UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




FORM 20-F




(Mark One)


 ̈
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934





OR





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





For the fiscal year ended December 31, 2010





OR





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





For the transition period from________________ to ___________________





OR





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




OR




Date of event requiring this shell company report _______________





Commission file number: 001-33176





Fuwei Films (Holdings) Co., Ltd.


(Exact name of Registrant as specified in its charter)





(Translation of Registrant’s name into English)





Cayman Islands


(Jurisdiction of incorporation or organization)





No. 387 Dongming Road


Weifang Shandong


People’s Republic of China, Postal Code: 261061


(Address of principal executive offices)





Amy Gao





Tel: +86 10-68522612





fuweiir@fuweifilms.com





(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)





Securities registered or to be registered pursuant to Section 12(b) of the Act.




Title of each class
Name of each exchange on which registeredOrdinary Shares
NASDAQ Global Market





Securities registered or to be registered pursuant to Section 12(g) of the Act.   None





Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.   None





As of December 31, 2010, there were 13,062,500 ordinary shares outstanding.





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





 ̈Yes   xNo





If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.





 ̈Yes   xNo





Note - Checking the box will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.





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





xYes    ̈No





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





Large accelerated filer    ̈    Accelerated filer    ̈     Non-accelerated filer   x





Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:





U.S. GAAP
x
International Financial Reporting Standards as issued by

the International Accounting Standards Board
 ̈
Other
o





If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:





 ̈Item 17    ̈Item 18





If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).





 ̈Yes   xNo









TABLE OF CONTENTS





DESCRIPTION
PAGESPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
3INTRODUCTION
5CURRENCIES AND EXCHANGE RATES
5PART IItem 1
Identity of Directors, Senior Management and Advisers
6Item 2
Offer Statistics and Expected Timetable
6Item 3
Key Information
6Item 3.A
Selected Financial Data
6Item 3.B
Capitalization and Indebtedness
7Item 3.C
Reasons for the Offer and Use of Proceeds
8Item 3.D
Risk Factors
8Item 4
Information on the Company
18Item 4A
Unresolved Staff Comments
33Item 5
Operating and Financial Review and Prospects
33Item 6
Directors, Senior Management and Employees
48Item 6A
Directors and Senior Management
48Item 6B
Compensation
52Item 6C
Board Practices
53Item 6D
Employees
53Item 7
Major Shareholders and Related Party Transactions
54Item 7A
Major Shareholders
54Item 7B
Related Party Transactions
55Item 7C
Interests of Experts and Counsel
55Item 8
Financial Information
55Item 8A
Consolidated Statements and Other Financial Information
55Item 8B
Legal Proceedings
55Item 8C
Other Significant Events
57Item 9
The Offer and Listing
57Item 9A
Offer and Listing Details
57Item 9B
Plan of Distribution
58Item 9C
Markets
58Item 9D
Other Significant Events
58Item 10
Additional Information
59Item 10A
Share Capital
59Item 10B
Memorandum and Articles of Association
59Item 10C
Material Contracts
68Item 10D
Exchange Controls
68Item 10E
Taxation
69Item 10F
Dividends and Paying Agents
75Item 10G
Statement by Experts
75Item 10H
Documents on Display
75Item 11
Quantitative and Qualitative Disclosures about Market Risk
75Item 12
Description of Securities Other than Equity Securities
76PART IIItem 13
Default, Dividend Arrearages and Delinquencies
76Item 14
Material Modifications to the Rights of Security Holders and Use of Proceeds
77Item 15
Controls and Procedures
77Item 16
[Reserved]
78Item 16A
Audit Committee Financial Expert
78Item 16B
Code of Ethics
78Item 16C
Principal Accountant Fees and Services
78Item 16D
Exemptions from the Listing Standards for Audit Committee
79Item 16E
Purchase of Equity Securities by the Issuer and Affiliated Purchaser
79Item 16F
Changes in Registrant’s Certifying Accountants
79Item 16G
Significant Differences in Corporate Governance Practices
79PART IIIItem 17
Financial Statements
79Item 18
Financial Statements
79Item 19
Exhibits
80




2




SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS




This Annual Report contains many statements that are “forward-looking” and uses forward-looking terminology such as “anticipate,” “believe,” “expect,” “estimate,” “future,” “intend,” “may,” “ought to,” “plan,” “should,” “will,” negatives of such terms or other similar statements. You should not place undue reliance on any forward-looking statement due to its inherent risk and uncertainties, both general and specific. Although we believe the assumptions on which the forward-looking statements are based are reasonable and within the bounds of our knowledge of our business and operations as of the date of this annual report, any or all of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based on those assumptions could also be incorrect. The forward-looking statements in this Annual Report include, without limitation, statements relating to:




·
our goals and strategies;




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




·
our ability to protect our intellectual property rights;




·
expected growth of and changes in the PRC BOPET film industry and in the demand for BOPET film products;




·
projected revenues, profits, earnings and other estimated financial information;




·
our ability to maintain and strengthen our position as a leading provider of BOPET film products in China;




·
our ability to maintain strong relationships with our customers and suppliers;




·
our planned use of proceeds;




·
effect of competition in China and demand for and price of our products and services; and




·
PRC governmental policies regarding our industry.




The forward-looking statements included in this Annual Report are subject to risks, uncertainties and assumptions about our businesses and business environments. These statements reflect our current views with respect to future events and are not a guarantee of our future performance. Actual results of our operations may differ materially from information contained in the forward-looking statements as a result of risk factors some of which are described under “Risk Factors” and elsewhere in this Annual Report. Risks, uncertainties and assumptions include, among other things:




·
competition in the BOPET film industry;




·
growth of, and risks inherent in, the BOPET film industry in China;




·
unpredictable impact on the company’s revenue by price movements of crude oil in recent years;




·
uncertainty in our export due to trade protectionism around the world;




·
uncertainty as to future profitability and our ability to obtain adequate financing for our planned capital expenditure requirements;




·
uncertainty in our ability to complete the construction of the new production line (thick film) project and begin production;




·
uncertainty as to our ability to continuously develop new BOPET film products and keep up with changes in BOPET film technology;




·
risks associated with possible defects and errors in our products;




3




·
uncertainty as to our ability to protect and enforce our intellectual property rights;




·
uncertainty as to our ability to attract and retain qualified executives and personnel;




·
uncertainty in acquiring raw materials on time and on acceptable terms;




·
Adverse effect on our business caused by adjustment of economic structure regulations of the Chinese government;




·
Adverse effect on our business caused by the uncertainty in economic recovery of major developed countries; and




·
Adverse effect on our business caused by extreme climate changes.




These risks, uncertainties and assumptions are not exhaustive. Other sections of this Annual Report include additional factors which could adversely impact our business and financial performance. The forward-looking statements contained in this Annual Report speak only as of the date of this annual report or, if obtained from third-party studies or reports, the date of the corresponding study or report, and are expressly qualified in their entirety by the cautionary statements in this Annual Report. Since we operate in an emerging and evolving environment and new risk factors and uncertainties emerge from time to time, you should not rely upon forward-looking statements as predictions of future events. Except as otherwise required by the securities laws of the United States, we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this Annual Report or to reflect the occurrence of unanticipated events.





4





INTRODUCTION




This annual report on Form 20-F includes our audited consolidated financial statements as of December 31, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010.




Our ordinary shares are listed on the Nasdaq Global Market, or NASDAQ, under the symbol “FFHL.”




Except as otherwise required and for purposes of this Annual Report only:




·
“Fuwei”, “Company”, “us”, “our” or “we” refer to Fuwei Films (Holding) Co., Ltd. The term “you” refers to holders of our ordinary shares.




·
“China” or “PRC” and the “Chinese government” refer to the People’s Republic of China and its government.




·
All references to “Renminbi,” or “RMB” are to the legal currency of China, all references to “U.S. dollars,” “dollars,” “$” or “US” are to the legal currency of the United States and all references to “Hong Kong dollars” or “HK$” are to the legal currency of Hong Kong. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.




·
“BOPET” refers to the Biaxially Oriented Polyester Film.





CURRENCIES AND EXCHANGE RATES




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




Solely for your convenience, certain RMB amounts in this annual report have been translated into U.S. dollars. The rate of translation is based on the noon buying rate for Chinese Yuan in New York City as certified for custom purposes by the Federal Reserve Bank of New York on the various dates specified where the translations are set forth in this annual report.  References to the “noon buying rate” in this annual report refer to this rate. These translations should not be taken as assurances that the RMB amounts actually represent these U.S. dollar amounts or that they were or could have been converted in U.S. dollars at the rate indicated or at any other rate.  The noon buying rate was US $1.00 = RMB 6.6118 as of December 31, 2010.




The following table sets forth various information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this Annual Report or will use in the preparation of our other periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.




Average


High


Low


Period-end(RMB per US$1.00)2006(1)


7.9723



8.0702



7.8041



7.80412007(1)


7.6038



7.7881



7.2946



7.29462008(1)


6.9623



7.2941



6.7480



6.85422009(1)


6.8311



6.8368



6.8242



6.82702010(1)


6.7788



6.8336



6.5820



6.6118September 2010(2)


6.7581



6.8055



6.6746



6.6981October 2010(2)


6.6773



6.6905



6.6310



6.6718November 2010(2)


6.6626



6.6862



6.6120



6.6714December 2010(2)


6.6610



6.6681



6.5820



6.6118January 2011(2)


6.6046



6.6286



6.5483



6.5833February 2011(2)


6.5811



6.5948



6.5397



6.5839March 2011(2) (3)


6.5691



6.5755



6.5560



6.5560




5




(1)
Annual averages are calculated by averaging the rates on the last business day of each month during the relevant period.




(2)
Monthly average is calculated by averaging the daily rates during the relevant period.




(3)
As of March 24, 2011, the exchange rate was 6.5560.





PART I




Item 1. Identity of Directors, Senior Management and Advisers




Not applicable.




Item 2. Offer Statistics and Expected Timetable




Not applicable.




Item 3. Key Information




A. Selected financial data.




The following selected financial data should be read in conjunction with Item 5 - the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements and Notes thereto included elsewhere in this Annual Report.




The following selected historical statement of income data for the years ended December 31, 2008, 2009 and 2010 and the selected historical balance sheet data as of December 31, 2009 and 2010 have been derived from the Company’s audited consolidated financial statements included in this Annual Report beginning on page F-1. The following selected historical statement of income data for the year ended December 31, 2006 and 2007, and the selected historical balance sheet data as of December 31, 2006, 2007 and 2008 have been derived from the Company’s audited financial statements not included in this Annual Report. The audited financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S.GAAP.




Certain factors that affect the comparability of the information set forth in the following table are described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Financial Statements and related notes thereto included elsewhere in this Annual Report.




As of December 31,2006


2007


2008


2009


2010(in thousands, except per share data)

RMB


RMB


RMB


RMB


RMB


US$Statement of Operations Data:Revenues


436,884



449,373



447,255



320,731



501,458



75,843Gross profit


102,543



99,842



70,332



24,612



130,553



19,745Operating income


78,017



64,266



24,604



(16,547
)


59,630



9,019Interest expense


(12,884
)


(13,233
)


(3,995
)


(6,540
)


(8,846
)


(1,338
)Income before income taxes


68,422



51,941



21,124



(23,024
)


50,754



7,676Net income/(loss) attributable to the Company


67,665



47,260



18,157



(18,963
)


40,783



6,168Earnings per shareBasic


61.46



3.62



1.39



(1.45
)


3.12



0.47Diluted


61.37



3.62



1.39



(1.45
)


3.12



0.47Weighted average number ordinary shares, Basic and dilutedBasic


1,101,031



13,062,500



13,062,500



13,062,500



13,062,500



13,062,500Diluted


1,102,488



13,062,500



13,062,500



13,062,500



13,062,500



13,062,500




6




Year EndedDecember 31,2006


2007


2008


2009


2010(in thousands)

RMB


RMB


RMB


RMB


RMB


US$Balance Sheet Data:Cash


249,939



30,909



15,823



26,804



171,227



25,897Accounts receivable, net


75,530



58,195



38,579



28,785



25,482



3,854Inventories


23,783



41,670



30,589



45,039



52,577



7,952Total current assets


372,001



211,842



104,105



119,282



263,458



39,847Property, plant and equipment, net


317,690



493,562



578,643



318,600



284,891



43,088Total assets


738,082



738,975



739,904



735,509



798,152



120,716Short-term bank loans


239,678



188,027



164,764



153,179



142,000



21,477Total current liabilities


272,175



226,445



204,305



198,666



216,402



32,730Total shareholders’ equity


465,907



512,530



530,599



511,567



552,544



83,570




If our subsidiary, Fuwei Films (Shandong) Co. Ltd., or Shandong Fuwei, was not entitled to a reduced enterprise income tax, or EIT, rate of 0% for the year ended December 31, 2006, and rate of 7.5% for the year ended December 31, 2007, it would have had an EIT rate of 15% for both of those years. Shandong Fuwei was entitled to preferential tax treatment at an EIT rate of 15% for the year ended December 31, 2008, 2009 and 2010 due to its status as a High-and-New Tech Enterprise since December 2008. If Shandong Fuwei was no longer designated as such, it would have been subject to a standard enterprise income tax at a rate of 25%. Net income and basic and diluted earnings per share would be reduced by the following amounts, if Shandong Fuwei was not entitled to a reduced EIT rate for the years 2006, 2007, 2008, 2009 and 2010:




Year Ended December 31,(In thousands, except per share data)

2006


2007


2008


2009


2010RMB


RMB


RMB


RMB


RMB


US$Net income


(10,453
)


(4,340
)


(2,966
)


-



(5,075
)


(768
)Earnings per share- basic


(9.50
)


(0.33
)


(0.23
)


-



(0.39
)


(0.06
)- diluted


(9.48
)


(0.33
)


(0.23
)


-



(0.39
)


(0.06
)




The 2010 RMB amounts included in the above selected financial data have been translated into U.S. dollars at the rate of US $1.00 = RMB 6.6118, which was the noon buying rate for U.S. dollars in effect on December 31, 2010 in the City of New York for cable transfer in RMB per U.S. dollar as certified for custom purposes by the Federal Reserve Bank. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at that rate or at any other certain rate on December 31, 2010, or on any other date.




Exchange Rate Information




On July 21, 2005 the Chinese government changed its policy of pegging the value of the Renminbi to the U.S. dollar. This revaluation of the Renminbi was based on a conversion of Renminbi into United States dollars at an exchange rate of US$1.00=RMB8.11. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. In December 31, 2010, this change in policy resulted in an approximately 18.5% appreciation in the value of the Renminbi against the U.S. dollar compared to 2005. Although the Company generates its revenue in the PRC in Renminbi which has become more valuable in U.S. dollars, the Company’s overseas sales and U.S. dollars cash deposits are subject to foreign currency translations which will impact net income (loss).




B.  Capitalization and indebtedness.




Not applicable.





7





C. Reasons for the offer and use of proceeds.




Not applicable.




D. Risk factors.




The following matters and other additional risks not presently known to us or that we deem immaterial, may have a material adverse effect on our business, financial condition, liquidity, results of operations or prospects or otherwise. Reference to a cautionary statement in the context of a forward-looking statement or statements shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements.




(a)
Risks Associated with Our Business




Our business may be adversely affected by the continued appreciation of RMB against US dollar and trade protection measures in place by several countries against exports of BOPET films from China.




With the increased demand of BOPET films in Chinese and foreign markets, our sales have increased. However, our business operation may be adversely affected due to continued appreciation of RMB against US dollar, and trade protection measures in place by several countries against exports of BOPET films from China. In addition, the uncertainty in the economic outlook of European countries caused by the slow economic recovery and the European sovereign debt crisis may also adversely affect our foreign market expansion.




A sharp fluctuation in the demand for raw materials may have a negative impact on our operations if we are unable to pass on all increases in cost of raw materials to our customers on a timely basis.




The total cost of raw materials made up approximately 78.6%, 73.3% and 77.2% of our cost of goods sold in 2008, 2009 and 2010, respectively. The main raw materials used in our production of BOPET film are polyethylene terephthalate (or PET) resin and additives, which respectively made up approximately 75.3% and 24.7% of our total cost of raw materials in the past three years on average.




Currently the PET resin is mainly used as a raw material in China’s textile industry. The market prices of PET resin may fluctuate due to changes in supply and demand conditions in that industry. Any sudden shortage of supply or significant increase in demand of PET resin and additives may result in higher market prices and thereby increase our cost of sales. The prices of PET resin and additives are, to a certain extent, affected by the price movement of crude oil. The international market prices for crude oil increased in 2010, which caused the price of raw materials to increase. In addition it is difficult to pass all the increase in cost of raw materials to customers, which consequently limits our profitability.




In 2011, if there is a significant increase in the cost of raw materials, we may not be able to pass the increase in costs of raw materials to our customers on a timely basis, which may have an adverse impact in results of our operations. Our ability to hedge against these fluctuations by either entering into long-term supply contracts or otherwise offsetting our exposure to these commodity price variations has been significantly limited. Currently, we have no hedging transactions in place with respect to PET resin or any other petroleum product.




Rising Competition may materially affect our operations and financial conditions.




We operate in a highly competitive and rapidly evolving field, and new developments are expected to continue at a rapid pace. Competitors may succeed by expanding their capacity or succeed in developing products that are more efficient, easier to use or less expensive than those which have been or are being developed by us or that would render our technology and products obsolete and non-competitive. Any of these actions by our competitors could adversely affect our sales.




In addition, several companies are developing similar and substitute products to address the same packaging field that we are targeting. These competitors may have a greater financial and technical resources, productivity and marketing capabilities and facilities, and human resources, or they may have a better quality of products, service, and production cycle. The competition from these competitors may adversely affect our business.




8





An increase in competition could result in material selling price reductions or loss of our market share, which could have an adverse material impact on our operations and financial condition.




Entry of new BOPET producers and continuously expanded production capacity of current BOPET film manufacturers in the industry in the PRC may increase the supply of, and decrease the prices of, BOPET films in the industry, and hence lead to a decline in our gross margins.




We believe that we are currently one of the few producers of BOPET films in the PRC with research and development capability. Due to easier access to the production technology of BOPET films, increased demand of BOPET films in the domestic market, the increased profitability of BOPET film industry in 2010, among other factors, the existing manufacturers and new entrants are expanding their production capacity of the BOPET film, which will result in substantial increase in production of BOPET films from 2011 to 2013. As a result, the market supply will increase more than demand. This will have an adverse impact on our sales and operation. In the event that we are unable to compete successfully or retain effective control over the pricing of our products, our profit margins might decrease.




In addition, China has gradually lowered import tariffs and relaxed foreign investment restrictions after its entry into the World Trade Organization in December 2001. This may lead to increased competition from foreign companies in our industry, some of which are significantly larger and financially stronger than us. If we fail to compete effectively with these companies in the future, our current business and future growth potential would be adversely affected.




We maybe subject to inventory risks that would negatively impact our operating results.




The possible price decline of the inventory may adversely affect the Company’s operation. To some extent, the price of raw materials and end-product of our inventories are affected by the price of crude oil and industry competition.  If the price of crude oil continues to increase, it may lead to a higher cost of our raw material. In addition, the competition in the BOPET industry may cause a decrease in the price of the end-products, which will also adversely affect our operation.




A significant portion of our revenue is derived from the flexible packaging industry in the PRC; our revenue might be adversely impacted if the flexible packaging industry is adversely affected.




A significant portion of our revenue is currently derived from the production and sale of BOPET films. Our BOPET films are mainly used in the flexible packaging industry for the consumer products such as tobacco packaging, alcoholic beverages, food, cosmetics and so on. The demand for our BOPET films is therefore indirectly affected by the demand for flexible packaging.




Any decrease in the demand for our BOPET films will significantly affect our financial performance. In the past two years, we have suffered a slowdown in economic growth due to the global financial crisis, which caused reduction in the sales volume and the prices of our products. In 2010,the sales volume and the prices of our products moved up as a result of increased demand in domestic and foreign markets. If such situation changes in the future, such as the slowdown of the market demand or the increase of the demand is less than that of the supply, it could continue to have an adverse impact on our financial condition and operation of our business.




We rely on key managerial and technical personnel and failure to attract or retain such personnel may compromise our ability to perform our strategies and then to develop new products and to effectively carry on our research and development and other efforts.




Our success to date has been largely attributable to the contributions of key management and experienced personnel, with whom we have entered into service agreements. The loss of their services might impede the achievements of our strategies and development objectives and might damage the close business relationship we currently enjoy with some of our larger customers. Our continued success is dependent, to a large extent, on our ability to attract or retain the services of these key personnel. Except for Mr. Xiaoan He, we do not currently maintain any other key man insurance for our directors or officers. Our future success will also depend on our continued ability to attract and retain highly motivated and qualified personnel. The rapid growth of the economy in China has caused intense competition to attract and retain qualified personnel. We cannot assure you that we will be able to retain our key personnel or that we will be able to attract, train or retain qualified personnel in the future.




9




If our R & D team cannot effectively develop new products, promote the market process, or we are unable to afford to continue to maintain this team or are not able to hire eligible and talented personnel, our ability to research and development, operation results and market competitiveness may be adversely affected.




Marketability of any of our new products is uncertain and low acceptance levels of any of our new products will adversely affect our revenue and profitability.




The development of our products is based on complex technology, and requires significant time and expertise in order to meet industry standards and customers’ specifications. Although we have developed some products that meet customers’ requirements in the past, there is no assurance that any of our research and development efforts will necessarily lead to any new or enhanced products or generate sufficient market share to justify commercialization. We must continually improve our current products and develop competitive new products to address the requirements of our customers. If our new products are unable to gain market acceptance, we would not be able to generate future revenue from our investment in research and development. In such event, we would be unable to increase our market share and achieve and sustain profitability. Our failure to further refine our technology and develop and introduce new products attractive to the market could cause our products to become uncompetitive or obsolete, which could reduce our market share and cause our sales to decline.




We may not be able to complete our new production line (thick film) currently under construction, and start production in the near future; this may have an adverse impact on us.




The new production line (thick film) with an expected investment totalling US$ 50 million is still under construction. To date, we have not reached an agreement with our equipment supplier regarding the new production line equipment. In the event we reach an agreement with the equipment suppliers, we may still not be able to start operation in a timely manner if the new production line cannot be delivered as stipulated by the contract due to unforeseen circumstances. This may have a material adverse impact on the Company's development in the thick films industry.




The circumstances under which we acquired ownership of our main productive assets may jeopardize our ability to continue as an operating business.




Substantially all of our operating assets were acquired through two auction proceedings under relevant PRC law. We acquired the Brückner production line in 2003 as a result of a foreclosure proceeding enforcing an effective court judgment and the DMT production in 2004 as a result of a commercial auction from a consigner who obtained such assets through a bankruptcy proceeding. In the opinion of our PRC counsel, Concord & Partners, these proceedings are both valid under Chinese auction and bankruptcy law based on certain factual assumptions. Our PRC counsel’s opinion solely relates to the legal procedure of the auctions and is based upon certain factual assumptions, our written representations and written reports of the auction company and other related parties. There can be no assurance that relevant authorities or creditors of the predecessor owner of these assets will not challenge the effectiveness of these asset transfers based upon the facts and circumstances of these transfers, despite the existence of independent appraisals, and other facts and circumstances of the auctions that cannot be verified by our PRC counsel. Taking into consideration the facts known by our PRC counsel related to the auction of the Brückner production line and the significant difference in the price paid for the DMT production line at the two bankruptcy auctions involved in our purchase of that asset and, assuming the representations and reports received by our PRC counsel are true and correct in all material respects, our PRC counsel is of the opinion that the auctions of the Brückner and DMT production lines were valid under PRC law and the possibility of the creditors of Shandong Neo-Luck successfully exercising recourse or claiming repayment with respect to our assets purchased in the bankruptcy proceeding should be remote. However, should any such challenge be brought in China (or elsewhere) and prevail, we may incur substantial liabilities and be required to pay substantial damages as a result of acquiring these assets and this could materially affect our ability to continue our operation.




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On June 25, 2007, we announced the investigation of three controlling shareholders, Mr. Jun Yin, Mr. Duo Wang, and Mr. Tongju Zhou, and on September 28, 2007, the three shareholders have been arrested, relating to the suspicion of the Crime of Irregularities for Favoritism and to selling state-owned assets at low prices.




