Table of Contents





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(mark
one)


x
            ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the fiscal year
ended  June 30,
2009




OR




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


For
the transition period from _____ to _________




Commission
file number: 000-27129




ASIAN
FINANCIAL, INC.


(Exact
name of registrant as specified in its charter)




Wyoming
            91-1922225(State
      or other jurisdiction of incorporation or
              organization)
            (I.R.S.
      Employer
              Identification
      No.)





No.
3 Jinyuan Road


Daxing
District Industrial Development Zone


Beijing,
People’s Republic of China


102600


(Address
of principal executive offices)




+86
10 6021 2222


(Registrant’s
telephone number, including area code)





Not
Applicable


(Former
name, former address and former fiscal year, if changed since last
report)




Securities
registered pursuant to Section 12(b) of the Act:




Title
      of class
            Name
      of each exchange on which
registered


None.




Securities
registered pursuant to Section 12(g) of the Act:


Common
      Stock, par value $0.001(Title
      of Class)





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




Yes o      
No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.




Yes o    
No x




Indicate
by check mark whether the registrant (1) has filedall
reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer  o Accelerated filer
o Non-accelerated
filer x
Smaller reporting company o




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





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the common equity was sold, or the average
bid and asked prices of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter.




Not
applicable.





There
were 25,000,050 shares of the registrant’s common shares issued and outstanding
as of September 14, 2009.


DOCUMENTS
INCORPORATED BY REFERENCE
  Certain
information required for Part III of this Annual Report on Form 10-K is
incorporated by reference to the Asian Financial, Inc. definitive Proxy
Statement for its 2009 Annual Meeting of Stockholders, which shall be filed with
the Securities and Exchange Commission pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, within 120 days of Asian Financial,
Inc.’s fiscal year end.









Table of Contents
   ASIAN
FINANCIAL, INC.




FORM
10-K




INDEX





PagePART I
                    
                    2Item 1. Business
                    
                    2Item 1A. Risk Factors
                    
                    16Item 2. Properties
                    
                    28Item 3. Legal Proceedings
                    
                    29Item 4. Submission of Matters to a Vote of Security
      Holders
                    
                    29PART II
                    
                    29Item 5. Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
                    
                    29Item 6. Selected Financial Data
                    
                    29Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                    
                    32Item 7A. Quantitative and Qualitative Disclosures About
      Market Risk
                    
                    49Item 8. Financial Statements and Supplementary
      Data
                    
                    50Item 9. Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
                    
                    50Item 9A. Controls and Procedures
                    
                    50Item 9B. Other Information
                    
                    51PART III
                    
                    52Item 10. Directors, Executive Officers and Corporate
      Governance
                    
                    52Item 11. Executive Compensation
                    
                    52Item 12. Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
                    
                    52Item 13. Certain Relationships and Related Transactions,
      and Director Independence
                    
                    52Item 14. Principal Accountant Fees and
      Services
                    
                    52PART IV
                    
                    53Item 15. Exhibits and Financial Statement
      Schedules
                    
                    53Signatures
                    
                    54


- i
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 Table of Contents




Introduction




Unless
otherwise indicated and except where the context otherwise requires, references
in this Annual Report to:




•
              “we,” “us,” “our company,” “the
      company” and “our” are to Asian Financial, Inc., a Wyoming corporation,
      its predecessor entities and
  subsidiaries;


•
              “single color presses” are to
      single color small format presses and single color large format presses,
      collectively;


•
              “multicolor presses” are to
      multicolor small format presses and multicolor large format presses,
      collectively; and


•
              “fiscal 2007,” “fiscal 2008” and
      “fiscal 2009” are to our years ended June 30, 2007, June 30, 2008 and June
      30, 2009,
respectively.






For
fiscal 2007, 2008 and 2009, our income statements were translated at the average
rates of RMB7.81 to $1.00, RMB7.26 to $1.00 and RMB6.83 to $1.00, respectively.
We make no representation that the Renminbi or U.S. dollar amounts referred to
in this prospectus could have been or could be converted into U.S. dollars or
Renminbi, as the case may be, at any particular rate or at all. See “Item 1A.
Risk Factors—Risks Related to Doing Business in China—Government control of
currency conversion and exchange rate fluctuations may materially and adversely
affect our business” for discussions of the effects of currency control and
fluctuating exchange rates on the value of our shares. Any discrepancies in any
table between totals and sums of the amounts listed are due to
rounding.
  Solely
for your convenience, the foreign currency figures from the Printing and
Printing Equipment Industries Association of China, have been translated into
U.S. dollars at the rate of RMB6.83 to $1.00.
  Our
website is www.duoyuan.com. Our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act are available, free of charge,
on the Securities and Exchange Commission website at www.sec.gov. Any materials
that we filed with the Securities and Exchange Commission also may be read and
copied at the Securities and Exchange Commission’s Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330.




Special
Note Regarding Forward-Looking Statements




This
Annual Report and the documents incorporated by reference into this Annual
Report, including “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” contain statements that constitute
“forward-looking statements” within the meaning of Section 21E of the
Exchange Act and Section 27A of the Securities Act of 1933, as
amended.





Generally,
the words “expect,” “estimate,” “anticipate,” “predict,” “believe,” “plan,”
“will,” “may,” “should,” “intend,” “continue,” and similar expressions or the
negative thereof or comparable terminology are intended to identify
forward-looking statements which include, but are not limited to, statements
concerning our expectations and those of our directors and officers regarding
our working capital requirements, financing requirements, business prospects,
and other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends, and similar expressions concerning matters that
are not historical facts. Such statements are not guarantees of future
performance and subject to certain risks and uncertainties, including the
matters set forth in this Annual Report, which could cause actual results or
outcomes to differ materially from those projected. Although we do not make
forward-looking statements unless we believe we have a reasonable basis for
doing so, we cannot guarantee their accuracy, and actual results may differ
materially from those we anticipated due to a number of uncertainties, many of
which cannot be foreseen. Undue reliance should not be placed on these
forward-looking statements which speak only as of the date hereof. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including, among others, the risks we face that are
described in the section entitled “Item 1A. Risk Factors” and elsewhere in this
Annual Report. We do not ordinarily make projections of our future operating
results and undertake no obligation (and expressly disclaim any obligation) to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by
law.





We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements include, without limitation, statements
relating to:





•
              our goals and
      strategies;


•
            our future business development,
      results of operations and financial
  condition;


•
            our ability to maintain a strong
      relationship with distributors or end-user customers or to expand our
      distribution network;


•
            our ability to control our
      operating costs and
expenses;


•
            our ability to generate revenue
      in new post-press
products;


•
            changes in our management team
      and other key
personnel;


•
            introduction by our competitors
      of new or enhanced
products;


•
            the effect of competition on
      demand for and prices of our
  products;


•
            fluctuations in general economic
      conditions;


•
            Chinese tax policies and
      regulations; and


•
            expected growth and change in the
      Chinese printing equipment
market.




This
Annual Report also contains data related to the Chinese printing industry, the
Chinese printing equipment industry and broad macroeconomic factors that we
believe drive the growth of the Chinese printing equipment market. These market
data and industry statistics, based on independent industry publications and
other publicly available information, include projections that are based on a
number of assumptions. The Chinese printing equipment market may not expand at
the rates projected by the market data, or at all. The failure of the market to
grow at the projected rates may have a material adverse effect on our business
and the market price of our common shares. In addition, the complex and changing
nature of the Chinese printing industry, the Chinese printing equipment industry
and the broad macroeconomic factors discussed in this Annual Report subject any
projections or estimates relating to the growth prospects or future conditions
of the Chinese printing equipment market to significant uncertainties. If any
one or more of the assumptions underlying the market data proves to be
incorrect, actual results may differ from the projections based on these
assumptions. You should not place undue reliance on these forward-looking
statements.




Readers
should carefully review this Annual Report and other documents filed by Asian
Financial, Inc. with the Securities and Exchange Commission. The forward-looking
statements in this Annual Report for the year ended June 30, 2009 involve known
and unknown risks, uncertainties and other factors that could cause the actual
results, performance or achievements of Asian Financial, Inc. to differ
materially from those expressed in or implied by the forward-looking statements
contained herein. Please see the discussion in “Item 1A. Risk
Factors.”




- 1
-
 Table of Contents




PART I





Item
      1.
            Business.





Overview







We are a
Wyoming corporation and a leading offset printing equipment supplier in China,
headquartered in Beijing. Through our principal operating subsidiary, Duoyuan
Digital Press Technology Industries (China) Co., Ltd., or Duoyuan China, and
Duoyuan China’s manufacturing subsidiaries, namely Langfang Duoyuan Digital
Technology Co., Ltd., or Langfang Duoyuan, and Hunan Duoyuan Printing Machinery
Co., Ltd., or Hunan Duoyuan, we design, manufacture and sell offset printing
equipment used in the offset printing process. The offset printing process
includes the following three stages: (1) “pre-press,” which is the transfer of
images to printing plates; (2) “press,” which is the transfer of images from
printing plates to another media, such as paper; and (3) “post-press,” which is
the last step of the offset printing process that includes cutting, folding,
binding, collating and packaging. We manufacture one product under the pre-press
product category (a computer-to-plate system, or CTP system) and fifteen
products across four product lines under the press product category (single
color small format presses, single color large format presses, multicolor small
format presses and multicolor large format presses). We plan to begin commercial
production and sale of certain post-press products, including a cold-set
corrugated paper machine, which makes corrugated cardboard paper, by the end of
2010. In addition, we plan to begin commercial production and sale of two other
post-press products, namely an automatic booklet maker and an automatic paper
cutter, for which we have developed prototypes, in 2011.




To
enhance our market position, we have made and continue to make investments in
research and development. Our Langfang Duoyuan research and development and
technical support center and our Hunan Duoyuan technical support center have
advanced design test tools, which we believe enable us to develop new and
enhanced products with improved functionality. Our research and development team
and our manufacturing department work closely together to optimize manufacturing
processes and develop commercially viable products. In addition, they
incorporate regular feedback from our sales and marketing personnel, enabling us
to timely and cost-effectively introduce products tailored to end-user needs.
Furthermore, our China-based research and development and manufacturing
operations provide us with a distinct competitive advantage in international
markets by enabling us to leverage low-cost technical expertise, labor, raw
materials and facilities. Our investments in research and development, technical
innovation and commitment to meet the needs of our end-user customers have
allowed us to create and introduce four new and enhanced products in the year
ended June 30, 2009.




Our
nationwide distribution network in China consists of over 85 distributors
located in over 65 cities and 28 provinces in China. Our nationwide distribution
network, which we believe, based on our experience in the industry, to be one of
the largest among Chinese offset printing equipment suppliers, enables us to be
more responsive to local market demands than many of our competitors. We support
our distributors’ sales efforts through coordinated marketing efforts. We
regularly attend industry trade shows and exhibitions to showcase our products,
as well as present seminars and training programs to our potential and existing
distributors, as well as potential and existing end-user customers, to highlight
the functions and capacities of our products. To maintain good relationships
with our end-user customers, we provide certain services during the one-year
warranty period associated with our products. During this period, we provide
training, technical support, warranty and repair services for complex technical
issues to our distributors who work with our end-user customers.




We
believe our pricing is competitive with Chinese and international offset
printing equipment manufacturers. We believe the relatively low operation, labor
and raw material costs in China, our ability to produce a substantial majority
of our key components in-house, our efficient production processes and our
effective inventory management give us a cost competitive advantage. Our cost
advantage allows us to offer quality products at lower prices, thus making our
products attractive in China and certain international markets.




Our
revenue grew 32.2% from $67.8 million in the year ended June 30, 2007 to $89.6
million in the year ended June 30, 2008 and 18.9% to $106.6 million in the year
ended June 30, 2009. Our net income grew 89.3% from $14.0 million in fiscal 2007
to $26.5 million in fiscal 2008 and 23.2% to $32.6 million in fiscal 2009. For
fiscal 2007, 2008 and 2009, our multicolor large format presses and our
multicolor small format presses were our best selling products. For fiscal 2007,
2008 and 2009, we derived 72.3%, 81.4% and 83.3% of our revenue from the sale of
our multicolor presses, respectively. For the same periods, our multicolor large
format presses accounted for approximately 46.7%, 52.0% and 51.2% of our
revenue, respectively, and our multicolor small format presses accounted for
approximately 25.6%, 29.4% and 32.1% of our revenue,
respectively.


- 2
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 Table of Contents


Industry
  China’s
Printing Industry
  China’s
printing industry has benefited from China’s rapid economic growth. This growth
has increased demand for publication printing needs, such as newspapers,
magazines and books, and commercial printing needs, such as corporate brochures,
product catalogues and labels, manuals and directories, conference and
advertising materials, and printed packaging materials. Pira International
reported that China was the third largest printing market in the world behind
the United States and Japan. After taking into account the effects of the
current economic environment, China’s printing industry is expected to remain
one of the fastest growing in Asia.
  From 2002
to 2007, the total annual output of China’s printing industry grew from $29.5
billion to $64.4 billion, according to the Printing and Printing Equipment
Industries Association of China, representing a compound annual growth rate, or
CAGR, of 17% per annum.
  
  
 Source:
the Printing and Printing Equipment Industries Association of China
 According
to Pira International, China’s printing market grew from $51 billion in 2007 to
$57 billion in 2008. Pira International estimates China’s printing market will
grow to $60 billion by the end of 2009, and projects the market to grow by 28%
total from 2009 to 2014, or a CAGR of 5.1% per annum, after taking into account
the effects of the current economic environment.
  In line
with global trends, package printing represents the largest segment in the
Chinese printing industry. According to the Printing and Printing Equipment
Industries Association of China, China produced $20.5 billion of package
printing in 2007, accounting for 32% of the total output of China’s printing
industry that year. Pira International projects that package printing to become
the largest segment by 2014, followed by commercial printing.
  Based on
another report issued by Pira International, corrugated paper and corrugated
board accounted for the largest share of the corrugated packaging materials in
2007. The consumption of corrugated paper in China grew at a CAGR of 14.2% per
annum from 2003 to 2007 reaching a market size of $4.4 billion by the end of
2007. Pira International estimates the consumption of corrugated paper to grow
at a CAGR of 8.2% per annum from 2008 to 2013.
  The
demand for corrugated board is growing in response to the increased demand from
industries such as food, beverages, electronic devices and toys. China’s output
of corrugated board in 2007 accounted for 18.6 million tons of the global total
of 109 million tons, and this output is projected to grow at a CAGR of 6.2% per
annum from 2008 to 2013, according to Pira International.
  The
printing industry in China is currently transitioning from single color printing
to multicolor printing. A few years ago, most high quality multicolor printing
was handled by large and sophisticated printing companies in the coastal areas,
especially in the Pearl River Delta region. Presently, almost every major city
in China has printing companies that can meet a wide spectrum of printing
demands, from simple single color works to fairly high quality multicolor
printing. Multicolor printing is becoming a mainstream capability that almost
every Chinese printing company must have to sustain its competitiveness in the
marketplace.
  China’s
Printing Equipment Industry
  We
operate in the Chinese printing equipment industry, which we believe is highly
correlated with the overall Chinese printing industry.
  Over the
past several years, China’s printing equipment industry grew at a higher rate
than its overall printing industry. As noted above, the total annual output of
China’s printing industry grew from $29.5 billion in 2002 to $64.4 billion in
2007 representing a CAGR of 17% per annum. The total annual output of China’s
printing equipment industry, however, grew from $0.9 billion to $2.5 billion,
representing a CAGR of 23% per annum for the same periods.
  
 Source:
the Printing and Printing Equipment Industries Association of China
 Taking
into account of the effects of the current economic environment, Pira
International projects China’s printing equipment to grow by 34% total from 2009
to 2014, or a CAGR of 6.0% per annum.
  We
believe that demand for Chinese-made offset printing equipment is strong and
that the market share of domestically made offset printing equipment has been
increasing in recent years. For example, according to the Printing and Printing
Equipment Industries Association of China, although the amount of imported
printing equipment increased annually from $1.3 billion in 2002 to $1.7 billion
in 2004, the total amount of imported printing equipment has since declined each
year to reach $1.6 billion in 2007. We believe this decline in imported printing
equipment is a result of leading Chinese printing equipment manufacturers’
increased investments in research and development and improved engineering
standards, both of which improve Chinese printing equipment manufacturers’
ability to compete against international competitors for market share in
China.
  We
believe two major entry barriers limit the potential competition we face from
Chinese offset printing equipment producers. First, the offset printing
equipment industry in China is particularly capital intensive due to high
production costs, and second, we believe few manufacturers have the technical
knowledge required to compete in our industry. We believe our position as an
existing and leading offset printing equipment supplier in China gives us market
advantages over potential competitors seeking to enter this market.
  We derive
all of our revenue from sales to our distributors in China. In 2007, according
to the Printing and Printing Equipment Industries Association of China, there
were an estimated 90,000 licensed printing companies in China. This estimate did
not include the possible significant number of printing companies that operate
in China without licenses. Printing companies in China purchase prepress, press
and post-press printing equipment from foreign and Chinese equipment providers,
including companies like us through our distributors.
 - 3
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 Table of Contents
 Our
Strengths
 
 We
believe that the following competitive strengths enable us to compete
effectively in and capitalize on the growing offset printing equipment industry
in China:
 
 Quality
Products at Competitive Prices
 
 We are
able to offer high quality products at prices that are competitive with both
foreign and domestic companies. We attribute our cost advantage to our ability
to control material and labor costs in China, our ability to produce a
substantial majority of our key components in-house, our efficient production
processes and effective inventory management.
 
 Established
Market Position
 
 Based on
the revenue of our press products, the Printing and Printing Equipment
Industries Association of China ranked us as one of the top three Chinese offset
printing equipment providers in 2006. Our current market position is primarily
contributable to the manufacturing and sale of our multicolor
presses.
 
 Wide
Product Offerings
 
 We
believe we are one of the first in China to develop, commercially produce and
sell CTP Systems, a pre-press product. We manufacture fifteen products across
four product lines under the press product category (single color small format
presses, single color large format presses, multicolor small format presses and
multicolor large format presses). By the end of 2010, we plan to enter into the
post-press market by commercially producing and selling our cold-set corrugated
paper machines, and we plan to introduce our automatic booklet makers and
automatic paper cutters in 2011.
 
 Large
Sales, Distribution and Service Network
 
 Our
nationwide distribution network includes more than 85 distributors located in
over 65 cities and 28 provinces in China. This nationwide distribution network,
which we believe, based on our experience in the industry, is one of the largest
among Chinese offset printing equipment suppliers, is enhanced by our integrated
marketing, sales and service team that includes over 200 professionals. Together
with our distributors, we provide comprehensive pre-sales and post-sales
services to our end-user customers.
 
 Research
and Development Capabilities
 
 We have
over 200 experienced researchers, engineers and technicians working at either
our research and development and technical support center at Langfang Duoyuan
and our technical support center at Hunan Duoyuan. Our research and development
team not only develop new technologies and products, but also discover ways to
improve the functionality and performance of our existing products.
 
 Our
Strategies
 
 Our
strategy is to capitalize on our competitive strengths to expand our current
market share and to benefit from the anticipated growth in China’s offset
printing equipment industry. Our strategy consists of the following key
elements:
 
 Adjust
and expand production facilities to improve efficiency and margins
 
 We are
continually upgrading our facilities and production methods to improve
efficiency. For example, we plan to renovate our foundry plant and surface
treatment workshop to improve the aesthetic quality of our products. In keeping
with our plans to sell more high margin products, we plan to designate more
production lines to build technologically advanced products, such as our
multicolor presses. We also plan to build a new cold-set corrugated paper
machine factory at Langfang Duoyuan.
 
 Expand
High Margin Product Offerings
 
 Multicolor
presses have a higher gross margin than single color presses. As such, we have
made efforts over the past three years to increase the sale of multicolor
presses by increasing our marketing efforts and launching new and enhanced
multicolor press models. In addition to our plans to offer more multicolor press
products, we also plan to increase our revenue by introducing other higher
margin products, such as our cold-set corrugated paper machines. We believe that
by focusing our selling efforts on higher end and more technologically advanced
products, we can further improve our margins and strengthen our market position
in China.
 
 Improve
Product Functionality through Research and Development
 
 Our
research and development initiatives include improving the functionality and
efficiency of our existing products, as well as developing new products and
models. We will continue to devote the necessary resources to our research and
development team to maintain and improve the quality, functionality and
technological competitiveness of our products.
 
 Focused
Market Expansion
 
 Currently,
all of our revenue is generated from sales to distributors in China. We plan,
however, to expand into certain overseas markets, including Africa, the Middle
East and some Asian countries, on a selective basis. We believe our quality
products and competitive prices not only gives us market advantages in China,
but would also make our products attractive to customers outside of
China.
 
 Pursue
Selective Strategic Acquisitions
 
 We intend
to grow our business through strategic and selective acquisitions of offset
printing equipment related technologies, equipment and/or assets to further
strengthen our product offerings and market
position.




- 4
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 Table of Contents
  Our
Corporate Structure


We were
organized under the laws of the State of Nevada on August 10, 1998. On July 27,
2005, we merged with Asian Financial, Inc., a Wyoming corporation, for the
purpose of changing our domicile from Nevada to Wyoming. From our inception
until the equity transfer described below, we were a shell company without
operations, revenue or employees, other than officers and
directors.
  On
October 6, 2006, we closed an equity transfer with Duoyuan Investments Limited,
a British Virgin Islands company with operating subsidiaries in China. Pursuant
to the equity transfer, we issued 47,100,462 common shares to Duoyuan
Investments Limited in exchange for all of Duoyuan Investments Limited’s equity
interest in Duoyuan China, its wholly owned subsidiary. Duoyuan China
manufactured single color offset printing presses, among other products. As a
result of this equity transfer Duoyuan China became our wholly owned subsidiary,
and Duoyuan Investments Limited, a company wholly owned by Wenhua Guo, the
chairman of our board of directors, became our controlling shareholder. Upon the
completion of the equity transfer, we commenced our offset printing equipment
business. We conduct our business through our principal operating subsidiary,
Duoyuan China, and Duoyuan China’s manufacturing subsidiaries, namely Langfang
Duoyuan and Hunan Duoyuan.
  On
November 2, 2006, we closed the transactions contemplated by a securities
purchase agreement by and between us and certain investors. Pursuant to the
securities purchase agreement, we issued an aggregate of 6,132,622 common shares
to the private placement investors for an aggregate purchase price of $23.5
million. This private placement was made pursuant to the exemption from the
registration provisions of the Securities Act of 1933, as amended, provided by
Section 4(2) of the Securities Act, and Rule 506 of Regulation D promulgated
thereunder, for issuances not involving a public offering.
  Through
our principal operating subsidiary, Duoyuan China, and Duoyuan China’s
manufacturing subsidiaries, namely Langfang Duoyuan and Hunan Duoyuan, we
design, manufacture and sell offset printing equipment used in the offset
printing process.
  Our
Subsidiaries
  Our
Principal Operating Subsidiary
  Duoyuan
China, our principal operating subsidiary, was incorporated on June 21, 2001
under the laws of the PRC by Duoyuan Industries (Holding), Inc., or Duoyuan
Industries, a British Virgin Islands company, wholly owned by Wenhua Guo. In
2001, Duoyuan China purchased certain offset printing equipment manufacturing
related assets from Beijing Duoyuan Electric Co. Ltd., or Duoyuan Electric, a
PRC company, which since 1994 was in the business of manufacturing single color
small format presses, among other products. Duoyuan Electric sold certain raw
materials and semi-finished products to Duoyuan China. Duoyuan Electric also
transferred a trademark to Duoyuan China without charge. On October 29, 2002,
Duoyuan Investments Limited purchased all of Duoyuan Industries’ interests in
Duoyuan China. Upon the completion of the equity transfer with Duoyuan
Investments Limited on October 6, 2006, Duoyuan China became our wholly owned
subsidiary and we commenced our offset printing equipment business.
  Duoyuan
China’s principal business activities include marketing and sale of our offset
printing equipment, technical support to our distributors and overall strategic
planning and management of our business.
  Our
Manufacturing Subsidiaries
  Langfang
Duoyuan was incorporated on October 27, 2000 under the laws of the PRC by
Beijing Yinhang Yinlu Advertisement Co. Ltd., or Beijing Advertisement, and
Beijing Huiyuan Duoyuan Digital Printing Technology Research Institute, or
Huiyuan Institute, each an entity controlled by Wenhua Guo. At the time of
Langfang Duoyuan’s incorporation, Beijing Advertisement and Huiyuan Institute
held an equity interest in Langfang Duoyuan of 5% and 95%, respectively.
Pursuant to an equity transfer agreement dated as of March 25, 2002, Duoyuan
China acquired all of Beijing Advertisement’s 5% interest in Langfang Duoyuan
for RMB1.5 million. Pursuant to an equity transfer agreement dated as of October
16, 2005, Duoyuan China acquired an additional 90% equity interest in Langfang
Duoyuan from Huiyuan Institute for RMB36 million. Huiyuan Institute remains the
holder of a 5% equity interest in Langfang Duoyuan.
  Langfang
Duoyuan’s principal business activities include manufacturing our CTP system and
two of our press products, namely our single color small format presses and
multicolor small format presses.
  Hunan
Duoyuan was incorporated on March 10, 2004. In December 2003, Duoyuan China
participated in a public auction and entered into an agreement, as further
supplemented in May 2004, to purchase certain assets (including real property,
manufacturing facilities and intellectual property) from Hunan Printing
Machinery Co., Ltd., which was a bankrupt state owned PRC enterprise. Duoyuan
China paid RMB38 million for those assets. Hunan Printing Machinery Co., Ltd.
was then one of the major large format press manufacturers in China approved by
the Chinese government to produce multicolor printing equipment. Duoyuan China
acquired certain assets from Hunan Printing Machinery Co., Ltd. for its
multicolor printing equipment and large format printing equipment production
capacity. After the acquisition of the assets of Hunan Printing Machinery Co.,
Ltd. in December 2003, Duoyuan China and Langfang Duoyuan incorporated Hunan
Duoyuan on March 10, 2004, with each holding an 88% and 12% equity interest in
Hunan Duoyuan, respectively.
  Hunan
Duoyuan’s principal business activities include manufacturing two of our press
products, namely our single color large format presses and multicolor large
format presses.
  The
entities formed or controlled by Wenhua Guo that were involved in the foregoing
transactions do not operate in the same industry as Duoyuan China. These
entities do not compete with Duoyuan China.
  The
following chart summarizes our corporate structure, including our
subsidiaries:
  
 
 *
                Represents
      our minority shareholders, consisting of the pre-equity transfer investors
      and the investors from the private placement in November
    2006.
 
 Office
Location
  Our
principal executive offices are located at No. 3 Jinyuan Road, Daxing Industrial
Development Zone, Beijing 102600, People’s Republic of China. Our telephone
number at this address is +8610-6021-2222. Our agent for service of process and
our registered office in Wyoming is Pioneer Corporate Services located at 214 W.
Lincolnway, Suite 23, Cheyenne, Wyoming, 82001.
  Executive
Officers and Key Employees
  The
following table sets forth our executive officers and key employees as of
September 14, 2009 and their ages as of such date and their positions and
offices.
  
 Name
                  
                  Age
                  
                  PositionOfficersChristopher
      Patrick Holbert
                  
                  39
                  
                  Chief
      Executive OfficerWilliam
      D. Suh
                  
                  44
                  
                  Chief
      Financial OfficerXiqing
      Diao(1)
                  
                  39
                  
                  Chief
      Operating OfficerWenzhong
      Liu
                  
                  41
                  
                  Vice
      President of Sales and MarketingYubao
      Wei
                  
                  42
                  
                  Chief
      Technology OfficerWenhua
      Guo(2)
                  
                  47
                  
                  Former
      Chief Executive OfficerBaiyun
      Sun(3)
                  
                  55
                  
                  Former
      Interim Chief Financial OfficerGene
      Michael Bennett(4)
                  
                  61
                  
                  Former
      Chief Financial OfficerWilliam
      Milewski(5)
                  
                  46
                  
                  Former
      Chief Financial Officer
 _______________
  (1)
                        Mr.
      Diao served as our interim chief executive officer from July 9, 2009 to
      August 26, 2009.
 (2)
                    Mr.
      Guo, the chairman of our board of directors served as our chief executive
      officer from October 6, 2006 until he resigned on June 29,
      2009.
 (3)
                  Ms.
      Sun served as our interim chief financial officer and controller from
      December 20, 2007 to March 1, 2008, and May 21, 2008 to October 1, 2008.
      She currently serves as our
controller.
 
 (4)
                  Mr.
      Bennett served as our chief financial officer from July 18, 2007 to
      December 20, 2007.
 
 (5)
                  Mr.
      Milewski served as our chief financial officer from March 1, 2008 to May
      21, 2008.
 - 5
-
 Table of Contents
   Christopher Patrick Holbert,Chief Executive
Officer.  Mr. Holbert has served as our chief executive officer
since August 2009. He served as a member of our board of directors and as the
chairman of our audit committee and a member of our compensation and nominating
and corporate governance committees from July 2007 to August 2009. From
September 2008 until August 2009, he served as a member of the board of
directors of Duoyuan Global Water Inc. From August 2008 to August 2009, Mr.
Holbert served as vice president of Vision China Media Inc., which operates one
of the largest out-of-home advertising networks in China. From July 2006 to
October 2008, he served as the chief financial officer of China Techfaith
Wireless Communications Technology Limited, a cell phone handset producer. From
2005 to 2006, he served as the director of finance for CDC Corporation, a
company that develops software, online games and other internet applications.
From 2004 to 2005, he served as director of Sarbanes-Oxley Act of 2002
compliance at Chinadotcom Corporation, the predecessor of CDC Corporation. From
2003 to 2004, he served as vice president of finance of Newpalm China, a
subsidiary of Chinadotcom Corporation. From 2001 to 2003, he was the founding
partner of Expat-CFO Services Limited, a Shanghai-based financial consultancy
providing advice on doing business in China. Mr. Holbert has also served as an
auditor and consultant with Deloitte Touche Tohmatsu. He is a certified public
accountant and has 14 years of experience in the field of accounting and
financial management. Mr. Holbert received a bachelor’s degree in science with a
concentration in accounting from Bowie State University, United
States.
 
 William D. Suh, Chief Financial
Officer.  Mr. Suh has served as our chief financial officer
since October 1, 2008. Prior to joining us and since 1990, Mr. Suh was an
accountant with Ganze & Company, a CPA firm in Napa, California, where he
was elected to the partnership in 1997. Mr. Suh has extensive experience in
public accounting, including auditing, tax planning, and financial and
accounting consulting services, and has worked in various industries, including
manufacturing, distribution, wineries and vineyards. He has advised numerous
private companies in the areas of business planning, strategic planning,
budgeting, reporting, and financing. Mr. Suh is a CPA in the State of
California, and a member of both the American Institute of Certified Public
Accountants and the California Society of CPAs. Mr. Suh received a Bachelor of
Arts in Accounting from Pacific Union College in California.
  Xiqing Diao, Chief Operating Officer. Mr. Diao
has served as our director and chief operating officer since November 2005. Mr.
Diao also served as our interim chief executive officer from July 9, 2009 to
August 26, 2009. He served as vice general manager of Duoyuan Global Water Inc.
from August to November 2005, assistant general manager of Duoyuan Electric
(Tianjin) Auto Water Pump Co., Ltd., an automobile parts manufacturer, from
January to July 2005, and general manager of Operations of Duoyuan Electric
Group from January 2003 to December 2004. From May 2001 to December 2002, Mr.
Diao served as general manager of No. 1 Division of Duoyuan Water. He was also
certified as an ISO9001 :2000 Internal Auditor and an ISO14000 Internal Auditor
in 2004. Mr. Diao received a bachelor’s degree in mechanics from Tianjin Textile
Technology Institute, China.
  Wenzhong Liu, Vice President of Sales and
Marketing.  Mr. Liu has served as our vice president of sales
and marketing since November 2005. He served as assistant general manager of
sales at Duoyuan China from July to October 2005, interim general manager of
sales at Duoyuan China from November 2004 to June 2005, and sales representative
at Duoyuan China from January 2001 to October 2004. Mr. Liu received a
bachelor’s degree in science from Luoyang Engineering Institute,
China.
 
 Yubao Wei, Chief Technology
Officer.  Mr. Wei has served as our chief technology officer
since December 2007. He served as the general manager of production of Duoyuan
China from July 2004 to December 2007 and as general manager of technology of
Duoyuan China from July 2003 to June 2004. Mr. Wei received a master’s degree in
engineering from Tsinghua University, China.
  Wenhua Guo, Former Chief Executive
Officer.  Mr. Guo is the founder of Duoyuan China and has
served as the chairman of our board of directors and chief executive officer
since the closing of the equity transfer on October 6, 2006 until June 29, 2009,
the effective date of his resignation as our chief executive officer. Mr. Guo
remains as the chairman of our board of directors. Before Mr. Guo founded
Duoyuan China, he was a physics teacher at Beijing Chemical Institute from 1983
to 1989. Mr. Guo is also chairman of Duoyuan Electric Group, a privately owned
Chinese company that focuses on property management services, and the founder,
chairman and chief executive officer of Duoyuan Global Water Inc, a British
Virgin Islands company and a leading China-based domestic water treatment
equipment supplier. Mr. Guo received a bachelor’s degree in physics from Beijing
Normal University, China.
  Baiyun Sun, Former Interim Chief
Financial Officer.   Ms. Sun served as our interim chief
financial officer from December 20, 2007 to March 1, 2008, and then from May 21,
2008 to October 1, 2008. Prior to that, she served as our chief financial
officer from October 6, 2006 to July 18, 2007, our director and vice president
between June 2001 and April 2007 and chief accountant of Duoyuan Electric Group
from January 1994 to May 2001. Ms. Sun received a bachelor’s degree in
accounting from Beijing Finance and Commerce Institute, China. Ms. Sun currently
serves as our controller.
 
 Gene Michael Bennett, Former Chief Financial
Officer.  Mr. Bennett served as our chief financial officer
from July 18, 2007 to December 20, 2007. Mr. Bennett served as our director and
our audit committee chairman between April 2007 and July 2007. He resigned from
our board of directors on July 18, 2007. Mr. Bennett was a partner at Nexis
Investment Consulting Corporation (Beijing), which provides consulting services
to companies seeking to become public companies, between 2004 and 2007, where he
assisted Chinese companies to raise funding and assisted U.S. companies to find
appropriate mergers and acquisitions candidates and investment opportunities. He
was a partner at ProCFO from 2000 to 2004, where he provided temporary chief
financial officer services to companies with such needs. Mr. Bennett received a
bachelor’s degree in finance and accounting and a master of business
administration degree from Michigan State University, United
States.
 
 William Milewski, Former Chief Financial
Officer.  Mr. Milewski served as our chief financial officer
from March 1, 2008 to May 21, 2008. Prior to joining us, he served as chief
financial officer of Foster Partners Asia, an executive recruitment firm,
between 2006 and 2008. Prior to serving at Foster Partners Asia, he served as
co-founder and chief financial officer of Bbmao.com Co. Ltd., China’s first
metasearch engine provider. From 2003 to 2005, Mr. Milewski served as chief
financial officer of POINTek, Inc., an optical components manufacturer. Mr.
Milewski received a bachelor’s degree in economics and French from George
Washington University, United States, and a master of business administration
degree from the University of Hartford, United
States.


Our
Products





We
categorize our products according to the three stages of the offset printing
process: pre-press, press and post-press. The following table shows an overview
of the types of products we offer, or plan to offer, within these three
stages:




Pre-Press
                                
                                Press(2)
                                
                                Post-Press(3)Products
                                
                                •
                                CTP
      System
                                (1)
                                
                                •
                                Single
      Color Small FormatPress
                                
                                
                                •
                                Cold-set
      Corrugated PaperMachine
      (4)•
                                Single
      Color Large FormatPress
                                
                                
                                •
                                Automatic
      Booklet Maker (5)•
                                Multicolor
      Small FormatPress
                                
                                
                                •
                                Automatic
      Paper Cutter (5)•
                                Multicolor
      Large FormatPressFunctionality
                                
                                
                                Digital formatting andprocessing to transfer imageonto printing plates
                                
                                
                                
                                Transfer of images fromprinting plates to anothermedia, such as paper
                                
                                
                                
                                Cutting, folding, binding,collating and packagingRevenue
      forfiscal
      2009 (6)(in
      thousands)
                                
                                $
                                4,004
                                
                                
                                $
                                104,139
                                
                                
                                
                                N/A





(1)
              We also offer a complimentary
      plate developer upon request to those end-user customers who purchase our
      CTP system. Our plate developer is an optional complementary product to
      our CTP System.


(2)
            We also offer a complimentary
      automatic plate puncher upon request to those end-user customers who
      purchase our press products. Our automatic plate puncher is an optional
      complementary product to our press
  products.


(3)
            We do not manufacture or sell any
      post-press products.


(4)
            We plan to manufacture and sell
      this post-press product by the end of
  2010.


(5)
            We plan to manufacture and sell
      this post-press product by the end of
  2011.


(6)
            Revenue figure before
      adjustments.





Pre-press
Printing Equipment





Traditionally,
in the pre-press stage of the offset printing process, a plate developer or
other light-sensitive emulsion is used in combination with photomechanical
exposure and various processing procedures to transfer images onto printing
plates, which are then mounted onto an offset press. This method is being
replaced by more technologically advanced methods, including CTP technology,
which use digital formatting and processing to transfer images onto printing
plates.




- 6
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 Table of Contents




The
following describes our pre-press product, namely our CTP system, and its key
features and competitive advantages:





•
              CTP
      System.  CTP technology
      improves the quality of the printing plates and the efficiency of the
      offset printing process by eliminating the labor and chemical intensive
      multiple step processes associated with the traditional pre-press
      processing method. Fully automated CTP technology reduces the risk of
      human error and offers improved consistency and higher quality compared to
      the traditional pre-press method. Although CTP technology has been adopted
      by printing companies in Europe and the United States, most of our
      end-user customers in China did not begin using CTP technology until 2002.
      This is largely because CTP technology related products are significantly
      more costly than existing pre-press printing equipment. Although a
      majority of CTP technology related products in China are imported from
      overseas manufacturers, such as Japan and the United States, we also offer
      our own CTP technology related product, namely our CTP system. We believe
      our CTP system offers similar functionality, quality and efficiencies when
      compared to those manufactured by international producers, but at a more
      competitive price. For the technological features of our CTP system, see
      “—Technology—CTP System”
below.





Press
Printing Equipment





In the
press stage of the offset printing process, images on printing plates are
transferred onto another printing medium, such as paper. In this stage of the
offset printing process, sheets of paper or other printing media are fed into
the press. Offset lithographic process, based on the principle that oil and
water repel each other, is used for the image transfer.





On the
press, printing plates are dampened first by water rollers and then by ink
rollers. The ink rollers distribute the ink onto the specific image areas on the
printing plates. Water distributed by the water rollers keeps the ink off the
non-image areas of the printing plate. Each printing plate then transfers its
image onto a rubber blanket, which in turn transfers the image onto the printing
media. The printing plate itself does not touch the printing media, hence the
term offset printing. Our press products are sheet-fed, which means individual
sheets of paper or paperboard are fed into the presses. The graphic below
illustrates the basic press process:










The
following describes our primary press products and their key features and
competitive advantages:





•
              Single Color
      Small Format Press.  Single color small
      format presses have one set of press rollers dedicated to a single color.
      Generally, printing on a single color press requires that a sheet of paper
      be processed four times, requiring precise adjustments for overprint.
      Typically, small format presses have a maximum sheet in-take width of 520
      mm (about 20.5 inches). Our single color small format presses have a
      maximum sheet width of up to 560 mm (about 22.0 inches), and incorporate
      our advanced technologies, making them efficient and requiring minimal
      operating skills. Our single color small format presses require low
      initial investment and are typically suitable for end-user customers who
      are transitioning into offset printing from type-set printing or have
      single color printing needs, such as book
  printing.


•
              Single Color
      Large Format Press.  Like single color
      small format presses, single color large format presses also have one set
      of press rollers dedicated to a single color. Single color large format
      presses generally have maximum sheet in-take width larger than 520 mm
      (about 20.5 inches) and are able to handle thick and ultra-thick sheets of
      paper. Our single color large format presses have a maximum sheet width of
      740 mm (about 29.1 inches) and incorporate our advanced technologies,
      making them efficient and requiring minimal operating skills. Our single
      color large format presses require relatively low initial investment
      compared to our multicolor presses and are typically suitable for end-user
      customers with basic single color printing needs, such as
      pamphlets.


•
              Multicolor
      Small Format Press.  Multicolor small
      format presses generally have four sets of rollers dedicated to different
      colors—typically, black, magenta, cyan, and yellow—to generate all other
      colors. Multicolor printing equipment generally require more operational
      skills compared to single color printing equipment. Our multicolor small
      format presses incorporate our advanced technologies, making them highly
      automated and efficient and help reduce potential human errors. Our
      multicolor small format presses offer a relatively low-cost solution for
      end-user customers with high quality multicolor printing needs, such as
      corporate brochures, product catalogues, labels and small
      packages.


- 7
-
 Table of Contents


•
              Multicolor
      Large Format Press.  Like multicolor
      small format presses, multicolor large format presses also have four sets
      of rollers dedicated to different colors—typically, black, magenta, cyan,
      and yellow—to generate all other colors. Multicolor large format presses,
      combining multicolor capability with the ability to handle thick and
      ultra-thick sheets of paper, are the most robust type of products among
      our press products. Our multicolor large format presses incorporate our
      advanced technologies, making them highly automated and efficient, and
      help reduce potential human errors. Our multicolor large format presses
      require relatively large investments compared to our other press products,
      and are suitable for end-user customers with high-quality multicolor
      printing needs, such as posters, large packages and banners. Our
      multicolor large format presses are also able to print at faster speeds
      compared to our other press products, making them ideal for time sensitive
      printing needs.





