in payment of international current account transactions. However, conversion of Renminbi into foreign currencies, and of foreign currencies into Renminbi, for payments relating to “capital account transactions,” which principally includes investments and loans, generally requires the approval of SAFE and other relevant PRC governmental authorities. Restrictions on the convertibility of the Renminbi for capital account transactions could affect the ability of our PRC subsidiaries to make investments overseas or to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us. (For more details on SAFE restrictions concerning loans or capital contributions to our subsidiaries, see the risk factor below, “Chinese regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”) At the same time, Chinese companies are also required to sell their foreign exchange earnings to authorized Chinese banks. The foreign exchange earnings may be reserved by Chinese companies or sold to authorized Chinese banks, however, both of which shall be subject to relevant approval of SAFE, unless it is otherwise provided by the state.




Fluctuation in exchange rates between the U.S. dollar and Renminbi have and will continue to affect our balance sheet and earnings per share in U.S. dollars. Fluctuations in the exchange rate have and will also affect the relative value of any earnings from and the value of any U.S. dollar-denominated investments we make in the future.


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Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert Renminbi into foreign currency.




Future inflation in China may inhibit economic activity.




In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. These factors have led the Chinese government to adopt, from time-to-time, various corrective measures to restrict the availability of credit or to regulate growth and contain inflation. The NBS reported that the general level of consumer prices in China in 2010 increased by 3.3% over 2009.  In the first quarter of 2011, the general level of consumer prices increased by 5% over the prior year period. To control inflation, the Chinese government may raise interest rates, impose controls on credit and/or prices, or take other actions which could inhibit economy activity in China and adversely affect the market for our products.




Our financial performance and prospects could be affected by natural calamities or health epidemics, and we have limited insurance coverage.




Our business could be materially and adversely affected by natural calamities (such as earthquake or fire), health epidemics (such as H1N1 influenza, avian influenza, severe acute respiratory syndrome), or other epidemics. Since, we store our products at our premises to satisfy our customers’ demands, there is a risk that these products and our premises may be damaged or destroyed by earthquake, fire, and other natural calamities. Any disruption of electricity supply or any outbreak of fire or similar calamities at our premises may result in a disruption of our business.




At present, insurance companies in China offer limited coverage for business related risks. As such, we only have a very limited form of insurance for our properties covering loss arising from theft, fire, lightning, and explosives. We do not have any business liability or disruption insurance coverage for our operations and our coverage may not be adequate to compensate for all losses that may occur. Any business disruption, natural disaster, or litigation resulting therefrom could expose us to substantial costs and losses.




Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.




We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies and certain non-U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in China and other foreign countries. Our employees or other agents may engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.




Under China’s new enterprise income tax (“EIT”), we may be subject to increased taxes that could adversely affect our business, operating results, and financial condition.
  Presently, the corporate income tax rate for companies operating in China is 25%. Prior to January 1, 2008, China imposed an income tax of 33% on domestic companies and 15% on foreign companies operating in China. China offered the preferential tax treatment to foreign companies to attract foreign investment into China. Effective January 1, 2008, a uniform corporate tax rate of 25% is applicable to both domestic and foreign funded companies. Under this new EIT law, the Chinese government may offer preferential tax treatment and tax incentives to qualified high-tech companies to attract investment in China. Presently, most of our Chinese subsidiaries receive some form of preferential treatment. However, such policies may not continue. As a result of the new tax law, our subsidiaries will be subject to increased tax rates which could adversely affect our profitability.


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In addition, under the new EIT law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Currently, no official interpretation or application of this new “resident enterprise” classification is available. Therefore it is unclear how tax authorities will determine tax residency based on the facts of each case. If the tax authorities determine that we, as a British Virgin Islands holding company, are a “resident enterprise” for EIT purposes, a number of unfavorable tax consequences could follow, including we may be subject to EIT at a rate of 25% on our worldwide taxable income, as well as EIT reporting obligations, . It is also possible that the rules regarding “resident enterprise” classification may change in the future and possibly be retroactively applied.




Chinese regulation of loans and direct investment by offshore holding companies to or in PRC entities may delay or prevent us from making loans or capital contributions to our PRC subsidiaries, which could materially and adversely affect our ability to fund and expand our business.




We are an offshore holding company conducting our operations in China through our PRC subsidiaries. Any loans or capital contributions we make to our PRC subsidiaries cannot exceed statutory limits and must be registered with SAFE or its local counterparts. Under applicable PRC law, the government authorities must approve a foreign-invested enterprise’s registered capital amount, which represents the total amount of capital contributions made by shareholders and registered with such registration authorities. In addition, the authorities must also approve the foreign-invested enterprise’s total investment, which represents the total statutory capitalization of the company, equal to the company’s registered capital plus the amount of loans it is permitted to borrow under the law. The ratio of registered capital to total investment cannot be lower than the minimum statutory requirement and the excess of the total investment over the registered capital represents the maximum amount of borrowings that a foreign invested enterprise is permitted to have under PRC law. If we were to advance funds to our PRC subsidiaries in the form of loans or capital contributions, which exceed the maximum amount of foreign debt that our PRC subsidiaries are permitted to incur, we may have to apply to the relevant government authorities for an increase in their permitted total investment amounts. The various applications could be time-consuming and the outcomes may be uncertain. Concurrently with the loans, we might have to make capital contributions to these subsidiaries to maintain the statutory minimum registered capital and total investment ratio, and such capital contributions involve uncertainties of their own. Furthermore, even if we make loans to our PRC subsidiaries that do not exceed their current maximum amount of borrowings, we will have to register each loan with SAFE or its local counterpart for the issuance of a registration certificate of foreign debts. In practice, it could be time-consuming to complete such SAFE registration process.




Any loans we make to our PRC affiliated entities, which are treated as PRC domestic companies rather than foreign-invested enterprises under PRC law, are also subject to various PRC regulations and approvals. Under applicable PRC regulations, international commercial loans to PRC domestic companies are subject to various government approvals.




We may be unable to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, or at all, with respect to future loans by us to our PRC subsidiaries or PRC affiliated entities or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
  We rely principally on dividends paid by our PRC subsidiaries to fund our cash and financing requirements and to pay dividends. Our ability to pay dividends is restricted.
  As a holding company, we rely principally on dividends and other distributions on equity paid by our PRC subsidiaries for our cash requirements, including funds necessary to pay dividends on our common shares and to service any debt we may incur. In addition, substantially all of our consolidated assets are held by our subsidiaries. Accordingly, our ability to service our debt and to pay dividends on our common shares depends on the results of operations of our subsidiaries, the ability of such subsidiaries to provide us with cash, whether in the form of dividends, loans or otherwise, our ability to pay amounts due on our obligations, and with respect to our ability to pay dividends, upon current and future agreements governing our debt and Chinese and BVI law.


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The instruments governing our current and future debt restrict and may restrict, respectively, our ability to pay dividends or make other distributions to us. Hainan Jinpan's credit facility with Bank of China prohibits Hainan Jinpan from paying dividends if the profits after tax at the end of a fiscal year are zero or negative and the profits after tax do not cover losses from previous fiscal years.   In such a situation, the profits before tax may not be used for repayment of the principal and/or interest due that fiscal year and payment of associated expenses therefor or if the profits before tax are insufficient to fully repay the next principal and/or interest due and to pay associated expenses therefore, then dividends may not be paid. Pursuant to the credit facility with Bank of Communications, Hainan Jinpan cannot pay any dividends to Jinpan International and Wuhan Jinpan, its stockholders, during fiscal year 2009 and 2010 unless the interest and principal on outstanding amounts are timely paid and the dividends paid by Hainan Jinpan did for any year do not exceed the net profit for that year. If any of these provisions are violated, all borrowings under the Bank of Communications facility will become immediately due.




Other restrictions include relevant PRC laws and regulations which permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our subsidiaries in China are required to set aside each year a certain amount of their accumulated after-tax profits, if any, to fund certain statutory reserves. These reserves are not distributable as dividends until the accumulated amount of such reserves has exceeded 50% of its registered capital. In addition, each of our PRC subsidiaries, before distribution of its dividends, is required to provide for a statutory reserve fund and a staff and workers’ bonus fund, and to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its after-tax profits each year at the discretion of its board of directors. In addition, applicable Chinese laws and regulations require that before a Sino-foreign cooperative joint venture enterprise, such as Hainan Jinpan, distributes profits to its joint venture partners, in our case Jinpan International and Wuhan Jinpan, it must first satisfy all of its tax liabilities, provide for any losses still unpaid from previous years, and make allocations, in the proportions as required by Chinese laws to certain statutory reserve funds.




Risks Relating to Our Common Shares




We may experience volatility in our share price, which could negatively affect your investment, and you may not be able to resell your shares at or above the price you paid for them.




The market price of our common shares may fluctuate significantly in response to a number of factors, some of which are beyond our control, including:




·
quarterly variations in operating results;




·
changes in financial estimates by securities analysts;




·
changes in market valuations of other similar companies;




·
announcements by us or our competitors of new products or of significant technical innovations, contracts, acquisitions, strategic partnerships or joint ventures;




·
additions or departures of key personnel;




·
any deviations in net sales or in losses from levels expected by securities analysts; and




·
future sales of common shares.




In addition, the stock market has recently experienced volatility due to political and economic events that has often been unrelated to the performance of particular companies. These market fluctuations may cause our share price to fall regardless of our performance.


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The price of our common shares may be adversely affected by negative market sentiments about U.S. listed China based companies.




In the past year, numerous fraud allegations against U.S. listed China based companies have shaken the confidence of U.S. investors in these companies.  This negative market sentiment not only affect the company facing fraud allegations, but may also adversely impact the share price of other U.S. listed China based companies.  We have been a U.S. listed company since our IPO in 1998 and have a track record of compliance with SEC reporting requirement.  Nevertheless, in the current environment, the price of our common shares may be adversely affected by negative market sentiments.




Shares eligible for future sale may depress our share price.




As of June 1, 2011, we had 16,395,4561 common shares outstanding. In addition, 498,566 common shares were subject to outstanding options granted under our stock option plan, of which 311,166 shares have vested.




All of the common shares held by our affiliates are restricted or control securities eligible for resale under Rule 144 promulgated under the Securities Act. Common shares issuable upon exercise of the stock options have been registered under the Securities Act. Sales of common shares under Rule 144 or another exemption under the Securities Act or pursuant to a registration statement could have a material adverse effect on the price of our common shares and could impair our ability to raise additional capital through the sale of equity securities.




Future issuance of additional common shares could cause dilution of ownership interests and adversely affect our share price.




We may in the future issue our previously authorized and un-issued securities, resulting in the dilution of the ownership interests of our shareholders. We are currently authorized to issue 40,000,000 common shares. The potential issuance of such additional common shares may create downward pressure on the trading price of our common shares. We may also issue additional common shares or other securities that are convertible into or exercisable for common shares for capital-raising or other business purposes. Future sales of substantial amounts of common shares, or the perception that sales could occur, could have a material adverse effect on the price of our common shares.




We may not continue to pay cash dividends in the future.




We may not continue to pay cash dividends or even if we do, we may not do so at the current rate. We may elect at any time to retain all future earnings for use in the operation of our business and to fund future growth. Any future cash dividends will depend upon our results of operations, financial condition, cash requirements, the availability of a surplus and other factors. For a discussion of the limits on our ability to pay dividends, see “Risk Factors – Risks Related to Our Chinese Operations – We rely principally on dividends paid by our PRC subsidiaries to fund our cash and financing requirements and to pay dividends. Our ability to pay dividends may be restricted.”




Because we are a British Virgin Islands company, your rights as a shareholder may be less clearly established as compared to the rights of shareholders of companies incorporated in other jurisdictions.












1
Effective February 6, 2010, Jinpan underwent a 2-for-1 stock split, thereby doubling its number of shares outstanding, doubling its number of shares authorized and halving its stock price as of such date.


15







jurisdictions. Under British Virgin Islands corporate law, our board of directors may negate or modify the three basic rights of shareholders (the right to vote, the right to an equal share in any dividend paid and the right to an equal share in any distribution of our surplus assets). Additionally, our board of directors could negate any transfer of our common shares between shareholders of record. Thus, our shareholders may have more difficulty protecting their interests in the face of actions by our board of directors than they would have as shareholders of a company incorporated in another jurisdiction.




Because we are a British Virgin Islands company with substantially all of our assets and operations in China, you may not be able to enforce judgments against us that are obtained in United States courts.




We are incorporated under the laws of the British Virgin Islands and substantially all of our assets and operations are located in China. As a result, it may be difficult for investors to effect service of process upon us within the United States or to enforce against us judgments obtained in the United States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States.




We have been advised by British Virgin Islands counsel that judgments of United States courts predicated upon the civil liability provisions of the federal securities laws of the United States may be difficult to enforce in British Virgin Islands courts and that there is doubt as to whether British Virgin Islands courts will enter judgments in original actions brought in British Virgin Islands courts predicated solely upon the civil liability provisions of the federal securities laws of the United States. Our PRC counsel has given us similar advice about the ability of investors to effect service of process upon us within China or to enforce judgments against us obtained in the United States.




We may be or become a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors.




We may be classified as a passive foreign investment company, or PFIC, by the U.S. Internal Revenue Service for U.S. federal income tax purposes. Such characterization could result in adverse U.S. federal income tax consequences to you if you are a U.S. investor. For example, generally, U.S. investors who owned our common shares during any taxable year in which we are deemed a PFIC, are subject to increased U.S. tax liabilities and reporting requirements for that taxable year and all succeeding years, regardless of whether we actually continue to be a PFIC, although a shareholder election to terminate such deemed PFIC status may be available in certain circumstances. The same adverse U.S. federal income tax consequences will apply to U.S. investors who acquire our common shares during the current taxable year of 2010 or any subsequent taxable year if we are treated as a PFIC for that taxable year.




The determination of whether or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets, including goodwill, from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes for a taxable year if either (a) 75% or more of our gross income for such taxable year is passive income, or (b) 50% or more of the average percentage of our assets during such taxable year either produce passive income or are held for the production of passive income. For such purposes, if we directly or indirectly own 25% or more of the shares of another corporation, we will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income.




Item 4. Information on the Company




A.        History and Development




Jinpan International Limited was incorporated in the British Virgin Islands on April 3, 1997 under the International Business Act of the British Virgin Islands. We are primarily engaged in the design and manufacture of cast resin transformers, switchgears, unit substations, VPI reactors and transformers and other power control and distribution products. Our predecessor Haikou Jinpan Special Transformers Works (“Haikou Jinpan”) was established in 1993 as a manufacturer of cast resin transformers.
  On June 30, 1997, we entered into an agreement with Haikou Jinpan to form a joint venture, Hainan Jinpan, pursuant to which Haikou Jinpan received a 15% equity interest in Hainan Jinpan in exchange for its


16







contribution of buildings, equipment, and other production and related facilities to the joint venture and we received an 85% equity interest in Hainan Jinpan for its capital contribution of US$ 2.1 million. We took over management of Hainan Jinpan from Haikou Jinpan after our acquisition of this 85% interest. On February 13, 2007, we purchased Haikou Jinpan’s interests in Hainan Jinpan (15%) for US$11 million. To maintain Hainan Jinpan’s status as a sino-foreign joint venture, Jinpan International subsequently transferred 5% of its equity interest in Hainan Jinpan to Wuhan Jinpan, a subsidiary that qualifies as a domestically funded limited liability company. Prior to September 2006, Hainan Jinpan was our only subsidiary in China and accounted for substantially all of our assets and sales.




In 2005 and 2006, we invested RMB 4.5 million (US$ 0.7 million) and RMB 21 million (US$ 3.1 million), respectively, on capital expenditures mainly to purchase equipment and to expand the Hainan facility. We funded these expenditures with our available cash, funds generated from operations and borrowings under credit facilities from Nan Yan Commercial Bank and the Bank of China.




In 2007, we invested RMB 33.1 million (US$4.7 million) to purchase and construct 20,000 square meters of land in Wuhan to serve as the site for our second manufacturing facility. We financed the acquisition and construction of the Wuhan facility from the proceeds we received from the sale of our shares in December 2006. Construction of the Wuhan facility began in early 2007 and was completed in May 2008. We began production in June 2008.




In 2008, we invested RMB 65.4 million (US$9.6 million) to purchase 71,000 square meters of land and buildings in Shanghai to serve as the site for our third manufacturing facility. We financed the acquisition using RMB 25.4 million (US$ 3.8 million) of our available cash and RMB 40.0 million (US$ 5.8 million) from secured loan facilities.  We paid back all our bank loans related to the acquisition of the Shanghai facility by the end of 2009. Construction of the Shanghai facility proceeded in tandem with our need for additional manufacturing capacity for our existing and new product lines.




In the fourth quarter of 2008, we began to renovate existing buildings on Shanghai to house the production line for our reactors and in the fourth quarter of 2009, we completed the renovation and installed equipment for the manufacture of VPI reactors and transformers and we began the manufacture of VPI transformers and reactors. We incurred RMB 13.8 million (US$ 2.0 million) for the renovation and RMB 6.7 million (US$ 1.0 million) for equipment.




In the fourth quarter of 2009, we began construction of two factory buildings – one for the manufacture of our gas insulated switchgear and one to house the testing equipment for a new wind energy product – and two employee dormitory buildings. This construction was completed in the fourth quarter of 2010.  In the fourth quarter of 2010, we installed equipment for the manufacture of gas insulated switchgears and began manufacturing gas insulated switchgears in the first quarter of 2011.   Because of delays in the launch of a new wind energy product, we postponed procurement of the test equipment for its manufacture.     We incurred RMB 13 million (US$ 2.0million) for the construction and RMB 22.3 million (US$ 3.7 million) for equipment used to manufacture gas insulated switchgears.




In the first quarter of 2010, we began construction of two more factory buildings and an employee dormitory building.    We plan to use the two factory buildings under construction to expand our production capacity for VPI reactors and transformers and gas insulated switchgears.  We expect to complete the construction of the two factory buildings by December 2011.  The projected cost for the construction of the buildings and the procurement of manufacturing equipment is approximately RMB 36.8 million(US$ 5.5 million).




In the second quarter of 2011, we completed acquisition of Guilin Jun Tai Fu Construction and Development Co. Ltd. (“Guilin JTF”) for RMB 15 million (US$ 2.3 million) and assumed debt of RMB 44.2 million (US$ 6.7 million) as a result of the acquisition.  Guilin JTF’s primary asset is a lot of thirty-eight (38) acres of land in Guilin, Guangxi zoned for industrial development.  Guilin JTF is in the process of acquiring an adjacent lot of forty-four (44) acres.  Our acquisition of Guilin JTF is part of our plan to build a large scale manufacturing and R&D facility in the city of Guilin, Guangxi province.  We plan to complete the development in several phases over the next five years. The new facility, once fully built, is expected to have a cast resin transformer manufacturing capacity of approximately 12 million KVA and substantial capacity for manufacturing other electrical distribution products for renewable energy and smart grid applications.


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Our headquarters are located at 168 Nanhai Avenue, Haikou Free Trade Zone, Haikou, Hainan Province, China, and our telephone number is (86) 898-6681-1301. Our subsidiary, Jinpan USA, has administrative offices located at 390 Veterans Boulevard, Carlstadt, New Jersey 07072 and the telephone number is (201) 460 8778.  Our website is www.jstusa.net.




B.         Business Overview




General overview




We design, manufacture and market cast resin transformers for the distribution of electricity. Our founders developed some of the first cast resin transformers in China in the early 1980’s and have since established a leading market position based on a reputation for quality, safety, manufacturing efficiency and customer service.  Our cast resin transformers allow high voltage transmissions of electricity to be distributed to various locations in lower, more usable voltages. We manufacture medium voltage cast resin transformers for a variety of end uses and applications, including large industrial, infrastructure and municipal projects such as factories, real estate developments, airports and subway systems. We manufacture four main types of transformers, which are distinguished by their insulation systems, each available in several models that are designed with various power transforming capabilities. In the event that our standard models do not meet a customer’s requirements, we have the capability to manufacture customized products designed to meet the customer’s specific needs. We measure production capacity for our transformer products in kilovolt amperes (“KVA”).




In addition to transformers, we also manufacture switchgears, VPI reactors and transformers, and unit substations.  Switchgears control the flow of electricity to and from electrical equipment.  We manufacture both conventional and high end gas insulated switchgears.  VPI reactors are components of inverters and converters.  They limit currents, filter waveforms and attenuate electric noise and harmonics to help balance current and voltage output.  We produce VPI reactors for both wind and solar applications.   VPI transformers raise and lower voltage.  We manufacture VPI transformers that serve as stand-alone units for power distribution and also as component for inverters and converters.  We also manufacture variable frequency variable wattage VPI transformers customized for industrial applications.  Unit substations are integrated products are integrated assemblies comprised of  high voltage switchgear, a transformer, a low voltage switchgear, a power meter and a power factor compensation device all interconnected with cables or buss bars.  Our unit substations transform high voltage electricity to lower voltages that feed into distribution transformers, which then lowers the electric voltage to levels suitable for consumer applications.  We measure our production capacity for switchgears, reactors, and unit substations in units produced.




The sale of wind energy products is one of the fastest growing segments of our business.  Our entrance into the wind equipment market began in to 2004 when we first began to supply VPI reactors for 1.5MW wind towers to an OEM customer. In 2006, we began to supply both reactors and cast resin transformers for 2.5MW wind towers to the same OEM customer.  Our portfolio of wind energy products in 2010 comprised of reactors for 1.5MW and 2.5MW wind towers and transformers for 2.5MW wind towers.  Revenue from sales of wind energy products grew concurrently with our product offerings.  Revenue from the sale of wind energy products reached RMB 106.4 million in 2010.   Up to 2010, most of our wind energy products were sold to one OEM customer and destined for the European and North American markets.  Given the large potential market for wind energy products worldwide, and particularly in China, we have constructed new facilities for the manufacture of wind energy products.  We also stepped up investment in R&D to develop new wind energy products.  Finally, we have expanded our OEM customer base to establish new sales channels to address both the Chinese and international markets.


Business Strategy
  We faced a challenging market environment in 2010 due to declines in transformer prices, brought on by increased competition enabled by historically low raw material prices, and a decline in international orders for wind power equipment.  We responded to these challenges by expanding our market reach in China, diversifying our OEM customer base, and developing new, high end products to position ourselves for future growth.
  Key elements of our business strategy included, but were not limited to, the following:


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Continue to focus on China’s growing electric infrastructure market.  China remained our largest market in 2010.  Sales in China accounted for 92.1% of our total revenue or RMB 890.6 million (US$ 132.4 million).   Macro trends in China also fuel demand for power distribution equipment.    According to the NBS, China’s gross domestic product in 2010 was RMB 39.7983 trillion, up by 10.3% over the previous year.  The NBS reported China’s gross domestic product in the first quarter of 2011 to be RMB 9.6311 trillion, a year-on-year increase of 9.7%.    On a quarterly basis, China’s gross domestic product increased by 2.1% in the first quarter of 2011.  As a leading manufacturer of cast resin transformers, we are well positioned to capitalize on this growth. We remain focused on the growing China market. We believe that macroeconomic conditions in China - fast economic growth, rising electricity consumption, increase in fixed asset investment, and urbanization – will continue to drive demand for electricity distribution equipment and provide us with opportunities for growth.




Invest in new, state-of-the-art facilities to increase our manufacturing capacity and efficiency.We continue to invest in advanced manufacturing facilities to expand our product lines and to enhance our competitive position in the market place.  We increased the combined transformer manufacturing capacity of our Haikou and Wuhan facilities to nearly 10 million KVA.  In the fourth quarter of 2010, we completed construction at our Shanghai facility of a new factory building for the manufacture of gas insulated switchgear.  In the first quarter of 2011, we installed and tested production equipment.  Production of the new gas insulated switchgears commenced in the mid first quarter 2011.  In 2010, we also completed a factory building for the testing of a new wind energy product.  However, we postponed the procurement of the test equipment due to delays in the development of the product.  In the second quarter of 2011, we began construction of two new factory buildings at our Shanghai facility.  The new factory buildings will expand our capacity to manufacture gas insulated switchgears and VPI reactors and transformers.  We expect to complete construction of the both factory buildings by December 2011.  In April 2011, we procured land in the city of Guilin, Guangxi province for the development of a new large scale manufacturing facility.  We plan to build out this new facility over the next five (5) years.  Once fully developed, this new facility is expected to have a cast resin transformer manufacturing capacity of approximately 12 million KVA and substantial capacity for the manufacture of other electric power distribution products for renewable and smart grid applications.  In the near term, we plan to add capacity for the manufacture of cast resin transformers and conventional switchgears at the new Guilin facility by the end of 2012.




Promote and develop high-margin products for new markets.  We continue to expand the application of our cast resin transformers, designing them to suit new applications and new markets. In 2010, we completed development of the first models of a new line of gas insulated switchgears.  We began manufacturing 12KV and 24K Ring Main Units, which are gas insulated switchgears used for power distribution, in the first quarter of 2011.  Our engineers are working to expand this new product line.  Over the next two years, we plan to introduce to market 36KV and 40.5KV RMUs as well as Cubicle Type Gas Insulated Switchgears (C-GIS) for various voltage levels.




Leverage our relationships with major OEM customers to expand our global reach.  We continue efforts to expand our OEM customer base.  Up to 2009, we had only one OEM customer that accounted for the bulk of our export sales.  In 2010, we successfully qualified as suppliers to two major international OEM customers based in Europe.  Currently, we are in the process of qualifying with one more European OEM that specializes in the development of wind turbines.  We expect to complete the qualification by the end of 2011.  By integrating ourselves into the global supply chain of major OEMs, we can leverage the superior market reach of these OEMs to reach a broader international market for power distribution equipment of conventional and wind power applications.




Products
  Cast Resin Transformers:
  Transformers step-up and step-down voltages in electric energy applications. Larger transformers are commonly used at power generation facilities to increase voltage and decrease current needs in order to transport electric energy across transmission lines. When the electric energy reaches the end user, a step-down transformer, such as those we manufacture, is used to reduce voltage and increase current for general use. The process of transforming high voltages to low voltages results in energy loss that produces heat and therefore electric transformers must contain effective cooling systems. Transformers are differentiated by their cooling




19




systems, which lowers heat levels during energy loss. Cast resin transformers have several advantages over alternative types of transformers, particularly oil-filled transformers, including greater fire resistance; more environmentally friendly due to a lack of potentially harmful cooling liquids that may leak; lower power requirements; less energy loss; and relatively low maintenance requirements. Although oil-filled transformers are still widely used in China and throughout the world, cast resin transformers are becoming increasingly popular due to these advantages.