On November 12, 2009, the company announced that it had become aware of the final verdict issued by the Supreme People's Court of Shandong Province, concerning the Company's three major shareholders, Mr. Jun Yin, Mr. Tongju Zhou and Mr. Duo Wang. The Supreme People's Court upheld the initial verdict issued by the Intermediate court in March 2009. The March 2009 initial verdict sentenced Mr. Yin to death, with a stay of execution for two years; the other two defendants, Mr. Zhou and Mr. Wang, each received life imprisonment; all of the personal property of the three individuals will be confiscated. The three individuals appealed the initial verdict to the Supreme People's Court of Shandong Province in March 2009. In November 2009, the Supreme People's Court of Shandong Province issued the final verdict, upholding the initial verdict issued by the Intermediate Court in March 2009. None of these individuals is involved in Fuwei's day-to-day operations. We met with officials of the Wei-Fang State-owned Assets Supervision and Administration Commission in March 2011 and learned that there is also another civil verdict issued by the Second Intermediate People’s Court of Beijing that conflicts with the foregoing verdict, which conflict must be resolved prior to any enforcement of the verdict and any confiscation of the personal property of the individuals.The final judgment against the three shareholders may cause uncertainty to the Company’s operation due to the uncertain timeline associated with its enforcement.




We have, in the past, experienced and may, from time to time, experience negative working capital. We also face risks associated with debt financing (including exposure to variation in interest rates).




Our total short-term loan as of December 31, 2010 was RMB 142.0 million (US$21.5 million), which excludes RMB 30.0 million (US$ 4.5 million) in long-term loans. We have pledged property, plant and equipment and lease prepayments as security for RMB 162.0 million (US$ 24.5 million) of the above outstanding indebtedness. In the event that we default on all expired indebtedness, our lenders could foreclose on our assets. In the event that our assets are foreclosed upon, we will not be able to continue to operate our business.




Our obligations under our existing loans have been mainly met through the cash flow from our operations and our financing activities. We are subject to risks normally associated with debt financing, including the risk of significant increases in interest rates and the risk that our cash flow will be insufficient to meet required payment of principal and interest. In the past, cash flows from operations have been sufficient to meet payment obligations. There is however, no assurance that we will be able to continue to do so in the future. We may also underestimate our capital requirements and other expenditures or overestimate our future cash flows. In such event, we may consider additional bank loans, issuing bonds, or other forms of financing to satisfy our capital requirements. If any of the aforesaid events occur and we are unable for any reason to raise additional capital, debt or other financing to meet our working capital requirements, our business, operating results, liquidity and financial position will be adversely affected. For example, if we fail to get appropriate financing, it will negatively impact the investment in and the production of our new production line. In addition, if we do not obtain financing or have negative working capital, there is a possibility that we may not be able to perform our contracts with our suppliers as a result of our inability to pay them back. The foregoing factors may have an adverse effect on our operation.




We may lose our competitive advantage and our operations may suffer if we fail to prevent the loss or misappropriation of, or disputes over, our intellectual property.




As of December 31, 2010, we have received 9 patents from, and have 12 patent applications pending with, the PRC authorities. All these patents are related to our products and production processes. We may not be able to successfully obtain the approvals of the PRC authorities for the pending patent applications. Furthermore, third parties may assert claims to our proprietary processes and technologies. These products, proprietary processes and technologies are important to our business as they allow us to maintain our competitive edge over our competitors.




Our ability to compete in our markets and to achieve future revenue growth will depend, in significant measure, on our ability to protect our proprietary technology and operate without infringing upon the intellectual property rights of others. The legal regime in China for the protection of intellectual property rights is still at its early stage of development. Intellectual property protection became a national effort in China in 1979 when China adopted its first statute on the protection of trademarks. Since then, China has adopted its Patent Law, Trademark Law and Copyright Law and promulgated related regulations, such as the Regulation on Computer Software Protection, Regulation on the Protection of Layout Designs of Integrated Circuits and Regulation on Internet Domain Names. China has also acceded to various international treaties and conventions in this area, such as the Paris Convention for the Protection of Industrial Property, Patent Cooperation Treaty, Madrid Agreement and its Protocol Concerning the International Registration of Marks. In addition, when China became a party to the World Trade Organization in 2001, China amended many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights. Despite many laws and regulations promulgated and other efforts made by China over the years with a view to tightening up its regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many Western countries, including the United States, and enforcement of such laws and regulations in China have not achieved the levels reached in those countries. Both the administrative agencies and the court system in China are not well-equipped to deal with violations or handle the nuances and complexities between compliant technological innovation and non-compliant infringement.




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We rely on trade secrets and registered patents and trademarks to protect our intellectual property. We have also entered into confidentiality agreements with our management and employees relating to our confidential proprietary information. However, the protection of our intellectual properties may be compromised as a result of:




·
departure of any of our management members or employees in possession of our confidential proprietary information;




·
breach by such resigned management member or employee of his or her confidentiality and non-disclosure  undertaking to us;




·
expiration of the protection period of our registered patents or trademarks;




·
infringement by others of our proprietary technology and intellectual property rights; or




·
refusal by relevant regulatory authorities to approve our patent or trademark applications.




Any of these events or occurrences may reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. There is no assurance that the measures that we have put into place to protect our intellectual property rights will be sufficient. As the number of patents, trademarks, copyrights and other intellectual property rights in our industry increases, and as the coverage of these rights and the functionality of the products in the market further overlap, we believe that business entities in our industry may face more frequent infringement claims. Litigation to enforce our intellectual property rights could result in substantial costs and may not be successful. If we are not able to successfully defend our intellectual property rights, we might lose the rights to technology that we need to conduct and develop our business. This may seriously harm our business, operating results and financial condition, and enable our competitors to use our intellectual property to compete against us.




Furthermore, if third parties claim that our products infringe their patents or other intellectual property rights, we might be required to devote substantial resources to defending against such claims. If we fail to defend against such infringement claims, we may be required to pay damages, modify our products or suspend the production and sale of such products. We cannot guarantee that we will be able to modify our products on commercially reasonable terms.




We may incur capital expenditures in the future in connection with our growth plans and therefore may require additional financing.




To expand our business, we will need to increase our products mix and capacity which will require substantial capital expenditures. Such expenditures are likely to be incurred in advance of any increase in sales. We cannot assure you that our revenue will increase after such capital expenditures are incurred as this will depend on, among other factors, our ability to maintain or achieve high capacity utilization rates. Any failure to increase our revenue after incurring capital expenditures to expand production capacity will reduce our profitability.




In addition, we may need to obtain additional debt or equity financing to fund our capital expenditures. Additional equity financing may result in dilution to existing shareholders’ return. Additional debt financing may be required which, if obtained, may:




·
limit our ability to pay dividends or require us to seek consents for the payment of dividends;




·
increase our vulnerability to general adverse economic and industry conditions;




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·
limit our ability to pursue our growth plan;




·
require us to dedicate a substantial portion of our cash flow from operations as payment for our debt, thereby reducing availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes;




·
limit our flexibility in planning for, or reacting to, changes in our business and our industry; and/or




·
We cannot assure you that we will be able to obtain the additional financing on terms that are acceptable to us, if at all.




A disruption in the supply of utilities, fire or other calamity at our manufacturing plant would disrupt production of our products and adversely affect our sales.




Our BOPET films are manufactured solely at our production facility located in Weifang City in the PRC. Any disruption in the supply of utilities, in particular, electricity or power supply or any outbreak of fire, flood or other calamity resulting in significant damage at our facilities would severely affect our production of BOPET film and, as a result, we could incur substantial liabilities that could reduce or eliminate the funds available for product development or result in a loss of equipment and properties.




While we maintain insurance policies covering losses in respect of damage to our properties, machinery and inventories of raw materials and products, we cannot assure you that our insurance would be sufficient to cover all of our potential losses.




We have limited experience in operating outside mainland China, and failure to achieve our overseas expansion strategy may have an adverse effect on our business growth in the future.




Our future growth depends, to a considerable extent, on our ability to develop both the domestic and overseas markets. We are currently exploring new business opportunities outside mainland China for our BOPET film products. Our primary overseas customers are from Europe, Asia and North America. However, we have limited experience in operating outside mainland China, and limited experience with foreign regulatory environments and market practices. As a result, we cannot guarantee that we will be able to penetrate any overseas market. In connection with our initial efforts to expand overseas, we have encountered many obstacles, including cultural and linguistic differences, difficulties in keeping abreast of market, business and technical developments in foreign jurisdictions, and political and social disturbances. Failure in the development of overseas market may have an adverse effect on our business growth in the future.




We have encountered anti-dumping investigations in South Korea and the United State, our overseas expansion strategy in our future business growth may be adversely affected.




Since 2007, the manufacturers in China, India and other countries have encountered anti-dumping investigations conducted by South Korea and the United States. The Korean Trading Committee (KTC) announced the final results for anti-dumping investigations for enterprises in China and India on August 27, 2008.  We finally received the anti-dumping duties (ADD) rate of 5.67% which is much lower than the average rate of 23.60% for other enterprises in China.




The US Department of Commerce conducted the anti-dumping investigation in October, 2007 covering exporters in China, Brazil, Thailand and the United Arab Emirates.  41 exporters in China were under investigation.  In October 2008, the anti-dumping judgments were announced.  Although we received the lowest ADD rate of 3.49% among five exporters that received a duty, our export to the United States, to a certain extent, was still adversely affected by paying the ADD. In 2010, sales to the US market represented less than 1% of our annual total sales volume.




On January 23, 2010, the US Department of Commerce (“USDOC”) began a first round annual review of Chinese BOPET exporters. Fuwei received the lowest anti-dumping duty (ADD) rate of 30.91% in this administrative review conducted by the USDOC, while the ADD rate of other four Chinese companies reviewed by the USDOC is more than 36.93%. In accordance with relevant laws and regulations in the US, the ADD rate of final results will retroactively apply to those US companies which imported Chinese-exported BOPET films, including Fuwei Films USA, LLC, during the period of first review, so these US importers are obligated to pay a supplementary antidumping duty at this ADD rate. In March 2011, we submitted comments to the USDOC regarding perceived ministerial errors made in calculating the ADD applicable to us, although there can be no assurance that the USDOC will agree with our position.





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In addition, if other countries or regions, such as the European Union, take trade protection measures against China's BOPET film or downstream industries, our business may be adversely affected.




Changes in Applicable PRC Taxes may be adversely affect the Company.




On October 18, 2010, the State Council issued a notice that the city maintenance and construction tax as well as educational surcharges shall be extended from Chinese companies to foreign-funded enterprises and citizens. Beginning December 1, 2010, Interim Regulations on City Maintenance and Construction Tax of the People’s Republic of China and Decision of the State Council on Amending the Interim Provisions on the Collection of Educational Surcharges shall be applicable to foreign-funded enterprises, foreign enterprises and foreign citizens, which mean they will no longer exempt from such taxes. In accordance with the regulations, since December 1, 2010, our subsidiary Shandong Fuwei became a taxpayer of city maintenance and construction tax as well as educational surcharges which shall be based on value-added tax, the consumption tax and business tax which currently stands at 12%. The new policy incurs additional tax expense. If the Chinese government changes its tax policy or adds new class of taxes in the future, our business may be adversely affected.




China’s actions to save energy and reduce emissions may adversely affect our business, by subjecting us to significant new costs and restrictions on our operations.




In 2010, the Chinese government tightened its control over energy saving and emission reduction. The Chinese government intends to reduce energy consumption for gross domestic products and water consumption for industrial added value as well as increasing the comprehensive usage rate of industrial solid waste. Certain of our manufacturing plants that use significant amounts of energy, including electricity and gas, are likely to be affected by this plan. Therefore, our operation might be influenced by the energy saving and emission reduction measures of the Chinese government. Regulations for restricting greenhouse gas emission may increase the prices of the electricity we purchase, increase costs for our use of natural gas, potentially restrict access to or the use of natural gas, require us to purchase allowances to offset our emissions or result in an overall increase in our costs of raw materials, any of which could increase costs and negatively affect our business operations or financial results.




Our primary source of funds for dividends and other distributions from our operating subsidiary in China is subject to various legal and contractual restrictions and uncertainties, and our ability to pay dividends or make other distributions to our shareholders are negatively affected by those restrictions and uncertainties.




We are a holding company established in the Cayman Islands and conduct our core business operations through our principal operating subsidiary, Shandong Fuwei, in China. As a result, our profits available for distribution to our shareholders are dependent on the profits available for distribution from Shandong Fuwei. If Shandong Fuwei incurs debt on its own behalf, the debt instruments may restrict its ability to pay dividends or make other distributions, which in turn would limit our ability to pay dividends on our ordinary shares. Under the current PRC laws, because we are incorporated in the Cayman Islands, our PRC subsidiary, Shandong Fuwei, is regarded as a wholly foreign-owned enterprise in China. Although dividends paid by foreign invested enterprises, such as wholly foreign-owned enterprises and Sino-foreign joint ventures, are not subject to any PRC corporate withholding tax, the PRC laws permit payment of dividends only out of net income as determined in accordance with PRC accounting standards and regulations. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant respects, such as the use of different principles for recognition of revenues and expenses. In addition, distribution of additional equity interests by our PRC subsidiary, Shandong Fuwei, to us (which is credited as fully paid through capitalizing its undistributed profits) requires additional approval of the PRC government due to an increase in our registered capital and total investment in Shandong Fuwei. Under the PRC laws, Shandong Fuwei, a wholly foreign-owned enterprise, is required to set aside a portion of its net income each year to fund designated statutory reserve funds. These reserves are not distributable as cash dividends. As a result, our primary internal source of funds of dividend payments from Shandong Fuwei is subject to these and other legal and contractual restrictions and uncertainties, which in turn may limit or impair our ability to pay dividends to our shareholders. Moreover, any transfer of funds from us to Shandong Fuwei, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by PRC governmental authorities. These limitations on the flow of funds between us and Shandong Fuwei could restrict our ability to act in response to changing market conditions.




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Investor confidence and the market price of our shares may be adversely impacted if we are unable to issue an unqualified opinion on the adequacy of our internal controls over our financial reporting beginning as of December 31, 2010, as required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002.




As a public company, we are required by section 404 of the Sarbanes-Oxley Act 2002 to include a report by management on our internal controls over financial reporting that contains our management’s assessment of the effectiveness of our internal controls in our annual report on Form 20-F beginning with the fiscal year ended December 31, 2010. We have documented, tested, and evaluated our internal controls as required. Our management has concluded that our internal controls over financial reporting are effective as of December 31, 2010. If our Management reaches a different conclusion in the future, there could be an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which could lead to a decline in the market price of our shares.




Risks Relating to Business Operations in China




Changes in China’s political and economic policies and conditions could cause a substantial decline in the demand for our products and services.




Currently, we derive substantially most of our revenues from mainland China. We anticipate that mainland China will continue to be our primary production and sales base in the near future.  In addition, currently, substantially all of our assets are located in China and most of our services are performed in China. In 2008, 2009 and 2010, sales to our customers in the PRC accounted for approximately 86.9%, 90.3% and 79.3%, respectively, of our total revenue. Accordingly, any significant slowdown in the PRC economy or decline in demand for our products from our customers in the PRC will have an adverse effect on our business, financial condition and results of our operations. Furthermore, any unfavorable changes in the social and political conditions of the PRC may also adversely affect our business and operations.




Since the adoption of the “open door policy” in 1978 and the “socialist market economy” in 1993, the PRC government has been reforming and is expected to continue to reform its economic and political systems. Any changes in the political and economic policy of the PRC government may lead to changes in the laws and regulations or the interpretation of the same, as well as changes in the foreign exchange regulations, taxation and import and export restrictions, which may in turn adversely affect our financial performance. While the current policy of the PRC government seems to be one of imposing economic reform policies to encourage foreign investments and greater economic decentralization, there is no assurance that such a policy will continue to prevail in the future. We cannot make any assurances that our operations would not be adversely affected should there be any policy changes.




With the recovery of the Chinese economy, increased prices in goods and inflation in 2010, the Chinese government altered its economic stimulus policy and gradually raised the Bank Reserve Ratio and Deposit and loan interest rates. These policy changes may adversely affect our business.




The discontinuation of any preferential tax treatments or other incentives currently available to us in the PRC could materially and adversely affect our business, financial condition and results of operations.




Our subsidiary, Shandong Fuwei, was converted into a wholly foreign owned enterprise in January 2005 and enjoys certain special or preferential tax treatments regarding enterprise income tax in accordance with the “Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises.” Accordingly, it is entitled to tax concessions whereby the profit for the first two financial years beginning with the first profit-making year (after setting off tax losses carried forward from prior years) is exempt from income tax in the PRC and the profit for each of the subsequent three financial years is taxed at 50% of the prevailing tax rates set by the relevant tax authorities. In addition, as a “High Technology Enterprise,” Shandong Fuwei currently enjoys enterprise income tax at an incentive rate of 15%. Shandong Fuwei was designated as a High-and-New Tech Enterprise in December 2008 and enjoys the favorable income tax rate. If there are any future changes in PRC tax laws, rules and regulations or Shandong Fuwei will not be designated as a High-and-New Tech Enterprise,Shandong Fuwei will no longer enjoy the preferential tax treatment.  If that were to occur, Shandong Fuwei would be subject to a 25% standard enterprise income tax rate which would significantly increase our effective tax rate and materially adversely affect our operating results.





15





On March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax Law of the People’s Republic of China, which law took effect on January 1, 2008. In accordance with the new law, a unified enterprise income tax rate of 25% and unified tax deduction standards were applied equally to both domestic-invested enterprises and foreign-invested enterprises. Enterprises established prior to March 16, 2007 eligible for preferential tax treatment in accordance with the currently prevailing tax laws and administrative regulations would, under the regulations of the State Council, gradually become subject to the new tax rate over a five-year transition period starting from the date of effectiveness of the new law. We expect details of the transitional arrangement for the five-year period from January 1, 2008 to December 31, 2012 applicable to enterprises approved for establishment prior to March 16, 2007, such as Shandong Fuwei, to be set out in more detailed implementing rules to be adopted in the future. In addition, certain qualifying “High Technology Enterprises” may still benefit from a preferential tax rate of 15% under the new tax law if they meet the definition of “Government Developing High Technology Enterprise” to be set forth in the more detailed implementing rules when they become adopted. Shandong Fuwei was designated as a High-and-New Tech Enterprise in December, 2008 and enjoys the favorable income tax rate of 15% pursuant to the Enterprise Income Tax Law.




In accordance with a notice issued by the PRC government in October, 2010, since December 1, 2010, Shandong Fuwei , our subsidiary, will become a taxpayer of city maintenance and construction tax as well as educational surcharges which shall be based on value-added tax, the consumption tax and business tax which currently stand at 12%. This policy change may have an adverse impact on our net profit.




We are subject to environmental laws and regulations in the PRC.




We are subject to environmental laws and regulations in the PRC. Any failure by us to comply fully with such laws and regulations will result in us being subject to penalties and fines or being required to pay damages. Although we believe we are currently in compliance with the environmental regulations in all material respects, any change in the regulations may require us to acquire equipment or incur additional capital expenditure or costs in order to comply with such regulations. Our profits will be adversely affected if we are unable to pass on such additional costs to our customers.




Changes in foreign exchange regulations in China may affect our ability to pay dividends in foreign currencies.




We currently receive most of our operating revenues in Renminbi. Currently, Renminbi is not a freely convertible currency and the restrictions on currency exchanges in China may limit our ability to use revenues generated in Renminbi to fund our business activities outside China or to make dividends or other payments in U.S. dollars. The PRC government strictly regulates conversion of Renminbi into foreign currencies. Over the years, the PRC government has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade- and service-related foreign exchange transactions, foreign debt service and payment of dividends. In accordance with the existing foreign exchange regulations in China, our PRC subsidiary, Shandong Fuwei, is able to pay dividends in foreign currencies, without prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. The PRC government may, however, at its discretion, restrict access in the future to foreign currencies for current account transactions and prohibit us from converting our Renminbi-denominated earnings into foreign currencies. If this occurs, our PRC subsidiary may not be able to pay us dividends in foreign currency without prior approval from SAFE. In addition, conversion of Renminbi for most capital account items, including direct investments, is still subject to government approval in China and companies are required to open and maintain separate foreign exchange accounts for capital account items. This restriction may limit our ability to invest earnings of Shandong Fuwei.





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Fluctuation in the value of Renminbi could adversely affect our overseas sales and import of raw materials and the value of, and dividends payable on, our shares in foreign currency terms.




The value of Renminbi is subject to various factors and depends to a large extent on China’s domestic and international economic, financial and political developments, as well as the currency’s supply and demand in the local market. From 1994, the conversion of Renminbi into foreign currencies, including the U.S. dollar, was based on exchange rates set and published daily by the People’s Bank of China, the PRC central bank, based on the previous day’s interbank foreign exchange market rates in China and exchange rates on the world financial markets. The official exchange rate for the conversion of Renminbi into U.S. dollars remained stable until Renminbi was revalued in July 2005 and allowed to fluctuate by reference to a basket of foreign currencies, including the U.S. dollar. Under the new policy, Renminbi is permitted to fluctuate within a band against a basket of foreign currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of Renminbi against the U.S. dollar. The Chinese government may adopt a substantially more liberalized currency policy, which could result in a further and more significant appreciation in the value of Renminbi against the U.S. dollar. Since our income and profits are denominated in Renminbi, fluctuation in the value of Renminbi could adversely affect our overseas sales and import of raw materials and further negatively affect our revenue and net income.  Any appreciation of Renminbi would increase the value of, and any dividends payable on, our shares in foreign currency terms. Conversely, any depreciation of Renminbi would decrease the value of, and any dividends payable on, our shares in foreign currency terms.




The uncertain legal environment in China could limit the legal protections available to you.




The PRC legal system is a civil law system based on written statutes. Unlike the common law system, the civil law system is a system in which decided legal cases have little precedential value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Our PRC subsidiary, Shandong Fuwei, is a wholly foreign-owned enterprise and is subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to wholly foreign-owned enterprises in particular. China has made significant progress in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the promulgation of new laws, changes of existing laws and abrogation of local regulations by national laws may have a negative impact on our business and prospects. In addition, as these laws, regulations and legal requirements are relatively recent and because of the limited volume of published cases and their non-binding nature, the interpretation and enforcement of these laws, regulations and legal requirements involve significant uncertainties. These uncertainties could limit the legal protections available to foreign investors, including you. For example, it is not clear if a PRC court would enforce in China a foreign court decision brought by you against us in shareholders’ derivative actions. Moreover, the enforceability of contracts in China, especially with the government, is relatively uncertain. If counterparties repudiated our contracts or defaulted on their obligations, we may not have adequate remedies. Such uncertainties or inability to enforce our contracts could materially and adversely affect our revenues and earnings.




Outbreak of viruses such as SARS, H1N1 or other epidemics could materially and adversely affect our overall operations and results of operations.




From March to July 2003, mainland China, Hong Kong, Taiwan and some other areas in Asia experienced an outbreak of a new and contagious form of atypical pneumonia known as severe acute respiratory syndrome, or SARS. A recurrent outbreak, or an outbreak of a similarly contagious disease, such as the H1N1 avian flu, could potentially disrupt our operations to the extent that any one of our employees is suspected of having the infection or that any of our facilities is identified as a possible source of spreading the virus or disease. We may be required to quarantine employees who are suspected of having an infection. We may also be required to disinfect our facilities and therefore suffer a suspension of production of indefinite duration. Any quarantine or suspension of production at any of our facilities will adversely affect our overall operations. In the recent two years, infectious disease like H1N1 has occurred in high frequency worldwide, which would have adverse effect on the consumption on packaged foods, and have influence on our products sales. In addition, any such outbreak will likely restrict the level of economic activities in the affected areas, which could lead to a substantial decrease in our revenues accompanied by an increase in our costs.




Regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and adversely affect our business and prospects.