Post-press
Printing Equipment





In the
post-press stage of the offset printing process, printed materials undergo
various processes, including cutting, folding, binding and collating to produce
the final printed product. The post-press stage also includes packaging,
packaging materials and processes related thereto. We plan to commercially
manufacture and sell the following products under this product
category:





•
              Cold-set
      Corrugated Paper Machine.  Corrugated paper
      equipment makes corrugated cardboard paper. Currently, many corrugated
      paper equipment use hot-set glue technology, which we believe can result
      in lower quality and/or damaged cardboard, and also generally requires
      higher equipment and operating costs. We plan to introduce a cold-set
      corrugated paper machine that utilizes cold-set gluing technology, which
      we believe can generate better quality products, is more efficient and
      provide greater energy savings. We intend to build a factory to
      manufacture cold-set corrugated paper machines at our Langfang Duoyuan
      facility, and have conducted related land clearing and site preparation
      services. We are also designing workshops and production lines and
      procuring equipment for this cold-set corrugated paper machine factory. We
      plan to commercially manufacture and sell cold-set corrugated paper
      machines by the end of
2010.


•
              Automatic
      Booklet Maker.  Automatic booklet
      makers assemble individual sheets of paper into booklets. Stacks of paper
      are either manually fed or automatically transported via collators into
      the automatic booklet makers, where they are then jogged, stapled, and/or
      folded into separate document sets. Trimmers cut away any undesired
      margins for a clean and crisp presentation. We have produced prototypes of
      our automatic booklet makers, which we believe are more efficient compared
      to similar products currently in the market. We plan to begin commercial
      production and sale of this product in
  2011.


•
              Automatic
      Paper Cutter.  Automatic paper
      cutters are generally designed for high volume industrial use as they cut
      hundreds of sheets of paper at a time on a continuous basis. We have
      produced prototypes of our automatic paper cutters, which we believe are
      more efficient and precise compared to similar products currently in the
      market. We plan to begin commercial production and sale of this product in
      2011.





Financial
Information about Products & Geographic Areas





The
following table provides a breakdown of our revenue, by product category, for
the periods indicated:
 
 Year
      Ended June 302007
                              
                              
                              2008
                              
                              
                              2009$
                              
                              
                              %
      of
                                Revenue
                              
                              
                              $
                              
                              
                              %
      of
                                Revenue
                              
                              
                              $
                              
                              
                              %
      of
                                Revenue(dollars
      in thousands)Pre-pressCTP
      system
                              
                              $
                              3,769
                              
                              
                              
                              5.6
                              %
                              
                              $
                              3,184
                              
                              
                              
                              3.6
                              %
                              
                              $
                              4,004
                              
                              
                              
                              3.8
                              %PressSingle
      color small-format presses
                              
                              
                              6,021
                              
                              
                              
                              8.9
                              
                              
                              
                              4,328
                              
                              
                              
                              4.8
                              
                              
                              
                              4,436
                              
                              
                              
                              4.2Single
      color large-format presses
                              
                              
                              9,730
                              
                              
                              
                              14.3
                              
                              
                              
                              10,700
                              
                              
                              
                              11.9
                              
                              
                              
                              10,903
                              
                              
                              
                              10.2Multicolor
      small-format presses
                              
                              
                              17,350
                              
                              
                              
                              25.6
                              
                              
                              
                              26,366
                              
                              
                              
                              29.4
                              
                              
                              
                              34,207
                              
                              
                              
                              32.1Multicolor
      large-format presses
                              
                              
                              31,671
                              
                              
                              
                              46.7
                              
                              
                              
                              46,597
                              
                              
                              
                              52.0
                              
                              
                              
                              54,593
                              
                              
                              
                              51.2Adjustments
                              
                              
                              (729
                              )
                              
                              
                              (1.1
                              )
                              
                              
                              (1,547
                              )
                              
                              
                              (1.7
                              )
                              
                              
                              (1,552
                              )
                              
                              
                              (1.5
                              )Revenue,
      net
                              
                              $
                              67,812
                              
                              
                              
                              100.0
                              %
                              
                              $
                              89,628
                              
                              
                              
                              100.0
                              %
                              
                              $
                              106,591
                              
                              
                              
                              100.0
                              %


Revenue
from our single color presses have been consistently declining as a percentage
of our revenue while revenue from our multicolor presses, in particular our
multicolor large format presses, have been generally increasing as a percentage
of our revenue. This is due to the growing market demand for multicolor presses.
End-user customers in China are increasingly demanding sophisticated offset
printing equipment, such as our multicolor presses, to produce high quality
printing materials more efficiently. However, single color presses are still in
demand for those end-user customers who are price sensitive, new to the printing
business, or looking to replace or upgrade their existing single color printing
equipment.


- 8
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 Table of Contents





We
generate all of our revenue from sales to distributors in China, with Middle
China being the single largest market, representing 22.0% of our revenue for the
year ended June 30, 2009.





Year
      Ended June 30,2007
                    
                    
                    2008
                    
                    
                    2009Regional
      Markets (1)North
      China
                    
                    
                    13.0
                    %
                    
                    
                    8.1
                    %
                    
                    
                    7.7
                    %South
      China
                    
                    
                    18.6
                    
                    
                    
                    26.9
                    
                    
                    
                    21.8Middle
      China
                    
                    
                    22.0
                    
                    
                    
                    19.2
                    
                    
                    
                    22.0East
      China
                    
                    
                    14.2
                    
                    
                    
                    15.0
                    
                    
                    
                    17.1Northeast
      China
                    
                    
                    7.4
                    
                    
                    
                    8.0
                    
                    
                    
                    8.4Northwest
      China
                    
                    
                    14.2
                    
                    
                    
                    8.6
                    
                    
                    
                    11.8Southwest
      China
                    
                    
                    10.6
                    
                    
                    
                    14.2
                    
                    
                    
                    11.2Total
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %





(1)
              For a map of the regional markets
      where our distributors are located, see “—Distribution and
      Marketing—Distribution
Network.”


(2)
              Our products are sold to
      distributors in China. According to our distributors, they have sold our
      products to certain end-user customers in Saudi Arabia, Ghana, Tunisia,
      South Africa, India, Pakistan, Vietnam and Brazil in the years ended June
      30, 2007, 2008 and 2009. Our distributors reported that the percentage of
      revenue generated by sales to end-user customers outside of China was less
      than 2% for these
periods.





Manufacturing
and Assembly





Our
manufacturing and assembly operations involve the (1) coordination of raw
materials and components procured from third party Chinese suppliers, (2)
internal production processes and (3) external distribution processes. We
manufacture, assemble and test our products at our two manufacturing facilities
located at Langfang and Hunan, China. Our Langfang Duoyuan facility islocated at the Langfang
Economic-Technological Development Zone, Langfang, Hebei Province, China. Our
Hunan Duoyuan facility is located at No. 362 Baoqing Xi Road, Shaoyang, Hunan
Province, China. Langfang Duoyuan primarily manufactures our CTP system, single
color small format presses and multicolor small format presses. Hunan Duoyuan
primarily manufactures our single color large format presses and multicolor
large format presses. Both of our facilities at Langfang Duoyuan and Hunan
Duoyuan have advanced and high-precision processing machines, tools and
measuring devices.





We
produce both standardized and customized products, emphasizing precision and
quality in our production and assembly. Single color small format presses and
multicolor small format presses are relatively standard in design, so we hold an
optimum inventory of these presses. We also maintain a small inventory of large
format presses to better meet the needs of our distributors and end-user
customers. Most of our single color large format presses and multicolor large
format presses, however, are built upon order, with subsystems or features that
can be added later if desired. Our flexible production methods, which utilize
standard models and product designs, enable us to meet changing market demands
while controlling production costs. We have implemented a rigid quality control
system for our products, and have complied with the ISO 9001 Quality Assurance
System Standards since September 1996, and with the ISO 14001 Environmental
Management System Standards since March 1999.





We
produce a substantial majority of our key components in-house at Hunan Duoyuan.
In-house production of our key components better ensures the quality of our
products, protects our intellectual property rights, reduces production costs
and limits our exposure to supplier-related risks. Because we produce a
substantial majority of our key components in-house, we believe we currently
have a relatively low cost base compared to other printing equipment
manufacturers, especially when compared to international printing equipment
manufacturers. We purchase all other raw materials and components from Chinese
suppliers, some of whom produce particular components based on our specific
demands and designs.





Our
Langfang Duoyuan facility has workshops covering several production processes,
including raw material inspection, mechanical processing of components, and
assembly of components into finished products. Our Langfang Duoyuan facility is
ISO 9001 and ISO 14001 certified.





Our Hunan
Duoyuan facility has an integrated manufacturing process featuring 13 workshops
covering several production processes, including model casting, heat treatment,
raw finishing, refined finishing and mechanical processing of components and
assembly of components into finished products. Since steel is one of our key raw
materials, our Hunan Duoyuan facility has its own foundry plant on site to
process the steel and certain components necessary to produce our press
products. Our Hunan Duoyuan facility is ISO 9001 certified.





We intend
to build a factory to manufacture cold-set corrugated paper machines at our
Langfang Duoyuan facility and have conducted related land clearing and site
preparation services. We are also designing workshops and production lines and
procuring equipment for this cold-set corrugated paper machine factory. We plan
to commercially manufacture and sell cold-set corrugated paper machines by the
end of 2010.


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Distribution
and Marketing





Distribution
Network





We sell
our products through distributors. Our nationwide distribution network in China
consists of over 85 distributors located in over 65 cities and 28 provinces in
China. Our nationwide distribution network, which we believe, based on our
experience in the industry, to be one of the largest among Chinese offset
printing equipment suppliers, enable us to be more responsive to local market
demands than many of our competitors. We also have 16 local representative
offices in 16 Chinese provinces. Our local representatives at these offices
contact potential key local end-user customers and then refer them to our
distributors when the end-user customers are ready to purchase our
products.





A
distributor may distribute various models of our products within one or both of
our product categories. Our distributors may distribute products of our
competitors, but may not distribute similar or competing products.





We
generally have a diverse group of end-user customers throughout China for each
of our current pre-press and press products, and our sales are not concentrated
to or depended on one or a few major distributors. We have made a conscious
effort to prevent a single distributor from covering too large a distribution
territory to ensure that no particular distributor monopolizes the sales of our
products in any one region. We believe our end-user customer and distributor
diversity reduces our exposure to potential market risks. For the year ended
June 30, 2009, no single distributor accounted for more than 3% of our sales
revenue, and our top five distributors accounted for approximately 13% of our
revenue for the same period.





We select
distributors based on their prior sales performance. We also make selections
based on factors such as sales experience, knowledge of offset printing
equipment, contacts in the offset printing equipment industry, reputation and
market coverage. We regularly evaluate the performance of our distributors and
terminate distributors who fail to meet their sales targets at the end of their
agreement term. We believe this helps us maximize our penetration of target
markets and our sales opportunities. Members of our service staff call our
distributors frequently and members of our senior management visit our
distributors every other month to assist with business strategies and strengthen
our relationship with our distributors.





We
believe we have a relatively established and stable distribution network.
Approximately 89% of our distributors have been working with us for over two
years, and approximately 75% of them have been working with us for over five
years. Our distribution network provides us with established access to end-user
customers throughout China, enables us to be responsive to local market demand,
allows us to effectively diversify our end-user customer base and facilitates
our efforts to improve our market penetration.







As
indicated in the map above, our distributors are widely dispersed throughout
each major region of China. As of June 30, 2009, we had 12 distributors in North
China, 18 distributors in South China, 16 distributors in Middle China, 13
distributors in East China, 5 distributors in Northeast China, 12 distributors
in Northwest China and 11 distributors in Southwest China. We currently do not
have distributors outside of China, but we plan to establish an international
distribution network in parts of Africa, the Middle East and Asia. According to
our distributors, sales to end-user customers outside of China accounted for
less than 2% of our revenue for fiscal 2007, 2008 and 2009. These sales were
accomplished through our Chinese distributors, with the support of our sales and
marketing team.


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Our
distributors are engaged and compensated on a competitive basis based on their
sales performance. We enter into annual distribution agreements with
distributors specifying the terms of sales targets for any given year. For
distributors who meet or exceed their sales targets, we provide incentives in
the form of sales rebates. For distributors who distribute our multicolor
presses, we also extend preferred credit terms. Based on a distributor’s
performance, we may extend credit of up to three times the monthly average sales
we realized from that distributor during the previous year. We do not
extendcredit to
distributors that have distributed our products for less than six months.
Although distributors may have a variety of payment arrangements with the
end-user customers, we do not factor these arrangements into our consideration
when deciding their preferred credit terms or installment payment schedules. We
assess distributors’ credit worthiness on an individual basis depending on (1)
their sales performances, (2) their payment and credit histories, (3) the
duration and extent of their dealings with us, (4) their market position and
reputation in the offset printing equipment sector and (5) their sales and
marketing abilities. We also lend products to high-performing distributors for
display and demonstration purposes, for up to three months.





Marketing





We
support our distributors’ sales efforts through coordinated marketing efforts.
We advertise our products in industry trade journals and magazines. We provide
several types of product brochures and materials to our distributors as well as
potential and existing end-user customers in an effort to familiarize them with
our products’ features and capabilities. In addition, we attend and participate
in industry trade shows and exhibitions, which we believe is the most important
venue to promote our products and corporate image and to showcase our new
product offerings. We also regularly host seminars and training programs on the
latest developments in offset printing equipment technologies for potential and
existing distributors, as well as potential and existing end-user customers.
During these seminars and training programs, we demonstrate our latest products
to the attendees to promote purchases from them.





Suppliers
and Raw Materials





The key
raw materials and components used to manufacture our products are steel, iron
and electronic components. We produce a substantial majority of our key
components in-house at our Hunan Duoyuan facility. We purchase all other raw
materials and components from Chinese suppliers through non-exclusive purchase
orders and supply contracts. The purchase order or supply contract specifies the
price for the raw material or component and design-related specifications, if
any. Although we allow for adjustments in the price for certain raw materials
such as steel and iron under extraordinary circumstances, the prices for our raw
materials are generally fixed for the effective term of the supply contracts.
Our supply contracts are generally renewable on an annual basis. We maintain
multiple supply sources for each of our key raw materials and other standard
off-the shelf parts so as to minimize any potential disruption of our operations
and maintain supply stability. We purchase certain specialized components, such
as springs, from a single supplier. Some of our suppliers produce components for
us based on our specified designs, and we do not believe we would have
difficulty replacing these suppliers should any of them become
unavailable.




For
fiscal 2007, 2008 and 2009, purchases from our largest supplier accounted for
9.5%, 8.8% and 10.7%, respectively, of our total purchases of raw materials and
components. For the same periods, our ten largest suppliers combined accounted
for 54.6%, 55.7% and 57.4%, respectively, of our total purchases of raw
materials and components. See “Item 1A. Risk Factors—Risks Related to Our
Business—If we cannot obtain sufficient raw materials and components that meet
our production demand and standards at a reasonable cost, or at all, our
business may be materially and adversely affected.”





Technology





We
believe our technical innovation and precision engineering enable us to offer a
broad range of high-quality and durable offset printing equipment. We utilize
and incorporate advanced technologies to our products, which enhance automation
for processes such as sheet-feeding, image transfer, ink dispensing and overall
centralized control. These technological advancements increase print quality,
reduce operator workload and make our products more competitive. The following
chart briefly describes the principal technologies we use and their
functionalities:





Technology
              
              FunctionalitySheet-feeding
      system
              
              Automatically
      measures and adjusts sheet placement and feedingSheet-guiding
      technology
              
              Reduces
      paper jams and ensures sheet transferCentralized
      monitoring and automatic regulation
              
              Automatically
      monitors and regulates timing of sheet feedingCentralized
      subsystems
              
              Regulate
      and control sub-systems, such as sheet-feeding, front and side layout, and
      reduces preparation timeCam-controlled
      hem front design
              
              Increases
      printing speed and improves accuracy of sheet transferMultiple
      front lay guides
              
              Increase
      printing efficiencyFront
      lay and transfer gripping sheet control with localization
      technology
              
              Improves
      operating stability and print speedPhotoelectric
      detecting and auto lock-up
              
              Automatically
      detect printing errorsDouble-diameter
      impression cylinders
              
              Produce
      higher quality print work while handling thicker sheetsAnti-triangle
      7 o’clock cylinder alignment
              
              Assures
      consistent ink application and prevents dot deformationData
      memory
              
              Stores
      data on memory chip for repetitive print jobsSemi-automatic
      plate-changing
              
              Reduces
      preparation time and increases efficiency during manual transfer of
      printing platesPneumatic
      engagement and disengagement unit
              
              Improves
      print adjustment accuracyContinuous
      alcohol
              
              Improves
      color application quality and automatically adjusts press
      speedCPC
      technology
              
              Controls
      ink dispensation quantity and color hue
  adjustment


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CTP
System





We have
also developed advanced technologies for our CTP system, which allow our
end-user customers to efficiently customize printing plates according to their
needs. These technologies include (1) open data interface technology allowing
for customized workflow control systems, (2) multiple printing plate
compatibility technology and (3) data storage technology. The following table
provides a brief description of these technologies and their functionality in
our CTP system:





CTP
      Technology
              
              FunctionalityVariable
      laser modulation
              
              Increases
      printing plate transfer speed and efficiencyIntelligent
      data center
              
              Enables
      files transfer to CTP system through a networkOpen
      data interface
              
              Customizes
      workflow control and monitoringUser-friendly
      interface
              
              Ensures
      simple and safe operationPlate
      compatibility
              
              Enables
      use of different types of printing
plates





Recognition
for our Products





We have
received over 20 technology awards, recognitions of achievement or endorsements
from the Chinese government, various industry associations and consumer interest
associations for our technological achievement as well as quality and
reliability of our products. In addition, our offset printing equipment has been
endorsed by the China Consumer Protection Fund as reliable products. We did not
and do not have any affiliation with these associations. These associations did
not receive any compensation from us for these awards, recognitions of
achievement or endorsements.





Intellectual
Property





Our
copyrights, trademarks, trade secrets and other intellectual property rights are
critical to our business. We rely on trademark and copyright laws, trade secret
protection, non-competition and confidentiality and/or licensing agreements with
our executive officers, distributors, research and development personnel and
others to protect our intellectual property rights. Other than as described
herein, we do not possess any licenses to use third party’s intellectual
property rights nor do we license to third parties any intellectual property
rights we own.




We have
the following eight patents registered with the China Patent Bureau: (1) a
vacuum chamber paper sheet lifting and advancing device, expiring on May 22,
2013, (2) a single-fiber field pattern used in multicolor press imaging system,
expiring on May 22, 2013, (3) a print appearance design, expiring on January 31,
2015, (4) an automatic printing oil cleaning device for presses, expiring on
September 25, 2010, (5) an automatic pressure detection device for presses,
expiring on October 18, 2017, (6) a paper discoloration prevention device for
presses, expiring on October 18, 2017, (7) an automatic water roll cleaning
device for presses, expiring on October 18, 2017, and (8) an automatic plate
change mechanism for presses, expiring on October 18, 2017. In addition, we have
three applications pending for Chinese patent registration. We currently have a
number of consultants that work for us on various technological issues. Each of
these consultants are contractually obligated to assign to us all intellectual
property rights produced by such consultants during the consulting
period.





The
protection afforded to our intellectual property rights may be inadequate. It
may be possible for third parties to obtain and use, without our consent,
intellectual property that we own or are licensed to use. Unauthorized use of
our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our business.
See “Item 1A. Risk Factors—Risks Related to Our Business—Failure to protect our
proprietary technologies or maintain the right to certain technologies may
materially and adversely affect our ability to compete.”





We may
also be subject to litigation involving claims of patent infringement or
violation of other intellectual property rights of third parties. In 1999, we
implemented and continue to follow a procedure under which our product
development teams are required to conduct a patent search of Chinese patents at
the beginning of the product development process for each product. Typically,
our research and development team conducts this search with guidance and
oversight from our in-house patent team. A product development project is
approved only if the result of the patent search indicates that development of
the proposed product will not infringe on any third party intellectual property
rights. We believe that our risk of infringing third party intellectual property
rights can be effectively reduced by our adherence to these procedures. To date,
we have neither been sued on the basis of alleged infringement of third party
intellectual property rights nor have we received any notification from third
parties alleging infringement of their intellectual property rights. However,
due to the complex nature of offset printing technology patents and the
uncertainty of construing the scope of these patents, as well as the limitations
inherent in our patent searches, the risk of infringing on third party
intellectual property rights cannot be fully eliminated. See “Item 1A. Risk
Factors—Risks Related to Doing Business in China—We may be exposed to
infringement or misappropriation claims by third parties, which, if determined
adversely against us, could disrupt our business and subject us to significant
liability to third parties.”


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Research
& Development





Research
& Development Team





We
believe quality product design is an important factor in maintaining our
competitiveness in the offset printing equipment market. As of June 30, 2009,
our research and development team included 141 researchers, engineers and
technicians working at our research and development and technical support center
at Langfang Duoyuan and 67 technicians working at our Hunan Duoyuan technical
support center. The research and development team at Langfang Duoyuan focuses on
designing and building prototypes for new products, as well as improving the
functionality of existing products. The technical support team at Langfang
Duoyuan focuses on testing prototypes and improving product efficiency, with
particular focus on our pre-press and small format press products. The technical
support team at Hunan Duoyuan focuses on testing prototypes and improving
production efficiency, with particular focus on our large format press products.
Since Hunan Duoyuan is also our in-house production base for certain key
components used in our products, the technicians at Hunan Duoyuan also engage in
development and improvement of steel foundry casting techniques and mechanical
processing techniques. Our research and development efforts have led to eight
patents in China, covering a wide range of offset printing
equipment.





The
quality of our product design is based on a strong research and development team
staffed with experienced researchers, engineers and technicians. The expertise
of our research and development team covers a broad range of disciplines,
including printing, image processing, mechanical engineering, automation and
computer sciences. We believe we have a strong and balanced research and
development team and are not dependent on a small number of key researchers.
Almost all of the members of our research and development team have obtained at
least a bachelor’s degree and the majority of the members of our research and
development team have been with us for over five years.




In
addition to improving our existing product offerings, our research and
development efforts also focus on the development of new products, as well as
the development of new production methodologies to improve our manufacturing
processes. We follow advanced project selection procedures prior to the
development of new products, including the use of detailed market and
technological analyses.





Our
research and development team utilizes advanced design and test tools such as
three-dimensional design software and digital simulation platforms, to test our
product designs. We can design specific offset printing equipment components
using three dimensional design software and export the designs directly onto the
simulation platform before testing them in real world settings. All new products
are subject to rigorous testing prior to commencement of commercial production,
and prototypes are often delivered to end-user customers for their trial use. We
begin manufacturing new products only after the prototypes from trial production
pass our internal quality inspection and achieve favorable end-user customer
satisfaction. This integrated approach allows us to identify potential
difficulties in commercializing a product, and make appropriate adjustments to
develop cost efficient manufacturing processes prior to mass
production.





We
recognize the importance of customer satisfaction with our newly developed
products and continue to seek feedback from our end-user customers even after
the formal launch of a product. Feedback from our major end-user customers,
collected by our sales and service professionals, are categorized and
prioritized, then forwarded to our research and development team to evaluate for
research potential. We believe this process keeps us in touch with our end-user
customers’ needs and improves our design efficiency, consistency and
accuracy.





End-User
Customers





Our
end-user customers are diverse, operating in different industries, including
publishing, commercial printing and packaging. Sales to end-user customers in
China accounted for more than 98% of our revenue for fiscal 2007, 2008 and 2009.
According to our distributors, sales to end-user customers outside of China
accounted for less than 2% of our revenue for the same periods. These sales were
accomplished through our Chinese distributors, with the support of our sales and
marketing team.





We offer
a range of products to our end-user customers, who have varying printing needs
and purchasing budgets. Our ability to offer a wide range of solutions, in terms
of pricing and technological sophistication, is one of our competitive
advantages. The following table describes our solution package
offerings:





Solutions
              
              End-User
      Customer Printing Needs
              
              Featured
      ProductsEconomy (1)
              
              Transitional
      printing needs to upgrade to offset printing from type-set
      printing
              
              Plate
      developer and single color small format pressesStandard
      (2)
              
              General
      commercial printing needs
              
              CTP
      system and single color small format pressesPremium
      (2)
              
              High-quality
      printing needs involving thick paper
              
              CTP
      system, single color small format presses and multicolor small format
      pressesNote
      Printing (3)
              
              Commercial
      note printing needs involving extra-thin paper
              
              CTP
      system and single color small format pressesMulticolor
      (2)
              
              High-quality
      multicolor printing needs
              
              CTP
      system and multicolor pressesAdvanced
      (2)
              
              High
      quality and time-sensitive multicolor printing needs
              
              CTP
      system and multicolor pressesPackaging
      (1)
              
              Package
      printing needs
              
              Single
      color presses and multicolor
presses




(1)
              We plan to include our cold-set
      corrugated paper machine in this solution package in 2010 and our
      automatic paper cutter in this solution package when we introduce this
      product in 2011.


(2)
              We also offer a complimentary
      plate developer to our CTP system in this solution package. We plan to
      include our automatic booklet maker and automatic paper cutter in this
      solution package when we introduce these two products in
      2011.


(3)
              We also offer a complimentary
      plate developer to our CTP system in this solution package. We plan to
      include our automatic paper cutter in this solution package when we
      introduce this product in
2011.


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End-User
Customer Service and Support





Together
with our distributors, we offer sales and post-sales services to our end-user
customers. Our distributors handle common post-sales issues for our end-user
customers, and we assist our end-user customers with more sophisticated and
complex issues. Our service team includes personnel from our sales, service and
research and development departments to ensure timely installation and operation
of our products at the end-user customers’ sites.





Our local
representatives consult with our end-user customers and distributors to
customize a best-fit printing solution based on the end-user customers’
individual printing needs, as well as such end-user customers’ budget
considerations. After product delivery, our distributors are responsible for
installation and configuration. After our products are installed and operating
at the end-user customer’s site, our service team provides training and
technical support to our distributors to ensure satisfactory test runs of our
products. For those who purchase our single color large format presses and
multicolor large format presses, we may keep service staff at our distributor
sites for up to two weeks to assist with meeting end-user customers’ needs and
to provide in-depth training to our distributors. We provide this service team
staffing upon distributor’s request.





To
generate good relationships with our end-user customers, we provide certain
services to them during the one year warranty period. During the warranty
period, we provide training, technical support, warranty and repair services for
complex technical issues. Our local representative offices make good efforts to
distribute replacement components to distributors and/or end-user customers
within 24 hours of such request. We also provide regular overhaul and upgrade
services during the warranty period. Our service team also solicits end-user
customer feedback and forwards the feedback to our research and development team
to evaluate for product research potential. We believe this integral part of our
post-sales service helps us determine market needs and changing end-user
customer demands.





As of
June 30, 2009, we had 211 marketing, sales and service professionals providing
customer service and support in over 65 cities and 28 provinces in China. Of
these employees, 24 were maintenance technicians.





Competition





We
operate in a competitive industry characterized by demanding technological
requirements and evolving industry standards. We compete primarily on the basis
of our brand recognition and industry reputation, comprehensive product
offerings, quality and performance of our products, established distribution
network, research and development capacities and competitive cost advantage. As
a result of generally lower operating, labor and raw material costs in China, we
are able to charge lower prices compared to our international competitors while
maintaining comparable product quality. Our efforts to produce a substantial
majority of our key components in-house allow us to lower our raw materials and
component costs, reduce our dependency on key suppliers and improve our workflow
and quality control.





Small
Format Press Producers





We
believe there are three tiers of products in China’s single color small format
and multicolor small format press sector, namely top tier, middle tier and
bottom tier. Top tier products generally feature (1) advanced structural or
mechanical designs, (2) advanced automation, (3) higher efficiency and (4) high
print quality. We believe top tier small format press manufacturers focus on
developing strong internal research and development capacities. We believe that
as the market demand for advanced offset printing equipment increases, the
market share occupied by top tier Chinese manufacturers will also increase. In
addition to us, other top tier Chinese manufacturers in the small format press
sector include Yingkou Saxin Printing Machine Co., Ltd, Liaoning Dazu Guanhua
Printing Equipment Co. Ltd., Weifang Huaguang Precision Printing Machinery Co.,
Ltd., Shandong Weihai Hamada (JV) Printing Machinery Co., Ltd. and Shandong
Weihai Printing Machinery Co., Ltd.





Among our
international competitors in the small format press sector, we believe
Heidelberger Druckmaschinen AG is one of the few German producers, with Japanese
producers supplying most of the single color small format presses and multicolor
small format presses in the international market. The major Japanese small
format press producers include Hamada Printing Press Co., Ltd. and Ryobi,
Ltd.





Large
Format Press Producers





There are
a few Chinese companies producing single color large format presses and many of
these companies are not capable of producing multicolor large format presses.
Major Chinese producers in the large format press sector include Beiren Printing
Machinery Holdings Limited, Shanghai Electric Group Printing & Packaging
Machinery Co., Ltd. and Jiangxi Zhongjing Group Co., Ltd.


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Our
competitors in the large format press sector are mainly international companies
that include German and Japanese producers. The major international producers
include Heidelberger Druckmaschinen AG, Man Roland Druckmaschinen AG, Koenig
& Bauer Group (KBA), Mitsubishi Heavy Industries, Ltd. and Komori
Corporation. Other important international manufacturers include Shinohara
Machinery Co. Ltd., Sakurai Graphic Systems Corp and Ryobi Ltd., as well as
Adast a.s., the largest Eastern European manufacturer.




These
international producers possess stronger research and development capabilities
and enjoy established recognition in the global market. Their products are more
user friendly to serve the sophisticated needs of high-end customers. We
believe, however, that their products are typically priced higher than our
products.





Environmental
Regulations





Our
manufacturing processes may generate noise, water waste, gaseous waste and other
industrial waste. We are subject to a variety of Chinese national and local
environmental laws and regulations related to our operations, including
regulations governing the storage, discharge and disposal of hazardous
substances in the ordinary course of our manufacturing processes. The major
environmentalregulations applicable to
us include the Environmental Protection Law, the Prevention and Control of Water
Pollution Law and related Implementation Rules, the Prevention and Control of
Air Pollution Law and related Implementation Rules, the Prevention and Control
of Solid Waste Pollution Law and the Prevention and Control of Noise Pollution
Law.





As of the
date of this Annual Report, we are not a party to any legal proceedings
involving PRC environmental laws and regulations and we have not received any
environment violation notice from the relevant PRC government
authorities.





Employees





As of
June 30, 2009, we had 1,339 employees, with 264 employees at Duoyuan China, 368
employees at Langfang Duoyuan and 707 employees at Hunan Duoyuan. The table
below sets forth the aggregate number of employees in our three Chinese
subsidiaries categorized by function and the percentage of each category of our
total employees as of June 30, 2009:





Functions
                      
                      Employees
                      
                      
                      PercentageManagement
                      
                      
                      144
                      
                      
                      
                      10.8
                      %Sales
      and Marketing
                      
                      
                      211
                      
                      
                      
                      15.8Production
                      
                      
                      776
                      
                      
                      
                      58.0Research
      and Development
                      
                      
                      208
                      
                      
                      
                      15.4Total
      number of employees
                      
                      
                      1,339
                      
                      
                      
                      100.0
                      %





We
believe we have good relationships with our employees, and we have not
experienced any significant labor disputes. The labor union of Duoyuan China
maintains a cooperative relationship with us. We are not a party to any
collective bargaining agreement and our employees are not represented by any
collective bargaining agreement. All our employees are based in China and are
full-time. Most of our employees have executed employment agreements governed by
PRC law. These employment agreements are for one-year terms and may be renewed
upon notice from the employee and with our consent. We adopted a new form of
employment contract pursuant to the PRC Labor Contract Law, which became
effective on January 1, 2008, after the current employment contracts expired.
After ten years of employment, an employee may enter into an employment
agreement with us for an indefinite period of time. We may terminate employees
for cause, without notice or severance. If we terminate employment due to
economic downturn or performance related reasons, we are obligated to give 30
days advance notice or pay one month’s salary as severance in lieu of notice. In
addition, we may pay additional severance in the amount of one month’s salary
for each year that an employee has served with us. If the monthly wage of an
employee is three times greater than the average monthly wage in the previous
year for employees as announced by the people’s government at the municipal
level directly under the central government or at the city-with-district level
where the Employer is located, the rate for the financial compensations paid to
him shall be three times the average monthly wage of employees and shall be for
not more than 12 years of work. An employee may resign without good reason upon
one month’s notice, or resign for good reason without notice.





As
required by PRC regulations, we participate in various employee benefit plans
implemented by municipal and provincial governments, including pension,
work-related injury insurance, medical insurance, unemployment insurance and
housing funds. We make contributions to these employee benefit plans at
specified percentages of the salaries, bonuses and certain allowances we pay to
our employees, capped at maximum amounts determined by the local government from
time to time.





We may
incur additional labor costs due to the implementation of the PRC Labor Contract
Law that became effective on January 1, 2008. For details, see “Item 1A. Risk
Factors—Risks Related to Doing Business in China—The new provisions of the PRC
Employment Contract Law may substantially increase our labor-related costs in
the future.”


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Item
      1A.
            Risk
    Factors.





Investment
in our common shares involves risks. You
should carefully consider the risks and uncertainties described below together
with the other information included in this Annual Report, including the matters
discussed under “Special Note Regarding Forward-Looking Statements,” our
consolidated financial statements and the accompanying notes, before you decide
to invest in our shares. The market price of our shares could decline due to any
of these risks, in which case you could lose all or part of your investment.You should pay particular attention to the fact that we are a holding
company with substantial operations in China and are subject to legal and
regulatory environments that in many respects differ from that of the United
States. Our business, financial condition or results of operations could be
affected materially and adversely by any of the risks discussed below and any
others not foreseen. This discussion contains forward-looking
statements.




Risks
Related to Our Business




The
market for offset printing equipment is very competitive, and if we are unable
to compete successfully, our business may be materially and adversely
affected.




The
offset printing equipment industry is extremely competitive and is characterized
by rapid technological changes. Our products compete against those offered by
several top-tier Chinese and international companies, particularly German and
Japanese companies.





•
            Small Format
      Press Producers.  Our competitors in
      the small format press market in China include Chinese companies such as
      Yingkou Gronhi Offset Printing Machinery Co., Ltd., Yingkou Saxin Printing
      Machine Co., Ltd, Liaoning Dazu Guanhua Printing Equipment Co. Ltd.,
      Weifang Huaguang Precision Printing Machinery Co., Ltd., Shandong Weihai
      Hamada (JV) Printing Machinery Co., Ltd. and Shandong Weihai Printing
      Machinery Co., Ltd. Our international competitors include Heidelberger
      Druckmaschinen AG, a German company, and Hamada Printing Press Co., Ltd.
      and Ryobi, Ltd., two major Japanese small format press
      manufacturers.


•
            Large Format
      Press Producers.  Our competitors in
      the large format press market in China include Chinese companies such as
      Beiren Printing Machinery Holdings Limited, Shanghai Electric Group
      Printing & Packaging Machinery Co., Ltd. and Jiangxi Zhongjing Group
      Co., Ltd. Our international competitors include German manufacturers such
      as Heidelberger Druckmaschinen AG, Man Roland Druckmaschinen AG, and
      Koenig & Bauer Group (KBA) and Japanese manufacturers such as
      Mitsubishi Heavy Industries, Ltd., Komori Corporation, Shinohara Machinery
      Co. Ltd., Sakurai Graphic Systems Corp. and Ryobi Ltd. Adast a.s., one of
      the largest Eastern European manufacturers, is another international
      competitor.




Some of
our competitors, particularly our international competitors, have significantly
greater financial, technical, manufacturing, sales, marketing and other
resources than we do and have achieved greater name recognition for their
products and technologies than we have. Because of this, we may not be able to
successfully increase our market penetration or our overall share of the offset
printing equipment market in China or internationally. In addition, companies
not currently in direct competition with us may introduce competing products in
the future. Although we attempt to develop and introduce innovative products to
meet end-user customer demand, products or technologies developed by other
offset printing equipment suppliers could render our products or technologies
obsolete or noncompetitive. Customers may defer or change their purchasing
decisions in anticipation of the introduction of new products or the actual
introduction of new products by us or our competitors.




Increased
competition may result in price reductions, increased sales incentive offers,
lower gross margins and loss of market share, which could require us to increase
investments in research and development, sales and marketing efforts, and other
means of market expansion. Our competitors’ products may be more competitive in
terms of market acceptance, price, quality and performance. We may be adversely
affected if we are unable to maintain current product cost reductions or achieve
future product cost reductions, including warranty costs.




If we
fail to address any of these competitive challenges and we are unable to compete
successfully, there could be a material adverse effect on our business,
financial condition and operating results.




We
face risks and difficulties due to our recent growth, and may be unable to
sustain our recent profitability and growth rates.




Our
revenue grew from $67.8 million for the year ended June 30, 2007 to $89.6
million for the year ended June 30, 2008 and to $106.6 million for the year
ended June 30, 2009. We will continue to encounter risks and difficulties in
connection with our significant growth, including our potential failure
to:





•
            implement, adapt or modify our
      business model and
  strategy;


•
            manage our investments in new
      businesses and facility expansion or construction, including the cold-set
      corrugated paper machine factory at Langfang Duoyuan that we intend to
      build;


•
            maintain our current and develop
      new relationships with
      distributors;


•
            manage our expanding operations
      and product
  offerings;


•
            maintain adequate control of
      expenses, inventory and
      receivables;


•
            attract, retain and motivate
      qualified
personnel;


•
            protect our reputation and
      enhance customer
  loyalty;


•
            implement additional and improve
      existing administrative, financial and operations systems, procedures and
      controls;
and


•
            anticipate and adapt to changes
      in the offset printing industry, government regulations, technology and
      other competitive and market
      dynamics.




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If we
fail to successfully deal with these risks and difficulties due to our recent
growth, we could experience disruptions in our business, any of which could
materially affect our business, financial condition and results of
operations.




In
addition, although our sales have increased rapidly in recent years, we expect
that our operating expenses will increase as we expand, and we may not maintain
or increase our profitability. Some of the factors which may contribute to our
inability to sustain our recent profitability and growth include:





•
            competitors offering comparable
      products at lower
  prices;


•
            decreases in the average selling
      prices of our products, particularly our single color
      presses;


•
            superior product innovations by
      competitors;


•
            rising raw materials and
      manufacturing costs;


•
            changes in our management and key
      personnel; and


•
            increased operating expenses
      relating to research and development, sales and marketing efforts and
      general and administrative expenses as we seek to grow our
      business.




As a
result of these and additional factors, we may experience lower revenue and
higher expenses and we may therefore fail to maintain our recent profitability
and growth rates, achieve our revenue targets, limit our operating expenses
and/or remain profitable in the future.




We
may be unsuccessful in developing and selling new products or in penetrating new
markets for which we have limited experience, particularly the post-press
market.




Our
revenue growth has been primarily from sales of our press products. Our future
success depends, in part, on our ability to develop and sell new press products,
as well as new pre-press and post-press products in a cost-effective and timely
manner. We continually evaluate expenditures for planned product developments
and choose among alternatives based upon our expectations of future market
trends.




We may
expand into business areas for which we do not have significant experience. One
area of planned expansion is the cold-set corrugated paper machine product line,
which we expect to begin commercial production and sale by the end of 2010. Many
factors, some of which are beyond our control, could materially and adversely
affect our ability to turn this and other products into profitable businesses,
including:





•
            our limited experience in these
      new businesses;


•
            the existence of larger more
      established
competitors;


•
            our potential inability to sell
      new products to existing end-user customers or to locate new end-user
      customers;


•
            the timing and completion of our
      introduction of new
designs;


•
            the quality, price and
      performance of our products and those of our
      competitors;


•
            our customer service capabilities
      and responsiveness;
and


•
            any unexpected expenses and costs
      related to the
expansion.




Failure
to effectively manage these factors may result in our inability to successfully
develop new products and expand into new markets, including the post-press
market, which could materially and adversely affect our financial condition and
results of operations and result in a loss of business
opportunities.




We
depend on distributors for all of our revenue and will rely on adding
distributors for most of our revenue growth. Failure to maintain relationships
with our distributors or to otherwise expand our distribution network could
negatively affect our ability to effectively sell our products.




We depend
on distributors for all of our revenue. We do not have long-term distribution
agreements, and all our distribution agreements have one-year terms. As our
existing distribution agreements expire, we may be unable to renew with our
desired distributors on favorable terms or at all. We compete for quality
distributors with both our international and Chinese competitors. In addition,
we rotate our sales and marketing personnel among our seven regional markets
periodically to reduce our reliance on any single employee’s relationship with
distributors in any market. This practice may make us less attractive to some
distributors. Any disruption of our distribution network, including our failure
to renew our existing distribution agreements with our desired distributors,
could negatively affect our ability to effectively sell our
products.




We
may be unable to effectively manage our distribution network, and our business,
prospects and brand may be materially and adversely affected by our
distributors’ actions.




Our
ability to manage the activities of our independent distributors is limited. Our
distributors could take one or more of the following actions, any of which may
have a material adverse effect on our business, prospects and
brand:





•
            sell products that compete with
      our products, possibly including counterfeit products with the “Duoyuan”
      name;


•
            sell our products outside their
      designated territory, possibly in violation of the distribution rights of
      other
distributors;


•
            fail to adequately promote our
      products;


•
            fail to provide proper training
      and service to our end-user customers;
      or


•
            violate the anti-corruption laws
      of China, the United States or other
      countries.