Cast resin transformers were developed in Germany in the 1960s as an alternative to oil-filled transformers. In contrast to oil-filled transformers, which have their coils immersed in oil to absorb and disperse heat, coils in cast resin transformers are coated with a dry epoxy resin which is able to withstand temperatures as high as 188 degrees Celsius. Heat passes through the epoxy resin coating and dissipates into the surrounding air. This dry epoxy resin coating serves as the insulation medium between coils. To ensure effective insulation, appropriate precautions must be maintained to ensure that any moisture or condensation has been removed when the epoxy resin is cast. Rather than requiring a liquid like oil to absorb the heat produced, cast resin transformers release the heat produced into the ambient air in the form of hot air.




We manufacture four main types of cast resin transformers, which are distinguished by their insulation systems. The insulation systems used are: 155 degree Celsius Class “F” per IEC60076 (International Electrotechnical Commission) and 180 degree Celsius Class “H” for the Chinese market and 150 and 185 degree Celsius per ANSI (American National Standard Institute), IEEE (Institute of Electrical and Electronics Engineers), and NEMA (National Electrical Manufacturers Associations) standards for the U.S. and North American markets. In some transformers the high and low voltage coils are cast in epoxy resin under vacuum conditions. In others, the high voltage coils are cast in epoxy resin under vacuum conditions and the low voltage coils are encapsulated. Since our coils are either cast or encapsulated, they use ambient air to cool the transformers instead of requiring a liquid, such as oil, to absorb the heat produced.




In the event that our standard size cast resin transformers do not meet our customer’s requirements or one of our customers seek to purchase a transformer with a capacity in excess of the maximum KVA capacities of our standard transformers, we offer design, engineering services which enable us to manufacture custom made transformers to fulfill our customer’s particular needs. In order to customize our transformers, we employ design engineers who utilize 3D design systems and AutoDesk Inventor to design custom made transformers. The pricing of our transformers is based upon capacity as measured in KVA. We add to the price of our transformer the cost of engineering services performed.




We believe that the main advantages of our cast resin transformers as compared to other electric transformers are that our transformers:




·
are manufactured with fire resistant components;




·
do not use a potentially environmentally harmful cooling liquid that may leak;




·
use less power or produce energy loss than other available transformers;




·
require less maintenance;




·
are resistant to short circuit shocks;




·
have greater emergency overload capability;




·
have greater reliability; and




·
have smaller dimensions and produce less noise.




We obtained an ISO9001 certification for our cast resin transformers in April 1997. We also obtained an ISO14001 certification from the Environmental Management Certification Center for the Machinery Industry in September 2000. The equipment we manufacture also underwent complete type testing and was certified by KEMA High Power Laboratory in September 1999. In addition, our transformers have been certified by the Chinese Ministry of Machinery and Ministry of Electric Power, indicating that we have satisfied the required national standards related to product quality.




20


We successfully listed our transformer products with Underwriters Laboratories Inc. The products have been listed under transformer categories XPRS and XPFS7 for the United States and Canada, respectively, with an effective issue date of January 26, 2007. UL specializes in product compliance. UL listing requires compliance with the UL’s Standards for safety, under which product samples are tested and evaluated in accordance with applicable safety requirements. UL Standards for safety provide for certain technical requirements, which products must meet in order to become eligible to bear a UL mark. Once a product meets these requirements, authorization is given by UL to apply the appropriate UL mark to the products. UL listing is considered by the industry to be necessary for entry into the North American market and will improve the company’s capability to address this market.







Switchgears




Since 2004, we have successfully developed into a supplier of switch gear products.  Switchgears control the flow of electricity to and from electrical equipment.  They enable operator to isolate electrical equipment in the event of an emergency.  We manufacture both conventional and gas insulated switchgears.  We license technology for the manufacture of conventional switchgears.  We procured and developed technology for the design and manufacture of high end gas insulated switchgears.




VPI Reactors and Transformers




We first began manufacturing and selling line reactors developed for wind towers in 2006. VPI reactors are critical components of inverters and converters.  They limit filter waveforms and attenuate electric noise and harmonics to help balance current and voltage output.  We licensed the design for the manufacture of VPI reactors designed for one OEM’s wind towers.  While we also supply reactors for solar and other applications, most of our reactors are for wind energy applications and are supplied to one OEM customer. This is in contrast to a more diversified customer base for our cast resin transformer. Any significant decrease in the sale of reactors to this large OEM could have a material adverse effect on revenue derived from the sale of reactors.




VPI transformers raise and lower voltage.  We manufacture VPI transformers that are stand-alone units for power distribution.  We also manufacture VPI transformers that serve components for inverters and converters.  We also manufacture variable frequency variable wattage VPI transformers customized for industrial applications




Unit Substations




We have also realized successful forward integration through our unit substation business.. Unit substations are integrated products are integrated assemblies comprised of  high voltage switchgear, a transformer, a low voltage switchgear, a power meter and a power factor compensation device all interconnected with cables or buss bars.  Our unit substations transform high voltage electricity to lower voltage electricity that feeds into distribution transformers, which in turn lowers the voltage to levels suitable for consumer applications.




21







Certifications




We have maintained our product and management systems certifications since their issuance by successfully passing regularly scheduled audits conducted by certification authorities.  As of June 1, 2011, we hold the following certifications:




Product Description
Certificate Title
Effective Date
Certification No.
Certification Authority
Expiration dateThree Phase Dry-Type Distribution Transformers,Designated Model Code 3T01105800.
UL Certification
Mar 17,2009
E326030
Underwriters Laboratories Inc.
No expiration date.Transformers,Distribution,Dry-Type,Over 600 Volts,Dc and SC Series
UL Certification
Jan 26,2007
E252479
Underwriters Laboratories Inc.
No expiration date.General Purpose Transformers,Part Number 151X1230MT01PC01B
UL Certification
Mar 10,2009
E326443
Underwriters Laboratories Inc.
No expiration date.Class 220(R) insulation system, designated JSTIS001
UL Certification
Apr 24,2008
E320247
Underwriters Laboratories Inc.
No expiration date.Transformers,Distribution,Dry-Type,Over 600 Volts
UL Certification
May 02,2002
E218188
Underwriters Laboratories Inc.
No expiration date.Class 220(R) transformer insulation system, designated GC0011
UL Certification
May 02,2002
E75663
Underwriters Laboratories Inc.
No expiration date.Dry Type Transformer,Model 3T01105800.
CSA Certification
Jun 01,2009
2149831
CSA INTERNATIONAL
No expiration date.Dry Type Transformer,Model 3T01106900.
CSA Certification
Jun 01,2009
2149832
CSA INTERNATIONAL
No expiration date.Low-voltage Switchgear Assemblies, Model Blokset
CCC Certification
Dec 12,2009
2009010301380413
CHINA QUALITY CERTIFICATION
Dec 10,2014Low-voltage Switchgear Assemblies, Model GCS
CCC Certification
Nov 26,2009
2009010301377269
CHINA QUALITY CERTIFICATION
Nov 26,2014
   22
  Low-voltage reactive power compensating assemblies, Model GGJ
CCC Certification
Jul 21,2009
2009010301319680
CHINA QUALITY CERTIFICATION
Sep 14,2015Low-voltage Switchgear Assemblies, Model GCL
CCC Certification
Jan 19,2009
2004010301110547
CHINA QUALITY CERTIFICATION
Nov 05,2015Low-voltage Switchgear Assemblies, Model GGL1
CCC Certification
Jan 19,2009
2003010301092789
CHINA QUALITY CERTIFICATION
Apr 08,2016Low-voltage Switchgear Assemblies, Model XL
CCC Certification
Jan 19,2009
2004010301123877
CHINA QUALITY CERTIFICATION
JAN 19,2014Low-voltage Switchgear Assemblies, Model GCL
CCC Certification
Jan 19,2009
2004010301123879
CHINA QUALITY CERTIFICATION
Feb 28,2016Low-voltage Switchgear Assemblies, Model GCMS
CCC Certification
Jan 19,2009
2004010301115385
CHINA QUALITY CERTIFICATION
JAN 19,2014Low-voltage Switchgear Assemblies, Model Blokset
CCC Certification
Jan 19,2009
2005010301154596
CHINA QUALITY CERTIFICATION
JAN 19,2014Low-voltage Switchgear Assemblies, Model GGL2
CCC Certification
Jan 19,2009
2003010301092791
CHINA QUALITY CERTIFICATION
Apr 08,2016Low-voltage Switchgear Assemblies, Model GGL3
CCC Certification
Jan 19,2009
2003010301092795
CHINA QUALITY CERTIFICATION
JAN 19,2014Dry Type Transformer,Model 3T01106900.
CE Certification
Feb 26,2009
902849
Usai Technology Services Co., Ltd.
No expiration date.-
GOST-R Certification
Jan 13,2009
POCC CN.MW07.B00434
RUSSIA GOSSTANDARD
Jan 12,2010Design,Production,Service of the Cast Resin Dry Type Transformers,Combined Transformers,Up to  0.4kV Low-Voltage Switchgears and Controlgear Assemblies,3.6-12kV High-Voltage Switchgears and Controlgears and VPI(Vacuum Pressure Impregnated) Products
ISO9001:2000 QUALITY
MANAGEMENT SYSTEM CERTIFICATION
May 06,2008
01408Q10115R3M
CHINA UNITED CERTIFICATION CENTER
May 05,2011
   23
  Design,Production,Service of the Cast Resin Dry Type Transformers,Combined Transformers,Up to  0.4kV Low-Voltage Switchgears and Controlgear Assemblies,3.6-12kV High-Voltage Switchgears and Controlgears and VPI(Vacuum Pressure Impregnated) Products
OHSAS18001:1999

OHSAS CERTIFICATION
May 06,2008
01408S10010R2M
CHINA UNITED CERTIFICATION CENTER
May 05,2011Design,Production,Service of the Cast Resin Dry Type Transformers,Combined Transformers,Up to  0.4kV Low-Voltage Switchgears and Controlgear Assemblies,3.6-12kV High-Voltage Switchgears and Controlgears and VPI(Vacuum Pressure Impregnated) Products
ISO14001:2004 ENVIRONMENTAL MANAGEMENT
SYSTEM CERTIFICATION
May 06,2008
01408E10033R3M
CHINA UNITED CERTIFICATION CENTER
May 05,2011Design,Production,Service of the Cast Resin Dry Type  Power Transformers
CCS QUALITY MANAGEMENT
SYSTEM CERTIFICATION
Oct 28,2008
00508Q11010ROM
CHINA CLASSFICATION SOCIETY CERTIFICATION  COMPANY
Oct 27,2011
   24
  Design,Production and Correlative Management Activities of the Cast Resin Dry Type   Transformers
ISO9001:2008 QUALITY MANAGEMENT SYSTEM CERTIFICATION
Dec 25,2009
01409Q10510ROM
CHINA UNITED CERTIFICATION CENTER
Dec 24,2012Design,Production and Correlative Management Activities of the Cast Resin Dry Type   Transformers
OHSAS18001:1999 OHSAS CERTIFICATION
Dec 25,2009
01409S10066ROM
CHINA UNITED CERTIFICATION CENTER
Dec 24,2012Design,Production and Correlative Management Activities of the Cast Resin Dry Type   Transformers
ISO14001:2004 ENVIRONMENTAL MANAGEMENT SYSTEM CERTIFICATION
Dec 25,2009
01409E10126ROM
CHINA UNITED CERTIFICATION CENTER
Dec 24,2012Three Phase Dry-Type Distribution Transformers,Designated Model Code 3T01105800.
UL Certification
Mar 17,2009
E326030
Underwriters Laboratories Inc.
No expiration date.General Purpose Transformers,Part Number 151X1230MT01PC01B
UL Certification
Mar 10,2009
E326443
Underwriters Laboratories Inc.
No expiration date.Class 220(R) insulation system, designated JSTIS001
UL Certification
Apr 24,2008
E320247
Underwriters Laboratories Inc.
No expiration date.Transformers,Distribution,Dry-Type,Over 600 Volts
UL Certification
May 02,2002
E218188
Underwriters Laboratories Inc.
No expiration date.Class 220(R) transformer insulation system, designated GC0011
UL Certification
May 02,2002
E75663
Underwriters Laboratories Inc.
No expiration date.Dry Type Transformer,Model 3T01105800.
CSA Certification
Jun 01,2009
2149831
CSA INTERNATIONAL
No expiration date.Dry Type Transformer,Model 3T01106900.
CSA Certification
Jun 01,2009
2149832
CSA INTERNATIONAL
No expiration date.Design,Production and Service of Dry Type Transformers,Reactor Pre Fabricabted Unit Substation ,Up to 0.66 kv Low-Voltage Switchgears and Controlgear Assemblies,3.6-12kv High-Voltage Switchgears and Controlgears.
ISO9001:2008 QUALITY MANAGEMENT SYSTEM CERTIFICATION
May 04,2011
01411Q10136R4M
CHINA UNITED CERTIFICATION CENTER
May 03,2014Design,Production and Correlative Management Activities of Vacuum Pressure Impregnation(VPI)  Transformer and Reactor Products
OHSAS18001:1999 OHSAS CERTIFICATION
Dec 25,2009
01409E10125ROM
CHINA UNITED CERTIFICATION CENTER
Dec 24,2012Design,Production and Correlative Management Activities of Vacuum Pressure Impregnation(VPI)  Transformer and Reactor Products
ISO14001:2004 ENVIRONMENTAL MANAGEMENT SYSTEM CERTIFICATION
Dec 25,2009
01409S10065ROM
CHINA UNITED CERTIFICATION CENTER
Dec 24,2012







In the table above, certifications identified as having “No Expiration Date” remain valid provided that we continue to pay fees and pass annual inspections by the relevant certifying authorities.





Net sales by Products and Geographic Market




Our net sales by product for the years ended December 31, 2008, 2009, and 2010 is as follows:




Year Ended December 31,2008


2009


2010(U.S. Dollars in millions)Cast Resin Transformers


128.8



129.0



110.0Switchgears and Unit substations


15.7



15.6



23.3Line Reactors


9.5



14.3



10.5Total


154.0



158.9



143.8





Our Wind products are classified within cast resin transformers and line reactors.




Our net sales by geographic market is as follows:




2010


2010


2009


2008US$


RMB


RMB


RMBNet Sales




(In thousands)United States


7,165



48,183



67,679



60,622Europe


4,254



28,607



94,241



77,550PRC


132,388



890,284



922,383



948,703143,807



967,074



1,084,303



1,086,875





Background information relating to the electric transformer industry in China
  Growth Drivers
  We believe that the demand for electricity distribution equipment in China is driven by growth in electricity consumption and in infrastructure development.  China’s economic growth underlies both growth drivers.
  The Chinese economy grew in 2010 continuing a decade long growth trend.  According to the NBS, China’s gross domestic product in 2010 was 39.7983 trillion yuan, up by 10.3% over the previous year.  The NBS reported China’s gross domestic product in the first quarter of 2011 to be 9.6311 trillion yuan, a


25


year-on-year increase of 9.7%.    On a quarterly basis, China’s gross domestic product increased by 2.1% in the first quarter of 2011.  We continue to expect strong economic growth in China, but we expect the rate of growth to moderate in 2011 as the government increase financial tightening measures to tame inflation.




Electricity consumption in China continue to grow at a fast pace. According to the China Electricity Council (“CEC”), China consumed 4.1923 trillion KWH of electricity in 2010, up 13.88% over 2009 during which China consumed 3.6812 trillion KWH of electricity.  The CEC reported that, between 2006 and 2010, China’s electricity consumption grew at an annual rate of 11.09%.    Demand for electricity grew across all sectors in 2010 compared to 2009.  The CEC reported that electricity consumption in 2010 by primary, secondary, tertiary sectors were 0.0984 trillion KWH, 3.1318 trillion KWH, and 0.4497 trillion KWH respectively.  Consumer use accounted 0.5125 trillion KWH of consumed.   The CEC reported that electricity consumption in 2009 by primary, secondary, tertiary and consumers were 0.0940 trillion KWH, 2.7137 trillion KWH, 0.3944 trillion KWH, and 0.4575 trillion KWH respectively.  Although electricity consumption grew across the board, the rate of growth reflected the result of structural adjustments in the Chinese economy that promote the growth of tertiary sectors and consumption.  From 2006 to 2010, electricity consumption by primary, secondary, tertiary and consumers grew at an average annual pace of 5.44%,   10.91%, 12.25%, and 12.65% respectively.  Compared to 2005, the proportion of electricity consumed by the secondary sector (which includes manufacturing) is lower in 2010 and the proportion of electricity consumed by the tertiary sector (which includes services) and consumers increased in 2010.




China continued a high level of investment in fixed assets in 2010.  According to the NBS, the completed investment in fixed assets of the country in 2010 was RMB 27.8140 trillion, up 23.8% over the previous year.  The real growth was 19.5% after deducting the price factors.  Of the total investment, that in urban areas was RMB 24.1415 trillion, up by 24.5%, and that in rural areas reached RMB 3.6725 trillion, up by 19.7% .  In the urban areas, the investment in the primary industry was RMB 396.6 billion, up by 18.2%, investment in the secondary industry was RMB 10.1048 trillion , up by 23.2%, and investment in the tertiary industry was RMB 13.6401 trillion, up by 25.6%.   In 2010, the investment in real estate was RMB 4.8267 trillion, up by 33.2%.  Of this total, the investment in commercial residential buildings reach RMB 3.4038 trillion, an increase of 32.9%, investment in office buildings was 0.1807 RMB trillion, up by 31.2 %, and  investment in buildings for commercial business was RMB 0.1807 trillion, up by 33.9%.




We believe that the rising consumption of electricity and increase in infrastructure development reflect the underlying trends of continuing industrialization, urbanization, and economic expansion.




Growth in Electric Generation and Distribution Capacity




We believe that growth in power generation capacity eventually leads to investment in power distribution capacity, because the electricity generated needs to be delivered to consumers.  We manufacture electricity distribution equipment, primarily cast resin transformers and switchgears, for both network and distribution applications.  The majority of transformers we build are under 11KV.  We also manufacture cast resin transformers and VPI reactors for the transmission and distribution of wind energy.  As a manufacturer of power distribution equipment, we stand to gain from China’s investment in its electric grid.




China continued adding to its power generating capacity in 2010.  According to the CEC, China’s total power generating capacity reached 962.190 million KW in 2010.  From 2006 to 2010, China’s power generating capacity grew at an annual average rate of 13.22% to meet the country’s demand for electricity to support its economic expansion.  In 2010, China invested RMB 364.100 billion  and added 91.270 million KW of power generating capacity.  From 2006 to 2010, China added 486.100 million KW of generating capacity.  Approximately half of China’s power generating capacity as of 2010 were added within the last five (5) years. 
 China continued to expand its power distribution capacity.  According to the CEC, in 2010, China’s cumulative length of line circuits that are 220KV and above, and public power transforming capacity that is 220KV and above reached 442,700. kilo-meters and 1.974 billion KVA respectively.  China substantially expanded the country’s power distribution network in the past five years. According to the CEC, China invested RMB 341 billion  on its power distribution network in 2010.    Average annual  investment in power distribution network over the past five years was RMB 294.9 billion.  From 2006 to 2010, China’s cumulative length of line circuits that are 220KV and above and public power transforming capacity that is 220KV and above increased by 189,000 kilo-meters and 1.131 billion KVA respectively.




26


Dry Type Transformer Industry




A transformer changes voltage through electromagnetic induction. Electromagnetic induction is the production of a voltage across a conductor moving through a magnetic field.  The principles of electromagnetic induction is applied in many devices and systems, including generators, induction motors, electric motors, electric magnets, and transformers.  In the induction process, energy is lost by the transformers and dissipated as heat.  Insulation materials covering a transformer’s induction coils are rated to withstand certain temperatures.  Pro-longed exposure of the insulation materials to heat in excess of its temperature rating can degrade the material, leading to short circuits and fires.   Modern transformers are designed with systems to either air or liquid to cool the transformer. A dry type transformer uses air, rather than liquid, as its cooling medium.    Dry type transformers are used in a wide range of applications, where oil filled transformers are not suitable including but not limited to :




·
urban infrastructure with high standards for fire safety, including high rises, high concentration residential area, underground infrastructure, transportation hubs (e.g. airport and subway stations), government buildings, and commercial centers;




·
power plants (both transformers that distribute electricity for use in power plants and excitation transformers for electric generators);




·
Mining, chemical, and metallurgical works (e.g. rectifier transformer and metallurgy transformers); and




·
Rail (traction transformers).




In recent years, dry type transformers have been widely deployed worldwide, particularly for power distribution applications.  According to a report published by China Industry Research, a market research firm, titled “China Dry Type Transformer Industry Market Research and Trend Forecast Report 2011 – 2015” (“CIR Report”), dry type transformers account for 40% to 50% of all transformers deployed in U.S., Europe, and developed countries.  According to the CIR Report, of the two major types of dry type transformers, castresin dry type transformers are predominant in Europe while open ventilation dry type transformer is more widely used in the U.S.  Cast resin dry type transformers are predominant in China, because the country imported its dry type transformer technology from Europe.  The CIR report projects that dry type transformers will be even more widely deployed in the next 5 years as the new materials, new technology, and new manufacturing processes make dry type transformers more efficient, reliable, and environmentally friendly while expanding its capacity and reducing its noise profile.






27






In the last couple of year, both production and sale of dry type transformer in China grew at rates that on average exceeded 10% annually.  According to the CIR report, China is the world’s largest market for dry type transformer products.  While foreign manufacturers have a hold on important segments of the market for various high and low voltage electric equipment in China, foreign manufacturers have a very small presence in China’s dry type transformer market.  Since 2000, most major infrastructure projects use transformers supplied by domestic manufacturers.






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China’s dry type transformer market is very competitive.  Downward price movements in key raw materials, such as silicon steel and copper, brought new entrants to the market and new capacity.   Overall production capacity exceeded domestic demand in 2010.   Competition from new market entrants, additional capacity, and lower materials prices resulted in declines in the unit price of dry type transformers and adversely impacted the margins.  Price competition is particular intense for standard distribution transformers, the lower segment of the transformer market.  Demand for high end customized transformers remains robust and healthy.  The high end transformer market is accessible to a handful of large high quality manufacturers , because of the engineering and manufacturing resources required to custom design and produce high quality transformers for demanding industrial and power applications.   According to the CIR report, Hainan Jinpan Electric Co. Ltd is a  major manufacturer of dry type transformers in China.




How our cast resin transformers are manufactured




The essential components of our cast resin transformers are their windings and cores.  Under our current manufacturing process, we use coil winding machines to wind copper or aluminum wire or foils into high and low voltage coils.    Our coils are insulated with fiber glass mats or quartz powder and are then cast with an epoxy resin in an automated vacuum casting machine to provide further insulation. The vacuum casting machine then removes all moisture and condensation between the coil and the resin coating. We implement such procedures to ensure that our coils are properly insulated for safety. We use the materials described above so that none of our windings crack when heat is produced in the transformer since the expansion coefficient of copper or aluminum coil is similar to the expansion coefficient of epoxy resin and fiber glass. 
 The high and low voltage windings are then wrapped around a silicon steel core. The core is composed of several rolls of silicon steel, which have been cut using automated steel cutting machines. The rolls of silicon steel are assembled and stacked by our assembly table machines to form the core of a transformer. As one of the most important components of a transformer, the core is used as a transforming medium of electric energy during the transforming process.




29


We use high quality material, advanced winding and cutting machines. Our transformers are designed to operate with minimal energy loss and noise. We test and inspect our transformers in accordance with Chinese national standards and will not deliver a transformer to a customer unless each required test has been passed. The standard testing procedure is comprised of the following 12 procedures:




1.
measurement of winding resistance;2.
measurement of voltage ratio;3.
measurement of impedance voltage;4.
measurement of current;5.
Source voltage tolerance test;6.
induced over-voltage tolerance test;7.
measurement of winding insulation resistance;8.
measurement of partial discharge;9.
lightning impulse test;10.
temperature raise test;11.
measurement of sound level; and12.
short-circuit test.





The raw materials used in our cast resin transformers and their sources of supply




The principal raw materials we require for our business are (1) epoxy resin, used to coat the coils of our transformers, (2) silicon steel, which comprises the cores of our transformers, and (3) copper and aluminum wires and foils for windings. We maintain at least two suppliers for each of our principal raw materials in order to enhance our ability to obtain an adequate supply of high quality, competitively-priced raw materials.








Other raw materials required to produce our products include copper wire, glass fiber, and quartz powder. We purchase our glass fiber and quartz powder from local suppliers in nearby regions and believe that these materials are readily available.




Our sales and marketing network




We have an extensive sales and marketing network in China, which consists of 35 regional sales offices located in various cities. We employ 66 sales representatives, who based in our regional sales offices.  Except for one sales representative, almost all of our sales representatives in China are salaried employees.  In addition to sales representatives at our regional offices, we staff our manufacturing facilities at Haikou, Wuhan, and Shanghai with sales support personnel.




Our significant customers
  Sales to our five largest customers for fiscal years ended December 31, 2008, 2009, and 2010 accounted for 26.5%, 27.0% , and 18.1% of total sales, respectively. Sales to our single largest customer for those same periods accounted for, 18.4%, 17.7%, and 9.1% of our net sales, respectively.
  Our trademark, “JST”
  We own the rights to the trademark “JST,” which is registered with the Trademark Bureau of the State Administration of Industry and Commerce in China. We believe that much of our success in growing sales and market share is due to our focus on providing high quality products and services. Achieving greater customer recognition of our trademark is also important to our marketing and expansion efforts.  We have not registered our intellectual property rights outside of China and we cannot be certain that the laws of other countries will protect proprietary rights to the same extent as do the laws of China.


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Material Agreements




We entered into two agreements with Hitran Corporation, a New Jersey corporation, to license designs for certain line reactors used on wind turbines on April 30, 2008 and November 14, 2008 respectively. Pursuant to the license agreements, Hitran Corporation granted us the exclusive right to use the licensed designs to manufacture, assemble, sell, maintain and repair the licensed products. Hitran Corporation also granted us the right to use Hitran’s trademark on the licensed products. We agreed to pay Hitran a royalty fee equal to a percentage of net sales of the licensed products. Both agreements have a term of five years.