In October 2005, SAFE issued a circular (SAFE circular 75) concerning foreign exchange regulation on investments by PRC residents in China through special purpose companies incorporated overseas. The circular states that, if PRC residents use assets or equity interests in their domestic entities as capital contribution to establish offshore companies or inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas, such PRC residents must register with local SAFE branches in advance with respect to their overseas investments in offshore companies and must also file amendments to their registrations within 30 days upon the generation of material events if their offshore companies experience material events, such as changes in share capital, share transfer, mergers and acquisitions, spin-off transactions or use of assets in China to guarantee offshore obligations which are not involved with return investment. Our existing shareholders prior to our initial public offering have completed the relevant SAFE registration procedures as currently required by SAFE circular 75.





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On May 29, 2007, SAFE issued the operative measures of SAFE circular 75 (SAFE circular 106), which specified the registration and approval procedures of SAFE circular 75.




As it is uncertain how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities, we cannot predict how this circular and other SAFE circulars will affect our business operations or future strategies. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign currency-denominated borrowings, which may adversely affect our ability to provide funds to us to pay dividends on our ordinary shares.




The uncertainty around the status of our major shareholders may eventually result in our delisting from the NASDAQ Global Market.




As described elsewhere in this Annual Report, on November 12, 2009, the Supreme People’s Court of Shandong Province issued the final verdict of three individuals who indirectly constitute our major shareholders, Mr. Jun Yin, Mr. Tongju Zhou and Mr. Duo Wang. Mr. Yin was sentenced to death, with a stay of execution for two years; the other two defendants, Mr. Zhou and Mr. Wang, each received life imprisonment; all of their personal property will be confiscated.




Although the management believes that the shares owned by the major shareholders, Jun Yin, Duo Wang and Tongju Zhou, will eventually be confiscated by the Chinese government, in accordance with the final verdict issued by the Supreme People’s Court of Shandong Province, it has no knowledge of the timing and procedures involved in enforcing such a verdict. We have been informed by the Listing Qualification Department of the NASDAQ Stock Market LLC that they view the continuing uncertainty associated with the verdict as a matter of concern, and have contacted the relevant State agency to see if any further information regarding such procedures is available. We met with officials of the Wei-Fang State-owned Assets Supervision and Administration Commission in March 2011 and learned that there is also another civil verdict issued by the Second Intermediate People’s Court of Beijing that conflicts with the foregoing verdict, which conflict must be resolved prior to any enforcement of the verdict and any confiscation of the personal property of the individuals. In the event that the verdict could not be enforced timely, we may ultimately be delisted from the Nasdaq Global Market.




Item 4. Information on the Company




Overview




We were formed as a Cayman Islands corporation in August 2004 under the name “Fuwei Films (Holding) Co. Ltd.” Our corporate headquarters, principal place of business, production and ancillary facilities occupy an area of approximately 74,251 square meters at No. 387 Dongming Road, Weifang Shandong, People’s Republic of China, 261061. Our agent for service in the United States is CT Corporation System located at 111 Eighth Avenue, NY, NY 10011.




We develop, manufacture and distribute high quality plastic film using the biaxially- oriented stretch technique, otherwise known as BOPET film (biaxially-oriented polyethylene terephthalate). The film is light-weight, non-toxic, odorless, transparent, glossy, temperature and moisture-resistant, and retains high barrier resistance, making it suitable for many forms of flexible packaging, printing, laminating, aluminum-plating and other applications. In addition, it retains high dielectric strength and volume resistance even at high temperatures, which are essential qualities for electrical and electronic uses. Our BOPET film is widely used in consumer based packaging (such as the food, pharmaceutical, cosmetics, tobacco and alcohol industries), imaging (such as printing plates and microfilms), electronics and electrical industries (such as wire and cable wrap, capacitors and motor insulation), as well as in magnetic products (such as audio and video tapes). We market our products under our brand name “Fuwei Films.” We export our products to packaging customers and distributors mainly in Europe, Asia and North America etc. Our main products are as below:




·
Printing base film used in printing and lamination;




·
Stamping foil base film and transfer base films used for packaging of luxury items of cigarettes and alcohol to increase the aesthetic presentation of the item and improving environmental performance ;




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·
Metallization film or aluminum plating base film used for vacuum aluminum plating for flexible plastic lamination;




·
High-gloss film used for aesthetically enhanced packaging purposes;




·
Heat-sealable film:used for construction, printing and making heat sealable bags;




·
Laser holographic base film used as anti-counterfeit film for food, medicine, cosmetics, cigarettes and alcohol packaging;




·
Dry film is generally used in circuit boards (PCB & FPC) production, and sometimes used for nameplate and crafts etching; and




·
Heat shrinkage film is widely used for special-shaped packaging for alcohol, cans, mineral water and cleaning products.




Since our establishment, all of our revenues have been derived from the sales of BOPET film, particularly our printing film, stamping film, transfer film and chemical pretreated film, high-gloss film, heat sealable film, dry film, and heat shrinkage film and so on.




We currently operate three production lines. The first line is a Brückner 6.3 m (in width) production line with an annual designed production capacity of 13,000 metric tons of BOPET film, the products of which ranged from 6 to 125μm. The second line is a DMT production line which is three-layer co-extruded with 6.7 m (in width), and has an annual designed production capacity of 16,100 metric tons of BOPET film. The third line is a Mitsubishi trial production line which has an annual designed production capacity of 1,500 metric tons. As of December 31, 2010, our manufacturing operations had a total annual designed production capacity of 30,600 metric tons based upon 7,200 production hours per annum. Currently, the company is designing a new BOPET thick films production line, the annual capacity of which is expected to be 23,000 metric tons. Its products, ranged from 38 to 250μm, could be widely used in many industrial products including electronics, electrical insulation and thin film transitor-liquid crystal display (“TFT-LCD”).




We sell most of our BOPET film products to customers in the flexible packaging industry in the PRC in the coastal region of China. Our top five customers over the three years ended December 31, 2010 were Southeast Films Technology Co., Ltd., Transparent Paper Limited, Dongguan Klaser Technologies Co., Ltd., Jiaxing Hengli Trading Co., Ltd., and Danyang Advance Packaging Material Subsidiary Company of Dare Technical Co., Ltd.. None of our customers accounted for more than 10% of our total revenues in any such year. In addition, we expect to continue to expand our product portfolio to exploit opportunities in different market sectors, such as electronics industries. In 2008, 2009 and 2010 our sales to our overseas customers constituted approximately 13.1%, 11.1% and 20.7%, respectively, of our total revenue.




On April 23, 2009, Fuwei Films USA, LLC was set up in South Carolina and co-invested by Fuwei Films (Holdings) Co., Ltd. and Newell Finance Management Co., Ltd.. Fuwei Films USA, LLC has a registered capital of US$10,000 and total investment amount of US$100,000. Fuwei Films (Holdings) Co., Ltd. and Newell Finance Management Co., Ltd. own 60% and 40% of the total shares of Fuwei Films USA, LLC, respectively.  As of December 31, 2010, the sale revenue of the Fuwei Films USA, LLC was US$94,119.




Competitive Strengths




We believe that our competitive strengths have enabled us over the years to meet the needs of our customers and become a leading provider of BOPET film products in China. We also believe that our strengths will continue to help us grow in the BOPET film industry in both China and internationally. Our principal strengths include the following:




We have the capability to expand our product range and markets by introducing new products required by customers.




We believe that our experience in the industry and personnel will enable us to continue to provide new BOPET film products required by customers, and we have already developed a series of new products. Our R&D team comprises of 12 research personnel in total.





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We have an established brand name and are recognized for our product quality in the PRC.




Our products are marketed under our brand name, “Fuwei Films.” We believe that this brand name is well known in the BOPET film market in the PRC and, although our selling prices sometimes exceed those of our competitors, our products have achieved significant market acceptance because of its high quality and our superior customer service.




We manufacture high quality products that can be customized for our clients.




We implement and enforce stringent quality controls on our production process and products. As part of our production process, we formulate different blends of PET resins and additives to produce film with specific properties for our customers based on their requirements. In addition, we have developed a special production process and we believe using these formulas will produce products that will meet our customers’ requirements in quality.




We have an experienced management team with extensive industry experience.




Our management team is led by our Chairman and Chief Executive Officer, Mr. Xiaoan He who has more than ten years of related experience in the plastics and packaging industries. He has been instrumental in our operations and strategies, contributing his knowledge and experience in the industry. Our management team has extensive management experience and most of them have many years of experience in the manufacturing and R&D of BOPET industry.




Our technical expertise and production facilities are advanced in the PRC.




We consider our technical expertise and production facilities to be highly advanced with respect to the BOPET film industry in the PRC. Our first production line was German made and manufactured by Brückner and the second was made by DMT in France. We believe that both of our production lines are able to provide high quality products and to compete effectively with our competitors.




Awards and Certifications




Our subsidiary, Shandong Fuwei, has received the following awards and certificates, each of which, we believe, is an indication of our achievements, the quality of our products and makes us more attractive to our potential customers and therefore a more competitive company both in the local and international markets:




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Date

Award/Certificate

Issuing AuthoritySeptember 2004(1)

ISO 9001:2000 Certificate

China Certification Center for Quality MarkJuly 2006(2)

ISO 14001 Certificate

SGSDecember 2007(3)

Key High-Tech Enterprise of the National Torch Program

Ministry of Science and TechnologyDecember 2008 (4)

·Designated as a High-and-New Tech Enterprise by Shandong Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, as well as from the Shandong Province Financial Bureau

Shandong Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, and Shandong Province Financial BureauMay 2009

·Designated as “Advanced Enterprise of Chinese plastic industry”

China Plastic and Packaging AssociationAugust 2009

·Technological Innovation Award

Shandong Province enterprise technological innovation promotion association.June 2010(5)

·Designated as an A-Category taxpayer by the National Taxation Bureau and the Local Taxation Bureau of Shandong Province.

The National Taxation Bureau and the Local Taxation Bureau of Shandong ProvinceOctober 2010(6)

·Designated As Shandong Engineering Technology Research Center

Department of Science & Technology of Shandong ProvinceJanuary 2011(7), (8)

·Award for Cooperative and Innovative Manufacturing, Study and Research of SME

SME Productivity Promotion Center of Shandong Province·First Award of Private SME Innovation of Shandong Province

SME Innovative Committee of Technological Promotion of Shandong ProvinceJanuary 2011

·Award of Tax Contribution of the Year of 2010

Weifang Municipal Finance BureauJanuary 2011(9)

·Fuwei Films was awarded as Famous Shandong Brand

Shandong Provincial Quality Supervision BureauFebruary 2011(10)

·Scientific Innovative Enterprise of Shandong Province

Department of Science & Technology of Shandong Province




(1)
ISO 9000 certification has become an international reference for quality management requirements in business-to-business dealings. This certification enables us to compete on many more markets around the world and provides our customers with assurances about our quality, safety and reliability.




(2)
After strict examination and approval by China Environment United (Beijing) Certification Center Co., Ltd (Environment Conformity Assessment Center of State Environment Protection Bureau), Fuwei Films (Shandong) Co., Ltd. has successfully passed the ISO14001 Environmental Administration System in July 2006.




(3)
Fuwei Films (Shandong) Co., Ltd. was awarded as Key High-Tech Enterprise of the National Torch Program in December 2007.




(4)
In December 2008, Fuwei Films was awarded as High-and-New Tech Enterprises by Shandong Department of Science and Technology, National and Local Taxation Bureau of Shandong Province, as well as from the Shandong Province Finance Bureau.




(5)
The A-Category is the top of the four ratings for corporate taxpayers in China. Candidates eligible for the category are reviewed and designated by the authorities every two years.




(6)
This center is mainly engaged in the research and development of polyester new materials and high-tech products. Currently, it has made more than ten R&D achievements and plays a positive leading role in the development of BOPET industry.




(7)
Fuwei starts technological cooperation with Chinese colleges and hires South Korean experts to research and develop new products, techniques and process.




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(8)
Fuwei has already developed and applied more than ten kinds of new products, including laser anti-counterfeit film, chemical pretreated film, heat-sealable film, dry film and heat shrinkage film. All these have been widely used in production.




(9)
The brand of Fuwei has been honored as famous brand resulting in visibility, credibility, reputation and continued growth.




(10)
Under the fierce competition, Fuwei is encouraged by the government to develop the new products.




Business Prospects




In 2010, the recovery of global economy and strong growth of Chinese economy leads to the rapid development of BOPET industries, such as the substantial rise of products price and the gross margin.




We have identified thick BOPET film, which is mainly used in the electrical and electronics industries, as a key market segment for potential growth. The thick BOPET film is mainly used in the electronics, electricity and solar energy industry. The thick film rapidly grows with the development of the above-mentioned industry. Currently, most of the high-end thick film products including thin film transistor-liquid crystal display (or TFT-LCD) screens are obtained from overseas.




Business Development Strategies




As a primary part of our business strategy, we will speed up the construction of production line for thick films. We believe that we have the ability to increase our sales and expand our markets. We will continue to improve our products by developing new functions and applications of the BOPET films and bettering our products mix. Meanwhile, we will continue to secure opportunities to develop new domestic and overseas customers. We believe that expanding the overseas business is a key part of our business strategy. So we will continue to focus on the development of the BOPET industry and look for the opportunities for merger and acquisition.




Our future plans include:




Continued construction of the new BOPET production line




We have commenced the construction of a new production line capable of producing BOPET film that is between 38 to 250μm in our current premises in Weifang City, PRC. The BOPET film production using this new production line is targeted at industrial use, including TFT-LCD screen films. We expect to penetrate into the electrical, electronics and solar energy industries with this new BOPET film. Such industries for high-end and special usage currently rely on expensive imports. The total investment amount of the new production line was about US$ 50 million.




Expansion into overseas markets




We believe that the overseas markets hold significant potential for future growth. We believe that our venture into the overseas markets which began in 2004 has been successful. Although we are not focused on any particular overseas market, we have identified Europe, Asia and North America as our primary overseas markets.




Our overseas sales were significantly affected by the anti-dumping investigations conducted by South Korea and the United States against BOPET manufacturers originated from China, India and other countries and the appreciation of Renminbi. However, we still believe there is a great potential in overseas BOPET market. Therefore, we will continue to carry out the marketing in the overseas market to attract new clients. As a result of the significant increase in the overseas market demand in 2010, we saw significant increase in export volume, especially in Europe and Asia.




Investment in research and development




As one of our key strategies, we continue to invest substantially in R&D area. We have constructed a trial production line for research and development of new products, which also saves experimental cost. We also intend to expand our R&D team by hiring more senior research personnel from both China and foreign countries. We attach great importance to intellectual property. To date, 9 patents have been granted and 12 patents are pending.





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Our Products and Services




We are principally engaged in the manufacture and distribution of BOPET film. We currently produce BOPET films from the three production lines, with an aggregate annual designed production capacity of 30,600 metric tons with thicknesses varying between 6 - 125μm.




BOPET is a high quality plastic film manufactured using the biaxially-oriented stretch (transverse and machine direction) technique. Our advanced production process improves the physical properties of the plastic film such as its tensile strength, resistance to impact, resistance to tearing and malleability. The high dimensional stability of the film over a wide range of humidity and temperature fulfills the basic requirements for flexible packaging. The film is light-weight, non-toxic, odorless, transparent, glossy, moisture-resistant, and retains high barrier resistance, making it suitable for many forms of flexible packaging, printing, laminating, aluminum-plating and other processes. In addition, it retains high dielectric strength and volume resistance even at high temperatures, which are essential qualities for electrical and electronic uses. The three-layer co-extruded structure enables us to develop high-quality BOPET products.




BOPET film has been widely used in the packaging (such as food, pharmaceutical, cosmetics, cigarettes, alcohol), imaging (such as printing plates and microfilms), and electronics and electrical (such as wire and cable wrap, capacitors and motor insulation). Due to its unique qualities, it has become a popular choice as a flexible packaging material in these industries in recent years.




We market our products under our brand name “Fuwei Films.” Our operations are based primarily in Shandong Province, PRC, where we manufacture our products for sale to customers engaged in flexible packaging businesses in the PRC, in particular the coastal region. We also export our products to packaging customers and distributors mainly in Europe, Asia, and North America.




Our BOPET film is mainly used in the flexible packaging industry for consumer products such as those relating to processed foods, pharmaceutical products, cosmetics, tobacco and alcohol. Our products may be sub-divided into five main categories constituting the following percentages of our total revenue for each of the twelve months ended 2008, 2009 and 2010:





Category

2008


2009


2010Printing film


12.6
%


11.0
%


15.3
%Stamping foil film


31.2
%


54.5
%


56.2
%Metallization film


10.1
%


10.9
%


5.6
%Specialty film


24.0
%


10.6
%


17.5
%Base film for other applications


22.0
%


13.1
%


5.4
%




The above categorizes BOPET film products by application.




Printing film




This is a high transparency film that is corona treated on one side to provide excellent adhesion to ink. This is primarily used in printing and lamination.




Stamping foil film




This is a film that displays excellent thermal stability and tensile strength and is used in metallized film and laser stamping foil and transfer.




Metallization film




This is an aluminum plating base film that displays good thermal stability and tensile strength and provides good adhesion between film and aluminum layer. This is mainly used for vacuum aluminum plating for flexible plastic lamination.





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Specialty film




We mainly produce the following types of specialty film:




·
High-gloss film: Film with high levels of reflection approaching a mirror-like surface, used for aesthetically-enhanced packaging purposes.




·
Heat-sealable film: Film with a three layer structure. The heat-sealable film is primarily used in construction, printing and making heat sealable bags.




·
Laser holographic base film: A directly embossable film with high transparency, used as anti-counterfeit film and for aesthetics for food, medicine, cosmetics, cigarette and alcoholic packaging.




·
Dry film: Generally used in circuit boards (PCB & FPC) production, and sometimes used for nameplate and crafts etching.




·
Heat shrinkage film is widely used for special-shaped packaging for alcohol, cans, mineral water and cleaning products.




Base film for other applications




Base films for other application are ordinary commodity polyester films with applications other than for the usages mentioned above.




Production




We currently operate three production lines. The first line is a Brückner 6.3 m (in width) production line with an annual designed production capacity of 13,000 metric tons of BOPET film, the products of which ranged from 6 to 125μm. The second line is a DMT production line which is three-layer co-extruded with 6.7 m (in width), and has an annual designed production capacity of 16,100 metric tons of BOPET film. Another is a Mitsubishi trial production line which has an annual designed production capacity of 1,500 metric tons. As of December 31, 2010, our manufacturing operations had a total annual designed production capacity of 30,600 metric tons based upon 7,200 production hours per annum.




BOPET film is manufactured from polyethylene terephthalate (PET) resin, which is a petrochemical product. BOPET film is produced by melting the granulated PET resin and extruding it into a flat sheet. This sheet is stretched to 3.0 to 3.6 times its original length, and then horizontally from 3.0 to 3.6 times its width, before being heat-set and finally wound into reels. The orientation process (stretching during the application of heat) gives the film its mechanical strength, barrier and optical properties (clarity and gloss). Our Brückner production line comprises a single extruder which can produce single-layer BOPET film, whereas our DMT production line comprises one main extruder and two co-extruders which can produce BOPET film comprising three layers, of which the core layer and the outer co-polymer layers are made of different materials. Depending on the additives used, the films produced have varying physical and chemical properties. The main steps of our manufacturing process involve:




Dosing and Mixing




PET resin is dosed and mixed with relevant additives to give it its desired characteristics. In the case of the production three-layer co-extruded BOPET film, the materials are dosed and mixed separately for each of the core and outer layers.




Extrusion/Co-extrusion




The mixed material is melted and plasticized to achieve the required homogenous state with the requisite characteristics and then it is filtered and transported to the die unit. Our DMT production line has one main extruder and two auxiliary extruders to allow us to produce multiple-layer co-extruded BOPET film.





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Die Casting




The respective mixed materials are extruded from the die unit which produces a flat layered cast sheet and casted on the chill roll which is cooled by the pinning system.




Machine Direction Orientation (vertical stretching)




The cast sheet is then heated and stretched by machine direction before annealing the cast sheet, which is a process of heat-setting so as to control the shrinkage of the sheet after the vertical stretching.




Transversal Direction Orientation (horizontal stretching)




After the machine direction stretching, the cast sheet is horizontally stretched before annealing again.




Pull Roll Station




The stretched sheet is trimmed and measured for thickness. For the production of base film for printing, the surface is treated by corona treatment. Corona treatment is the process which enables the BOPET film to become receptive to printing. At the pull roll station, continuous feedback on the thickness of the BOPET film is also relayed back to the die unit which therefore ensures consistency in the thickness of the BOPET film.




Winder




The final BOPET film is then wound up into metal rolls in the mill roll by the winder.




Slitter




The wound BOPET film is then unwound from the metal rolls, divided to the requisite width and length, and wound again into paper core for delivery to customers.




Inventory Management




Our warehousing facilities are located in the Shandong Province, PRC. Our warehouses are guarded by security personnel and loss of our inventory is covered under our insurance policies. As of December 31, 2010, our total inventories amounted to approximately RMB 52.6 million and our raw materials, work-in-progress, finished goods and consumables and spare parts made up approximately 36.8%, 2.7%, 52.6% and 7.9% of our inventories, respectively.




To ensure an accurate inventory record and to monitor our inventory aging, we conduct monthly stock counts. We usually maintain raw materials which can be used for one or two weeks of production. Typically, we start manufacturing such goods upon our receipt of orders from our customers.




Our inventory turnover periods (in days) for 2008, 2009 and 2010 were 34.9, 45.9 and 47.2, respectively. Inventory turnover is calculated as 365 days times inventory at period/year end date divided by cost of sales in respect of the financial period/year.




There were no provisions for inventory obsolescence, inventory written off or inventory written down to net realizable value in 2010.




Manufacturing Facilities and Utilization Rates




As of December 31, 2010, we have the following production lines:





Production Line

Designed Production Capacity

Estimated Remaining Life SpanBrückner Production Line

13,000 tons per annum

Approximately 8 yearsDMT Production Line

16,100 tons per annum

Approximately 15 yearsTrial Production Line

1,500 tons per annum

Approximately 9 years





25





The designed production capacity as given by the manufacturer is determined based on the assumption of the production of a specific mix of BOPET films of varying thicknesses. Our Brückner and DMT production lines and the trial production line have been in use since 1996, 2003 and 2009, respectively. The production lines are depreciated on the straight-line method over their respective estimated useful lives.




Our approximate annual production volumes and the average annual utilization rates for our facilities for 2008, 2009 and 2010, based on our estimated operational production capacities were as follows.





Approximate Annual Production Volume

(tons)


Average Annual Utilization Rate (%)Production Line

2008


2009


2010


2008


2009


2010Brückner Production Line


12,092



11,823



12,141



93.0
%


90.9
%


91.1
%DMT Production Line


13,769



13,822



15,995



85.5
%


85.8
%


99.1
%




There are currently no regulatory requirements that may materially affect the utilization rates of our property, plant and equipment. However, certain of the fixed assets relating to our production lines have been mortgaged in respect of certain of our bank loans as described under “Properties” for further details.




Quality Control




The quality and reliability of our products are essential for our continued success. We adopt strict measures for quality control in the entire production process of all our products, from the purchase and selection of raw materials, to each stage of the manufacturing processes and to the final inspection of the end products. Our quality control procedures were certified for ISO 9001:2000 compliance in September 2004.




As of December 31, 2010, our product inspection and quality control department comprised of 19 employees. We have one manager, 8 process inspectors and 8 end-product inspectors and 2 after-sale personnel. Members of our quality control departments have had relevant training in the area of quality control in accordance with ISO 9001:2000 procedures. Our product inspection and quality control department ensures that our production process, raw materials and end products are of the quality to our customers’ satisfaction. Only products which have been endorsed with our certified quality marks are delivered to our customers.




Raw Materials




We adopt and adhere to a set of quality inspection procedures and internal controls for the procurement, selection and quality checks of raw materials. Different types of checks are utilized for different categories of raw materials. Our suppliers are also required to meet our internal qualification criteria such as the quality and pricing of their suppliers, their ability to meet our requirements and timely delivery. We conduct batch inspections for raw materials delivered to us before they are accepted and stored in our warehouses. Defective materials are returned to our suppliers for necessary corrective action to ensure that such defects are not repeated. The raw materials are inspected again prior to selection for use in the production process.