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Failure to adequately manage our
distribution network or non-compliance by distributors with our distribution
agreements could harm our corporate image among our end-user customers and
disrupt our sales, which could result in a failure to meet our sales goals.
Furthermore, we could be liable for actions taken by our distributors, including
violations of applicable law in connection with the marketing or sales of our products, such as the PRC
anti-corruption laws and the United States Foreign Corrupt Practices Act. In
particular, we may be held liable under U.S. law for actions taken by our
distributors even though all of our distributors are non-U.S. companies that are
not subject to the Foreign Corrupt Practices Act. Our distributors may violate
these laws or otherwise engage in illegal practices with respect to their sales
or marketing of our products. If our distributors violate these laws, we could
be required to pay damages or fines, which may materially and adversely affect
our business, financial condition and results of operations. In addition, our
brand, reputation, sales or the price of our common shares could be adversely
affected if we become the target of any negative publicity as a result of
actions taken by our distributors.




If
the market for printing equipment does not grow at the rate we expect or at all,
including due to a decrease in the demand for commercial printing services, our
revenue and profitability may be materially and adversely affected.




The
development of our business depends, in large part, on continued growth in the
demand for quality printing equipment in China, including demand driven by
providers of commercial printing services in China and on the maintenance or
growth of the general selling prices of pre-press, press and post-press products
in the market. Although the Chinese printing equipment market has grown rapidly,
the growth may not continue at the same rate or at all.




A variety
of factors, including economic, regulatory, political and social instability,
could contribute to a decrease in the demand for quality offset printing
equipment or commercial printing services. In addition, we believe the average
price charged for regular and low-end commercial printing services has been
decreasing. We also believe that the average selling price of press products,
particularly the less sophisticated single color printing equipment, has been
decreasing. If there is a decrease in the demand for or the price of offset
printing equipment, including as a result of decreased demand for commercial
printing services, our revenue and profitability may be materially and adversely
affected.




If
we fail to accurately project demand for our products, we may encounter problems
of inadequate supply or oversupply, which may materially and adversely affect
our business, financial condition and operating results.




Our
distribution agreements contain annual sales targets for each distributor, and
we take such targets into account when we formulate our overall operation plans.
We forecast demand for our products based on rolling projections from our
distributors. The varying sales and purchasing cycles of our distributors,
however, make it difficult for us to forecast future demand
accurately.




If we
overestimate demand, we may purchase more raw materials or components than
required. If we underestimate demand, our third party suppliers may have
inadequate raw material or product component inventories, which could interrupt
our manufacturing, delay shipments and result in lost sales. In particular, we
are seeking to reduce our procurement and inventory costs by matching our
inventories closely with our projected manufacturing needs and by deferring our
purchase of raw materials and components, from time to time, in anticipation of
supplier price reductions. If we have excess products, we may need to lower
prices to stimulate demand. We also risk new material inventory obsolescence if
we do not sell components before the end of their shelf life. As we seek to
balance inventory cost savings and production flexibility, we may fail to
accurately forecast or meet demand. Our inability to accurately predict and
timely meet our demand could materially and adversely affect our business,
financial condition and operating results.




If
we cannot obtain sufficient raw materials and components that meet our
production demand and standards at a reasonable cost, or at all, our business
may be materially and adversely affected.




The key
raw materials and components used in the manufacturing of our products are
steel, iron and electronic components. We produce a substantial majority of our
key components in-house at our Hunan Duoyuan facility. We purchase all other raw
materials and components from Chinese suppliers.




For fiscal 2007, 2008 and 2009,
purchases from our largest supplier accounted for 9.5%, 8.8% and 10.7% of our
total raw materials and components purchases, respectively. For the same
periods, our ten largest
suppliers combined accounted for 54.6%, 55.7% and 57.4% of our total raw
materials and components purchases, respectively. If any supplier is unwilling
or unable to provide us with raw materials and components in the required
quantities and at acceptable costs and quality, we may not be able to find
alternative sources on satisfactory terms in a timely manner, or at all. In
addition, some of our suppliers may fail to meet qualifications and standards
required by our end-user customers, which could impact our ability to purchase
raw materials and components.




Our
inability to find or develop alternative supply sources for raw materials or
components that meet our production demand and standards could result in
production delays or reductions as well as shipment delays. The prices of our
raw materials and components could also increase, and we may not be able to pass
these price increases on to our end-user consumers. For example, steel prices in
China decreased during the year ended June 30, 2006 but, increased significantly
during fiscal 2007 and fiscal 2008. Should any of these events occur, our
business may be materially and adversely affected.




Our
distributors have reduced or terminated their purchases in the past, and could
reduce or terminate their purchases in the future, which could materially and
adversely affect our business.




We do not
have long-term distribution agreements with our distributors, who could reduce
their purchases or cease purchasing our products altogether. If major
distributors elect to purchase products from another manufacturer, our operating
results could be harmed through, among other things, decreased sales volumes and
write-offs of accounts receivable and inventory related to products we have
manufactured for these distributors. In addition, any decline in demand for our
products, including any negative development affecting our major distributors or
the printing industry in general, would likely harm our sales and operating
results.




A
substantial portion of our backlog is scheduled for delivery within 90 days or
less, and our distributors may cancel or change their purchase orders or
delivery times for products they have ordered from us without penalty. In
addition, a significant portion of our operating expenses are fixed in advance
based on projected sales. Accordingly, if sales are below expectations in any
given quarter, the resulting impact on our business, financial conditions and
operating results will be more significant given our inability to adjust
spending in the short term to compensate for this shortfall.




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We
may be unable to successfully expand our manufacturing capacity, which could
result in material delays, quality issues, increased costs and loss of business
opportunities, and, if we fail to accurately gauge demand for our products or
our product and end-user customer initiatives fail, we may have overcapacity,
which may materially and adversely affect our business.




We intend
to upgrade our existing in-house production facilities for our key components
and build a new factory at Langfang Duoyuan to manufacture cold-set corrugated
paper machines, a post-press product. These projects may not be constructed in
time or within budget. We may also experience quality control issues as we
implement these manufacturing upgrades and ramp up production. Any material
delay in completing these projects, or any substantial increase in costs or
quality issues in connection with these projects, could materially and adversely
affect our business, financial condition, results of operations and business
opportunities.




Our
decision to upgrade our existing production facilities and build a new cold-set
corrugated paper machine factory at Langfang Duoyuan is based on the sale of
current products, our growth strategy and market trends. However, market demand
could shift and result in lower than anticipated demand for and sales of our
existing or future products, such as our cold-set corrugated paper machines. Our
marketing initiatives to promote our existing and new products may not result in
the anticipated level of end-user customer demand, resulting in production
overcapacity or excess inventory for us, which may have a material adverse
effect on our profitability.




We
are exposed to potential product liability claims that may be costly to defend
against, and, if successful, may materially and adversely affect our
business.




As a manufacturer of offset printing
equipment, our business exposes us to product liability risks. Claims against us
may also result from actions taken by our distributors over whom we exercise
little to no control. The malfunctioning of our products could potentially cause
financial loss, property damage or personal injuries. If our products
are not properly designed or manufactured or if they do not perform adequately,
we could be subject to claims for damages based on legal theories, including
product liability. Product liability claims may be expensive to defend and may
potentially result in large financial judgments being made against us, which
could adversely affect our financial performance. We do not maintain liability
insurance, so we are responsible for any expenses we might incur in connection
with such claims. Even if a product liability or other claim is not successful,
the adverse publicity, time and expense of defending such a claim may interfere
with or negatively impact our business and materially and adversely impact our
results of operations and reputation.




If
we fail to meet evolving end-user customer demand and requirements for offset
printing equipment, including through product enhancements or new product
introductions, or if our products do not compete effectively, our financial
conditions and operating results may be negatively and adversely
affected.




The
offset printing equipment industry is characterized by evolving technological
change, frequent new product developments, periodic product obsolescence, high
industry standards, changing information technologies and evolving distribution
channels. We must adapt quickly to new and changing technologies and their
related applications and to introduce new products offerings with improved
features and functionality. We could incur substantial costs to keep pace with
the technological changes and may fail to adapt to these changes.




Our
future success largely depends on our ability to continuously develop new
products with the quality levels our end-user customers demand and new services
to support them. Despite our investments in research and development, we may
fail to develop new products. Our new products may not achieve market acceptance
or be manufactured at competitive costs or in sufficient volume. Our failure to
enhance our existing products and services or to develop and introduce new
products and services that meet changing end-user customer requirements and
evolving technological standards would adversely impact our ability to sell our
products and our financial condition and operating results may be negatively and
adversely affected.




Third
party use of the “Duoyuan” trademark name may dilute its value and materially
and adversely affect our reputation, goodwill and brand.




We have a
license from Duoyuan Investments Limited, our majority shareholder, wholly owned
by Wenhua Guo, the chairman of our board of directors, to use the “Duoyuan”
trademark name. Duoyuan Investments Limited, however, may license the “Duoyuan”
trademark name to others for products unrelated to printing, which may create
confusion regarding our brand. In addition, some of our distributors use the
Chinese characters of our name, “Duoyuan,” in their company names, and we may be
unable to prevent such use. The use of “Duoyuan” in the legal names of these
distributors may confuse our end-user customers who may associate our name with
the distributor and incorrectly believe our distributors are our affiliates. Due
to ambiguities in Chinese intellectual property law, the cost of enforcement and
our prior lack of enforcement, we may be unable to prevent third parties from
using the “Duoyuan” trademark name.




We
may undertake acquisitions which may have a material adverse effect on our
ability to manage our business and may be unsuccessful.




Our
growth strategy may involve the acquisition of new technologies, businesses,
products or services or the creation of strategic alliances in areas in which we
do not currently operate. These acquisitions could require that our management
develop expertise in new areas, manage new business relationships and attract
new types of customers. Furthermore, acquisitions may require significant
attention from our management, and the diversion of our management’s attention
and resources could have a material adverse effect on our ability to manage our
business. We may also experience difficulties integrating acquisitions into our
existing business and operations. Future acquisitions may also expose us to
potential risks, including risks associated with:





•
            integration of new operations,
      services and
personnel;




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•
            unforeseen
      or hidden liabilities;


•
            diversion
      of resources from our existing businesses and
  technologies;


•
            inability to generate sufficient
      revenue to offset the costs of acquisitions;
      and


•
            potential loss of, or harm to,
      relationships with employees or
      customers.




Any of
these risks may have a material adverse effect on our ability to manage our
business and the acquisitions may be unsuccessful.




If
our efforts to expand into international markets are unsuccessful, our business
and financial conditions could be materially and adversely
affected.




Our
long-term business strategy relies in part on establishing an international
distribution network in parts of Africa, the Middle East and Asia. Risks
affecting our international expansion include challenges caused by geographic
distance, language, cultural differences and the burdens of complying with a
wide variety of laws and regulations which differ from those to which we are
accustomed, including:





•
            international import and export
      legislation;


•
            financial condition, expertise
      and performance of potential international
      distributors;


•
            foreign tax
      consequences;


•
            trade and tariff
      restrictions;


•
            quotas;
      and


•
            inability to effectively enforce
      contractual or other legal
rights.




These
risks could result in increased and unbudgeted costs associated with servicing
international markets, which could in turn materially and adversely affect our
business and financial condition.




Our
business is capital intensive and our growth strategy may require additional
capital which may not be available on favorable terms or at all.




We
believe that our current cash and cash flows from operations will be sufficient
to meet our present and reasonably anticipated cash needs to maintain current
operations. We may, however, require additional cash resources due to changed
business conditions, planned expansion of our manufacturing capacity and product
offerings (for example, our plans to expand our existing property to build a
cold-set corrugated paper machine factory at Langfang Duoyuan) or other
investments or acquisitions we may decide to pursue. If our own financial
resources are insufficient to satisfy our capital requirements, we may seek to
sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity securities could result in dilution of
shareholders’ holdings. The incurrence of indebtedness would result in increased
debt service obligations and could require us to agree to operating and
financial covenants that would restrict our operations. Financing may not be
available in amounts or on terms acceptable to us, if at all. Any failure by us
to raise additional funds on terms favorable to us, or at all, could limit our
ability to expand our business operations and could harm our overall business
prospects.




Any
interruption in our production process could materially impair our financial
performance and adversely affect our relationships with our
distributors.




Our manufacturing operations are
complicated and integrated, involving the coordination of raw materials and
components (some purchased from third parties), internal production processes
and external distribution processes. While these operations are modified on a
regular basis in an effort to improve manufacturing and distribution efficiency
and flexibility, we may experience difficulties in coordinating the various
aspects of our manufacturing processes, thereby causing downtime and delay. For
example, due to increased demand for our multicolor presses, we transferred some
of our employees from the single color press production line to the multicolor
press production line. Production of multicolor presses involves a more
complicated manufacturing process that required additional training for these
transferred employees and ultimately resulted in some production delays. We
manufacture, assemble and store almost all of our products, as well as conduct
most of our research and development activities, at our manufacturing
facilities. We do not maintain back-up facilities, so we depend on our
manufacturing facilities for the continued operation of our business. A natural
disaster or other unanticipated catastrophic event, including power
interruption, water shortage, storm, fire, earthquake, terrorist attack or war,
could significantly impair our ability to manufacture our products and operate
our business and delay our research and development activities. Our facilities
and certain manufacturing equipment would be difficult to replace and could
require substantial replacement time. Catastrophic events may also destroy our
inventory. The occurrence of such an event could materially and adversely affect
our business and operations. In addition, any interruption in our production,
even if temporary, could delay our delivery to our distributors, who deliver to
end-user customers. Any production interruption and/or delivery delays could
negatively affect our business and potentially our reputation. Any interruption
of our business operations could have a material adverse effect on our business,
financial condition and operating results and may negatively affect our
relationships with our distributors.




We
do not have insurance coverage to protect us against losses.




We do not
maintain insurance coverage for our equipment or manufacturing facilities, and
we do not have any business liability, loss of data or business interruption
insurance coverage for our operations in China. If any claims for injury are
brought against us, or if we experience any business disruption, litigation or
natural disaster, we might incur substantial costs and diversion of resources,
which would materially and adversely affect our business, financial condition
and operating results.




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Environmental
claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may materially and adversely affect
our business.




We are
subject to environmental laws and regulations that affect our operations,
facilities and products in China. Any failure to comply with any present or
future environmental laws and regulations could result in the assessment of
damages or imposition of fines against us, suspension of production, cessation
of our operations or even criminal sanctions. New laws and regulations could
also require us to acquire costly equipment or to incur other significant
expenses. Our failure to control the use of, or adequately restrict the
discharge of, hazardous substances could subject us to potentially significant
monetary damages and fines or suspension of our business operations, which may
harm our results of operations.




In
connection with the construction of our Langfang Duoyuan facility, which became
operational in October 2000, we obtained the required environmental protection
assessment. We were also required to obtain a pollutant discharging permit from
the governmental authorities in connection with the discharge of certain
pollutants prior to commencing operations. We have not received this permit yet.
Pursuant to the Regulations of Hebei Province on the Administration and
Supervision of Environmental Pollution Prevention, effective March 1, 2008, our
failure to timely obtain this permit may result in us being reprimanded by the
relevant governmental authorities, which may result in a monetary fine in an
amount equal to three times any illegal gains, or RMB5,000 to RMB10,000, if we
have no illegal gains, subject to the discretion of the governmental
authorities. If we are deemed to have materially violated the regulation
regarding the discharge of pollutants, the governmental authorities may order us
to comply with the regulation within a time limit. If more stringent regulations
are adopted in the future, the related compliance costs could be substantial.
Any failure by us to control the use or adequately restrict the discharge of
hazardous substances could subject us to potentially significant monetary
damages and fines or suspensions in our business operations.




In
connection with the construction of our Hunan Duoyuan facility, which became
operational in March 2004, we did not obtain the required environmental
protection assessment. We were also required to obtain a pollutant discharging
permit. We have not received this permit yet. Pursuant to the Provisional
Measures of Hunan Province on the Administration and Supervision of Pollutant
Discharging Permit, effective January 1, 2004, our failure to obtain this
permit, may result in us being prohibited the discharge of pollutants. We may
not obtain the required approval of our potential construction
project.




The
loss of key personnel, failure to attract or retain specialized technical and
management personnel and recent replacements of our chief executive officer and
chief financial officer could materially and adversely affect our
business.




We rely
heavily on the services of our key personnel, including Wenhua Guo, the chairman
of our board of directors, Christopher Patrick Holbert, our chief executive
officer, Xiqing Diao, our chief operating officer, William D. Suh, our chief
financial officer, and Yubao Wei, our chief technology officer, each of whom are
a significant asset to us. Our future success will depend on our ability to
retain these key personnel and attract and retain other skilled managerial,
engineering, technical and sales and marketing personnel. Competition for such
key personnel, particularly technical personnel, is intense in the offset
printing equipment industry, and we may fail to attract and retain a sufficient
number of technical personnel to support our anticipated growth. Despite the
incentives we provide, our current employees may not continue to work for us. If
additional personnel are required for our operations in the future, we may not
be able to obtain the services of additional personnel necessary for our
growth.




Turnover
in our senior management could significantly deplete institutional knowledge
held by our existing senior management team and impair our operations, which
could harm our business. On June 29, 2009, Wenhua Guo resigned as our chief
executive officer. Mr. Diao served as our interim chief executive officer from
July 9, 2009 until we appointed Christopher Patrick Holbert as our chief
executive officer on August 26, 2009. During the year ended June 30, 2008, Gene
Michael Bennett and William Milewski, who served as our chief financial officers
from July 19, 2007 to December 20, 2007 and from March 1, 2008 to May 21, 2008,
respectively, resigned. From December 20, 2007 to March 1, 2008 and again from
May 21, 2008 to October 1, 2008, Baiyun Sun served as our interim chief
financial officer and controller. We appointed William Suh as our chief
financial officer effective as of October 1, 2008, with Ms. Sun continuing to
serve as our controller. During the transition periods when we had only an
interim chief financial officer, certain of our projects were subject to delay
or put on hold which may have a material adverse effect on our financial
condition and operating results.




In
addition, if any of our key personnel joins a competitor or forms a competing
company, we may not be able to replace them easily and we may lose end-user
customers, business partners, key professionals and staff members as a result.
All of our key personnel have entered into employment agreements with us, which
include confidentiality and non-disclosure provisions. However, if any disputes
arise between these key personnel and us, it is not clear, in light of
uncertainties associated with the Chinese legal system, what the court decisions
will be and the extent to which these court decisions could be enforced in
China, where all of these key personnel reside and hold some of their assets.
See “—Risks Related to Doing Business in China—Uncertainties with respect to the
Chinese legal system could limit the legal protections available to our
shareholders and us.”




The
successful management of our printing operations and growth may suffer because
our senior management team has a limited history of working
together.




Our
success depends, in large part, upon the services of our senior management team.
A significant portion of our senior managment team, namely our chief executive
officer and chief financial officer, has been in place for less than 12 months.
These executives do not have previous management experience with us and may not
fully integrate themselves into our business or manage effectively our growth.
Our failure to assimilate these new executives, the failure of these new
executives to perform effectively, or the loss of any of these new executives,
could adversely affect our business, financial condition, and results of
operations. We do not carry key person life insurance on any of our executive
officers.




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Failure
to protect our proprietary technologies or maintain the right to certain
technologies may materially and adversely affect our ability to
compete.




We believe that the protection of our
intellectual property rights will continue to be important to the success of our
business. We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We have also entered into confidentiality or license agreements
with our employees, business partners and other third parties. We have
implemented procedures to control access to and distribution of documents and
other proprietary information. These efforts may fail to adequately protect our
intellectual property rights. Further, these agreements do not prevent others
from independently developing technologies that are equivalent or superior to
our technology. In addition, unauthorized parties may attempt to copy or
otherwise obtain and use our proprietary technology. Monitoring unauthorized use
of technology is difficult, particularly in China, where the laws may not
protect our proprietary rights as fully as do the laws of the United
States.




Currently,
we have seven patents registered in China. Patents might not be issued for our
future applications, and any issued patents may not protect or benefit us or
otherwise give us adequate protection from competing products. For example,
issued patents may be circumvented or challenged and declared invalid or
unenforceable or provide only limited protection for our technologies. We also
cannot be certain that others will not design around our patented technology,
independently develop our proprietary technology or develop effective competing
technologies on their own.




We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely against us, could disrupt our business and
subject us to significant liability to third parties.




We rely
upon certain proprietary confidential information, trademarks, know-how, trade
secrets and improvements and continuing technological innovation to develop and
maintain our competitive position. In addition, we have seven registered patents
that we use in our business. Our product development teams conduct patent
searches of Chinese patents with guidance and oversight from our in-house patent
team. Our product development projects are approved only if the result of the
patent search indicates that development of the proposed products will not
infringe on any third party intellectual property rights. However, due to the
complex nature of offset printing technology patents, the uncertainty of
construing the scope of the patents, inadequate oversight or guidance from our
in-house patent team, and other limitations inherent to these patent searches,
the risk of our infringing on third party intellectual property rights cannot be
fully eliminated.




Third
parties may claim that one or more of our products or our various processes
infringe upon their patents or other intellectual property. A successful claim
of patent or other intellectual property infringement could subject us to
significant damages or an injunction preventing the manufacture, sale or use of
our affected products or otherwise limit our freedom to operate. The legal
protection of intellectual property in China is significantly more limited than
in the United States and many other countries and may afford us little or no
effective protection.




Technologies
licensed to and relied on by us may be subject to infringement or corresponding
claims by others which could damage our ability to rely on such technologies. In
addition, although we endeavor to ensure that companies that work with us
possess appropriate intellectual property rights or licenses, we cannot fully
avoid the risks of intellectual property rights infringement created by
suppliers of components used in our products or companies with which we
collaborate on research and development activities. Our current or potential
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, may have obtained or may obtain patents
that will prevent, limit or interfere with our ability to make, use or sell our
products in China or other countries. The defense of intellectual property
claims, including patent infringement suits, and related legal and
administrative proceedings can be both costly and time-consuming and may
significantly divert the efforts and resources of our technical and management
personnel. Furthermore, an adverse determination in any such litigation or
proceeding to which we may become a party could cause us to:





•
            pay damage
      awards;


•
            seek licenses from third
      parties;


•
            pay additional ongoing royalties,
      which could decrease our profit
  margins;


•
            redesign our products;
      or


•
            be restricted by
      injunctions.




These
factors could effectively prevent us from pursuing some or all of our business
and result in our customers or potential customers deferring, canceling or
limiting their purchase or use of our products, which could have a material
adverse effect on our financial condition and results of
operations.




We
may be exposed to potential risks relating to our internal control over
financial reporting and our ability to have those controls attested to by our
independent auditors for the year ending June 30, 2010, in accordance with the
Sarbanes-Oxley Act of 2002.




We are
required by the Securities and Exchange Commission to include a report of
management on our internal control over financial reporting in our annual
reports. In addition, the independent registered public accounting firm auditing
a company’s financial statements must attest to and report on management’s
assessment of the effectiveness of our internal control over financial reporting
and the operating effectiveness of our internal controls. Our management has
concluded that our internal control over our financial reporting is not
effective and has material weaknesses. Our independent registered public
accounting firm is not yet required to attest to our management’s assessment
until the year ending June 30, 2010, but once it is required to do so it may
issue a report that is qualified if it is not satisfied with our controls at
that time or the level at which our controls are documented, designed, operated
or reviewed. We have identified significant deficiencies or material weaknesses
in our internal controls that we may not be able to remediate in a timely
manner, and investors and others may lose confidence in the reliability of our
financial statements. We can provide no assurance that we will be in compliance
with Section 404 of the Sarbanes-Oxley Act of 2002, be able to rectify the
material weaknesses we have identified or receive a positive attestation from
our independent auditors in the future. Any of these possible outcomes could
result in loss of investor confidence in the reliability of our reporting
processes, which could adversely affect the price of our shares.




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The
termination and expiration or unavailability of preferential tax treatments once
available to us may materially and adversely affect our business.




Prior to
January 1, 2008, enterprises established in China were generally subject to 30%
state and 3% local enterprise income tax rate. However, enterprises that
satisfied certain conditions enjoyed preferential tax treatments. For example,
in accordance with the Foreign Invested Enterprise Income Tax Law, which was
effective until December 31, 2007, a foreign-invested manufacturing enterprise
scheduled to operate for a period not less than ten years would be exempted from
paying income tax in its first and second years of generating profit, followed
by a 50% reduction in its tax rate in the third, fourth and fifth years subject
to the approval of relevant tax authorities. Duoyuan China, which we believe
qualifies as a manufacturing enterprise scheduled to operate more than ten
years, enjoyed an income tax exemption for its first two profitable years (2004
and 2005) and a 50% income tax reduction for the next three years (2006 through
2008). Since the definition of manufacturing enterprise is unclear and subject
to discretionary interpretation and enforcement by the PRC authorities, if
Duoyuan China is deemed not qualified for such preferential tax treatment in the
prior periods by relevant tax authorities, it may be required to refund prior
tax benefits received.




Effective January 1, 2008, the PRC
National People’s Congress enacted the PRC Enterprise Income Tax Law. The new
Enterprise Income Tax Law generally imposes a single uniform income tax rate of
25% on all Chinese enterprises, including foreign-invested enterprises, and
eliminates or modifies most of the tax exemptions, reductions and preferential
treatments available under the previous tax laws and regulations, subject to the
State Council’s further regulation. According to the new Enterprise Income Tax
Law and relevant implementation rules, the specific foreign-invested enterprises
which used to enjoy a tax holiday in accordance with the state laws, regulations
or the relevant rules will continue to enjoy it under the new tax law until the
expiration of such tax holiday. As a result, Duoyuan China enjoyed the 50% tax
reduction for the calendar year 2008 with an applicable income tax rate of
12.5%. Beginning on January 1, 2009, Duoyuan China became subject to the 25%
income tax rate. Our other two subsidiaries, Langfang Duoyuan and Hunan Duoyuan,
were both granted five-year income tax exemptions beginning with their first
profitable year, by the relevant local governments. However, these preferential
tax treatments granted by the local governments were not supported by relevant
state laws and regulations, thus Langfang Duoyuan and Hunan Duoyuan may be
ordered by relevant authorities to refund these tax benefits. Langfang
Duoyuan became subject to the 25% income tax rate beginning on January 1, 2008.
Pursuant to the preferential tax treatments granted by the local government,
Hunan Duoyuan will become subject to the 25% income tax rate beginning on
January 1, 2010. See “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Critical Accounting Policies—Taxes and
Incentives.”




If we are
required to refund the tax benefits we received, our financial condition and
result of operation could be materially and adversely affected.




The
newly enacted PRC tax law affects tax exemptions on dividends received by us and
increases the enterprise income tax rate applicable to us.




According
to the PRC enterprise income tax law applicable prior to January 1, 2008,
dividends paid to us by our Chinese subsidiaries were exempted from the Chinese
enterprise income tax. However, such tax exemption ceased after January 1, 2008,
when the new PRC Enterprise Income Tax Law and its implementation rules became
effective. Under the new Enterprise Income Tax Law, dividends payable by a
foreign invested enterprise in the PRC to its foreign investor who is a
non-resident enterprise will be subject to a 10% withholding tax unless such
non-resident enterprise’s jurisdiction of incorporation has a tax treaty with
the PRC that provides for a reduced rate of withholding tax. We are a company
incorporated in the State of Wyoming, United States. As the tax treaty between
China and the United States does not have such a reduced rate of withholding tax
on dividends, if we are considered a non-resident enterprise, our dividend
income received from our PRC subsidiary will be subject to a 10% withholding
tax. The new Enterprise Income Tax Law also provides that an enterprise
established outside the PRC with its “de facto management body” within the PRC
is considered a resident enterprise and will be subject to the enterprise income
tax at the rate of 25% on its worldwide income. According to the Implementing
Rules of PRC Enterprise Income Tax Law, “de facto management organization” means
organizations implementing substantive and comprehensive management and control
over the production and business operations, staff, accounts and property of an
enterprise. On April 22, 2009, the State Administration of Taxation promulgated
a circular which set out criteria for determining whether “de facto management
bodies” are located in China for overseas incorporated, domestically controlled
enterprises. However, as this circular only applies to enterprises incorporated
under laws of foreign countries or regions that are controlled by PRC
enterprises or groups of PRC enterprises, it remains unclear how the tax
authorities will determine the location of “de facto management bodies” for
overseas incorporated enterprises that are controlled by individual PRC
residents like us. Although substantially all members of our management are
located in China, it is unclear whether Chinese tax authorities would require
(or permit) us to be treated as PRC resident enterprises. If we are deemed a
Chinese tax resident enterprise, we may be subject to an enterprise income tax
rate of 25% on our worldwide income, excluding dividends received directly from
another Chinese tax resident. As a result of such changes, our historical tax
rates will not be indicative of our tax rates for future periods and the value
of our common shares may be adversely affected.




We
conduct all of our business through our Chinese subsidiaries and almost all of
income will be derived from these subsidiaries. Currently, we have not received
any dividend payments from our Chinese subsidiaries and we, as a holding
company, do not have any revenue because all revenues are reported by the
Chinese subsidiaries.




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Our
foreign shareholders may be subject to PRC withholding tax on the dividends
payable by us and upon gains realized on their sales of our shares if we are
deemed a PRC “resident enterprise.”




Under the new PRC Enterprise Income Tax
law, non-PRC enterprise shareholders may be subject to a 10% withholding tax
upon dividends payable by us and gains realized on their sales or other
dispositions of our shares, if such income is deemed as sourcing from China.
Accordingly, under the new Enterprise Income Tax Law, (i) if the enterprise that
distributes dividends is domiciled in the PRC, or (ii) if gains are realized
from transferring equity interests of enterprises domiciled in the PRC, then
such dividends or capital gains are treated as China-sourced income. It is not
clear how “domicile” may be interpreted under the new Enterprise Income Tax law.
It remains unclear whether the gains our non-PRC enterprise shareholders may
realize will be regarded as income from within China if we are deemed
aPRC resident enterprise
under the new Enterprise Income Tax Law. If we are deemed a PRC resident
enterprise and investors’ sales of our shares and dividends payable by us are
deemed as gains sourced from China, investors’ sales of our shares and dividends
payable by us may be subject to withholding tax. However, if investors do not
pay the withholding tax, there is no certainty regarding whether penalties will
be imposed or the type of penalties. Any such withholding tax or penalties
imposed upon our shareholders will reduce the returns on your investment in our
shares.




We
may be unable to ensure compliance with U.S. economic sanctions laws, especially
when we sell our products to distributors over which we have limited
control.




The
United States Department of the Treasury’s Office of Foreign Assets Control
administers certain laws and regulations that impose penalties on U.S. persons
and, in some instances, foreign entities owned or controlled by U.S. persons,
for conducting activities or transacting business with certain countries,
governments, entities or individuals subject to U.S. economic sanctions. We will
not engage in or fund, directly or indirectly, any activity or business with any
country, government, entity or individual that U.S. economic sanctions laws
prohibit U.S. persons, or foreign entities owned or controlled by U.S. persons,
from engaging in or funding. However, we sell our products through independent
non-U.S. distributors which are responsible for interacting with the end-user
customers of our products. Although none of these independent non-U.S.
distributors are located in or conduct business with countries subject to U.S.
economic sanctions such as Cuba, Sudan, Iran, Syria and Myanmar, we may not be
able to ensure that such non-U.S. distributors comply with any applicable U.S.
economic sanctions laws. As a result of the foregoing, actions could be taken
against us that could materially and adversely affect our reputation and have a
material and adverse effect on our business, financial condition, results of
operations and prospects.




The
slowdown of China’s economy caused in part by the recent challenging global
economic conditions may adversely affect our business, results of operations and
financial condition.




China’s
economy has experienced a slowdown after the second quarter of 2007, when the
quarterly growth rate of China’s gross domestic product reached 11.9%. A number
of factors have contributed to this slowdown, including appreciation of the
Renminbi, which has adversely affected China’s exports, and tightening
macroeconomic measures and monetary policies adopted by the Chinese government
aimed at preventing overheating of China’s economy and controlling China’s high
level of inflation. The slowdown has been further exacerbated by the challenging
global economic conditions in the financial services and credit markets, which
in recent months has resulted in extreme volatility and dislocation of the
global capital and credit markets.




It is
uncertain how long the challenging global economic conditions in the financial
services and credit markets will continue and how much of an adverse impact it
will have on the global economy in general and the Chinese economy specifically.
In response to the challenging global economic conditions, in September 2008 the
Chinese government began to loosen economic measures and monetary policies by
reducing interest rates and decreasing the statutory reserve rates for banks. On
November 5, 2008, the State Council of China announced an economic stimulus plan
in the amount of $585 billion to stimulate economic growth and bolster domestic
demand. We cannot assure you that the economic stimulus plan or various
macroeconomic measures and monetary policies adopted by the Chinese government
to guide economic growth and the allocation of resources will be effective in
sustaining the growth of the Chinese economy. The slowdown of China’s economy
could lead to lower demand for commercial printing services in China, because
demand for commercial printing services is dependent on strong general economic
activities and conditions. Lower demand for commercial printing services may
decrease demand for offset printing equipment, which could decrease demand for
our products and adversely and materially affect our business, results of
operations and financial condition.




Claims
by our shareholders are subordinate to existing and future liabilities and
obligations of our Chinese subsidiaries.




Because all of our assets are held by
our Chinese subsidiaries, the claims of our shareholders will be structurally
subordinate to all existing and future liabilities and obligations and trade
payables of our Chinese subsidiaries. In the event of our bankruptcy,
liquidation or reorganization, our assets and those of our Chinese subsidiaries will be
available to satisfy the claims of our shareholders only after all of our
subsidiaries’ liabilities and obligations have been paid in
full.




Risks
Related to Doing Business in China




Recent
Chinese regulations relating to the establishment of offshore special purpose
companies by Chinese residents may subject our Chinese resident shareholders to
personal liability and limit our ability to acquire Chinese companies or inject
capital into our Chinese subsidiaries, limit our Chinese subsidiaries’ ability
to distribute profits to us, or otherwise materially and adversely affect our
business.




The State
Administration of Foreign Exchange, or SAFE, issued the Notice on Issues
Relating to the Administration of Foreign Exchange in Fund-Raising and Reverse
Investment Activities of Domestic Residents Conducted via Offshore Special
Purpose Companies in October 2005, which became effective in November 2005
namely Notice 75, and an implementing rule in May 2007 namely Notice 106,
collectively the SAFE Rules. According to the SAFE Rules, Chinese residents,
including both legal persons and natural persons (including Chinese citizens and
foreign citizens) who reside in China, are required to register with the SAFE or
its local branch before establishing or controlling any company outside China,
referred to in the SAFE rules as an “offshore special purpose company,” for the
purpose of financing that offshore company with their ownership interests in the
assets of or their interests in any Chinese enterprise. In addition, a Chinese
resident that is a shareholder of an offshore special purpose company is
required to amend its SAFE registration with the local SAFE branch with respect
to that offshore special purpose company in connection with the injection of
equity interests or assets of a Chinese enterprise in the offshore company or
overseas fund raising by the offshore company, or any other material change in
the capital of the offshore company, including any increase or decrease of
capital, transfer or swap of share, merger, division, long-term equity or debt
investment or creation of any security interest. The SAFE Rules apply
retroactively. As a result, Chinese residents who have established or acquired
control of offshore companies that have made onshore investments in China in the
past were required to complete the relevant registration procedures with the
competent local SAFE branch. If any Chinese resident failed to file its SAFE
registration for an existing offshore company, any dividends remitted by the
onshore entity to its overseas parent since April 21, 2005 will be considered to
be an evasion of foreign exchange purchase rules, and the payment of the
dividend will be illegal. As a result of any illegal action of this type, both
the onshore entity and its actual controlling person(s) can be fined. In
addition, failure to comply with the registration procedures may result in
restrictions on the relevant onshore entity, including prohibitions on the
payment of dividends and other distributions to its offshore parent or affiliate
and capital inflow from the offshore company. Chinese resident shareholders of
the offshore company may also be subject to penalties under Chinese foreign
exchange administration regulations.




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Our majority shareholder, Duoyuan
Investments Limited, is wholly owned by Wenhua Guo, who is the chairman of our
board of directors and a Chinese citizen as defined in the SAFE Rules. We have
asked Mr. Guo, and will ask our future shareholders and beneficial owners who
are Chinese residents, to make the necessary applications and filings as
required under Notice 75 and other related rules. Mr. Guo has submitted the
application in September 2006 pursuant to Notice 75. Because of lack of
implementation procedures, SAFE did not issue a registration certificate to Mr.
Guo. In May 2007, SAFE promulgated the Notice 106 and set out the relevant
procedures. Mr. Guo will resubmit his application with SAFE by the end of the
calendar year 2009. We cannot provide any assurances that he can obtain such
SAFE registration. Moreover, due to uncertainty concerning the reconciliation of
Notice 75 with other approval or registration requirements, it remains unclear
how Notice 75, and any future legislation concerning offshore or cross-border
transactions, will be interpreted, amended and implemented by the relevant
government authorities. We will attempt to comply, and attempt to ensure that
Mr. Guo and our future shareholders and beneficial owners who are subject to
these rules comply, with the relevant requirements. However, we cannot provide
any assurances that all of our shareholders and beneficial owners who are
Chinese residents will comply with our request to make or obtain any applicable
registrations or comply with other requirements required by Notice 75 or other
related rules. The failure or inability of our Chinese resident shareholders or
beneficial owners to register with the SAFE in a timely manner pursuant to the
SAFE Rules, or the failure or inability of any future Chinese resident
shareholders or beneficial owners to make any required SAFE registration or
comply with other requirements under the SAFE Rules, may
subject these shareholders or beneficial owners to fines or other sanctions and
may also limit our ability to contribute additional capital into or provide
loans to our Chinese subsidiaries, limit our Chinese subsidiaries’ ability to
pay dividends to us, repay shareholder loans or otherwise distribute profits or
proceeds from any reduction in capital, share transfer or liquidation to us, or
otherwise adversely affect us.




We
may not be able to enforce our legal rights in China or elsewhere, which could
materially and adversely affect our business.




Although
we are incorporated in the State of Wyoming, United States, all of our
operations are in China. Our operating subsidiaries are formed under Chinese
law, and all of our assets are located in China. As a result, most of our
material agreements are governed by Chinese law. Since all of our revenue is
derived from our operations in China, our business, financial condition and
results of operations are subject to legal developments in China. There is no
assurance that we will be able to enforce any of our material agreements or that
remedies will be available outside of China with respect to our material
agreements. The legal system and enforcement of laws in China may not be as
transparent as those in the United States. The Chinese judiciary is relatively
inexperienced in enforcing corporate and commercial law, leading to a high
degree of uncertainty regarding the outcome of any litigation. The inability to
enforce or obtain a remedy under any of our future agreements could result in a
significant loss of business, business opportunities or capital.




It
may be difficult to serve us with legal process or enforce judgments against us
or members of our management.




A
substantial majority of our executive officers and our directors reside outside
of the United States. Because our operations, assets and officers and directors
are located outside of the United States, it may not be possible for U.S.
investors to enforce their legal rights, effect service of process upon our
directors or officers or enforce civil or criminal judgments of U.S. courts
against us or our directors and executive officers under U.S. federal securities
laws. Moreover, we have been advised by our PRC counsel, Commerce & Finance
Law Offices, that China’s treaties do not provide for reciprocal recognition and
enforcement of judgments by U.S. courts.




We
may have difficulty establishing adequate management, legal and financial
controls in China, which could impair our planning processes and make it
difficult to provide accurate reports of our operating results.




China has
historically not followed Western-style management and financial reporting
concepts and practices, and its access to modern banking, computer and other
control systems has been limited. We may have difficulty hiring and retaining a
sufficient number of qualified employees to work in China with skills in these
areas. As a result, we may experience difficulty establishing management, legal
and financial controls, collecting financial data, preparing financial
statements, books of account and corporate records and instituting business
practices that meet U.S. standards. Consequently, it may be difficult for our
management to forecast our needs and present accurate operating
results.




The
Chinese government could change its policies toward private enterprises, which
could materially and adversely affect our business.




Our
business is subject to political and economic uncertainties in China and may be
adversely affected by its political, economic and social developments. Over the
past several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. The Chinese government may not continue to pursue these
policies or may alter them to our detriment from time to time. Changes in
policies, laws and regulations, including their interpretation, or the
imposition of confiscatory taxation, restrictions on currency conversion,
restrictions or prohibitions on dividend payments to shareholders, devaluations
of currency or the nationalization or other expropriation of private enterprises
could have a material adverse effect on our business. Nationalization or
expropriation could result in the total loss of our investment in
China.




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Economic,
political and social conditions in China could materially and adversely affect
our business.




All of
our business, assets and operations are located in China. The economy of China
differs from the economies of most developed countries in many respects,
including government involvement, level of development, growth rate, control of
foreign exchange and allocation of resources. The economy of China has been
transitioning from a planned economy to a more market-oriented economy. Although
the Chinese government has recently implemented measures emphasizing the
utilization of market forces for economic reform, reduction of state ownership
of productive assets and establishment of sound corporate governance in business
enterprises, a substantial portion of productive assets in China is still owned
by the Chinese government. In addition, the Chinese government continues to play
a significant role in regulating industry by imposing industrial policies. It
also exercises significant control over China’s economic growth through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. Therefore, the Chinese government’s
involvement in the economy could adversely affect our business, financial
condition or operating results. The Chinese government has implemented various
measures from time to time to control the rate of economic growth. Some of these
measures benefit the overall economy of China, but may have a negative effect on
our business, financial condition and operating results.




Government
control of currency conversion and exchange rate fluctuations may materially and
adversely affect our business.




All of
our revenue and expenses are denominated in Renminbi, the currency of China. A
portion of such revenue may be converted into other currencies to meet our
foreign currency obligations. In addition, we incur approximately 1% of our
expenses in foreign currencies, mostly for professional services such as
auditors, attorneys and other intermediaries. Foreign exchange transactions
under our capital account, including principal payments with respect to foreign
currency-denominated obligations, continue to be subject to significant foreign
exchange controls and require the approval of the SAFE in China. These
limitations could affect our ability to obtain foreign exchange through debt or
equity financing or to obtain foreign exchange for capital
expenditures.