On April 10, 2008, we entered into agreement with Schneider Electric (China) Investment Co. Ltd., a Chinese affiliate of Schneider Electric, renewing an agreement to license designs for certain circuit breakers used in our switchgears.  Pursuant to the license agreement, Schneider granted us a non-exclusive right to manufacture, assemble, sell, maintain, and repair certain circuit breakers in the PRC (excluding Hong Kong and Taiwan).  Schneider also granted us the right to use certain trademarks on the licensed products.  The agreement was renewed on January 1, 2011 and the agreement will expire on December 31, 2012.




On July 29, 2010, Shanghai Jinpan Electric (Group) Co. Ltd. entered into an agreement with Shanghai Kai Tian Construction (Group) Co. Ltd. for the construction of one employee dormitory building at Company’s Shanghai facility. The agreement provides for the construction to commence on September 9, 2010 and to be completed on February 26, 2011.  The price of the construction is RMB 5.5 million (USD$ 0.83 million ).   As of the date of this report, construction of the dormitory building has been completed.





In March 2011, Hainan Jinpan entered into agreement with Guilin Jin Fu Investment Co. Ltd. to buy all the equity of Guilin JTF for a purchase price of RMB 15 million (US$ 2.3 million).  Guilin JTF’s primary asset is property rights to a lot of land, thirty-eight (38) acres in size, zoned for industrial use in the city of Guilin, Guangxi province.  Guiln JTF’s primary liability is RMB 44.2 million (US$ 6.7 million) in debt that Guilin JTF owe to Guilin Jin Fu Investment Co. Ltd. incurred for the procurement of the land.  Upon acquiring Guilin JTF, Hainan Jinpan would indirectly assume liability for payment of this debt.    In April 2011, Hainan Jinpan paid Guilin Jin Fu Investment Co. Ltd. the purchase price of RMB 15 million (US$ 2.3 million) in full and closed the transaction.


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Our competitors in the electric transformer business





We primarily compete in the cast resin transformer market with a few large transformer manufacturers and a large number of small transformer manufacturers.  Our major competitors in China are re-organized state-owned enterprises either with partial government ownership or has become fully private.  Although some of our competitors entered the market before we did and have achieved greater brand recognition, we believe that our growing brand recognition, the quality of our products, and the efficiency of our operations enable us to compete effectively.  We have a good track record in terms of product quality. To the best of our knowledge, none of our transformers have been the cause of any major accident. We believe that foreign cast resin transformer manufacturers presently do not pose a significant competitive threat to us because of their relatively high production costs. However, we may face increased competition in the future as foreign manufacturers enter into meaningful joint venture arrangements or establish wholly foreign-owned enterprises to manufacture transformers within China.




Seasonality




Historically, our revenue has fluctuated quarterly and has generally been the higher in second half of the year primarily due to the seasonal demand of our customers.  We believe that the seasonality is due to the procurement cycles of our domestic Chinese customers which tend to be heavily weighted in the second half of the year.  This seasonality effect is especially pronounced in 2010 due to the impact of the 2008-9 financial crises.  In 2010, the first, second, third, and fourth quarter represented 13.8%, 25.8%, 30.9% and 29.5% of full year net sales, respectively.  The 2008-09 financial crisis depressed construction activity worldwide including China.  The down turn in construction activity translated to fewer than expected domestic and international orders in the first half of 2010.  The financial crisis also severely depressed materials prices, which brought more price competition within the industry and lowered the price of transformers.   However, by mid 2010, spurred by a broad based economic recovery in China, our domestic sales rebounded strongly.  Our international sales also pick up in the fourth quarter of 2010.  In the first quarter of 2011, we saw continued recovery in markets worldwide spurring sales growth in China and abroad. For the full year 2011, we expect a steady strong growth in sales through much of the year.  We believe that the seasonality in sales that we experienced in 2010 is an aberration from the norm.   As we return to a normal economic environment, we expect the seasonal patterns that we saw prior to 2009 to resume.




Doing Business in China




China’s Corporate Income Tax




Presently, the corporate income tax rate for companies operating in China is 25%. Prior to January 1, 2008, China imposed an income tax of 33% on domestic companies and 15% on foreign companies operating in China. China offered the preferential tax treatment to foreign companies to attract foreign investment into China. Effective January 1, 2009, a uniform corporate tax rate of 25% is applicable to both domestic and foreign funded companies. Under this new EIT law, the Chinese government may offer preferential tax treatment and tax incentives to qualified high-tech companies to attract investment in China. Presently, most of our Chinese subsidiaries receive some form of preferential treatment. However, such policies may not continue. As a result of the new tax law, our subsidiaries will be subject to increased tax rates which could adversely affect our profitability.




In addition, under the new EIT law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Currently, no official interpretation or application of this new “resident enterprise” classification is available. Therefore it is unclear how tax authorities will determine tax residency based on the facts of each case. If the tax authorities determine that we, as a British Virgin Islands holding company, are a “resident enterprise” for EIT purposes, a number of unfavorable tax consequences could follow, including we may be subject to EIT at a rate of 25% on our worldwide taxable income, as well as EIT reporting obligations. It is also possible that the rules regarding “resident enterprise” classification may change in the future and possibly be retroactively applied.




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Hainan Jinpan. Under China’s corporate income tax law, qualified high-tech enterprises enjoy a 15% corporate income tax rate. In 2008, Hainan Jinpan successfully qualified as a high-tech enterprise with the Chinese government. Consequently, the applicable tax for Hainan Jinpan is 15% for each of the years 2008 to 2010. Hainan Jinpan’s qualification as a high-tech enterprise is subject to government review and renewal every three years. To maintain this preferential corporate tax rate after 2012, Hainan Jinpan must re-apply and qualify as a high-tech enterprise.




Hainan Jinpan R&D. Hainan Jinpan R&D enjoyed a preferential corporate tax rate of 18% in 2009. The corporate tax rate applicable to Hainan Jinpan R&D would increase by 2% per year up to 25% in 2012.




Jinpan China. From 2010 to 2012, Jinpan China must pay income tax at a preferential rate of 12.5% or half of the prevailing rate of 25%. After 2012, the corporate tax rate applicable to Jinpan China is 25%.




Wuhan Jinpan. The corporate tax rate applicable to Wuhan Jinpan is 25%.




Shanghai Jinpan. For 2010, the corporate income tax rate applicable to Shanghai Jinpan was 1.25% of its estimated annual sales revenue. Shanghai Jinpan will be subject to a corporate income tax rate of 25% in 2011.




Although we expect the Chinese government to continue to offer preferential tax treatment to our Chinese subsidiaries, such policies may not continue indefinitely. As a result of the new tax law, we may be subject to increased taxation which could adversely affect our profit.




Chinese Regulation on Dividends




Applicable Chinese laws and regulations require that before a Sino-foreign equity joint venture enterprise, such as Hainan Jinpan, distributes profits to its parent company, Jinpan International, it must first do the following:




·
satisfy all of its tax liabilities;




·
provide for any losses still unpaid from previous years; and




·
make allocations, in the proportions as determined by the discretion of the board, to a capital reserve fund and a public welfare fund.




Furthermore, if there is to be any distribution of profits, it is required to be in the proportion of each party’s investment in the joint venture.




For more information on limitations of our subsidiaries to pay dividends to us, its parent company, see Item 8. Financial Information – Dividend Policy.




Chinese Regulation of Loans and Direct Investment by Offshore Holding Companies




We are an offshore holding company conducting our operations in China through our PRC subsidiaries. Any loans or capital contributions we make to our PRC subsidiaries cannot exceed statutory limits and must be registered with SAFE or its local counterparts. Under applicable PRC law, the government authorities must approve a foreign-invested enterprise’s registered capital amount, which represents the total amount of capital contributions made by shareholders and registered with such registration authorities.  In addition, the authorities must also approve the foreign-invested enterprise’s total investment, which represents the total statutory capitalization of the company, equal to the company’s registered capital plus the amount of loans it is permitted to borrow under the law. The ratio of registered capital to total investment cannot be lower than the minimum statutory requirement and the excess of the total investment over the registered capital represents the maximum amount of borrowings that a foreign invested enterprise is permitted to have under PRC law. If we were to advance funds to our PRC subsidiaries in the form of loans or capital contributions, which exceed the maximum amount of foreign debt that our PRC subsidiaries are permitted to incur, we may have to apply to the relevant government authorities for an increase in their permitted total investment amounts. The various applications could be time-consuming and the outcomes may be uncertain. Concurrently with the loans, we might have to make capital contributions to these subsidiaries to maintain the statutory minimum registered capital and total


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Any loans we make to our PRC affiliated entities, which are treated as PRC domestic companies rather than foreign-invested enterprises under PRC law, are also subject to various PRC regulations and approvals. Under applicable PRC regulations, international commercial loans to PRC domestic companies are subject to various government approvals.




We may be unable to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, or at all, with respect to future loans by us to our PRC subsidiaries or PRC affiliated entities or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.




Legal system




China’s legal system is a civil law system, which is based on written statutes and legal cases with little precedential value. China does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion in individual cases. As legal systems in China develop, we, like other foreign business entities, may be adversely affected by new laws, changes to existing laws (or new interpretations of the laws) and preemption of provincial or local laws by national laws. In addition, in circumstances where adequate laws do exist, it still may not be possible for us to obtain swift and equitable enforcement of those legal rights under Chinese law.




Environmental laws




Environmental protection in China is regulated in accordance with the Environmental Protection Law of the People’s Republic of China, which became effective on December 26, 1989. This law sets national standards for environmental quality and monitoring as well as for the utilization of natural resources and the reduction of pollution. As a manufacturer, we are subject to annual inspections. We have passed our most recent inspection and believe that we are materially in compliance with applicable environmental laws.






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C.         Organizational Structure


We are a British Virgin Islands company whose securities are registered with the U.S. Securities and Exchange Commission and publicly traded on The NASDAQ Global Select Market. We conduct business through our subsidiaries in the United States and China. The following chart illustrates our organizational structure:




org chart








Jinpan USA




Jinpan USA is an U.S. subsidiary of Jinpan International Ltd.  Jinpan USA is a corporation organized under the laws of the State of New York in January 1998. Jinpan USA’s principle office is located in Carlstadt, New Jersey.   Jinpan USA is primarily engaged the sale of cast resin transformers to customers in the US and worldwide. Jinpan USA is wholly-owned by Jinpan International.







Jinpan Realty




Jinpan Realty is a wholly owned subsidiary of Jinpan USA.  Jinpan Realty is a limited liability company organized under the laws of New Jersey in July 2009. Jinpan Realty owns the land and building located at 390 Veterans Blvd, Carlstadt, New Jersey.  Jinpan Realty leases the building to Jinpan USA for its operations. Its principal office is located in Carlstadt, New Jersey.







Jinpan China




Jinpan China is a foreign funded limited liability company organized under the laws the PRC in January 2007.   Its principal office is located in the city of Wuhan, Hubei Province, PRC.   Jinpan China is wholly owned by Jinpan International.  Jinpan China is the parent company of Wuhan Jinpan and Shanghai Jinpan.




Hainan Jinpan




On June 30, 1997, we entered into an agreement with Haikou Jinpan to form a joint venture, Hainan Jinpan, pursuant to which Haikou Jinpan received a 15% equity interest in Hainan Jinpan in exchange for its contribution of buildings, equipment, and other production and related facilities to the joint venture and we received an 85% equity interest in Hainan Jinpan for its capital contribution of US$2.1 million. We assumed management of Hainan Jinpan from Haikou Jinpan after our acquisition of this 85% interest. In February 2007, we purchased Haikou Jinpan’s interests in Hainan Jinpan (15%) for US$11 million. To maintain Hainan Jinpan’s status as a sino-foreign joint venture, Jinpan International subsequently transferred 5% of its equity interest in Hainan Jinpan to Wuhan Jinpan, which qualifies as a domestically funded limited liability company.  In April 2011, Wuhan Jinpan acquired an additional 10% of the equity from Hainan Jinpan for RMB 80 million (US$ 12 million).




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Prior to September 2006, Hainan Jinpan was our only subsidiary in China and accounted for substantially all of our assets and sales.  Hainan Jinpan is organized under the laws of the PRC.  Its principal office is located in Haikou, Hainan Province, PRC.  It is primarily engaged in the design and manufacture of cast resin transformers, switchgears, and unit substations.




Hainan Jinpan R&D




Hainan Jinpan R&D is a domestically funded limited liability company organized under the laws of the PRC in September 2008.  Hainan Jinpan R&D is a wholly owned subsidiary of Hainan Jinpan.  Its principal office is located in Haikou, Hainan Province, PRC.   Jinpan R&D is primarily engaged in the research and development of new cast resin transformer technologies and manufacturing techniques.




Wuhan Jinpan




Wuhan Jinpan is a limited liability company organized under the laws of the PRC in September 2006.  Its principal office is located in Wuhan, Hubei Province, China.  Hainan Jinpan and Jinpan China owned 5% and 95% of Wuhan Jinpan respectively until April 2011 when Hainan Jinpan transferred all of its equity interests in Wuhan Jinpan to Jinpan China.  As a result of the transaction, Wuhan Jinpan became a wholly owned subsidiary of Jinpan China. Wuhan Jinpan is the primarily engaged in the manufacture of cast resin transformers.




Shanghai Jinpan




In June 2008, Jinpan China and Hainan Jinpan jointly acquired a new manufacturing facility in Shanghai China. Shanghai Jinpan is organized under the laws of the PRC as a domestically funded limited liability Company.  Its principal office is located in Shanghai, China. Shanghai Jinpan owns and operates the Shanghai facility. Hainan Jinpan and Jinpan China own 70% and 30% of Shanghai Jinpan, respectively.




Jinpan Alternative Energy




We organized Jinpan Alternative Energy under the laws of the PRC in January 2010.  Jinpan Alternative Energy is a domestically funded PRC limited liability company with its principal office in Shanghai, China.  It is a wholly owned subsidiary of Shanghai Jinpan.  The purpose of Jinpan Alternative Energy is to consolidate the design, manufacture, and sale of our wind energy products.




Jinpan T&D




We organized Jinpan T&D under the laws of the PRC in January 2010.  Jinpan T&D is a domestically funded PRC limited liability company with principal offices in Shanghai, China.  It is a wholly owned subsidiary of Shanghai Jinpan.  The purpose of Jinpan T&D is to consolidate the design, manufacture, and sell our switchgear and other integrated assembly products.




Jinpan Trading




We organized Jinpan Trading under the laws of the PRC in January 2010.  Jinpan Trading is a domestically funded PRC limited liability company with its principal office in Shanghai, China. .  It is a wholly owned subsidiary of Shanghai Jinpan.  The purpose of Jinpan Trading is to engage in the procurement of raw materials and components for our products.




Shanghai Panding




We organized Shanghai Panding under the laws of the PRC in March 2010.  Jinpan Panding is a domestically funded PRC limited liability company with its principal office in Shanghai, China.  It is a wholly owned subsidiary of Shanghai Jinpan.  The purpose of Shanghai Panding is to hold our new facilities under construction in Shanghai and future investments not directly related to manufacturing.




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Guilin JTF




Guilin JTF is a domestically funded PRC limited liability company organized under the laws of the PRC with its principal office in the city of Guilin, Guangxi Province, China.  In April 2011, Hainan Jinpan acquired of Guilin JTF from its parent Guilin Jin Fu Investment Co. Ltd. in a cash for equity transaction.  Hainan Jinpan paid RMB 15 million (US$ million) for all the equity of JTF and also assumed RMB 44.2 million (US$ ) in Guilin JTF’s debt.  At the time of the acquisition, Guilin JTF’s primary asset is the property rights to thirty-eight (38) acres of land in Guilin, Guangxi Province.  As a result of the acquisition, Guilin JTF became a wholly owned subsidiary of Hainan Jinpan.




D.        Property, Plant and Equipment




We have three manufacturing facilities in China located in the cities of Haikou, Wuhan, and Shanghai respectively.  We recently acquired land to develop a fourth manufacturing facility in the city of Guilin, Guangxi Province, China.  We also have a transformer storage and testing facility in the United States located in Carlstadt, New Jersey.




Haikou Facility




Our headquarters, administrative and manufacturing facilities are located at No. 100 Nanhai Avenue, Haikou, Hainan Province, China.  Our Haikou facility is our primary manufacturing and R&D facility. It manufactures cast resin transformers, unit substations, and switchgears.  The Company established this facility in 1993 and has gradually expanded the size and capacity of this facility to meet increasing demand.   Our Haikou Facility is approximately 44,000 square meters.  Hainan Jinpan owns 42% of the property, contributed by its predecessor Haikou Jinpan, and leased the remaining 58%. The total annual rent for the leased portion of the property (excluding maintenance fees) is RMB 1,647,748 (US$ 246, 000).  Rent is payable quarterly but accrues on a monthly basis.   As of the end of 2010, our Haikou facility has reached a maximum transformer manufacturing capacity of six (6) million KVA.




Wuhan Facility




In February 2007, we acquired approximately 20,000 square meters of land in Wuhan to build a second manufacturing facility.  Our Wuhan facility is located at No. 90 Nanhu Ave., Dong Hu High Tech Development Zone, Wuhan, Hubei Province, PRC 430074. We paid a purchase price of RMB 6.7 million (US$0.97 million) for the site and incurred an additional RMB 26.4 million (US$3.84 million) in construction costs. We financed the acquisition and construction of the Wuhan facility from the net proceeds we received from the sale of our common shares in December 2006.Construction on the Wuhan facility began in early 2007 and was completed in May 2008.




We began production at the Wuhan Facility in June 2008.  The Wuhan facility manufactures cast resin transformers.  Our Wuhan Facility has as a maximum transformer manufacturing capacity of four (4) million KVA as of the end of 2010.  In 2010, our Wuhan Facility produced 3,515,545 KVA of cast resin transformers.




Shanghai Facility




In June 2008, we acquired land and buildings to serve as a third manufacturing facility near Shanghai.  The Shanghai facility is located at No. 999 Huijin Road, QingPu Industrial Park, QingPu District, Shanghai, PRC 201700.  The site covers an area of approximately 71,000 square meters.  At time of acquisition, the site contained partially completed factory buildings.  We purchased the facility through a court ordered bankruptcy auction. On June 10, 2008, we paid RMB 64.0 million (US$9.4 million) for the site, plus RMB 1.4 million (US$205,000) in administrative fees associated with the closing. On June 18, 2008, the Shanghai Qingpu District People’s court issued an order granting us the land and buildings on the site.




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To fund this acquisition, we secured a loan of RMB 40.0 million (US$5.9 million) from the Bank of Communications, in China at an interest rate that declared by the Bank of China times 1.025. Our borrowings under this credit facility accrued interest at an average interest rate of 5.35% per annum for the year ended December 31, 2008.  We renewed this credit facility in 2009. We also used RMB 24 million (US$3.5 million) from our existing cash funds.  At the end of the 2009, we paid back all our bank loans related to the acquisition of the Shanghai facility.




Construction of the Shanghai facility proceeded in tandem with our need for additional manufacturing capacity for our existing and new product lines. We began to renovate existing buildings to house the production line for reactors in the fourth quarter of 2008.  We completed the renovation and installed equipment for the manufacture of VPI reactors and transformers in the fourth quarter of 2009.  We began the manufacture of VPI transformers and reactors in Shanghai at the end of 2009. We incurred RMB 13.8 million (US$ 2.0 million) for the renovation and RMB 6.7 million (US$ 1.0 million) for equipment.




In the fourth quarter of 2009, we began construction of two factory buildings – one for the manufacture of our gas insulated switchgear and one to house the testing equipment for a new wind energy product – and two employee dormitory buildings. This construction was completed in the fourth quarter of 2010.  In the fourth quarter of 2010, we installed equipment for the manufacture of gas insulated switchgears. We began manufacturing gas insulated switchgears in the first quarter of 2011.   Because of delays in the launch of the new wind energy product, we postponed procurement of the test equipment for its manufacture. We incurred RMB 13 million (US$ 2.0 million) for the construction and RMB 22.3 million (US$ 3.7 million)for equipment used to manufacture gas insulated switchgears.




In the second quarter of 2011, we began construction of two more factory buildings and an employee dormitory. We plan to use the two factory buildings under construction to expand our production capacity for VPI reactors and transformers and gas insulated switchgears.  We expect to complete the construction of the two factory buildings by December 2011.  The projected cost for the construction of the buildings and the procurement of manufacturing equipment is approximately RMB 36.8 million (US$ 5.5 million).




Guilin Facility




In the second quarter of 2011, we completed acquisition of Guilin Jun Tai Fu Construction and Development Co. Ltd. (“Guilin JTF”) for RMB 15 million (US$ 2.3 million) and assumed debt of RMB 44.2 million (US$ 6.7 million) as a result of the acquisition.  Guilin JTF’s primary asset is a lot of thirty-eight (38) acres of land zoned for industrial development in the city of Guilin, Guangxi.  Guilin JTF is in the process of acquiring an adjacent lot of forty-four (44) acres.




Our acquisition of Guilin JTF is part of our plan to build a large scale manufacturing and R&D facility in the city of Guilin, Guangxi province.  We plan to build the Guilin Facility in several phases over the next five (5) years.  When fully built, the new facility is expected to have a cast resin transformer manufacturing capacity of approximately 12 million KVA and substantial capacity for manufacturing other electrical distribution products for renewable energy and smart grid applications.




New Jersey Facility




In October 2009, we purchased a new 53,000 square feet (1.24 acres)   facility in Carlstadt, New Jersey.  The facility serves as the administrative headquarters for our U.S. subsidiary, Jinpan USA, and as a transformer storage, testing and service center.  We acquired the facility, which includes land and a newly constructed building for US$ 2.5 million.  We funded this acquisition through mortgage financing from Enterprise Bank, in the amount of US$ 1.7 million and US$ 0.8 million from our own cash flow.  This new facility will enable us to better support our North American customers




Sales Offices in China




We lease thirty-three (33) and own two (2) sales offices throughout China. We also use office space in the sales office of our independent agent in Guangzhou. Instead of paying rent for the use of this office space, we pay additional commissions to our independent sales agent who owns the office.




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Capacity




Presently, we have three manufacturing facilities in the Chinese cities of Haikou, Wuhan, and Shanghai respectively. We recently acquired land in the city of Guilin, Guangxi Province to develop a fourth manufacturing facility.  We believe that our facilities, including our machinery and equipment, currently are, and in the foreseeable future will be, generally in good condition, well-maintained and suitable for their intended uses. We also believe that our manufacturing, service, and sales facilities have adequate capacity to accommodate our present needs and have room for capacity expansion to meet foreseeable business growth.




Our Haikou and Wuhan facilities manufactures cast resin transformers.  In addition to cast resin transformers, our Haikou facility also manufactures switchgears and unit substations.  Our Shanghai facility manufactures VPI transformers and reactors and, starting in 2011, gas insulated switchgears.  We measure production capacity for cast resin transformers and unit substations, which incorporates cast resin transformers, in Kilovolt Amperes (KVA).  We measure production capacity for switchgears and VPI transformers and reactors in units.




The following table provides details of our production in 2010 by facility and product line:









Manufacturing Facility
Cast Resin Transformers
VPI Transformers & Reactors
Switchgears
Unit SubstationsHaikou
3,644,779 KVA
-
2859 Units
171,450 KVAWuhan
3,515,545 KVA
-
-
-Shanghai
-
10,192 Units
-
-




Item 4A.Unresolved Staff Comments




None.




Item 5.Operating and Financial Review and Prospects




The following discussion and analysis should be read together with our audited consolidated financial statements and notes appearing in Item 18 below.




Critical Accounting Policies




Our discussion and analysis of financial conditions and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies reflect the more significant estimates and judgments used in the preparation of our consolidated financial statements.






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Allowance for Doubtful Accounts




We reserve for doubtful accounts for estimated losses resulting from the inability of our customers and others to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We estimate the allowance for doubtful accounts related to trade receivable and other receivables based on analysis as described below. We evaluate specific accounts where we have information that certain customers are unable to meet their financial obligations. In these cases, we make judgments, based on the best available facts and circumstances, including but not limited to, the length of our relationship with the customer or debtor and customer’s current credit status based on third party credit reference and known market factors, to record specific reserve for customers against amounts due to reduce our receivables to amounts that we expect to collect. These specific reserves are re-evaluated and adjusted as additional information received affects the amounts estimated. This analysis requires the Company to make significant estimates, and the changes in fact and circumstances could result in changes in the allowance for doubtful accounts. While bad debts have historically been within the provision established, we cannot guarantee that we will continue to experience the same bad debt rate that we have in the past.




Inventories Obsolescence




Inventories are stated at the lower of cost or market value. Market value represents the net realizable value for inventories.  Cost is determined using the weighted average cost method.  We periodically review our inventory for  excess inventory and obsolescence. We write down the value of ending inventory for obsolete and unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. These reviews require management to estimate future demand for our products and the market conditions. Possible changes in these estimates could result in a write down of inventory.  If actual market conditions are less favorable than those projected, additional inventory write-downs may be required. If actual market conditions are more favorable than projected, inventory previously written down may be sold, resulting in lower cost of sales and higher income from operations than expected in that period.




Deferred Tax Valuation Allowance




Estimates and judgments are required in the calculation of certain tax liabilities and in determining the recoverability of certain of the deferred tax assets, which arise from net operating losses, tax carry forwards and temporary differences between the timing of the recognition of revenues and expenses for tax and financial statement purposes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more-likely-than-not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.




Goodwill




Under Accounting Standards Codification (ASC) 350, Goodwill and Other Intangible Assets, goodwill is subject to an annual impairment test. If an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the reporting unit below its carry value, an interim impairment test would be performed between annual tests. The impairment test includes a comparison of estimated discounted cash flows associated with the asset’s carrying amount. If the fair value is less than the carrying value of the asset, the second step of the impairment test shall be performed to measure the amount of impairment loss, if any. In the second step, the implied fair market value of goodwill is estimated and compared to the carrying amount of goodwill. If the carrying amount of goodwill exceeds its implied fair market value, an impairment loss equal to this excess is recorded. The recorded loss cannot exceed the carrying amount of goodwill. During the test performed in 2010, the fair value of the reporting unit significantly exceeded the carrying value of the related goodwill.