Production Process




We have established standard operational procedures and implementation rules for each stage of the production process to ensure that our products comply with and adhere to our stringent quality control standards and that our productivity is optimized. We only permit employees who have undergone and completed the relevant training to work on our production lines. At each stage of the production process, our inspectors check and ensure that our production process complies with our quality standards, while our quality control department monitors and ensures that our products-in-process and final products comply with our internal and international standards of quality control by carrying out random sampling of the products.





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End Products




To ensure that our products fulfill our quality criteria established by our product inspection and quality control department, our products undergo final quality inspection upon production, labeling and packaging. Our product inspection and quality control department continues to monitor and ensure that our products are properly handled and stored in our warehouses. Prior to delivery to our customers, our products are inspected one final time to ensure that they are in good condition and not damaged.




Maintenance




Our maintenance engineers regularly maintain and repair our machinery and equipment to ensure that they are in good working order and functioning properly. We also conduct periodic maintenance of all our machinery on a rotation basis. On an average basis, we replace our filters every 20-35 days and this replacement process takes about six to eight hours. We believe that due to our stringent maintenance policies, our equipment is still in good condition. Our monthly average downtime for 2010 (primarily for maintenance) was less than 1.2% of our monthly production time.




For 2010, the rejection rates of our products were generally less than 0.8% of our total production volume. Defective or inferior products that do not fulfill our quality control standards are recycled.




New Products




Through years of R&D endeavors, we have introduced a variety of BOPET film products. The following are some of the new products for which commercial production has begun:




Product

AchievementLaser holographic base film

Our laser holographic base film is a directly embossable BOPET film, ideal for holographic applications. This film eliminates the need to coat and prepare substrates for holographic embossing, thus reducing costs for our customers. It can be used for anti-counterfeit purposes and in packaging to help enhance the aesthetic perception of food, medicine, cosmetics, cigarettes and alcohol.Single/double surface matte film

Our matte film is mainly used for aesthetically-enhanced packaging purposes. Our ability to produce single-sided matte films offers significant cost savings for our customers as the non-matte side of the film may be used for other applications without further processing.Anti-counterfeit film

Our anti-counterfeit film changes color under ultraviolet rays. Accordingly, it is used for packaging branded products for anti-counterfeit purposes.Chemical pretreated film

Our film is pretreated in-line and coated, which results in a strong adhesion to ink and aluminum.Heat-sealable film

Heat-sealable film is a three layers co-extruded Biaxially oriented polyester film with an amorphous polyester heat seal layer. Available with corona treatment on the non-seal side to give improved adhesion to typical packaging inks and metallizing. It cannot only provide permanent seals to itself for package bag, but also to APET, CPET, PETG and others. Heat-sealable film can be aluminized, printed and composite with other films. It is microwave ovenable film for packaging refrigerated and frozen foods.





27


Product

AchievementHeat sealable film for steel

To improve the heat-sealable strength between the film and steel and adjust the stretchable capability so as to be more suitable for steel’s heat sealing. Mainly used for protection and decoration of colorful armor plate for home appliances.High-gloss film

By using special raw chips and process, provides very high gloss, uniform thickness, good mechanical properties, and surface smoothness. It can be used under -70~200°C for packaging food, cigarettes, alcohol and laser embossing, holographic anti-fake and metallic yarn and others.White film

To be used for print, composite, coating and others, such as advertising lamp house, release film and reflector film.DFR base film

Generally used in circuit boards (PCB & FPC) production, sometimes used for nameplate and crafts etching.Heat shrinkage film

To change the heat shrinkage rate by enlarging the draw ratio.  It is mainly used for PET beverage bottle shrinkable tags. Hot shrink film uses PET structure which is the substitute of PVC shrinkable tags, which is also in line with the requirements of environmental protection and recyclable.
  New Product Development
  We have also begun working on the following projects which are currently in the test production phase:
  Product

ObjectivesandApplications

CommercializationDate

ExpectedSmooth heat-sealable film

To improve the static and kinetic friction by adding special additive, smooth heat-sealable film is widely used in the package of mosquito-repellent incense and so on.

April 2011Flame retardant film

It has a property to reduce or delay the propagation of flame whereby the combustion is slowed, terminated or prevented if the heat source is removed.

September 2011Metal-adhesion improved film

To improve the peel strength after be metalized sealing. Mainly used for liquid packages.

December 2011
  We have applied for patents with respect to some of our new processes and technologies used in our business.  Currently there are pending approvals from the relevant PRC authorities. We do not believe that the denial of any of these applications will affect our ability to continue to manufacture our products on a competitive basis. As our operations expand internationally, we plan to evaluate the benefits of seeking international protection of our intellectual property in relevant markets. In addition to our patent applications, we protect our proprietary know-how by subjecting our employees to confidentiality, non-compete and non-solicitation obligations through our labor contracts with them and restricting access to our research and development center and access to technology know-how to authorized personnel.
  Our expenditure on research and development, excluding staff salaries and related expenses, in 2008, 2009 and 2010 were as follows (in thousands):
  28
 YearEnded

December 31,

2008


YearEnded

December31,

2009


YearEnded

December31,

2010RMBResearch and Development Expenses


2,631
(1)


4,722
(2)


8,058
(3)
  (1)& (2)& (3)  In addition to the above-mentioned Expenses in 2008, 2009 and 2010 of RMB 2,631, RMB 4,722 and RMB8,058, respectively, the R&D capital expenditure was RMB 3,200, RMB 5,5 00 and RMB 4,434.
  We view research and development as an essential part of our business. In the face of increasing competition, we increased our expenditure on research and development from 2008 to 2010, as we believe that higher investment in the equipment of our R&D center and in the development of new products and upgrading of existing products will enhance our ability to compete.
  Sales, Marketing and Key Customers
  As of December 31, 2010, our sales department comprised of 13 employees in the domestic sales division and 4 employees in the over sales division. Our marketing department comprised of 2 employees.  Our sales department is responsible for our market penetration, such as cultivating new customers and businesses, and market development such as developing existing accounts through better service support and customer relationship. Marketing department is responsible for market research, development and promotion.  Our management is actively involved in overseeing and supervising our sales and marketing activities and often visits our clients together with our sales personnel. They have established and maintained close business relationship with our key customers.
  Customers and Markets
  Over the past years, we have established good working relationships with our customers in the flexible packaging industry. Our products are mainly used in the packaging of consumer products such as those relating to processed foods, pharmaceutical products, cosmetics, tobacco and alcohol. In addition, we entered into dry films market and maintain good relationship with major dry films customers.
  The majority of our domestic customers are located in the coastal region of the PRC. Our overseas customers are mostly based in Europe, Asia, North America and others. In 2010, sales from our domestic and overseas customers constituted approximately 79.3% and 20.7%, respectively, of our annual revenue.
  The following are our top five customers and their respective percentages of contribution to our total revenue for each of the years ended December 31, 2008, 2009 and 2010:
 Percentage of Total Revenue (%)2008


2009


2010Southeast Films Technology Co., Ltd.


1.8



3.9



6.3Transparent Paper Limited


-



0.9



4.9Dongguan Klaser Technologies Co., Ltd.


4.9



7.2



4.7Jiaxing Hengli Trading Co., Ltd.


-



0.3



4.2Dare Technical Co., Ltd. Danyang Advance Packaging Material Subsidiary Company


3.4



5.0



3.3
  None of our customers accounted for more than 10% of our total revenue in any of the previous three years.
  None of our directors or principal shareholders or any of their affiliates has any interest, direct or indirect, in any of our customers listed above.
  Sales
  Because of our broad range of product offerings and customers, our sales and marketing efforts are generally specific to particular types of products, customer or geographic region. Most of our products are sold by our own direct sales force. These salespeople, including our management, maintain close relationships with our customers by paying visits to our customers from time to time to understand their needs, and to obtain their feedback and suggestions. Our sales personnel provide technical support to our customers when required. We also regularly invite our existing and potential customers to our manufacturing facilities for visits as we believe that such visits enable our customers to better understand our production processes and operations and also enhance our customers’ confidence in us.
  29
  We adopt a risk assessment model to our customer credit management system, and we offer different credit terms to our customers based on criteria such as working relationship, payment history, creditworthiness and their financial position. We offer our domestic customers credit terms of up to 30 - 45 days. Our international sales are settled through telegraphic transfer and letters of credit, which generally have payment terms of between 30 and 60 days. However, since 2010, some transactions are performed in cash.
  We offer a basic salary and commission package for our sales personnel. The scale for the commission payable is dependent on a number of factors such as sales completion targets, debt collection, customer service rendered, and development of new customers.
  Customer Service
  We place great emphasis on good, fast and effective pre-sales and after-sales customer support services. As such, all our sales personnel have undergone stringent training and have sufficient knowledge and understanding of our products. Our sales personnel are responsible for coordinating and providing after-sales services which include following through with our customers’ orders, maintaining relationships with our customers, handling complaints effectively, ensuring that our customers’ needs are met and understanding the future needs of our customers. Our quality department gives support to our customer service, and is responsible for explaining questions related to our products usage from customers. If there are complaints as to our product quality, they are responsible for receiving and settling complaints on our customers’ site.
  Marketing
  We have the following marketing channels:
  ·
we regularly attend trade fairs and exhibitions as we believe that they serve as a good platform for us to exhibit our new products and expand our sales network. In addition, participation in seminars, fairs and exhibitions provides us with opportunities to network with our potential and existing customers and allows us to obtain up-to-date information on new products, market trends and consumer demand;
  ·
referrals from existing customers as well as business associates to generate sales opportunities; and
  ·
promotion through our corporate website. Information on our products and services are also found on our corporate website which allows us to reach out to potential domestic and overseas customers.
  Our marketing personnel also conduct PRC domestic and overseas market surveys and research. The statistics, findings and information obtained from such surveys and research are then passed on to our management and production department for their analysis on the demand for and supply of our products, which allows them to make adjustments to our production and sales targets as well as our marketing strategies.
  Suppliers and Raw Materials
  Suppliers
  We purchase raw materials according to the relevant technical specifications and production requirements. We select our suppliers based on the following considerations and/or methods:
  ·
the consistency of the quality of raw materials supplied and any relevant certifications;
  ·
our inspection of the supplier’s quality control system;
  ·
positive feedback from the supplier’s other customers;
  30
  ·
pricing of raw materials;
  ·
timely delivery of raw materials;
  ·
the supplier’s financial position and viability;
  ·
the service provided by the supplier;
  ·
qualifying suppliers by sample testing and batch purchasing of their raw materials; and
  ·
annual evaluation and review of our suppliers.
  The following are the suppliers that supplied 5% or more of our purchases of raw materials for each of the years ended December 31, 2008, 2009 and 2010:
 Percentage of total purchases (%)Supply

2008


2009


2010Sinopec Yizheng Chemical Fibre Company Limited

PET resin and Additives


44.8



45.8



42.4Jiangyin Huaxing Compound Co., Ltd.

PET resin


9.7



12.5



11.6Mahongany Joy Investment Ltd.

PET resin


-



-



11.1
  Note: To our knowledge, Jiangyin Huaxing Compound and Mahongany Joy Investment Company are related companies.
  We purchase the majority of our PET resin from Sinopec Yizheng as the quality of its supply of PET resin consistently meets our requirements. We currently have an annual supply agreement with Sinopec Yizheng pursuant to which Sinopec Yizheng has agreed to supply us fixed quantities of PET resin monthly at the prevailing market prices.  Such supply agreement is renewable annually. We have not entered into any long-term supply contracts with any other supplier. Our purchases of raw materials are on a cash basis. While we believe that there are only a limited number of suppliers of PET resin that can consistently meet our quality and quantity requirements on a timely basis, there are many PET resin suppliers in the PRC or overseas market from whom we may easily obtain PET resin, on a short-term basis, if necessary.
  None of our directors or principal shareholders or any of their affiliates has any interest, direct or indirect, in any of our major suppliers mentioned above.
  Raw Materials
  The main raw materials that we purchase from our suppliers are as follows:
 Percentage of Total Purchases (%)Raw Material

2008


2009


2010

CountryPET resin


77.2



76.0



75.5

PRC, KoreaAdditives


22.8



24.0



24.5

PRC
  The market prices of PET resin and additives may fluctuate due to changes in supply and demand conditions. Any sudden shortage of supply or significant increase in demand, of PET resin and additives may result in higher market prices and thereby increase our costs of sales. The prices of PET resin and additives are, to a certain extent, affected by the price movement of crude oil. Since September 2008, the intense fluctuation of the crude oil price has significantly affected the price of raw materials. In 2010, the oil price continued to increase, especially at the end of 2010, the price increased by 14.4% compared to the price at the end of 2009.  Therefore, the price for raw materials continued to increase and at the end of 2010 it increased by 21.0% compared to the price at the end of 2009.
  As we are unable to predict the price movements of such raw materials and to minimize the impact of such price fluctuations on our cost, we generally purchase such raw materials in quantities sufficient for our production process for approximately one or two weeks. In 2010 along with the economy recovery and based on the orders from our customers we stored some raw materials.  This way we saved some purchase costs. We may also adjust the prices of our end products, when appropriate, and pass portion of cost increases to our customers. Failure to transfer all the increase in cost to our customers may adversely affect our operating income.
  31
  Competition
  We face intense competition in the PRC plastic film industry. We believe that there are currently many plastic film manufacturers in the PRC and we expect further entrants into this market in the future. Among the flexible packaging industries, in particular those involving packaging of processed food and pharmaceutical products, the primary types of plastic films in the packaging products include BOPET, Biaxially oriented polyester (BOPP); and Biaxially oriented polyamide (BOPA).
  The following table gives a general comparison of the key differences in the technical specifications and usage of the above types of plastic films.
  Comparison of BOPP Film, BOPET Film and BOPA Film(1)
 
 Features

BOPP

BOPET

BOPAWater vapor barrier

Excellent

Fair

PoorGas barrier properties

Poor

Excellent

ExcellentBreak down voltage

Poor

Excellent

ExcellentMachine-ability

Fair

Excellent

ExcellentPrint-ability

Fair

Excellent

FairSuitability for Metallizing

Poor

Excellent

FairDensity (gm/cc)

Low (0.91)

High (1.39)

Medium (1.15)Tensile strength

Poor

Excellent

Excellent
  (1)
This comparison is based on the book of Biaxially Oriented Plastics Film, edited by Yanping Yin and published by China Chemical Press in August 1999.The Company did not notice updated technical specifications subsequently as of December 31, 2010.
  The production of BOPET film requires a large capital investment. We believe that we are one of the few BOPET film manufacturers in the PRC with research and development capabilities.
  We believe that the major competitive factors in our industry include:
  ·
research and development capability;
  ·
quality and reliability of products;
  ·
technical/manufacturing capability;
  ·
industrial reputation; and
  ·
production cost and sales prices.
  We believe that our major competitors in BOPET manufacturing are currently:
  ·
Dupont Hongji Films Foshan Co., Ltd.;
  ·
Yihua Toray Polyester Film Co., Ltd.; and
  ·
Ningbo Shunsu Film Co., Ltd.
  32
  We believe that we have established a good reputation and management track record as a manufacturer of BOPET film and are able to offer quality products.
  C. Organizational structure.
  The following table set forth the details of our subsidiaries as at the date of this Annual Report:
  Name

CountryofIncorporation

OwnershipsInterests

DirectParentFuwei Films (Shandong) Co., Ltd.

Weifang Shandong, China

100% wholly owned by Direct Parent

Fuwei Films (BVI) Co. Ltd.Fuwei Films (BVI) Co., Ltd.

British Virgin Islands

100% wholly owned by Direct Parent

Fuwei Films (Holdings) Co. Ltd.Fuwei Films USA LLC

South Carolina, USA

60% owned by Direct Parent

Fuwei Films (Holdings) Co. Ltd.
  D. Property, plant and equipment.
  Our corporate headquarters and production and ancillary facilities occupy an area of approximately 74,251 square meters in Weifang City, Shandong Province. The land at our facilities is covered by land use rights held by us. The land use rights for the land upon which our buildings and facilities are located have terms of 50 years, the earliest of which expires in November 2050. All of our research and development, manufacturing, warehousing and administrative functions are conducted at our corporate headquarters. The total gross floor area of production and other facilities owned by us is approximately 46,196 square meters. We own all the buildings and facilities on the premises. Most of our land use rights, office buildings and two facilities in operation have been mortgaged to a bank in the PRC for loans totaling RMB 162 million.
  We are in the process of constructing our new production line located in Weifang Hi & New Technology Development Zone. We anticipate that this new production line will produce BOPET film that is between 38 to 250μm. The BOPET film produced using this new production line is targeted at industrial use, including TFT-LCD. The construction of the plants has already been completed.  We initially planned to complete the production line construction at the end of 2008.  However, this production line was not constructed as planned, since we are unable to raise funds through issuing shares or bonds as a result of our major shareholder issues and global financial crisis. Currently, we are negotiating with the German equipment provider to reach an agreement so that we can continue working on the construction of the production line. It is estimated that the production line will be put into operation by the end of 2012.
  Item 4A. Unresolved Staff Comments
  None.
  Item 5. Operating and Financial Review and Prospects
  MANAGEMENT’S DISCUSSION AND
 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements included in this Annual Report beginning on page F-1. The consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties.
  Overview
  We develop, manufacture and distribute high quality plastic film using the biaxially oriented stretch technique, otherwise known as BOPET film. Since the establishment of the Company, all of our revenues have been derived from the sales of BOPET film. We sell majority of our BOPET film products to domestic customers in China in the flexible packaging industry. We established an overseas sales division in June 2004 and have been selling our products into overseas markets. Currently, we sell our products to Europe, Asia, North America and other overseas markets.
  33
  Our Operating History and Corporate Structure
  The diagram below illustrates our corporate structure:
  
  Shandong Fuwei, our PRC operating subsidiary, was formed on January 28, 2003, as a Sino-foreign equity joint venture under the name Weifang Fuwei Plastic Co., Ltd. In July 2003, this company began production of BOPET film, initially renting the necessary fixed assets from Shandong Neo-Luck, a company involved in BOPET film production for which Mr. Xiaoming Wang, our current executive officer, served as executive officer at the time.
  Shandong Fuwei subsequently acquired these fixed assets through two auction proceedings, the first in October of 2003 and the second in December 2004. At the first auction proceeding in October 2003, Shandong Fuwei acquired assets related to the Brückner production line that it had been renting from Shandong Neo-Luck. This line had been previously mortgaged by Shandong Neo-Luck to the Bank of China, Weifang city branch as security for several loans extended to Shandong Neo-Luck’s affiliates. When these loans went into default, the Bank of China brought a series of legal actions in Weifang Municipal People’s Court that resulted in the assets securing the loans being sold at a public auction. Following its successful bid at an auction on October 9, 2003, Shandong Fuwei acquired the Brückner production line and facilities (with an appraised value of approximately RMB 169 million) for RMB 156 million.
  In November 2003, Shandong Fuwei’s shares were sold to Shenghong Group Co., Ltd. (“Shenghong Group”) and Shandong Baorui for an aggregate consideration of RMB 98.2 million. Tongju Zhou, a former director of the Company, and Duo Wang each indirectly own 50% of Easebright Investments Limited (“Easebright”), one of our principal shareholders, and are both officers and directors of Shandong Baorui. Jun Yin and Duo Wang own 17.5% and 4.6%, respectively, of Shandong Baorui. In 2004, Messrs. Zhou and Wang, along with Jun Yin established several offshore holding companies in the British Virgin Islands and the Cayman Islands to acquire and hold these shares. In October 2004, Fuwei (BVI) entered into a sale and purchase agreement with Shenghong Group and Shandong Baorui pursuant to which Fuwei (BVI) acquired the respective equity interest of Shenghong Group and Shandong Baorui in Shandong Fuwei for an aggregate consideration of RMB 91 million. Shandong Fuwei thereafter became a wholly-owned subsidiary of Fuwei (BVI) and was converted into a wholly-foreign owned enterprise pursuant to PRC law.
  34
  As a result of its ongoing financial difficulties, Shandong Neo-Luck was declared bankrupt by the Weifang Municipal People’s Court in the PRC on September 24, 2004. Prior to the bankruptcy, Shandong Neo-Luck’s then major operating asset, the DMT production line, had been pledged by Shandong Neo-Luck to Weifang City Commercial Bank. When Shandong Neo-Luck was declared bankrupt, the Shandong Branch of the Bank of China seized the production line by order of the Qingdao Intermediate People’s Court and the Qingdao Southern District People’s Court while the Weifang Branch of Bank of Communications did so through Weifang Intermediate People’s Court. As such, the effectiveness of the pledge in favor of Weifang City Commercial Bank was under dispute. Subsequently, pursuant to the decision from Weifang Intermediate People’s Court, Weifang City Commercial Bank ranked senior in terms of the right of claims.
  The pledged DMT production line was put up for public auction by the Shandong Neo-Luck Liquidation committee on October 22, 2004. In view of the above complexities, the auction was deemed to be tremendously risky at that time, and therefore, our PRC operating subsidiary did not directly participate in the first auction, which began with a bid price of approximately RMB 53 million by reference to an independent valuation performed on a forced sale basis. However, due to the potential tremendous risk involved, the auction had been withdrawn twice and the starting bid price had been further reduced to approximately RMB 34 million and was finally purchased by Beijing Baorui, a company indirectly controlled by Shandong Baorui. When the DMT production line was put for public auction by Beijing Baorui three months later, our PRC operating subsidiary purchased it for approximately RMB 119 million, which was supported by an independent valuation performed on a going concern basis. We understood that acquiring the DMT production line from Beijing Baorui through the first auction would be an effective way to minimize the risk associated with the uncertainties arising from the bankruptcy of Shandong Neo-Luck. The price difference of approximately RMB 85 million represented a risk premium paid to Beijing Baorui, which bore the ultimate risks of recourse from creditors of Shandong Neo-Luck.
  Subsequent to the auction for several years, the PRC government conducted an investigation into the conduct of certain individuals in connection with such transactions. In March 2009, Messrs Yin, Wang and Zhou committed the crime of corruption by verdict of the Jinan Intermediate People’s Court in the city of Jinan, Shandong Province. In November 2009, the Company became aware of the final verdict issued by the Supreme People's Court of Shandong Province. The Supreme People’s Court upheld the initial verdict issued by the Intermediate court in March 2009. The March 2009 initial verdict sentenced Mr. Yin to death, with a stay of execution for two years, and the other two defendants, Mr. Zhou and Mr. Wang, each received life imprisonment. All of the personal property of the three individuals will be confiscated.
  At the time of the Company’s initial public offering, we had obtained an opinion of PRC counsel with respect to the validity of the auction proceedings under PRC law, although you should read the description of the opinion and the subsequent development in March 2009 described under the title “Risk Factors — The circumstances under which we acquired ownership of our main productive assets may jeopardize our ability to continue as an operating business”. Certain of the assumptions relied upon in providing that opinion have been called into question by the verdict referred to above.
  Key Factors Affecting Our Results of Operations
  The following are key factors that affect our financial condition and results of operations and we believe them to be important to the understanding of our business:
  Raw Material Prices
  During the period for the years ended 2008, 2009 and 2010, the total cost of raw materials made up approximately 78.6%, 73.3% and 77.2% of our cost of goods sold, respectively. The primary raw materials used in our production of BOPET film are polyethylene terephthalate (or PET) resin and additives, which made up approximately 74.3% and 25.7%, respectively, of our total cost of raw materials in 2010. PET resin trades as a commodity and its market price is influenced significantly by global energy prices, including the price of crude oil. In addition, PET resin is also largely used in the textile industry and accordingly the demand from that industry will also affect the price of PET resin.
  Although we try to pass on all increases in our raw material costs to our customers, and have generally been able to pass certain partial increases in recent years on to them, we are occasionally constrained partially in this regard by industry practice and preexisting obligations. We obtain a significant amount of the PET resin used at our facilities from one supplier, who has agreed to supply us fixed quantities of PET resin monthly at the prevailing market price. We have not engaged in any hedging transactions to limit our exposure to fluctuations in the market prices of these raw materials or their components.
  35
  Prices of Our Products
  Our BOPET film products generally fall into two categories: commodity products and specialty products. The price of commodity products, such as our printing films, stamping films and metallization films, is typically driven by supply and demand conditions in the market. We have more control over setting the prices for our specialty products, such as our high-gloss films and heat sealable film.
  As selling prices are generally higher for those types of BOPET film products which require higher technical expertise, our revenue will be affected, to certain extent, by our product mix. Our product mix is dependent on, among other things, our production facilities, R&D abilities and new products commercialization. Presently, our Brückner production line is capable of producing single-layer BOPET film while our DMT production line is capable of producing both single-layer and three-layer BOPET films.
  Demand for Our Products
  We have been able to expand our product range and markets by introducing new products required by customers. We believe that our technical expertise is important in introducing products that are in demand.
  Our BOPET film products are mostly sold to customers in the flexible packaging industry for consumer products such as processed foods, pharmaceutical products, cosmetics, tobacco, alcohol and beverage. Recently, the sales of the light-resistant dry film which is used in printed circuit board also significantly increased. In the fiscal years ended December 31, 2008, 2009 and 2010, approximately 86.9%, 88.9% and 79.3%, respectively, of our total revenue was derived from the PRC. The demand for our products is therefore, to a large extent, affected by the general economic conditions in the PRC. A significant improvement in the economic environment in the PRC will likely improve consumer spending, increase the demand for our customers’ products and consequently increase the demand for our BOPET film. However, the economic downturn of the PRC market will impact our customers’ demand and will decrease the demand for our products.
  Production Capacity and Utilization Rates
  Our sales volume is limited by our operational annual production capacity.
  As we grow our business in the future, our ability to fulfill more and larger orders will be dependent on our ability to increase our production capacity. As our business is capital-intensive, our ability to expand our production capacity will depend on, inter alia, the availability of capital to meet our needs of expansion or upgrading of production lines.
  Competition
  We believe that we are currently one of the few producers of BOPET film in the PRC with research and development capability. Our past financial performance is attributable to our market position in the industry. Over time, there may be new investors into our industry, and the current BOPET film manufacturers may expand their production capacity. We believe that currently our major competitors in the BOPET manufacturing market in the PRC include Dupont Hongji Films Foshan Co., Ltd., Yihua Toray Polyester Film Co., Ltd., and Ningbo Shunsu Film Co., Ltd.
  Our ability to enhance existing products, introduce new products to meet customers’ demand, deliver quality products to our customers and maintain our established industry reputation will affect our competitiveness and our market position.
  Our ability to compete against new and existing competitors to maintain or improve our market position and secure orders will affect our revenue and financial performance.
  36
  Description of Certain Statements of Income Line Items
  Revenues
  Revenue from the sale of our domestic BOPET film products is recognized when significant risks and rewards of ownership have been transferred to the buyer. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods, or when the amount of revenue and costs incurred or to be incurred in respect of the transaction cannot be measured reliably. In respect of our overseas sales, we ship directly to the destinations of our overseas customers and our revenue is recognized at the time when we receive customs clearance of our exports. Most of our overseas sales are conducted on a Cost, Insurance and Freight (or “CIF”) basis, meaning that we pay the costs and freight necessary to get the products to the port of destination, and the risk of loss is transferred from us to the buyer when the goods pass the ship’s rail at the port of destination. In addition, we have to procure marine insurance against the buyer’s risk of loss of damage to the goods during the carriage. Most of our sales invoices are denominated in the Renminbi Yuan, although certain of our overseas sales are denominated in US dollars.
  Cost of Goods Sold
  Our cost of goods sold comprises mainly of materials costs, factory overheads, packaging materials and direct labor. The breakdown of our cost of goods sold in percentage is as follows:
 