The
Renminbi is reported to be measured against a basket of currencies determined by
the People’s Bank of China. The Renminbi may appreciate or depreciate
significantly in value against the U.S. dollar in the long term, depending on
the fluctuation of the basket of currencies against which it is currently
valued, or it may be permitted to enter into a full float, which may also result
in a significant appreciation or depreciation of the Renminbi against the U.S.
dollar. Because all of our earnings and cash assets are denominated in Renminbi
and our financial reporting is denominated in U.S. dollars, fluctuations in the
exchange rates between the U.S. dollar and the Renminbi will affect our
financial results reported in U.S. dollars terms without giving effect to any
underlying change in our business, financial condition or results of operations.
Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue that will be exchanged into U.S. dollars and earnings from,
and the value of, any U.S. dollar denominated investments we make in the
future.




Historically,
we have not engaged in exchange rate hedging activities. Although we may
implement hedging strategies to mitigate exchange rate risk, these strategies
may not eliminate our exposure to foreign exchange rate fluctuations and may
involve costs and risks of their own, such as ongoing management time and
expertise, external costs to implement the strategy and potential accounting
implications.




Uncertainties
with respect to the Chinese legal system could limit the protections available
to our shareholders and us.




The Chinese legal system is based on
written statutes and their interpretation by the Supreme People’s Court.
Although the Chinese government has introduced new laws and regulations to
modernize its business, securities and tax systems, China does not yet possess a
comprehensive body of business law. Because Chinese laws and regulations are
relatively new, interpretation, implementation and enforcement of these laws and
regulations involve uncertainties and inconsistencies. Therefore, it may be
difficult to enforce
contracts under Chinese law. These uncertainties could materially and adversely
affect our business, financial condition and operating results. In addition, as
the Chinese legal system develops, changes in these laws and regulations, their
interpretation or their enforcement may have a material adverse effect on our
business operations. Moreover, interpretative case law does not have the same
precedential value in China as in the United States, so legal compliance in
China may be more difficult or expensive. These uncertainties could limit the
legal protections available to us and other foreign investors, including our
shareholders.




We
may be unable to complete a business combination transaction efficiently or on
favorable terms due to complicated merger and acquisition regulations which
became effective on September 8, 2006, as amended on June 22, 2009.




The new
Regulation on Mergers and Acquisitions of Domestic Companies by Foreign
Investors governs the approval process by which a Chinese company may
participate in an acquisition of assets or equity interests. Depending on the
structure of the transaction, the new M&A rules will require the Chinese
parties to make a series of applications to certain government agencies. In some
instances, the application process may require the presentation of economic data
concerning a transaction, including appraisals of the target business and
evaluations of the acquirer, which are designed to allow the government to
assess the transaction. Government approvals will have expiration dates by which
a transaction must be completed and reported to the government agencies.
Compliance with the new M&A rules is likely to be more time consuming and
expensive than in the past and the government can now exert more control over
the combination of two businesses. Accordingly, due to the new M&A rules,
our ability to engage in business combination transactions has become
significantly more complicated, time consuming and expensive, and we may not be
able to negotiate a transaction that is acceptable to our shareholders or
sufficiently protect their interests in a transaction. The new M&A rules
allow Chinese government agencies to assess the economic terms of a business
combination transaction. Parties to a business combination transaction may have
to submit to the Ministry of Commerce and other relevant government agencies an
appraisal report, an evaluation report and the acquisition agreement, all of
which form part of the application for approval, depending on the structure of
the transaction. The new M&A rules also prohibit a transaction at an
acquisition price obviously lower than the appraised value of the Chinese
business or assets and, in certain transaction structures, requires that
consideration must be paid within defined periods, generally not in excess of a
year. The new M&A rules also limit our ability to negotiate various terms of
the acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited.
Therefore, the new M&A rules may impede our ability to negotiate and
complete a business combination transaction on financial terms that satisfy our
investors and protect our investors’ economic interests.




- 26
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The
new provisions of the PRC Employment Contract Law may substantially increase our
labor-related costs in the future.




The PRC Employment Contract Law, which
became effective as of January 1, 2008, contains many more provisions favorable
to employees than prior labor regulations in effect in China. This may
substantially increase our labor-related costs in our future operations.
According to the new law, an employee is entitled to terminate his or her
employment relationship with his or her employer for certain causes, such as
delay in payment of wages or social insurance contribution or dissatisfactory
labor protection, and under such circumstances the employer is liable to pay
compensation to the employee. The amount of such compensation payment shall be
one month's salary for each year that the employee has served the employer. If
the monthly wage of an employee is three times greater than the average monthly
wage in the previous year for employees as announced by the people’s government
at the municipal level directly under the central government or at the
city-with-district level where the Employer is located, the rate for the
financial compensations paid to him shall be three times the average monthly
wage of employees and shall be for not more than 12 years of work. An employer
shall also be liable to compensate an employee when the employer decides not to
renew an existing employment contract that is about to expire, unless the
employee refuses to renew the employment contract even though the employer offers equal or more favorable
terms than those in the existing employment contract. In addition, an employer
is obligated to conclude an open-ended employment contract with an employee
after two consecutive terms of fixed-term employment, which means the employer
will be liable to pay damages to an employee if it terminates this employee
without cause, until the employee reaches an age at which he or she is eligible
for pension. We may have greater difficulty terminating underperforming
employees and may incur higher level of labor costs in order to comply with the
provisions of the new law, which may have a material adverse effect on our
business, financial condition and operating results.




The
contractual arrangements entered into between our Chinese subsidiaries may be
subject to audit or challenge by the Chinese tax authorities. Any finding that
our Chinese subsidiaries owe additional taxes could substantially reduce our net
earnings and the value of our shareholders’ investments.




Under
Chinese laws and regulations, arrangements and transactions among affiliated
parties may be subject to audit or challenge by the Chinese tax authorities. We
could face material and adverse tax consequences if the Chinese tax authorities
determine that the contractual arrangements between our Chinese subsidiaries do
not represent arm’s-length prices and, as a result, apply a transfer pricing
adjustment to any of our income. A transfer pricing adjustment could, among
other things, result in a reduction of the expense deductions recorded by our
Chinese subsidiaries for PRC tax purposes or an increase in taxable income, any
of which could increase our tax liabilities. In addition, the Chinese tax
authorities may impose late payment fees and other penalties on our Chinese
subsidiaries for under-paid taxes.




We
rely principally on dividends and other distributions paid by our Chinese
subsidiaries. Limitations on the ability of our Chinese subsidiaries to pay
dividends to us could have a material adverse effect on our
business.




We are a
holding company and we rely principally on dividends and other distributions
paid by our Chinese subsidiaries for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to
our shareholders, service any debt we may incur and pay our operating expenses.
If our Chinese subsidiaries incur debt on their own behalf, the instruments
governing the debt may restrict their ability to pay dividends or make other
distributions to us. Furthermore, relevant Chinese laws and regulations permit
payments of dividends by our Chinese subsidiaries only out of their respective
retained earnings after tax, if any, determined in accordance with Chinese
accounting standards and regulations.




Under
Chinese laws and regulations, each of our operating subsidiaries is required to
set aside a portion of its net income each year to fund certain statutory
reserves. These reserves, together with the registered equity, are not
distributable as cash dividends. As of June 30, 2009, we had statutory reserves
of $9.4 million and total shareholders’ equity of $126.7 million. As a result of
these Chinese laws and regulations, each of our Chinese subsidiaries is
restricted in its ability to transfer a portion of its net assets to us,
including in the form of dividends, loans or advances. Limitations on the
ability of our Chinese subsidiaries to pay dividends to us could adversely limit
our ability to grow, make investments or acquisitions that could be beneficial
to our businesses, pay dividends or otherwise fund and conduct our
business.




We
face risks related to health epidemics and other outbreaks that may disrupt our
operations and have a material adverse effect on our business and results of
operations.




Our business could be materially and
adversely affected by the effects of H1N1 flu (swine flu), avian flu, severe
acute respiratory syndrome or other epidemics or outbreaks. In April 2009, an
outbreak of H1N1 flu (swine flu) first occurred in Mexico and quickly spread to
other countries, including the U.S. and China. In the last decade, China has
suffered health epidemics related to the outbreak of avian influenza and severe
acute respiratory syndrome. Any prolonged occurrence or recurrence of H1N1 flu
(swine flu), avian flu, severe acute respiratory syndrome or other adverse
public health developments in China may have a material adverse effect on our
business and operations. These health epidemics could result in severe travel
restrictions and closures that would restrict our ability to ship our products.
Potential outbreaks could also lead to temporary closure of our manufacturing
facilities, our suppliers’ facilities and/or our end-user
customers’ facilities, leading to reduced production, delayed or cancelled
orders, and decrease in demand for our products. Any future health epidemic or
outbreaks that could disrupt our operations and/or restrict our shipping
abilities may have a material adverse effect on our business and results of
operations.




- 27
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Risks
Associated with our Common Shares




We
do not intend to pay dividends in the foreseeable future.




To date,
we have paid no dividends. Our board of directors does not intend to pay any
dividends in the foreseeable future. The holders of our common shares are
entitled to receive dividends when, as and if declared by our board of directors
out of legally available funds. As a result, a return on an investment in our
common shares may be realized only through a sale of such shares, if at
all.




We
have not held any annual shareholder meetings since we acquired Duoyuan China in
2006, and as a result, our shareholders have limited ability to exercise their
voting rights.




We have
not held an annual meeting of shareholders since we acquired Duoyuan China in
2006. Under Wyoming law, the district court of the county in which a
corporation’s principal office is located may summarily order a meeting be held
upon application of any member or other person entitled to participate in an
annual or regular meeting, if an annual meeting was not held within fifteen
months after the corporation’s last annual meeting. Because we have not held
regular shareholders’ meetings, our shareholders’ ability to exercise their
voting rights may be limited.




Wenhua
Guo, the chairman of our board of directors and beneficial owner of 70.25% of
our common shares, has substantial influence over us, and his interests may not
be aligned with the interests of our other shareholders.




Wenhua
Guo, the chairman of our board of directors, beneficially owns 70.25% of our
outstanding common shares. As a result, he has significant influence over our
business, including decisions regarding mergers, consolidations, the sale of all
or substantially all of our assets, election of directors, and other significant
corporate actions, which may at times conflict with the interests of our other
shareholders. This concentration of ownership may also have the effect of
discouraging, delaying or preventing a future change of control, which in turn
could prevent our shareholders from recognizing a gain in the event that a
favorable offer is extended.




We
have the right to issue additional common shares and preferred shares without
the consent of our shareholders. This would have the effect of diluting our
shareholders’ ownership in us and could decrease the value of our
shares.




As of the
date of this Annual Report, we have 100,000,000 common shares authorized for
issuance, of which only 25,000,050 shares of common shares were issued and
outstanding. Approximately 74,999,950 authorized common shares are available for
issuance for any purpose without shareholder approval. The issuance of these
available shares would dilute shareholders’ percentage ownership of us. We have
outstanding warrants to acquire 1,226,972 common shares.




In addition, our articles of
incorporation authorize the issuance of preferred shares, the rights,
preferences, designations and limitations of which may be set by our board of
directors. While no preferred shares are currently outstanding, our articles of
incorporation authorize the issuance of up to 1,000,000 preferred shares at the
discretion of our board of directors. Preferred shares may be issuedupon the filing of amended articles of
incorporation and the payment of required fees, requiring no further shareholder
action. If issued, the rights, preferences, designations and limitations of the
preferred shares would be set by our board of directors and could operate to the
disadvantage of our outstanding common shares. These terms could include, among
others, preferences as to dividends and distributions on
liquidation.




The
conversion of outstanding derivative securities could cause our shareholders’
ownership to be diluted and may decrease the value of our shareholders’
investments.




Outstanding
derivative securities and current and future obligations to issue our securities
to various parties may dilute the value of our shareholders’ investments. On
October 9, 2006, as part of our compensation to them, we issued to CCG Investor
Relations Partners, LLC warrants to acquire 37,287 shares at a strike price of
$4.61 per share. On November 2, 2006, we issued warrants to Roth Capital
Partners, LLC to purchase 613,260 shares at a strike price of $4.21 per share
for a term of five years. These warrants are exercisable at any time after June
30, 2008 on a cashless or net exercise basis. In addition, in December 2007 we
issued to 25 of our November 2006 private placement investors warrants to
purchase 576,425 shares at a strike price of $5.76 per share for a term of five
years starting on June 30, 2008, which are exercisable at any time after June
30, 2008 on a cashless basis. For as long as these warrants are outstanding and
exercisable, the warrant holder will have an opportunity to profit from a rise
in the market price of our common shares without assuming the risks of
ownership. The outstanding warrants may have an adverse effect on the terms upon
which we can obtain additional capital. We expect that the warrant holders will
exercise the warrants at a time when we are able to obtain equity capital on
terms more favorable than the exercise prices provided by the warrants. Holders
of our common shares do not have pre-emptive rights.




Item
      2.
              Properties.





Duoyuan China leases 3,080 square
meters of space, located at No. 3 Jinyuan Road, Daxing Industrial Development
Zone, Beijing, China, from Duoyuan Information Terminal Manufacture (Langfang) Co., Ltd., or Duoyuan
Information, a company owned by Wenhua Guo, the chairman of our board of
directors. The property is used as an office building. Duoyuan China originally
leased the property at No.3 Jinyuan Road from Duoyuan Clean Water Technology
Industries (China) Co., Ltd., or Duoyuan Water, a company owned by Mr. Guo. The
initial lease had a five-year term from January 1, 2003 to December 31, 2007 and
was extended for one year. As a result of the property transfer between Duoyuan
Water and Duoyuan Information, in which Duoyuan Information became the new owner
of the property at No. 3 Jinyuan Road, the initial lease with Duoyuan Water was
terminated. We entered into a new lease with Duoyuan Information for a period
from July 1, 2008 to December 31, 2009, with an annual rent payment of $0.2
million.




- 28
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Langfang
Duoyuan was granted land use rights from the Chinese government for 133,333
square meters of land located to the east of Jinzhiguang Electronic Company,
Langfang Economic-Technological Development Area, Langfang, Hebei Province,
China. The land use rights have a 50-year term and will expire on September 29,
2052. In addition to the land use rights, Langfang Duoyuan also has ownership of
9,333 square meters of office building and 21,593 square meters of production
facilities located at this site. Langfang Duoyuan currently does not have an
outstanding mortgage or pledge on the properties located at this
site.





Hunan
Duoyuan was granted land use rights from the Chinese government for 229,281
square meters of land for industrial use located at No. 362 Baoqing Xi Road
Shaoyang, Hunan Province, China. The land use rights have a 50-year term and
will expire on May 19, 2054. In addition to the land use rights, Hunan Duoyuan
also has ownership of 68,068 square meters of office building and production
facilities located at this site. All of Hunan Duoyuan’s land and buildings have
been mortgaged under a Maximum Amount Mortgage Contract (which will expire in
July 2010) to China Agricultural Bank as security interests of Duoyuan China’s
debt obligations.




We
believe our properties and facilities have been adequately maintained, are
generally in good condition and are suitable and adequate for our
business.





We intend
to build a factory to manufacture cold-set corrugated paper machines at our
Langfang Duoyuan facility, and have conducted related land clearing and site
preparation services. We are also designing workshops and production lines and
procuring equipment for this cold-set corrugated paper machine factory at
Langfang Duoyuan. We plan to commercially manufacture and sell cold-set
corrugated paper machines by the end of 2010.





Item
      3.
              Legal
      Proceedings.





Neither
we nor any of our direct or indirect subsidiaries is a party to, nor is any of
our property the subject of, any legal proceedings other than ordinary routine
litigation incidental to our respective businesses. There are no proceedings
pending in which any of our officers, directors, promoters or control persons is
adverse to us or any of our subsidiaries or in which any of these persons is
taking a position or has a material interest that is adverse to us. There are no
proceedings pending in which any of our officers, directors, promoters or
control persons is adverse to us.





We are
not a party to any administrative or judicial proceeding arising under U.S.
federal, state or local environmental laws or their Chinese
counterparts.




Item
      4.
              Submission of Matters to a Vote
      of Security Holders.





None
applicable.




PART II




Item
      5.
              Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities.





Currently
there is no public trading market for our common shares. No dividends have been
declared or paid on our common shares. As of September 14, 2009,
we had approximately 88 holders of our common shares of record. Currently
there are no compensation plans under which equity securities of the company are
authorized for issuance.




Item 6.
              Selected
      Financial Data.




You
should read the selected consolidated financial information set forth below in
conjunction with our consolidated financial statements and related notes and
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.” The selected consolidated statements of income and other
comprehensive income for the years ended June 30, 2005, 2006, 2007, 2008 and
2009, the selected consolidated balance sheets as of June 30, 2005, 2006, 2007,
2008 and 2009, and the selected consolidated statements of cash flows for the
years ended June 30, 2005, 2006, 2007, 2008, and 2009 have been derived from our
audited consolidated financial statements that are included elsewhere in this
Annual Report. The consolidated financial statements are prepared and presented
in accordance with U.S. GAAP. Our historical results are not necessarily
indicative of results to be expected for future periods.




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Consolidated
      Statements of
                                        Income
      and Other
                                        Comprehensive
      Income
                                      
                                      Year
      Ended June 30,2005
                                      
                                      
                                      2006
                                      
                                      
                                      2007
                                      
                                      
                                      2008
                                      
                                      
                                      2009(in
      thousands, except for share and per share data)Revenue,
      net
                                      
                                      $
                                      26,469
                                      
                                      
                                      $
                                      43,747
                                      
                                      
                                      $
                                      67,812
                                      
                                      
                                      $
                                      89,628
                                      
                                      
                                      $
                                      106,591Cost
      of revenue
                                      
                                      
                                      16,887
                                      
                                      
                                      
                                      22,478
                                      
                                      
                                      
                                      37,694
                                      
                                      
                                      
                                      44,462
                                      
                                      
                                      
                                      50,334Gross
      profit
                                      
                                      
                                      9,582
                                      
                                      
                                      
                                      21,269
                                      
                                      
                                      
                                      30,118
                                      
                                      
                                      
                                      45,166
                                      
                                      
                                      
                                      56,257Research
      and development expenses
                                      
                                      
                                      680
                                      
                                      
                                      
                                      1,037
                                      
                                      
                                      
                                      1,046
                                      
                                      
                                      
                                      1,683
                                      
                                      
                                      
                                      1,768Selling
      expenses
                                      
                                      
                                      3,025
                                      
                                      
                                      
                                      3,753
                                      
                                      
                                      
                                      7,827
                                      
                                      
                                      
                                      8,705
                                      
                                      
                                      
                                      9,726General
      and administrative expenses
                                      
                                      
                                      2,406
                                      
                                      
                                      
                                      2,896
                                      
                                      
                                      
                                      3,079
                                      
                                      
                                      
                                      4,472
                                      
                                      
                                      
                                      4,474Income
      from operations
                                      
                                      
                                      3,471
                                      
                                      
                                      
                                      13,583
                                      
                                      
                                      
                                      18,167
                                      
                                      
                                      
                                      30,306
                                      
                                      
                                      
                                      40,289Liquidated
      damages (expenses) income, net of settlement
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (2,119
                                      )
                                      
                                      
                                      235
                                      
                                      
                                      
                                      —Change
      in fair value of derivative instruments
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      73
                                      
                                      
                                      
                                      194Other
      income (expense), netNon-operating
      (expenses)
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (957
                                      )Interest
      expense
                                      
                                      
                                      (505
                                      )
                                      
                                      
                                      (742
                                      )
                                      
                                      
                                      (742
                                      )
                                      
                                      
                                      (730
                                      )
                                      
                                      
                                      (1,188
                                      )Interest
      and other income
                                      
                                      
                                      997
                                      
                                      
                                      
                                      503
                                      
                                      
                                      
                                      721
                                      
                                      
                                      
                                      195
                                      
                                      
                                      
                                      176Other
      income (expense), net
                                      
                                      
                                      492
                                      
                                      
                                      
                                      (239
                                      )
                                      
                                      
                                      (21
                                      )
                                      
                                      
                                      (535
                                      )
                                      
                                      
                                      (1,969
                                      )Income
      before minority interest and provision for income taxes
                                      
                                      
                                      3,963
                                      
                                      
                                      
                                      13,344
                                      
                                      
                                      
                                      16,027
                                      
                                      
                                      
                                      30,079
                                      
                                      
                                      
                                      38,514Minority
      interest
                                      
                                      
                                      86
                                      
                                      
                                      
                                      187
                                      
                                      
                                      
                                      241
                                      
                                      
                                      
                                      381
                                      
                                      
                                      
                                      464Income
      before provision for income taxes
                                      
                                      
                                      3,877
                                      
                                      
                                      
                                      13,157
                                      
                                      
                                      
                                      15,786
                                      
                                      
                                      
                                      29,698
                                      
                                      
                                      
                                      38,051Provision
      for income taxes
                                      
                                      
                                      —
                                      
                                      
                                      
                                      261
                                      
                                      
                                      
                                      1,807
                                      
                                      
                                      
                                      3,238
                                      
                                      
                                      
                                      5,454Net
      income
                                      
                                      $
                                      3,877
                                      
                                      
                                      $
                                      12,896
                                      
                                      
                                      
                                      13,979
                                      
                                      
                                      
                                      26,460
                                      
                                      
                                      
                                      32,597Other
      comprehensive incomeForeign
      currency translation gain
                                      
                                      
                                      —
                                      
                                      
                                      
                                      426
                                      
                                      
                                      
                                      1,834
                                      
                                      
                                      
                                      8,200
                                      
                                      
                                      
                                      329Comprehensive
      income
                                      
                                      $
                                      3,877
                                      
                                      
                                      $
                                      13,322
                                      
                                      
                                      $
                                      15,813
                                      
                                      
                                      $
                                      34,660
                                      
                                      
                                      $
                                      32,925Basic
      and diluted weighted average number of shares
                                      
                                      
                                      18,867,436
                                      
                                      
                                      
                                      18,867,436
                                      
                                      
                                      
                                      23,041,021
                                      
                                      
                                      
                                      25,000,050
                                      
                                      
                                      
                                      25,000,050Basic
      and diluted earning per share
                                      
                                      $
                                      0.21
                                      
                                      
                                      $
                                      0.68
                                      
                                      
                                      $
                                      0.61
                                      
                                      
                                      $
                                      1.06
                                      
                                      
                                      $
                                      1.30
 
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As
      of June 30,Consolidated
      Balance Sheets
                                
                                2005
                                
                                
                                2006
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2009(in
      thousands)Cash
                                
                                $
                                294
                                
                                
                                $
                                3,740
                                
                                
                                $
                                7,816
                                
                                
                                $
                                14,200
                                
                                
                                $
                                31,044Working
      capital (1)
                                
                                
                                (6,405
                                )
                                
                                
                                6,945
                                
                                
                                
                                30,935
                                
                                
                                
                                55,587
                                
                                
                                
                                75,337Total
      current assets
                                
                                
                                22,002
                                
                                
                                
                                34,906
                                
                                
                                
                                51,267
                                
                                
                                
                                72,017
                                
                                
                                
                                94,214Total
      assets
                                
                                
                                37,467
                                
                                
                                
                                50,544
                                
                                
                                
                                80,280
                                
                                
                                
                                112,905
                                
                                
                                
                                148,551Total
      current liabilities
                                
                                
                                28,406
                                
                                
                                
                                27,962
                                
                                
                                
                                20,332
                                
                                
                                
                                16,431
                                
                                
                                
                                18,877Total
      liabilities
                                
                                
                                28,406
                                
                                
                                
                                27,962
                                
                                
                                
                                20,332
                                
                                
                                
                                17,805
                                
                                
                                
                                20,057Minority
      interest
                                
                                
                                327
                                
                                
                                
                                527
                                
                                
                                
                                801
                                
                                
                                
                                1,293
                                
                                
                                
                                1,762Total
      shareholders’ equity
                                
                                
                                8,734
                                
                                
                                
                                22,055
                                
                                
                                
                                59,147
                                
                                
                                
                                93,806
                                
                                
                                
                                126,732





(1)
              Working capital is equal to total
      current assets less total current
  liabilities.




Consolidated
      Statements of
                                              CashFlows
                                            
                                            Year
      Ended June 30,2005
                                            
                                            
                                            2006
                                            
                                            
                                            2007
                                            
                                            
                                            2008
                                            
                                            
                                            2009(in
      thousands)Cash
      flows provided by (used in) operating activities
                                            
                                            $
                                            (9,883
                                            )
                                            
                                            $
                                            4,933
                                            
                                            
                                            $
                                            (4,200
                                            )
                                            
                                            $
                                            16,801
                                            
                                            
                                            $
                                            29,842Cash
      flows used in investing activities
                                            
                                            
                                            (2,609
                                            )
                                            
                                            
                                            (1,563
                                            )
                                            
                                            
                                            (11,081
                                            )
                                            
                                            
                                            (10,524
                                            )
                                            
                                            
                                            (16,189
                                            )Cash
      flows provided by (used in) financing activities
                                            
                                            
                                            11,858
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            19,171
                                            
                                            
                                            
                                            (1,092
                                            )
                                            
                                            
                                            2,929







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Item
      7.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations.




This
Annual Report for the period ended June 30, 2009 contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”) and Section 21E of the Exchange Act. Generally,
the words “expect,” “estimate,” “anticipate,” “predict,” “believe,” “plan,”
“will,” “may,” “should,” “intend,” “continue,” and similar expressions or the
negative thereof or comparable terminology are intended to identify
forward-looking statements which include, but are not limited to, statements
concerning our expectations and those of our directors and officers regarding
our working capital requirements, financing requirements, business prospects,
and other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends, and similar expressions concerning matters that
are not historical facts.  Such statements are subject to certain risks and
uncertainties, including the matters set forth in this Annual Report or other
reports or documents we file with the Securities and Exchange Commission from
time to time, which could cause actual results or outcomes to differ materially
from those projected. Undue reliance should not be placed on these
forward-looking statements which speak only as of the date hereof. We undertake
no obligation to update these forward-looking statements. In addition, the
forward-looking statements in this Annual Report on Form 10-K for the annual
period ended June 30, 2009 involve known and unknown risks, uncertainties and
other factors that could cause our actual results, performance or achievements
to differ materially from those expressed in or implied by the forward-looking
statements contained herein. Please see the discussion on risk factors in “Item 1A. Risk
Factors” of
this Annual Report.




Overview




We are a
Wyoming corporation and a leading offset printing equipment supplier in China,
headquartered in Beijing. Through our principal operating subsidiary, Duoyuan
China, and Duoyuan China’s manufacturing subsidiaries, namely Langfang Duoyuan
and Hunan Duoyuan, we design, manufacture and sell offset printing equipment
used in the offset printing process. We manufacture one product under the
pre-press product category (a CTP system) and fifteen products across four
product lines under the press product category (single color small format
presses, single color large format presses, multicolor small format presses and
multicolor large format presses). We plan to begin commercial production and
sale of certain post-press products, including a cold-set corrugated paper
machine, which makes corrugated cardboard paper, by the end of 2010. In
addition, we plan to begin commercial production and sale of two other
post-press products, namely an automatic booklet maker and an automatic paper
cutter, for which we have developed prototypes, in 2011.




Our
revenue grew 32.2% from $67.8 million in the year ended June 30, 2007 to $89.6
million in the year ended June 30, 2008 and 18.9% to $106.6 million in the year
ended June 30, 2009. Our net income grew 89.3% from $14.0 million in fiscal 2007
to $26.5 million in fiscal 2008 and 23.2% to $32.6 million in fiscal 2009. For
fiscal 2007, 2008 and 2009, our income from operations was $18.2 million, $30.3
million and $40.3 million, respectively. Our operating results reflect our
continuous growth in sales of our multicolor presses, which are generally more
expensive and more profitable. For fiscal 2007, 2008 and 2009, our multicolor
large format presses and our multicolor small format presses were our best
selling products. For fiscal 2007, 2008 and 2009, we derived 72.3%, 81.4% and
83.3% of our revenue from the sale of our multicolor presses, respectively. For
the same periods, our multicolor large format presses accounted for
approximately 46.7%, 52.0% and 51.2% of our revenue, respectively, and our
multicolor small format presses accounted for approximately 25.6%, 29.4% and
32.1% of our revenue, respectively.




Outlook




We derive
all of our revenue from sales of our pre-press and press equipment to our
distributors in China. China’s printing equipment industry grew from
approximately $908 million in 2002 to approximately $2.5 billion in 2007,
according to the Printing and Printing Equipment Industries Association of
China, representing a CAGR of 23% per annum. Taking into account of the effects
of the current economic environment, Pira International projects China’s
printing equipment market to grow by 34% total from 2009 to 2014, or a CAGR of
6.0% per annum.




Our
business expansion plans focus on developing and manufacturing higher quality
and more efficient multicolor presses, post-press products and machines
servicing the packaging market. Package printing represents the largest segment
in China’s printing industry. According to the Printing and Printing Equipment
Industries Association of China, China’s overall printing industry reached $64.4
billion in 2007, of which approximately $20.5 billion was related to package
printing, accounted for 32% of the China’s printing industry that year. Pira
International projects that package printing to become the largest segment by
2014, followed by commercial printing.




We dedicate a large portion of our
research and development expenses to creating and improving our press products,
particularly our multicolor presses. In addition, we plan to begin commercial
production and sale of a new product targeting the packaging market, namely a
cold-set corrugated paper machine, a machine that makes corrugated cardboard
paper, by the end of 2010. We also plan to begin commercial production and sale of
two post-press products, namely an automatic booklet maker and an automatic
paper cutter, for which we have developed prototypes, in
2011.




Principal
Factors Affecting Our Results of Operations




The
following factors have had, and we expect that they will continue to have, a
significant effect on the development of our business, financial condition and
results of operations:




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Growth
of the Overall Printing Industry, Printing Equipment Market and Packaging
Equipment Market in China
  We
believe the growing market for print products and printing equipment in China
has affected and will continue to affect our financial condition by increasing
market demand for our products. Similarly, China’s printing equipment market
grew from approximately $0.9 billion in 2002 to approximately $2.5 billion in
2007, according to the Printing and Printing Equipment Industries Association of
China, representing a CAGR of 23% per annum. Package printing is an important
segment within China’s printing industry. In 2007, package printing accounted
for 32% of China’s printing industry. Any adverse changes in China’s
economic conditions may adversely affect demand for print and printed packaging
materials, and consequently our products. See “Item 1A. Risk Factors—Risks
Related to Our Business—If the market for printing equipment does not grow at
the rate we expect or at all, including due to a decrease in the demand for
commercial printing services, our business may be materially and adversely
affected.”
  Expansion
of Our Production Capacity and Acquisitions
  To meet
the potential increase in demand for our products and to improve our overall
product quality and manufacturing efficiency, we plan to improve and upgrade our
existing manufacturing facilities and productions lines at Langfang Duoyuan and
Hunan Duoyuan. We expect these projects will be completed by the end of 2010. We
will also consider strategic acquisitions to increase our production capacity
and obtain new technology for additional products. As our production capacity
increases, we also plan to expand our distribution network and end-user customer
base.
  Fluctuations
in Raw Material Costs
  Price
fluctuations in raw materials and components impact our gross profits and
results of operations. Our operations require substantial quantities of various
raw materials, particularly steel and iron, and electronic components. These
materials and components have been and continue to be susceptible to significant
price fluctuations. For example, steel prices in China decreased during fiscal
2006, but increased significantly during fiscal 2007 and 2008, increasing our
raw material costs as a percentage of revenue. For fiscal 2008 and 2009, raw
material costs accounted for approximately 90% and 88%, respectively, of our
production costs. We attempt to minimize the effect of price fluctuations in raw
materials and components by:
  •
              producing a substantial majority
      of our key components in-house, as measured by the cost of revenue, and
      purchasing other off-the-shelf components from third party
      suppliers; •
              buying in large quantities to
      increase our purchasing
  leverage; •
              entering into year-long supply
      contracts for raw materials and components on favorable terms;
      and •
              reducing raw material and
      component consumption through research and development and increased
      automation of our manufacturing
      process.
  Ultimately,
we may need to raise our product prices sufficiently in order to recover higher
raw material and component costs and maintain our profit margin.
  Product
Mix
  Our
revenue and, as described in greater detail below, gross margins in any given
period will be directly impacted by our product mix. Due to the technological
complexity and high capital requirements of multicolor presses, the number of
companies selling multicolor presses in China is significantly smaller than
those selling single color presses. As a result, our multicolor presses have a
higher average unit sales price, which can be substantially greater than that of
single color presses, and generate better gross profits. Also, sales prices and
margins for our single color presses have faced consistent downward pressure
because of increased competition.
  Changes
in PRC Tax Regulations
  Our
Chinese subsidiaries have enjoyed significant tax preferential treatments. These
preferential tax treatments were applicable to foreign-invested manufacturing
enterprises scheduled to operate for a period of not less than ten years in
accordance with the Foreign Invested Enterprise Income Tax Law, which was
effective until December 31, 2007. The additional tax that would otherwise be
payable without such preferential tax treatments totaled $4.5 million for fiscal
2007, $7.9 million for fiscal 2008 and $4.3 million for fiscal 2009. See “Item
1A. Risk Factors—Risks Related to Our Business—The termination and expiration or
unavailability of preferential tax treatments once available to us may
materially and adversely affect our business.”
  As a
result of recent changes in the Chinese enterprise income tax laws, we expect
that our tax expenses will be increase significantly. In addition, as explained
below, some of the tax preferences we previously received were granted by local
governments and not supported by relevant state laws and regulations. As a
result, our Chinese subsidiaries may be ordered by relevant authorities to
refund these tax benefits. In addition, as a result of the changes in Chinese
tax laws, our historical operating results will not be indicative of our
operating results for future periods. See “—Critical Accounting Policies—Taxes
and Incentives” below.
  Impact
of Recent Currency Exchange Rate Increase
  We use
the U.S. dollar as the reporting currency for our financial statements. Our
operations are conducted through our Chinese subsidiaries. On July 21, 2005, the
Chinese government changed its policy of benchmarking the value of the Renminbi
to the U.S. dollar and, as a result, the Renminbi has appreciated by
approximately 17.5% from RMB8.28 to $1.00 on July 21, 2005 to RMB6.83 to $1.00
on June 30, 2009. In converting our Renminbi income statement amount into U.S.
dollars, the average translation rates used for fiscal 2007, 2008 and 2009 were
RMB7.81 to $1.00, RMB7.26 to $1.00 and RMB6.83 to $1.00, respectively. Our U.S.
dollar denominated operating results for these periods have benefited as a
result of the appreciation of the Renminbi against the U.S. dollar.
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  Components
of Revenue and Expenses
  Revenue,
net
  Our
revenue is reported net of value-added taxes, or VAT, that are levied on our
products. As of June 30, 2009, all of our products were subject to VAT at a rate
of 17% of the gross sales price. We also offer sales rebates as an incentive for
large purchase orders. These sales rebates are recorded as a reduction of our
revenue.
  We derive
all of our revenue from the sale of our offset printing equipment to
distributors in China. We sell products in the pre-press and press product
categories of printing equipment with substantially all our revenue being
derived from the sale of our press printing equipment. Pre-press printing
equipment comprised approximately 5.6%, 3.6% and 3.8% of our revenue for fiscal
2007, 2008 and 2009, respectively. Press printing equipment comprised
approximately 94.4%, 96.4% and 96.2% of our revenue for fiscal 2007, 2008 and
2009. For fiscal 2007, 2008 and 2009, within the press category of our printing
equipment, we derived 72.3%, 81.4% and 83.3% of our revenue from the sale of our
multicolor presses, respectively. For fiscal 2007, 2008 and 2009, we derived
23.2%, 16.7% and 14.4% of our revenue from the sale of our single color presses,
respectively.
  For
fiscal 2007, 2008 and 2009, our multicolor large format presses and our
multicolor small format presses were our best selling products. For fiscal 2007,
2008 and 2009, our multicolor large format presses accounted for approximately
46.7%, 52.0% and 51.2% of our revenue, respectively, and our multicolor small
format presses accounted for approximately 25.6%, 29.4% and 32.1% of our
revenue, respectively.
  Because
of the increasing market demand for multicolor presses in China, which typically
have higher profit margins than single color presses, we plan to continue to
expand our multicolor press production capacities, product offerings and sales
network. Our multicolor presses incorporate our advanced technologies, making
them highly automated and efficient, and help reduce potential human errors. Our
multicolor small format presses offer a relatively low-cost solution for
end-user customers with high quality multicolor printing needs, such as
corporate brochures, product catalogues, labels and small packages. Our
multicolor large format presses, which require relatively large investments
compared to our other press products, are suitable for end-user customers with
high-quality multicolor printing needs, such as posters, large packages, and
banners. Our multicolor large format presses are also capable of printing at a
faster speed than our other press products, making them ideal for time sensitive
printing needs.
  Although
we expect that our multicolor presses will continue to be our best selling
products in the near future, we expect that sales of our pre-press product and
single color presses will continue growing as the printing industry in China
continues expanding. Our CTP system is more technologically advanced than
products using the traditional pre-press processing method. Our CTP system
improves printing plate quality and eliminates the labor and chemical intensive
multiple step processes associated with traditional pre-press processing
methods. Although computer-to-plate technology is relatively new in China, we
believe that there is revenue growth potential for our CTP system with increased
market acceptance. We also expect to see revenue growth with our single color
presses, which are typically suited for end-user customers who are entering
offset printing from type-set printing or need to print works that are mostly
single colored, such as books. Our single color presses require low initial
investments and minimal operating skills compared to our multicolor presses. We
also expect to generate revenue from our post-press line of business,
particularly from the manufacture and sale of our cold-set corrugated paper
machines, which we expect to launch by the end of 2010.
  The
following table provides a breakdown of our revenue, by product category, for
the periods indicated:
 
 Year
      Ended June 302007
                                
                                
                                2008
                                
                                
                                2009$
                                
                                
                                %
      of
                                  Revenue
                                
                                
                                $
                                
                                
                                %
      of
                                  Revenue
                                
                                
                                $
                                
                                
                                %
      of
                                  Revenue(dollars
      in thousands)Pre-pressCTP
      system
                                
                                $
                                3,769
                                
                                
                                
                                5.6
                                %
                                
                                $
                                3,184
                                
                                
                                
                                3.6
                                %
                                
                                $
                                4,004
                                
                                
                                
                                3.8
                                %PressSingle
      color small-format presses
                                
                                
                                6,021
                                
                                
                                
                                8.9
                                
                                
                                
                                4,328
                                
                                
                                
                                4.8
                                
                                
                                
                                4,436
                                
                                
                                
                                4.2Single
      color large-format presses
                                
                                
                                9,730
                                
                                
                                
                                14.3
                                
                                
                                
                                10,700
                                
                                
                                
                                11.9
                                
                                
                                
                                10,903
                                
                                
                                
                                10.2Multicolor
      small-format presses
                                
                                
                                17,350
                                
                                
                                
                                25.6
                                
                                
                                
                                26,366
                                
                                
                                
                                29.4
                                
                                
                                
                                34,207
                                
                                
                                
                                32.1Multicolor
      large-format presses
                                
                                
                                31,671
                                
                                
                                
                                46.7
                                
                                
                                
                                46,597
                                
                                
                                
                                52.0
                                
                                
                                
                                54,593
                                
                                
                                
                                51.2Adjustments
                                
                                
                                (729
                                )
                                
                                
                                (1.1
                                )
                                
                                
                                (1,547
                                )
                                
                                
                                (1.7
                                )
                                
                                
                                (1,552
                                )
                                
                                
                                (1.5
                                )Revenue,
      net
                                
                                $
                                67,812
                                
                                
                                
                                100.0
                                %
                                
                                $
                                89,628
                                
                                
                                
                                100.0
                                %
                                
                                $
                                106,591
                                
                                
                                