Revenue Recognition




Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs, the sales price is fixed or determinable and collectability is reasonably assured. There are no acceptance provisions, installation or other services required after the delivery. Revenue is recognized on the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer upon delivery, provided that we maintain neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold.


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Stock-based Compensation.





We are required to measure and recognize compensation expense for all share-based payment awards based on estimated fair values at the date of grant. Determining the fair value of share-based awards requires judgment in developing assumptions, which involve a number of variables. We calculate fair value by using the Black-Scholes option-pricing model, which requires estimates for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option.





New Accounting Pronouncements




In January 2010, the FASB issued Accounting Standards Update ("ASU") 2010-06 Fair Value Measurement and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.This guidance provides for the following new required disclosures related to fair value measurements: 1) theamounts of and reasons for significant transfers in and out of level one and level two inputs and 2) separate presentation of purchases, sales, issuances, andsettlements on a gross basis rather than as one net number for level three reconciliations. The guidance also clarifies the existing disclosures as follows:1) provide fair value measurement disclosures for each class of assets and liabilities and 2) provide disclosures about the valuation techniques and inputs used forboth recurring and nonrecurring level two or level three inputs. The Company has adopted this standard, but it did not have a material effect on the Company'sconsolidated balance sheet or required financial statement disclosures





In April 2010, the FASB issued ASU 2010-13, Compensation -Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This updateprovides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated incurrency of a market in which a substantial porting of the entity’s equity securities trades should not be considered to contain acondition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability ifit otherwise qualifies as equity. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscalyears, beginning on or after December 15, 2010. The Company’s adoption of this ASU did not have a material impact on itsconsolidated financial statements.





In December 2010, the FASB issued Accounting Standard Update 2010-28, Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU modifiedStep 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entityis required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. For publicentities, the amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December15, 2010. The Company`s adoption of this ASU is not expected to have a material impact on its consolidated financial statements.





In December 2010, the FASB issued Accounting Standard Update 2010-29, Business Combinations(Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU specifies that, if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 is effective prospectively for business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company’s adoption of this ASU is expected to have  impact on its consolidated financial statements disclosures for the year ended December 31, 2011.


41





A.        Operating Results





Overview




We design, manufacture and sell cast resin transformers for voltage distribution equipment primarily in China. Historically, our revenue has fluctuated quarterly and has generally been the higher in second half of the year due to the seasonal demand of our customers. We believe this seasonality is likely to continue in the future.




We intend to sustain the long-term growth of our businesses through technological innovation, engineering excellence, expanding our international presence and a commitment to delivering high-quality products and services to our customers. As part of our efforts to maximize growth, we continue to focus on research and development to ensure that our products maintain the quality and efficiency that our customers expect from our brand.




·
We believe that over the last few years we have laid a foundation for long-term growth by:




·
expanding our product line by developing new products and applications that extend the use of our cast resin transformers into new markets, including, but not limited to, wind, solar and nuclear;




·
receiving UL certification for our transformer products, which are listed under transformer categories XPRS and XPFS7 for the United States and Canada, respectively;




·
continuing to execute our plan to manufacture, sell, and promote higher margin integrated assemblies such as our switchgear and unit substations internationally; and




·
expanding our presence in the OEM market by successfully passing the qualification program of one of the world’s largest power generating equipment manufacturers.




Our focus in 2010 is to build on this foundation and continue to execute well in key areas, including responding effectively to customer needs and continuing to focus internally on product excellence, business efficacy, and accountability across our company. For a discussion of trends we expect for 2010, see “Trends” below.




Summary of Financial Results




The following table presents selected statement of operations data expressed as a percentage of net sales for the years ended December 31, 2008, 2009 and 2010.




Year ended December 31,2008

2009

2010Net sales


100.0
%


100.0
%


100.0
%Cost of goods sold


(68.3
)%


(57.7
)%


(61.2
%)Gross profit


31.7
%


42.3
%


38.8
%Selling and administrative expenses


(17.0
)%


(22.7
)%


(28.5
%)Other income


1.1
%


0.6
%


1.7
%Other expenses


(0.8
)%


(0.1
)%


(0.2
%)Income taxes


(2.2
)%


(1.9
)%


(2.7
%)Net income


12.9
%


18.2
%


9.1
%





Year ended December 31, 2010 compared with the year ended December 31, 2009




Net Sales. Net sales decreased RMB 117.2 million or 10.8%from RMB 1,084.3 million (US$158.9 million) in the year ended December 31, 2009 to RMB 967.1 million (US$143.8 million) in the year ended December 31, 2010. Transformers accounted for 76.5% of our net sales. Switch and unit substations accounted for 16.2% of net sales and line reactors accounted for 7.3% of net sales. The decrease in sales was primarily due to lower prices of raw materials which resulted in lower average selling prices during the year 2010. The selling price is largely impacted by the low raw material costs incurred or expected to be incurred at or near the time of transaction. In 2010, we  passed most of the savings from low materials price to customers in order to remain competitive.  As such, fluctuations in raw material price directly impact our selling price. In 2010, the average selling price decrease by approximately 20%, and overall unit sales volume increased by approximately 10% as compared with 2009. Our increase in sales volume was primarily the result of increased marketing efforts and expanded our customers’ base.


42




Cost of Goods Sold. Cost of goods sold decreased RMB 34.2 million or 5.5% from RMB 625.8 million (US$91.7 million) in the year ended December 31, 2009, to RMB 591.6 million (US$88.0 million) in the year ended December 31, 2010. Cost of goods sold as a percentage of sales increased by 3.4 % in the year ended December 31, 2010, from 57.7% in the year ended December 31, 2009, to 61.1%% in the year ended December 31, 2010. The increase in percentage was mainly the result of decrease in the average selling price.




Gross Profit. Gross profit decreased RMB 83.0 million or 18.1% to RMB 375.5 million (US$55.8 million) in the year ended December 31, 2010 from RMB 458.5 million in the year ended December 31, 2009. As a percentage of sales, gross profit decreased from 42.3% in the year ended December 31, 2009, to 38.8% in the year ended December 31, 2010. This decrease also resulted from the aforementioned decrease in average selling  price.




Selling and Administrative. Selling and administrative expenses,  increased by RMB 27.5 million or 11.2% from RMB 246 million in the year ended December 31, 2009, to RMB 273.5 million (US$40.7 million) in the year ended December 31, 2010.  As a percentage of sales, selling and administrative expenses increased approximately 5.5%, from 22.7% in the year 2009 to 28.2% in the year ended December 31, 2010. The increase was primarily the result of the additional RMB 7.6 million expenses to operate with the newly expanded Shanghai facility and increase RMB 5.4 million in shipping expense. We are developing a new switchgear product and improved the design of our current product which resulted in R&D expense increasing by RMB 10.6 million .




Interest Expense. Interest expense increased RMB 0.7 million or 50% from RMB 1.4 million for the year ended December 31, 2009, to RMB 2.1 million (US$0.3 million) for the year ended December 31, 2010. This increase was mainly due to the extension of more credit  to  customers as compared to prior year, resulting in more loans from the bank.




Income Tax. Income tax expense increased RMB 5.9 million or 28.9% from RMB 20.4 million for the year ended December 31, 2009 to RMB 26.3 million (US$3.9 million) for the year ended December 31, 2010. The higher tax expense resulted from the distribution of profits by our Chinese subsidiaries to their parent company in the British Virgin Islands. Under China’s tax law, profits distributed by Chinese subsidiaries to their foreign parent company are subject to a 10% tax. In 2010, we paid RMB 18.2 million (US$ 2.7 million) tax on profit distribution.




Net Income. Net income decreased RMB 107.7 million or 54.5% from RMB 197.7 million in the year ended December 31, 2009, to RMB 90.0 million (US$13.4 million) in the year ended December 31, 2010. The decrease in net income was mainly the result of an decrease in sales and gross profit. As a percentage of sales, net income decreased from approximately 18.2% in the year ended December 31, 2009 to approximately 9.2% in the year ended December 31, 2010.




Basic Earnings Per Share. Earnings per share decreased RMB 6.77 or 54.9% from RMB 12.33 in the year ended December 31, 2009 to RMB 5.57 (US$0.83) in the year ended December 31, 2010.




Year ended December 31, 2009 compared with the year ended December 31, 2008




Net Sales. Net sales decreased RMB 2.6 million or 0.2% from RMB 1,086.9 million in the year ended December 31, 2008 to RMB 1,084.3 million (US$158.9 million) in the year ended December 31, 2009. Transformers  accounted for 81.2% of our net sales. Switch and unit substations accounted for 9.8% of net sales and line reactors accounted for 9% of net sales. The decrease in sales was primarily due to lower prices of raw materials which resulted in lower average selling prices as compared with 2008. The selling price is largely impacted by the low raw material costs incurred or expected to be incurred at or near the time of transaction. As such, fluctuations in raw material price directly impact our selling price. In 2009, the average selling price decrease by approximately 20%, and overall unit sales volume increased by approximately 20% as compared with 2008. Our increase in sales volume was primarily the result of increased marketing efforts and increased production capacity.




43




Cost of Goods Sold. Cost of goods sold decreased RMB 116.1 million or 15.7% from RMB 741.9 million in the year ended December 31, 2008, to RMB 625.8 million (US$91.7 million) in the year ended December 31, 2009. Cost of goods sold as a percentage of sales decreased by 10.6 % in the year ended December 31, 2009, from 68.3% in the year ended December 31, 2008, to 57.7% in the year ended December 31, 2009. The decrease was mainly the result of decrease in the price of certain raw materials, particularly steel and copper prices during the year 2009 and we did not pass all the savings to customers.




Gross Profit. Gross profit increased RMB 113.5 million or 32.9% to RMB 458.5 million (US$67.2 million) in the year ended December 31, 2009 from RMB 345 million in the year ended December 31, 2008. As a percentage of sales, gross profit increased from 31.7% in the year ended December 31, 2008, to 42.3% in the year ended December 31, 2009. This increase also resulted from the aforementioned decrease in the price of certain raw materials and we did not pass all the savings to customers.




Selling and Administrative. Selling and administrative expenses,  increased by RMB 60.9 million or 32.9% from RMB 185.1 million in the year ended December 31, 2008, to RMB 246 million (US$36.0 million) in the year ended December 31, 2009.  As a percentage of sales, selling and administrative expenses increased approximately 5.7%, from 17% in the year 2008 to 22.7% in the year ended December 31, 2009. The increase was primarily the result of the additional expenses associated with Wuhan facility which was only partially operational in 2008 and Shanghai facility which was not operational in 2008. These two locations increased selling and administrative expense by RMB 25.5 million in 2009. We are developing a new generator related product which resulted in R&D expense increasing by RMB 23.5 million.




Interest Expense. Interest expense decreased RMB 7.0 million or 83.3% from RMB 8.4 million for the year ended December 31, 2008, to RMB 1.4 million (US$0.2 million) for the year ended December 31, 2009. This decrease was mainly because we paid off loans in 2009.




Income Tax. Income tax expense decreased RMB 3.3 million or 16.2% from RMB 23.7 million for the year ended December 31, 2008 to RMB 20.4 million (US$3.0 million) for the year ended December 31, 2009. This decrease was primarily the result of Jinpan China’s higher taxable income which was exempted from corporate income tax in 2009.




Net Income. Net income increased RMB 58.0 million or 41.5% from RMB 139.7 million in the year ended December 31, 2008, to RMB 197.7 million (US$29.0 million) in the year ended December 31, 2009. The increase in net income was mainly the result of an increase in gross profit. As a percentage of sales, net income increased from approximately 12.9% in the year ended December 31, 2008 to approximately 18.2% in the year ended December 31, 2009.




Basic Earnings Per Share. Earnings per share increased RMB 3.59 or 41.1% from RMB 8.74 in the year ended December 31, 2008 to RMB 12.33 (US$1.81) in the year ended December 31, 2009.




Impact of Inflation




We do not believe that inflation over the past three years has had a material impact on our net sales or operating results.




Foreign Currency Fluctuations




We receive almost all of our revenues in Renminbi, which is not freely convertible into foreign currency. However, we are required to meet certain foreign currency obligations, for things such as future purchases of certain equipment and raw materials. The Chinese government controls our foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign currency and through restrictions on foreign imports. Effective January 1, 1994, the conversion of Renminbi into U.S. Dollars must be based on rates set by the People’s Bank of China ( the “PBOC”), which rates are set daily based on the previous day’s Chinese interbank foreign exchange market rate with reference to current exchange rates on the world


44


Dollar. As a result of adopting a more flexible exchange rate system, China’s financial sector has become more responsive to fluctuations in the international currency market. The Renminbi/U.S. Dollar exchange rate has climbed steadily since July 2005.




Effective as of December 1, 1996, Renminbi has become fully convertible for all current account transactions. Foreign currency, which is required for current account transactions, can be bought freely at authorized Chinese banks, so long as the procedural requirements prescribed by law are met. Payment of dividends to foreign investors holding equity interests in Chinese companies, including Foreign Investment Enterprises such as Hainan Jinpan and Jinpan China, is considered a current account transaction. At the same time, Chinese companies are also required to sell their foreign exchange earnings to authorized Chinese banks. Purchase of foreign currency for capital account transactions still requires prior approval of the State Administration for Foreign Exchange.




During 2010, the RMB remained relatively stable against the U.S. Dollar.  Domestic sales in China accounted for 92.1% of our net sales.  Sales in China are priced in Renminbi.  Exports accounted for 7.9% of our net sales.  Exports are either priced in U.S. Dollars or Euros.  We procured 90.8% of our raw materials from China and paid for these materials using RMB.  We procured 19.8% of our raw materials from abroad and paid for these materials using the U.S. Dollar or Euro Dollar.  Because most of our operations are conducted in China using RMB, the RMB’s appreciation against the U.S. Dollar did not have a material adverse effect on our business.




Political and Economic Risks




Our operations in China are subject to several potential political and economic risks. See Item 3. Key Information – Risk Factors – Risks Related to our Chinese Operations.




B.         Liquidity and Capital Resources




Sources of Funds




Historically, we financed our operations principally through cash generated from our operations, bank borrowings and securities offerings.




As of December 31, 2010, we had the following components of debt representing a total indebtedness outstanding of RMB 80.0 million:




Hainan Jinpan has a working capital credit facility from the Bank of China for RMB 130.0 million.  As of December 31, 2010, there was no outstanding balance under this credit facility. This credit facility bears interest at the prime rate declared by the Bank of China. Our borrowings under this credit facility accrued interest at an average interest rate 5.81% per annum for the year ended December 31, 2010. This facility will expire in October 2011 and we intend to extend the facility for another year.  For a description of restrictions on dividend payments, see Item 8.A. Dividend Policy.  Upon default on any material terms, any outstanding balance would be immediately due and payable.





Hainan Jinpan has an unsecured letter of credit facility from Bank of Communication for RMB 90 million of which 40 million was included in a written agreement and RMB 50 million was an oral agreement. As of December 31, 2010, there was RMB 50 million outstanding under this credit facility. This credit facility bears interest at the benchmark rate set  by the People’s Bank of China..  This credit facility will expire in June 2011 and we are in the process of renewing this credit facility.





Hainan Jinpan has an unsecured letter of credit facility from the Bank of China for RMB 173 million.  This credit facility bears interest at LIBOR plus a margin rate.  As of December 31, 2010, there was no outstanding balance under this credit facility.  This facility will expire October 2011 and we intend to extend the facility for another year.




Hainan Jinpan has an oral agreement of working capital credit facility from the Industrial and Commercial Bank of China for RMB 132 million. This credit facility bears interest at the benchmark rate set by the People’s Bank of China. As of December 31, 2010, there were no borrowings outstanding under this credit facility.


45





Shenghai Jinpan has an oral credit facility from Bank of Communication for RMB 160 million of which 100 million was working capital facility and RMB 60 million was letter of credit facility. As of December 31, 2010, there was RMB 30 million outstanding balance under this credit facility. This credit facility bears an interest rate that is 5% below benchmark rate set by People’s Bank of China. Our borrowings under this credit facility accrued interest at an average interest rate of 5.28% per annum for the year ended December 31, 2010. This credit facility will expire in September 2011.





Shenghai Jinpan has an oral  credit facility from bank of China for RMB 80 million of which 50 million was working capital facility and RMB 30 million was letter of credit facility. This credit facility bears interest according to the benchmark rate set by bank of China. As of December 31, 2010, there is no outstanding balance under this credit facility.





Jinpan Realty has a long term mortgage bank loan of 1.7 million from Enterprise Bank in USA for purchasing the land and building, which constitute our U.S. offices, in 2009. The loan was secured by the property. The interest rate is fixed at 6% for first 5 years. Thereafter, the rate shall be reset at the then current five year U.S. treasury rate plus 2% for the remainder term of the loan. The term of the loan is 20 years.   There was US$1.6 million outstanding as of December 31, 2010. The table below reflects the principal balance due for the next five years.





For a discussion of economic restrictions on the ability of any of our subsidiaries to transfer funds to us or restrictions on the use of funds from our credit facilities, see “Item 8. Financial Information, A. Consolidated Statements and Other Financial Information, Dividend Policy” and “Item 3. Key Information, Risk Factors, Risks Related to Our Chinese Operations.  We rely principally on dividends paid by our PRC subsidiaries to fund our cash and financing requirements and to pay dividends. Our ability to pay dividends is restricted.”




On December 31, 2010, we had working capital of RMB 664.4 million compared to RMB 624.8 million at December 31, 2009.




In our opinion, we believe that our cash balances and cash generated from operation, supplemented as needed by financing activities including obtaining short-term bank loans from our loan facilities in China  are sufficient for our present capital requirements.




Analysis of Cash Flows




In 2010, net cash provided by operating activities of RMB 12.7 million primarily resulted from  income generated from operation , increased in accounts receivable and increase in prepaid expense and notes payable. In 2010, accounts receivable increase by RMB 64.7 million is primary resulting we increased more new larger customers this year and  we extended credit line and term to them. The increase in prepaid expense and notes payable is primary resulting from a purchase commitment to a silicon steel supplier in China. In 2009, net cash provided by operating activities of RMB 186.5 million primarily resulted from higher gross profit generated from operation and lower prices for raw materials which resulted in lower valued inventories.  As of December 31, 2009, we had inventories of RMB 178.0 million as compared to RMB 220.2 million as of December 31, 2008. The decrease of RMB 42.2 million is primarily as a result of (1) an increase in raw materials of RMB 3.2 million; (2) an decrease in work-in-process of RMB 29.1 million; and (3) an decrease in finished goods of RMB 16.3 million. The decrease in all levels of our inventory was due to the decreased cost of inventories, which resulted from lower prices for raw materials such as steel and copper.




In 2010, net cash used in investing activities of RMB 55.9 million primarily resulted from construction of production facilities in Shanghai, dormitory in Wuhan and purchasing equipments in Shenghai.  In 2009, net cash used in investing activities of RMB 54.0 million primary resulted from constructing the Shanghai facility and purchasing equipment for the Shanghai facility.




In 2010, net cash provided by financing activities of RMB 64.1 million primarily resulted from increasing net bank loans of RMB 79.4 million, and a dividend payment of RMB 15.4 million.  In 2009, net cash used in financing activities of RMB 76.1 million primarily resulted from  a net repayment of bank loans of RMB 67.8 million and a dividend payment of RMB 13.2 million.


46




Capital Expenditures and Requirements




Our principal commitments consist of a long-term obligation outstanding under operating leases on certain buildings and apartments, employee contracts, capital commitments and bank loans. For more information on these commitments, see “Tabular Disclosure of Contractual Obligations” below.




We had capital expenditures of RMB 56.5 million for 2010.  Capital expenditures in Shanghai including RMB 11million were used to expand our Shanghai facility, RMB22.9 million was used to purchase equipment, RMB 11.5 million were used to purchase equipment and to expand the Wuhan facility, RMB 8.9 million was used for our Haikou expansion.  We expect an increase in capital expenditures of RMB 24.5 million (US$3.7. million) to renovate and construct the Shanghai facility and RMB 22.1 million (US$3.4 million) to purchase equipment in the year 2011. We also expect about RMB 90 million (US$13.6 million) to purchase the land in Guilin , RMB 61.5 million (US$ 9.3 million) to construct Guilin facility and RMB 20 million (US$ 3.0 million) deposit for acquiring equipments in Guilin.




We anticipate, based on management’s internal forecasts and assumptions relating to our operations, that our existing cash and funds generated from our operations, together with our existing financing agreements, will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. In the event that our plans change, our assumptions change or prove inaccurate, or other capital resources and projected cash flow otherwise prove to be insufficient to fund our operations (due to, for example, unanticipated expenses, technical problems or otherwise), we may be required to seek additional financing sooner than currently anticipated.




C.        Research and Development




In 2010, we focused our R&D effort on developing lower cost transformers, new transformer and reactor products for alternative energy applications, and new switchgear products.    Total R&D spending in 2010 was RMB 51.4 million (US$ 7.6 million).




We continue to develop products with lower cost and greater utility to enhance our competitiveness in the market place. In 2010, we successfully developed a low cost SCB 10 type 20KV/10KV dual voltage transformer, which expanded our product offering in 20KV transformer market.  We developed a 10KV series energy-saving SCB10-type dry type transformer, which optimizes transformer performances to achieve energy savings. We also developed a lower-cost design of a traction transformer which will make us more competitive in the rail infrastructure market.




We continue to expand our offerings of new transformer and reactor products for alternative energy applications.  We developed new products that expand our reach in the solar power generation market.  In 2010, we developed highly efficient VPI transformers and reactors for solar photovoltaic power generation.  We also developed a VPI rectifier transformer for mono-crystalline silicon solar cells.  These new products expand our reach in the solar power generation.  We also expanded our portfolio of wind energy products. In 2010, we developed  a dry type cast resin transformer for 2.75MW wind towers, which should enable us to reach a broader segment of the wind power market.




We added a new line of gas insulated switchgears to our product offering.  In 2010, we successfully developed a 12KV gas insulated metal clad enclosed switchgear.  This new product is designed for 12kV secondary distribution networks.  The switching parts are enclosed in a stainless steel enclosure filled with SF6 gas.  The constant atmospheric conditions in the switchgear’s sealed container ensures a high level of reliability and safety.




In 2011, our R&D efforts are focused on expanding our portfolio of cast resin transformers for wind applications to include transformers for offshore wind towers.  We are also developing more highly engineered transformers for industrial applications in support of our business strategy to move up the value chain by serving the high end of the electric equipment market.  Finally, we are working to expand our offering of gas insulated switchgears.  We are in the process of developing 24kV, 36kV 40.5kV gas insulated switchgear, which we plan to introduce to market over the course of 2011 and 2012.


47




D.        Trends




Based on forecasts provided by our customers, we expect international sales to expand substantially and account for a greater portion of our net sales in 2011 compared to 2010.  We also expect to sell more equipment for wind and solar power applications in 2011 than in 2010, because of stronger demand for wind and solar equipment both in China and overseas.  We expect switchgear sales to account for a greater portion of our net sales in 2011 as we expand our marketing efforts and product offerings.




With regard to materials prices, we expect prices of copper, aluminum, and epoxy resin to rise moderately in 2011 due to continuing upward pricing pressure on these commodities.  We expect silicon steel prices to rise moderately from its current low base in line with upward momentum of other commodities prices.  However, at this time, we do not expect a significant or sudden rise in materials prices that would have a material adverse effect on our gross margins.




E.        Off-Balance Sheet Arrangements




None.




F.        Tabular Disclosure of Contractual Obligations




Our material contractual obligations are composed of operating lease commitments, employees contracts, capital commitments and repayment of bank loans. The table below provides a summary of the Company’s contractual obligations at December 31, 2010.




Payments due by period (RMB in thousands)Contractual Obligations

Total


Less than 1 year


1-3 Years


3-5 years


More than 5 yearsOperating Lease Obligations


4,872



776



793



716



2,587Employees Contracts (1)


110,376



23,346



34,277



5,941



46,812Capital Commitments (2)


6,351



6,291



60



-



-Interest Cost (3)


7,194



634



1,211



1,122



4,227Long Term Bank loans


10,306



311



681



770



8,544Total


139,099



31,358



37,022



8,549



62,170





(1)
Our employees in China include engineers, technicians, management and administrative personnel, marketing and sales personnel, and factory personnel, while employees in the United States include management, administrative, and marketing personnel. All of the employees except US employees are contract employees and have entered into renewable employment contracts with us. Terms of the employment agreements with management, engineers, marketing and sales personnel and technicians range from two to five years and terms of the employment agreements with administrative personnel range from six months to one year.




(2)
Capital commitments related to the purchase of our new office, equipment and machinery.




(3)
The calculation of interest cost is based on an  interest rate of 6%, applied to the ending loan balance outstanding at December 31, 2010. The outstanding loan was from our credit facilities with Enterprise Bank. For more details of this loan, see “B. Liquidity and Capital Resources” within this item above.




48







Item 6. Directors, Senior Management and Employees.




A.          Directors and Senior Management




Our directors and executive officers are as follows:




Name
Age
PositionLi Zhiyuan
56
Chairman of the Board of Directors, President, and Chief Executive OfficerLing Xiangsheng
59
Vice Chairman of the Board of Directors and Vice PresidentJing Yuqing
48
SecretaryMark Du
50
Principal Financial OfficerStephan R. Clark
58
DirectorLi-wen Zhang
58
DirectorDonald S. Burris
68
DirectorCai Xu
47
Director





Li Zhiyuan has served as our Chairman of the Board of Directors, President, and Chief Executive Officer since April 1997, and of our predecessor, Haikou Jinpan, since August 1993, and as Chairman of the Board of Directors and Chief Executive Officer of Jinpan Hainan since June 1997. From October 1991 to present, Mr. Li served as General Manager of Haikou Rongda Enterprise Company and Director of Hainan’s KaDa Manufacturing Company, a Sino-Japanese joint-venture. From August 1988 to October 1991, Mr. Li served as General Manager of Hainan Jindao Yacht Company. From August 1982 to October 1988, Mr. Li was employed as an engineer at Guangxi Electric Power Institute. Mr. Li is responsible for the overall management of our operations. He is married to Jing Yuqing.