 Year Ended

December 31, 2008


Year Ended

December 31, 2009


Year Ended

December 31, 2010Materials costs


78.6
%


73.3
%


77.2
%Energy expense


8.2
%


9.0
%


7.4
%Factory overhead


9.0
%


13.1
%


11.3
%Packaging materials


2.9
%


3.0
%


2.8
%Direct labor


1.3
%


1.6
%


1.3
%
  Material Costs
  As noted above, the raw materials used in our BOPET film production are PET resin and additives, which made up approximately 74.3% and 25.7%, respectively of our total materials costs in 2010.
  Energy expense
  Energy expense includes water, electricity and gas costs, in which electricity is the main energy consumed.
  Factory Overhead
  Factory overhead comprises primarily of depreciation, electricity and water charges, and repair and maintenance of our machinery and equipment, etc. In 2010, the repair and maintenance of our machinery and equipment were RMB 12.2 million, accounting for 26.5% of Cost of Goods Sold, including overhaul repairs of the two production lines equipments in 2010 and maintenance fees of the trial production lines.
  Packaging Materials
  Our packaging materials comprise of, among other things, packaging pallets and carton boxes, used for the packaging of our BOPET film products for delivery to customers. Generally, our unit cost of packaging materials does not fluctuate significantly and our total costs for packaging materials typically vary in line with our sales volume.
  Direct Labor
  Direct labor cost includes salaries, wages, bonuses and other payments to our employees in the PRC who are involved in the production of our products. The main factors affecting our direct labor cost are the demands and supply of skilled labor and the implementation or changes of any new government policies or laws relating to employment such as defined contribution plans stipulated by the PRC municipal government.
  37
  Operating Expenses
  Our operating expenses comprise of administrative expenses, distribution expenses and other operating expense.
  Our administrative expenses comprise mainly of allowance for doubtful trade receivables, administrative staff salaries and related welfare costs, entertainment expenses, depreciation charges of office equipment, furniture and fixtures, amortization charges relating to our trademark and land use rights, professional fees, government duties and fees, insurance expenses, rental expenses, travel expenses, office expenses, research and development expenses, and other miscellaneous expenses.
  Our distribution expenses comprise mainly of freight costs, travel expenses, selling and promotion expenses as well as salaries, allowances and welfare benefits paid to our sales and marketing personnel.
  Other operating expenses comprise mainly of loss on disposal of property, plant and equipment and other miscellaneous expenses.
  Finance Costs
  Finance costs comprise mainly of interest expense relating to our loans, exchange deficit and bank charge.
  Income Tax Expense
  For the period from January 28, 2003 to December 31, 2004, Shandong Fuwei was granted certain tax relief under which it was exempted from PRC income tax. As of January 2005, Shandong Fuwei has been a wholly foreign-owned enterprise under the laws of the PRC. Accordingly, Shandong Fuwei is entitled to tax concessions whereby the profit for the first two financial years beginning with the first profit-making year (after setting off tax losses carried forward from prior years) is exempt from income tax in the PRC and the profit for each of the subsequent three financial years is taxed at 50% of the prevailing tax rates set by the relevant tax authorities.
  On March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax Law of the People’s Republic of China, which law took effect on January 1, 2008 (the “New Tax Law”). Under the New Tax Law, domestic enterprises and foreign-invested enterprises will generally become subject to a unified enterprise income tax rate of 25%, except that enterprises incorporated prior to March 16, 2007 may continue to enjoy existing preferential tax treatments until January 1, 2013. In addition, certain qualifying “High Technology Enterprises” may still benefit from a preferential tax rate of 15% under the New Tax Law if they meet the definition of “Government Developing High Technology Enterprise” to be set forth in the more detailed implementing rules when they become adopted. Shandong Fuwei was designated as a High-and-New Tech Enterprise in December 2008 and enjoyed the favorable income tax rate of 15% pursuant to the New Tax Law in 2008, 2009 and 2010.
  The US entity, Fuwei Films USA, LLC, is headquartered in South Carolina. As of December 31, 2010, the income tax rate is 39%, including 34% of federal income tax rate and 5% of state income tax rate.
  Inflation
  According to the National Bureau of Statistics of China, the change in the consumer price index in China was 4.8%, 1.9% and 3.3% in 2008, 2009 and 2010, respectively.
  38
  Critical Accounting Policies
  The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates. We prepare our financial statements in accordance with the U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities, to disclose contingent assets and liabilities on the date of the financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. We continue to evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application assists management in making their business decisions.
  Goodwill ImpairmentGoodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired.  Goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist.  Impairment testing is performed at a reporting unit level.  An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis.  A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce.  Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.
  Collectibility of Accounts Receivable Our management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. Generally, we offer our customers in the PRC credit terms of up to 30-45 days. Our international sales are settled through telegraphic transfer and letters of credit, which generally have payment terms of between 30 and 60 days.
  We adopt a risk assessment model to our customer credit management system, and we offer different credit terms to our customers based on criteria such as working relationship, payment history, creditworthiness and their financial position. All credit terms are to be approved by our finance department, in consultation with our sales and marketing department. For extension of larger credit limits, approvals have to be sought from our credit committee which is made up of members from our finance department, sales department and CFO. Our finance department and sales department review our outstanding debt account on a monthly basis and follow up with customers when payments are due. We do not impose interest charges on overdue account receivable.
  As of December 31, 2010, our largest trade debtor was Yangzhou Haikesaier Co., Ltd., a company based in China. The trade receivables from Yangzhou Haikesaier Co., Ltd. amounted to approximately RMB1.2 million as of December 31 2010.
  We make specific allowance for doubtful trade receivables when our management takes the view (taking into account the aging of trade receivables and in consultation with our sales department) that we will not be able to collect the amounts due. Our customers pay by installments, creating long accounts receivable cycles. We provide for an allowance for doubtful accounts based on our best estimate of the amount of losses that could result from the inability or intention of our existing customers not to make the required payments. We generally review the allowance by taking into account factors such as historical experience, age of the accounts receivable balances and economic conditions.
  Specific write-off of trade receivables is made when the outstanding trade receivables have been due for more than two years.
  The analysis of the allowance for doubtful amounts for 2008, 2009 and 2010 is as follows (in thousands):
  2008


2009


2010RMB


RMB


RMB


US$Balance at beginning of year


2,644



4,074



2,259



342Bad debt (recovery) / expense


1,430



(1,713
)


(119
)


(18
)Write-offs


-



(102
)


-



-Balance at end of year


4,074



2,259



2,140



324
  39
  Impairment of Long-lived AssetsWe assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. We measure the recoverability of assets that will continue to be used in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows. If an asset grouping’s carrying value is not recoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is measured by comparing the difference between the asset grouping’s carrying value and its fair value. We estimate the fair value of an asset group based on market prices (i.e., the amount for which the asset could be bought by or sold to a third party), when available. When market prices are not available, we estimate the fair value of the asset group using the income approach and/or the market approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, approved business plans, expected growth rates and cost of capital, among others. We also make certain assumptions about the level of demand for our products in the marketplace, our cost levels, future economic conditions, interest rates, and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.
 
 Impairments of long-lived assets are determined for groups of assets related to the lowest level of identifiable independent cash flows. Our operating subsidiary, Shandong Fuwei, currently operates three production lines. Since our products are capable of being produced, and are produced, on multiple lines, each production line cannot produce cash flow separately resulting from the combined administrative expense, R&D, market and sales, etc. Therefore, the Company considers whole assets as an asset group. The estimated undiscounted net cash flow was higher than the net carrying amount of asset as of December 31, 2008, 2009 and 2010, hence there was no impairment of long-lived assets recognized for the year ended December 31, 2008, 2009 and 2010.
  Results of Operations
  The following discussion of our results of operations is based upon our audited consolidated financial statements beginning on page F-1 of this Annual Report.
  The table below sets forth certain line items from our Statement of Income as a percentage of revenues:
  YearEnded

December31,

2008


YearEnded

December31,

2009


YearEnded

December31,

2010(% of Total Revenue)Gross profit


15.7



7.7



26.0Operating expenses


(10.2
)


(12.8
)


(14.1
)Other expense


(0.8
)


(2.0
)


(1.8
)Income tax benefit / (loss)


(0.7
)


1.3



(2.2
)Net income / (loss)


4.1



(5.9
)


8.1
  Fiscal year ended 2010 compared to fiscal year ended 2009
  Revenues
  Our revenue can be analyzed as follows (in thousands):
  December 31, 2010





December 31, 2009RMB


US$


% of Total


RMB


% of TotalPrinting film


76,720



11,604



15.3
%


35,231



11.0
%Stamping film


282,033



42,656



56.2
%


174,356



54.4
%Metallization film


28,108



4,251



5.6
%


35,138



10.9
%Specialty film


87,956



13,303



17.5
%


34,004



10.6
%Base film for other applications


26,641



4,029



5.4
%


42,002



13.1
%Total


501,458



75,843



100
%


320,731



100.0
%
  40
  During the fiscal year ended December 31, 2010, our revenues were RMB 501.5 million, which was an increase of RMB 180.7 million or 56.3%, as compared to the same period for 2009. The significant increase in sales was mainly due to the significant increase of average unit sales price.
  In 2010, sales of specialty films were RMB 88.0 million and 17.5% of our total revenues as compared to RMB 34.0 million and 10.6% in 2009, which was an increase of RMB 54.0 million, or 158.7%, as compared to the same period in 2009. The increase was mainly attributable to the increased demand for high value-added packaging. Furthermore, the increase of the sales of some specialty films, such as dry films also attributed to the sales increase.
  Overseas sales were RMB 103.7 million or US$15.7 million, or 20.7% of total revenues, compared with RMB35.6 million or 11.1% of total revenues in 2009. The increase of the overseas sales mainly attributes to the increase of the overseas market and the sales price of BOPET products.
  The following is a breakdown of domestic versus overseas sales for the periods ended December 31, 2010 and 2009 (amounts in thousands):
  December 31, 2010





December 31, 2009RMB


US$


% of Total


RMB


% of TotalSales in China


397,781



60,162



79.3
%


285,120



88.9
%Sales in other countries


103,677



15,681



20.7
%


35,611



11.1
%Total


501,458



75,843



100.0
%


320,731



100.0
%
  Cost of Goods Sold
  Our cost of goods sold was RMB 370.9 million for the year ended December 31, 2010, which was an increase of RMB 74.8 million, or 25.3%, as compared to the same period for 2009. The increase resulted from the increased unit material price compared to the same period in 2009.
  Gross Profit
  Our gross profit during the year ended December 31, 2010 was RMB 130.6 million representing a gross margin of 26.0%, increasing RMB 106.0 million or 430.4%, compared to RMB 24.6 million or 7.7% for the year ended December 31, 2009. The increase in gross margin was mainly due to the increase of sales price being more than the increase of cost of sales.
  Operating Expenses
  Our operating expenses during the year ended December 31, 2010 was RMB 70.9 million, which was an increase of RMB 29.8 million, or 72.3%, as compared to the same period for 2009. This increase was mainly due to the increase of R&D expenses, accrued class action indemnity and related legal fees, and overseas sales expenses.
  Other Expense
  Our other expenses during the year ended December 31, 2010 was RMB 8.9 million, which was an increase of RMB 2.4 million, or 37.0%, as compared to the same period for 2009. The increase was mainly due to bank loan interest increase of RMB 2.3 million.
  41
  Income Tax Benefit/(Expense)
  The effective tax rate was 21.8% and 17.7% in 2010 and 2009, respectively. The higher effective tax rate in 2010 was primarily due to higher proft in 2010 and the carryforward net loss for the period ended 2009.
  Fiscal year ended 2009 compared to fiscal year ended 2008
  Revenues
  Our revenue can be analyzed as follows (in thousands):
  December 31, 2009





December 31, 2008RMB


US$


% of Total


RMB


% of TotalPrinting film


35,231



5,161



11.0
%


56,611



12.7
%Stamping film


174,356



25,539



54.4
%


139,598



31.2
%Metallization film


35,138



5,147



10.9
%


45,152



10.1
%Specialty film


34,004



4,981



10.6
%


98,536



22.0
%Base film for other applications


42,001



6,152



13.1
%


107,409



24.0
%Total


320,731



46,980



100.0
%


447,307



100
%
  During the fiscal year ended December 31, 2009, our revenues were RMB 320.7 million, which was a decrease of RMB 126.5 million or 28.3%, as compared to the same period for 2008. The decrease in sales is mainly because the decrease of average unit sales price and the closing of leased production line, which caused the revenue to decrease RMB 74.8 million and RMB 51.7 million respectively compared to the same period in 2008.
  In 2009, sales of specialty films were RMB 34.0 million and 10.6% of our total revenues as compared to RMB 107.4 million and 24.0% in 2008, which is a decrease of RMB 73.4 million, or 68.3%, as compared to the same period in 2008. The decrease was attributable to the decreased demand for high value-added packaging caused by financial crisis which further caused the decreased demand for specialty films. Furthermore, we adjusted the composition of products portfolio, reducing sales of some specialty films, such as matte films. In 2009, the sales of specialty films such as dry films increased.
  Cost of Goods Sold
  Our cost of goods sold was RMB 296.1 million for the year ended December 31, 2009, which was a decrease of RMB 80.8 million, or 21.4%, as compared to the same period for 2008. The decrease resulted from the decreased unit material price and the closing of the leased production line, which caused the total cost of goods sold to decrease RMB 35.1 million and RMB 45.7 million respectively compared to the same period in 2008.
  Gross Profit
  Our gross profit during the year ended December 31, 2009 was RMB 24.6 million representing a gross margin of 7.7%, compared to RMB 70.3 million or 15.7% for the year ended December 31, 2008. The decrease in gross margin was mainly due to the decline in sales quantity of specialty films which further led to a sharp decline in average unit sale prices.
  Operating Expenses
  Our operating expenses during the year ended December 31, 2009 was RMB 41.2 million, which was a decrease of RMB 4.6 million, or 10.0%, as compared to the same period for 2008. The decrease was mainly due to decline of the maintainance expenses as a public company.
  42
  Other Expense
  Our other expenses during the year ended December 31, 2009 was RMB 6.5 million, which was an increase of RMB 3.0 million, or 86.1%, as compared to the same period for 2008. The increase was mainly due to the decrease of capitalized expenditure of interest by RMB 6.0 million.
  Income Tax Benefit/(Expense)
  The effective tax rate was 17.7% and 14.0% in 2009 and 2008 respectively. The higher effective tax rate in 2009 was primarily due to the net loss for the period ended 2009, hence, no income tax was incurred only deferred tax benefit.
  Liquidity and Capital Resources
  Since inception, our sources of cash were mainly from cash generated from our operations and borrowings from financial institutions and capital contributed by our shareholders.
  Our capital expenditures in 2010 have been primarily financed through short-term borrowings from financial institutions. The interest rates of short-term borrowings from financial institutions during the three-year period from 2008 to 2010 ranged from 0% to 6.73%, and these borrowings may not be prepaid prior to maturity.
  Since our inception, we have utilized significant amounts of secured short-term financing to fund our acquisition of the Brückner and DMT production lines and our working capital needs. On December 31, 2010, we had borrowings of RMB 172.0 million including four different loan agreements with four financial institutions in the PRC. In June 2010, we signed an extension for our RMB137.0 million loan agreement, which will expire in June 2011.
  Each of the related loan agreements contains provisions regarding collateral, covenants prohibiting us from engaging in certain activities (including selling, mortgaging or otherwise disposing of or encumbering all or substantially all of our assets or before any merger, acquisition, spin-off, or other transaction resulting in a change in our corporate structure) without the lenders consent and acceleration (and setoff) provisions in the event of default in payment or failure to comply with such covenants.
  We obtained two new short-term loans on June 7, 2010 and June 8, 2010, for RMB70 million maturing on June 6, 2011, and for RMB67 million maturing on June 7, 2011, respectively. The annual interest rate is up by 10% compared with the fixed benchmark interest rate 5.56% announced by the People’s Bank of China. As of December 31, 2010, the effect interest rate is 6.116%.
  We entered into three interest-free Loan Contracts with the Bank of Weifang (formerly known as Weifang City Commercial Bank) for the amount of (i) RMB10 million, effective January 13, 2010, with a maturity date of January 12, 2012; (ii) RMB10 million, effective January 16, 2009, with a maturity date of January 12, 2012; and (iii) RMB5 million, effective December 2, 2008, with a maturity date of December 2, 2011.
  On June 4, 2009, Shandong Fuwei entered into a one-year foreign currency loan agreement with Bank of China Weifang Branch for US$ 477,000 which was secured by a deposit of RMB 3.3 million with an interest rate of 1.38375%, 0.2% down float by trading day’s LIBOR interest, in order to reduce the currency translation cost of Shandong Fuwei. Proceed of the loan of US$ 477,000 was paid off on June 4, 2010.
  On November 20, 2009, we signed a long-term loan contract of RMB10 million with Weifang Dongfang State-owned Assets Management Co., Ltd., for a term of eight years effective as of October 19, 2009 and will expire on October 18, 2017. From 2015 to 2016, we will make principal installment payments of RMB3.4 million per year with the remaining principal balance of RMB3.3 million paid in 2017. The annual interest rate is 5.52% which is down by 10% compared to the fixed benchmark of 5-year interest rate announced by the People’s Bank of China. The loan is guaranteed by Shandong Deqin Investment & Guarantee Co., Ltd. and is used for our key projects.
  43
  We believe that, after taking into consideration our present banking facilities, existing cash and the expected cash flows to be generated from our operations, we have adequate sources of liquidity to meet our short-term obligations and our working capital.
  A summary of our cash flows for 2008, 2009 and 2010 is as follows:
 Year Ended December

31, 2008


Year Ended

December 31, 2009


Year Ended December

31, 2010(RMB in thousands)Net cash generated from operating activities


80,027



7,988



98,574Net cash generated/(used in) investing activities


(76,750
)


(5,657
)


52,012Net cash generated/(used in) from financing activities


(18,262
)


8,415



(6,179
)Effect of foreign exchange rate change


(104
)


236



16Net increase/(decrease) in cash and cash equivalents


(15,086
)


10,981



144,423Cash as at the beginning of the year


30,909



15,823



26,804Cash as at the end of the year


15,823



26,804



171,227
  Operating Activities
  Net cash provided from operating activities was RMB 98.6 million for the year ended December 31, 2010 as compared to RMB 8.0 million for the year ended December 31, 2009. The increase was mainly due to the increase of net income and increased advance from our customers.
  Net cash provided from operating activities was RMB 8.0 million for the year ended December 31, 2009 as compared to RMB 80.0 million for the year ended December 31, 2008. The decrease was mainly due to the decline of net income and increased inventories.
  Net cash provided from operating activities was RMB 80.0 million for the year ended December 31, 2008 as compared to RMB 82.9 million for the year ended December 31, 2007. The decrease was mainly due to the decline of net income which resulted from the financial crisis in the fourth quarter that caused the inventory cost to be higher than the sales price.
  Investing Activities
  Net cash provided from investing activities was RMB 52.0 million in 2010 due to the retrieval of the advance of the equipment.
  Net cash used in investing activities was RMB 5.7 million in 2009 which is mainly used in equipment purchase and payment for constructions.
  Net cash used in investing activities was RMB 76.8 million in 2008 which is mainly used in rebuilding the equipment of the second production line, expenditures related to the third production line and the equipment for trial production line.
  Financing Activities
  Net cash used in financing activities was RMB 6.2 million for the year ended December 31, 2010, which was mainly due to repayment of the bank loans.
  Net cash generated from financing activities was RMB 8.4 million for the year ended December 31, 2009, which was mainly from bank loans.
  44
  Net cash used in financing activities was RMB 18.3 million for the year ended December 31, 2008, which was mainly used to repay short-term loans to banks and pay the interest.
  Foreign Exchange Exposure
  Translations
  Our reporting currency is RMB. The functional currency of our operating subsidiary in the PRC is RMB and our operating subsidiary also maintains its books and records in RMB. Accordingly, we are not exposed to any material foreign currency translation effects.
  Transactions
  We are, to a certain extent, exposed to transaction foreign currency exposure arising from our operations in the PRC.
  We began conducting part of our sales in foreign currency in 2004 with the commencement of our overseas sales business. During 2008, 2009 and 2010, approximately 86.9%, 88.9% and 79.3%, respectively, of our revenue was denominated in RMB and the remainder was in US dollars. The proportion of raw materials we procured within the PRC during 2008, 2009 and 2010 were 93.4%, 95.6% and 85.1%, respectively. The remainder was purchased in US dollars.
  Our foreign currency exchange risk arises mainly from this mismatch between the currency of our sales, purchases and operating expenses. We may, therefore, be susceptible to foreign exchange exposure.
  In addition, we also maintain US dollar accounts with financial institutions for our US dollar receipts and US dollar payments. We may also incur foreign exchange gains or losses when we convert the US dollar balances into RMB.
  Currently, we do not have a formal foreign currency hedging policy as our foreign exchange gains and losses in 2008, 2009 and 2010 were insignificant. Our management believes that it is more efficient for us to assess the hedging need of each transaction on a case-by-case basis. We will continue to monitor our foreign exchange exposure in the future and will consider hedging any material foreign exchange exposure should such need arise.
  Capital Expenditures and Contractual Commitments
  Capital Expenditures
  Our capital expenditures in 2008, 2009 and 2010 were as follows:
 Year Ended December