                                100.0
                                %
  In fiscal
2007, 2008 and 2009, sales to distributors in China accounted for all of our
revenue. We use an extensive distribution network to reach a broad end-user
customer base. We generally make sales on a purchase order and short-term
agreement basis. We do not have long-term purchase orders with any of our
distributors. No single distributor accounted for more than 5.0% of our revenue
for fiscal 2007, 2008 and 2009.
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  Adjustments
to revenue accounted for 1.1%, 1.7% and 1.5% for fiscal 2007, 2008 and 2009,
respectively, for sales rebates paid to distributors as part of our incentive
program that rewards those distributors who meet or exceed their sales targets
in the prior year. We provide sales rebates, or discounts of 2% to 5%, to
distributors who place large purchase orders with us. The greater the dollar
amount of the purchase order, the higher the percentage rebate we offer. We pay
sales rebates at the end of each calendar year. We intend to continue this
incentive program.
  Cost
of Revenue
  Our cost
of revenue consists primarily of direct costs to manufacture our products,
including component and raw material costs, salaries and related manufacturing
personnel expenses, production plant and equipment depreciation and repair and
maintenance costs. Our costs of revenue were $37.7 million, $44.5 million and
$50.3 million for fiscal 2007, 2008 and 2009, respectively.
  The
direct costs of manufacturing a new product are generally highest when a new
product is first introduced due to (1) start-up costs associated with
manufacturing a new product and (2) generally higher raw material and component
costs due to lower initial production volumes. As production volumes increase,
we typically improve our manufacturing efficiencies and are able to strengthen
our purchasing power by buying raw materials and components in greater
quantities, which decreases raw material and component costs. In addition, we
are able to lower or help offset rising raw material and component costs by
identifying lower-cost raw materials and components. Also, when production
volumes become sufficiently large, we often gain further cost efficiencies by
producing our key components in-house at our Hunan Duoyuan
facility.
  Our
principal raw materials are steel, iron and electronic components. We purchase
our raw materials and components from Chinese suppliers, manufacturing a
substantial majority of our key components in-house. As a result, we believe we
currently have a relatively low cost base compared to other printing equipment
manufacturers, especially when compared to international printing equipment
manufacturers. The relatively low operation, labor and raw material costs in
China have historically allowed us to achieve lower costs as we increase
purchase volumes and make improvements in manufacturing processes.
  Primarily
due to a drop in commodity prices as a result of the global economic slowdown,
the overall cost of our raw materials in fiscal 2009 decreased by 3% compared to
fiscal 2008. We expect raw material costs to remain relatively unchanged for the
remaining calendar 2009, because of existing supply agreements. However, we
believe that raw materials, components and wages in China will increase as a
result of China’s further economic development. Once global economic conditions
improve and our existing supply agreements expire, we expect our raw material
costs will increase.
  As we
focus on manufacturing more advanced products and new product lines, we may find
it necessary to use more expensive raw materials and components. We plan to
mitigate future increases in raw material and component costs by using more
common resources across our product lines, increasing in-house manufacturing of
our key components and adopting more uniform manufacturing and assembly
practices. In addition, to minimize and control raw material waste and increase
production efficiency, we continue to make investments to improve and further
automate our manufacturing process.
  Gross
Margins
  Our gross profit margins for fiscal
2007, 2008 and 2009 were 44.4%, 50.4% and 52.8%, respectively. Our gross profit
margins are impacted by changes in the average selling prices of our products,
product sales mix and cost of revenue. The average selling prices for our
products may decline if competitors lower their prices and we respond by
reducing prices for some of our products to compete more effectively or if we
choose to lower our prices to gain market share. For example, in fiscal 2008
and fiscal 2009, we
lowered the prices of our entry level single color small format presses to gain
market share. Alternatively, we are able to increase our average selling prices
in certain circumstances, such as when we introduce new or enhanced products.
For example, in fiscal 2008 we introduced a new model of our multicolor large
format presses, Model DY4104, that has all of the existing features of our other
multicolor large format presses, but is also capable of printing on packaging
materials directly. Currently, this is the most expensive product we sell. Also,
in fiscal 2009, we introduced a new model of our multicolor large format
presses, Model PZ-4660AL, which is an enhanced version or our existing Model
PZ-4660. This new model produces printed materials in brighter colors and is
more automated than our existing model.
  Since the
average selling prices and gross profit margins of our products vary by product
line, changes in our product sales mix will also impact our overall gross profit
margins. Our more sophisticated and technologically advanced products, such as
our CTP system and multicolor presses, generally have higher gross profit
margins than our less sophisticated and low technology products, such as our
single color presses. Therefore, product mix impacts our overall gross profit
margins. For fiscal 2007, 2008 and 2009, the overall gross profit margins for
our CTP system were 42.6%, 47.1% and 47.2%, respectively, and the overall gross
profit margins for our multicolor presses were 49.7%, 51.2% and 53.3% for the
same periods. For fiscal 2007, 2008 and 2009, the overall gross profit margins
for our single color presses were 28.5%, 46.5% and 46.1%,
respectively.
  Given
recent market trends and to better offset raw material costs and maintain our
gross profit, we have been adjusting our product mix by increasing our
production and sale of multicolor presses while decreasing our production and
sale of single color presses. As a result, our gross profit margins increased by
2.4% from 50.4% in fiscal 2008 to 52.8% in fiscal 2009, primarily due to the
increase in the proportion of revenue from sales of our multicolor
presses.
  Lastly,
our gross profit margins are also affected by changes in our cost of revenue and
our ability to manage such cost as described in further detail “—Components of
Revenue and Expenses—Cost of Revenue” above.
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  Research
and Development Expenses
  Our
research and development expenses consist primarily of costs associated with
designing, developing and testing our products. Among other things, these costs
include employee compensation and benefits for our research and development
team, expenditures on purchases of supplies and raw materials, depreciation
expenses related to equipment used for research and development and other
related costs. Our research and development team focuses its efforts on
upgrading and enhancing our existing products and designing new products,
discovering new ways to improve our press printing equipment, particularly our
multicolor presses, and developing new post-press printing equipment. Our
research and development expenses for fiscal 2007, 2008 and 2009 were $1.0
million, $1.7 million and $1.8 million, respectively.
  Our
research and development expenses as a percentage of revenue were 1.5%, 1.9% and
1.7% for fiscal 2007, 2008 and 2009, respectively. From fiscal 2007 to fiscal
2008, our research and development expenses as a percentage of revenue increased
mainly due to increased costs from the purchase of raw materials and an increase
in salary expenses as we hired additional engineers.
  We plan
to upgrade our existing products and design new products, particularly
multicolor presses as well as certain post-press equipment like our cold-set
corrugated paper machine. We plan to continue investing in research and
development to maintain and enhance our market competitiveness.
  Selling
Expenses
  Our
selling expenses consist primarily of employee subsidies and benefits for our
sales and marketing staff, transportation costs and marketing, sales,
advertising, travel and entertainment activities expenses. Our selling expenses
were $7.8 million, $8.7 million and $9.7 million for fiscal 2007, 2008 and 2009,
respectively.
  From
fiscal 2007 to fiscal 2009, our selling expenses increased primarily as a result
of increased sales and marketing activities, the hiring of additional sales
representatives and increased transportation costs. In fiscal 2009, our selling
expenses as a percentage of revenue decreased by 0.6% to 9.1% from 9.7% in
fiscal 2008 mainly due to increased sales volume, which created economies of
scale, reducing our per unit selling expenses. In fiscal 2008, our selling
expenses as a percentage of revenue decreased by 1.8% to 9.7% from 11.5% in
fiscal 2007, as our transportation costs remained steady and we improved our
selling and marketing efficiencies.
  Because
we sell all of our products to distributors, our selling expenses as a
percentage of revenue are significantly lower than manufacturers that primarily
sell directly to end-user customers. While we intend to continue to sell our
products exclusively to distributors, we plan to build our brand recognition
through increased marketing activities both inside and outside of China, which
may increase our sales and marketing expenses in terms of actual amounts, as
well as a percentage of revenue. In the near term, we expect that certain
components of our selling expenses will increase as we continue to build brand
recognition through increased marketing activities both inside and outside of
China. Specifically, we expect that advertising expenses will increase as we
increase our advertising in magazines and trade journals and expand into new
forms of media, including online advertising. In addition, we anticipate that
exhibition expenses will increase as we plan to participate in more trade shows
and exhibitions all across China to develop and enhance our reputation in the
printing and packaging industries. We also expect salary expenses to increase as
we continue to hire additional sales representatives to help broaden our
end-user customer base. This anticipated increase in selling expenses will be a
direct result of our plan to grow, strengthen and support our nationwide
distribution network.
  General
and Administrative Expenses
  Our
general and administrative expenses consist primarily of employee compensation
and benefits for our general management, finance and administrative staff,
depreciation and amortization with respect to equipment used for general
corporate purposes, consultant fees and other expenses incurred for general
corporate purposes. Our general and administrative expenses were $3.1 million,
$4.5 million and $4.5 million for fiscal 2007, 2008 and 2009,
respectively.
  We
anticipate we will incur more expenses as we seek more guidance and services
from attorneys, investors relationship consultants and auditors as our business
expands. Our general and administrative expenses as a percentage of revenue were
4.5%, 5.0% and 4.2% for fiscal 2007, 2008 and 2009, respectively. In general, as
a percentage of revenue, we expect that general and administrative expenses will
decrease as we increase our staffing level at a slower rate than we increase our
revenue.
  Liquidated
Damages Expense
  Liquidated
damages expense relates to our failure to timely register for resale certain
private placement shares and terminate related party transactions. We recorded
liquidated damages expenses of $2.1 million for fiscal 2007. We settled the
claims for liquidated damages in the third quarter of fiscal 2008, and we
reversed the accrual and recognized a net liquidated damages gain of $0.2
million for fiscal 2008. See “—Critical Accounting Policies—Liquidated Damages
Expense.”
  Other
Income (Expense)
  Other
expense is comprised primarily of interest expense from five short-term loans we
have with the Bank of Agriculture, Chongwen branch in the aggregate amount of
$14.4 million as of June 30, 2009. Other expense is net of interest income from
our interest bearing checking accounts.
  Minority
Interests
  Minority
interests refer to the 5% equity interest in Langfang Duoyuan and 0.6% equity
interest in Hunan Duoyuan held by Huiyuan Institute. For a summary of Huiyuan
Institute's equity ownership, see “Item 1. Business—Our
Subsidiaries—Our Manufacturing
Subsidiaries.”Income allocated
to the minority interests was $0.2 million, $0.4 million and $0.5 million for
fiscal 2007, 2008 and 2009, respectively.
  Provision
for Income Taxes
  Our
provision for income taxes was $1.8 million, $3.2 million and $5.5 million for
fiscal 2007, 2008 and 2009, respectively. Our effective tax rate was 11.4%,
10.9% and 14.3% for the same periods.
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  Foreign
Currency Translation Adjustments
  Although
all of our revenue and expenses are denominated in Renminbi, we use the U.S.
dollar for financial reporting purposes. Our results of operations and cash
flows are calculated based on the average exchange rate during the relevant
periods. Our assets and liabilities are calculated based on the uniform exchange
rate announced by the People’s Bank of China at the end of the relevant periods.
Our share capital is calculated based on historical exchange rates. This
practice is in compliance with U.S. GAAP.
  Critical
Accounting Policies
  We
prepare our financial statements in accordance with U.S. GAAP, which requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosure of contingent assets
and liabilities. We evaluate our estimates and judgments, including those
related to sales, returns, pricing concessions, bad debts, inventories,
investments, fixed assets, intangible assets, income taxes and other
contingencies, based on our historical experience and various other assumptions
that we believe are reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or
circumstances.
  We
believe the following accounting policies are critical to the portrayal of our
financial condition and results of operations and require difficult, subjective
or complex management judgments, often as a result of the need to estimate the
effects of matters that are inherently uncertain.
  Revenue
Recognition
  We
recognize revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue
Recognition”, which specifies that revenue is realized or realizable and earned
when four criteria are met:
 
 •
                  persuasive evidence of an
      arrangement exists, such as sales
  contracts;
 •
                  product is shipped or services
      have been rendered;
 •
                  the price to the buyer is fixed
      or determinable; and
 •
                  collectability of payment is
      reasonably assured.
  In
accordance with Statement of Financial Accounting Standards, or SFAS, No. 48,
“Revenue Recognition when Right of Return Exists,” revenue is recorded net of an
estimate of markdowns, price concessions and warranty costs. Markdowns represent
price adjustments on sale of units whose model is nearing the end of its cycle
and the model is planned to be discontinued; price concessions represent price
adjustments on contractual agreements for the sale of units; and warranty costs
represent costs to repair previously sold units still under warranty for
manufacturer’s defects. Such amounts are based on management’s evaluation of
historical experience, current industry trends and estimated costs.
  We sell
our products solely to distributors. Master distribution agreements are signed
with each distributor. The agreements list all terms and conditions with the
exception of delivery, price and quantity terms, which are evidenced separately
in purchase orders. Title transfers when products are shipped. There are no
instances where receivables from distributors are not due and payable until
goods purchased from us are sold by the distributors. We do not sell products to
distributors on a consignment basis. Our distributors have a right of return on
our products within one month after shipping only if our products exhibit any
manufacturing defects and it cannot be repaired. We did not have any returns
during fiscal 2007, 2008 or 2009 and did not provide for any allowance for sales
returns.
  We recognize revenue when the goods are
shipped and title has passed. Sales revenue represents the invoiced value of
goods, net of VAT. All of our products that are sold in China are subject to a
Chinese VAT at a rate of 17% of the gross sales price or at a rate approved by
the Chinese local government. This VAT may be offset by the VAT paid by us on
raw materials and other materials included in the cost of producing their finished products. The
VAT on sales may also be offset by the VAT paid on equipment purchases. Our
distributors are all equipped to install our products and we are not
contractually obligated to perform any installation services. As a result, there
is no substantial performance required on our part and there is no impact on our
recognition of revenues.
  Purchase
prices of products are fixed and customers are not allowed to renegotiate
pricing after the contracts are signed. The agreements with our distributors do
not include cancellation or termination clauses.
  Credit
limits are assigned to each distributor. As a distributor builds a sales and
credit history with us, the credit limit can be increased. Credit limits are
periodically reviewed by management and reductions to credit limits are made if
deemed necessary.
  We
estimate sales rebates to distributors based on the projected annual sales and
corresponding cash receipts. These rebates are paid at the end of each calendar
year. We account for the sales rebates in accordance with Emerging Issues Task
Force Issue 01-09, “Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products).” Sales rebates are included as
a reduction of revenue and accounts receivable to be received by
us.
  For
fiscal 2007, 2008, and 2009, the aggregate amounts referenced above of the
markdowns, price concessions, warranty costs, and sales rebates were immaterial
to the consolidated financial statements taken as a whole for each of those
years.
  Accounts
Receivable, Trade and Allowance for Doubtful Accounts
  During
the normal course of business, we extend unsecured preferred credit terms to
some of our distributors, specifically those distributing our multicolor
presses. We assign credit limits to each distributor. As a distributor builds a
sales history with us, we may adjust its credit limits. Our management reviews
these credit limits from time to time and makes adjustments as it deems
advisable.
  For
single color presses, distributors must pay the entire purchase price before
shipment. For multicolor presses, distributors are required to pay between 50%
and 70% of the purchase price before shipment. Our sales representatives
evaluate the creditworthiness of these distributors in order to determine their
installment payment schedules for the remaining 30% to 50% of the multicolor
press purchase prices. These installment payment schedules, entered into at the
time a distributor signs a purchase order, generally last for six to nine
months.
  - 37
-
 Table of Contents
  We review
accounts receivable on a quarterly basis to determine if the allowance for
doubtful accounts is adequate. We record a reserve for doubtful accounts when
collection of the full amount is no longer probable. Our reserves of $1.2
million and $1.4 million as of June 30, 2008 and 2009, respectively, were
consistent with our historical experience and we consider them
adequate.
  Inventories
  We record
inventories at the lower of cost or market, using the weighted-average method.
We review our inventory on a regular basis for possible obsolete goods by
examining our products’ shelf life and distributor demand to determine if any
reserve is necessary for potential obsolescence. However, most of our products
are manufactured on a purchase order basis. We determined that no reserves were
necessary as of June 30, 2008 and 2009.
  Liquidated
Damages Expense
  Liquidated
damages expense relates to our failure to timely register for resale certain
private placement shares and terminate related party transactions. We recorded
liquidated damages expenses of $2.1 million for fiscal 2007. We settled the
claims for liquidated damages in the third quarter of fiscal 2008, and we
reversed the accrual and recognized a net liquidated damages gain of $0.2
million for fiscal 2008.
  The
registration liquidated damages meet the definition of a registration payment
arrangement as defined in Financial Accounting Standards Board’s, or FASB, Staff
Position No. EITF 00-19-2, “Accounting for Registration Payment Arrangements,”
or EITF 00-19-2. In accordance with EITF 00-19-2, paragraph 7, the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment and related party arrangement is recognized and measured
separately. In accordance with FASB Interpretation No. 14, “Reasonable
Estimation of the Amount of Loss,” we have recorded an expense and a liability
equal to the minimum estimated loss. In November 2007, we reached a settlement
with our private placement investors, who agreed to waive the liquidated damages
due in exchange for warrants or cash payments. Therefore, we reversed the
accrual and recognized a gain, which is included in liquidated damages as a
credit balance in our financial statements.
  Impairment
of Long-Lived Assets, Including Intangible Assets and Fixed Assets
  We review
our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may no longer be
recoverable.
  When
these events occur, we measure impairment by comparing the carrying value of the
long-lived assets to the estimated undiscounted future cash flows expected to
result from the use of the assets and their eventual disposition. If the sum of
the expected undiscounted cash flows is less than the carrying amount of the
assets, we recognize an impairment loss based on the fair value of the assets.
We have determined that there was no impairment of long-lived
assets.
  As of
June 30, 2009, we expect the long-lived intangible assets on our consolidated
balance sheet, primarily related to the land use rights for Langfang Duoyuan and
Hunan Duoyuan, to be fully recoverable.
  Income
Taxes
  We
recognize deferred income taxes for temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements, net operating loss carry-forwards and credits by applying enacted
statutory tax rates applicable to future years.
  We reduce
deferred tax assets by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. We provide for current income taxes in accordance with the
laws of the relevant tax authorities.
  Taxes
and Incentives
  Prior to
January 1, 2008, our subsidiaries were governed by the FIE Income Tax Law and
various local income tax laws, or collectively the Old Income Tax
Laws.
  Beginning
on January 1, 2008, the New EIT Law replaced the Old Income Tax Laws for
domestic Chinese enterprises and foreign invested enterprises, or FIEs.
Generally, the income tax rate of 25% in accordance with the New EIT Law
replaced the 33% rate applicable to domestic Chinese enterprises and foreign
invested enterprises, or FIEs. The New EIT Law, however, permits companies,
whether foreign-invested or domestic, to continue to enjoy their preferential
tax treatment granted in accordance with the ten prevailing tax laws and
regulations, adjusted by certain transitional phase-out rules.
  According
to the Old Income Tax Laws, upon approval by the PRC tax authorities, FIEs
scheduled to operate for ten years or more and engaged in manufacturing and
production may be exempt from income taxes for two years, commencing with their
first profitable year of operations, after taking into account any losses
brought forward from prior years, and thereafter with a 50% reduction for the
next three years. For tax filing purposes in China, all yearly periods refer to
calendar years.
  As a foreign-invested manufacturing
enterprise scheduled to operate for a period of not less than ten years in
accordance with the FIE Income Tax Law, Duoyuan China enjoyed a two-year tax
exemption followed by a three-year 50% tax reduction. Duoyuan China began to
generate net profit in the calendar year ended December 31, 2004. Therefore,
Duoyuan China had an income tax exemption for the calendar years ended December
31, 2004 and 2005, and enjoyed a 50% tax reduction for the calendar years ended
December 31, 2006, 2007 and 2008. Under the phase-out rules, enterprises
established before the
promulgation date of the New EIT Law and which were granted tax holidays under
the then effective tax laws or regulations may continue to enjoy their tax
holidays until their expiration. Duoyuan China, an enterprise established before
the promulgation date of the New EIT Law, continued to enjoy its two-year 50%
reduction of the enterprise income tax until the end of 2008, and therefore was
subject to a 12.5% tax rate for the calendar year ended December 31, 2008.
Beginning on January 1, 2009, Duoyuan China became subject to the 25% income tax
rate under the New EIT Law. See “Item 1A. Risk Factors—Risks Related to Our
Business—The termination and expiration or unavailability of preferential tax
treatments once available to us may have a material adverse effect on our
business, financial condition and operating results.”
  - 38
-
 Table of Contents
  Our
Langfang Duoyuan facility is located in a Special Economic and High Technology
Zone, and the Administration Committee of such zone has granted Langfang Duoyuan
a special income tax rate for doing business in the special zone. With this
approval from the local government, Langfang Duoyuan is exempted from income
taxes for five years, commencing with its first year of profitable operations.
Langfang Duoyuan began to generate net profit in the calendar year ended
December 31, 2003. Therefore, Langfang Duoyuan enjoyed an income tax exemption
for the calendar years 2003 through 2007. Langfang Duoyuan became subject to the
25% income tax rate starting January 1, 2008, under the New EIT Law. Because
this tax preferential treatment was granted by the local government and was not
supported by the state laws and regulations, we face a risk of being ordered to
refund these prior tax benefits. See “Item 1A. Risk Factors—Risks Related to Our
Business—The termination and expiration or unavailability of preferential tax
treatments once available to us may materially and adversely affect our
business.”
  Prior to
the incorporation of Hunan Duoyuan, we negotiated with Hunan Shaoyang Treasury
Department for an income tax exemption. The Hunan Shaoyang Treasury Department
granted Hunan Duoyuan a five year income tax exemption commencing with its first
year of profitable operations. Hunan Duoyuan began to generate net profit in the
calendar year ended December 31, 2005. Therefore, Hunan Duoyuan enjoys an income
tax exemption for the calendar years 2005 through 2009. Pursuant to the tax
preferential treatment granted by the local government, Hunan Duoyuan will
become subject to the 25% income tax rate starting January 1, 2010, under the
New EIT Law. Because this tax preferential treatment was granted by the local
government and was not supported by the state laws and regulations, we face a
risk of being ordered to refund these prior tax benefits. See “Item 1A. Risk
Factors—Risks Related to Our Business—The termination and expiration or
unavailability of preferential tax treatments once available to us may have a
material adverse effect on our business, financial condition and operating
results.”
  The
following table reconciles the U.S. statutory rates to our effective tax rates
for fiscal 2007, 2008 and 2009:
 
 Year
      Ended June 30,2007
                        
                        
                        2008
                        
                        
                        2009U.S.
      statutory rates
                        
                        
                        34
                        %
                        
                        
                        34
                        %
                        
                        
                        34
                        %Foreign
      income not recognized in the U.S.
                        
                        
                        -34
                        
                        
                        
                        -34
                        
                        
                        
                        -34China
      income taxes
                        
                        
                        33
                        
                        
                        
                        33
                        
                        
                        
                        25China
      income tax exemption
                        
                        
                        -23.2
                        
                        
                        
                        -22.3
                        
                        
                        
                        -11.2Other
      (a)
                        
                        
                        1.6
                        
                        
                        
                        0.2
                        
                        
                        
                        0.5Effective
      income tax rates
                        
                        
                        11.4
                        %
                        
                        
                        10.9
                        %
                        
                        
                        14.3
                        %
  (a)
                The
      1.6%, 0.2% and 0.5% represent $2,720,474, $423,888 and $1,399,143 of
      expenses incurred by us that are not subject to China income tax for
      fiscal 2007, 2008 and 2009,
respectively.
  VAT
  Enterprises
or individuals who sell commodities, engage in repair and maintenance, or import
and export goods in China are subject to a VAT in accordance with Chinese laws.
The VAT standard rate is 17% of the gross sales price. A credit is available
whereby VAT paid on the purchases of equipment, semi-finished products or raw
materials used in finished products can be used to offset the VAT due on sales
of the finished products.
  The VAT
on sales amounted to $19.8 million, $28.9 million, and $32.4 million for fiscal
2007, 2008 and 2009, respectively. The VAT on purchases amounted to $7.3
million, $20.1 million and $23.9 million for fiscal 2007, 2008 and 2009,
respectively. Our sales and purchases are recorded net of VAT, which is not
impacted by the tax preferential treatments.
  Fair
Value of Financial Instruments
  On July
1, 2008, we adopted SFAS No. 157, “Fair Value Measurements,” or SFAS 157. SFAS
157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the consolidated balance
sheets for receivables and current liabilities each qualify as financial
instruments and are a reasonable estimate of fair value because of the short
period of time between the origination of such instruments and their expected
realization and their current market rate of interest. The three levels of
valuation hierarchy are defined as follows:
 
 •
                  Level 1 inputs to the valuation
      methodology are quoted prices (unadjusted) for identical assets or
      liabilities in active
markets.
 •
                  Level 2 inputs to the valuation
      methodology include quoted prices for similar assets and liabilities in
      active markets and inputs that are observable for the asset or liability,
      either directly or indirectly, for substantially the full term of the
      financial
instrument.
  - 39
-
 Table of Contents
  •
                  Level 3 inputs to the valuation
      methodology are unobservable and significant to the fair value
      measurement.
  We
analyze all financial instruments with features of both liabilities and equity
under SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” or SFAS 150, SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” or SFAS 133, and
EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock,” or EITF 00-19. Under EITF 00-19,
our warrants were required to be recorded as a liability at fair value and
marked to market each reporting period.
  As of
June 30, 2009, the outstanding principal on our short-term loans was $14.4
million. We concluded that the carrying value of the short term loan is a
reasonable estimate of fair value because the amounts are due within one year
and the stated interest rate approximates current rates available.
  As of
June 30, 2009, we determined that certain inputs to the fair value measurement
of the warrant liability falls under level 3 of the valuation hierarchy, since
there was no observable market price for certain inputs significant to the
valuation model used to determine the fair value of the warrant liability, and
also rendered the fair value calculation under the same classification. We carry
warrant liability at fair value totaling $1.2 million as of June 30,
2009.
 
 Fair Value
                          as of
                          June 30, 2009
                        
                        
                        Fair Value Measurements at June 30, 2009
                          Using Fair Value HierarchyLiabilities
                        
                        
                        
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3Warrant
      liability
                        
                        $
                        1,180,477
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        1,180,477
  Except
for the derivative liabilities and the short term loan, we did not identify any
other non-recurring assets and liabilities that are required to be presented on
the consolidated balance sheet at fair value in accordance with SFAS
157.
  SFAS 159,
“The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115,” became applicable and
effective for us on July 1, 2008. SFAS 159 provides us with the irrevocable
option to elect fair value for the initial and subsequent measurement for
certain financial assets and liabilities on a contract-by-contract basis with
the difference between the carrying value before election of the fair value
option and the fair value recorded upon election as an adjustment to beginning
retained earnings. We chose not to elect the fair value option.
  Results
of Operations
  The
following table sets forth selected data from our consolidated statements of
income and other comprehensive income for the periods indicated as a percentage
of revenue:
 
 Year
      Ended June 30,2007
                        
                        
                        2008
                        
                        
                        2009$
                        
                        
                        %
      of
                          Revenue
                        
                        
                        $
                        
                        
                        %
      of
                          Revenue
                        
                        
                        $
                        
                        
                        %
      of
                          Revenue(dollars
      in thousands)Revenue,
      net
                        
                        
                        67,812
                        
                        
                        
                        100.0
                        %
                        
                        
                        89,628
                        
                        
                        
                        100.0
                        %
                        
                        
                        106,591
                        
                        
                        
                        100.0
                        %Cost
      of revenue
                        
                        
                        37,694
                        
                        
                        
                        55.6
                        
                        
                        
                        44,462
                        
                        
                        
                        49.6
                        
                        
                        
                        50,334
                        
                        
                        
                        47.2Gross
      profit
                        
                        
                        30,118
                        
                        
                        
                        44.4
                        
                        
                        
                        45,166
                        
                        
                        
                        50.4
                        
                        
                        
                        56,257
                        
                        
                        
                        52.8Selling
      expenses
                        
                        
                        7,827
                        
                        
                        
                        11.5
                        
                        
                        
                        8,705
                        
                        
                        
                        9.7
                        
                        
                        
                        9,726
                        
                        
                        
                        9.1General
      and administrative expenses
                        
                        
                        3,078
                        
                        
                        
                        4.6
                        
                        
                        
                        4,472
                        
                        
                        
                        5.0
                        
                        
                        
                        4,474
                        
                        
                        
                        4.2Research
      and development
                        
                        
                        1,046
                        
                        
                        
                        1.5
                        
                        
                        
                        1,683
                        
                        
                        
                        1.9
                        
                        
                        
                        1,768
                        
                        
                        
                        1.7Income
      from operations
                        
                        
                        18,167
                        
                        
                        
                        26.8
                        
                        
                        
                        30,306
                        
                        
                        
                        33.8
                        
                        
                        
                        40,289
                        
                        
                        
                        37.8Liquidated
      damage, net of settlement
                        
                        
                        (2,119
                        )
                        
                        
                        (3.1
                        )
                        
                        
                        235
                        
                        
                        
                        0.3
                        
                        
                        
                        —
                        
                        
                        
                        —Change
      of the fair value of derivative instruments
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        73
                        
                        
                        
                        0.1
                        
                        
                        
                        194
                        
                        
                        
                        0.2Other
      income (expense), net
                        
                        
                        (21
                        )
                        
                        
                        (0.1
                        )
                        
                        
                        (535
                        )
                        
                        
                        (0.6
                        )
                        
                        
                        (1,969
                        )
                        
                        
                        (1.8
                        )Income
      before minority interest and provision for income taxes
                        
                        
                        16,027
                        
                        
                        
                        23.7
                        
                        
                        
                        30,079
                        
                        
                        
                        33.6
                        
                        
                        
                        38,514
                        
                        
                        
                        36.2Minority
      interest
                        
                        
                        241
                        
                        
                        
                        0.4
                        
                        
                        
                        382
                        
                        
                        
                        0.4
                        
                        
                        
                        464
                        
                        
                        
                        0.4Provision
      for income taxes
                        
                        
                        1,807
                        
                        
                        
                        2.7
                        
                        
                        
                        3,238
                        
                        
                        
                        3.6
                        
                        
                        
                        5,454
                        
                        
                        
                        5.1Net
      income
                        
                        
                        13,979
                        
                        
                        
                        20.6
                        
                        
                        
                        26,459
                        
                        
                        
                        29.5
                        
                        
                        
                        32,596
                        
                        
                        
                        30.7Foreign
      currency translation gain
                        
                        
                        1,834
                        
                        
                        
                        2.7
                        
                        
                        
                        8,200
                        
                        
                        
                        9.1
                        
                        
                        
                        329
                        
                        
                        
                        0.3Comprehensive
      income
                        
                        $
                        15,813
                        
                        
                        
                        23.3
                        %
                        
                        $
                        34,659
                        
                        
                        
                        38.7
                        %
                        
                        $
                        32,925
                        
                        
                        