Ling Xiangsheng has served as our Vice Chairman of the Board of Directors and Vice President since April 1997, and of our predecessor, Haikou Jinpan, since August 1993 and is responsible for the design, manufacture and development of our cast resin transformers. He has also served as the Vice President of Jinpan Hainan since June 1997. From June 1990 to December 1992, Mr. Ling was the chief consultant for the Danycast Company in Thailand where he was responsible for the entire production process of its cast resin transformer line. From January 1980 to June 1990, Mr. Ling was employed by the Beijing Transformer Company ultimately serving as Chief Engineer and General Manager for its cast resin transformer plant. Between October 1985 and February 1986, Mr. Ling attended Fuji Electric Company in Japan to study vacuum cast resin insulated transformer manufacturing technology. Mr. Ling was responsible for designing China’s first cast resin transformer.




Jing Yuqing has served as our Corporate Secretary since April 1997, the president of our subsidiary Jinpan USA since 2000, and a director of our subsidiary Jinpan Hainan since 1993. From 1997 to 2002, Ms. Jing served as a director on our board. From October 1988 to December 1992, Ms. Jing was employed by the Hainan Electric Bureau Electric Planning Department as manager of the electrical engineering department. From September 1984 to October 1988, Ms. Jing performed designing services for the Liaoning Electric Designing Institute. Ms. Jing is the wife of Li Zhiyuan.




Mark Du has served as our Principal Financial Officer since August 2002. Since January 1993, Mr. Du has been Controller of PC Warehouse, Inc., a worldwide company headquartered in New Jersey, with 24 subsidiaries companies located throughout the United States. From September 1987 to December 1992, Mr. Du served in different accounting positions in various accounting firms and companies. Mr. Du received his Masters in Business Administration in Accounting from Pace University in 1987 and is a CPA.




Stephan R. Clark was elected director in October 2006.  Mr. Clark served as Group Vice President of Connectivity Solutions and Chief Operating Officer at Avaya Communications from January 2000 to January 2004. From October 1997 to January 2000, Mr. Clark served as the Marketing and Sales Vice President of Lucent Power Systems. From January 1982 to October 1997, Mr. Clark worked at AT&T where he acted as the managing director and chief representative in China and the regional managing director for the Asia/Pacific, as well as holding various sales and marketing positions. While at AT&T, Mr. Clark also served as program director for the AT&T Executive Education Program at the Wharton School at the University of Pennsylvania and the chairman for the Public Affairs Committee of American Chamber of Commerce in the People’s Republic of China. Mr. Clark holds a B.F.A. degree in political communication from Southern Methodist University and a M.A. in Management from the University of Texas at San Antonio.




Dr. Li-Wen Zhang was elected to our Board of Directors in August 2003. Dr. Zhang is a permanent staff member of the United Nations Department of General Assembly Management Affairs currently in Economic and Social Council Servicing Branch. As part of the managing staff, Dr. Zhang provided consulting services to the Delegation of Beijing Fiscal Bureau on socioeconomic issues in November of 2000. In 1996, Dr Zhang helped organize a conference in Shanghai with Chinese authorities regarding the Development and Management of Special Economic Zones in a Transitional Economy. Dr. Zhang received a Ph.D. in International Comparative Education from Columbia University in 2001 and holds a Masters degree in Economic Policy Management from Columbia University Graduate School of Business and International Affairs.


49




Donald S. Burris was elected to our Board of Directors in June 2001. Mr. Burris is the senior principal in the firm of Burris & Schoenberg, LLP, an AV-rated West Coast based law firm with a national and international practice. Mr. Burris served as editor-in-chief of the Georgetown Law Journal and as a law clerk to the Honorable James R. Browning of the United States Court of Appeals for the Ninth Circuit and has taught at the Georgetown Law Center, Loyola University School of Law, and the International Law Institute in Washington, D.C. Mr. Burris also served with distinction as a Special Counsel for the United States Senate Watergate Committee. Mr. Burris brings to the Company thirty-one years of experience as a successful businessman and business litigation attorney who has counseled clients from both a business and legal perspective.




Cai Xu was appointed to our Board of Directors in June 2009 and subsequently elected in September 2009.  Since 2002, Dr. Cai has been a distinguished faculty member of the School of Electronic, Information, and Electrical Engineering at Shanghai Jiaotong University, one of China’s leading research universities.  His research focuses on the application of high power electronics in electric systems, generators, and related electrical equipment, on the automation of power distribution networks, and on wind power grid connection and conversion technology.  Since 2008, he has chaired the University’s Wind Energy Research Centre.  The Centre combines research expertise in the fields of electrical, mechanical, control, and oceanic engineering to create a multidisciplinary platform for the research of wind energy.  The Centre provides consultation services for the Chinese government and both public and private industries.  Dr. Cai received his Ph.D and master’s degrees in electrical engineering from China University of Mining and Technology.  He received his bachelor’s degree in power generation and electrical systems from China South East University.




Family Relationships. Li Zhiyuan, our Chairman of the Board of Directors and President is married to Jing Yuqing, our Secretary.




There is no arrangement or understanding with major shareholders, customers, suppliers or other, pursuant to which any person referred to above was selected as a director or member of senior management.




B.         Compensation of Directors and Officers




The total compensation paid to our directors and officers during fiscal year 2010 was US$ 1,197,478 comprised of salaries in the amount of US$ 902,978 and bonuses in the amount of US$ 294,500 During 2010, we did not issue stock option, reserve for any pension, retirement or similar benefits for our directors and officers.




C.         Board Practices




All of our directors hold office until the next annual meeting of shareholders and until their successors have been elected and qualified. Our officers are elected by the Board of Directors at the first Board of Directors meeting after each annual meeting of shareholders and hold office until death, resignation, or upon removal from office.




None of our directors have service contracts with Jinpan International or its subsidiaries providing for benefits upon termination of their employment.




Our Audit Committee consists of Stephan R. Clark, Donald S. Burris, and Dr. Li-Wen Zhang, all of whom are independent directors. Mr. Stephan R. Clark is the chair of Audit Committee and also meets the criteria of an “Audit Committee Financial Expert” under the applicable rules and regulations of the SEC. The Audit Committee oversees our auditing procedures, receives and accepts the reports of our independent certified public accountants, oversees our internal systems of accounting and management controls, and makes recommendations to the Board of Directors as to the selection and appointment of our auditors. The Audit Committee is governed by the terms of the Charter of the Audit Committee of the Board of Directors.
  Our Compensation Committee consists of Donald S. Burris, Stephan R. Clark and Li-Wen Zhang. Mr. Donald S. Burris is the chair of the Compensation Committee. The function of the Compensation Committee is to administer the 2006 Stock Incentive Plan and to have authority over the salaries, bonuses, and other compensation arrangements of our executive officers.


50




Our Nominating and Corporate Governance Committee consists of Li-Wen Zhang, Donald S. Burris, and Stephan R. Clark. Dr. Li-Wen Zhang is the chair of the Nominating and Corporate Governance Committee. This committee (1) identifies individuals qualified to become members of the Board, (2) selects, or recommends to the Board, the director nominees for the next annual stockholders meeting, (3) selects candidates to fill any vacancies on the Board; and (4) develops and recommends to the Board a set of corporate governance principles applicable to the corporation.




D.           Employees




As of December 31, 2010, we had 1,235 employees in China, including 187 engineers and technicians, 301 management and administrative personnel, 66 marketing and sales personnel and 681 manufacturing personnel. We also had 9 employees in the United States, including 3 management and administrative personnel, 2 marketing and sales personnel, 2 accounting personnel, 1 legal personnel, and 1 maintenance technician. Except for our U.S. employees, all of our employees are contract employees and have entered into renewable employment contracts with us. Terms of our employment agreements with management, engineers, sales persons, and technicians range from two to three years and the terms of our employment agreements with support personnel range from six months to one year.




Our employees are not currently members of a trade union. We have not experienced any strikes or other labor disputes that have interfered with our operations and we believe that our relations with our employees are good.






51





Item 7. Major Shareholders and Related Party Transactions.




A.           Major Shareholders




The following table sets forth specific information as of June 1, 2010, to the best of our knowledge, concerning the beneficial ownership of (i) persons or entities who, to our knowledge, beneficially own more than 5.0% of our outstanding common shares, (ii) each of our directors and officers, and (iii) the number of our common shares beneficially owned by all officers and directors as a group.




Title of Class
Name of Beneficial Owner

Amount Owned(1)

Percent of ClassCommon Shares
Li Zhiyuan (2)


3,665,256



22.4
%Common Shares
Ling Xiangsheng (3)


630,992



3.8
%Common Shares
Jing Yuqing (4)


3,665,256



22.4
%Common Shares
Mark Du (5)


40,500



*Common Shares
Stephan R. Clark (6)


14,666



*Common Shares
Li-wen Zhang (7)


27,500



*Common Shares
Donald S. Burris (8)


13,600



*Common Shares
Cai Xu


-



-Common Shares
All officers and directors as a group(7 persons) (9)


4,392,514



26.8
%





*
Represents share ownership of less than one percent (1%).




(1)
We believe that all persons named in the table have sole investment power with respect to all shares of common shares beneficially owned by them, unless otherwise noted in these footnotes.




(2)
Represents (i) 2,522,658 common shares, (ii) 1,106,598 common shares beneficially owned by Jing Yuqing, the wife of Mr. Li, as to which Mr. Li disclaims beneficial ownership, and (iii) 36,000 shares of common shares issuable upon exercise of currently exercisable stock options held by Mr. Li. And Ms. Jing. The options have an exercise price and expiration dates ranging from US$7.68 to US$10.83 per share and  February 5, 2014 to March 7,2016 respectively.




(3)
Represents 612,992 common shares and 18,000 shares of common shares issuable upon exercise of currently exercisable stock options. The options have an exercise price and expiration dates ranging from US$7.68 to US$10.83 per share and February 5, 2014 to March 7, 2016 respectively.




(4)
Represents (i) 1,106,598 common shares (ii) 2,522,658 common shares beneficially owned by Li Zhiyuan, the husband of Ms. Jing and our Chairman of the Board, Chief Executive Officer, and President, as to which Ms. Jing disclaims beneficial ownership, and (iii) 36,000 shares of common shares issuable upon exercise of currently exercisable stock options held by Mr. Li and Ms. Jing. The options have an exercise price and expiration dates ranging from US$7.68 to US$10.83 per share and February 5, 2014 to March 7, 2016 respectively.




(5)
Represents 40,500 common shares issuable upon exercise of currently exercisable share options. The options have exercise prices and expiration dates which range from US$7.68 to US$15.28 and March 10, 2012 to March 7, 2016, respectively.




(6)
Represents 14,666 common shares issuable upon exercise of currently exercisable share options. The options have exercise prices and expiration dates which range from US$7.68 to US$15.28 and March 10, 2012 to March 7, 2016, respectively.




(7)
Represents 4,000 common shares and 23,500 common shares issuable upon exercise of currently exercisable share options. The options have exercise prices and expiration dated ranging from US$7.68 to US$15.28 and March 10, 2012 to March 7, 2016, respectively.




(8)
Represents 1,600 common shares and 12,000 common shares issuable upon exercise of currently exercisable share options. The options have exercise prices and expiration dates ranging from US$9.03 to US$15.28 and March 10, 2012 to March 7, 2016, respectively.




52






(9)
Represents 4,247,848 common shares and 144,666 common shares issuable upon exercise of currently exercisable share options issued to all directors and executive officers.




As of June 14, 2011, 16,395,456 common shares were issued and outstanding and were held by twenty record holders in the United States.




Our shareholders who beneficially own 5.0% or more of the common shares outstanding do not have different voting rights from other shareholders of common shares.




Since May 19, 2008, beneficial ownership percentages for Mr. Li, Ms. Jing, and Mr. Ling have decreased by, 2.7%, 2.8% and 4.0% respectively, to the percentages as indicated in the chart above.




B.        Related Party Transactions




None.




C.        Interests of Experts and Counsel.




Not applicable.




Item 8. Financial Information.




A.        Consolidated Statements and Other Financial Information




See Item 18.




Export Sales




For the year ended December 31, 2009, our export sales were US$23.7 million or 14.9% of net sales.




Dividend Policy




Any future payment of dividends is within the discretion of our board of directors and will be dependent upon, among other things, our earnings, capital requirements, financing agreement covenants, our financial condition and applicable Chinese and BVI laws. To the extent that our board of directors may decide to pay cash dividends in the future, these dividends will be declared from the retained earnings, e.g., surplus, as determined by resolution of our board. As a holding company, we rely principally on dividends and other distributions on equity paid by our PRC subsidiaries for our cash requirements, including funds necessary to pay dividends on our common shares and to service any debt we may incur. This in turn, affects the amount of the our retained earnings which is limited by the amount of dividends or other distributions, which can be declared by our subsidiaries and paid to us under agreements governing the subsidiaries’ debt and applicable law. Our subsidiaries are separate and distinct legal entities and have no obligation to make funds available for dividends or other distributions to us. In addition, substantially all of our consolidated assets are held by our subsidiaries. Accordingly, our ability to service our debt, and to pay dividends on our common shares depends on the results of operations of our subsidiaries, the ability of such subsidiaries to provide us with cash, whether in the form of dividends, loans or otherwise, our ability to pay amounts due on our obligations, and with respect to our ability to pay dividends, upon current and future agreements governing our debt and Chinese and BVI law.




The instruments governing our current and future debt restrict and may restrict our ability to pay dividends or make other distributions to us. Hainan Jinpan’s credit facility with Bank of China prohibits Hainan Jinpan from paying dividends if the profits after tax at the end of a fiscal year are zero or negative and the profits after tax do not cover losses from previous fiscal years.   In this situation, the profits before tax may not be used for repayment of the principal and/or interests due that fiscal year and payment of associated expenses therefor, or if the profits before tax are not enough to fully repay the next principal and/or interests due and to pay associated expenses therefore, then dividends may not be paid. Pursuant to the credit facility with Bank of Communications, Hainan Jinpan agreed not to pay any dividends to Jinpan International and Wuhan Jinpan, its stockholders, during fiscal years 2009 and 2010 unless the interest and principal on outstanding amounts are timely paid and the dividends paid by Hainan Jinpan for any year do not exceed the net profit for that year. If any of these provisions are violated, all borrowings under the Bank of Communications facility will be immediately due.




53




Other restrictions include relevant PRC laws and regulations which permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our subsidiaries in China are required to set aside each year a certain amount of their accumulated after-tax profits, if any, to fund certain statutory reserves. These reserves are not distributable as dividends until the accumulated amount of such reserves has exceeded 50% of its registered capital. In addition, each of our PRC subsidiaries, before distribution of its dividends, is required to provide for a statutory reserve fund and a staff and workers’ bonus fund, and to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its after-tax profits each year at the discretion of its board of directors. In addition, applicable Chinese laws and regulations require that before a Sino-foreign cooperative joint venture enterprise, such as Hainan Jinpan, distributes profits to its joint venture partners, in our case Jinpan International and Wuhan Jinpan, it must first satisfy all of its tax liabilities, provide for any losses still unpaid from previous years, and make allocations, in the proportions as required by Chinese laws to certain statutory reserve funds.




In February 2009, the board of directors declared a cash dividend of US$ 0.24 per share (US$0.12 per share if adjusted for 2-for-1 stock split in February 2010). We made the first distribution of US$ 0.12 per share on February 27, 2009. We made the second distribution of US$ 0.12 per share on July 10 2009.  In January 2010, the board of directors declared a two-for-one forward stock split and a post-split full year dividend of US$ 0.14 per share.  We made the first distribution of US$ 0.07 per share on Feb 25, 2010.  We plan to make a second distribution of US$ 0.07 per share in the second half of 2010.




Legal Proceedings




Neither we nor our subsidiaries is a party to, nor is our property or the property of our subsidiaries’ the subject of, any pending legal or arbitration proceeding that is material.




B.        Significant Changes




None.




54


Item 9. The Offer and Listing.




A.           Offer and Listing Details




Trading Prices and Markets




The following table sets forth the high and low sales prices for our common shares, as publicly traded on the American Stock Exchange (the “AMEX”) up until September 8, 2008 and the NASDAQ Global Select Market (the “NASDAQ”) from September 9, 2008 and on for: (i) the five most recent full financial years, (ii) each full financial quarter for the two most recent full financial years, and (iii) for each month, during the six months of December 2008 through May 2009.  All of the prices below have been adjusted to reflect the two-for-one stock split of our common shares, effective February 6, 2010, as if such reverse split had been in effect during the periods indicated.




(in US$)Year Ended

High

Low2006


14.70



2.962007


15.72



7.152008


22.49



6.642009


25.12



5.672010





Quarter Ended

High

LowMarch 31, 2009


8.78



5.67June 30, 2009


16.50



8.38September 30, 2009


19.25



12.00December 31, 2009


25.12



14.31March 31, 2010


25.33



18.13June 30, 2010


22.14



13.39September 30, 2010


15.15



10.08December 31, 2010


14.53



10.03March 31, 2011


11.86



10.02June 30, 2010 (through June 14, 2011)


14.00



11.01








Month

High

LowDecember, 2010


10.74



10.03January, 2011


11.25



10.02February, 2011


11.86



10.78March, 2011


11.73



10.71April, 2011


13.35



11.59May, 2011


14.00



11.61June, 2011 (through June 14, 2011)


12.39



11.01








B.        Plan of Distribution




Not applicable.




C.        Markets




Our common shares began trading on AMEX on February 1998 under the symbol “JST.” On September 9, 2008, we delisted from AMEX and began to trade on the NASDAQ under the symbol “JST.”




55




D.        Selling Shareholders
 
 Not applicable.
 E.         Dilution




Not applicable.




F.         Expenses of the Issue




Not applicable.




Item 10.  Additional Information.




A.        Share Capital




Not Applicable.




B.        Memorandum and Articles of Association




Our registered office is located at the offices of Offshore Incorporations Limited, P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. Our purpose, as stated in Article 4 of our Memorandum of Association, is to engage in any lawful act not prohibited under any law of the British Virgin Islands. We may not, however: (i) engage in business with British Virgin Islands residents, (ii) own an interest in real property situated in the British Virgin Islands, (iii) carry on banking or trust business, unless licensed to do so under the Banks and Trust Companies Act of 1990, (iv) carry on business as an insurance or reinsurance company, insurance agent, or insurance broker, unless licensed to do so under an enactment authorizing us to carry on that business, (v) carry on business of company management, unless licensed under the Company Management Act of 1990, or (vi) carry on the business of providing the registered office or the registered agent for companies incorporated in the British Virgin Islands.




According to our Articles of Association, our directors can vote on a proposal, arrangement or contract in which they are materially interested and such transaction is not void or voidable so long as such director’s interest in the transaction is disclosed in good faith or is known by the other directors. Our directors are empowered to cause us to borrow money, to mortgage or charge our undertakings and property and to issue debentures, debenture stock or other securities when money is borrowed. Under our Articles of Association, a director shall not require a share qualification. Our Articles of Association do not state whether in the absence of an independent quorum, a director has, or does not have, the power to vote compensation to himself or another director. There is no age limit requirement causing retirement of any director.




Holders of our common shares are entitled to receive dividends if and when declared by our Board of Directors out of funds legally available under British Virgin Islands law.  All common shares are equal to each other with respect to liquidation and dividend rights.  In the event of our liquidation, all assets available for distribution to the holders of common shares are distributable among them according to their respective share holdings.  Holders of our common shares are entitled to one vote for each share held of record on all matters to be voted upon by the shareholders, including the election of directors.  Holders of our common shares do not have cumulative voting rights in the election of our directors.  The Company’s convertible preferred shares (the “Preferred Shares”) are convertible at any time to common shares and each Preferred Share entitles its holder to the same number of votes as a common share.  In the event of our liquidation, dissolution or winding up, the holders of our Preferred Shares are entitled to a preference over the holders of our common shares in the distribution of our assets in an amount equal to the sum of: (i) US$4.375 per share, and (ii) an amount equal to declared but unpaid dividends on each such share.  After payment of the full amount of the liquidation distributions to which the holders of our Preferred Shares are entitled, holders of our Preferred Shares and holders of our common shares will be entitled to any further distributions of our assets on a pari passu basis.  Each Preferred Share entitles its holder to the same number of votes as a common share with respect to any vote of our shareholders. Holders of our Preferred Shares are entitled, at any time, to convert their Preferred Shares into common shares, subject to the anti-dilution adjustments described below. Holders of our Preferred Shares have certain anti-dilution protection upon the occurrence of certain events including share dividends, divisions, combinations, reclassifications, mergers and issuances of shares of our common shares.




56




The rights attached to any class or series of our shares may be varied with the written consent of the holders of not less than three-fourths of the issued shares of that class or series and the written consent of the holders of not less than three-fourths of the issued shares of any other class or series which may be affected by such variation.




Our directors may convene shareholder meetings as they deem necessary. The directors must convene a meeting upon the written request of members holding 10% or more of our outstanding voting shares. The directors must give at least 7 days notice of any meeting to members whose names appear as members in our share register and are entitled to vote as of the date such notice is given. A meeting may be called on short notice if: (i) members holding not less than 90% of the total number of shares entitled to vote on the matters to be considered at the meeting, or 90% of the votes of each class or series of shares where members are entitled to vote thereon as a class or series, together with not less than a 90% majority of the remaining votes, have agreed to short notice of the meeting, or (ii) all members holding shares entitled to vote on all or any matters to be considered at the meeting have waived notice of the meeting, presence at such meeting being indicative of such waiver.




Our Memorandum of Association and Articles of Association have no limitations on the rights to own securities.




Our Memorandum of Association and Articles of Association do not have any provisions, which would effectively delay, defer or prevent a change of control of our company.




Our Memorandum of Association and Articles of Association do not have any provisions governing the ownership threshold above which shareholder ownership must be disclosed.




C.        Material Contracts




On April 30, 2008 and November 14, 2008, we entered into agreements with Hitran Corporation to license designs for certain line reactors. (For more details on these licensing agreements, see Item 4. Information on the Company – B. Business Overview – Material Agreements.)




On April 10, 2008, we entered into agreement with Schneider Electric (China) Investment Co. Ltd., a Chinese affiliate of Schneider Electric, renewing an agreement to license designs for certain circuit breakers used in our switchgears.  (For more details on the licensing agreement, see Item 4. Information on the Company – B. Business Overview – Material Agreements.)




On July 29, 2010, we entered into an agreement with Shanghai Kai Tian Construction (Group) Co. Ltd. for the construction of an employee dormitory at our Shanghai facility. (For more details on the construction agreements, see Item 4. Information on the Company – B. Business Overview – Material Agreements.)




On March 20, 2011, we entered into an agreement with Guilin Jin Fu Investment Co. Ltd.o acquire 100% of the equity of Guilin Jin Fu Investment Co. Ltd.’s wholly owned subsidiary, Guilin Jun Tai Fu Construction and Development Co. Ltd. for a purchase price of RMB 15, 000, 000.  We closed the transaction on April 21, 2011. Information on the Company – B. Business Overview – Material Agreements.)




D.        Exchange Controls and Other Limitations Affecting Security Holders




There are no exchange control restrictions on payment of dividends in the British Virgin Islands. Other jurisdictions in which we conduct operations may have various exchange controls.




Dividend distribution and repatriation by our Chinese subsidiaries is regulated by China’s laws and regulations.


57




Applicable Chinese laws and regulations require that before a Sino-foreign equity joint venture enterprise, such as Hainan Jinpan, distributes profits to its parent company, Jinpan International, it must first do the following:




·
satisfy all of its tax liabilities;




·
provide for any losses still unpaid from previous years; and




·
make allocations, in the proportions as determined by the discretion of the board, to a capital reserve fund and a public welfare fund.




Furthermore, if there is to be any distribution of profits, it is required to be in the proportion of each party’s investment in the joint venture. To date, these controls have not had and are not expected to have a material impact on our financial results.




There are no British Virgin Islands laws which impose foreign exchange controls on us or that affect the payment of dividends, interest or other payments to nonresident holders of our common shares. British Virgin Islands law and our Memorandum and Articles of Association impose no limitations on the right of nonresident or foreign owners to hold or vote our common shares.




E.           Taxation




The following discussion is a summary of all material anticipated British Virgin Islands and Chinese tax consequences of an investment in our common shares for security holders located in the United States. The discussion does not deal with all possible tax consequences relating to an investment in our common shares and does not purport to deal with the tax consequences applicable to all categories of investors, some of which (such as dealers in securities, insurance companies and tax-exempt entities) may be subject to special rules. In particular, the discussion does not address the tax consequences under state, local and other national (e.g., non-Chinese and non-British Virgin Islands) tax laws. Accordingly, each investor should consult his own tax advisor regarding the particular tax consequences to him of an investment in our common shares. The following discussion is based upon laws and relevant interpretations relating to our common shares currently in effect, all of which are subject to change.




BVI Taxation




British Virgin Islands Taxation Policy. Under the BVI Business Companies Act 2004 of the British Virgin Islands as currently in effect, a holder of common shares who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to common shares and all holders of common shares are not liable to British Virgin Islands income tax on gains realized during the year on sale or disposal of any common shares. The British Virgin Islands has enacted legislation, the Mutual Legal Assistance (Tax Matters) (Amendment) Bill 2004 (the “EU Act”), to implement the European Union Savings Tax Directive (the “Tax Directive”) and the bilateral agreements agreed with the European Union to be entered into with the 25 Member States of the European Union. The EU Act and the bilateral agreements provide for alternative procedures, both a withholding tax option and an automatic exchange of information option. Under the withholding tax option, banks and other paying agents will automatically deduct tax from interest and other savings income earned. For the purposes of implementation of the Tax Directive in the BVI, paying agents will pay the withholding tax to the Competent Authority. 75% of the withholding tax levied will be remitted to the tax authorities in the receiving EU Member States and the Competent Authority will keep 25%. The withholding tax rates will be:




·
15% from July 1, 2005;




·
20% from January 1, 2008; and




·
35% from January 1, 2011.




Withholding tax will be transferred to receiving EU Member States at specific periods but receiving EU Member States will not receive information relating to EU resident individuals. Under the automatic exchange of information option, the Tax Directive requires the following information:




58


·
The identity and residence of the beneficial owner;




·
The name and address of the paying agent;




·
The account number of the beneficial owner; and




·
Information concerning the savings income.