31, 2008


Year Ended December

31, 2009


Year Ended December

31, 2010(RMB in thousands)Buildings


-



-



-Plant and equipment


50,553



7,924-



7,447Motor vehicles


466



-Assets under construction


4,645



1,462



1,257Others (computer and furniture fittings)


4,134



-



1,241Total


59,798



9,386



9,945
  The following table summarizes our contractual commitments as of December 31, 2010 and the effect those commitments are expected to have on our liquidity and cash flow in future periods:
  Payments Due by PeriodContractual Commitments

Total


Less than 1

Total Year


1-3 Years


3-5 Years


More than 5

Years(RMB in thousands)Equipment Purchase Contract(i)


134,830



88,920



45,910



-



-Bank loans(ii)Principal


172,000



142,000



20,000



-



10000Interest(iii)


8,846



8,846



-



-



-Operating leases(iv)


401



401



-



-



-Total


316,077



240,167



65,910



-



10,000
  45
  (i)
The purchase of equipment has been financed by the sale of our ordinary shares and in the future would be financed by bank borrowings and internally generated funds from operations.
  (ii)
We had short-term of RMB 142.0 million on December 31, 2010 that are due at various times in 2011. We also have long-term loans for RMB 30.0 million. We renegotiated substantially all of our outstanding indebtedness resulting in approximately RMB 162.0 million of secured indebtedness of the total outstanding. Our obligations under our existing loans have been mainly met through the cash flow from our operations and our financing activities. In the past, cash flow from operations has been sufficient to meet payment obligations and/or we have been able to extend our borrowings. In the event that our cash flows are insufficient to satisfy these obligations, we may consider additional bank loans, issuing bonds, or other forms of financing to satisfy our capital requirements.
  (iii)
The interest expenses are estimated based on the interest rate of borrowings adopted by People Bank of China on December 31, 2010 plus an estimated risk premium on borrowing.
  (iv)
The operating leases mainly relate to our rental of warehouse. The term of these leases typically ranges from 1 year, and are renewable, subject to renegotiation of terms, upon expiration. We intend to finance these operating leases from our cash flows from operations.
  Off-Balance Sheet Arrangements and Contingent Liabilities
  We do not have any off-balance sheet guarantees, any outstanding derivative financial instruments, interest rate swap transactions or foreign currency forward contracts.
  Inflation
  According to the National Bureau of Statistics of China, the change in the consumer price index in China was 4.8%, 1.9% and 3.3% in 2008, 2009 and 2010, respectively.
  Recent Accounting Pronouncements
  Business Combinations:   In December 2010, the FASB issued amended guidance related to Business Combinations. The amendments affect any public entity that enters into business combinations that are material on an individual or aggregate basis. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company will assess the impact of these amendments on its consolidated financial statements if and when an acquisition occurs.
  Intangibles-Goodwill and Other:    In December 2010, the FASB issued amended guidance related to Intangibles-Goodwill and Other. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
  46
  Subsequent Events:    The FASB has issued amended guidance for subsequent events. The amendment removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC's literature. All of the amendments were effective upon issuance (February 24, 2010). The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
  Fair Value Measurements:    In January 2010, the FASB issued amended guidance for Fair Value Measurements and Disclosures. This update requires some new disclosures and clarifies existing disclosure requirements about fair value measurement. The FASB's objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, this update requires that a reporting entity disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, this update clarifies the requirements of existing disclosures. For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This update was adopted on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
  Receivables:  In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU No. 2010-20 amends the guidance with ASC Topic 310, “Receivables” to facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses; and (3) the changes and reasons for those changes in the allowance for credit losses. The amendments in ASU No. 2010-20 also require an entity to provide additional disclosures such as a rollforward schedule of the allowance for credit losses on a portfolio segment basis, credit quality indicators of financing receivables and the aging of past due financing receivables. The Company is required to adopt ASU No. 2010-20 as of December 15, 2010 and is currently evaluating the impact the new disclosure requirements will have on its financials statements and notes.
  Research and Development, Patents and Licenses
  We rely on copyright, patent, trademark and other intellectual property law, nondisclosure agreement and technical know-how to protect our intellectual property and proprietary rights. We enter into confidentiality and licensing agreements with the relevant employees. Our senior employees and employees who work in our research and development department and other technical departments have signed agreements acknowledging that we own the rights to all technology, inventions, trade secrets, works of authorship, developments and other processes generated in connection with their employment with us or their use of our resources or relating to our business or our property and that they must assign any ownership rights that they may claim in those works to us. As most of our business is currently conducted in mainland China, we have not taken any action outside mainland China to protect our intellectual property.
  As of the date of this Annual Report, we have received 9 patents from, and have 12 patent applications pending with, the Patent Office of the National Intellectual Property Office of China with respect to our BOPET film technology. Two of these applications are not being used in our production process as they require expensive imported raw materials and, furthermore, they have been replaced by the films used in LCD and electronic products in the market.
  47
  We currently sell our products in the PRC under our brand “Fuwei Films.” We have a pending application for the registration of the trademark “Fuwei Films” with the Trademark Bureau of the State Administration of Industry and Commerce in the PRC. Our ability to compete in our markets and to achieve future revenue growth will depend, in significant part, on our ability to protect our proprietary technology and operate without infringing upon the intellectual property rights of others. An infringement upon these rights may reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. We are not aware of any infringement or unauthorized use of our intellectual property rights. We will take appropriate legal actions to protect our rights if there is any unauthorized use or infringement of our rights in the future. To date, we have not been sued for infringement of intellectual property rights by any third party.
  Trend Information
  The Company has been aware of some new production lines contract signed by the existing suppliers and new entrants of the BOPET industry in 2010. We expect the China’s BOPET production capacity to increase significantly in the next two to three years. Since the increase of production capacity is far above the increase of market demand, the supply will be over the demand in the BOPET industry. There will be fierce competition in the BOPET industry.
  Other than as disclosed elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net sales, profitability, liquidity or capital resources, or that caused the disclosed financial information to not necessarily be indicative of future operating results or financial conditions.
  Item 6. Directors, Senior Management and Employees
  A. Directors and senior management.
  Our directors and executive officers and their present positions with us, as of December 31, 2010, are as follows:
  Directors and Executive Officers
  Name

Age

PositionXiaoan He

49

Chairman and Chief Executive OfficerXiuyong Zhang

41

Chief Financial Officer and DirectorTee Chuang Khoo (1)(2)

65

Independent DirectorChangrong Ji (1)(2)(3)

65

Independent DirectorShan Jiang (1)

64

Independent DirectorZhibing Qian(4)

46

Senior Vice President and SecretaryXiaoming Wang

51

Vice President (Production) of Shandong FuweiHanyong Lee (5)

55

Vice President (Research & Development) of Shandong Fuwei
 
 (1)
Member of the Audit Committee.
 (2)
Member of the Compensation Committee.
 (3)
Member of the Corporate Governance and Nominating Committee.
 (4)
On March 24, 2011, Mr. Qian submitted his resignation from his position as the Senior Vice President and Secretary of the Company, effective April 2, 2011.
 (5)
Mr. Lee resigned from his position as the Vice President (Research & Development) of Shandong Fuwei in November 2010.
  48
  Information about Directors and Officers
  Set forth below is certain information with respect to each director and officer as of December 31, 2010:
  Xiaoan Hehas been the Chairman of the Board of Directors and Chief Executive Officer of our Company since 2005 and is responsible for the formulation and implementation of our business strategies and management of our business operations. Mr. He has more than ten years of management experience in the plastics and packaging industries in the PRC. From June 2004 to January 2005, Mr. He was our General Manager responsible for our daily operation and management. Prior to joining us as the General Manager in June 2004, Mr. He was the general manager of Suzhou Broadway Plastic Packaging Co., Ltd from 1996 to 2003. From 1990 to 1996, he was the vice general manager at Suzhou Xiangxuehai Freezer Co., Ltd and from 1983 to 1990, he was the vice general manager at Suzhou Marine Machinery Co., Ltd. Mr. He obtained his EMBA from the China Europe International Business School in 2003 and Bachelor in Engineering from the Shanghai Jiaotong University in 1983.
  Xiuyong Zhang has been a director of our Company since November 2007. He began serving as our Chief Financial Officer on April 11, 2008. He had accumulated more than 10 years of experience in investment, accounting and financial fields. He is responsible for the day-to-day management of our investment, financing, accounting and auditing matters in the Company and financing, financial and taxation matters for its subsidiary. Prior to joining us as a director of the Company, Mr. Zhang has also been the director of Shandong Fuwei since July 2004, and the Vice President since January 2005. Mr. Zhang was the vice-head of an audit firm, Shandong Zhengyuan Hexin Auditors, Weifang branch from 1999 to 2004. From 1991 to 1999, he was an accounting supervisor at the main office of the Weifang City Local Products Company. Mr. Zhang was jointly certified as a Public Valuer by the Ministry of Personnel and Ministry of Finance in the PRC in 2004. He was certified as the Chinese Certified Public Accountant by the Ministry of Finance of the PRC in 1997. He received the Professional Certification in Law from China University of Political Science and Law and China Central Radio and TV University in 2005. He received the Certification of Financial Accounting from the Shandong Television University in 1996.
  Tee Chuang Khoo has been a director of our Company since November 2007. Mr. Khoo was a Senior Partner in Management Consulting at DENEC Management Consulting Co. Ltd. (“DENCE”) in Shanghai from October 2005 to October 2007. From November 2000 to September 2005, Mr. Khoo was a Senior Partner at Improve Management Consulting Services in Malaysia where he was responsible for reducing manufacturing costs and process improvement. Mr. Khoo was an Executive Director at JPK (M) Sdn Bhd, a Malaysian-listed company, from October 1998 to September 2000, where he assisted the Managing Director with the entire operation of the company. From November 1996 to August 1998, he was the General Manager of Broadway Group’s (a Singapore-listed company) product factories in Johor Baru, Malaysia, and in China. He also held managerial positions at the Malaysian conglomerate, The Lion Group, and he was a Human Resources Manager at Metal Box Singapore Ltd, a Singapore-listed company owned by the British Metal Box Group. Mr. Khoo received a Bachelor of Arts in Finance & Management from the University of Oregon (USA), a Masters in Business Administration (MBA) from University of Southern California (USA) and a diploma in Accounting from the Association of International Accountants from the United Kingdom.
  Changrong Ji has been a director of our Company since March 2007. Mr. Ji is currently the Investigation Officer of the People’s Bank of China, Weifang city central branch and has been since 2004. Mr. Ji was the president of People’s Bank of China, Weifang City central branch from 2001 to 2004 and was the president of People’s Bank of China, Weihai City central branch from 1999 to 2001. From 1989 to 1997, Mr. Ji was the vice-president of People’s Bank of China, Weifang city central branch. He joined the State Administration of Foreign Exchange, Weifang branch as its deputy director from 1989 to 1997 and was appointed as the director of the State Administration of Foreign Exchange, Weihai branch from 1999 to 2001. Mr. Ji was the director of the State Administration of Foreign Exchange, Weifang branch from 2001 to 2004. Mr. Ji obtained his Master’s degree in Economics in 1999 from Shanghai Fudan University and his bachelor’s degree in international economics in 1993 from East China Normal University.
  Shan Jiang has been a director of our Company since August 2010. He is a Partner of C&I Partners Legal Firm in Beijing since 1995. Prior to that, he worked in Legal Affairs Center of China from 1986 to 1995; and he worked in maritime court office in Ministry of Communications from 1982 to 1986. Mr. Shan Jiang graduated from Renmin University of China majored in Economic Law in 1985.
  49
  Zhibing Qian has been the Senior Vice President of the Company since April 2007. From 2003 to March 2007, he was the general manager of Beijing Capital Jindian Technology Limited. From 2000 to 2003, Mr. Qian was appointed as the general manger of Beijing Zhongguancun International Incubator Limited, comprehensively responsible for the company’s set up and operations. Mr. Qian also worked at senior management level at other state-owned and joint venture companies in China. Mr. Qian received his Doctor’s and Master’s degrees from University of Idaho in 1995 and 1993, respectively.
  Xiaoming Wang has been Vice President (Production) of Shandong Fuwei since January 2005 and is responsible for the management of our production facilities. Prior to joining us, Mr. Wang was the vice manager of Weifang Engine Manufacturing Co. from 1986 to 1998 and the deputy general manager of Shandong Neo-Luck from 1998 to 2003. Mr. Wang was the deputy general manager of Shandong Fuwei during 2004. Mr. Wang was certified as a professional economist by the Shandong Province Human Resources Committee in 2001 and obtained a certificate in Economics Management awarded by the PRC Central Party Learning Institute and obtained a certificate in Business Enterprises Operational Management from the Shandong Television University in 1986.
  Hanyong Leehas been Vice President of Research and Development of Shandong Fuwei since January 8, 2008. He has more than 22 years of experience in the BOPET film industry, especially in the aspects of development and management. He worked for 18 years at SKC Co., Ltd., a world-famous BOPET supplier. From 2002 to 2007, Mr. Lee was Vice President of i-components and Polystar International in South Korea. From 1987 to 1997, he was mainly responsible for the management of the R&D team, including the development of the BOPET film technology, the refinement of the manufacturing process and the production in general at SKC in Korea. At SKC from 1998 to 2000, he worked in the American Branch of SKC where he was responsible for evaluating the technology, monitoring the production growth and managing a professional staff. In 1987 Mr. Lee received Master’s degree from the University of Connecticut.
  None of our directors or officers is related to each other.  To the best of our knowledge and belief, there are no arrangements or understandings with any of our principal shareholders, customers, suppliers, or any other person, pursuant to which any of our directors or executive officers were appointed.
  The business address of our directors and executive officers is No. 387 Dongming Road, Weifang Shandong, People’s Republic of China, Postal Code: 261061.
  Board Committees
  Our Board of Directors has established an Audit Committee, Compensation Committee and a Corporate Governance and Nominating Committee, and adopted charters for each of these committees. We have appointed independent directors to each of our committees.
  Nasdaq Rule 5605(b)(1) requires that the Board be comprised of a majority of Independent Directors as such term is defined in Rule 5605(a)(2). The Company provided Nasdaq with a notice on December 25, 2007 stating that as a “Controlled Company”, it is exempt from the requirements of Rule 5605(b)(1). Pursuant to Rule 5615(c)(1), a “Controlled Company” is a Company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company. Currently, as of the date of this Annual Report, Apex Glory Holding Limited holds 53% of our outstanding ordinary shares of the Company. As a result, Fuwei is considered to be a Controlled Company and relied upon the exemption from December 25, 2007
  Audit Committee
  Our Audit Committee currently consists of Tee Chuang Khoo, Changrong Ji and Jiang Shan. On August 4, 2010, the board of directors appointed Mr. Shan Jian to be a director and a member of the Audit Committee of the Company. The Audit Committee will oversee our accounting and financial reporting processes and the audits of our financial statements. The audit Committee is responsible for, among other things:
  ·
selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;
  ·
reviewing and approving all proposed related-party transactions;
  ·
discussing the annual audited financial statements with management and the independent auditors;
  50
  ·
annually reviewing and reassessing the adequacy of our audit committee charter;
  ·
meeting separately and periodically with management and the independent auditors;
  ·
reviewing such other matters that are specifically delegated to our audit committee by our board of directors from time to time; and
  ·
reporting regularly to the full board of directors.
  Compensation Committee
  Our Compensation Committee currently consists of Tee Chuang Khoo and Changrong Ji. The Compensation Committee is responsible for, among other things:
  ·
reviewing and determining the compensation package for our senior executives;
  ·
reviewing and making recommendations to our board with respect to the compensation of our directors;
  ·
reviewing and approving officer and director indemnification and insurance matters;
  ·
reviewing and approving any employee loan in an amount equal to or greater than RMB 100,000; and
  ·
reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
  Corporate Governance and Nominating Committee
  Mr. Changrong Ji is the sole member of our Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee is responsible for, among other things:
  ·
identifying and recommending to the board nominees for election or re-election to the board;
  ·
making appointments to fill any vacancy on our board;
  ·
reviewing annually with the board the current composition of the board in light of the characteristics of independence, age, skills, experience and availability of service to us;
  ·
identifying and recommending to the board any director to serve as a member of the board’s committees;
  ·
advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any corrective action to be taken; and
  ·
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.
  Duties of Directors
  Under Cayman Islands laws, our directors have a common law duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached. You should read “Description of Share Capital - Differences in Corporate Law” for a more complete discussion of these matters.
  51
  B. Compensation.
  Compensation of Directors and Executive Officers
  All directors receive reimbursements from us for expenses which are necessary and reasonably incurred by them for providing services to us or in the performance of their duties. Our directors who are also our employees receive compensation in the form of salaries, housing allowances, other allowances and benefits in kind in their capacity as our employees. Our directors do not receive any compensation in their capacity as directors in addition to their salaries and other remunerations as members of our management team. We pay their expenses related to attending board meetings and participating in board functions.
  The aggregate cash compensation and benefits that we paid to our directors and executive officers, a group of 8 persons for the year ended December 31, 2010 was approximately RMB 2.2 million. No executive officer is entitled to any severance benefits upon termination of his or her employment with the Company.
  Employment and Service Agreements
  Executive Officers
  We have entered into a service agreement dated as of April 27, 2005, with Mr. Xiaoan He for the position of Chief Executive Officer for a term of three years, effective December 25, 2006. On December 26, 2009, we extended the agreement with Mr. He for three years to December 25, 2012. Under this Service Agreement, Mr. He’s annual basic salary is RMB 500,000 and is eligible for a discretionary bonus.
  We have also entered into a service agreement with Mr. Xiuyong Zhang, our Chief Financial Officer. The first duration of his Service Agreement began from March 1, 2006 to March 1, 2009. Upon its expiration, we extended the term of his agreement for another three years to March 1 2012. Under the term of his initial Service Agreement, Mr. Zhang was entitled to an annual basic salary of RMB 300,000. As approved by the board of directors, Mr. Zhang’s annual salary was adjusted to RMB 350,000 effective as of January 1, 2011. Mr. Zhang can terminate his Service Agreement upon three months prior written notice or by paying the Company a sum equaling to three months salary in lieu of such notice. The Service Agreement may also be terminated by either party pursuant to the applicable provisions of the China Labor Law.
  We have also entered into service agreements with our other executive officers. The initial term of Mr. Xiaoming Wang’s Service Agreement was three years commencing from April 2, 2007. Upon expiration of his Service Agreement, it was renewed for two years to December 31, 2011. The initial term of Mr. Zhibing Qian’s Service Agreement was two years commencing from April 2, 2007. Upon expiration of his Service Agreement, it was renewed twice for one year in April 2009 and 2010. On March 24, 2011, Mr. Qian submitted his resignation from his position as the Senior Vice President and Secretary of the Company, effective April 2, 2011.We entered into a Service Agreement with Mr. Hanyong Lee for a term of three years commencing on January 8, 2008. Mr. Lee resigned from his position as the Vice President (Research & Development) of Shandong Fuwei in November 2010.
  We may only terminate the Service Agreement prior to the expiration of the initial period (except by mutual agreement and except as provided in the Service Agreement) upon the occurrence of certain events including, without limitation, for cause, disability or personal bankruptcy. The term of service of each of our executive officers will be renewed for successive periods of one year each after the expiration of the initial period. The Service Agreement may be terminated by not less than three months’ notice in writing served by either party to the Service Agreements. We have the option to pay the executive officer salary in lieu of any required period of notice of termination.
  Under the terms of their respective Service Agreements, Mr. Zhibing Qian and Mr. Xiaoming Wang are jointly entitled to an annual basic salary of RMB 600,000 effective January 1, 2011. Their annual salaries may be revised at the discretion of the Compensation Committee. We may pay them discretionary management bonuses for any financial year, the payment and the amount of which are subject to the approval of the Compensation Committee. Except for the payment in lieu of notice described above, there are no provisions for benefits for termination of employment of our executive officers under the Service Agreements. On March 24, 2011, Mr. Qian submitted his resignation from his position as the Senior Vice President and Secretary of the Company, effective April 2, 2011.
  52
  Share Option Plan
  We plan to adopt a share option plan that is a share incentive plan, the purpose of which is to recognize and acknowledge the contributions the eligible participants had or may have made to our company. The share option plan will provide the eligible participants an opportunity to have a personal stake in our company with the view to achieving the following objectives:
  ·   motivate the eligible participants to optimize their performance efficiency for the benefit of our company; and
  ·   attract and retain or otherwise maintain an on-going business relationship with the eligible participants whose contributions are or will be beneficial to our long-term growth.
  Indemnification
 Cayman Islands law does not limit the extent to which a Company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Pursuant to our memorandum and articles of association, our directors and officers, as well as any liquidator or trustee for the time being acting in relation to our affairs, will be indemnified and secured harmless out of our assets and profits from and against all actions, costs, charges, losses, damages and expenses that any of them or any of their heirs, executors or administrators may incur or sustain by reason of any act done, concurred in or omitted in or about the execution of their duties in their respective offices or trusts. Accordingly, none of these indemnified persons will be answerable for the acts, receipts, neglects or defaults of each other; neither will they be answerable for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to us may have been lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to us may be placed out or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts. This indemnity will not, however, extend to any fraud or dishonesty that may attach to any of said persons.
  Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
  C. Board practices.
  Our Articles provide that our board of directors will consist of not less than two directors. At each annual general meeting, one-third of the directors (or, if their number is not a multiple of three, the number nearest to but not greater than one-third) shall retire from office by rotation except that the chairman of the board and/or the managing director of our company shall not be required to retire whilst holding such office nor be taken into account in determining the number of directors to retire in each year. A director who is appointed by the board must retire at our next annual general meeting of the shareholders following his or her appointment. A retiring director is eligible for re-election.
  D. Employees.
  As of December 31, 2010,our total staff consisted of 263 employees.
  We do not have any collective bargaining agreements with our employees. We have never experienced any material labor disruptions and are unaware of any current efforts or plans to organize employees. We believe we have good relationships with our employees.
  53
 Item 7.  Major Shareholders and Related Party Transactions
  A. Major shareholders.
  The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our ordinary shares, as of March 25, 2011, for:
  ·
each person known to us to own beneficially more than 5% of our ordinary shares; and
  ·
each of our directors and executive officers who beneficially own our ordinary shares.
  Beneficial ownership includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named in the table have or share the voting and investment power with respect to all ordinary shares shown as beneficially owned by them. The number of our ordinary shares used in calculating the percentage for each listed person includes any options exercisable by such person within 60 days after the date of this Annual Report. Percentage of beneficial ownership is based on 13,062,500 ordinary shares outstanding as of March 25, 2011.
 