                        31.0
                        %
  - 40
-
 Table of Contents
  Comparison
of Fiscal 2008 and Fiscal 2009
  Revenue,
net
  Our
revenue increased by $17.0 million, or 18.9%, from $89.6 million for fiscal 2008
to $106.6 million for fiscal 2009, primarily as a result of an increase in
revenue from all our products. Specifically, revenue for our pre-press printing
equipment increased by $0.8 million, or 25.7%, from $3.2 million for fiscal 2008
to $4.0 million for fiscal 2009. In addition, revenue for our press printing
equipment for fiscal 2009 increased by $16.1 million, or 18.4%, when compared to
fiscal 2008. Specifically, the increase in revenue of our press printing
equipment was primarily due to increased demand for our presses. Our top five
selling models, which accounted for more than 72% of our total revenue in fiscal
2009, were all multicolor presses.
  Pre-press
Printing Equipment
  CTP
System. Revenue for our CTP system increased by $0.8 million, or 25.7%,
from $3.2 million for fiscal 2008 to $4.0 million for fiscal 2009. We believe
that the increase in revenue for our CTP system was a result of increased market
acceptance and our increased marketing activities. During fiscal 2009, we
promoted our CTP system at more exhibitions and trade shows when compared to the
prior year.
  Press
Printing Equipment
  Revenue
from the sale of our press printing equipment increased by $16.1 million, or
18.4%, from $88.0 million for fiscal 2008 to $104.1 million for fiscal 2009.
This increase was primarily due to an increase in demand for our multicolor
presses. We sold more units of our multicolor presses when compared to the prior
year.
  Single
Color Small Format Press.
Revenue for our single color small format presses increased by $0.1 million, or
2.5%, from $4.3 million for fiscal 2008 to $4.4 million for fiscal 2009. Due to
increased competition,
demand for our single color small format presses decreased and we sold fewer
single color small format presses for fiscal 2009 when compared to the prior
year. The slight increase in revenue was mainly due to the appreciation of the
Renminbi against the U.S. dollar.
  Single Color
Large Format Press. Revenue for our single color large format presses
increased by $0.2 million, or 1.9%, from $10.7 million for fiscal 2008 to $10.9
million for fiscal 2009. This increase was primarily due to the increased demand
for a new single color large format press, Model DY66T, which we introduced in
October 2008. We promoted Model DY66T to our distributors as a complementary
product to our multicolor presses at trade shows and exhibitions we attended
during fiscal 2009. This model offers similar functionality to one of our
existing single color large format presses, Model J4109, but costs less than
Model J4109. This increase in revenue from Model DY66T was offset by a decrease
in revenue from J4109 of $1.2 million for fiscal 2009 when compared to the prior
year.
  Multicolor Small
Format Press. Revenue for our multicolor small format presses increased
by $7.8 million, or 29.7%, from $26.4 million for fiscal 2008 to $34.2 million
for fiscal 2009. We believe the increased demand for our multicolor small format
press was partially a result of increased marketing activities, which resulted
in increased sales volume. The increase in the number of units sold was a result
of increased purchases by our existing and new end-user customers seeking
upgrades to multicolor presses from single color presses. We promoted our
multicolor small format presses at more exhibitions and trade shows during
fiscal 2009 when compared to the prior year. Specifically, for fiscal 2009 due
to our increased marketing efforts, we recognized an increase in revenue by $3.3
million when compared to fiscal 2008 due to the sale of Model DY456, a printing
machine that prints colorful books, magazines, corporate brochures, product
catalogues, labels and small packages. We also increased the promotion of Model
DY452, a highly automated multicolor small format press mainly used for shorter
print runs such as corporate brochures, conference documents, labels and small
packages. This increase in promotion of Model DY452 attributed to an increase in
our revenue from the sale of this product by $3.5 million over the prior
year.
  Multicolor Large
Format Press. Revenue for our multicolor large format presses increased
by $8.0 million, or 17.2%, from $46.6 million for fiscal 2008 to $54.6 million
for fiscal 2009. We believe the increased demand for our multicolor large format
presses was partially a result of increased marketing activities, which resulted
in an increase in sales volume for our existing products, and new demand for two
products we introduced in fiscal 2009. The increase in the number of units sold
was a result of increased purchases by our existing and new end-user customers
seeking upgrades to multicolor presses from single color presses. Specifically,
we introduced into the market a new multicolor large format press, Model
DY474II, in November 2008. This highly automated and energy efficient machine,
which is an enhanced version of an existing product, Model DY474, has been well
received since its introduction. It has new features such as plate cocking and a
color pilotless control function. It generated $3.8 million in revenue for
fiscal 2009. We also introduced into the market another new multicolor large
format press, PZ-4660AL, in February 2009. This is an enhanced version of an
existing product produces printed materials in brighter colors and is more
automated. It generated $3.1 million in revenue for fiscal 2009.
  Cost
of Revenue
  As a
percentage of revenue, the cost of revenue decreased by 2.4% from 49.6% for
fiscal 2008 to 47.2% for fiscal 2009. This decrease was mainly due to the
increase in sales of our multicolor presses, which overall have lower costs and
higher gross profit margins than our single color presses.
  Our cost
of revenue increased by $5.8 million, or 13.2%, from $44.5 million for fiscal
2008 to $50.3 million for fiscal 2009. This increase was primarily due to an
increase in the volume of our products sold during this period, particularly the
sale of our multicolor presses. This increase in sales contributed to the
increase in consumption of raw materials and components across our two product
categories as our revenue increased by 18.9% from fiscal 2008 to fiscal
2009.
  - 41
-
 Table of Contents
  Gross
Profit
  Our gross
profit margin increased by 2.4% from 50.4% for fiscal 2008 to 52.8% for fiscal
2009. The increase in gross profit and gross profit margin during this period
was due to the increased production and sale of our multicolor presses, which
have higher gross profits and gross profit margins than our single color
presses.
  Our gross
profit increased by $11.1 million, or 24.6%, from $45.2 million for fiscal 2008
to $56.3 million for fiscal 2009.
  Selling
Expenses
  As a
percentage of revenue, selling expenses decreased by 0.6% from 9.7% for fiscal
2008 to 9.1% for fiscal 2009. This decrease was mainly due to our increased
sales volume, which created economies of scale, reducing our per unit selling
expenses.
  Selling
expenses increased by $1.0 million, or 11.7%, from $8.7 million for fiscal 2008
to $9.7 million for fiscal 2009. This increase was primarily due to an increase
in salary expense to our sales professionals and an increase in shipping and
handling costs.
  General
and Administrative Expenses
  As a
percentage of revenue, general and administrative expenses decreased from 5.0%
for fiscal 2008 to 4.2% for fiscal 2009. This decrease was mainly a function of
our revenue increasing faster than our administrative expenses.
  General
and administrative expenses remained constant at $4.5 million for fiscal 2008
and 2009.
  Research
and Development Expenses
  As a
percentage of revenue, research and development expenses decreased from 1.9% for
fiscal 2008 to 1.7% for fiscal 2009. This decrease was mainly because of the
increase in our revenue increasing faster than our research and development
expenses.
  Research
and development expenses increased by $0.1 million, or 5.0%, from $1.7 million
for fiscal 2008 to $1.8 million for fiscal 2009. This increase was primarily due
to an increase in salary expenses of our research and development team.
Specifically, we hired an additional six engineers in fiscal 2009, increasing
our research and development team to 208 employees and salary expenses increased
by $0.2 million, or 27.2%, from $0.8 million in fiscal 2008 to $1.0 million in
fiscal 2009.
  Income
from Operations
  Income
from operations increased by $10.0 million, or 32.9%, from $30.3 million for
fiscal 2008 to $40.3 million for fiscal 2009. The increase was due to the
increased sale of our multicolor presses, which generated higher revenue for
us.
  Liquidated
Damage Expenses
  Liquidated
damages expense relates to our failure to timely register for resale certain
private placement shares and terminate related party transactions. We recorded
liquidated damages and expenses of $2.1 million for fiscal 2007. We settled the
claims for liquidated damages in the third quarter of fiscal 2008, and we
reversed the accrual and recognized a net liquidated damages gain of $0.2
million for fiscal 2008. See “—Critical Accounting Policies—Liquidated Damages
Expense.” There was no such expense for fiscal 2009.
  Other
Income (Expenses)
  Other
expenses increased by $1.5 million, or 268.0%, from $0.5 million for fiscal 2008
to $2.0 million for fiscal 2009.
  Our
interest expense increased by $0.5 million from $0.7 million for fiscal 2008 to
$1.2 million for fiscal 2009 as our borrowing increased by $3.0 milllion from
$11.4 million for fiscal 2008 to $14.4 million for fiscal 2009. Interest expense
was offset by $0.2 million of interest income for fiscal 2008 and fiscal
2009.
  In
addition, in accordance with Securities and Exchange Commission Staff Accounting
Bulletin, Topic 5A, in the second quarter of fiscal 2009, we expensed $1.0
million incurred in connection with our proposed initial public offering due to
market uncertainty.
  Minority
Interest
  Minority
interest increased by $0.1 million, or 21.5%, from $0.4 million for fiscal 2008
to $0.5 million for fiscal 2009. The increase in minority interest is mainly due
to the increase of net income in Langfang Duoyuan and Hunan
Duoyuan.
  Provision
for Income Taxes
  Provision
for income taxes increased $2.3 million, or 68.5%, from $3.2 million for fiscal
2008 to $5.5 million for fiscal 2009. Our effective tax rates for fiscal 2008
and 2009 were 10.9% and 14.3%, respectively. The increase in the provision for
income taxes was attributable to the increase in net income by 18.9% over the
same period and the increase in income tax rates of Duoyuan China and Langfang
Duoyuan.
  Duoyuan
China began paying income taxes on January 1, 2006. The income tax rate for
Duoyuan China in the first half of fiscal 2008 was 16.5%, and the income tax
rate for Duoyuan China in the second half of fiscal 2008 was 12.5%. Beginning on
January 1, 2009, the income tax rate for Duoyuan China increased to
25%.
  Pursuant
to the tax preferential treatment granted by the local government, Langfang
Duoyuan was exempt from paying taxes prior to calendar year 2008. Langfang
Duoyuan began paying income taxes on January 1, 2008. The income tax rate for
Langfang Duoyuan was 0% in the first half of fiscal 2008 and 25% in the second
half of fiscal 2008.
  Pursuant
to the tax preferential treatment granted by the local government, Hunan Duoyuan
is tax exempted through calendar year 2009.
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  Net
Income
  As a
result of the foregoing, net income increased by $6.1 million, or 23.2%, from
$26.5 million for fiscal 2008 to $32.6 million for fiscal 2009.
  As a
percentage of revenue, net income increased 1.2% from 29.5% for fiscal 2008 to
30.7% for fiscal 2009.
  Foreign
Currency Translation Adjustment
  The
foreign currency translation adjustment decreased by $7.9 million, or 96.0%,
from $8.2 million for fiscal 2008 to $0.3 million for fiscal 2009. The foreign
currency translation adjustment reflects the appreciation of the Renminbi
against the U.S. dollar. Our assets and liabilities are translated at a rate of
RMB6.85 to $1.00 at June 30, 2008 and RMB6.83 to $1.00 at June 30, 2009. Our
results of operations are translated at an average rate of RMB7.26 for fiscal
2008 and RMB6.83 to $1.00 for fiscal 2009. Our equity accounts are translated at
historical rates.
  Comparison
of Fiscal 2007 and Fiscal 2008
  Revenue,
net
  Our
revenue increased $21.8 million, or 32.2%, from $67.8 million for fiscal 2007 to
$89.6 million for fiscal 2008. This increase was primarily due to increased
demand for our multicolor presses. Our top five selling models, which
represented more than 75% of our total revenue in fiscal 2008, were all
multicolor presses. This increase in revenue from our multicolor presses was
offset by a decrease in revenue from our CTP system and single color small
format presses.
  Pre-press
Printing Equipment
  CTP
System.Revenue for our
CTP system decreased by $0.6 million, or 15.5%, from $3.8 million for fiscal
2007 to $3.2 million for fiscal 2008. This decrease was primarily due to
increased competition from Chinese competitors. For most of fiscal 2007, we
believe we were the dominant manufacturer of computer-to-plate pre-press products in
China. By the end of the third quarter of fiscal 2007, we became aware of a
number of Chinese competitors that entered the computer-to-plate pre-press
market, decreasing our market share and demand for our CTP
system.
  Press
Printing Equipment
  Revenue
for our press printing equipment increased by $23.2 million, or 35.8%, from
$64.8 million for fiscal 2007 to $88.0 million for fiscal 2008. This increase
was primarily due to an increase in demand for our multicolor
presses.
  Single Color
Small Format Press. Revenue for our single color small format presses
decreased by $1.7 million, or 28.1%, from $6.0 million for fiscal 2007 to $4.3
million for fiscal 2008. This decrease was primarily due to increased
competition from Chinese competitors, decrease in our single color small format
product offerings and decreased marketing efforts. Demand for our single color
small format presses, a less sophisticated and low technology product, decreased
as more Chinese manufacturers entered the single color small format press
business, increasing competition. The low barrier to entry allows manufacturers
to enter this market with relative low cost. As part of our plan to focus on
selling more technologically advanced products like our multicolor presses, we
discontinued the manufacture of five different models of our single color small
format presses in fiscal 2008. For these same reasons, we also decreased
marketing efforts for our single color small format presses, instead increasing
our marketing efforts for our multicolor presses.
  Single Color
Large Format Press. Revenue for our single color large format presses
increased by $1.0 million, or 10.0%, from $9.7 million for fiscal 2007 to $10.7
million for fiscal 2008. This increase was primarily due to the increased demand
for a new single color large format press, Model J4109, which we introduced in
fiscal 2007. Model J4109, which is an enhanced version of Models DY166 and
J4105, gained market acceptance during fiscal 2008 and we recognized revenue of
$4.9 million from the sale of this product. This increase in revenue for Model
J4109 was offset by a decrease in revenue for Models DY166 and J4105 of $4.3
million for fiscal 2008 when compared to fiscal 2007.
  Multicolor Small
Format Press. Revenue for our multicolor small format presses increased
by $9.0 million, or 52.0%, from $17.4 million for fiscal 2007 to $26.4 million
for fiscal 2008. This increase was primarily due to increased demand. We believe
the increase in demand for our multicolor small format presses was partially a
result of increased marketing activities. During fiscal 2008, we increased our
marketing efforts by advertising our products in a greater number of magazines
and trade journals more frequently than in fiscal 2007. In addition, we
performed more demonstrations of our multicolor small format presses to our
end-user customers to showcase the quality of the printed materials as well as
the speed and ease of use in fiscal 2008 when compared to fiscal
2007.
  Multicolor Large
Format Press. Revenue for our multicolor large format presses increased
by $14.9 million, or 47.1%, from $31.7 million for fiscal 2007 to $46.6 million
for fiscal 2008. This increase was primarily due to increased demand. We believe
the increase in demand for our multicolor large format presses was partially a
result of increased marketing activities. During fiscal 2008, we increased our
marketing efforts by advertising our products in a greater number of magazines
and trade journals more frequently than in fiscal 2007. In addition, we
performed more demonstrations of our multicolor large format presses to our
end-user customers to showcase the quality of the printed materials as well as
the speed and ease of use in fiscal 2008 when compared to fiscal 2007. The
increase in revenue is also a result of the revenue recognized from the sale of
Model DY4104, a new multicolor large format press that we introduced to the
market in fiscal 2008. Model DY4104, a highly automated and energy efficient
machine, has been well received since its introduction to the market. It is
capable of printing on larger sheets of paper than our existing multicolor large
format press models and it is capable of printing on packaging materials
directly. We recognized revenue from the sale of this new product in the amount
of $8.1 million during fiscal 2008.
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  Cost
of Revenue
  As a percentage of revenue, the cost of
revenue decreased by 6.0% from 55.6% for fiscal 2007 to 49.6% for fiscal 2008.
This decrease was mainly due to the increase in sales of our multicolor
presses, which overall
have lower costs and higher gross profit margins than our single color presses.
In addition, we began manufacturing our key components in-house in fiscal 2007
at Hunan Duoyuan, reducing the per unit cost of our
products.
  Our cost
of revenue increased by $6.8 million, or 18.0%, from $37.7 million for fiscal
2007 to $44.5 million for fiscal 2008. This increase was primarily due to an
increase in the volume of our products sold during this period, particularly the
sale of our multicolor presses. Most of our increases were from the purchase of
additional raw materials, such as steel and iron, as more materials were needed
to manufacture our multicolor presses. Our raw material costs increased by $5.7
million, or 16.7%, from $34.2 million in fiscal 2007 to $39.9 million in fiscal
2008. Also, our labor costs increased by $0.4 million, or 16.7%, from $2.3
million in fiscal 2007 to $2.7 million in fiscal 2008 primarily due to employees
working additional hours to produce a greater volume of products. Lastly, our
depreciation expense had increased by $0.9 million, or 164.6%, from $0.6 million
in fiscal 2007 to $1.5 million in fiscal 2008 mainly due to the purchase of new
manufacturing equipment to be used at Hunan Duoyuan. This increase in cost of
revenue was partially offset by a reduction of $0.2 million in our parts costs
for repairs of our manufacturing equipment.
  Gross
Profit
  Our gross
profit margin increased from 44.4% in fiscal 2007 to 50.4% for fiscal 2008. The
increase in gross profit and gross profit margin during this period was due to
the increased production and sale of our multicolor presses, which have higher
gross profits and gross profit margins than our single color
presses.
  As a
result of the factors above, our gross profit increased by $15.1 million, or
50.0%, from $30.1 million for fiscal 2007 to $45.2 million for fiscal
2008.
  Selling
Expenses
  As a
percentage of revenue, selling expenses decreased by 1.8% from 11.5% in fiscal
2007 to 9.7% in fiscal 2008. This decrease was mainly due to our increased sales
volume, which created economies of scale, reducing our per unit selling
expenses.
  Selling
expenses increased by $0.9 million, or 11.2%, from $7.8 million for fiscal 2007
to $8.7 million for fiscal 2008. This increase was primarily due to an increase
in the salaries and commissions of our sales staff, our advertising expenses and
participation in industry trade conferences.
  The
salaries and commissions paid to our sales staff increased by $1.3 million, or
49.3%, from $2.6 million in fiscal 2007 to $3.9 million in fiscal 2008. The
increase in salaries and commissions was primarily due to the hiring of 14 new
sales employees during the year and bonuses awarded to our sales personnel for
meeting or exceeding their sales and performance targets.
  Our
advertising expenses increased by $0.3 million, or 21.4%, from $1.1 million in
fiscal 2007 to $1.4 million in fiscal 2008. This increase was primarily due to
an increase in print advertising for our products in magazine and trade
journals, and the costs of preparing exhibition and promotional
materials.
  General
and Administrative Expenses
  As a
percentage of revenue, general and administrative expenses increased from 4.5%
in fiscal 2007 to 5.0% in fiscal 2008. This increase was mainly because of the
reasons described below.
  General
and administrative expenses increased by $1.4 million, or 45.3%, from $3.1
million for fiscal 2007 to $4.5 million for fiscal 2008. This increase was
primarily due to an increase in professional fees paid to our auditors and
attorneys and an increase in reserve for doubtful accounts.
  Our professional fees increased by $0.4
million from $3,903 in fiscal 2007 to $0.4 million in fiscal 2008 as we paid the
outstanding balance due to our auditors and attorneys. In addition, we increased
our reserve for doubtful accounts by $0.7 million, or 136.3%, from $0.5 million
in fiscal 2007 to $1.2 million in fiscal 2008. We increased our reserve for
doubtful accounts as we increased sales of our multicolor presses. For multicolor
presses, distributors are not required to pay for the entire purchase price
before shipment unlike for our single color presses. Instead distributors for
our multicolor presses are required to pay 50% to 70% of the purchase price
before shipment, based on their preferred credit terms. Because of the increase
in sales of multicolor presses and the greater risk of non-payment and
incomplete or partial payment from our distributors, we increased our reserve
for doubtful accounts.
  Research
and Development Expenses
  As a
percentage of revenue, research and development expenses increased from 1.5% in
fiscal 2007 to 1.9% in fiscal 2008. This increase was mainly because of increase
in salary expenses as a result of the six new engineers we hired and the
increased costs from the purchase of raw materials in connection with our sample
product development, as described below.
  Research
and development expenses increased by $0.7 million, or 61.0%, from $1.0 million
for fiscal 2007 to $1.7 million for fiscal 2008. This increase was primarily due
to an increase in salary expenses of our research and development team and
increased costs from the purchase of raw materials in connection with our sample
product development. Specifically, we hired an additional six engineers in
fiscal 2008, increasing our research and development team to 202 employees and
salary expenses increased by $0.2 million, or 21.7%, from $1.0 million in fiscal
2007 to $1.2 million in fiscal 2008.
  Income
from Operations
  Income
from operations increased by $12.1 million, or 66.8%, from $18.2 million for
fiscal 2007 to $30.3 million for fiscal 2008.
  The
increase was due to the increased sale of our multicolor presses, which
generated higher revenue for us.
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  Liquidated
Damages Expense
  Liquidated
damages expense relates to our failure to timely register for resale certain
private placement shares and terminate related party transactions. We recorded
liquidated damages expenses of $2.1 million for fiscal 2007. We settled the
claims for liquidated damages in the third quarter of fiscal 2008, and we
reversed the accrual and recognized a net liquidated damages gain of $0.2
million for fiscal 2008. See “—Critical Accounting Policies—Liquidated Damages
Expense.”
  Other
Income (Expenses)
  Other
expenses increased by $0.5 million from $20,734 for fiscal 2007 to $0.5 million
for fiscal 2008.
  We had
interest expense of $0.7 million from our short-term borrowing in each of fiscal
2007 and fiscal 2008. In fiscal 2007, our interest expense was offset by
non-operating rental income of $0.4 million. In fiscal 2008, we did not
recognize any rental income.
  Minority
Interest
  Minority
interest increased by $0.2 million, or 58.6%, from $0.2 million for fiscal 2007
to $0.4 million for fiscal 2008. The increase in minority interest is mainly due
to the increase of net income in Langfang Duoyuan and Hunan
Duoyuan.
  Provision
for Income Taxes
  Provision
for income taxes increased $1.4 million, or 79.2%, from $1.8 million for fiscal
2007 to $3.2 million for fiscal 2008. This increase in the provision for income
taxes was attributable to the increase in net income by 32.2% over the same
period and the increase in income tax rates of Duoyuan China and Langfang
Duoyuan. Our effective tax rates for fiscal 2007 and fiscal 2008 were 11.4% and
10.9%, respectively.
  Duoyuan China began paying income tax
on January 1, 2006. The income tax rate for Duoyuan China in the first half of
fiscal 2008 was 16.5%, and the income tax rate for Duoyuan China in thesecond half of fiscal 2008
was 12.5%. Beginning on January 1, 2009, the income tax rate for Duoyuan China
increased to 25%. Pursuant to the tax preferential treatment granted by the
local government, Langfang Duoyuan was exempt from paying taxes prior to
calendar year 2008. Langfang Duoyuan began paying income tax on January 1, 2008.
The income tax rate for Langfang Duoyuan was 0% in the first half of fiscal 2008
and 25% in the second half of fiscal 2008. Pursuant to the tax preferential
treatment granted by the local government, Hunan Duoyuan is tax exempted through
calendar year 2009.
  Due to
various special tax rates, preferential tax treatments and incentives that have
been granted to us in China, our taxes in recent years have been relatively low.
The additional amounts of tax that we would have otherwise been required to pay
had we not enjoyed the various preferential tax treatments would have been $4.5
million in fiscal 2007 and $7.9 million in fiscal 2008.
  Net
Income
  As a
result of the foregoing, net income increased by $12.5 million, or 89.3%, from
$14.0 million for fiscal 2007 to $26.5 million for fiscal 2008.
  As a
percentage of revenue, net income increased 8.9% from 20.6% for fiscal 2007 to
29.5% for fiscal 2008.
  Foreign
Currency Translation Adjustment
  The
foreign currency translation adjustment increased by $6.4 million, or 347.0%,
from $1.8 million for fiscal 2007 to $8.2 million for fiscal 2008. The increase
in the foreign currency translation adjustment is due to the appreciation of the
Renminbi against the U.S. dollar. Our assets and liabilities are translated at a
rate of RMB7.60 to $1.00 at June 30, 2007 and RMB6.85 to $1.00 at June 30, 2008.
Our results of operations are translated at an average rate of RMB7.81 for
fiscal 2007 and RMB7.26 to $1.00 for fiscal 2008. Our equity accounts are
translated at historical rates.
  Liquidity
and Capital Resources
  We relied
primarily on cash flows from operating activities and our bank loans for our
capital requirements for fiscal 2007, 2008 and 2009. We expect that our future
capital expenditures primarily will be to build a factory to manufacture
cold-set corrugated paper machines at our Langfang Duoyuan facility and improve
and upgrade our existing manufacturing facilities and production lines. Since we
have not encountered any difficulties in meeting our cash obligations to date,
we believe that cash flows from operating activities and our bank loans will be
sufficient to meet our presently anticipated cash needs for at least the next 12
months.
  Our
long-term liquidity needs will relate primarily to working capital to pay our
suppliers, as well as any increases in manufacturing capacity or acquisitions of
third party businesses or licenses that we may seek. We expect to meet these
requirements primarily throughrevolving short-term bank borrowings, as well as
our cash flows from operations, which we expect will increase with the planned
increase in our manufacturing capacity. We believe our working capital is
sufficient for these current requirements, though we may require additional cash
due to changing business conditions or other future developments, including any
investments or acquisitions we may decide to pursue. If our existing cash is
insufficient to meet our requirements, we may seek to sell additional equity
securities or increase our borrowing level. The actual amount and timing of our
future capital requirements may differ materially from our estimate depending on
our actual results of operations.
  The
actual amount and timing of our future capital requirements may differ
materially from our estimate depending on our actual results of operations. As
of June 30, 2007, 2008 and 2009, we had cash of $7.8 million, $14.2 million and
$31.0 million, respectively. For a discussion of our current level of borrowing,
see “—Liquidity and Capital Resources—Sources and Uses of Cash” below. There is
no seasonal fluctuation to our borrowing requirements.
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  Sources
and Uses of Cash
  The
following table sets forth cash flow data for the periods
indicated:
 
 Year
      Ended June 30,2007
                        
                        
                        2008
                        
                        
                        2009(In
      thousands)Cash
      flow data:Net
      cash (used in) provided by operating activities
                        
                        $
                        (4,200
                        )
                        
                        $
                        16,801
                        
                        
                        $
                        29,842Net
      cash used in investing activities
                        
                        
                        (11,081
                        )
                        
                        
                        (10,524
                        )
                        
                        
                        (16,189
                        )Net
      cash (used in) provided by financing activities
                        
                        
                        19,171
                        
                        
                        
                        (1,092
                        )
                        
                        
                        2,929Effect
      of exchange rate changes on cash
                        
                        
                        186
                        
                        
                        
                        1,199
                        
                        
                        
                        262Net
      changes in cash
                        
                        
                        4,076
                        
                        
                        
                        6,384
                        
                        
                        
                        16,844Cash
      at beginning of period
                        
                        
                        3,740
                        
                        
                        
                        7,816
                        
                        
                        
                        14,200Cash
      at end of period
                        
                        $
                        7,816
                        
                        
                        $
                        14,200
                        
                        
                        $
                        31,044
  As of
June 30, 2009, the maturities for our bank loans were as
follows:
 
 Description
      of Bank Loan
                      
                      AmountLoan
      from Bank of Agriculture, Chongwen branch due March 12, 2010. Quarterly
      interest only payment at 5.841% per annum, secured by land use rights and
      buildings
                      
                      $
                      1,465,000Loan
      from Bank of Agriculture, Chongwen branch due July 3, 2009. Quarterly
      interest only payment at 8.217% per annum, secured by land use rights and
      buildings
                      
                      
                      2,930,000Loan
      from Bank of Agriculture, Chongwen branch due July 10, 2009. Quarterly
      interest only payment at 8.217% per annum, secured by land use rights and
      buildings
                      
                      
                      2,930,000Loan
      from Bank of Agriculture, Chongwen branch due July 17, 2009. Quarterly
      interest only payment at 8.217% per annum, secured by land use rights and
      buildings
                      
                      
                      4,102,000Loan
      from Bank of Agriculture, Chongwen branch due July 24, 2009. Quarterly
      interest only payment at 8.217% per annum, secured by land use rights and
      buildings
                      
                      
                      2,930,000Total
                      
                      $
                      14,357,000
  As of the
date of this Annual Report, we have five short-term loans in the aggregate
amount of $14.4 million pursuant to our line of credit with Bank of Agriculture,
Chongwen branch, in China. On July 3, 2009, we refinanced our loan due July 3,
2009 with a short-term loan due July 2, 2010. On July 20, 2009, we refinanced
our loan due July 10, 2009 with a short-term loan due July 9, 2010. On July 17,
2009, we refinanced our loan due July 17, 2009 with a short-term loan due July
16, 2010. On July 24, 2009, we refinanced our loan due July 24, 2009 with a
short-term loan due July 23, 2010. Each of our short-term loans has an
expiration date of no longer than one year and each loan has an interest rate of
5.841%. Interest on our loans is accrued quarterly. These outstanding loans are
secured by land use rights and buildings for our Hunan Duoyuan facility. We plan
to either repay the debt as it matures or refinance the debt. These loans were
made under our RMB100.0 million ($14.6 million) revolving credit line. We are
allowed to refinance these loans by entering into new short-term loan
agreements.
  Banks in
China are subject to national banking regulations and may withdraw our credit
line if regulations change. If the Bank of Agriculture were to withdraw our
credit line, we would use cash on hand or external financing to repay amounts
outstanding. We provide our financial information as well as other documentation
required by the bank on a quarterly basis. We have not had any indication from
the bank that it intends to not renew the short-term loan agreements. We are
continually monitoring our relationship with the Bank of Agriculture in light of
the challenging global economic conditions.
  Operating
Activities
  Net cash
provided by operating activities for fiscal 2007, 2008 and 2009 was generated
from our net income of $14.0 million, $26.5 million and $32.6 million,
respectively, as adjusted in each year for non-cash items such as depreciation
and amortization, and for changes in various assets and liabilities such as
accounts receivable, accounts payable and inventories.
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  Net cash
provided by operating activities increased by $13.0 million, or 77.6%, from
$16.8 million for fiscal 2008 to $29.8 million for fiscal 2009. The increase in
operating cash flows was mainly due to $32.6 million in net income during this
period. This increase was offset by a $4.2 million increase in accounts
receivable, $2.0 million increase in inventory and $0.7 million decrease in
accounts payable. The increase in accounts receivable was primarily due to an
increase in sales of our multicolor presses. In general, for sale of our
multicolor presses, distributors pay 50% to 70% of purchase price before
shipment. The remaining 30% to 50% are paid in installments over six to nine
months. The increase in inventory was primarily due to an increase in production
of multicolor presses. We had more work in progress inventory to meet the future
demand of our multicolor presses. The decrease in accounts payable was primarily
because we paid our suppliers more promptly during fiscal 2009 than during
fiscal 2008.
  Net cash
provided by operating activities increased from net operating cash used of $4.2
million for fiscal 2007 to net operating cash provided by $16.8 million for
fiscal 2008. This increase was primarily due to an increase in net income from
$14.0 million to $26.5 million over the same period. This increase in operating
cash flows was offset by (1) an increase in accounts receivable of $9.7 million,
(2) an increase in inventory of $1.6 million and (3) a decrease in accounts
payable of $1.3 million. The increase in accounts receivable was primarily due
to a marked increase in sales of our multicolor presses. In addition, we
selectively granted preferred credit terms to distributors who distributed our
multicolor presses, reducing the amount of advanced payments due to us as a
reward for meeting or exceeding their sales targets in the prior year. The
increase in inventory was primarily due to an increase in production of
multicolor presses. More raw materials are needed to produce multicolor presses
than single color presses. Accounts payable decreased because we shortened the
payment periods for several key suppliers. We agreed to a shorter payment
schedule with these suppliers in order to obtain favorable pricing on raw
materials.
  Investing
Activities
  Net cash
used in investing activities for fiscal 2007, 2008 and 2009 was $11.1 million,
$10.5 million and $16.2 million, respectively.
  Net cash used in investing activities
increased by $5.7 million, or 53.8%, from $10.5 million for fiscal 2008 to $16.2
million for fiscal 2009. The main uses of our cash in investing activities
included equipment acquisition, purchase prepayments and expenses related to the
launching of our new post-press products, namely our cold-set corrugated paper
machine. We expended $3.9 million to purchase manufacturing equipment to produce
certain key components in-house. We also expended $1.4 million to purchase new
manufacturing equipment for the future production of our cold-set corrugated
paper machine, which we anticipate to commercially produce and sell by the end
of 2010. In addition, we spent $6.3 million to purchase electroplating and
non-crystal plating equipment that will treat and protect the external surfaces of our press and
post-press products. This equipment also features a temperature-controlling
precision meter which monitors and cools the internal temperature while the
external surface is treated. We also made a prepayment of $4.5 million to
purchase new manufacturing equipment for the future production of our cold-set
corrugated paper machine.
  Net cash
used in investing activities decreased by $0.6 million, or 5.0%, from $11.1
million for fiscal 2007 to $10.5 million for fiscal 2008. For fiscal 2008, our
investing activities included improving and upgrading our production lines and
manufacturing facilities at Langfang Duoyuan and/or Hunan Duoyuan, and
purchasing machinery and equipment to use at these facilities. Net cash used in
investing activities also included expenses related to the launching of a new
post-press product, namely our cold-set corrugated paper machine. Specifically,
we expended (1) $2.1 million to improve and upgrade our production lines and
manufacturing facilities at Langfang Duoyuan and Hunan Duoyuan, (2) $1.5 million
to purchase machinery and equipment, including a JY sand mixer, which is used
for heating and shaping parts for our press products, and a double-post low
temperature wax injector to improve the casting manufacturing of our press
parts, (3) $4.3 million for land clearing and site preparation services for
building our cold-set corrugated paper machine factory at Langfang Duoyuan and
(4) $2.6 million as prepayment for new manufacturing equipment to produce our
cold-set corrugated paper machines.
  Currently,
our main uses of cash for investing activities are payments for equipment,
building and structural improvements and prepayments to purchase new
manufacturing equipment for the future production of our cold-set corrugated
paper machines. In connection with our entry into the cold-set corrugated paper
machine business and efforts to upgrade our existing facilities,we expect to
increase net cash used in investing activities.
  Financing
Activities
  Cash
provided by and used in our financing activities consists of borrowings from and
repayments to our short-term loans.
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  Net cash
provided by financing activities increased by $4.0 million, or 368.1%, from net
cash used in financing activities of $1.1 million for fiscal 2008 to net cash
provided by financing activities of $2.9 million for fiscal 2009. We borrowed an
additional $2.9 million, net, during this period to pay for our operating
expenses.
  Net cash
used in financing activities was $1.1 million for fiscal 2008, which was the
result of our payment for lines of credit exceeding proceeds by approximately
$2.75 million offsetting with a decrease in restricted cash of $2.1 million,
compared to net cash provided by financing activities of $19.2 million for
fiscal 2007, which was the result of a private placement we completed in
November 2006. We did not engage in any private placement fundraising activities
in fiscal 2008.
  Contractual
Obligations
  The
following table sets forth our contractual obligations as of June 30,
2009:
 
 Obligations
                      
                      Total
                      
                      
                      Less than 1 Year
                      
                      
                      1-3
                        Years
                      
                      
                      3-5
                        Years
                      
                      
                      More than
                        5 Years(in
      thousands)Long
      Term Debt Obligations
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Capital
      Lease Obligations
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Operating
      Lease Obligations
                      
                      
                      234
                      
                      
                      
                      200
                      
                      
                      
                      34
                      
                      
                      
                      —
                      
                      
                      
                      —Purchase
      Obligations
                      
                      
                      383
                      
                      
                      
                      383
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Repayment
      Obligations under Line of Credit
                      
                      
                      14,357
                      
                      
                      
                      14,357
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      $
                      14,974
                      
                      
                      $
                      14,940
                      
                      
                      $
                      34
                      
                      
                      $
                      —
                      
                      
                      $
                      —
  We have
an office lease agreement with Duoyuan Information Terminal Manufacture
(Langfang) Co., Ltd., a related party. The lease commended on July 1, 2008 and
will expire on December 31, 2009. As of June 30, 2009, the remaining rent
commitment was $0.1 million. In addition, we lease sales offices in 16 Chinese
provinces, with the latest lease to expire on December 2010. The remaining rent
commitment was $0.1 million as of June 30, 2009.
  In August
2008, Langfang Duoyuan entered into a packing material equipment purchase
agreement with Beijing Jingneng Mechanical & Electrical Equipments Ltd. As
of June 30, 2009, $0.4 million, or approximately 5% of the total commitment,
remained on this agreement. As of June 30, 2009, total remaining minimum
purchase payment pursuant to these agreements was $0.4 million.
  Other
than the contractual obligations set forth and described above, we do not have
any other operating lease obligations or repayment obligations under lines of
credit.
  Capital
Expenditures
  Our
capital expenditures for fiscal 2007, 2008 and 2009 were $11.1 million, $10.5
million and $16.2 million, respectively.
  Our
capital expenditures for fiscal 2009 were used primarily for purchasing surface
treatment equipment at our Hunan Duoyuan facility. Specifically, we expended
$6.3 million for the surface treatment equipment. We also had capital
expenditure of $3.9 million for purchasing various manufacturing equipment for
our production of key components as well as $1.4 million for the future
production of our cold-set corrugated paper machine at our Langfang Duoyuan
facility. Furthermore, we made $4.5 million purchase prepayments and expenses
related to the launching of our new post-press products, namely our cold-set
corrugated paper machine.
  For
fiscal 2008, our capital expenditures were primarily for improving and upgrading
our production lines and manufacturing facilities at Langfang Duoyuan and/or
Hunan Duoyuan, and purchase machinery and equipment to use at these facilities.
Our capital expenditures in fiscal 2008 also included expenses related to the
launching of a new post-press product, namely our cold-set corrugated paper
machine. Specifically, we expended (1) $2.1 million to improve and upgrade our
production lines and manufacturing facilities at Langfang Duoyuan and Hunan
Duoyuan, (2) $1.5 million to purchase machinery and equipment, including a JY
sand mixer, which is used for heating and shaping parts for our press products,
and a double-post low temperature wax injector to improve the casting
manufacturing of our press parts, (3) $4.3 million for land clearing and site
preparation services for building our cold-set corrugated paper machine factory
at Langfang Duoyuan and (4) $2.6 million as prepayment for new manufacturing
equipment to produce our cold-set corrugated paper machines.
  Our
capital expenditures for fiscal 2007 was primarily for improving and upgrading
our production lines and manufacturing facilities at Langfang Duoyuan and/or
Hunan Duoyuan, and purchasing machinery and equipment to use at these
facilities.
  In
connection with our entry into the cold-set corrugated paper machine business
and efforts to upgrade our existing facilities,we expect our capital
expenditures to increase.
 
 - 48
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  Our
future capital requirements will depend on many factors including our rate of
revenue growth, the timing and extent of spending to support research and
development efforts, the expansion of manufacturing and sales activities and the
introduction of new products. In connection with the anticipated launch of our
cold-set corrugated paper machine product line, we may enter into agreements or
letters of intent with respect to potential investments in, or acquisitions of,
complementary businesses, products or technologies, which may require us to seek
additional equity or debt financing. The sale of additional equity securities or
convertible debt securities would result in additional dilution to our
shareholders. Additional debt would result in increased interest expense and
could result in covenants that would restrict our operations. We have not made
arrangements to obtain additional financing and additional financing, if
required, may be unavailable in amounts or on terms acceptable to us, if at
all.
  Off-Balance
Sheet Arrangements
 
 We have
not entered into any off-balance sheet arrangements.
  Recently
Issued Accounting Pronouncements
 
 See Note
2 to the Consolidated Financial Statements of Asian Financial, Inc. for
discussion of recent accounting pronouncements.
  Seasonality
 
 Typically,
we recognize lower revenue during our third fiscal quarter from January to March
each year due to the Chinese Lunar New Year holiday, when our factories close
for one week. Our distributors, who are all in China, are also on holiday during
this time of the year. Typically, our second fiscal quarter, from October to
December each year, is our strongest quarter because most Chinese businesses
complete planned purchases of capital goods during this period.
  Inflation
 
 Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although we do not believe that inflation has had
a material impact on our financial position or results of operations to date, a
high rate of inflation may have an adverse effect on our ability to maintain
current levels of gross profit and selling, general and administrative expenses
as a percentage of revenue if the selling prices of our products do not increase
with these increased costs.
  Item
      7A.
                Quantitative and Qualitative
      Disclosures About Market
Risk.
  Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as changes in foreign currency exchange rates, exchange
controls and interest rates. A discussion of our primary market risk
exposures is presented below.
  Exchange
Rate Sensitivity
  Although
we maintain our books and records in Renminbi, the functional currency of China,
we use the U.S. dollar as the reporting currency of our financial statements.
The exchange rate between the U.S. dollar and the Renminbi is subject to the
foreign exchange quotation publicized by the People’s Bank of China daily.
Results of operations and cash flows are translated at average exchange rates
during the period, assets and liabilities are translated at the unified exchange
rate as quoted by the People’s Bank of China at the end of the period and equity
is translated at historical exchange rates.
  Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than Renminbi are included in the results of
operations as incurred. Gains and losses from foreign currency transactions are
included in the results of operations. There were no material transaction gains
or losses for fiscal 2009.
  Although
the conversion of the Renminbi is highly regulated in China, the value of the
Renminbi against the value of the U.S. dollar (or any other currency) may
fluctuate and be affected by, among other things, changes in China’s political
and economic conditions. Under the currency policy in effect in China today, the
Renminbi is permitted to fluctuate in value within a narrow band against a
basket of certain foreign currencies. China is currently under significant
international pressures to liberalize this currency policy, and if such
liberalization occurs, the value of the Renminbi could appreciate or depreciate
against the U.S. dollar. The exchange rate of the Renminbi as of June 30, 2009
was RMB6.83 to $1.00. This floating exchange rate, and any appreciation of the
Renminbi that may result from such rate, could have various adverse effects on
our business, as described in “Item 1A. Risk Factors—Risks Related to Doing
Business in China—Government control of currency conversion and exchange rate
fluctuations may materially and adversely affect our business.”
  Our
exposure to foreign exchange risk primarily relates to cash and cash equivalents
denominated in U.S. dollars as a result of our past issuance of common shares
through private placements. For example, to the extent that we need to convert
U.S. dollars received in the private placements into Renminbi for our
operations, appreciation of the Renminbi against the U.S. dollar would have an
adverse effect on the Renminbi amount that we receive from the conversion.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making dividend payments on our common shares or for other business
purposes, appreciation of the U.S. dollar against the Renminbi would have a
negative effect on the U.S. dollar amount available to us. In addition,
fluctuations in the exchange rate would affect our financial results reported in
U.S. dollar terms without giving effect to any underlying change in our business
or results of operations.
  At June
30, 2009, our outstanding financial instruments with foreign currency exchange
rate risk exposure had an aggregate fair value of approximately $23.5 million
(including our non-U.S. dollar-denominated fixed rate debt). The potential
increase in the fair values of these instruments resulting from a 10% adverse
change in quoted foreign currency exchange rates would be approximately $2.4
million at June 30, 2009. We have not entered into any foreign currency
instruments for trading purposes at June 30, 2009.
  We
currently do not hedge our exposure to fluctuations in the Renminbi to U.S.
dollar exchange rate. We may choose to reduce our exposures through financial
instruments (hedges) that provide offsets or limits to our exposures when
considered appropriate.
  Exchange
Controls
  Chinese
law allows enterprises owned by foreign investors to remit their profits,
dividends and bonuses earned in China to other countries, and the remittance
does not require prior approval by the SAFE regulations formerly required
extensive documentation and reporting, some of which was burdensome and delayed
payments. If there is a return to payment restrictions and reporting, the
ability of a Chinese company to attract investors will be reduced. Also, current
investors may not be able to obtain the profits of the business which they own
as a result of other restrictions that the Chinese government may impose.
Relevant Chinese law and regulation permit payment of dividends only from
retained earnings, if any, determined in accordance with Chinese accounting
standards and regulations. It is possible that the Chinese tax authorities may
require changes in our reported income that would limit our ability to pay
dividends and other distributions. Chinese law requires companies to set aside a
portion of net income to fund certain reserves which amounts are not
distributable as dividends. These rules and possible changes could restrict a
company in China from repatriating funds to us and our shareholders as
dividends.
  Interest
Rate Risk
  We are exposed to interest rate risk
due primarily to our short-term loans. As of June 30, 2009, we had RMB98.0
million ($14.4 million) outstanding on our bank lines of credit which are
subject to interest rate change risk. Although the interest rates on our
short-term loans are fixed during their respective terms, the terms are
typically 12 months or less and interest rates are subject to change upon
renewal. The interest rates on our short-term loans are determined by reference
to the benchmark interest rates set by the People’s Bank of China. Since April
28, 2006, the People’s Bank of China has increased the benchmark interest rate of Renminbi
bank loans with a term of 6 to 12 months 12 times, seven consecutive increases
followed by five consecutive decreases, by 0.27% on most occasions. As a result,
from 2006 to the three months ended March 31, 2009, the benchmark interest rate
for these Renminbi bank loans increased from 5.85% to 7.47% then decreased to
5.31% and the interest rate applicable to us increased from 6.696% to 8.217%
then decreased to 5.841% over the same period. Any future increase in the
People’s Bank of China’s benchmark interest rate will result in an increase in
our interest expenses.
  As of
June 30, 2009, our short term loans with exposure to interest rate risk had an
aggregate fair value of approximately $14.4 million. The potential change in
fair market value for these short term loans from an adverse 10% change in
quoted interest rates across all maturities, often referred to as a parallel
shift in the yield curve, would be approximately $1.4 million as of June 30,
2009. We have not hedged our exposure to interest rate risk and have not entered
into any interest rate sensitive instruments for trading purposes as of June 30,
2009. We monitor interest rates in conjunction with our cash requirements to
determine the appropriate level of debt balances relative to other sources of
funds.
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Item
      8.
              Financial Statements and
      Supplementary Data.
 
 The
information required by this item is contained in the consolidated financial
statements listed in Item 15(a) 1 under the caption “Consolidated Financial
Statements.”
 
 Item
      9.
              Changes in and Disagreements with
      Accountants on Accounting and Financial
  Disclosure.
 
 None.
 
 Item
      9A.
              Controls and
      Procedures.
  Evaluation
of Disclosure Controls and Procedures
 We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our periodic reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and that such information
is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, our management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
 
 As of
June 30, 2009, the end of the fiscal year covered by this Annual Report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and our chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our chief executive officer and
chief financial officer concluded that because of the material weakness in
internal control over financial reporting described below, our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) were not effective as of June 30, 2009.
 
 Management’s
Annual Report on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, which is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. GAAP. Our
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 our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. GAAP and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the
financial statements.
 
 Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be detected
in a timely manner. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.
 
 A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet important enough to
merit attention by those responsible for oversight of our financial
reporting.
 
 Our
management assessed the effectiveness of our internal control over financial
reporting as of June 30, 2009. In making this assessment, our management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in "Internal Control-Integrated Framework." During its
assessment of the effectiveness of internal control over financial reporting as
of June 30, 2009, our management identified material weakness related to the
following:   Lack of Internal
Audit Function – Although we maintain internal audit department, the
scope and effectiveness goal of internal audit function have not been
identified. Due to this weakness, we may be ineffective in timely prevention or
detection of errors in the recording of accounting transactions, which may have
a material impact on our financial statements.


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   In light
of the foregoing material weaknesses, our management has concluded that our
internal control over financial reporting was not effective as of June 30, 2009.
Our ineffective internal control over financial reporting could result in
material misstatements in our annual or interim financial statements that would
not be prevented or detected. However, nothing has come to the attention of
management that causes them to believe that any material inaccuracies or errors
exist in our financial statements as of June 30, 2009. The reportable conditions
and other areas of our internal control over financial reporting identified by
us as needing improvement have not resulted in a material restatement of our
financial statements. We are not aware of any instance where such reportable
conditions or other identified areas of weakness have resulted in a material
misstatement or omission in any report we have filed with or submitted to the
Securities and Exchange Commission.
 
 Remediation
of Material Weaknesses in Internal Control over Financial Reporting
 
 Our
management has identified the steps necessary to address the material weakness
described above, as follows:
 
 Our
internal auditors are responsible for auditing our key financial areas including
sales (including rebates), cost of sales, accounts receivable, payables and
expenses, inventory and other material accounts.  They are also
responsible for detecting any internal control deficiencies.  We are
still in process of identifying various internal audit requirements and also in
process of implementing the necessary audit procedures to fulfill those
requirements.  In addition, we have engaged an outside consultant to
assist us in setting up internal audit processes to identify internal control
weaknesses, testing our internal controls and remedying any
deficiencies.  The outside consultant will also advise us in becoming
compliant with Sarbanes Oxley Act Section 404 requirements.
 
 We
believe that the foregoing step will remediate the material weaknesses
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies and procedures may deteriorate.
 Auditor
Attestation
 
 This
Annual Report does not include an attestation of our registered public
accounting firm regarding internal control over financial reporting. Our
management’s report on internal control was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only our management’s report
in this Annual Report.
 
 Changes In
Internal Control Over Financial Reporting
 
 There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
 
 Item
      9B.
              Other
      Information.
 
 None.
  - 51
-
 Table of Contents
 PART III
 
 Item
      10.
              Directors, Executive Officers and
      Corporate Governance.
  The
information required by this item regarding directors is incorporated by
reference to our Definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of Stockholders to be
held in 2009 (the “2009 Proxy Statement”) under the caption “Proposal 1 –
Ratification of Directors.”
 
 The
information required by this item regarding executive officers is set forth on
this Annual Report on Form 10-K under the caption “Executive Officers and
Key Employees.”
 
 The
information required by this item regarding “Compliance with Section 16(a)
of the Exchange Act,” “Code of Ethics,” our Audit Committee and the director
nomination procedure is incorporated by reference to the 2009 Proxy Statement
under the captions “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Report of the Audit Committee” and “Corporate Governance
Matters.”
  Item
      11.
              Executive
      Compensation.
 The
information required by this item with respect to executive compensation and
director compensation is incorporated by reference to the 2009 Proxy Statement
under the captions “Director Compensation” and “Compensation Discussion and
Analysis” respectively.
  The
information required by this item with respect to compensation committee
interlocks and insider participation is incorporated by reference to the 2009
Proxy Statement under the caption “Compensation Committee Interlocks and Insider
Participation.”
  The
compensation committee report required by this item is incorporated by reference
to the 2009 Proxy Statement under the caption “Compensation Committee
Report.”
 Item
      12.
              Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters.
 The
information regarding the security ownership of certain beneficial owners and
management is incorporated by reference to the 2009 Proxy Statement under the
caption “Security Ownership of Directors and Officers and Certain Beneficial
Owners.”
 
 The
information regarding “Securities Authorized for Issuance Under Equity
Compensation Plans” is incorporated by reference to the 2009 Proxy Statement
under the caption “Compensation Discussion and Analysis.”
 Item
      13.
                Certain Relationships and Related
      Transactions, and Director
Independence.
 The
information required by this item is incorporated by reference to the 2009 Proxy
Statement under the captions “Certain Relationships and Related Transactions”
and “Corporate Governance Matters.”


Item
      14.
            Principal Accountant Fees and
      Services.




The
information required by this item is incorporated by reference to the 2009 Proxy
Statement under the caption “Proposal 2 – Ratification of Independent
Auditor.”


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 Table of Contents





PART IV




Item
      15.
            Exhibits and Financial Statement
      Schedules.




(a) 
The following documents are filed as part of this report:




(1)  
Financial Statements. The financial statements required to be filed as part of
this Annual Report and the Report of Independent Registered Public Accounting
Firm are included beginning on page F-1.




(2) 
 Financial Statement Schedules. All Schedules are either included in the
Notes to Consolidated Financial Statements or are omitted because they are not
applicable.




(3)  
Exhibits (numbered in accordance with Item 601 of Regulation S-K). The exhibits
listed on the accompanying Exhibit Index filed or incorporated by references as
part of this Annual Report and such Exhibit Index is incorporated herein by
reference. On the Exhibit Index, a “†” identifies each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Annual Report, and such listing is incorporated herein by
reference.