This information will be reported by the paying agent to the competent authority in the country where the account is held and forwarded to the competent authority of the country where the EU resident individual resides. If you are an individual who is resident in an EU Member State and earn bank interest or other savings income, as defined by the Tax Directive, on deposits or investments held in your own name in the British Virgin Islands then you will probably be affected by the implementation of the Tax Directive. The Tax Directive does not apply to individuals, including EU nationals, who are resident outside the EU.




There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated under the BVI Business Companies Act 2004. In addition, the common shares of these companies is not subject to transfer taxes, stamp duties or similar charges.




Presently, there is no income tax treaty, convention or reciprocal tax treaty regarding withholdings currently in effect between the United States and the British Virgin Islands.




PRC Taxation




There are no material Chinese tax consequences to holders of common shares solely as a result of the purchase, ownership and disposition of common shares or receipt of dividends, if declared.




United States Taxation






The following discussion is a summary of certain U.S. federal income tax consequences that may be relevant with respect to the ownership and disposition of our common shares by a U.S. Holder (as hereinafter defined). This discussion is based upon the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder, administrative rulings and judicial decisions, in each case as of the date hereof. These authorities are subject to differing interpretations and may be changed, perhaps retroactively, resulting in U.S. federal income tax consequences different from those discussed below.




We have not sought any ruling from the U.S. Internal Revenue Service (“IRS”) with respect to the statements made and the conclusions reached in this discussion, and there can be no assurance that the IRS will agree with such statements and conclusions. This discussion applies only to U.S. Holders who hold our common shares as capital assets within the meaning of Section 1221 of the Code. In addition, this summary does not address all U.S. federal income tax considerations that may be applicable to a U.S. Holder’s particular circumstances or to U.S. Holders who may be subject to special tax rules, including, without limitation: tax-exempt organizations, qualified retirement plans, individual retirement accounts and other tax-deferred accounts, financial institutions, insurance companies, partnerships or other entities treated as partnerships for U.S. federal income tax purposes, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals, U.S. Holders whose “functional currency” is not the U.S. dollar, persons subject to the alternative minimum tax, persons who hold our common shares as part of a straddle, hedging or conversion transaction, and persons who own, actually or constructively, 10% or more of our common shares.




For purposes of this discussion, a “U.S. Holder” means a holder of our common shares who is (i) a citizen or an individual resident of the U.S., (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the U.S., any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if it is subject to the primary supervision of a court within the U.S. and one or more “U.S. persons,” as defined in the Code, have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.


59






If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our common shares, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner should consult its own tax advisors as to the U.S. federal income tax consequences of being a partner in a partnership that holds or disposes of our common shares.




This discussion addresses only certain aspects of U.S. federal income taxation to U.S. Holders. U.S. Holders should consult their own tax advisors regarding the U.S. federal, state, local, non-U.S. and other tax consequences of the ownership and disposition of our common shares.




Distributions on Our Common Shares. Generally, U.S. Holders receiving dividend distributions (including constructive dividends) with respect to our common shares generally are required to include in gross income for U.S. federal income tax purposes the gross amount of such distributions (without reduction for any Canadian income or other tax withheld from such distributions), equal to the U.S. dollar value of such distributions on the date of receipt (based on the exchange rate on such date), to the extent that we have current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits, it will be treated as a return of capital to the extent of a U.S. Holder’s adjusted tax basis in our common shares and thereafter as capital gain from the sale or exchange of such common shares. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that the full amount of a distribution with respect to the common shares will be treated, and reported by us, as a dividend.




Certain U.S. Shareholders (including individuals) are eligible for reduced U.S. federal income tax rates (at a maximum rate of 15%) in respect of “qualified dividend income” received in taxable years beginning before January 1, 2011. For this purpose, qualified dividend income generally includes dividends paid by a non-U.S. corporation if, among other things, the U.S. Shareholder meets certain minimum holding periods and the non-U.S. corporation satisfies certain requirements, including that either (i) the shares with respect to which the dividend has been paid are readily tradable on an established securities market in the United States, or (ii) the non-U.S. corporation is eligible for the benefits of a comprehensive U.S. income tax treaty (such as the U.S. Treaty) which provides for the exchange of information. We currently believe that dividends paid with respect to our ordinary shares should constitute qualified dividend income for U.S. federal income tax purposes. We anticipate that our dividends will be reported as qualified dividends on Forms 1099-DIV delivered to U.S. Shareholders. Each individual U.S. Shareholder of ordinary shares is urged to consult his or her own tax advisor regarding the availability to him of the reduced dividend tax rate in light of his or her own particular situation and regarding the computations of his or her foreign tax credit limitation with respect to any qualified dividend income paid by us, as applicable.




In the case of foreign currency received as a dividend that is not converted by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Generally any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including the exchange for U.S. dollars, will be ordinary income or loss.




Disposition of Our Common Shares. Generally, U.S. Holders will recognize gain or loss upon the sale of our common shares equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the U.S. Holder’s tax basis in our common shares. A U.S. Holder’s tax basis in the shares generally will be equal to the amount such U.S. Holder paid for the shares, subject to adjustments. Any gain or loss on disposition of our common shares generally will be U.S. source gain or loss and will be capital gain or loss. If, at the time of the disposition, a U.S. holder is treated as holding the common shares for more than one year, such gain or loss will be a long-term capital gain or loss. Long-term capital gain recognized by a non-corporate U.S. holder is currently subject to taxation at a reduced rate. The deductibility of capital losses is subject to limitations.


Passive Foreign Investment Company. We may be classified as a passive foreign investment company, or PFIC, by the U.S. Internal Revenue Service for U.S. federal income tax purposes. Such characterization could result in adverse U.S. federal income tax consequences to you if you are a U.S. investor. For example, generally, U.S. investors who owned our common shares during any taxable year in which we are deemed a PFIC, are subject to increased U.S. tax liabilities and reporting requirements for that taxable year and all succeeding years, regardless of whether we actually continue to be a PFIC, although a shareholder election to terminate such deemed PFIC status may be available in certain circumstances. The same adverse U.S. federal income tax consequences will apply to U.S. investors who acquire our common shares during the current taxable year of 2009 or any subsequent taxable year if we are treated as a PFIC for that taxable year.


60




The determination of whether or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets, including goodwill, from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes for a taxable year if either (a) 75% or more of our gross income for such taxable year is passive income, or (b) 50% or more of the average percentage of our assets during such taxable year either produce passive income or are held for the production of passive income. For such purposes, if we directly or indirectly own 25% or more of the shares of another corporation, we will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income.




The PFIC rules are complex. U.S. Shareholders should consult their own tax advisors regarding the potential application of the PFIC rules to the ownership of our ordinary shares.




Information Reporting; Backup Withholding.In general, payments made in the U.S. or through certain U.S. related financial intermediaries with respect to the ownership and disposition of our common shares will be required to be reported to the IRS unless the U.S. Holder is a corporation or other exempt recipient and, when required, demonstrates this fact. In addition, a U.S. Holder may be subject to a backup withholding tax (currently at a rate of 28%) on such payments unless the U.S. Holder (i) is a corporation or other exempt recipient and when required, demonstrates this fact or (ii) provides a taxpayer identification number and otherwise timely complies with applicable certification requirements. U.S. Holders should consult their tax advisors regarding their qualification for an exemption from backup withholding and the procedures for obtaining such an exemption, if applicable. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s U.S. federal income tax liability and such U.S. Holder may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.




THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS FOR GENERAL INFORMATION PURPOSES ONLY, DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE POTENTIAL TAX CONSIDERATIONS RELATING TO OUR COMMON SHARES AND IS NOT TAX ADVICE. U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF OUR COMMON SHARES.




F.         Dividends and Paying Agents




Not Applicable.




G.        Statement by Experts




Not Applicable.




H.        Documents on Display




We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the Securities and Exchange Commission (the “Commission”). These materials, including this annual report on Form 20-F and its exhibits, may be inspected and copied at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the Commission’s regional office at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the materials may be obtained from the Public Reference Room of the Commission at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330.


61





I.          Subsidiary Information




Not Applicable.




Item 11. Quantitative and Qualitative Disclosure of Market Risk.




We do not invest in derivative financial instruments or other market risk sensitive instruments, except for certain corporate bond securities. Accordingly, our exposure to financial market risk derives primary from changes in interest rates. The primary objective of our investments in corporate securities is to preserve principal while maximizing yields, without significantly increasing risk. These available for sale securities are subject to interest rate risk. The fair market value of these securities may fluctuate with changes in interest rate.




We maintain letters of credit with several banking institutions in the PRC. These facilities bear interest at rates that fluctuate based on the prime rate as declared by the Bank of China. As a result, changes in interest rates also impact our interest expense associated with these facilities.  If the interest rate on our credit facilities had been 1% higher, an additional RMB 299,604 of interest expense could have been incurred throughout the year 2009. (For more details on our loans with banking institutions in the PRC, see “Item 5. Operating and Financial Review and Prospects – B.Liquidity and Capital Resources.)




Item 12. Description of Securities Other than Equity Securities.




Not Applicable.




Part II




Item 13. Defaults, Dividend Arrearages and Delinquencies.




None.




Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.




None.




Item 15. Controls and Procedures




(a)        Disclosure Controls and Procedures




As of the end of the period covered by this Annual Report, our management (with the participation of our Principal Executive Officer and Principal Financial Officer) conducted an evaluation, pursuant to Rule 13a-15(b) promulgated under the Exchange Act, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures and implementing controls and procedures based on the application of management’s judgment.




In connection with the audit of our consolidated financial statements for the year ended December 31, 2010, the Company’s Principal Executive Officer and Principal Financial Officer concluded that as of the end of the period covered by this Annual Report such disclosure controls and procedures were effective.
 
 (b)       Management’s Annual Report on Internal Control Over Financial Reporting
  Management, including our Principal Executive Officer and Principal Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting.


62





Our internal control over financial reporting is a process designed under the supervision of our Principal Executive and Financial Officers, and effected by our Board of Directors, management and other personnel, to provide reasonable but not absolute assurance regarding the reliability of financial reporting and the preparation of its published financial statements in accordance with U.S. GAAP. Internal control over financial reporting includes policies and procedures that:




·
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;




·
Provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with the generally accepted accounting principles;




·
Provide reasonable assurance that receipts and expenditures are being made only in accordance with the authorization of our management and directors; and




·
Provide reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected in a timely manner.




All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.




Management conducted an evaluation of the effectiveness of our internal control over financial reporting on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2009.




(c)        Attestation Report of the Registered Public Accounting Firm




The effectiveness of our internal control over financial reporting as of December 31 2010 was audited by Grant Thornton, an independent registered public accounting firm, as stated in their report included under Item 18 of this Annual Report on Form 20-F.




(d)        Changes in Internal Controls Over Financial Reporting




There have been no changes in our internal controls over financial reporting that occurred during the period covered by this Annual Report on Form 20-F that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.




Item 16A. Audit Committee Financial Expert




Stephan R. Clark, a member of our Audit Committee, meets the criteria of an “Audit Committee Financial Expert” under the applicable rules and regulations of the SEC, and his designation as the Audit Committee’s Financial Expert has been ratified by the Board. Mr. Clark is “independent,” as that term is defined in the Nasdaq Marketplace Rules.




Item 16B. Code of Ethics
  We adopted a code of ethics that is applicable to all of our directors, officers and employees, including our principal executive, financial and accounting officers, and persons performing similar functions (the “Code of Ethics”). The Code of Ethics covers areas of professional and business conduct, and is intended to promote honest and ethical behavior, including fair dealing and the ethical handling of conflicts of interest, support full, fair, accurate, timely, and understandable disclosure in reports and documents we file with, or submits to, the SEC and other governmental authorities, and in our other public communications; deter wrongdoing; encourage compliance with applicable laws and governmental rules and regulations; and ensure the protection of our legitimate business interests. We encourage all of our directors, officers, and employees to promptly report any violations of the Code of Ethics, and have provided mechanisms by which they may do so. We will provide a copy of the Code of Ethics to any person, without charge, upon written request addressed to our Corporate Secretary at our offices in Carlstadt, New Jersey.


63




Item 16C. Principal Accountant Fees and Services




The Audit Committee maintains a policy of approving and recommending only those services to be performed by our external auditors that are permitted under the Sarbanes-Oxley Act and the applicable rules of the SEC relating to auditor’s independence, and which are otherwise consistent with and will encourage, and are remunerated at levels that accord with, the basic principles of auditor independence. The practice of the Audit Committee is to receive from our management, at the time of approval of our annual financial statements for the preceding fiscal year, a list of all services, including audit, audit-related, tax and other services, proposed to be provided during the current fiscal year to us and our subsidiaries by Grant Thornton as well as a report regarding the extent of such services actually provided by Grant Thornton during the previous fiscal year and the fees paid for such services performed. After reviewing and considering the services proposed to be provided during the current fiscal year and, where appropriate in order better to understand their nature, discussing them with management, the Audit Committee pre-approves such of the proposed services, with a specific pre-approved budget, as it considers appropriate in accordance with the above principles. Management also maintains a practice of discussing these matters on an ongoing basis during the year with Stephan R. Clark, the Audit Committee’s appointed delegate in respect of audit-related and non audit-related services. Additional services from Grant Thornton and any increase in budgeted amounts will similarly be pre-approved during the year by the Audit Committee on a case-by-case basis.




All (100%) audit-related and non-audit-related services performed by JBPB (formerly Grant Thornton Hong Kong) during 2009 were reported to, and the services proposed to be provided during 2009 were pre-approved by, the Audit Committee in accordance with the procedures outlined above.




The following table provides information regarding fees we paid to our auditors for all services, including audit services, for the years ended December 31, 2010 and 2009.  In 2010, we paid RMB 419,170 to JBPB(formerly Grant Thornton Hong Kong) and RMB 1,815,695 to Grant Thorn China respectively.




Year Ended December 31, 2009

Year Ended December 31, 2010Audit Fees
RMB 2,441,000

RMB 2,234,865Audit Related Fees
-

-Tax Fees
-

-All Other fees
-

-Total
RMB 2,441,000

RMB 2,234,865





“Audit Fees” are the aggregate fees billed for the audit of our annual financial statements. This category also includes services that generally the independent accountant provides, such as statutory audits, consents and assistance with and review of documents filed with the SEC.




“Audit-Related Fees” are the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit and are not reported under Audit Fees. These fees include mainly accounting consultations regarding the accounting treatment of matters that occur in the regular course of business, implications of new accounting pronouncements and other accounting issues that occur from time to time.


“Tax Fees” are the aggregate fees billed for professional services rendered for tax compliance, tax advice, other than in connection with the audit. Tax compliance involves preparation of original and amended tax returns, tax planning and tax advice.
  Item 16D. Exemptions from the Listing Standards for Audit Committees
  Not applicable.
  Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  None.


64


Item 16F. Change in Registrant’s Certifying Accountant




At our most recent annual meeting of shareholders on September 27, 2010, our shareholders ratified the Board of Director’s selection of the Hong Kong member firm of Grant Thornton International Ltd. (“Grant Thornton Hong Kong”) as our independent public accounting firm to audit our 2010 financial statements.




In October 2010, Grant Thornton Hong Kong advised of its pending merger with BDO Ltd.  Subsequently, on November 26, 2010 it was announced that BDO and Grant Thornton Hong Kong had concluded an agreement to merge their business and practice in the name of BDO Limited.  As a consequence of this merger, the Grant Thornton Hong Kong entity changed its name to JBPB & Co. on December 10, 2010.  In addition, Grant Thornton Hong Kong ceased to be a member firm of Grant Thornton International effective November 23, 2010.  As a result of these developments, we decided to engage the China member of Grant Thornton (“Grant Thornton China”) as our new independent registered public accountants to audit our 2010 financial statements.  Grant Thornton Hong Kong (now JBPB&Co)  resigned as our auditor as of November 1, 2010.  This change of auditor has been approved by our audit committee.




JBPB & Co.’s report on the Company’s consolidated financial statements as of and for the two fiscal years ended December 31, 2009 did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principles.  During the two fiscal years ended December 31, 2009 through November 1, 2010, we did not have any disagreement with JBPB & Co. on any matter of accounting principles or practices, financial disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of JBPB & Co., would have caused them to make reference to the subject matter of the disagreement in their report on the consolidated financial statements for such year and for such period. Furthermore, during  the two fiscal years ended December, 2009 and through November 1 ,2010, there were no “reportable events” (hereinafter defined) requiring disclosure pursuant to Item 16F (a)(1)(v) of Form 20-F.  As used herein, the term “reportable event” means any of the items listed in paragraphs (a)(1)(v)(A)-(D) of Item 16F of Form 20-F.




Prior to engaging Grant Thornton China , we did not consult the firm on the application of accounting principles to any specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements.  Furthermore, we did not consult Grant Thornton China regarding any matter that was the subject of disagreement with our former auditor or was a reportable event.




We provided a copy of this disclosure to JBPB & Co. and requested that JBPB & Co. furnish a letter addressed to the SEC stating whether it agrees with the above statements, and if not, stating the respects in which it does not agree.  A copy of the letter from JBPB & Co. addressed to the SEC, dated June 22, 2011, is filed as Exhibit 15.3.







Item 16G. Corporate Governance


Our corporate governance practices do not differ in any significant way from those followed by U.S. domestic companies listed on the NASDAQ.
  Part III
  Item 17. Financial Statements
  Not applicable.
   Item 18.Financial Statements
   See Item 19 below for consolidated financial statements filed as a part of this Annual Report.


65




Item 19.Exhibits




(a)
Index to Financial Statements





PageReports of Independent Registered Public Accounting Firm
F-1Consolidated Balance Sheets
F-3Consolidated Statements of Income
F-4Consolidated Statements of Shareholders’ Equity
F-5Consolidated Statements of Cash Flows
F-6Notes to Consolidated Financial Statements
F-7





(b)
Exhibits





Exhibit No.
Exhibit Description1.1
Memorandum of Association and Articles of Association of Jinpan International Limited. (1)1.2
Amendments to the Memorandum of Association and Articles of Association. (1)4.1
License Agreement dated April 30, 2008, between Hainan Jinpan Electric Company Ltd. and Hitran Corporation. (2)4.2
Amendment dated May 19, 2008, between Hainan Jinpan Electric Company Ltd., Hitran Corporation and Jinpan International (USA), Ltd. amending the License Agreement dated April 30, 2008. (2)4.3
License Agreement dated November 14, 2008, between Jinpan International (USA) Co. Ltd., Hainan Jinpan Electric Co. Ltd., Jinpan Electric (China) Co. Ltd. and Wuhan Jinpan Electric Co. Ltd. and Hitran Corporation. (2)4.4
License Agreement dated January 19, 2005, between Hainan Jin Pan Electric Co., Ltd. and Schneider Electric (China) Investment Co., Ltd. (2)4.5
Amendment dated April 10, 2008, between Hainan Jin Pan Electric Co. Ltd. and Schneider Electric (China) Investment Co. Ltd. amending the License Agreement dated January 19, 2005. (2)4.6
Summary of the material terms of the Construction Agreement, dated July 29, 2010, beteen Shanghai Jinpan Electric (Group) Co. Ltd. and Shanshai Kai Jian Construction (Group) Co. Ltd.*





66





4.7
Summary of the material terms of the agreement to acquire Guilin Jun Tai Fu Construction and Development Co. Ltd. *8.1
List of Subsidiaries.*12.1
Certification of the Principal Executive Officer pursuant to 17 C.F.R. 240.13a-14(a), as adopted pursuant to § 302 of the Sarbanes-Oxley Act.*12.2
Certification of Principal Financial Officer pursuant to 17 C.F.R. 240.13a-14(a), as adopted pursuant to § 302 of the Sarbanes-Oxley Act.*13.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act.*15.1
Consent of JBPB & Co. ( formerly known as Grant Thornton, Hong Kong).*15.2
Consent of Grant Thornton, China.*15.3
Letter to the Securities and Exchange Commission from JBPB & CO. (formerly known as Grant Thornton, Hong Kong).*


______________________________


*
Filed herewith.





(1)
Filed as an exhibit to Jinpan International Limited’s Registration Statement on Form F-1 (File No. 333-8198), filed with the Securities and Exchange Commission on November 22, 1997, and incorporated herein by reference.





(2)
File as an exhibit to Jinpan International Limited’s Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 Under the Securities Exchange Act of 1934, filed with the Securities and Exchange Commission on November 12, 2009 and incorporated herein by reference.





67


SIGNATURES







The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.







JINPAN INTERNATIONAL LIMITEDBy:
/s/ Li ZhiyuanName:
Li ZhiyuanTitle:
Chief Executive Officer(Principal Executive Officer)





June 23, 2010
















68





INDEX TO FINANCIAL STATEMENTS














JINPAN INTERNATIONAL LIMITED AND SUBSIDIARIES:




PagesReports of Independent Registered Public Accounting Firm
F-1Consolidated Balance Sheets as of December 31, 2010 and 2009
F-4Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008
F-5Consolidated Statements of Shareholders' Equity for the years ended December 31, 2010, 2009 and 2008
F-6Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
F-7Notes to Consolidated Financial Statements
F-8


























REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of Directors and Shareholders


Jinpan International Limited





We have audited the accompanying consolidated balance sheets of Jinpan International Limited (a British Virgin Islands company) and its subsidiaries (the Company) as of December 31, 2010, and the related statements of income, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jinpan International Limited and its subsidiaries as of December 31, 2010, and the results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.





We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Jinpan International Limited and its subsidiaries' internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)and our report dated June 22, 2011 expressed an unqualified opinion thereon.

















/s/ Grant Thornton





Shanghai, The People’s Republic of China


June 22, 2011


F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of Directors and Stockholders


Jinpan International Limited





We have audited Jinpan International Limited and its subsidiaries’ (the "Company") internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.





We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.





A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





In our opinion, Jinpan International Limited and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Frameworkissued by COSO.





We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2010, and the related statements of income, stockholders’ equity, and cash flows then ended, and our report dated June 22, 2011 expressed an unqualified opinion on those financial statements.














/s/ Grant Thornton





Shanghai, The People’s Republic of China


June 22, 2011











F-2
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Board of Directors and
 Shareholders of Jinpan International Limited
  We have audited the accompanying consolidated balance sheets of Jinpan International Limited and subsidiaries (the “Company”) as of December 31, 2009 and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income, and cash flows for the years ended December 31, 2009 and December 31, 2008.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.
  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
  In our opinion, such 2009 and 2008 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and the results of their operations and their cash flows for the years ended December 31, 2009 and December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
     /s/  JBPB & Co (formerly known as GRANT THORNTON)
  Hong Kong
 June 15, 2010







F-3


Jinpan International Limited and Subsidiaries


Consolidated Balance Sheets


As of December 31, 2010 and 2009




December 31,2010


2010


2009Notes


US$


RMB


RMB(In thousands, except number of shares and per share data)AssetsCurrent assets:Cash and cash equivalents





27,527



182,300



161,554Restricted cash





1,079



7,148



14,235Notes receivable





5,380



35,627



49,942Accounts receivable, net


4



75,658



501,062



438,109Inventories, net


5



29,532



195,578



174,893Prepaid expenses






28,939



191,657



66,770Land use right


6



317



2,102



1,931Other receivables






4,453



29,494



16,174Total current assets






172,885



1,144,968



923,608Property, plant and equipment, net


7



32,138



212,839



182,393Construction-in-progress






1,861



12,327



12,361Land use right


6



6,057



40,114



38,974Goodwill






12,721



84,245



84,245Other assets






69



459



318Deferred tax assets


9



858



5,681



2,399Total assets






226,589



1,500,633



1,244,298Liabilities and shareholders' equityCurrent liabilities:Short-term bank loans


10



12,127



80,311



-Accounts payable






13,269



87,875



70,899Notes Payable


8



27,111



179,550



34,200Income tax






1,659



10,990



12,614Value added tax






1,732



11,472



39,286Advances from customers






5,319



35,227



27,277Commission payable






6,311



41,793



88,379Accrued employee benefits






2,051



13,583



2,182Government grants


11



-



-



3,738Other liabilities






3,032



20,080



20,259Total current liabilities






72,611



480,881



298,834Long term liability:Government grants


11



935



6,195



6,194Long Term bank loans


10



1,550



10,263



11,216Shareholders' equity:Convertible preferred stock, US$0.0045 par value:Authorized shares - 2,000,000Issued and outstanding shares – none in 2010 and2009


19



-







-Common stock, US$0.0045 par value:Authorized shares – 40,000,000Issued and outstanding shares –16,395,456 in 2010 and 16,395,456 in 2009


19



74



605



605Common stock-warrants






854



6,232



6,232Additional paid-in capital






35,738



282,538



281,106Reserves






9,514



69,107



31,451Retained earnings


19



92,834



646,858



609,941Accumulated other comprehensive income






12,958



2,371



3,339151,972



1,007,711



932,674Less: Treasury shares at cost,Common stock –227,306 in 2010 and 231,306 in 2009






(479
)


(4,417
)


(4,620
)Total shareholders' equity






151,493



1,003,294



928,054Total liabilities and shareholders' equity






226,589



1,500,633



1,244,298





The accompanying notes form an integral part of these consolidated financial statements.


F-4


Jinpan International Limited and Subsidiaries


Consolidated Statements of Income


For the years ended December 31, 2010, 2009 and 2008





Year ended December 31,2010


2010


2009


2008Notes


US$


RMB


RMB


RMB(In thousands, except number of shares and  per share data)Net sales


17



143,807



967,074



1,084,303



1,086,875Costs and expenses:Cost of products sold






(87,971
)


(591,591
)


(625,817
)


(741,887
)Selling and administrative






(40,673
)


(273,518
)


(245,956
)


(185,055
)(128,644
)


(865,109
)


(871,773
)


(926,942
)Non operating incomeOther income, net






2,267



15,244



5,286



10,794Dividend income






-



-



-



249Interest income






176



1,187



1,783



8762,443



16,431



7,069



11,919Non operating expenses:Interest expenses






(309
)


(2,078
)


(1,446
)


(8,433
)Income before income taxes






17,297



116,318



218,153



163,419Income taxes


9



(3,913
)


(26,314
)


(20,428
)


(23,742
)Net income






13,384



90,004



197,725



139,677Earnings per share-Basic






US$0.83


RMB 5.57


RMB 12.33


RMB 8.74-Diluted






US$0.81


RMB 5.46


RMB12.15


RMB 8.59Weighted average number of shares-Basic






16,159,893



16,159,893



16,028,152



15,970,160-Diluted






16,457,462



16,457,462



16,269,440



16,261,196





The accompanying notes form an integral part of these consolidated financial statements.