 Shares Beneficially OwnedNumber


PercentExecutive Officers and Directors:—



—Xiaoan He


65,520
(1)


0.5
%Xiuyong Zhang


46,800
(2)


0.4
%Tee Chuang Khoo


—



—Changrong Ji


—



—Xiaoming Wang


37,440
(3)


0.3
%Shan Jiang


—



—Zhibing Qian(4)


—



—All directors and executive officers as a group ( 8 persons)


187,200



1.1
%5% Shareholders:Apex Glory Holdings Limited(5)


6,912,503



52.9
%Easebright Investments Limited(6)


1,637,497



12.5
%
  (1)
Owned by Everise Investment Management Co., Ltd., a Hong Kong corporation (“Everise Investment”). 187,200 shares of ordinary shares of the Company are held of record by Everise Investment and Mr. He shares voting and dispositive control with Messrs. Jiang Yong, Xiuyong Zhang, Xuehua Li and Xiaoming Wang over the shares held by Everise Investment. Mr. He disclaims beneficial ownership in 187,200 shares of ordinary shares except to the extent of his pecuniary interest in 65,520 shares of ordinary shares.
  (2)
Owned by Everise Investment.187,200 shares of ordinary shares of the Company are held of record by Everise Investment and Mr. Zhang shares voting and dispositive control with Messrs. Jiang Yong, Xiaoan He, Xuehua Li and Xiaoming Wang over the shares held by Everise Investment. Mr. Zhang disclaims beneficial ownership in 187,200 shares of ordinary shares except to the extent of his pecuniary interest in 46,800 shares of ordinary shares.
  (3)
Owned by Everise Investment. 187,200 shares of ordinary shares of the Company are held of record by Everise Investment and Mr. Wang shares voting and dispositive control with Messrs. Jiang Yong, Xiaoan He, Xuehua Li and Xiuyong Zhang over the shares held by Everise Investment. Mr. Wang disclaims beneficial ownership in 187,200 shares of ordinary shares except to the extent of his pecuniary interest in 37,440 shares of ordinary shares.
  (4)
On March 24 2011, Mr. Qian submitted his resignation from his position as the Senior Vice President and Secretary of the Company, effective April 2, 2011.
  (5)
Apex Glory Holdings Limited is a wholly-owned subsidiary of Eastfaith Holdings Limited, a British Virgin Islands corporation. Mr. Jun Yin is the sole shareholder of Eastfaith Holdings Limited.
  (6)
Easebright Investments Limited is a wholly-owned subsidiary of Goodsuccess Enterprises Ltd. Mr. Tongju Zhou and Mr. Duo Wang each indirectly own 50% of Goodsuccess Enterprises Ltd.
  Except as disclosed below, there were no related party transactions with major shareholders during the period commencing January 1, 2008 and ending December 31, 2010.
  54
  B. Related Party Transactions.
  Our Related-Party Transaction Policies
  We have conducted our related-party transactions on normal commercial terms that we believe are fair and reasonable and in the interests of our shareholders as a whole. We believe that the terms of our related-party transactions are comparable to the terms we could obtain from independent third parties. Our related-party transactions are subject to the review and approval of the Audit Committee of our board of directors.
  The transactions and balances with related parties are analyzed as follows:
  (a) Transactions with Related Parties
  During the years ended 2008, 2009 and 2010, we paid approximately RMB 182,625, RMB 136,820 and RMB76,100 (USD$11,510) , respectively, to Fuhua Industrial Material Management Co., Ltd. as rental payments in connection with living quarters for our staff.
  C. Interests of Experts and Counsel.
  Not applicable.
  Item 8. Financial Information
  A. Consolidated Statements and Other Financial Information.
  Our consolidated financial statements are included herein under Item 18.
  We have not paid any dividends on our ordinary shares. The payment of dividends in the future, if any, is within the discretion of our Board of Directors and will depend upon our earnings, capital requirements and financial condition and other relevant factors. We do not anticipate declaring or paying any dividends in the foreseeable future.
  B. Legal Proceedings
  DMT Arbitration
  In 2006, Shandong Fuwei received correspondence relating to an arbitration proceeding initiated by DMT S. A. (“DMT”) against Shandong Neo-Luck in the ICC International Court of Arbitration (the “ICC”). In that proceedings DMT sought monetary damages against Shandong Neo-Luck for approximately US $1,250 plus interest relating to a claim of partial non-payment for the DMT production line, which Shandong Fuwei acquired from Beijing Baorui in 2005. In early 2007, the ICC determined that despite arguments made to the ICC that Shandong Fuwei should not be a party to the proceeding; the arbitration should proceed with Shandong Fuwei as the respondent pending adjudication of issues relating to jurisdiction and liability.
  A hearing was held by the ICC in November 2007. Subsequent to the hearing, at the invitation of Weifang Neoluck (Group) Co., Ltd (“Neoluck Group”), the original majority shareholder of Shandong Neo-Luck, the Neoluck Group and DMT engaged in efforts to achieve a settlement of the pending arbitration on January 18, 2008. Shandong Fuwei joined these discussions later as an interested party and in order to support a resolution of the pending dispute and to achieve resolution of certain outstanding service and spare part issues.
  After several weeks of negotiations among the parties, in March 2008, the parties entered into two agreements, a Service and Technical Assistance Agreement (the “Service Agreement”), between DMT and Shandong Fuwei, and a Settlement Agreement (the “Settlement Agreement”) between DMT and the Neoluck Group. Under the Service Agreement, Shandong Fuwei would pay an amount of US$180 in two installments with respect to service and spare parts. The Company made its first payment in April 2008.  As of December 31, 2010, Shandong Fuwei has paid US$135 and still US$45 left unpaid.
  55
  Under the Settlement Agreement, the Neoluck Group was obligated to pay an amount equal to US$900 in RMB by delivery of a bank draft to DMT. In April 2008, the Neoluck Group had not performed its obligation under the Settlement Agreement, and the Neoluck Group and DMT entered into a Supplemental Agreement pursuant to which the Neoluck Group would pay the amount owed to DMT in two installments. The Neoluck Group paid the first installment equal to US$ 450 in April 2008. As agreed between Neoluck Group and DMT, the remaining US$450 was to be paid in installments by the end of December 2008. As of December 31,2010, Neoluck Group has paid US$ 320 and still has US$130 outstanding to DMT.
  In the event the arbitration proceedings continue as a result of non-performance of the payment obligation, it is possible for the arbitral tribunal for the ICC International Court of Arbitration to rule in favor of DMT, which might result in a liability for Shandong Fuwei for the amount claimed plus interest. However, any possible liability regarding DMT’s claim should be reduced by the amount previously paid to DMT in connection with the above-described settlement. It should be noted further that in such event Fuwei might have sustainable claims for damages against the Neoluck Group for its failure to perform its obligations under the Settlement Agreement.
  On January 18, 2010, the Company was advised by the Secretary of The International Court of Arbitration of International Chamber of Commerce (ICC) the arbitration was withdrawn due to DMT’s failure to pay the balance of the advance on costs.
  Class Action
  On October 19, 2007, the Company became aware that a class action lawsuit had been filed in the United States District Court for the Southern District of New York, on behalf of all persons who purchased the Company’s stock from the date of the Company’s IPO on December 19, 2006 through October 16, 2007. The complaint alleged that the Company and certain of its present and former officers, directors and shareholders violated the Securities Act of 1933.
  On November 21, 2007, the Company was given notice that a second class action lawsuit had been filed in the United States District Court for the Southern District of New York, commenced on behalf of all persons who purchased the Company’s stock pursuant or traceable to the Registration Statement and Prospectus issued in connection with the Company’s IPO during the period from December 19, 2006 through November 12, 2007. The complaint alleged that the Company, its underwriters and certain of its executives (collectively, the “defendants”) violated Sections 11, 12(2) and 15 of the Securities Act of 1933. The complaint also alleged the defendants by misrepresenting or omitting material information regarding the Company and its business operations.
  On January 24, 2008, the Court consolidated into a single action the putative securities class actions pending against the Company and certain of its officers, directors and shareholders.  The Court also appointed Ninyat Tonyaz as lead plaintiff, appointed the Rosen Law Firm, P.A. as lead counsel, and granted plaintiffs leave to file a consolidated amended class action complaint.  The consolidated action is styled In re Fuwei Films Securities Litigation, Case No. 07-CV-9416 (RJS).
  On March 14, 2008, plaintiffs filed a consolidated amended class action complaint  (the "Amended Complaint") naming as defendants the Company, Xiaoan He, Mark Stulga, Jun Yin, Tongju Zhou, Duo Wang, and the Company's IPO underwriters (the “Underwriter Defendants”) — Maxim Group LLC, WR Hambrecht + Co.and Chardan Capital Markets, LLC.  The Amended Complaint asserts claims for violation of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.  The Company, Messrs. He and Stulga, and the Underwriter Defendants were served with the Amended Complaint and, as described below, moved to dismiss the claims asserted against them.
  On May 14, 2008, the Company and Messrs. He and Stulga filed a motion to dismiss the Amended Complaint in its entirety.  The Underwriter Defendants separately moved to dismiss the Amended Complaint.
  On November 3, 2008, Plaintiffs filed proofs of service with the Court, indicating that Messrs. Yin, Wang, and Zhou had been served with the Amended Complaint on or about August 14, 2008, and that they had 90 days after such date to serve an answer to the Amended Complaint or a motion pursuant to Rule 12 of the Federal Rules of Civil Procedure.
  56
  By letter dated March 17, 2009, Plaintiffs apprised the Court of Fuwei’s March 10, 2009 Press Release disclosing the initial verdict against Messrs. Yin, Wang, and Zhou, and requested that the Court take judicial notice of this press release in adjudicating the pending motions to dismiss.
  By the Court’s Memorandum and Order dated July 10, 2009, the motions to dismiss of the Company, Messrs. He and Stulga, and the Underwriter Defendants were granted in part and denied in part. In ruling on the motion to dismiss, the Court was required to assume that the facts alleged by the plaintiffs are true and to draw all reasonable inferences in the plaintiffs’ favor.  Applying that standard, the motions to dismiss of the defendants were granted in part and denied in part by the court. The Court dismissed plaintiffs’ claims to the extent they were based upon Fuwei’s alleged failure to disclose the DMT arbitration proceeding.  The Court also dismissed certain of plaintiffs’ claims to the extent they were brought on behalf of shareholders who did not purchase their shares directly in the IPO.
  The Court sustained plaintiffs’ remaining claims. However, the Court noted that defendants may be able to assert affirmative defenses provided by the federal securities laws in a motion for summary judgment, which could resolve the case before trial.
  On September 9, 2009, the Company and Messrs. He and Stulga filed their answer to the Amended Complaint. On October 2, 2009, the Court entered a case management plan and scheduling order, which set deadlines relating to pre-trial discovery, mediation, and dispositive motions. Discovery thereafter proceeded.
  On March 26, 2010, Fuwei, Messrs. He and Stulga, the Underwriter Defendants, and Plaintiffs, through their respective attorneys, engaged in mediation aimed at resolving the litigation. On June 24, 2010, the parties reached a settlement in principle. Subject to the Court’s approval, Plaintiffs have agreed to accept US$2.15 million in full and final settlement of all claims they have or may have against the Company, certain of its present and former officers, directors, shareholders and the underwriters. Fuwei Films has agreed to contribute US$1.0 million towards the settlement. The signed settlement agreement was submitted to the Court for approval on September 9, 2010. The Court has preliminarily approved the settlement, directed that notice be given to the class, and set a fairness hearing for April 27, 2011.
  The Company’s management continues to believe that the plaintiffs’ allegations are without merit. However, in recognition of the attendant risks and costs of continued litigation, and the benefits of resolving the same, the Board of Directors has unanimously consented to settle this case.
  As of December 31, 2010, the Company accrued US$1.0 million liability in connection with this litigation excluding defense costs. In accordance with the settlement agreement, the Company has deposit US$0.8 million in the Securities Litigation Settlement Fund account in January 2011.
  C.Other significant events
  Shandong Fuwei and Dornier had entered an equipment purchase contract for the third production line in January 2007. Shandong Fuwei made the prepayment to Dornier for 3.1 million Euros, Due to the fund shortage of Shandong Fuwei at that time, Dornier terminated the initial contract with Shandong Fuwei. The two parties have been in discussion on a renewed equipment purchase contract. The prepayment made will be considered in the renewed contract together with additional cost of 4.2 million Euros incurred by Dornier, which includes financial cost, storage cost, and equipment modification cost. As of March 25, 2011, we have not entered into the renewed contract because of pending provisions of the renewed contract.
  Item 9. The Offer and Listing.
  A. Offer and listing details.
  We have authorized capital of 20,000,000 ordinary shares, par value US$0.129752 per share. As of March 25, 2011, 13,062,500 ordinary shares were issued and outstanding.
  The annual high and low market prices of our ordinary shares for the three most recent full financial years and subsequent period are as set forth below:
  57


Ordinary Shares(Year Ended)

High


LowDecember 31,2008

$
6.19


$
0.70December 31,2009

$
2.07


$
0.34December 31,2010

$
4.60


$
0.78




The high and low market prices of our ordinary shares for each financial quarter over the two most recent full financial years and subsequent period are as set forth below:


Ordinary Shares(Quarter Ended)

High


LowMarch 31,2009

$
0.99


$
0.32June 30, 2009

$
2.07


$
0.65September 30, 2009

$
1.55


$
1.10December 31,2009

$
1.93


$
1.00March 31,2010

$
1.32


$
0.86June 30, 2010

$
1.23


$
0.78September 30, 2010

$
1.57


$
0.80December 31,2010

$
4.60


$
1.11




For the most recent six months, the high and low market prices of our ordinary shares are as set forth below:


Ordinary Shares(Month Ended)

High


LowOctober 31, 2010

$
1.84


$
1.11November 30, 2010

$
2.60


$
1.66December 31, 2010

$
4.60


$
2.21January 31, 2011

$
4.85


$
3.20February 28, 2011

$
6.55


$
4.36March 24, 2011

$
5.57


$
3.3




B. Plan of Distribution.




Not applicable.




C. Markets.




Our ordinary shares were included for quotation on the Nasdaq Global Market on December 18, 2006 under the symbol “FFHL”.




D. Other significant events




In November 2009, the Supreme People’s Court of Shandong Province issued the final verdict of our three major shareholders, Mr. Jun Yin, Mr. Tongju Zhou and Mr. Duo Wang. Mr. Yin was sentenced to death, with a stay of execution for two years and the other two defendants, Mr. Zhou and Mr. Wang, each received life imprisonment. All of their personal property will be confiscated.




Although the management believes that the shares owned by the major shareholders, Jun Yin, Duo Wang and Tongju Zhou will eventually be confiscated by the Chinese government, in accordance with the final verdict issued by the Supreme People’s Court of Shandong Province, it has no knowledge of the timing and procedures involved in enforcing such a verdict.  We have been informed by the Listing Qualification Department of the NASDAQ Stock Market LLC that they view the continuing uncertainty associated with the verdict as a matter of concern, and have contacted the relevant State agency to see if any further information regarding such procedures is available. But as of today, the Company has not received any information regarding the confiscation of shares. In the event that the verdict could not be enforced timely, the Company may ultimately be delisted from the Nasdaq Global Market.




58




Item 10. Additional Information.




A. Share Capital.




Not applicable.




B. Memorandum and Articles of Association.




We are a Cayman Islands company and our affairs are governed by our memorandum and articles of association and the Companies Law,Cap.22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands, or the Companies Law. We have filed copies of our complete Memorandum and Articles of Association as exhibits to our Annual Report on Form 20-F for the year ended 2006 filed with the SEC on April 2, 2007.




As of the date of this Annual Report, our authorized share capital consisted of 20,000,000 ordinary shares, par value US$0.129752 per share. As of the date of this Annual Report, 13,062,500 ordinary shares were issued and outstanding, and no preference shares were issued and outstanding.




Ordinary Shares




We were incorporated under the laws of the Cayman Islands as an exempted company. A Cayman Islands exempted company:




·
is a company that conducts its business outside the Cayman Islands;




·
is exempted from certain requirements of the Companies Law, including the filing of any annual return of its shareholders with the Registrar of Companies or the Immigration Board;




·
does not have to make its register of shareholders open to inspection; and




·
may obtain an undertaking against the imposition of any future taxation.




The following summarizes the terms and provisions of our share capital, as well as the material applicable laws of the Cayman Islands. This summary is not complete, and you should read our amended and restated memorandum and articles of association, filed as exhibits to this Annual Report.




The following discussion primarily concerns ordinary shares and the rights of holders of ordinary shares.




Protection of Minority Shareholders




The Grand Court of the Cayman Islands may, on the application of shareholders holding not less than one fifth of our shares in issue, appoint an inspector to examine our affairs and report thereon in a manner as the Grand Court shall direct.




Any shareholder may petition the Grand Court of the Cayman Islands which may make a winding up order, if the court is of the opinion that it is just and equitable that we should be wound up. Where any such petition has been presented by our shareholders, the Grand Court is permitted to make alternative order to a winding-up order including orders regulating the conduct of our affairs in the future, requiring us to refrain from doing an act complained of by the petitioner or for the purchase of our shares by us or another shareholder.




Claims against us by our shareholders must, as a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by our amended and restated memorandum and articles of association.




The Cayman Islands courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against, or derivative actions in our name to challenge:




59




·
an act which is ultra vires or illegal;




·
an act which constitutes a fraud against the minority shareholder and the wrongdoers are themselves in control of us; and




·
an irregularity in the passing of a resolution which requires a qualified (or special) majority.




Pre-emption Rights




There are no pre-emption rights applicable to the issue of new shares under either Cayman Islands law or our amended and restated memorandum and articles of association.




Modification of Rights




Except with respect to share capital (as described below) alterations to our amended and restated memorandum and articles of association may only be made by special resolution of no less than two-thirds of votes cast at a meeting of the shareholders.




Subject to the Companies Law, all or any of the special rights attached to shares of any class (unless otherwise provided for by the terms of issue of the shares of that class) may be varied, modified or abrogated with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class.




The provisions of our amended and restated articles of association relating to general meetings shall apply similarly to every such separate general meeting, but the quorum for the purposes of any such separate general meeting or at its adjourned meeting shall be a person or persons together holding (or represented by proxy) not less than one third in nominal value of the issued shares of that class. Every holder of shares of the class shall be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that class present in person or by proxy may demand a poll.




The special rights conferred upon the holders of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.




Alteration of Capital




We may from time to time by ordinary resolution:




·
increase our capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe;




·
consolidate and divide all or any of our share capital into shares of larger amount than our existing shares;




·
cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person, and diminish the amount of our share capital by the amount of the shares so cancelled subject to the provisions of the Companies Law;




·
sub-divide our shares or any of them into shares of smaller amount than is fixed by our amended and restated memorandum and articles of association, subject nevertheless to the Companies Law, and so that the resolution whereby any share is subdivided may determine that, as between the holders of the share resulting from such subdivision, one or more of the shares may have any such preference or other special rights, or may have such deferred rights or be subject to any such restrictions as compared with, the others as we have power to attach to unissued or new shares; and




·
divide shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares, attach to the shares respectively as preferential, deferred, qualified or special rights, privileges, conditions or such restrictions which, in the absence of any such determination in a general meeting, may be determined by our directors.


60




We may, by special resolution, subject to any confirmation or consent required by the Companies Law, reduce our share capital or any capital redemption reserve in any manner authorized by law.




Transfer of Shares




Subject to any applicable restrictions set forth in our amended and restated memorandum and articles of association, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in any form prescribed by the NASDAQ Global Market or in any other form which our directors may approve. You should note that, under Cayman Islands law, a person whose name is entered on the register of members will be deemed to be a member or shareholder of our company. We have designated American Stock Transfer and Trust Company as our share registrar. Under Cayman Islands law, a share certificate constitutes admissible evidence as proof of title of its holder to the shares specified on such certificate.




Our directors may decline to register any transfer of any share which is not paid up or on which we have a lien. Our directors may also decline to register any transfer of any share unless:




·
the instrument of transfer is lodged with us accompanied by the certificate for the shares to which it relates and such other evidence as our directors may reasonably require to show the right of the transferor to make the transfer;




·
the instrument of transfer is in respect of only one class of shares;




·
the instrument of transfer is properly stamped (in circumstances where stamping is required);




·
in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; and




·
a fee of such maximum sum as the NASDAQ Global Market may at any time determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof.




If our directors refuse to register a transfer, they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.




The registration of transfers may, on notice being given by advertisement in such one or more newspapers or by any other means in accordance with any requirements of the NASDAQ Global Market, be suspended and the register closed at such times and for such periods as our directors may from time to time determine; provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our directors may determine.




Share Repurchase




We are empowered by the Companies Law and our amended and restated memorandum and articles of association to purchase our own shares, subject to certain restrictions. Our directors may only exercise this power on our behalf, subject to the Companies Law, our amended and restated memorandum and articles of association and to any applicable requirements imposed from time to time by the U.S. Securities and Exchange Commission, the NASDAQ Global Market, or by any recognized stock exchange on which our securities are listed.




Dividends




Subject to the Companies Law, we may declare dividends in any currency to be paid to our shareholders. Dividends may be declared and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which our directors determine is no longer needed. Our board of directors may also declare and pay dividends out of the share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies Law.




Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provides (1) all dividends shall be declared and paid according to the amounts paid up on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for this purpose as paid up on that share and (2) all dividends shall be apportioned and paid pro rata according to the amounts paid upon the shares during any portion or portions of the period in respect of which the dividend is paid.


61




Our directors may also pay any dividend that is payable on any shares semi-annually or on any other dates, whenever our financial position, in the opinion of our directors, justifies such payment.




Our directors may deduct from any dividend or other money payable to any shareholder all sums of money (if any) presently payable by such shareholder to us on account of calls or otherwise.




No dividend or other money payable by us on or in respect of any share shall bear interest against us.




In respect of any dividend proposed to be paid or declared on our share capital, our directors may resolve and direct that (1) such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that our shareholders entitled thereto will be entitled to elect to receive such dividend (or part thereof if our directors so determine) in cash in lieu of such allotment or (2) the shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as our directors may think fit. We may also, on the recommendation of our directors, resolve in respect of any particular dividend that, notwithstanding the foregoing, it may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right of shareholders to elect to receive such dividend in cash in lieu of such allotment.




Any dividend, interest or other sum payable in cash to any shareholder may be paid by check or warrant sent by mail addressed to the shareholder at his registered address, or addressed to such person and at such addresses as the shareholder may direct. Every check or warrant shall, unless the shareholder or joint shareholders otherwise direct, be made payable to the order of the shareholder or, in the case of joint shareholders, to the order of the shareholder whose name stands first on the register in respect of such shares, and shall be sent at their risk and payment of the check or warrant by the bank on which it is drawn shall constitute a good discharge to us.




All dividends unclaimed by shareholders for one year after having been declared may be invested or otherwise made use of by our board of directors for the benefit of our company until claimed. Any dividend unclaimed by shareholders after a period of six years from the date of declaration of such dividend may be forfeited and, if so forfeited, shall revert to us.




Whenever our directors have resolved that a dividend be paid or declared, our directors may further resolve that such dividend be satisfied wholly or in part by the distribution of specific assets of any kind, and in particular of paid up shares, debentures or warrants to subscribe for our securities or securities of any other company. Where any difficulty arises with regard to such distribution, our directors may settle it as they think expedient. In particular, our directors may issue fractional certificates, ignore fractions altogether or round the same up or down, fix the value for distribution purposes of any such specific assets, determine that cash payments shall be made to any of our shareholders upon the footing of the value so fixed in order to adjust the rights of the parties, vest any such specific assets in trustees as may seem expedient to our directors, and appoint any person to sign any requisite instruments of transfer and other documents on behalf of a person entitled to the dividend, which appointment shall be effective and binding on our shareholders.




Untraceable Shareholders




We are entitled to sell any shares of a shareholder who is untraceable, provided that:




·
all checks or warrants in respect of dividends of such shares, not being less than three in number, for any sums payable in cash to the holder of such shares have remained uncashed for a period of twelve years prior to the publication of the advertisement and during the three months referred to in the third bullet point below;




·
we have not during that time received any indication of the whereabouts or existence of the shareholder or person entitled to such shares by death, bankruptcy or operation of law; and




·
we have caused an advertisement to be published in newspapers in the manner stipulated by our amended and restated memorandum and articles of association, giving notice of our intention to sell these shares, and a period of three months has elapsed since such advertisement and the NASDAQ Global Market has been notified of such intention.


62




The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to such net proceeds.




Issuance of Additional Ordinary Shares or Preference Shares




Subject to the Companies Law and the rules of the NASDAQ Global Market and without prejudice to any special rights or restrictions for the time being attached to any shares or any class of shares, our board of directors may issue additional ordinary shares from time to time as our board of directors determines, to the extent of available authorized but unissued shares and establish from time to time one or more series of preference shares and to determine, with respect to any series of preference shares, the terms and rights of that series, including:




·
the designation of the series;




·
the number of shares of the series;




·
the dividend rights, conversion rights, voting rights; and




·
the rights and terms of redemption and liquidation preferences.




Subject to the foregoing, our board of directors may issue series of preference shares without action by our shareholders to the extent authorized but unissued. Accordingly, the issuance of preference shares may adversely affect the rights of the holders of the ordinary shares. In addition, the issuance of preference shares may be used as an anti-takeover device without further action on the part of the shareholders. Issuance of preference shares may dilute the voting power of holders of ordinary shares.