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SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




Asian
      Financial, Inc.
                  (Registrant)Date:
      September 14, 2009
                
                By:
                /s/
      Christopher Patrick HolbertChristopher
      Patrick Holbert
                  Chief
      Executive OfficerDate:
      September 14, 2009
                
                By:
                /s/
      William D. SuhWilliam
      D. Suh
                  Chief
      Financial Officer




POWER
OF ATTORNEY




KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Christopher Patrick Holbert, his attorney-in-fact, with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorney-in-fact, or his substitute or substitutes may do or cause to be done by
virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




Signature
                  
                  Title
                  
                  Date/s/
      Christopher Patrick Holbert
                  
                  Chief
      Executive Officer
                  
                  September 14, 2009Name: Christopher
      Patrick Holbert
                  
                  (Principal
      Executive Officer)/s/
      William D. Suh
                  
                  Chief
      Financial Officer
                  
                  September 14, 2009Name: William D.
      Suh
                  
                  (Principal
      Financial and Accounting Officer)/s/
      Wenhua Guo
                  
                  Director
                  
                  September 14, 2009Name: Wenhua
      Guo/s/
      Lianjun Cai
                  
                  Director
                  
                  September 14, 2009Name: Lianjun
      Cai/s/
      Xiqing Diao
                  
                  Director
                  
                  September 14, 2009Name: Xiqing
      Diao/s/
      Punan Xie
                  
                  Director
                  
                  September 14, 2009Name: Punan
      Xie/s/
      James Zhang
                  
                  Director
                  
                  September 14, 2009Name: James
      Zhang


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EXHIBIT
INDEX





Number
                
                Description2.1
                
                Equity
      Transfer Agreement dated August 31, 2006 between Asian Financial, Inc. and
      Duoyuan Investments Limited (Incorporated by reference to Exhibit 2.1 to
      Current Report on Form 8-K (File No.000-27129) filed with the Securities
      and Exchange Commission on September 6, 2006).3.1
                
                Articles
      of Incorporation, as amended of Asian Financial, Inc. (Incorporated by
      reference to Exhibit 3.1 to Amendment No. 1 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on July 5, 2007).3.2
                
                Amended
      and Restated Bylaws of Asian Financial, Inc. (Incorporated by reference to
      Exhibit 3.2 to Amendment No. 4 to Registration Statement on Form S-1 (File
      No. 333-141507) filed with the Securities and Exchange Commission on
      February 11, 2008).4.1
                
                Securities
      Purchase Agreement dated October 24, 2006 between Asian Financial, Inc.
      and certain Investors indentified therein (Incorporated by reference to
      Exhibit 4.1 to Amendment No. 1 to Registration Statement on Form S-1 (File
      No. 333-141507) filed with the Securities and Exchange Commission on July
      5, 2007).4.2
                
                Amendment
      to Securities Purchase Agreement dated November 28, 2007 between Asian
      Financial, Inc. and certain Investors identified therein (Incorporated by
      reference to Exhibit 4.4 to Amendment No. 4 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on February 11, 2008).4.3
                
                Registration
      Rights Agreement, dated October 24, 2006, between Asian Financial, Inc.
      and certain Investors identified therein (Incorporated by reference to
      Exhibit 4.1 to Current Report on Form 8-K (FileNo. 000-27129) filed with
      the Securities and Exchange Commission on October 25,
    2006).4.4
                
                Warrant
      issued to Roth Capital Partners, LLC dated November 2, 2006 (Incorporated
      by reference to Exhibit 4.2 to Amendment No. 4 to Registration Statement
      on Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on February 11, 2008).4.5
                
                Form
      of Warrant dated December 31, 2007 issued to certain investors party to
      the Securities Purchase Agreement dated October 24, 2006 (filed as exhibit
      4.1 hereto) in satisfaction of related party penalties in relation thereto
      (Incorporated by reference to Exhibit 4.3 to Amendment No. 4 to
      Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on February 11,
2008)4.6
                
                Form
      of Certificate representing the common stock, par value $0.001, of Asian
      Financial, Inc. (Incorporated by reference to Exhibit 4.5 to Annual Report
      on Form 10-K (File No. 000-27129) filed with the Securities and Exchange
      Commission on September 26, 2008).4.7
                
                Waiver
      Agreement dated November 18, 2008 (Incorporated by reference to Exhibit
      10.1 to Current Report on Form 8-K (File No.000-27129) filed with the
      Securities and Exchange Commission on November 19,
      2008).4.8
                
                Investor
      Warrants Proposal Letter, dated September 19, 2007 (Incorporated by
      reference to Exhibit 4.8 to Amendment No. 9 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securitiesand Exchange
      Commission on July 10, 2009).4.9
                
                Form
      of Investor Warrants Proposal Supplemental Letter, dated October 26, 2007
      (Incorporated by reference to Exhibit 4.9 to Amendment No. 9 to
      Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on July 10, 2009).4.10
                
                Waiver
      Agreement, dated as of August 24, 2009, among Asian Financial, Inc. and
      the Investors (Incorporated by reference to Exhibit 10.1 to Current Report
      on Form 8-K (File No. 000-27129) filed withthe Securities and Exchange
      Commission on August 31, 2009).10.1
                
                Lease
      Agreement between Duoyuan Clean Water Technology Industries (China) Co.,
      Ltd. and Duoyuan Digital Printing Technology Industry (China) Co. Ltd.
      (Incorporated by reference to Exhibit 10.7 to Amendment No. 5 to
      Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on March 14, 2008).10.2
                
                English
      Summary of Form of Employment Agreement (Incorporated by reference to
      Exhibit 10.8 to Amendment No. 4 to Registration Statement on Form S-1
      (File No. 333-141507) filed with the Securities and Exchange Commission on
      February 11, 2008). †10.3
                
                Share
      Transfer Agreement, dated October 16, 2005, between Beijing Huiyuan
      Duoyuan Digital Printing Technology Research Institute and Duoyuan Digital
      Printing Technology Industry (China) Co., Ltd. (Incorporated by reference
      to Exhibit 10.9 to Amendment No. 4 to Registration Statement on Form S-1
      (File No. 333-141507) filed with the Securities and Exchange Commission on
      February 11, 2008).





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10.4
            
            Property
      Lease Agreement, dated December 25, 2002 between Duoyuan Water
      Environmental Protection Technology Industry (China) Co. Ltd. And Duoyuan
      Digital Printing Technology Industry (China) Co. Ltd. (Incorporated by
      reference to Exhibit 10.12 to Amendment No. 1 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on July 5, 2007).10.5
            
            Property
      Lease Agreement, dated June 27, 2008, between Duoyuan Information Terminal
      Manufacture (Langfang) Co., Ltd. and Duoyuan Digital Press Technology
      Industries (China) Co., Ltd. (Incorporated by reference to Exhibit 10.4 to
      Amendment No. 7 to Registration Statement on Form S-1 (File No.
      333-141507) filed with Securities and Exchange Commission on March 27,
      2009).10.6
            
            Letter
      of Trademark Use Authorization dated June 30, 2001, from Duoyuan Water
      Environmental Protection Technology Industry (China) Co., Ltd. to Duoyuan
      Technology Industry (China) Co., Ltd. (Incorporated by reference to
      Exhibit 10.13 to Amendment No. 1 to Registration Statement on Form S-1
      (File No. 333-141507) filed with the Securities and Exchange Commission on
      July 5, 2007).10.7
            
            Letter
      of Patent Use Authorization, dated June 30, 2001, from Beijing Huiyuan
      Duoyuan Digital Printing Technology Research Institute to Duoyuan Digital
      Technology Industry (China) Co. Ltd. (Incorporated by reference to Exhibit
      10.14 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
      333-141507) filed with the Securities and Exchange Commission on July 5,
      2007).10.8
            
            Framework
      Agreement on Cooperation in Research and Development of Stability
      Technology for Offset Printing Machines and New Technologies, dated May
      16, 2005, between Duoyuan Digital Printing Technology Industry (China) Co.
      Ltd and Beijing Aeronautic Manufacturing Technology Research Institute
      (Incorporated by reference to Exhibit 10.15 to Amendment No. 1 to
      Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on July 5, 2007).10.9
            
            Offset
      Printing Machine Assembly Line Design Research and Development Contract,
      dated March 11, 2002, between Duoyuan Digital Printing Technology Industry
      (China) Co. Ltd and Beijing Printing Machinery Research (Incorporated by
      reference to Exhibit 10.17 to Amendment No. 1 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on July 5, 2007).10.10
            
            Assignment
      of Patent Agreement dated December 26, 2002 between Beijing Huiyuan
      Duoyuan Digital Technology Institute and Duoyuan Digital Printing
      Technology Industries (China) Co. Ltd. (Incorporated by reference to
      Exhibit 10.25 to Amendment No. 5 to Registration Statement on Form S-1
      (File No. 333-141507) filed with the Securities and Exchange Commission on
      March 14, 2008).10.11
            
            Registered
      Trademark Usage License Agreement, dated October 2008, between Duoyuan
      Digital Press Technology Industries (China) Co., Ltd. and Duoyuan
      Investments Limited. (Incorporated by reference to Exhibit 10.8 to
      Amendment No. 7 to Registration Statement on Form S-1 (File No.
      333-141507) filed with Securities and Exchange Commission on March 27,
      2009).10.12
            
            Convertible
      Promissory Note covering the fiscal years ended December 31, 1995 through
      1999 (Incorporated by reference to Exhibit 10.18 to Amendment No. 4 to
      Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on February 11,
  2008).10.13
            
            Convertible
      Promissory Note covering the fiscal years ended December 31, 2003 through
      2004 (Incorporated by reference to Exhibit 10.19 to Amendment No. 4 to
      Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on February 11,
  2008).10.14
            
            Employment
      Agreement between Asian Financial, Inc. and Gene Michael Bennett dated as
      of July 18, 2007 (Incorporated by reference to Exhibit 10.22 to Amendment
      No. 5 to Registration Statement on Form S-1 (File No. 333-141507) filed
      with the Securities and Exchange Commission on March 14, 2008). †10.15
            
            Separation
      Agreement and Release of All Claims effective December 20, 2007 between
      Asian Financial, Inc. and Gene Michael Bennett (Incorporated by reference
      to Exhibit 99.1 to Current Report on Form 8-K (File No. 000-27129) filed
      with the Securities and Exchange Commission on December 27, 2007). †10.16
            
            Maximum
      Amount Mortgage Contract dated July 28, 2007 among   Agriculture Bank
      of China Chongwen Sub-branch, Duoyuan Digital Printing Technology (China)
      Co. Ltd., and Hunan Duoyuan Printing Machine Co. Ltd. (Incorporated by
      reference to Exhibit 10.21 to Amendment No. 4 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on February 11, 2008).10.17
            
            Employment
      Agreement with William Milewski dated as of March 1, 2008 (Incorporated by
      reference to Exhibit 10.23 to Amendment No. 5 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on March 14, 2008). †


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10.18
            
            Termination
      of Letter of Patent Use Authorization, from Beijing Huiyuan Duoyuan
      Digital Printing Technology Research Institute to Duoyuan Digital
      Technology Industry (China) Co. Ltd. (see Exhibit 10.11) (Incorporated by
      reference to Exhibit 10.24 to Amendment No. 5 to Registration Statement on
      Form S-1 (File No. 333-141507) filed with the Securities and Exchange
      Commission on March 14, 2008).10.19
            
            Separation
      Agreement and Release of All Claims effective May 21, 2008 between Asian
      Financial, Inc. and William Edward Milewski (Incorporated by reference
      Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-27129) filed
      with the Securities and Exchange Commission on May 27, 2008). †10.20
            
            Employment
      Agreement with William D. Suh dated as of September 30, 2008 (Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K (File No.
      000-27129) filed with the Securities and Exchange Commission on October 1,
      2008). †10.21
            
            English
      translation of Employment Agreement, dated as of December 26, 2007,
      between Duoyuan Digital Press Technology Industries (China) Co., Ltd. and
      Wenhua Guo (Incorporated by reference to Exhibit 10.18 to Amendment No. 8
      to Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on June 12, 2009). †10.22
            
            English
      translation of Employment Agreement, dated as of December 26, 2007,
      between Duoyuan Digital Press Technology Industries (China) Co., Ltd. and
      Baiyun Sun (Incorporated by reference to Exhibit 10.19 to Amendment No. 8
      to Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on June 12, 2009). †10.23
            
            English
      translation of Employment Agreement, dated as of December 26, 2007,
      between Duoyuan Digital Press Technology Industries (China) Co., Ltd. and
      Xiqing Diao (Incorporated by reference to Exhibit 10.20 to Amendment No. 8
      to Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on June 12, 2009). †10.24
            
            English
      translation of Employment Agreement, dated as of December 26, 2007,
      between Duoyuan Digital Press Technology Industries (China) Co., Ltd. and
      Wenzhong Liu (Incorporated by reference to Exhibit 10.21 to Amendment No.
      8 to Registration Statement on Form S-1 (File No. 333-141507) filed with
      the Securities and Exchange Commission on June 12, 2009). †10.25
            
            English
      translation of Employment Agreement, dated as of December 26, 2007,
      between Duoyuan Digital Press Technology Industries (China) Co., Ltd. and
      Yubao Wei (Incorporated by reference to Exhibit 10.22 to Amendment No. 8
      to Registration Statement on Form S-1 (File No. 333-141507) filed with the
      Securities and Exchange Commission on June 12, 2009). †10.26
            
            English
      Translation of Loan Agreement, dated as of July 4, 2008, between Duoyuan
      Digital Press Technology Industries (China) Co. Ltd. and Agricultural Bank
      of China (Incorporated by reference to Amendment No. 9 to Registration
      Statement on Form S-1 (File No. 333-141507) filed with the Securities and
      Exchange Commission on July 10, 2009).10.27
            
            English
      Translation of Loan Agreement, dated as of July 11, 2008, between Duoyuan
      Digital Press Technology Industries (China) Co. Ltd. and Agricultural Bank
      of China (Incorporated by reference to Amendment No. 9 to Registration
      Statement on Form S-1 (File No. 333-141507) filed with the Securities and
      Exchange Commission on July 10, 2009).10.28
            
            English
      Translation of Loan Agreement, dated as of July 18, 2008, between Duoyuan
      Digital Press Technology Industries (China) Co. Ltd. and Agricultural Bank
      of China (Incorporated by reference to Amendment No. 9 to Registration
      Statement on Form S-1 (File No. 333-141507) filed with the Securities and
      Exchange Commission on July 10, 2009).10.29
            
            English
      Translation of Loan Agreement, dated as of July 25, 2008, between Duoyuan
      Digital Press Technology Industries (China) Co. Ltd. and Agricultural Bank
      of China (Incorporated by reference to Amendment No. 9 to Registration
      Statement on Form S-1 (File No. 333-141507) filed with the Securities and
      Exchange Commission on July 10, 2009).10.30
            
            English
      Translation of Loan Agreement, dated as of March 13, 2009, between Duoyuan
      Digital Press Technology Industries (China) Co. Ltd. and Agricultural Bank
      of China (Incorporated by reference to Amendment No. 9 to Registration
      Statement on Form S-1 (File No. 333-141507) filed with the Securities and
      Exchange Commission on July 10, 2009).14.1
            
            Code
      of Business Conduct and Ethics of Asian Financial, Inc.*21.1
            
            List
      of Subsidiaries. *23.1
            
            Consent
      of Moore Stephens Wurth Frazer and Torbet, LLP.*31.1
            
            Chief
      Executive Officer Certification required by Rules 13a-14 and 15d-14 under
      the Securities Exchange Act of 1934, as amended.*31.2
            
            Chief
      Financial Officer Certification required by Rules 13a-14 and 15d-14 under
      the Securities Exchange Act of 1934, as amended.*32.1
            
            Chief
      Executive Officer and Chief Financial Officer Certification pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley
      Act of 2002.*


*
Filed herewith.


† Management
contract or compensatory plan or arrangement.


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 Table of Contents


ASIAN FINANCIAL, INC.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  Contents
              
              PageReport of Independent
      Registered Public Accounting Firm
              
              
              F-2Consolidated Balance
      Sheets as of June 30, 2009 and 2008
              
              
              F-3Consolidated
      Statements of Income and Other Comprehensive Income for the Years Ended
      June 30, 2009, 2008 and 2007
              
              
              F-4Consolidated
      Statements of Shareholders’ Equity for the Years Ended June 30, 2009, 2008
      and 2007
              
              
              F-5Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2009, 2008 and
      2007
              
              
              F-6Notes to Consolidated
      Financial Statements, June 30, 2009
              
              
              F-7
 
 
  F-1
  
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
  To the
Board of Directors and
  Stockholders
of Asian Financial, Inc. and Subsidiaries
  
  We have
audited the accompanying consolidated balance sheets of Asian Financial, Inc.
and subsidiaries as of June 30, 2009 and 2008, and the related consolidated
statements of income and other comprehensive income, shareholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 2009.
Asian Financial, Inc.'s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
  
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Asian
Financial, Inc. and subsidiaries as of June 30, 2009 and 2008, and the
consolidated results of its operations and its cash flows for each of the years
in the three-year period ended June 30, 2009 in conformity with accounting
principles generally accepted in the United States of
America.
  
  /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
  
  Brea,
California
  September
2, 2009
  F-2
  ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 AS
OF JUNE 30, 2009 AND 2008
 2009
                    
                    2008ASSETSCURRENT
      ASSETS:Cash
                    
                    $
                    31,044,070
                    
                    
                    $
                    14,199,700Accounts
      receivable, net of allowance for doubtful accounts of $1,401,689 and
      $1,178,328 as of June 30, 2009 and 2008, respectively
                    
                    
                    37,259,616
                    
                    
                    
                    33,184,833Inventories
                    
                    
                    25,883,242
                    
                    
                    
                    23,950,551Other
      receivables
                    
                    
                    26,912
                    
                    
                    
                    682,084Total
      current assets
                    
                    
                    94,213,840
                    
                    
                    
                    72,017,168PLANT
      AND EQUIPMENT, net
                    
                    
                    43,123,153
                    
                    
                    
                    34,130,651OTHER
      ASSETS:Intangible
      assets, net
                    
                    
                    3,939,476
                    
                    
                    
                    4,003,128Advances
      on equipment purchases
                    
                    
                    7,274,677
                    
                    
                    
                    2,753,610Total
      other assets
                    
                    
                    11,214,153
                    
                    
                    
                    6,756,738Total
      assets
                    
                    $
                    148,551,146
                    
                    
                    $
                    112,904,557LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Lines
      of credit
                    
                    $
                    14,357,000
                    
                    
                    $
                    11,380,200Accounts
      payable
                    
                    
                    756,116
                    
                    
                    
                    1,489,255Other
      liabilities
                    
                    
                    2,251,419
                    
                    
                    
                    1,858,112Taxes
      payable
                    
                    
                    1,512,727
                    
                    
                    
                    1,702,986Total
      current liabilities
                    
                    
                    18,877,262
                    
                    
                    
                    16,430,553DERIVATIVE
      INSTRUMENT LIABILITIES
                    
                    
                    1,180,477
                    
                    
                    
                    1,374,824MINORITY
      INTEREST
                    
                    
                    1,761,712
                    
                    
                    
                    1,292,843COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Preferred
      shares; $0.001 par value; 1,000,000 shares authorized; no shares issued
      and outstanding as of June 30, 2009 and 2008
                    
                    
                    —
                    
                    
                    
                    —Common
      shares; $0.001 par value; 100,000,000 shares authorized; 25,000,050 shares
      issued and outstanding as of June 30, 2009 and 2008
                    
                    
                    25,000
                    
                    
                    
                    25,000Additional
      paid-in capital
                    
                    
                    27,263,040
                    
                    
                    
                    27,263,040Statutory
      reserves
                    
                    
                    9,428,573
                    
                    
                    
                    6,000,090Retained
      earnings
                    
                    
                    79,226,497
                    
                    
                    
                    50,058,176Accumulated
      other comprehensive income
                    
                    
                    10,788,585
                    
                    
                    
                    10,460,031Total
      shareholders' equity
                    
                    
                    126,731,695
                    
                    
                    
                    93,806,337Total
      liabilities and shareholders' equity
                    
                    $
                    148,551,146
                    
                    
                    $
                    112,904,557
    The
accompanying notes are integral part of the these consolidated financial
statements.
  See
report of independent registered public accounting firm.
  F-3
  ASIAN FINANCIAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
THE YEARS ENDED JUNE 30, 2009, 2008 AND 2007
 2009
                  
                  2008
                  
                  2007REVENUE,
      net
                  
                  $
                  106,590,583
                  
                  
                  $
                  89,627,677
                  
                  
                  $
                  67,811,867COST
      OF REVENUE
                  
                  
                  50,334,043
                  
                  
                  
                  44,461,903
                  
                  
                  
                  37,693,679GROSS
      PROFIT
                  
                  
                  56,256,540
                  
                  
                  
                  45,165,774
                  
                  
                  
                  30,118,188RESEARCH
      AND DEVELOPMENT EXPENSES
                  
                  
                  1,768,050
                  
                  
                  
                  1,683,304
                  
                  
                  
                  1,045,543SELLING
      EXPENSES
                  
                  
                  9,725,635
                  
                  
                  
                  8,704,958
                  
                  
                  
                  7,826,958GENERAL
      AND ADMINISTRATIVE EXPENSES
                  
                  
                  4,473,655
                  
                  
                  
                  4,472,196
                  
                  
                  
                  3,078,851INCOME
      FROM OPERATIONS
                  
                  
                  40,289,200
                  
                  
                  
                  30,305,316
                  
                  
                  
                  18,166,836LIQUIDATED
      DAMAGES, net of settlement
                  
                  
                  —
                  
                  
                  
                  235,492
                  
                  
                  
                  (2,119,428
                  )CHANGE
      IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
                  
                  
                  194,347
                  
                  
                  
                  73,112
                  
                  
                  
                  —OTHER
      INCOME (EXPENSE), netNon-operating
      (expenses)
                  
                  
                  (956,936
                  )
                  
                  
                  —
                  
                  
                  
                  —Interest
      expense
                  
                  
                  (1,188,111
                  )
                  
                  
                  (729,934
                  )
                  
                  
                  (742,083
                  )Interest
      income and other income
                  
                  
                  175,781
                  
                  
                  
                  194,878
                  
                  
                  
                  721,349Other
      expense, net
                  
                  
                  (1,969,266
                  )
                  
                  
                  (535,056
                  )
                  
                  
                  (20,734
                  )INCOME
      BEFORE MINORITY INTEREST AND PROVISION FOR INCOME TAXES
                  
                  
                  38,514,281
                  
                  
                  
                  30,078,864
                  
                  
                  
                  16,026,674MINORITY
      INTEREST
                  
                  
                  463,553
                  
                  
                  
                  381,633
                  
                  
                  
                  240,584INCOME
      BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  38,050,728
                  
                  
                  
                  29,697,231
                  
                  
                  
                  15,786,090PROVISION
      FOR INCOME TAXES
                  
                  
                  5,453,924
                  
                  
                  
                  3,237,707
                  
                  
                  
                  1,806,943NET
      INCOME
                  
                  
                  32,596,804
                  
                  
                  
                  26,459,524
                  
                  
                  
                  13,979,147OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
                  
                  
                  328,554
                  
                  
                  
                  8,199,861
                  
                  
                  
                  1,834,313COMPREHENSIVE
      INCOME
                  
                  $
                  32,925,358
                  
                  
                  $
                  34,659,385
                  
                  
                  $
                  15,813,460BASIC
      AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
                  
                  
                  25,000,050
                  
                  
                  
                  25,000,050
                  
                  
                  
                  23,041,021BASIC
      AND DILUTED EARNING PER SHARE
                  
                  $
                  1.30
                  
                  
                  $
                  1.06
                  
                  
                  $
                  0.61
    The
accompanying notes are integral part of the these consolidated financial
statements.
  See
report of independent registered public accounting firm.  F-4
 ASIAN FINANCIAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 FOR
THE YEARS ENDED JUNE 30, 2009, 2008 AND 2007
 Common
      Shares
                  
                  
                  
                  Retained
      earnings
                  
                  Accumulated
      other comprehensive incomeNumber
      of shares
                  
                  Amount
                  
                  Additional
                    paid-in
                    capital
                  
                  Statutory
      reserves
                  
                  Unrestricted
                  
                  TotalBALANCE,
      June 30, 2006
                  
                  
                  17,562,388
                  
                  
                  $
                  17,562
                  
                  
                  $
                  5,992,339
                  
                  
                  $
                  1,871,198
                  
                  
                  $
                  13,748,397
                  
                  
                  $
                  425,857
                  
                  
                  $
                  22,055,353Shares
      due to reorganization on August 31, 2006
                  
                  
                  1,305,040
                  
                  
                  
                  1,305
                  
                  
                  
                  (1,305
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  —Shares
      issued for cash, $1.43 per share
                  
                  
                  6,132,622
                  
                  
                  
                  6,133
                  
                  
                  
                  21,272,006
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21,278,139Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  13,979,147
                  
                  
                  
                  
                  
                  
                  
                  13,979,147Adjustment
      to statutory reserves
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,411,403
                  
                  
                  
                  (1,411,403
                  )
                  
                  
                  
                  
                  
                  
                  —Foreign
      currency translation adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,834,313
                  
                  
                  
                  1,834,313BALANCE,
      June 30, 2007
                  
                  
                  25,000,050
                  
                  
                  $
                  25,000
                  
                  
                  $
                  27,263,040
                  
                  
                  $
                  3,282,601
                  
                  
                  $
                  26,316,141
                  
                  
                  $
                  2,260,170
                  
                  
                  $
                  59,146,952Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  26,459,524
                  
                  
                  
                  
                  
                  
                  
                  26,459,524Adjustment
      to statutory reserves
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,717,489
                  
                  
                  
                  (2,717,489
                  )
                  
                  
                  
                  
                  
                  
                  —Foreign
      currency translation adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,199,861
                  
                  
                  
                  8,199,861BALANCE,
      June 30, 2008
                  
                  
                  25,000,050
                  
                  
                  $
                  25,000
                  
                  
                  $
                  27,263,040
                  
                  
                  $
                  6,000,090
                  
                  
                  $
                  50,058,176
                  
                  
                  $
                  10,460,031
                  
                  
                  $
                  93,806,337Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  32,596,804
                  
                  
                  
                  
                  
                  
                  
                  32,596,804Adjustment
      to statutory reserves
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,428,483
                  
                  
                  
                  (3,428,483
                  )
                  
                  
                  
                  
                  
                  
                  —Foreign
      currency translation adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  328,554
                  
                  
                  
                  328,554BALANCE,
      June 30, 2009
                  
                  
                  25,000,050
                  
                  
                  $
                  25,000
                  
                  
                  $
                  27,263,040
                  
                  
                  $
                  9,428,573
                  
                  
                  $
                  79,226,497
                  
                  
                  $
                  10,788,585
                  
                  
                  $
                  126,731,695
    The
accompanying notes are integral part of the these consolidated financial
statements.
  See
report of independent registered public accounting firm.
  F-5
  ASIAN FINANCIAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED JUNE 30, 2009, 2008 AND 2007
 2009
                  
                  2008
                  
                  2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  32,596,804
                  
                  
                  $
                  26,459,524
                  
                  
                  $
                  13,979,147Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Minority
      interest
                  
                  
                  463,553
                  
                  
                  
                  381,633
                  
                  
                  
                  240,584Depreciation
                  
                  
                  2,826,707
                  
                  
                  
                  2,239,063
                  
                  
                  
                  882,842Amortization
                  
                  
                  80,115
                  
                  
                  
                  75,297
                  
                  
                  
                  70,047Loss
      on fixed assets disposal
                  
                  
                  —
                  
                  
                  
                  1,458
                  
                  
                  
                  —Bad
      debt expense
                  
                  
                  218,516
                  
                  
                  
                  589,901
                  
                  
                  
                  322,305Change
      in fair value of derivative instruments
                  
                  
                  (194,347
                  )
                  
                  
                  (73,112
                  )
                  
                  
                  —Liquidated
      damages penalty
                  
                  
                  —
                  
                  
                  
                  706,476
                  
                  
                  
                  2,119,428Gain
      from settlement of liquidated damages
                  
                  
                  —
                  
                  
                  
                  (941,968
                  )
                  
                  
                  —Transaction
      gain
                  
                  
                  (63,357
                  )
                  
                  
                  —
                  
                  
                  
                  —Write-off
      of deferred expenses
                  
                  
                  661,250
                  
                  
                  
                  —
                  
                  
                  
                  —Changes
      in operating assets and liabilitiesAccounts
      receivable
                  
                  
                  (4,156,829
                  )
                  
                  
                  (9,740,414
                  )
                  
                  
                  (9,452,582
                  )Inventories
                  
                  
                  (2,036,858
                  )
                  
                  
                  (1,566,856
                  )
                  
                  
                  (2,440,076
                  )Other
      receivables
                  
                  
                  (5,992
                  )
                  
                  
                  51,706
                  
                  
                  
                  71,457Other
      receivables - related parties
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  913,154Deferred
      expense
                  
                  
                  —
                  
                  
                  
                  (661,250
                  )
                  
                  
                  —Other
      assets
                  
                  
                  —
                  
                  
                  
                  42,230
                  
                  
                  
                  (43,198
                  )Accounts
      payable
                  
                  
                  (739,264
                  )
                  
                  
                  (1,287,681
                  )
                  
                  
                  (10,935,839
                  )Customer
      deposits
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (19,265
                  )Other
      payables
                  
                  
                  —
                  
                  
                  
                  (104,471
                  )
                  
                  
                  (341,354
                  )Other
      payables - related parties
                  
                  
                  —
                  
                  
                  
                  (386,960
                  )
                  
                  
                  (455,164
                  )Other
      liabilities
                  
                  
                  388,655
                  
                  
                  
                  538,634
                  
                  
                  
                  312,551Taxes
      payable
                  
                  
                  (197,261
                  )
                  
                  
                  477,886
                  
                  
                  
                  576,025Net
      cash provided by (used in) operating activities
                  
                  
                  29,841,692
                  
                  
                  
                  16,801,096
                  
                  
                  
                  (4,199,938
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment
                  
                  
                  (11,678,852
                  )
                  
                  
                  (7,925,596
                  )
                  
                  
                  (13,314,596
                  )Advances
      on equipment purchases
                  
                  
                  (4,509,743
                  )
                  
                  
                  (2,598,661
                  )
                  
                  
                  2,233,885Net
      cash used in investing activities
                  
                  
                  (16,188,595
                  )
                  
                  
                  (10,524,257
                  )
                  
                  
                  (11,080,711
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from private placement
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  21,278,139Proceeds
      from lines of credit
                  
                  
                  14,363,400
                  
                  
                  
                  10,739,820
                  
                  
                  
                  15,050,400Payments
      for lines of credit
                  
                  
                  (11,434,400
                  )
                  
                  
                  (13,493,620
                  )
                  
                  
                  (15,060,400
                  )Payments
      to settle liquidated damages
                  
                  
                  —
                  
                  
                  
                  (436,000
                  )
                  
                  
                  —Restricted
      cash
                  
                  
                  —
                  
                  
                  
                  2,097,490
                  
                  
                  
                  (2,097,490
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  2,929,000
                  
                  
                  
                  (1,092,310
                  )
                  
                  
                  19,170,649EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                  
                  
                  262,273
                  
                  
                  
                  1,198,810
                  
                  
                  
                  186,650INCREASE
      IN CASH
                  
                  
                  16,844,370
                  
                  
                  
                  6,383,339
                  
                  
                  
                  4,076,650CASH,
      beginning of year
                  
                  
                  14,199,700
                  
                  
                  
                  7,816,361
                  
                  
                  
                  3,739,711CASH,
      end of year
                  
                  $
                  31,044,070
                  
                  
                  $
                  14,199,700
                  
                  
                  $
                  7,816,361
    The
accompanying notes are integral part of the these consolidated financial
statements.
  See
report of independent registered public accounting firm.  F-6
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
1—Organization background and principal activities
  Asian
Financial, Inc. (“AFI”) was organized under the laws of the State of
Nevada on August 10, 1998. On July 27, 2005, AFI merged with Asian Financial,
Inc. (a Wyoming entity) for the purpose of changing its domicile from Nevada to
Wyoming. AFI has no operations and generated no revenues since inception. On
July 17, 2007, the Company effected a 1-for-2.68189924 reverse stock split of
its common stock. All share and per share amounts used in the Company's
consolidated financial statements and notes thereto have been retroactively
restated to reflect the 1-for-2.68189924 reverse stock split.
  Duoyuan
Investments Limited (“Duoyuan BVI”) is a British Virgin Islands company that
owns 100% of the equity interest of Duoyuan Digital Press Technology Industries
(China) Co., Ltd. (“Duoyuan China”). Duoyuan China has two subsidiaries, a 99.4%
ownership in Hunan Duoyuan Printing Machinery Co., Ltd. and 95% ownership in
Langfang Duoyuan Digital Technology Co., Ltd (collectively referred to as the
Duoyuan Interest).
  On August
31, 2006, Asian Financial, Inc. entered into a definitive Equity Transfer
Agreement with Duoyuan BVI to acquire the “Duoyuan Interest” in exchange for
47,100,462 new shares (pre-split) (equivalent to 17,562,388 post-split shares)
of common stock in Asian Financial, Inc. Prior to the acquisition, Asian
Financial, Inc. had 3,500,000 shares (pre-split) (equivalent to 1,305,040
post-split shares) of outstanding common stock. Accordingly, at the closing,
there were 50,600,462 shares (pre-split) (equivalent to 18,867,428 post-split
shares) of common stock outstanding. The Equity Transfer Agreement became
effective October 6, 2006. The stock exchange transaction has been accounted as
a reverse acquisition and recapitalization of the Company whereby Duoyuan BVI is
deemed to be the accounting acquirer (legal acquiree) and the Company to be the
accounting acquiree (legal acquirer). The historical financial statements for
periods prior to October 6, 2006 are those of Duoyuan BVI, except that the
equity section and earnings per share have been retroactively restated to
reflect the reverse acquisition. As a result of the equity transfer, Duoyuan
China became Asian Financial, Inc.’s wholly-owned subsidiary, and Mr. Wenhua
Guo, the sole shareholder of Duoyuan BVI, became the controlling
shareholder.
  Duoyuan Digital Press Technology
Industries (China) Co., Ltd. (“Duoyuan China”) was originally established
and wholly-owned by Duoyuan Industries (Holding) Inc. (“Duoyuan Industries”), a
British Virgin Islands company. In September 2002, Duoyuan Industries entered
into an Equity Transfer Agreement with Duoyuan BVI, whereby Duoyuan BVI acquired
100% of the equity in Duoyuan China from Duoyuan Industries. Mr. Wenhua Guo is
the sole shareholder of Duoyuan Industries. Duoyuan China was incorporated in
the People’s Republic of China (“PRC”) in 2001 with the registered capital of
$6,000,000. Subsequently, Duoyuan China increased its registered capital to
$19,000,000. As of June 30, 2007, $18,000,000 was contributed to Duoyuan China
from the Company, and the remaining $1,000,000 was received in July and August
2007. The capital was raised through a private placement to accredited investors
(see Note 14). On August 21, 2007, Duoyuan China received its business license
requiring $25,000,000 registered capital. As of June 30, 2009, Duoyuan China
owns 95.0% of Langfang Duoyuan Digital Technology Co., Ltd. and 88.0% of Hunan
Duoyuan Printing Machinery Co., Ltd.
  Langfang Duoyuan Digital Technology
Co., Ltd. (“Langfang Duoyuan”) is located in the city of Langfang, China,
and it produces primarily pre-press and small format offset printing presses (in
both single and multi colors). Langfang Duoyuan is 95% owned by Duoyuan China
and 5% by Beijing Huiyuan Duoyuan Research Institute Co., Ltd. Langfang Duoyuan
owns 12% of Hunan Duoyuan Printing Machinery Co. Ltd.
  Hunan Duoyuan Printing Machinery Co.,
Ltd. (“Hunan Duoyuan”) is located in Hunan, China , and it mainly
produces large format offset printing presses (in both single and multi colors).
Hunan Duoyuan was established on March 10, 2006, and is 88% owned by Duoyuan
China and 12% by Langfang Duoyuan.
   See
report of independent registered public accounting firm.
   F-7
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
2—Summary of significant accounting policies
  The reporting entity and
principles of consolidation
  The
consolidated financial statements of Asian Financial, Inc. and subsidiaries
(“the Company”) reflect the activities of Asian Financial, Inc., Duoyuan
China—100%, Langfang Duoyuan—95.0%, and Hunan Duoyuan—99.4%. All intercompany
balances and transactions have been eliminated in consolidation.
  Basis of
presentation
  The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America,
and have been consistently applied.
  Use of
estimates
  The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The significant estimates made in the preparation
of the Company’s consolidated financial statements relate to allowance for
doubtful accounts, reserves for inventory obsolescence, as well as the fair
value of its warrants carried as derivative instruments marked to market each
reporting period. Management believes that the estimates used in preparing its
financial statements are reasonable and prudent. Actual results could materially
differ from these estimates upon which the carrying values were
based.
  Foreign currency
translation
  The
reporting currency of the Company is the U.S. dollar. The Company uses their
local currency Chinese Renminbi (“RMB”), as their functional currency. In
accordance with Statement of Financial Accounting Standards (“SFAS”) 52,
“Foreign Currency Translation,” results of operations and cash flows are
translated at average exchange rates during the period, assets and liabilities
are translated at the unified exchange rate as quoted by the People’s Bank of
China at the end of the period, and equity is translated at historical exchange
rates.
  Translation
adjustments amounted to $10,788,585 and $10,460,031 as of June 30, 2009 and June
30, 2008, respectively. Asset and liability accounts at June 30, 2009 were
translated at RMB6.83 to $1.00, as compared to RMB6.85 to $1.00 at June 30,
2008. The average translation rates applied to the consolidated statements of
income for the years ended June 30, 2009, 2008 and 2007 were RMB6.83 to $1.00,
RMB7.26 to $1.00, and RMB7.81 to $1.00, respectively.
  In
accordance with SFAS 95, “Statement of Cash Flows,” cash flows from the
Company's operations is calculated based upon the local currencies using the
average translation rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
  Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. Gains and losses from foreign currency
transactions are included in the results of operations for the periods
presented. There were no material transaction gains or losses for the years
ended June 30, 2009, 2008 and 2007.
  Comprehensive
income
  SFAS 130,
“Reporting Comprehensive Income,” establishes standards for reporting and
display of comprehensive income and its components in financial statements. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be
      See
report of independent registered public accounting firm.  F-8
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
2—Summary of significant accounting policies
 – (continued)
  reported
in financial statements that is displayed with the same prominence as other
financial statements. The accompanying consolidated financial statements include
the provisions of SFAS 130.
  Revenue
recognition
  The
Company recognizes revenue in accordance with the Securities and Exchange
Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition,” which specifies that revenue is realized or realizable and earned
when four criteria are met:
 Persuasive
      evidence of an arrangement exists. (The Company considers its sales
      contracts to be persuasive evidence of an
  arrangement.)
 Product
      is shipped or services have been
rendered.
 The
      seller’s price to the buyer is fixed or
  determinable.
 Collectability
      of payment is reasonably assured.
  In
accordance with SFAS 48, “Revenue Recognition when Right of Return Exists,”
revenue is recorded net of an estimate of markdowns, price concessions and
warranty costs. Markdowns represent price adjustments on sale of units whose
model is nearing the end of its cycle and the model is planned to be
discontinued; price concessions represent price adjustments on contractual
agreements for the sale of units; and warranty costs represent costs to repair
previously sold units still under warranty for manufacturer’s defects. Such
amounts are based on management’s evaluation of historical experience, current
industry trends and estimated costs.
  The
Company sells its products solely to its distributors. Master distribution
agreements are signed with each distributor. The agreements list all terms and
conditions with the exception of delivery, price and quantity terms, which are
evidenced separately in purchase orders. Title transfers when products are
shipped. There are no instances where receivables from distributors are not due
and payable until goods purchased from the Company are sold by the distributors.
The Company does not sell products to distributors on a consignment basis. Its
distributors have a right of return within one month after shipping only if the
Company’s products exhibit any manufacturing defects and it cannot be repaired.
The Company had no returns during the years ended June 30, 2009, 2008 and 2007
and did not provide for any allowance for sales returns.
  The
Company recognizes revenue when the goods are shipped and title has passed.
Sales revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are sold in the PRC are subject to a
Chinese VAT at a rate of 17% of the gross sales price or at a rate approved by
the Chinese local government. This VAT may be offset by the VAT paid by the
Company on raw materials and other materials included in the cost of producing
their finished products. The VAT on sales may also be offset by the VAT paid on
equipment purchases. The Company’s distributors are all equipped to install the
Company’s products and the Company is not contractually obligated to perform any
installation services. As a result, there is no substantial performance required
on the Company’s part and there is no impact on the Company’s recognition of
revenues.
  Purchase
prices of products are generally fixed and customers are not allowed to
renegotiate pricing after the contracts are signed. The Company’s agreements
with its distributors do not include cancellation or termination
clauses.
  Credit
limits are assigned to each distributor. As a distributor builds a sales and
credit history with the Company, the credit limit can be increased. Credit
limits are periodically reviewed by management and reductions to credit limits
are made if deemed necessary.
      See
report of independent registered public accounting firm.  F-9
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
2—Summary of significant accounting policies
 – (continued)
  The
Company estimates sales rebates to distributors based on the projected annual
sales and corresponding cash receipts. These rebates are paid at the end of each
calendar year. The Company accounts for the sales rebates in accordance with
Emerging Issues Task Force (“EITF”) Issue 01-09, “Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products).” Sales rebates are included as a reduction of revenue and accounts
receivable to be received by the Company.
  For the
years ended June 30, 2009, 2008, and 2007, the aggregate amount of the
aforementioned markdowns, price concessions, warranty costs, and sales rebates
were immaterial to the consolidated financial statements taken as a whole for
each of those years.
  Accounts
receivable
  The
Company’s business operations are conducted in the PRC. During the normal course
of business, the Company extends unsecured credit to its customers by selling on
various credit terms from six to nine months. Management reviews its accounts
receivable on a quarterly basis to determine if the allowance for doubtful
accounts is adequate. An estimate for doubtful accounts is recorded in the
period of the related sales. The Company’s existing reserve is consistent with
its historical experience and considered adequate by management. Known bad debts
are written off against allowance for doubtful accounts when identified. The
Company recorded an allowance for doubtful accounts for trade accounts
receivables aged between nine months and one year at 15%, and currently the
Company does not have any outstanding balance aged over one year.
  The
following represents the changes of allowance for doubtful
accounts:
 June
      30,
                    2009
                  
                  June
      30,
                    2008Balance,
      beginning of period
                  
                  $
                  1,178,328
                  
                  
                  $
                  498,648Provision
      for bad debts
                  
                  
                  218,516
                  
                  
                  
                  589,901Foreign
      currency translation adjustments
                  
                  
                  4,845
                  
                  
                  