F-5


Jinpan International Limited and Subsidiaries


Consolidated Statements of Shareholders' Equity


For the years ended December 31, 2010, 2009 and 2008


Number of treasury



Number of common



Number of preferred



Treasury stock



Warrants



Common shares



Convertible preferred

stock



Additional paid-in capital



Reserve



Retained earnings



Accumulated Other Comprehensive Income


Comprehensive Income



Totalshares



shares



shares



RMB



RMB



RMB



RMB



RMB



RMB



RMB



RMB


RMB



RMBBalance at January 1, 2008


(412,940
)


16,381,234



12,222



(6,525
)


6,232



602



1



270,269



31,451



299,489



2,055






603,574Net income


-



-



-



-



-



-



-



-



-



139,677



-



139,677



139,677Cash dividends distributed ($0.12 per share)


-



-



-



-



-



-



-



-



-



(13,695
)


-



-



(13,695
)Preferred stock to common shares


-



6,134



(6,134
)


-



-



1



(1
)


-



-



-



-



-



-Exercise of stock options for cash


-



2,000



-



-



-



-



-



2



-



-



-



-



2Employees stock-based expenses


-



-



-



-



-



-



-



657



-



-



-



-



657Available-for-sale securities


-



-



-



-



-



-



-



-



-



-



69



69



69Currency translation adjustments


-



-



-



-



-



-



-



-



-



-



998



998



998Balance at December 31, 2008


(412,940
)


16,389,368



6,088



(6,525
)


6,232



603



-



270,928



31,451



425,471



3,122



140,744



731,282Net income


-



-



-



-



-



-



-



-



-



197,725



-



197,725



197,725Cash dividends distributed ($0.12 per share)


-



-



-



-



-



-



-



-



-



(13,255
)


-



-



(13,255
)Preferred stock to common shares


-



6,088



(6,088
)


-



-



-



-



-



-



-



-



-



-Exercise of stock options for cash


181,634



-







1,905



-



2



-



3,983



-



-



-



-



5,890Employees stock-based expenses


-



-



-



-



-



-



-



6,195



-



-



-



-



6,195Currency translation adjustments


-



-



-



-



-



-



-



-



-



-



217



217



217Balance at December 31, 2009


(231,306
)


16,395,456



-



(4,620
)


6,232



605



-



281,106



31,451



609,941



3,339



197,942



928,054Net income


-



-



-



-



-



-



-



-



-



90,004



-



90,004



90,004Transfer to reserves


-



-



-



-



-



-



-



-



37,656



(37,656
)


-



-



-Cash dividends distributed ($0.14 per share)


-



-



-



-



-



-



-



-



-



(15,431
)


-



-



(15,431
)Exercise of stock options for cash


4,000



-







203







-



-



-



-



-



-



-



203Employees stock-based expenses


-



-



-



-



-



-



-



1,432



-



-



-



-



1,432Currency translation adjustments


-



-



-



-



-



-



-



-



-



-



(968
)


968



(968
)Balance at December 31, 2010


(227,306
)


16,395,456



-



(4,417
)


6,232



605



-



282,538



69,107



646,858



2,371



90,972



1,003,294


The accompanying notes form an integral part of these consolidated financial statements.


F-6


Jinpan International Limited and Subsidiaries


Consolidated Statements of Cash Flows


For the years ended December 31, 2010, 2009 and 2008





Year ended December 31,2010


2010


2009


2008US$


RMB


RMB


RMB(In thousands)Operating activitiesNet income


13,384



90,004



197,725



139,677Adjustments to reconcile net income tonet cash provided by/(used in) operating activities:Depreciation


3,636



24,449



25,512



11,725Deferred income taxes


(488
)


(3,282
)


(347
)


3,832Allowance for doubtful accounts


257



1,725



2,314



(1,946
)Loss/(gain) on disposal of property, plant and equipment


(67
)


(451
)


(28
)


69Employee stock-based compensation


213



1,432



6,195



659Gain from sales of available-for-sales securities


-



-



-



(69
)Changes in operating assets and liabilitiesRestricted cash


1,006



7,087



(5,154
)


1,250Accounts receivable


(9,618
)


(64,678
)


(39,304
)


(85,316
)Notes receivable


2,129



14,314



(16,555
)


(21,608
)Inventories


(3,076
)


(20,685
)


42,526



(29,635
)Prepaid expenses


(18,571
)


(124,888
)


(34,616
)


25,789Other receivables


(1,972
)


(13,260
)


43



(6,587
)Accounts payable


2,524



16,976



(6,197
)


30,613Notes Payable


21,614



145,350



34,200



-Income tax


(241
)


(1,624
)


(12,433
)


7,885Value added tax


(4,136
)


(27,814
)


(8,496
)


29,562Advances from customers


1,182



7,950



(26,131
)


19,573Commission payable


(6,928
)


(46,586
)


21,298



395Accrued employee benefits


1,695



11,401



(4,474
)


3,305Government grants


(556
)


(3,737
)


5,916



(12,071
)Other liabilities


(143
)


(960
)


4,551



10,903Net cash provided by/(used in) operating activities


1,844



12,723



186,545



128,005Investing activitiesPurchases of property, plant and equipment


(8,202
)


(55,157
)


(54,717
)


(78,235
)Proceeds from sales of property, plant and equipment


111



748



747



15Payment for construction-in-progress


-



-



-



(20,241
)Purchase of Land use right


(195
)


(1,311
)


-



(33,556
)Payment for investment in minority interest


(30
)


(200
)


-



-Proceeds from sales of available-for-sales securities


-







-



1,481Net cash used in investing activities


(8,316
)


(55,920
)


(53,970
)


(130,536
)Financing activitiesProceeds from bank loans


16,726



112,476



44,327



294,333Repayment of bank loans


(4,925
)


(33,118
)


(113,111
)


(286,358
)Proceeds from exercise of stock options


30



203



5,891



-Dividends paid


(2,293
)


(15,431
)


(13,255
)


(13,695
)Net cash provided by/(used in) financing activities


9,538



64,130



(76,148
)


(5,720
)


Effect of exchange rate changes on cash


797



(187
)


7



(1,194
)


Net increase/(decrease) in cash and cash equivalents


3,863



20,746



56,434



(9,445
)Cash and cash equivalents at beginning of year


23,664



161,554



105,120



114,565Cash and cash equivalents at end of year


27,527



182,300



161,554



105,120Interest paid


250



1,679



1,756



8,495Income taxes paid


4,665



31,370



29,780



763


The accompanying notes form an integral part of these consolidated financial statements.


F-7
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements





1.         ORGANIZATION AND PRINCIPAL ACTIVITIES





Jinpan International Limited (the “Company”) was incorporated under the laws of the British Virgin Islands on April 3, 1997.





As of December 31, 2010, the Company had direct interests in the following subsidiaries:





Name of entity

Date of

establishment

Percentage of equity

interest attributable to

the Company

Paid-up capital

Principal activitiesHainan Jinpan Electric Co., Ltd.

(“Hainan Jinpan” )

June 3, 1997

95%

RMB 160,171,897

Manufacturing and sale of cast resin transformersJinpan International

(USA) Limited

(“Jinpan USA”)

February 18, 1998

100%

US$10,000

Marketing of cast resin transformersJinpan Electric (China) Co. Ltd.

(“Jinpan China”)

January 12, 2007

100%

RMB 93,360,000

Manufacturing and sale of cast resin transformers





Jinpan International Limited owns 100% of the common stock of Jinpan USA, a New York corporation, and Jinpan China, a foreign-funded PRC limited liability company registered in Wuhan, Hubei China.  Jinpan International and Wuhan Jinpan Electric Co. Ltd jointly own 95% and 5%, respectively, of Hainan Jinpan, a sino-foreign cooperative joint venture registered in Haikou, Hainan China.  Jinpan China and Hainan Jinpan jointly owns 95% and 5% respectively of Wuhan Jinpan, a domestically funded PRC limited liability company registered in Wuhan, Hubei China. Hainan Jinpan and Jinpan China jointly own 70% and 30% of Shanghai Jinpan, a domestically funded PRC limited liability company registered in Shanghai China. Hainan Jinpan also owns 100% of Jinpan Research and Development Company. The Company and its majority owned subsidiaries are hereinafter collectively referred to as the “Group.”





The Company is a holding company and its common shares, par value US$0.0045 per share,2 are referred to herein as the “Common Shares.”  Substantially all of the Group’s operations are conducted in the People’s Republic of China (the “PRC”) and its principal market is in the PRC.





The term of Hainan Jinpan is 50 years, ending on September 3, 2047, and can be extended with the mutual consent of the joint venture parties, subject to the approval of the relevant PRC government authorities.  The co-operative joint venture can be terminated upon the unanimous agreement of the Board of Directors of Hainan Jinpan. In the event that the term of Hainan Jinpan is not extended, the joint venture will be dissolved and liquidated pursuant to the provisions of applicable law and the joint venture agreement. In addition, Hainan Jinpan may be terminated prior to the expiration of the joint venture agreement upon the occurrence of certain events, including but not limited to, the inability of the entity to conduct its business due to financial losses or a breach of the joint venture agreement by one of the parties thereto.





Jinpan USA is primarily engaged the sale of cast resin transformers and wind energy products to customers in the US and worldwide.





Jinpan China is formed under the foreign funded limited liability company law of the PRC. The term of Jinpan China is 50 years, ending on January 11, 2057 and can be extended upon approval of the PRC government. Jinpan China can be dissolved upon the agreement of foreign investors due to financial losses or a natural disaster that causes Jinpan China to be unable to continue operations.  Hainan Jinpan and





2 As of December 31, 2009, the Company’s par value was $0.009 per share.  On February 6, 2010, the Company effected a two-for-one stock split, whereby the Company’s par value changed to $0.0045 per share.


F-8
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements


Jinpan China are primarily engaged in the design, manufacture and sale of cast resin transformers, switchgears, unit substations and wind energy products.





2.             BASIS OF PRESENTATION





The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.





The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). This basis of accounting differs from that used in the statutory financial statements of Hainan Jinpan and Jinpan China, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to foreign investment enterprises as established by the Ministry of Finance of China.





The reporting currency of the Group is Renminbi (“RMB”), the national currency of China. Solely for the convenience of the reader, the asset and liability accounts have been translated into United States dollars (“US$”) using the People’s Bank of China’s rate of RMB 6.62 to US$1, the prevailing rate on December 31, 2010, and equity accounts were translated using historical rates. Income statement accounts were translated using the average exchange rate of RMB 6.72 to US$1 for the year 2010. No representation is made that the Renminbi amounts could have been, or could be, converted into United States dollars at this rate or any other.




3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


(a)        Basis of Consolidation





The consolidated financial statements include the accounts of the Company and its subsidiaries, which are directly and indirectly wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation.





(b)       Cash, Cash Equivalents and Restricted Cash





The Group considers all highly liquid investments with a maturity of three months or less to be cash equivalents. The Group maintains certain bank accounts in the PRC which are not protected by FDIC insurance or other insurance. There was approximately RMB 188 million held in non-US banks or financial institutions as of December 31, 2010. As of December 31, 2010, the Group held approximately RMB 1.0 million (US$ 157,430) cash in the United States none of which  was in excess of FDIC insurance limits. At December 31, 2010, the Group had approximately RMB 7.2 million restricted cash related to products guaranty insurance.





(c)       Trade Receivables





Trade receivables, which generally have 30 to 120 day terms, are recognized and carried at original invoice amounts less an allowance for doubtful accounts. Credit is offered to customers based on their payment history, financial capability, and credit rating. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. We evaluate specific accounts where we have information that certain customers are unable to meet their financial obligations. We also make judgments, based on the best available facts and circumstances, including but not limited to, the length of our relationship with the customer, the customers' current credit status and known market factors, to record a specific reserve for customers against their corresponding receivable amounts. These specific reserves are re-evaluated and adjusted as additional information affects the estimated amounts. We write off receivables against allowance for doubtful account when there is evidence that the likelihood of collection is not probable and it is  deemed uncollectible.


F-9
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements




(d)       Notes Receivable


For accounts receivable in which payment is received in the form of short-term financial instruments, the Group classifies such accounts receivable as notes receivable. These short-term financial instruments generally mature, and thus are convertible into cash, in six months or less.




(e)       Inventories





Inventories are priced at the lower of cost or market value. Market value represents the net realizable value for inventories. Cost is determined using the weighted average cost method.





We periodically review our inventory for excess inventory, obsolescence.  We write down the value of ending inventory for obsolete and unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. These reviews require management to estimate future demand for our products and evaluate market conditions. Possible changes in these estimates could result in a write down of inventory. If actual market conditions are less favorable than those projected, additional inventory write-downs may be required. If actual market conditions are more favorable than projected, inventory previously written down may be sold, resulting in lower cost of sales and higher income from operations than expected in that period.


(f)        Property, Plant and Equipment





Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the asset. Estimated useful lives are as follows:





Buildings 10 - 20 years


Machinery and equipment 6 - 10 years


Motor vehicles 6 years


Furniture, fixtures and office equipment 5 years





Maintenance and repair costs of a routine nature are expensed as incurred. Expenditures for major renewals and improvements that extend the life of an asset are capitalized.





(g)       Construction-in-Progress





Construction-in-progress is stated at cost which includes the cost of construction and other direct costs attributable to the construction. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and put into use. Construction-in-progress at December 31, 2010 represents a manufacturing factory that was under construction but was not ready for occupancy at year end and machinery under installation. Interest related to construction-in-progress of nil, nil, and 0.2 million was capitalized for the years ended December 31, 2010, 2009, and 2008, respectively.





(h)       Impairment of Long-lived Assets





For long-lived assets used in operations, the Group records impairment losses when events and circumstances indicate that these assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their respective carrying amounts. If less, the impairment losses are based on the excess of the carrying amounts of these assets over their respective fair values. Their fair values would then become the new cost basis.  Fair value is determined by quoted market prices, if available. When quoted market prices are not available, the present value of the future estimated net cash flow is generally used. For assets held for sale, impairment losses are measured at the lower of the carrying amount or the fair value less costs to sell. For assets to be disposed of other than by sale, impairment losses are measured at their carrying amount less salvage value, if any, at the time the assets cease to be used.


F-10
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements





(i)         Income Taxes





The Group uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss carry forwards, to the extent that such benefits will more-likely-than-not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.





The National People’s Congress, China’s parliament, promulgated on March 16, 2007, set a unified corporate income tax rate of 25% applicable to both domestic and foreign funded companies.  The new tax rate of 25% will take effect gradually. The applicable tax rate is 18% for calendar year 2008, 20% for 2009, 22% for 2010, 24% for 2011, and 25% for 2012. However, Hainan Jinpan was recognized as a technically advanced enterprise at the end of 2008 and is entitled to a 15% tax rate for three years commencing from January 1, 2008. Jinpan China is not subject to income tax for 2008 and 2009. From 2010 to 2012, the income tax rate applicable to Jinpan China will be one half of the prevailing rate.  Shanghai Jinpan is taxes at 1.25% of sales. (For more information on Jinpan China’s effective tax rates, see Note 8. Deferred Tax Assets and Income Taxes.)





The Group classifies tax penalties and interest expense as income tax expense.




(j)        Value Added Tax





All of the Group’s products sold in the PRC are subject to Chinese VAT at a rate of 17% of the gross sales price. This VAT may be offset by VAT paid by the Group on raw materials and other materials included in the cost of producing its finished products.  The VAT amounts paid and available for offset are maintained in VAT Tax payables.





(k)        Goodwill




Goodwill and Other intangible Assets




(l)        Foreign Currency Translation


The reporting currency of the Group is the Renminbi. The functional currency of Hainan Jinpan and Jinpan China is Renminbi and the functional currency of the Company and Jinpan USA is the US dollar. Financial statements for these entities have been translated into Renminbi in accordance with ASC 830, Foreign Currency Translation.  Asset and liability accounts are translated using the exchange rates in effect at the balance sheet date, and shareholders’ equity accounts are translated at the historical exchange rate. Income statement and cash flows amounts are translated using the average exchange rate for the applicable year. The gains and losses resulting from the changes in exchange rates from year-to-year are reported in Accumulated Other Comprehensive Income (Loss). The effect on the transaction gains and losses as reported on the Consolidated Statements of Income is insignificant for all years presented herein.


F-11
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements




(m)      Operating Leases


Leases, where substantially all the rewards and risks of ownership of assets remain with the leasing company, are accounted for as operating leases.  Rentals applicable to such operating leases are reported on the Consolidated Statements of Income and determined using the straight-line basis over the applicable lease term. The Operating Lease Rental Expense incurred by the Group during the years ended December 31, 2010, 2009 and 2008 amounted to RMB 2.9 million, RMB 2.7 million and RMB 2.3 million, respectively.





(n)       Revenue Recognition





Revenue is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery occurs, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. For our products, there are no acceptance provisions, installation or other services required after the delivery.   Revenue is recognized on the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer upon delivery, provided that the Company maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold.




(o)       Non-Operating Income





For the Group’s non-operating transactions, income is recognized as follows:





(i)
interest income from bank deposits is recognized on a time proportionate basis using the principal outstanding and at the applicable interest rate; and





(ii)
government grant income is recognized as a component of other income when the relevant approvals are received from the government and any grant terms are met. If management does not believe that sufficient objective and positive evidence exists to conclude that approval of the grant from government is probable, the receipt of the grant is not recognized as income.





(p)       Use of Estimates





The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and the accompanying notes.  Actual results could differ from those estimates.





(q)       Earnings Per Common and Common Equivalent Share





Basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.  Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the year. The number of ordinary equivalent shares is related to outstanding stock options and warrants and is calculated using the treasury stock method.





(r)        Accumulated Other Comprehensive Income (Loss)





Unrealized gains or losses on the Group’s available-for-sale securities and foreign currency translation adjustments are included in Accumulated Other Comprehensive Income (Loss). The balance of accumulated other comprehensive income at December 31, 2010 and 2009 was approximately RMB 3,3million and RMB 2,4 million respectively.


F-12
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements




(s)        Research and Development Costs




Research and development costs consist of expenditures incurred during the course of planned research and investigation to develop new products or processes, or significantly enhance existing products or production processes, and implement new methods of design, testing of product alternatives or construction of prototypes.  The Group expenses all research and development costs as incurred.  The research and development costs incurred by the Group during the years ended December 31, 2010, 2009 and 2008 were RMB 51.4 million, RMB 40.8 million and RMB 16.1 million, respectively.








The cost of advertising is expensed as incurred. The Group incurred RMB 0.6million, RMB 3.0 million and RMB 0.5 million in advertising costs during 2010, 2009 and 2008, respectively.





(u)       Shipping and Handling Expenses





The cost of shipping and handling is expensed as incurred and reported within Selling and Administration Expenses. The Group incurred RMB 24.7 million, RMB 20.5 million and RMB 24.1 million in shipping and handling costs during 2010, 2009 and 2008, respectively.





(v)       Stock-based Compensation


We record stock-based compensation expense based upon the grant date fair value of share-based awards. The fair value of the award is recognized as expense ratably over the requisite service periods. We use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates to determine fair value.





(For more information on the valuation methods used for options and warrants, see note 19(g), and (h), Stock Option Activity, Option Valuation Assumptions and Warranty Valuation Assumptions, respectively.)




(w)      Product Warranty


The Group provides a basic limited warranty, which covers parts and labor, for all products, for one year.  The product warranty expense incurred in each year from 2008 through 2010 is not considered significant and the product warranty expense has not correlated with sales volume, thus, the Group recorded warranty expense as incurred. The Group incurred RMB 2.6 million, RMB 1.3 million, and RMB 1.8 million in product warranty expense during the years ended December 31, 2010, 2009 and 2008, respectively.




(x)        New Accounting Pronouncements


In January 2010, the FASB issued Accounting Standards Update ("ASU") 2010-06 Fair Value Measurement and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.


F-13
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements


This guidance provides for the following new required disclosures related to fair value measurements: 1) theamounts of and reasons for significant transfers in and out of level one and level two inputs and 2) separate presentation of purchases, sales, issuances, andsettlements on a gross basis rather than as one net number for level three reconciliations. The guidance also clarifies the existing disclosures as follows:1) provide fair value measurement disclosures for each class of assets and liabilities and 2) provide disclosures about the valuation techniques and inputs used forboth recurring and nonrecurring level two or level three inputs. The Company has adopted this standard, but it did not have a material effect on the Company'sconsolidated balance sheet or required financial statement disclosures


In April 2010, the FASB issued ASU 2010-13, Compensation -Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This updateprovides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated incurrency of a market in which a substantial porting of the entity’s equity securities trades should not be considered to contain acondition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability ifit otherwise qualifies as equity. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscalyears, beginning on or after December 15, 2010. The Company’s adoption of this ASU did not have a material impact on itsconsolidated financial statements.





In December 2010, the FASB issued Accounting Standard Update 2010-28, Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU modifiedStep 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entityis required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. For publicentities, the amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December15, 2010. The Company`s adoption of this ASU is not expected to have a material impact on its consolidated financial statements.





In December 2010, the FASB issued Accounting Standard Update 2010-29, Business Combinations(Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU specifies that, if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 is effective prospectively for business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company`s adoption of this ASU is  expected to have  impact on its consolidated financial statements disclosures for the year ended December 31, 2011.





F-14
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements




4.  ACCOUNTS RECEIVABLE, NET
  Accounts receivable of the Group at December 31, 2010 and 2009 were as follows:


2010


2010


2009US$


RMB


RMB(In thousands)Accounts receivable-trade


78,050



516,904



453,056Less: Allowance for doubtful accounts


(2,392
)


(15,842
)


(14,947
)Account Receivable-Net


75,658



501,062



438,109Movement of allowance for doubtful accountsBeginning at January 1


(2,256
)


(14,947
)


(12,632
)Reversal (provided) during the year


(261
)


(1,725
)


(2,868
)Less: Written off during the year


125



830



553(2,392
)


(15,842
)


(14,947
)







5.  INVENTORIES, NET





Inventories of the Group at December 31, 2010 and 2009 were as follows:




2010


2010


2009US$


RMB


RMB(In thousands)Finished products


10,352



68,555



72,717Products in process


5,094



33,736



1,003Raw materials


14,908



98,730



104,30930,354



201,021



178,029Less: provision for inventories


(822
)


(5,443
)


(3,136
)Inventories


29,532



195,578



174,893




2010


2010


2009US$


RMB


RMB(In thousands)Movement of provision for inventoriesBalance as at January 1


(458
)


(3,136
)


(2,744
)Provided during the year


(364
)


(2,307
)


(392
)Less: Written off during the year


-



-



-Balance as at December 31


(822
)


(5,443
)


(3,136
)





6.             LAND USE RIGHT





All lands in the PRC are state-owned and no private land ownership rights exist.




The Group has obtained land use right certificates for all its facilities except for a piece of land in Hainan which cost RMB 3.4 million. We amortize the land use right in Hainan and Shanghai on a straight line basis over 20 yearswhich will expire from the year 2026 to 2030. We also amortize the land use right in Wuhan on a straight line basis over 50 years which will expire in the year 2057.


F-15
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements


7.  PROPERTY, PLANT AND EQUIPMENT


Property, plant and equipment of the Group at December 31, 2010 and 2009 were as follows:




2010


2010


2009US$


RMB


RMB(In thousands)Buildings


21,211



140,472



125,203Machinery and equipment


21,574



142,879



112,926Motor vehicles


3,001



19,877



15,634Furniture, fixtures and office equipment


3,134



20,754



16,77448,920



323,982



270,537Less: accumulated depreciation


(16,782
)


(111,143
)


(88,144
)32,138



212,839



182,393


The Group’s buildings are located in the PRC and USA and the land on which the Group’s buildings are situated in the PRC are State-owned.  The property in the U.S. is owned by Jinpan Realty, LLP, a wholly owned subsidiary of Jinpan USA Depreciation expense in 2010, 2009 and 2008 was RMB 24.5 million, RMB 25.5 million and RMB 11.7 million respectively. The depreciation was included both in cost of goods sold and selling and administrative expense.




8.  NOTES PAYABLE


In 2010, Hainan Jinpan entered into material purchasing agreement with a supplier in China.  The notes were payable to the supplier and were unsecured, short term and non-interest bearing. As of December 31, 2010 and 2009, the balance of the note payable was RMB 179.5 million and RMB 34.2 million respectively.





9.             DEFERRED TAX ASSETS AND INCOME TAXES





The Company was incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, is not subject to tax on income or on capital gains.





Jinpan USA, a wholly-owned subsidiary of the Company, is incorporated in the State of New York.  Jinpan USA is subject to federal tax and state tax of United States.





In accordance with the relevant PRC income tax laws , Hainan Jinpan’s  applicable tax rate is 18%, however, at the end of 2008, Hainan Jinpan was recognized as a technically advanced enterprise by the PRC government and was approved for a preferential tax rate of 15% for three years commencing from January 1, 2008.





Jinpan China is exempt from corporate income tax for 2008 and 2009, and from 2010 to 2012 will be subject to a 12.5% tax rate in accordance with PRC income tax law.





Shanghai Jinpan is taxed at deemed profit method for 2009 and 2010. The tax rate for deemed profit method is 1.25% of sales. Shanghai Jinpan will be subject to a corporate income tax rate of 25% in 2011.





F-16
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements


Pretax income (loss) for the years ended December 31, 2010, 2009 and 2008 was taxed in the following jurisdictions with the exception of the British Virgin Islands, which is tax exempt:


2010


2010


2009


2008US$


RMB


RMB


RMB(In thousands)British Virgin Islands


(1,510
)


(10,157
)


(13,288
)


(12,759
)United States of America


251



1,685



5,865



19,238The People’s Republic of China


18,556



124,790



225,576



156,94017,297



116,318



218,153



163,419





Significant components of the provision for income taxes attributable to income before taxes are as follows:




2010


2010


2009


2008US$


RMB


RMB


RMB(In thousands)CurrentNon-US


(4,013
)


(26,974
)


(17,477
)


(16,158
)US


(29
)


(192
)


(2,951
)


(7,584
)Deferred










-



-US


-



-



-



-Non-US


129



852



-



-(3,913
)


(26,314
)


(20,428
)


(23,742
)








Deferred Deferred tax assets and deferred tax liabilities of the Group at December 31, 2010 and 2009 were as follows:





2010


2010


2009US$


RMB


RMB(In thousands)Deferred tax assets-ChinaCurrentAllowance for doubtful accounts


342



2,263



1,813Inventory reserves


90



593



378Deferred expenses


394



2,610



2,191Non- CurrentDepreciation


32



215



208Total deferred tax assets-China


858



5,681



2,399Deferred tax assets-USA


-



-



-Total deferred Tax assets


858



5,681



2,399Deferred tax liabilities-China


-



-



-Deferred tax liabilities-USACurrent


-



-



-Non-CurrentDepreciation


37



242



-Total deferred tax liabilities


37



242



-Net deferred tax assets


821



5,439



2,399








Based on available evidence, management believes it is more-likely-than-not that the net deferred tax assets will be fully realized. Accordingly, the Group did not provide a valuation allowance against its net deferred tax assets at December 31, 2010. At December 31, 2010, the Group does not have any net operating loss carryforward.


F-17
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements


The reconciliation of income tax computed using the PRC statutory rate of 15% in 2008, 2009 and 2010 to actual income tax expense is as follows:


2010


2010


2009


2008US$


RMB


RMB


RMB(In thousands)Computed expected income tax


5,158



34,684



39,530



26,888Impact of tax holiday of Jinpan China and Shanghai


(732
)


(4,924
)


(21,066
)


(6,516
)Effect of difference between the PRC and USA tax rate


(72
)


(483
)


2,032



4,698Others Tax credits


(441
)


(2,964
)


(68
)


(1,328
)3,913



26,314



20,428



23,742





Under ASC 740, the Group recognizes the financial statement benefit of a tax position only afterdetermining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. , We evaluated the over all Company’s tax positions and determined there were no material unrecognized tax benefits and there have been no material changes in unrecognized benefits since January 1, 2007.




10.BANK LOANS
  Short-Term Bank loans comprised:







2010


2010


2009US$


RMB


RMB(In thousands)Short-term bank loans


12,127



80,311



-Letters of credit


-



-



-Less: current portion


(12,127
)


(80,311
)


--



-



-





Hainan Jinpan has a working capital credit facility from the Bank of China for RMB 130.0 million.  As of December 31, 2010, there was no outstanding balance under this credit facility. This credit facility bears interest at the prime rate declared by the Bank of China. Our borrowings under this credit facility accrued interest at an average interest rate 5.81% per annum for the year ended December 31, 2010. This facility will expire in October 2011 and we intend to extend the facility for another year.  For a description of restrictions on dividend payments, see Item 8.A. Dividend Policy.  Upon default on any material terms, any outstanding balance would be immediately due and payable.





Hainan Jinpan has an unsecured letter of credit facility from Bank of Communication for RMB 90 million of which 40 million was included in a written agreement and RMB 50 million was an oral agreement. As of December 31, 2010, there was RMB 50 million outstanding under this credit facility. This credit facility bears interest at the benchmark rate set by the People’s Bank of China.. This credit facility will expire in June 2011 and we are in the process of renewing this credit facility.





Hainan Jinpan has an unsecured letter of credit facility from the Bank of China for RMB 173 million.  This credit facility bears interest at LIBOR plus a  margin rate.  As of December 31, 2010, there was no outstanding balance under this credit facility.  This facility will expire in October 2011 and we intend to extend the facility for another year.




Hainan Jinpan has an oral agreement of working capital credit facility from the Industrial and Commercial Bank of China for RMB 132 million. This credit facility bears interest at the benchmark rate set by the People’s Bank of China. As of December 31, 2010, there were no borrowings outstanding under this credit facility.


F-18
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements





Shanghai Jinpan has an oral credit facility from Bank of Communication for RMB 160 million of which RMB100 million was working capital facility and RMB 60 million was letter of credit facility. As of December 31, 2010, there was RMB 30 million outstanding balance under this credit facility. This credit facility bears an interest rate that is 5% below benchmark rate set by People’s Bank of China. Our borrowings under this credit facility accrued interest at an average interest rate of 5.28% per annum for the year ended December 31, 2010. This credit facility will expire in September 2011 .





Shanghai Jinpan has a oral credit facility from bank of China for RMB 80 million of which 50 million was working capital facility and RMB 30 million was letter of credit facility. This credit facility bears interest according to the benchmark rate set by bank of China. As of December 31, 2010, there is no outstanding balance under this credit facility.





Jinpan Realty has a long term mortgage bank loan of US$1.7 million from Enterprise Bank in USA for purchasing the land and building, which constitute our U.S. offices, in 2009. The loan was secured by the property. The interest rate is fixed at 6% for first 5 years. Thereafter, the rate shall be reset at the then current five year U.S. treasury rate plus 2% for the remainder term of the loan. The term of the loan is 20 years.   There was approximately RMB 10.6 million (US$1.6 million) outstanding as of December 31, 2010. The table below reflects the principal balance due for the next five years.





Year
2011
2012
2013
2014
2015
thereafterPrincipal Due in RMB
311,414
329,115
351,485
373,473
396,837
8,811,969








11.           GOVERNMENT GRANTS





Since 1998, Hainan Jinpan received grants in advance from the local Chinese government based on its past business performance and its investment in advance technologies which has to be pre-approved by the government. Government grants are recorded as deferred grant revenue until the terms of the grants are met and final approval from the government is obtained. Once these conditions are satisfied grant revenue is recognized in other income. The Group recognized income of RMB 13.1 million, RMB 3.0 million and RMB 7.3 million respectively in 2010, 2009 and 2008, respectively.





12.           DISTRIBUTION OF INCOME





According to PRC accounting rules and regulation, the Group’s China subsidiaries are required to maintain reserves which include a statutory reserve fund, an enterprise expansion fund and staff welfare and bonus fund based on 10% of its net income as reported in the statutory accounts prepared in accordance with  GAAP. The maximum amount of the aggregate of these reserves is 50% of its registered capital. The Group and its subsidiaries in China made reserve RMB 37.6 million, nil million and nil million for the years ended December 31, 2010, 2009 and 2008. The remaining reserve to fulfill the 50% capital requirement is approximately RMB 223.7 million at December 31, 2010.





The statutory reserve fund, enterprise expansion fund and staff welfare and bonus fund represent appropriations made at the sole discretion of the Company’s board of directors.  The statutory reserve fund and enterprise expansion fund are used for future expansion. The staff welfare and bonus fund is used for the collective welfare of the staff and workers of Hainan Jinpan.  During the years ended December 31, 2010, 2009 and 2008, the directors of the Group’s China subsidiaries approved the following appropriations to reserves.


F-19
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements








2010


2010


2009


2008(In thousand)

US$


RMB


RMB


RMBStatutory reserve fund


5,604



37,656



-



-Enterprise expansion fund


-



-



-



-Staff welfare and bonus fund


-



-



-



-Dividends


-



-



-



-5,604



37,656



-



-




The Company declared a cash dividend of US$0.14 per common share on January 29, 2010, which was paid in 2 installments, first on February 25, 2010 and then on July 20, 2010.  The Company also declared cash dividend of US$0.12 per Common Share in 2009 and 2008.  These cash dividends declared reflect the effect of 2-for–1 stock split effected in February 2010.




13.COMMITMENTS AND CONTINGENT LIABILITIES




(1)          Operating lease commitments





The Group leases certain buildings and apartments under non-cancelable lease arrangements.  These operating leases expire in various years through 2022. Total lease expense for the year 2010 is RMB 2.9 million.  These leases may be renewed for periods ranging from one to two years.





Future minimum payments under non-cancelable operating leases with initial terms of one year or more consisted of the following at December 31, 2010:





(In thousands)US$

RMB2011
115

7762012
60

4032013
58

3902014
53

3582015
53

3582016 after
385

2,587Total minimum lease payments
724

4,872


(2)          Capital commitments





As of December 31, 2010, the Group has commitments of RMB 6.3 million for the purchase of new machinery.





(3)           Employment contracts





The Group’s employees in the PRC include engineers, technicians, management administrative personnel, marketing and sales personnel, and factory personnel while employees in U.S. include management, administration and marketing personnel. All of the employees except U.S. employees are contract employees and have entered into renewable employment contracts with the Group’s applicable entities.  Terms of the employment agreements with management, engineers, sales persons and technicians range from two to five years and terms of the employment agreements with support personnel range from six months to one year.




Future minimum payments to employees under employment contracts consisted of the following at December 31, 2010:
  US$


RMB(In thousands)2011


3,525



23,3462012


3,101



20,5372013


2,075



13,7402014


897



5,9412015 after


7,068



46,812Total minimum employment contract payments


16,666



110,376


F-20
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements


(4)        Licensee agreement





The Group is engaged in a licensee agreement with a third party that designs certain line reactors. This agreement provides us the exclusive right to manufacture, assemble, sell, and maintain the licensed products.  Licensee expense was RMB 0.5 million, RMB 3.4 million and RMB 2.3 million for the years ended December 31, 2010, 2009, and 2008, respectively.




14. FINANCIAL INSTRUMENTS




Cash and cash equivalents





The carrying amount reported on the Consolidated Balance Sheets for cash and cash equivalents approximates their fair value because of the short maturity of those instruments.




Investments, accounts receivable, notes receivable, other receivables advance from customers and bank loans.
  The carrying value, as reported on the Consolidated Balance Sheets, of accounts receivable, notes receivable, other receivables, advance from customers, accruals, and bank loans approximate their market values based on their short-term maturities, or their fair values.





15.CONCENTRATION OF RISK





Financial instruments that potentially subject the Group to significant concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable and short-term investments.





The Group maintains cash and cash equivalents with the Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Nan-Yang Commercial Bank in the PRC and Citibank, N.A. in the U.S.





Concentrations of credit risk with respect to accounts receivable are minimal because the Group has many different customers.  The Group also performs ongoing credit evaluations of its customers’ financial conditions and, as a result, does not require collateral for Accounts Receivable.








A significant portion of our sales revenues is concentrated on one OEM, which is our largest customer.  Sales to our largest customer accounted for 9.1%, 17.7% and 18.4% for years 2010, 2009 and 2008, respectively.





F-21
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements




16.PENSION AND OTHER POST RETIREMENT BENEFITS





In the beginning of 2006, Jinpan USA set up a Simple IRA plan for its employees.  The amounts employees contribute are tax deferred.  Jinpan USA, has not made any contributions since 2006.





Hainan Jinpan , Jinpan China and Shanghai Jinpan have a defined contribution retirement plan for their employees.  As required by PRC laws and organized by local government, Hainan Jinpan and Jinpan China make certain statutory contributions to the plan.  All permanent employees are entitled to an annual pension that is equal to a fixed proportion of their final annual salary at their retirement date. Hainan Jinpan and Jinpan China and its employees are required to make contributions to the retirement plan at rates of 20% and 8% of each employee’s annual salary, respectively.  Payment is made, on a monthly basis, to a PRC insurance company organized by the PRC government, which is responsible for the payments of pension benefits to retired employees.  Hainan Jinpan and Jinpan China have no obligations for the pension benefits beyond the annual contributions as described above.  The pension costs recognized by Hainan Jinpan  Jinpan China and Shanghai Jinpan during the years ended December 31, 2010, 2009 and 2008 amounted to RMB 5.7 million, RMB 3.5 million and RMB 2.9 million, respectively.






17.OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA


We operate in one reportable segment, electrical distribution equipment based on aggregation criteria:




(1)  We manufacture and sell power control and distribution equipment, including cast resin transformers, substation, reactors, and switchgears.  While each type of product has a different function, all are used to control and to distribute electric power. (2) While the manufacturing techniques and equipment may vary among product types, we apply the similar production process, quality, and cost monitoring and control systems throughout our manufacturing facilities. (3) Our customer base is not differentiated by the type of products.   Our customers base comprise of resellers or end users of power control and distribution equipment, including OEMs, utilities, municipal governments, industrial companies, and commercial and residential developers.  Customers often procure one or more types of products we offer depending on their requirements. (4) Presently, we use the same sales team and similar distribution channels for all of our products, because the customer base for our products are the same.





Thus, we report one operating segment based on aggregation criteria. We sell our products in the People’s Republic of China, the United States, and Europe.





Geographic area data




Year ended December 31,2010


2010

2009

2008US$


RMB

RMB

RMB(In thousands)
  Revenues from external customers:United States


7,165



48,183



67,679



60,622Europe


4,254



28,607



94,241



77,550PRC


132,388



890,284



922,383



948,703143,807



967,074



1,084,303



1,086,875Property, Plant, and Equipment by area:United States


2,619



17,342



17,303



433PRC


29,519



195,497



165,090



131,86932,138



212,839



182,393



132,302








Net AssetsUnited States


52,628



348,534



295,640



304,078PRC


98,865



654,760



632,414



427,204151,493



1,003,294



928,054



731,282







F-22
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements





18            EARNINGS PER COMMON AND COMMON EQUIVALENT  SHARE




On January 26, 2010, the Company declared a two-for one stock split to the shareholders of record as of  February 5, 2010. Accordingly, all outstanding shares and per share data in all period presented have been restated to reflect the stock split.





Basic earnings per share for the years ended December 31, 2010, 2009 and 2008 was computed by dividing net income of RMB 90.0 million, RMB 197.7 million and RMB 139.7 million by the weighted average number of 16,159,893, 16,028,152 and 15,970,160  common shares outstanding, respectively.





Diluted earnings per share for the years ended December 31, 2010, 2009 and 2008 was computed by dividing net income of RMB 90.0 million, RMB 197.7 million and RMB 139.7 million by the weighted average number of 16,457,462, 16,269,440 and 16,261,196  common shares outstanding, respectively. The weighted average number of shares includes potentially dilutive common shares, which reflect the dilutive effect of stock options, preferred shares and warrants.  Reconciliation of the denominator is as follows:





2010


2009


2008Denominator for basic earnings per share  – weighted average shares


16,159,893



16,028,152



15,970,160Effect of dilutive securities:Convertible preferred stock






-



6,088Exercisable stock options


246,770



216,026



251,020Convertible warrants


50,799



25,262



33,928Denominator for diluted earnings per share  – adjusted weighted average shares andassumed conversions


16,457,462



16,269,440



16,261,196






19.EQUITY




As of December 31, 2009, 424,940 common shares have been repurchased at an aggregate cost of US$0.8 million, approximately RMB 6.8 million. The Company did not purchase any of its stock in the open market during 2010 and 2009.





The Company issued 4,000, 141,634 and nil shares respectively in 2010, 2009 and 2008 from its treasury shares to the employees who exercised their stock options.





The Company’s convertible preferred stock (“preferred stock”) is convertible at any time into common shares at the rate of 1-to-1 and each share of preferred stock entitles its holder to the same number of votes as a Common Share. In the event of the Company’s liquidation, dissolution or winding up, the holders of preferred stock are entitled to a preference over the holders of common shares in the distribution of assets in an amount equal to the sum of: (i) US$2.188 per share, and (ii) an amount equal to declared but unpaid dividends on each such share.




(a)1997 Stock Option Plan


A total of 1,000,000 common shares have been reserved for issuance under the Company’s 1997 Stock Option Plan. The 1997 Stock Option Plan provides for options to employees, officers, directors and consultants of the Group. The 1997 Stock Option Plan, which was established in October 1997, is administered by the board of directors or a committee appointed by the board, which determines the terms of options granted, including the exercise price, the number of shares subject to the option and the option’s exercisability.  The exercise price of all options granted under the 1997 Stock Option Plan must be at least equal to the fair market value of each share on the date of grant. The vesting period is determined in each stock option agreement. Options shall be fully vested and become exercisable at the date vested. The maximum term of options granted under the 1997 Stock Option Plan is 10 years. We used the intrinsic value method under APB 25 and recognized no expense for options granted under this plan.







F-23
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements
 
  (b)Stock option transactions under 1997 stock option plan


No options were exercised by employees during 2008. No options were exercised by directors during 2008 and 2009. During 2009 certain employees exercised stock options to purchase an aggregate of  78,000 shares of the Company’s common stock. The Company received US$138,450 from these exercises.  No options were exercised under this plan during 2010.





(c)           2006 Stock Option Plan





In October 2006, the Company adopted the 2006 Stock Option Plan, under which 600,000 common shares have been reserved for issuance. The 2006 Stock Option Plan provides for options to employees, officers, directors and consultants of the Group. The 2006 Stock Option Plan is administered by the board of directors or a committee appointed by the board, which determines the terms of options granted, including the exercise price, the number of shares subject to the option and the option’s exercisability. The exercise price of all options granted under the 2006 Stock Option Plan must be at least equal to the fair market value of a Common Share on the date of grant.  Options shall be fully vested and become exercisable on the date of vesting. The vesting period is determined in each stock option agreement. The maximum term of options granted under the 2006 Stock Option Plan is 10 years. We measure the fair value of each stock option grant at the date of grant using a Black-Scholes option pricing model.








(d)           Stock Option Transactions Under the 2006 Stock Option Plan





In March, 2007, the Group entered into stock option agreements with certain of its directors and employees, to purchase an aggregate of 54,500 common shares. Options granted are exercisable at the price of US$9.03 per share and expire 5 years from the dated granted. The options are not transferable other than upon death and are exercisable from the date granted.





During 2009, certain current and previous employees exercised stock options to purchase 62,334 common shares. The Company received US$ 228,788 from these exercises.





In March 2008, the Company issued options to purchase 111,000 common shares.  These options are exercisable at a price of US$11.65 per share and expire 5 years from the date of grant.  The options are subject to termination of employment and are not transferable other than upon death.  The vesting dates range from the date of grant to January 1, 2011.





During 2009, certain employees exercised their options to purchase 37,300 common shares. The Company received US$ 434,545 from these exercises.





In April 2008, the Company issued options to purchase 21,500 common shares.  Options granted are exercisable at the price of US$15.28 per share and expire 5 years from the date of grant.  The options are subject to termination of employment and are not transferable other than upon death.  The options vested on January 1, 2009.


In December 2009, one employee exercised an option to purchase 4,000 common shares. The Company received US$61,140 from this exercise.


F-24
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements


In February 2009, the Company issued stock options to purchase 207,200 common shares. Options granted are exercisable at a price of US$7.68 per share and expire 5 years from the date of grant. The options are subject to termination of employment and are not transferable other than upon death. There were 74,000 shares vested on January 1, 2010 and, additionally, 133,200 shares vested on February 5, 2012.





In December 2010, a director exercised a stock option to purchase 4,000 common shares. The Company received US$30,720 from this exercise.





In March, 2011, the Company issued stock options to purchase 44,000 common shares. Options granted are exercisable at the price of US$ 10.83 per share and expire 5 years from the date of grant.




(e)               Warrants





In March, 2007, the Company issued warrants to purchase 200,000 common shares in connection with a private placement.  This warrant is exercisable at a price of US$11.65 per share and expires on March 15, 2012.




We measure the fair value of each warrant at the date of granting using the Black-Scholes option-pricing model. The Black-Scholes option pricing model was developed to estimate the fair value of traded warrants, including expected volatility, expected life, expected dividend rate and expected risk-free rate of return.





The fair value of the warrants, issued in March 2007, in the amount of RMB 6.2 million, was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 2007: risk-free interest rate was 4.47%, an expected dividend yield of 1.03%, the volatility factor of the expected market price of the common shares was 66.14%, and a weighted average contractual life of the warrants of 5 years.





(f)     Common Shares Reserved for Options, Warrants and Preferred Stock.





December 31, 2010


December 31,2009Warrants


200,000



200,000Stock options


454,566



458,566Preferred stock






-Total


654,566



658,566





(g)Stock Option Valuation





We measure the fair value of each stock option grant at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, including expected volatility, expected life, expected dividend rate and expected risk-free rate of return.  The weighted-average exercise price for options outstanding as of December 31, 2010 was US$7.02. The weighted-average remaining contractual life of those options is 2.83 years.




December 31,


December 31,


December 312010


2009


2008Risk -free interest rate

1.62% to 1.99%


1.37% to 1.62%


1.99% to 2.18%Average expected term (years)


3



3



3Dividend yield


1.62
%


1.62
%


0.96
%Expected volatility

60.64% to 68.65%


68.65% to 75.6%


60.62% to 60.64%


F-25
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements


The Company’s calculation of expected volatility for the year ended December 31, 2010 was based on the historical volatility of the Company’s stock price. We have adopted the guidance of ASC 718-10-S99-1 for purposes of determining the expected term for stock options. Due to limited historical data to rely upon, we use the “simplified” method in developing an estimate of expected term for stock options per ASC 718-10-S99-1.   The interest rate is based on the  U.S. Treasury yields in effect at the time of grant. While we believe that these assumptions are reasonable, actual experience may differ materially from these assumptions.




(h)               Option Award Activity




A summary of the Company’s stock option activities, and related information for the years ended December 31, 2010, 2009 and 2008 are as follows:




2010

2009

2008Options
Weighted

average

exercise

price

Options
Weighted

average

exercise

price

Options
Weighted

average

exercise

priceUS$



US$



US$Outstanding at beginning of year
458,566

7.03

433,000

5.93

302,500

3.17Granted
-

-

207,200

7.68

132,500

12.24Exercised
(4,000)

7.68

(181,634)

4.21

(2,000)

1.77Cancelled
-







-

-Forfeited
-







-

-Outstanding at the end of year
454,566

7.02

458,566

7.03

433,000

5.93Exercisable at the year end
311,166

6.82

216,266

5.69

319,500

3.67Weighted average grant-date fair value of options granted during the year
-



US$7.68



US$12.24













F-26
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements


A summary of the status of the Company’s nonvested shares for the years ended December 31, 2010, 2009, 2008 are as follows










Weighted-AverageGrant-DateNonvested Shares
Shares
Fair Value (US$)Nonvested at January 1, 2008
-Granted
132,500
12.24Vested
(19,000)
11.65Forfeited
-
-Nonvested at December  31, 2008
113,500
12.34Granted
207,200
7.68Vested
(78,400)
12.65Forfeited
-
-Nonvested at December  31, 2009
242,300
8.23Granted
-
-Vested
(98,900)
10.87Forfeited
-
-Nonvested at December 31, 2010
143,400
US$7.96








The Company recognized approximately RMB 1.4 million, RMB 6.2 million and RMB 0.7 million of compensation cost for the years ended December 31, 2010, 2009 and 2008, respectively.  No income tax benefit was recognized for the years ended December 31, 2010, 2009 and 2008. The total intrinsic value of options exercised during the years ended December 31, 2010, 2009 and 2008 was RMB 75,000, RMB 14.9 million and RMB nil  respectively. The total intrinsic value of options outstanding during the year ended December 31, 2010 was RMB 10 million. There were 4,000 shares of options exercised during the year 2010. The total fair value of shares vested during the years ended December 31, 2010, 2009 and 2008 were approximately RMB 5.7 million, RMB 6.4 million and RMB 1.5 million respectively.  Total compensation cost related to nonvested stock options that are not recognized at the end of December 31, 2010 and will be recognized in future years is RMB 1.6 million. The weighted average period of nonvested stock options that is expected to be recognized is 2 years.





The following table summarizes information with respect to options outstanding at December 31, 2010


OutstandingExercise

Options
Number

Weighted Average

RemainingPrice

Outstanding

Contractual Life (in years)US$  1.77

92,000

2.73US$  3.67

36,000

3.04US$ 9.03

32,166

1.19US$11.65

73,700

2.3US$15.28

17,500

2.3US$7.68

203,200

3.1454,566

2.83





20.SUBSEQUENT EVENT
  a) Cash Dividend
 
 On January 29, 2011, the Company declared a cash dividend of US$0.14 per common share for the year 2010.  The Company made the first distribution of US$0.07 per share on February 10, 2011, to shareholders of record on January 26, 2011. The second distribution will be made during the second half of the year.
 
 b) Acquisition of Guilin Jun Tai Fu
 
 In April of 2011, the Company completed acquisition of Guilin Jun Tai Fu Construction and Development Co. Ltd. (“Guilin JTF”) for RMB 15 million (US$ 2.3 million) and assumed debt of RMB 44.2 million (US$ 6.7 million) as a result of the acquisition.  Guilin JTF’s primary asset is a lot of thirty-eight (38) acres of land in Guilin, Guangxi zoned for industrial development.  Guilin JTF is in the process of acquiring an adjacent lot of forty-four (44) acres.  Our acquisition of Guilin JTF is part of our plan to build a large scale manufacturing and R&D facility in the city of Guilin, Guangxi province.




F-27
 Jinpan International Limited and Subsidiaries
 Notes to Consolidated Financial Statements




c) Acquisition 10%  equity of Hainan Jinpan




In April 2011, Wuhan Jinpan acquired an additional 10% of the equity from Hainan Jinpan for RMB 80 million(US$ 12 million).







The Company has performed an evaluation of subsequent events through the date these consolidated financial statements were issued to determine whether the circumstances warranted recognition and disclosure of those events or transactions in the consolidated financial statements as of December 31, 2010.





21.QUARTERLY FINANCIAL DATA (Unaudited)





Summarized quarterly financial data for 2010 and 2009 is as follows:





QuarterFiscal 2010

First


Second


Third


FourthRMBSales


133,671,958



249,751,284



298,620,667



285,030,007Gross  profit


48,806,661



108,883,571



107,038,886



110,753,633Net  income from continuing operations


7,814,318



13,654,774



29,303,304



39,231,711Net  income from discontinued operationsNet  income


7,814,318



13,654,774



29,303,304



39,231,711Earnings per share - Basic


0.48



0.85



1.81



2.42Earnings per share - Diluted


0.47



0.82



1.79



2.38








QuarterFiscal 2009

First


Second


Third


FourthRMBSales


221,135,274



279,185,232



299,586,510



284,396,047Gross  profit


79,989,507



129,993,215



130,934,447



117,568,790Net  income from continuing operations


31,943,839



59,305,372



63,873,852



42,601,582Net  income from discontinued operations






-



-



-Net  income


31,943,839



59,305,372



63,873,852



42,601,582Earnings per share - Basic


2.00



3.70



3.98



2.65Earnings per share - Diluted


1.99



3.66



3.88



2.62













F-28


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