                  89,779Balance,
      end of period
                  
                  $
                  1,401,689
                  
                  
                  $
                  1,178,328
  Inventories
  Inventories
are stated at the lower of cost (weighted average method) or market. The Company
reviews its inventory on a regular basis for possible obsolete goods to
determine if any reserves are necessary. As of June 30, 2009 and 2008, the
Company determined that no reserves were necessary.
  Intangible
assets
  All land
in the PRC is owned by the government. However, the government grants rights to
use the land. Land use rights are valid for a limited period of time, depending
on their use. Under PRC regulations, the term of land use rights is 50 years for
industrial property. As such, the Company has the right to use the land for 50
years and has elected to amortize the cost of rights over 50 years using the
straight-line method.
  Intangible
assets of the Company are reviewed each reporting period to determine whether
their carrying value has become impaired. The Company considers assets to be
impaired if the carrying value exceeds future projected cash flows from related
operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of June 30, 2009, the Company expects these assets to be
fully recoverable.
  Plant and
equipment
  Plant and
equipment are stated at cost less accumulated depreciation. Major renewals are
charged directly to the plant and equipment accounts, while replacements,
maintenance, and repairs which do not
     See
report of independent registered public accounting firm.
  F-10
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
 Note
2—Summary of significant accounting policies
 – (continued)
 improve
or extend the respective lives of the assets are expensed currently.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets with 5% residual value. Estimated useful lives of the
assets are as follows:
 Estimated
      Useful LifeBuildings
                30 YearsOffice
      equipment
                3-10 YearsMotor
      vehicles
                4-10 YearsMachinery
      and equipment
                5-10 Years
  Construction-in-progress
represents the costs incurred in connection with the construction of buildings
or additions to the Company’s plant facilities. Interest incurred during
construction is capitalized into construction-in-progress. All other interest is
expensed as incurred. No depreciation is provided for construction–in-progress
until such time as the assets are completed and are placed into service. The
cost and related accumulated depreciation and amortization of assets sold or
otherwise retired are eliminated from the accounts and any gain or loss is
included in operations.
  Long-lived
assets of the Company are reviewed each reporting period to determine whether
their carrying value has become impaired in accordance with SFAS 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of the remaining useful lives of the assets. As of
June 30, 2009, the Company expects these assets to be fully
recoverable.
  Advances on equipment
purchases
  The
Company makes advances to certain vendors for equipment purchases. The Company
transfers the amounts advanced to the equipment accounts upon receipt of the
equipment purchased. These advances are classified as noncurrent, as the
advances relate to equipment accounts and the ultimate delivery of the equipment
may exceed one year from the date the advances are made.
  Concentration of
risk
  Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC and an offshore account with DBS Bank. Cash
deposits at these financial institutions are not covered by insurance from the
U.S. government. Total cash in state-owned banks and DBS Bank at June 30, 2009
and 2008 amounted to $31,036,332 and $14,192,775, respectively. To date, the
Company has not experienced any losses in such accounts.
  For the
year ended June 30, 2009, one supplier accounted for 11% of the Company’s total
purchases. This supplier represents 12% of total accounts payable as of June 30,
2009. For the year ended June 30, 2008, one supplier accounted for approximately
12% of total purchases. This supplier represents 14% of the Company's total
accounts payable as of June 30, 2008.
  For the
year ended June 30, 2009, the Company’s top five customers accounted for 13% of
the Company’s total sales. These customers represent 14% of total accounts
receivable as of June 30, 2009. For the year ended June 30, 2008, the Company’s
top five customers accounted for 21.6% of the total sales. These customers
represent 15% of total accounts receivable as of June 30, 2008.
  The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated
with
    See
report of independent registered public accounting firm.
  F-11
  ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
2—Summary of significant accounting policies
 – (continued)
  companies
in North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign currency
exchange. The Company's results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
  Liquidated
damages
  The
liquidated damages associated with the registration of the shares and the
settlement of all outstanding related party balances are treated in accordance
with Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) EITF
00-19-2, “Accounting for Registration Payment Arrangement,” which requires the
Company to recognize an expense and a liability equal to minimum estimated
losses.
  Financial
instruments
  SFAS 107,
“Disclosures about Fair Value of Financial Instruments,” defines financial
instruments and requires disclosure of the fair value of financial instruments
held by the Company. SFAS 157, “Fair Value Measurements,” adopted July 1, 2008,
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the consolidated balance
sheets for receivables and payables qualify as financial instruments and reflect
reasonable estimates of fair value because of the short period of time between
the origination of such instruments and their expected realization. The three
levels of valuation hierarchy are defined as follows:
  Level
      1 inputs to the valuation methodology which are quoted prices (unadjusted)
      for identical assets or liabilities in active
  markets.
 Level
      2 inputs to the valuation methodology that includes quoted prices for
      similar assets and liabilities in active markets, and inputs that are
      observable for the asset or liability, either directly or indirectly,
      substantially for the full term of the financial
    instrument.
 Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
  The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities,” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.” In accordance with EITF 00-19, the Company’s warrants were
required to be recorded as a liability at fair value and marked to market each
reporting period.
  As of
June 30, 2009, the outstanding principal on the Company’s short term loans
amounted to $14,357,000. Management concluded the carrying value of the short
term loans is a reasonable estimate of fair value because the amounts are due
within one year and the stated interest rate approximates current rates
available.
  As of
June 30, 2009, the Company’s management determined that certain inputs to the
fair value measurement of the Company’s warrant liability falls under level 3 of
the valuation hierarchy, since there was no observable market price for certain
inputs significant to the valuation model used to determine the fair value of
the warrant liability, and also rendered the fair value calculation thereof
under the same classification. The Company’s warrant liability is carried at
fair value totaling $1,180,477 as of June 30, 2009.
    See
report of independent registered public accounting firm.
  F-12
  ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
 Note
2—Summary of significant accounting policies
 – (continued)
 Fair
      Value
                    as
      of
                    June
      30, 2009
                  Fair
      Value Measurement
                    at
      June 30, 2009
                    using
      Fair Value HierarchyLiabilities
                  
                  
                  Level
      1
                  Level
      2
                  
                  Level
      3Warrant
      liability
                  
                  $
                  1,180,477
                  
                  
                  
                  
                  $
                  1,180,477
  Except
for the derivative liabilities and the short term loans, the Company did not
identify any other non-recurring assets and liabilities that are required to be
presented on the consolidated balance sheets at fair value in accordance with
SFAS 157.
  SFAS 159,
“The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115,” became effective for the
Company on July 1, 2008. SFAS 159 provides the Company with the irrevocable
option to elect fair value for the initial and subsequent measurement for
certain financial assets and liabilities on a contract-by-contract basis with
the difference between the carrying value before election of the fair value
option and the fair value recorded upon election as an adjustment to beginning
retained earnings. The Company chose not to elect the fair value
option.
  Income
taxes
  The
Company accounts for income taxes in accordance with SFAS 109, “Accounting for
Income Taxes.” Under the asset and liability method as required by SFAS 109,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Under SFAS 109, the effect on deferred
income taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recognized if it is more
likely than not that some portion, or all of, a deferred tax asset will not be
realized. Since the Company’s operations are domiciled in the PRC, and the PRC
taxable income mirrors that of GAAP income, there are no material temporary
differences that would result in deferred tax assets or liabilities. As such, no
valuation allowances were necessary at June 30, 2009 and 2008 for taxable income
from the PRC. However, the Company has certain deferred taxes as a result of net
operating losses for U.S. income tax purposes. (See Note 10.)
  In July
2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No.
109,” which clarifies the accounting and disclosure for uncertain tax positions.
FIN 48 prescribes a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition.
  Under FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more likely than not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met. The adoption of FIN 48 did not
have a material effect on the Company's consolidated financial
statements.
    See
report of independent registered public accounting firm.  F-13
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
 Note
2—Summary of significant accounting policies
 – (continued)
 China income
tax
  The
Company’s subsidiaries are governed by the Income Tax Law of the PRC concerning
Foreign Investment Enterprises and Foreign Enterprises and various local income
tax laws (the “Income Tax Laws”).
   Beginning
on January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the
existing laws for Domestic Enterprises (“DES”) and Foreign Investment
Enterprises (“FIEs”).
  The key
changes are:
 a.
              The
      new standard EIT rate of 25% replaced the 33% rate currently applicable to
      both DES and FIEs, except for High Tech companies who pay a reduced rate
      of 15%;
 
 b.
              Companies
      established before March 16, 2007, will continue to enjoy tax holiday
      treatment approved by local government for a grace period of either for
      the next five years or until the tax holiday term is completed, whichever
      is sooner. These companies will pay the standard tax rate as defined in
      point “a” above when the grace period
expires.
  Duoyuan
China was established before March 16, 2007, and therefore qualify to continue
to enjoy the reduced tax rate as described below.
   Prior to
March 16, 2007, upon approval by the PRC tax authorities, FIEs scheduled to
operate for a period of 10 years or more and engaged in manufacturing and
production may be exempt from income taxes for two years, commencing with their
first profitable year of operations, after taking into account any losses
brought forward from prior years and thereafter with a 50% reduction for the
subsequent three years.
   Duoyuan
China has been a wholly foreign-owned enterprise since its inception. This
entity status allowed Duoyuan China a two-year income tax exemption and a 50%
income tax reduction for the following three years. Duoyuan China also had
operating losses prior to the calendar year ended December 31, 2003, and started
to generate a net profit for the calendar year ended December 31, 2004.
Therefore Duoyuan China had an income tax exemption for the calendar years ended
December 31, 2004 and 2005, and 50% income tax reduction for the calendar years
ended December 31, 2006, 2007, and 2008. Thus, income tax rate for Duoyuan China
for the calendar years ended December 31, 2006 and 2007 was 16.5% and for the
calendar year ended December 31, 2008 was 12.5%. Duoyuan China is subject to an
income tax rate of 25% starting January 1, 2009, under the newly unified
corporate income tax rate.
   Langfang
Duoyuan is located in a Special Economic and High Technology Zone and the PRC
tax authority has offered a special income tax rate to Langfang Duoyuan for
doing business in the special zone. With the approval of the local government,
Langfang Duoyuan is exempt from income taxes for five years, commencing with
their first profitable year of operations. Langfang Duoyuan has operating losses
prior to the calendar year ended December 31, 2002, and started to generate a
net profit for the calendar year ended December 31, 2003. Therefore, Langfang
Duoyuan had an income tax exemption for the years ended December 31, 2003,
through December 31, 2007. Langfang Duoyuan is subject to an income tax rate of
25% starting January 1, 2008, under the newly unified corporate income tax
rate.
   Prior to
acquiring Hunan Duoyuan, the shareholders negotiated with the Hunan Shaoyang
Treasury Department to obtain an income tax exemption benefit. The Treasury
Department granted the company a five-year income tax exemption commencing with
the first profitable year of operations. In addition, the Treasury Department
granted a 50% refund of income taxes based upon the amount of income taxes paid
by Hunan Duoyuan. Hunan Duoyuan had an operating loss in the first year of
operations ended December 31, 2004, and started to generate a net profit for the
calendar year ended December 31, 2005.
      See
report of independent registered public accounting firm.
   F-14
  ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
2—Summary of significant accounting policies
 – (continued)
  Therefore
Hunan Duoyuan has an income tax exemption for the years ended December 31, 2005
through December 31, 2009. Hunan Duoyuan will become subject to income tax at a
rate of 25% starting January 1, 2010, under the newly unified corporate income
tax rate.
  PRC laws
require that before a foreign invested enterprise can legally distribute profits
to its partners, it must satisfy all tax liabilities, provide for losses in
previous years, and make allocations in proportions made at the discretion of
the board of directors, after the statutory reserve. The statutory reserves
include the surplus reserve fund and the common welfare fund, and represent
restricted retained earnings.
  During
the years ended June 30, 2009, 2008 and 2007, the provision for income taxes
amounted to approximately $5,454,000, $3,238,000 and $1,807,000, respectively.
The estimated tax savings due to this tax exemption for the years ended June 30,
2009, 2008 and 2007 amounted to approximately $4,272,000, $7,865,000 and
$4,510,000, respectively. The net effect on earnings per share had the income
tax been applied would decrease basic and diluted earnings per share from $1.30
to $1.13, $1.06 to $0.74 and $0.61 to $0.49 for the years ended June 30, 2009,
2008 and 2007, respectively.
  The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended June 30, 2009, 2008 and 2007:
 Year
      Ended June 30,2009
                  
                  2008
                  
                  2007U.S.
      statutory rates
                  
                  
                  34
                  %
                  
                  
                  34
                  %
                  
                  
                  34
                  %Foreign
      income not recognized in the U.S.
                  
                  
                  -34
                  
                  
                  
                  -34
                  
                  
                  
                  -34China
      income taxes
                  
                  
                  25
                  
                  
                  
                  33
                  
                  
                  
                  33China
      income tax exemption
                  
                  
                  -11.2
                  
                  
                  
                  -22.3
                  
                  
                  
                  -23.2Other
      (a)
                  
                  
                  0.5
                  
                  
                  
                  0.2
                  
                  
                  
                  1.6Effective
      income tax rates
                  
                  
                  14.3
                  %
                  
                  
                  10.9
                  %
                  
                  
                  11.4
                  %
  
 (a)
              The
      0.5%, 0.2%, and 1.6% represent $1,399,143, $423,888 and $2,720,474 of
      expenses incurred by the Company that are not subject to China income tax
      for the years ended June 30, 2009, 2008 and 2007,
      respectively.
  Value added
tax
  Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
goods in the PRC are subject to a value added tax in accordance with PRC laws.
The VAT standard rate is 17% of the gross sales price. A credit is available
whereby VAT paid on the purchases of semi-finished products or raw materials
used in the production of the Company’s finished products can be used to offset
the VAT due on sales of the finished products. A credit is also available for
VAT paid on the purchases of equipment.
  VAT on
sales and VAT on purchases amounted to approximately $32,442,000 and $23,892,000
for the year ended June 30, 2009, approximately $28,937,000 and $20,122,000 for
the year ended June 30, 2008 and approximately $19,791,000 and $7,258,000 for
the year ended June 30, 2007, respectively. Sales and purchases are recorded net
of VAT collected and paid as the Company acts as an agent because the VAT is not
impacted by the income tax holiday.
  Shipping and
handling
  Shipping
and handling costs related to goods sold are included in selling expenses.
Shipping and handling costs were approximately $1,396,000, $960,000 and
$1,128,000 for the years ended June 30, 2009, 2008 and 2007,
respectively.
   See
report of independent registered public accounting firm.  F-15
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
 Note
2—Summary of significant accounting policies
 – (continued)
 Advertising
costs
  Advertising
costs are expensed as incurred and included in selling expenses. Advertising
costs were approximately $1,436,000, $1,357,000 and $1,118,000 for the years
ended June 30, 2009, 2008 and 2007, respectively.
  Research and development
costs
  Research
and development costs are expensed as incurred. The costs of material and
equipment acquired or constructed for research and development activities, and
have alternative future uses, either in research and development, marketing, or
sales, are capitalized as plant and equipment and depreciated over their
estimated useful lives.
  Recent accounting
pronouncements
  In
December 2007, the FASB issued SFAS 141R, “Business Combinations,” which
replaces SFAS 141. SFAS 141R retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting as well as
requiring the expensing of acquisition-related costs as incurred. Furthermore,
SFAS 141R provides guidance for recognizing and measuring the goodwill acquired
in the business combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for fiscal years
beginning on or after December 15, 2008. Earlier adoption is prohibited. The
Company is evaluating the impact, if any, that the adoption of this statement
will have on its consolidated results of operations or consolidated financial
position.
   In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51.” SFAS 160 amends
ARB 51 to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It is
intended to eliminate the diversity in practice regarding the accounting for
transactions between equity and noncontrolling interests by requiring that they
be treated as equity transactions. Further, it requires consolidated net income
to be reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest. SFAS 160 also establishes a single
method of accounting for changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation, requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated,
requires expanded disclosures in the consolidated financial statements that
clearly identify and distinguish between the interests of the parent’s owners
and the interests of the noncontrolling owners of a subsidiary, among others.
SFAS 160 is effective for fiscal years beginning on or after December 15, 2008,
with early adoption permitted, and it is to be applied prospectively. SFAS 160
is to be applied prospectively as of the beginning of the fiscal year in which
it is initially applied, except for the presentation and disclosure
requirements, which must be applied retrospectively for all periods presented.
The Company is evaluating the impact that SFAS 160 will have on its consolidated
financial position or consolidated results of operations.
   In
February 2008, the FASB issued FSP FAS 157-1, “Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13.” FSP FAS 157-1 indicates that it does not apply under SFAS
13, “Accounting for Leases,” and other accounting pronouncements that address
fair value measurements for purposes of lease classification or measurement
under SFAS 13. This scope exception does not apply to assets acquired and
liabilities assumed in a business combination that are required to be measured
at fair value under SFAS 141 or SFAS 141R, regardless of whether those assets
and liabilities are related to leases.
   See
report of independent registered public accounting firm.  F-16
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
 Note
2—Summary of significant accounting policies
 – (continued)
  Also in
February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement
No. 157.” With the issuance of FSP FAS 157-2, the FASB agreed to: (a) defer the
effective date in SFAS 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), and
(b) remove certain leasing transactions from the scope of SFAS 157. The deferral
is intended to provide the FASB time to consider the effect of certain
implementation issues that have arisen from the application of SFAS 157 to these
assets and liabilities.
   In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities – An Amendment of SFAS No. 133.” SFAS 161 is intended to
improve financial reporting of derivative instruments and hedging activities by
requiring enhanced disclosures to enable financial statement users to better
understand the effects of derivatives and hedging on an entity's financial
position, financial performance and cash flows. To achieve this increased
transparency, SFAS 161 requires (1) the disclosure of the fair value of
derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. SFAS 161 is effective on January 1,
2009. The Company has adopted SFAS 161.
   In June
2008, the FASB issued EITF 07-5, “Determining whether an Instrument (or Embedded
Feature) is indexed to an Entity’s Own Stock.” EITF 07-5 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early application is not
permitted. Paragraph 11(a) of SFAS 133 specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the
Company’s own stock and (b) classified in stockholders’ equity in the statement
of financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer’s own stock
and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. This
standard triggers liability accounting on all options and warrants exercisable
at strike prices denominated in any currency other than the functional currency
in China (Renminbi). The Company will adopt EITF 07-5 effective July 1, 2009.
See note 14 which discusses the effect on the Company’s consolidated financial
statements.
   In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities,” to address
the question of whether instruments granted in share-based payment transactions
are participating securities prior to vesting. FSP EITF 03-6-1 indicates that
unvested share-based payment awards that contain rights to dividend payments
should be included in earnings per share calculations. The guidance will be
effective for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the requirements of FSP EITF 03-6-1 and the impact that its
adoption will have on the consolidated results of operations or consolidated
financial position.
   In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active,” which clarifies the application
of SFAS 157 when the market for a financial asset is inactive. Specifically, FSP
FAS 157-3 clarifies how (1) management’s internal assumptions should be
considered in measuring fair value when observable data are not present, (2)
observable market information from an inactive market should be taken into
account, and (3) the use of broker quotes or pricing services should be
considered in assessing the relevance of observable and unobservable data to
measure fair value. The Company is currently evaluating the impact of adoption
of FSP FAS 157-3 on the Company’s consolidated financial
statements.
   In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” FSP FAS 157-4 amends SFAS 157
and provides additional guidance for estimating fair
     See
report of independent registered public accounting firm.
  F-17
  ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
 Note
2—Summary of significant accounting policies
 – (continued)
 value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. FSP FAS 157-4 shall be applied prospectively with retrospective
application not permitted. FSP FAS 157-4 shall be effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting FSP FAS 157-4 must
also early adopt FSP FAS 115-2 and 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”. Additionally, if an entity elects to early
adopt either FSP FAS 107-1 and 28-1, “Interim Disclosures about Fair Value of
Financial Instruments” or FSP FAS 115-2 and 124-2, it must also elect to early
adopt this FSP. The Company has determined that this new FSP did not have a
material impact on the consolidated financial statements.
  In April
2009, the FASB issued FSP FAS 115-2 and 124-2. FSP FAS 115-2 amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF 99-20, “Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets,” to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This FSP will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This FSP provides increased disclosure about
the credit and noncredit components of impaired debt securities that are not
expected to be sold and also requires increased and more frequent disclosures
regarding expected cash flows, credit losses, and an aging of securities with
unrealized losses. Although this FSP does not result in a change in the carrying
amount of debt securities, it does require that the portion of an
other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early adopt
this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an entity
elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and 28-1, the entity
also is required to early adopt this FSP. The Company has determined that this
new FSP did not have a material impact on the consolidated financial
statements.
   In April
2009, the FASB issued FSP FAS 107-1 and 28-1. This FSP amends SFAS 107, to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects to
early adopt FSP FAS 157-4 and 115-2 and 124-2. This FSP does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption. In periods after initial adoption, this FSP requires comparative
disclosures only for periods ending after initial adoption. The Company is
currently evaluating the disclosure requirements of this new FSP.
   In June
2009, the FASB issued SFAS 168, “The FASB Accounting Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB
Statement No. 162” (“SFAS 168”). This Standard establishes the FASB Accounting
Standards CodificationTM
(the
    See
report of independent registered public accounting firm.  F-18
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
 Note
2—Summary of significant accounting policies
 – (continued)
 “Codification”)
as the source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with U.S. GAAP. The Codification does not change
current U.S. GAAP, but is intended to simplify user access to all authoritative
U.S. GAAP by providing all the authoritative literature related to a particular
topic in one place. The Codification is effective for interim and annual periods
ending after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q
for the quarter ending September 30, 2009 and all subsequent public filings will
reference the Codification as the sole source of authoritative
literature.
  Reclassifications and
correction
  Certain
prior period amounts have been reclassified for consistent presentation with the
current period.
  Note
3—Earnings per share
  The
Company reports earnings per share in accordance with the provisions of SFAS
128, “Earnings Per Share.” SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock.
  The
following is a reconciliation of the basic and diluted earnings per share
computation:
 2009
                  
                  2008
                  
                  2007For
      the years ended June 30, 2009, 2008 and 2007Net
      income for earnings per share
                  
                  $
                  32,596,804
                  
                  
                  $
                  26,459,524
                  
                  
                  $
                  13,979,147Weighted
      average shares used in basic computationBasic
      and Diluted
                  
                  
                  25,000,050
                  
                  
                  
                  25,000,050
                  
                  
                  
                  23,041,021Earnings
      per share:Basic
      and Diluted
                  
                  $
                  1.30
                  
                  
                  $
                  1.06
                  
                  
                  $
                  0.61
  At June
30, 2009 and 2008, 1,226,972 warrants, whose weighted average exercise price is
$4.95, were excluded from the calculation of diluted earnings per share because
of their anti-dilutive effect.
  Note
4—Supplemental disclosure of cash flow information
  Cash paid
for interest amounted to $1,186,225, $957,684 and $750,736 for the years ended
June 30, 2009, 2008 and 2007, respectively.
   Cash paid
for income taxes amounted to $4,970,955, $2,831,179 and $1,355,095 for the years
ended June 30, 2009, 2008 and 2007, respectively.
  Note
5—Inventories
  Inventories
consist of the following:
   See
report of independent registered public accounting firm.
  F-19
  ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
 Note
5—Inventories  – (continued)
 June
      30,
                    2009
                  
                  June
      30,
                    2008Raw
      materials
                  
                  $
                  6,494,433
                  
                  
                  $
                  7,282,772Work-in-process
                  
                  
                  13,125,837
                  
                  
                  
                  10,984,027Finished
      goods
                  
                  
                  6,262,972
                  
                  
                  
                  5,683,752Totals
                  
                  $
                  25,883,242
                  
                  
                  $
                  23,950,551
  Note
6—Plant and equipment
  Plant and
equipment consist of the following:
  June
      30,
                      2009
                    
                    June
      30,
                      2008Buildings
                    
                    $
                    13,699,189
                    
                    
                    $
                    13,643,084Office
      equipment
                    
                    
                    928,051
                    
                    
                    
                    924,251Motor
      vehicles
                    
                    
                    382,372
                    
                    
                    
                    322,447Plant
      and machinery
                    
                    
                    32,008,907
                    
                    
                    
                    20,305,152Construction-in-progress
                    
                    
                    4,286,527
                    
                    
                    
                    4,268,971Total
                    
                    
                    51,305,046
                    
                    
                    
                    39,463,905Less:
      accumulated depreciation
                    
                    
                    (8,181,893
                    )
                    
                    
                    (5,333,254
                    )Plant
      and equipment, net
                    
                    $
                    43,123,153
                    
                    
                    $
                    34,130,651
  Depreciation
expense for the years ended June 30, 2009, 2008 and 2007 amounted to
approximately $2,827,000, $2,239,000 and $883,000, respectively.
   Interest
costs totaling approximately $141,000 was capitalized into
construction-in-progress for the year ended June 30, 2008. No interest costs
were capitalized into construction-in-progress for the years ended June 30, 2009
and 2007.
  Note
7—Intangible assets
  Intangible
assets consist of the following:
 June
      30,
                      2009
                    
                    June
      30,
                      2008Intangible – land
      use rights
                    
                    $
                    4,457,876
                    
                    
                    $
                    4,439,619Less:
      accumulated amortization
                    
                    
                    (518,400
                    )
                    
                    
                    (436,491
                    )Total
                    
                    $
                    3,939,476
                    
                    
                    $
                    4,003,128
  Total
amortization expense for the years ended June 30, 2009, 2008 and 2007 amounted
to $80,115, $75,297 and $70,047, respectively.
  Note
8—Related party transactions
  The
Company leased office space from Duoyuan China Water Recycle Technology Industry
Co., a related party. On June 30, 2008, the Company and Duoyuan Water Recycle
Technology Industry Co. terminated the lease pursuant to a termination
agreement. The title of property transferred to Duoyuan Information Terminal
Manufacture (Langfang) Co., Ltd., a related party, which Mr. Wenhua Guo is the
sole shareholder. On July 1, 2008, the Company entered into a lease agreement
with Duoyuan Information Terminal Manufacture (Langfang) Co., Ltd., from July 1,
2008 to December 31, 2009. For the years ended June 30, 2009, 2008 and 2007,
rental expense related to this office lease amounted to $164,610 $154,784 and
$143,992 (See Note 12).
   See
report of independent registered public accounting firm.
  F-20
 
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
 Note
8—Related party transactions  – (continued)
  The
Company had a lease agreement to rent part of its manufacturing plant located in
Lanfang Duoyuan with Duoyuan Water Treatment Equipment Manufacturing (Langfang)
Co., Ltd. (lessee), a company 80% owned by Mr. Wenhua Guo, from October 1, 2004
to September 30, 2009. On May 25, 2007, the Company and the lessee terminated
the lease pursuant to a termination agreement. Total rental income related to
this lease for the year ended June 30, 2007 was approximately $447,000, and is
included in other income in the accompanying consolidated statement of income.
There was no such rental income for the years ended June 30, 2009 and
2008.
  Note
9—Lines of credit
  The lines
of credit represent short-term loan amounts due to a bank which are due normally
within one year. These loans can be renewed with the bank. The loans were
comprised of the following:
  June
      30,
                    2009
                  
                  June
      30,
                    2008Loan
      from Bank of Agriculture, Chongwen branch due March 12, 2010, interest
      rate of 5.841% per annum, interest only paid quarterly, secured by land
      use rights and buildings
                  
                  $
                  1,465,000
                  
                  
                  $
                  —Loan
      from Bank of Agriculture, Chongwen branch due March 13, 2009 , interest
      rate of 8.570% per annum, interest only paid quarterly, secured by land
      use rights and buildings
                  
                  
                  —
                  
                  
                  
                  1,459,000Loan
      from Bank of Agriculture, Chongwen branch due July 3, 2009, interest rate
      of 8.217% per annum, interest only paid quarterly, secured by land use
      rights and buildings
                  
                  
                  2,930,000
                  
                  
                  
                  —Loan
      from Bank of Agriculture, Chongwen branch due July 10, 2009, interest rate
      of 8.217% per annum, interest only paid quarterly, secured by land use
      rights and buildings
                  
                  
                  2,930,000
                  
                  
                  
                  2,918,000Loan
      from Bank of Agriculture, Chongwen branch due July 17, 2009, interest rate
      of 8.217% per annum, interest only paid quarterly, secured by land use
      rights and buildings
                  
                  
                  4,102,000
                  
                  
                  
                  4,085,200Loan
      from Bank of Agriculture, Chongwen branch due July 24, 2009, interest rate
      of 8.217% per annum, interest only paid quarterly, secured by land use
      rights and buildings
                  
                  
                  2,930,000
                  
                  
                  
                  2,918,000Total
                  
                  $
                  14,357,000
                  
                  
                  $
                  11,380,200
  As of
June 30, 2009 and 2008, the carrying value of the collateralized fixed assets
amounted to $4,206,000 and $4,304,772, respectively.
   Total
interest expense for the above short term loans, net of capitalized interest,
amounted to approximately $1,186,000, $817,000 and $751,000 for the years ended
June 30, 2009, 2008 and 2007, respectively.
  Note
10—Taxes payable
  Asian
Financial, Inc. was incorporated in the U.S. and has incurred net operating
losses for income tax purposes for the year ended June 30, 2009. The net
operating loss carryforwards for U.S. income taxes is $2,862,715 which may be
available to reduce future years’ taxable income. These carryforwards will
expire, if not utilized, starting in 2027 through 2028. Management believes that
the realization of
    See
report of independent registered public accounting firm.
  F-21
  ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
10—Taxes payable  – (continued)
  the
benefits from these losses appears uncertain due to the Company’s limited
operating history and continuing losses for U.S. income tax purposes.
Accordingly, the Company has provided a 100% valuation allowance on the deferred
tax asset to reduce the asset to zero. Management reviews the valuation
allowance periodically and makes adjustments as warranted.
  Taxes
payable consisted of the following:
 June
      30,
                    2009
                  
                  June
      30,
                    2008VAT
      (credit) payable
                  
                  $
                  (313,382
                  )
                  
                  $
                  359,725Income
      tax payable
                  
                  
                  1,740,765
                  
                  
                  
                  1,253,988Others
                  
                  
                  85,344
                  
                  
                  
                  89,273Total
      taxes payable
                  
                  $
                  1,512,727
                  
                  
                  $
                  1,702,986
  The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $84.6 million as of June 30, 2009, which is included in retained
earnings on the consolidated balance sheets and will continue to be indefinitely
reinvested in international operations. Accordingly, no provision has been made
for U.S. deferred taxes related to future repatriation of these earnings, nor
has it been determined to be practicable to estimate the amount of income taxes
that would have to be provided if we concluded that such earnings will be
remitted in the future.
   Significant
components of the Company’s deferred tax assets and liabilities at June 30, 2009
were as follows (tax-effected amounts shown):
 U.S.
                  
                  China
                  
                  TotalDeferred
      tax assets (liabilities):Net
      operating loss carryforwards
                  
                  $
                  973,323
                  
                  
                  $
                  —
                  
                  
                  $
                  973,323Deferred
      tax assets, net
                  
                  
                  973,323
                  
                  
                  
                  —
                  
                  
                  
                  973,323Valuation
      allowance
                  
                  
                  (973,323
                  )
                  
                  
                  —
                  
                  
                  
                  (973,323
                  )Net
      deferred tax assets
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
  Significant
components of the Company’s deferred tax assets and liabilities at June 30, 2008
were as follows (tax-effected amounts shown):
  U.S.
                  
                  China
                  
                  TotalDeferred
      tax assets (liabilities):Net
      operating loss carryforwards
                  
                  $
                  428,545
                  
                  
                  $
                  —
                  
                  
                  $
                  428,545Deferred
      tax assets, net
                  
                  
                  428,545
                  
                  
                  
                  —
                  
                  
                  
                  428,545Valuation
      allowance
                  
                  
                  (428,545
                  )
                  
                  
                  —
                  
                  
                  
                  (428,545
                  )Net
      deferred tax assets
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
  Note
11—Statutory reserves and dividends
  The laws
and regulations of the PRC require that before a foreign-invested enterprise can
legally distribute profits, it must first satisfy all tax liabilities, provide
for losses in previous years, and make allocations in proportions determined at
the discretion of the board of directors, after the statutory reserve. The
statutory reserves include the surplus reserve fund and the enterprise fund.
Additionally, the Chinese government restricts distributions of registered
capital and the additional investment amounts required by a foreign-invested
enterprise. Approval by the Chinese government must be obtained before
distributions of these amounts can be returned to the shareholders.
    See
report of independent registered public accounting firm.  F-22
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
11—Statutory reserves and dividends  – (continued)
  Statutory surplus reserve
fund
  The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
  The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the years ended June 30, 2009, 2008 and 2007, the Company
transferred $3,428,483, $2,717,489 and $1,411,403 , respectively, to this
reserve. The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years’ losses, if any. It may also
be utilized for business expansion or converted into share capital by issuing
new shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
  The
remaining reserve to fulfill the 50% registered capital requirement amounted to
approximately $4,640,000 and $8,900,000 as of June 30, 2009 and 2008,
respectively.
  Enterprise
fund
  The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expend on production and operation of the business. No minimum
contribution is required and, to date, the Company has not made any
contributions to this fund.
  Note
12—Operating leases
  The
Company entered into a lease arrangement for an office space with Duoyuan China
Water Recycle Technology Industry Co. from January 1, 2008 to December 31, 2008.
On June 30, 2008, the title of leased property transferred to Duoyuan
Information Terminal Manufacture (Langfang) Co., Ltd., a related party (see Note
8), and the lease arrangement with Duoyuan China Water Recycle Technology
Industry Co. was terminated on that date. On July 1, 2008, the Company entered
into a lease agreement with Duoyuan Information Terminal Manufacture (Langfang)
Co. Ltd. with annual lease payments totaling $164,610.
  In
addition, the Company leases sixteen sales offices in sixteen different Chinese
provinces with various terms with latest office lease due to expire in December
2010. The monthly lease amounts for these offices are de minimis.
  Total
lease expense for the years ended June 30, 2009, 2008 and 2007 was $236,421,
$154,784 and $143,992, respectively. Total future minimum lease payments at June
30, 2009, are as follows:
  Years
      ending June 30,
                
                Amount2010
                
                $
                200,0392011
                
                
                33,696Thereafter
                
                
                —
  Note
13—Retirement plan
  The
Company’s retirement plan includes two parts: the first to be paid by the
Company is 20% of the employee’s actual salary in the prior year. The other
part, paid by the employee, is 8% of the actual salary. The Company’s
contributions amounted to approximately $1,103,000, $891,000 and $503,000 for
the years ended June 30, 2009, 2008 and 2007.
    See
report of independent registered public accounting firm.
  F-23
  ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
14—Shareholders' equity
  On
October 25, 2006, Asian Financial, Inc. entered into a definitive Security
Purchase Agreement with unrelated investors (the “Purchase Agreement”). The
transaction closed on November 2, 2006. In accordance with the Purchase
Agreement, Asian Financial, Inc. issued 6,132,622 shares of common stock for a
purchase price of approximately $3.84 per share or a total of
$23,549,200.
  The
financing was conducted through a private placement to accredited investors and
is exempted from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended (the “Securities Act”). In conjunction with the private
placement, the Company agreed to register the shares with the SEC within 90 days
of the closing. The Company also agreed to make the registration statement
effective no later than the 150th day following the closing date or the fifth
trading day following the date on which the Company is notified by the SEC that
such registration statement will not be reviewed or is no longer subject to
further review and comments, whichever date is earlier. If the registration
statement is not filed or declared effective pursuant to the above timeline or
if the registration statement ceases to be effective for more than an aggregate
of 45 trading days, the Company is required to pay the investors monthly
liquidated damages equal to 1% of the aggregate investment amount. The total
amount of the liquidated damages payable by the Company was capped at 8% of the
total investment amount paid by the investors. Additionally, pursuant to the
Purchase Agreement, the Company agreed to cease all related party transactions
and to settle all outstanding balances due to or from related parties by
December 31, 2006. Failure to terminate the related party transactions was to
result in a monthly cash penalty of 1% of the proceeds with a cap of 4%.
Penalties were expensed as incurred and totaled $2,119,428 through December 31,
2007. During the year ended June 30, 2008, the Company paid cash of $436,000 and
issued 576,425 warrants valued at $1,447,936, and the investors agreed to waive
all future penalties under the registration rights related to obtaining timely
effectiveness of the registration statement. The fair value of the warrants was
calculated using the Cox-Ross-Rubinstein (“CRR”) binomial model with the
following assumptions: market price $5.76, 5-year term, volatility of 42%, risk
free interest rate of 2.09% and no dividends. Pursuant to SFAS 133 and EITF
00-19, the warrants explicitly provide the holder with the right to request the
Company to cash-settle the warrants. Therefore, the warrants did not meet the
criteria established under EITF 00-19 and triggered liability accounting. As
such, the Company recorded liability of $1,447,936 on December 31, 2007, the
grant date. As of June 30, 2009, the fair value of these warrants was $1,180,477
and the Company recorded a gain of $194,347 for the change of fair value for the
year then ended.
  The
changes in the fair value of derivative instrument liabilities were as
follows:
 AmountBalance,
      June 30, 2007
                  
                  $
                  —Value
      of warrant liability on grant date
                  
                  
                  1,447,936Change
      in fair value of derivative instruments
                  
                  
                  (73,112
                  )Balance,
      June 30, 2008
                  
                  
                  1,374,824Change
      in fair value of derivative instruments
                  
                  
                  (194,347
                  )Balance,
      June 30, 2009
                  
                  $
                  1,180,477
  As
discussed above, the Company incurred liquidated damages for failure to register
the resale of securities as well as to terminate all related party transactions
pursuant to the Purchase Agreement. In November 2007, the Company reached a
settlement with the investors who agreed to waive all penalties due in exchange
for warrants or cash payments of $1,883,936.
     See
report of independent registered public accounting firm.  F-24
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
14—Shareholders' equity  – (continued)
  The
following is a reconciliation of liquidated damages for the year ended June 30,
2008:
  Liquidated
      damages expense accrued at June 30, 2007
                  
                  $
                  2,119,428Settlement
      payments with warrants and cash payments
                  
                  
                  (1,883,936
                  )Net
      gain from reversal of liquidated damages expense at June 30,
      2008
                  
                  $
                  235,492
  The
Company had no gain or loss from the liquidated damages during the year ended
June 30, 2009, since an agreement was reached and settled during the year ended
June 30, 2008.
  At
closing, as part of the compensation to the placement agent, Roth Capital
Partners, LLC (“Roth Capital”), the Company issued to Roth Capital warrants to
acquire 613,260 shares of common stock, exercisable at any time after June 30,
2008. The warrants have a strike price equal to $ 4.21. In addition, the Company
issued to CCG, an investor relations firm, warrants to acquire 37,287 shares of
common stock. The warrants have a strike price equal to $4.61. The warrants have
a term of five years starting from July 1, 2008, and will permit cashless or net
exercise at all times. The shares underlying the warrants will have registration
rights. The warrant contains a standard antidilution provision for stock
dividends, stock splits, stock combination, recapitalization and a change of
control transaction. The warrants meet the conditions for equity classification
pursuant to SFAS 133 and EITF 00-19. Therefore, these warrants were classified
as equity and accounted for as common stock issuance cost.
  Warrants
      Outstanding
                  
                  Warrants
      Exercisable
                  
                  Weighted
      Average Exercise Price
                  
                  Average
      Remaining Contractual LifeBalance,
      June 30, 2007
                  
                  
                  650,547
                  
                  
                  
                  —
                  
                  
                  $
                  4.23
                  
                  
                  
                  —Granted
                  
                  
                  576,425
                  
                  
                  
                  576,425
                  
                  
                  
                  5.76
                  
                  
                  
                  5.00Forfeited
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Balance,
      June 30, 2008
                  
                  
                  1,226,972
                  
                  
                  
                  1,226,972
                  
                  
                  $
                  4.95
                  
                  
                  
                  5.00Granted
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Balance,
      June 30, 2009
                  
                  
                  1,226,972
                  
                  
                  
                  1,226,972
                  
                  
                  $
                  4.95
                  
                  
                  
                  4.25
  As
discussed in Note 2 under recent accounting pronouncements, in June 2008, the
FASB issued EITF 07-5. EITF 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early application is not permitted. This standard triggers
liability accounting on all options and warrants exercisable at strike prices
denominated in any currency other than the functional currency in China
(Renminbi). Accordingly, 613,260 warrants issued to Roth Capital and 37,287
warrants issued to CCG will be recorded as a liability beginning fiscal year
ending June, 30, 2010, and interim periods within that fiscal year. The fair
value of the warrants will be calculated using the Cox-Ross-Rubinstein (“CRR”)
binomial model with the following assumptions: market price $5.76, 5-year term,
volatility of 42%, risk free interest rate of 2.09% and no dividends. Currently,
the estimated liability of approximately $1,732,000 as of June 30, 2009, will be
recorded during the fiscal year ending June 30, 2010 and the off-setting entry
will be against stockholders’ equity. This adjustment will have no impact on the
Company’s earnings.
     See
report of independent registered public accounting firm.  F-25
 ASIAN
FINANCIAL, INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE
30, 2009
  Note
15—Commitments and contingencies
  Equipment
purchase agreement
  In August
2008, Langfang Duoyuan entered into a packing material equipment purchase
agreement with Beijing Jingneng Mechanical & Electrical Equipments Ltd. As
of June 30, 2009, $382,877, or 5% of the total commitment, remains outstanding
on this agreement.
  Litigation
  The
Company is subject to various legal matters in the ordinary course of business.
After taking into consideration the Company’s legal counsels’ evaluation of
these matters, the Company has determined that the resolution of these matters
will not have a material adverse effect on the Company’s consolidated financial
statements.
  Note
16—Subsequent events
  On July
3, 2009, the Company renewed the $2,930,000 bank loan due on July 3, 2009 from
Bank of Agriculture, Chongwen branch. The new loan is due on July 2, 2010, with
an interest rate of 5.841% per annum, secured by land use rights and
buildings.
  On July
10, 2009, the Company renewed the $2,930,000 bank loan due on July 10, 2009 from
Bank of Agriculture, Chongwen branch. The new loan is due on July 9, 2010, with
an interest rate of 5.841% per annum, secured by land use rights and
buildings.
  On July
17, 2009, the Company renewed the $4,102,000 bank loan due on July 17, 2009 from
Bank of Agriculture, Chongwen branch. The new loan is due on July 16, 2010, with
an interest rate of 5.841% per annum, secured by land use rights and
buildings.
  On July
24, 2009, the Company renewed the $2,930,000 bank loan due on July 24, 2009 from
Bank of Agriculture, Chongwen branch. The new loan is due on July 23, 2010, with
an interest rate of 5.841% per annum, secured by land use rights and
buildings.
  On August
26, 2009, the Company announced the appointment of Mr. Christopher Patrick
Holbert to serve as the new Chief Executive Officer of the Company, effective
August 26, 2009.
  The
Company has performed an evaluation of subsequent events through the date these
consolidated financial statements were issued.
     See
report of independent registered public accounting firm.
 F-26