Subject to applicable regulatory requirements, our board of directors may issue additional ordinary shares without action by our shareholders to the extent of available authorized but unissued shares. The issuance of additional ordinary shares may be used as an anti-takeover device without further action on the part of the shareholders. Such issuance may dilute the voting power of existing holders of ordinary shares.




Our ordinary shares are listed on the NASDAQ Global Market under the symbol “FFHL”.




Committees of Board of Directors




Pursuant to our amended and restated articles of association, our board of directors, we have established an audit committee, a compensation committee and a corporate governance and nominating committee.




Differences in Corporate Law




The Companies Law is modeled after similar laws in the United Kingdom but does not follow recent changes in United Kingdom laws. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States, such as in the State of Delaware.




Duties and Directors




Under Cayman Islands law, at common law, members of a board of directors owe a fiduciary duty to the company to act in good faith in their dealings with or on behalf of the company and exercise their powers and fulfill the duties of their office honestly. This duty has four essential elements:




·
a duty to act in good faith in the best interests of the company;




·
a duty not to personally profit from opportunities that arise from the office of director;


63




·
a duty to avoid conflicts of interest; and




·
a duty to exercise powers for the purpose for which such powers were intended.




In general, the Companies Law imposes various duties on officers of a company with respect to certain matters of management and administration of the company. The Companies Law contains provisions, which impose default fines on persons who fail to satisfy those requirements. However, in many circumstances, an individual is only liable if he knowingly is guilty of the default or knowingly and willfully authorizes or permits the default.




In comparison, under Delaware law, the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders. The duty of care requires that directors act in an informed and deliberative manner and inform themselves, prior to making a business decision, of all material information reasonably available to them. The duty of care also requires that directors exercise care in overseeing and investigating the conduct of the corporation’s employees. The duty of loyalty may be summarized as the duty to act in good faith, not out of self-interest, and in a manner which the director reasonably believes to be in the best interests of the shareholders.




Under Delaware law, a party challenging the propriety of a decision of a board of directors bears the burden of rebutting the applicability of the presumptions afforded to directors by the “business judgment rule.” If the presumption is not rebutted, the business judgment rule protects the directors and their decisions, and their business judgments will not be second guessed. Where, however, the presumption is rebutted, the directors bear the burden of demonstrating the entire fairness of the relevant transaction. Notwithstanding the foregoing, Delaware courts subject directors’ conduct to enhanced scrutiny in respect of defensive actions taken in response to a threat to corporate control and approval of a transaction resulting in a sale of control of the corporation.




Interested Directors




There are no provisions under the Companies Law that require a director who is interested in a transaction entered into by a Cayman Islands company to disclose his interest. However, under our amended and restated memorandum and articles of association, our directors are required to do so, and in the event that they do not do so it may render such director liable to such company for any profit realized pursuant to such transaction.




In comparison, under Delaware law, such a transaction would not be voidable if (a) the material facts as to such interested director’s relationship or interests are disclosed or are known to the board of directors and the board in good faith authorizes the transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum, (b) such material facts are disclosed or are known to the shareholders entitled to vote on such transaction and the transaction is specifically approved in good faith by vote of the shareholders, or (c) the transaction is fair as to the corporation as of the time it is authorized, approved or ratified. Under Delaware law, a director could be held liable for any transaction in which such director derived an improper personal benefit.




Voting Rights and Quorum Requirements




Under Cayman Islands law, the voting rights of shareholders are regulated by the company’s articles of association and, in certain circumstances, the Companies Law. The articles of association will govern matters such as quorum for the transaction of business, rights of shares, and majority votes required to approve any action or resolution at a meeting of the shareholders or board of directors. Under Cayman Islands law, certain matters must be approved by a special resolution which is defined as two-thirds of the votes cast by shareholders present at a meeting and entitled to vote or such higher majority as is specified in the articles of association; otherwise, unless the articles of association otherwise provide, the majority is usually a simple majority of votes cast.


64




In comparison, under Delaware law, unless otherwise provided in the corporation’s certificate of incorporation, each shareholder is entitled to one vote for each share of stock held by the shareholder. Unless otherwise provided in the corporation’s certificate of incorporation or bylaws, a majority of the shares entitled to vote, present in person or represented by proxy, constitutes a quorum at a meeting of shareholders. In matters other than the election of directors, with the exception of special voting requirements related to extraordinary transactions, the affirmative vote of a majority of shares present in person or represented by proxy at the meeting and entitled to vote is required for shareholder action, and the affirmative vote of a plurality of shares is required for the election of directors.




Mergers and Similar Arrangements




A merger of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation to be approved by the directors of each constituent company and authorization by (a) a majority in number representing seventy-five percent (75%) in value of the shareholders voting together as one class and (b) if the shares to be issued to each shareholder in the surviving company are to have the same rights and economic value as the shares held in the constituent company, a special resolution of the shareholders voting together as one class.




A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders.  For this purpose a subsidiary is a company of which at least ninety percent (90%) of the issued shares entitled to vote are owned by the parent company.




The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.




Save in certain circumstances, a dissentient shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares upon dissenting to a merger or consolidation.  The exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.




There are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement in question is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings convened for that purpose.




The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction should not be approved, the court can be expected to approve the arrangement if it satisfies itself that:




·
the company is not proposing to act illegally or ultra vires and the statutory provisions as to majority vote have been complied with;




·
the shareholders have been fairly represented at the meeting in question;




·
the arrangement is such as a businessman would reasonably approve; and




·
the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law or that would amount to a “fraud on the minority.”




When a takeover offer is made and accepted by holders of 90% of the shares within four months, the offerer may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection may be made to the Grand Court of the Cayman Islands but is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.




Cayman Islands laws do not require that shareholders approve sales of all or substantially all of a company’s assets as is commonly adopted by U.S. corporations.




If the arrangement and reconstruction are thus approved, any dissenting shareholders would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares.


65




Shareholders’ Suits




Derivative actions have been brought under Cayman Islands law but were unsuccessful for technical reasons. In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a minority shareholder. However, based on English authorities, who would in all likelihood be of persuasive authority in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:




·
a company is acting or proposing to act illegally or beyond the scope of its authority;




·
the act complained of, although not beyond the scope of its authority, could be effected duly if authorized by more than a simple majority vote which has not been obtained; and




·
those who control the company are perpetrating a “fraud on the minority.”




Class actions and derivative actions generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court generally has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.




Corporate Governance




Cayman Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty of care and owe a fiduciary duty to the companies for which they serve. Under our amended and restated memorandum and articles of association, subject to any separate requirement for audit committee approval under the applicable rules of The Nasdaq Stock Market, Inc. or unless disqualified by the chairman of the relevant board meeting, so long as a director discloses the nature of his interest in any contract or arrangement which he is interested in, such a director may vote in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at such meeting.




Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association provide for the indemnification of our directors, auditors and officers against all losses or liabilities incurred or sustained by him or her as a director, auditor or officer of our company in defending any proceedings, whether civil or criminal, in which judgment is given in his or her favor, or in which he or she is acquitted provided that this indemnity may not extend to any matter in respect of any fraud or dishonesty which may attach to any of these persons.




Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable.




We are managed by our board of directors. Our amended and restated memorandum and articles of association provide that the number of our directors shall not be less than two and there shall be no maximum number of our directors unless our shareholders in the general meeting otherwise determine a maximum number. Initially we have set our board of directors to have 4 directors. Any director on our board may be removed by way of an ordinary resolution of shareholders. At each annual general meeting, one third of our directors for the time being (or, if their number is not a multiple of three, the number nearest to but not greater than one-third) shall retire from office by rotation provided that every director shall be subject to retirement at least once every three years. Any vacancies on our board of directors or additions to the existing board of directors can be filled by an ordinary resolution of our shareholders or the affirmative vote of a majority of the remaining directors, although this may be less than a quorum where the number of remaining directors falls below the minimum number fixed by our board of directors. Our directors are not required to hold any of our shares to be qualified to serve on our board of directors.




Meetings of our board of directors may be convened at any time deemed necessary by any one of our directors. Advance notice of a meeting is not required if each director entitled to attend consents to the holding of such meeting.




66




A meeting of our board of directors at which a quorum is present shall be competent to make lawful and binding decisions. At any meeting of our directors, each director is entitled to one vote.




Questions arising at a meeting of our board of directors are required to be decided by simple majority votes of the members of our board of directors present or represented at the meeting. In the case of a tie vote, the chairman of the meeting shall have a second or deciding vote. Our board of directors may also pass resolutions without a meeting by unanimous written consent.




Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable.




Inspection of Corporate Records




Shareholders of a Cayman Islands company have no general right under Cayman Islands law to inspect or obtain copies of a list of shareholders or other corporate records of the company. However, these rights may be provided in the articles of association.




In comparison, under Delaware law, shareholders of a Delaware corporation have the right during normal business hours to inspect for any proper purpose, and to obtain copies of list(s) of shareholders and other books and records of the corporation and its subsidiaries, if any, to the extent the books and records of such subsidiaries are available to the corporation.




Shareholder Proposals




The Companies Law does not provide shareholders any right to bring business before a meeting or requisition a general meeting. However, these rights may be provided in the articles of association.




Unless provided in the corporation’s certificate of incorporation or bylaws, Delaware law does not include a provision restricting the manner in which shareholders may bring business before a meeting.




Approval of Corporate Matters by Written Consent




The Companies Law allows a special resolution to be passed in writing if signed by all the shareholders and authorized by the articles of association.




In comparison, Delaware law permits shareholders to take action by written consent signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting of shareholders.




Calling of Special Shareholders Meetings




The Companies Law does not have provisions governing the proceedings of shareholders meetings that are usually provided in the articles of association.




In comparison, Delaware law permits the board of directors or any person who is authorized under a corporation’s certificate of incorporation or bylaws to call a special meeting of shareholders.




Staggered Board of Directors




The Companies Law does not contain statutory provisions that require staggered board arrangements for a Cayman Islands company. Such provisions, however, may validly be provided for in the articles of association.




In comparison, Delaware law permits corporations to have a staggered board of directors.




67




Anti-takeover Provisions




Neither Cayman Islands nor Delaware law prevents companies from adopting a wide range of defensive measures, such as staggered boards, blank check preferred, and removal of directors only for cause and provisions that restrict the rights of shareholders to call meetings, act by written consent and submit shareholder proposals.




C. Material Contracts.





We also entered into two Loan Contracts with the Bank of Communications for the amount of (i) RMB 70 million, effective June 7, 2010, with a maturity date of June 6, 2011, and (ii) RMB 67 million effective June 8, 2010, with a maturity date of June 7, 2011. The proceeds of these two loans are being used for acquisition capital and working capital turnover.  In addition, we entered into three interest-free Loan Contracts with Bank of Weifang (formerly known as Weifang City Commercial Bank) for the amount of (i) RMB 10 million effective January 16, 2009, with a maturity date of January 12, 2010, which was  extended for an additional two years from January 13, 2010 to January 2012 after it expired on January 12, 2010; (ii) RMB 10 million effective January 13, 2010, with a maturity date of January 12, 2012; and (iii) RMB 5 million effective December 2, 2008, with a maturity date of December 2, 2011. The proceeds of these three loans have been used for construction the trial production line and research and development of special BOPET films.





On November 20, 2009, we signed a long-term loan contract of RMB10 million with Weifang Dongfang State-owned Assets Management Co., Ltd., for a term of eight years effective October 19, 2009, which will expire on October 18, 2017. The loan is guaranteed by Shandong Deqin Investment& Guarantee Co., Ltd. and is used for the Company's key projects.




D. Exchange Controls.




Chinese government imposes control over the convertibility of RMB into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China publishes a daily exchange rate for RMB, or the PBOC Exchange Rate, based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC Exchange Rate according to market conditions.




Pursuant to the Foreign Exchange Control Regulations issued by the State Council on January 29, 1996 and effective as of April 1, 1996 (and amended on January 14, 1997) and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July 1, 1996 regarding foreign exchange control, or the Regulations, conversion of Renminbi into foreign exchange by foreign investment enterprises for current account items, including the distribution of dividends and profits to foreign investors of joint ventures, is permissible upon the proper production of qualified commercial vouchers or legal documents as required by the Regulations. Foreign investment enterprises are permitted to remit foreign exchange from their foreign exchange bank account in China upon the proper production of, inter alia, the board resolutions declaring the distribution of the dividend and payment of profits. Conversion of RMB into foreign currencies and remittance of foreign currencies for capital account items, including direct investment, loans, security investment, is still subject to the approval of the State Administration of Foreign Exchange, or SAFE, in each such transaction. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, as Article 5 provides that the State shall not impose restrictions on recurring international payments and transfers.




Under the Regulations, foreign investment enterprises are required to open and maintain separate foreign exchange accounts for capital account items (but not for other items). In addition, foreign investment enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business upon the production of valid commercial documents and, in the case of capital account item transactions, document approval from SAFE.




Currently, foreign investment enterprises are required to apply to SAFE for “foreign exchange registration certificates for foreign investment enterprises” . With such foreign exchange registration certificates (which are granted to foreign investment enterprises, upon fulfilling specified conditions and which are subject to review and renewal by SAFE on an annual basis) or with the foreign exchange sales notices from the SAFE (which are obtained on a transaction-by-transaction basis), foreign-invested enterprises may enter into foreign exchange transactions at banks authorized to conduct foreign exchange business to obtain foreign exchange for their needs.


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E. Taxation.




United States Federal Income Taxation




General




The following is a summary of the material U.S. federal income tax consequences of the acquisition, ownership, and disposition of our ordinary shares. The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares that is for U.S. federal income tax purposes:




·
an individual citizen or resident of the United States;




·
a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia;




·
an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or




·
a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.




A beneficial owner of our ordinary shares that is described above is referred to herein as a “U.S. Holder.”  If a beneficial owner of our ordinary shares isnot described as a U.S. Holder and are not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, you will be considered a “Non-U.S. Holder.” The U.S. federal income tax consequences applicable to Non-U.S. Holders of owning and disposing of our ordinary shares described below under the heading “Non-U.S. Holders.”




This summary is based on the Internal Revenue Code of 1986, as amended, or the Code, its legislative history, existing and proposed Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change, possibly on a retroactive basis.




This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances. In particular, this discussion considers only holders that own and hold our ordinary shares as capital assets within the meaning of Section 1221 of the Code and does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:




·
financial institutions or financial services entities;




·
broker-dealers;




·
persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;




·
tax-exempt entities;




·
governments or agencies or instrumentalities thereof;


·
insurance companies;


·
regulated investment companies;




·
real estate investment trusts;


·
certain expatriates or former long-term residents of the United States;


·
persons that actually or constructively own 5% more of our voting shares;


·
persons that acquired our ordinary shares pursuant to an exercise of employee options, in connection with employee incentive plans or otherwise as compensation;




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·
persons that hold our ordinary shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; or




·
persons whose functional currency is not the U.S. dollar.




This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws. Additionally, the discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our ordinary shares through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our ordinary shares, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership.




We have not sought and will not seek a ruling from the Internal Revenue Service (“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.





THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES.  IT IS NOT TAX ADVICE.  EACH PROSPECTIVE INVESTOR IN OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.


U.S. Holders




Taxation of Cash Distributions Paid on Ordinary Shares





Subject to the passive foreign investment company (PFIC) rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary income the amount of any cash dividend paid on our ordinary shares.  A cash distribution on our ordinary shares generally will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes), although we do not intend to calculate such earnings and profits.  Such dividend generally will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.  The portion of such distribution, if any, in excess of such earnings and profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in our ordinary shares.  Any remaining excess generally will be treated as gain from the sale or other taxable disposition of such  ordinary shares.
 
 With respect to non-corporate U.S. Holders for taxable years beginning before January 1, 2013, any such cash dividends may be subject to U.S. federal income tax at the lower applicable regular long term capital gains tax rate (see “—Taxation on the Disposition of Ordinary Shares” below) provided that (a) our ordinary shares are readily tradable on an established securities market in the United States or, in the event we are deemed to be a PRC “resident enterprise” under the EIT Law, we are eligible for the benefits of the Agreement between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC Tax Treaty, (b) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (c) certain holding period requirements are met.  Therefore, if our ordinary shares are not readily tradable on an established securities market and if we are not eligible for benefits under the U.S.-PRC Tax Treaty, then cash dividends paid by us to non-corporate U.S. Holders will not be subject to U.S. federal income tax at the lower regular long term capital gains tax rate.  Under published IRS authority, shares are considered for purposes of clause (a) above to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which presently include the NASDAQ Global Market. Although our ordinary shares currently are listed on the NASDAQ Global Market, U.S. Holders nonetheless should consult their own tax advisors regarding the availability of the lower rate for any cash dividends paid in respect to our ordinary shares.  For taxable years beginning on or after January 1, 2013, the regular U.S. federal income tax rate applicable to such dividends currently is scheduled to return to the regular U.S. federal income tax rate generally applicable to ordinary income.
 
 Any such dividends generally will constitute foreign source income for U.S. foreign tax credit limitation purposes and generally will constitute “passive category income,” but could, in the case of certain U.S. Holders, constitute “general category income.”  If a PRC income tax applies to any cash dividends paid to a U.S. Holder on our ordinary shares, such tax should be treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to applicable conditions and limitations).  In addition, if such PRC tax applies to any such dividends, an individual U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty.  U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.


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Taxation on the Disposition of Ordinary Shares




Upon a sale or other taxable disposition of our ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder should recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the ordinary shares.





The regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at a maximum regular rate of 15% for taxable years beginning before January 1, 2013 (but currently scheduled to increase to 20% for taxable years beginning on or after January 1, 2013).  Capital gain or loss will constitute long term capital gain or loss if the U.S. Holder’s holding period for ordinary shares exceeds one year.  The deductibility of capital losses is subject to various limitations.  Subject to the U.S.-PRC Tax Treaty, any such gain or loss generally will be U.S. source income or loss for U.S. foreign tax credit limitation purposes.
 
 If a PRC income tax applies to any gain from the disposition of our ordinary shares by a U.S. Holder, such tax should be treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to any gain, such U.S. Holder should be entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty.  U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.


Passive Foreign Investment Company Rules




A foreign corporation will be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income, or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business), and gains from the disposition of passive assets.




We do not expect to be treated as a PFIC for the current taxable year or in the near future. However, our actual PFIC status for our current taxable year or any subsequent taxable year will not be determinable until after the end of such taxable year.  Accordingly, there can be no assurance with respect to our status as a PFIC for our current taxable year or any subsequent taxable year.


If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our ordinary shares, and such U.S. Holder did not make either a timely qualified electing fund, or QEF, election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) our ordinary shares, or a mark-to-market election, as described below, such holder generally will be subject to special rules in respect to:
  ·
any gain recognized by the U.S. Holder on the sale or other disposition of its ADSs or ordinary shares; and
  ·
any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the ADSs or ordinary shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the ADSs or ordinary shares).
  Under these rules,
  ·
the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares;
  ·
the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we qualified as a PFIC will be taxed as ordinary income;
  ·
the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
  ·
the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder.




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In general, if we are determined to be a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to our ordinary shares by making a timely QEF election to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed. However, a U.S. Holder may make a QEF election only if we agree to provide certain tax information to such holder annually. At this time, we do not intend to provide U.S. Holders with such information as may be required to make a QEF election effective.




Alternatively, if a U.S. Holder, at the close of its taxable years, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election in respect to such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) ordinary shares and for which we are determined to be PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its ordinary shares. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value of its ordinary shares at the end of its taxable year over the adjusted tax basis in its ordinary shares. The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its ordinary shares over the fair market value of such shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis in its ordinary shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the ordinary shares will be treated as ordinary income.




The mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission, including the NASDAQ Global Market, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. While our ordinary shares currently are listed on the NASDAQ Global Market, U.S. Holders nonetheless should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to our shares under their particular circumstances.




If we are a PFIC and, at any time, have a forever subsidiary that is classified as a PFIC, a U.S. Holders should be deemed to own a portion of the shares of such lower-tier PFIC, and could incur liability for the deferred tax and interest charge described above if we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder were otherwise deemed to have disposed of an interest in, the lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs.




A U.S. Holder that owns (or is deemed to own) ordinary shares in a PFICduring any taxable year of the U.S. Holders may have to file an IRS Form 8621 (whether or not a market-to-market election that is or has been made) and any other information as may be required by the U.S. Treasury Department.




The rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly, U.S. Holders of our ordinary shares should consult their own tax advisors concerning the application of the PFIC rules to our ordinary shares under their particular circumstances.




Additional Taxes After 2012
  For taxable years beginning after December 31, 2012, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned income, including, among other things, cash dividends on, and capital gains from the sale or other taxable disposition of, our ordinary shares, subject to certain limitations and exceptions. U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition of our ordinary shares.




Non-U.S. Holders




Cash-dividends paid to a Non-U.S. Holder in respect to our ordinary shares generally will not be subject to U.S. federal income tax, unless such dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains in the United States).


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In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our ordinary shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income tax treaty is attributable to a permanent establishment or fixed base that such holder maintains in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of sale or other taxable disposition and certain other conditions are met (in which case such gain from U.S. sources generally is subject to U.S. Federal income tax at a 30% rate or a lower applicable tax treaty rate).




Cash dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject to U.S. federal income tax (but not the Medicare contribution tax) at the same regular U.S. federal income tax rates as applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.




Backup Withholding and Information Reporting




In general, information reporting for U.S federal income tax purposes should apply to cash distributions made on our ordinary shares within the United States to a U.S. Holder (other than an exempt recipient) and to the proceeds from sales or other dispositions of our ordinary shares by a U.S. Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office) outside the United States will be subject to information reporting in limited circumstances. In addition, pursuant to recently enacted legislation, certain information concerning a U.S. Holder’s adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether any gain or loss with respect to such ordinary shares is long-term or short-term also may be required to be reported to the IRS.


Moreover, backup withholding of U.S. federal income tax, at a rate of 28% for taxable years beginning before January 1, 2013 (but currently scheduled to increase to 31% for taxable years beginning on or after January 1, 2013), generally will apply to cash dividends paid on our ordinary shares to a U.S. Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt recipient), in each case who:




·
fails to provide an accurate taxpayer identification number;




·
is notified by the IRS that backup withholding will be required; or




·
in certain circumstances, fails to comply with applicable certification requirements.




A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.




Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.




Other Non-United States Taxation Treatment




The following discussion is a summary of certain anticipated Cayman Islands and PRC tax consequences of an investment in our ordinary shares. The discussion does not deal with all possible tax consequences relating to an investment in our ordinary shares and does not purport to deal with the tax consequences applicable to all categories of investors, some of which (such as dealers in securities, insurance companies and tax-exempt entities) may be subject to special rules. In particular, the discussion does not address the tax consequences under state, local and other national tax laws. Accordingly, each prospective investor should consult its own tax advisor regarding the particular tax consequences to it of an investment in our ordinary shares. The following discussion is based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change.




China Taxation


There are significant uncertainties under the new corporate income tax law of the PRC, or the New Tax Law, which became effective on January 1, 2008, regarding our PRC enterprise income tax liabilities, such as a tax on any dividends paid to us by our PRC subsidiary.  The New Tax Law also contains uncertainties regarding possible PRC withholding tax on dividends we pay to our overseas shareholders and gains realized from the transfer of our shares by our overseas shareholders.




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We are a holding company incorporated in the Cayman Islands, which indirectly holds, through Fuwei (BVI), our equity interest in Shandong Fuwei, our subsidiary and actual operating body in the PRC.  Our business operations are principally conducted through Shandong Fuwei.




Under the New Tax Law, enterprises established under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered to be PRC tax resident enterprises for tax purposes and subjected to the tax obligations of a PRC tax resident.  If we or Fuwei (BVI) is considered as a PRC tax resident enterprise under the New Tax Law, then our global income will be subject to PRC enterprise income tax at the rate of 25%.





On April 22, 2009, the State Administration of Taxation issued a Notice Regarding Recognition of Overseas Incorporated Enterprises Controlled by PRC Domestic Enterprises as PRC Resident Enterprises Based on the De Facto Management Body Criteria (the “Tax Residency Notice”). Under the Tax Residency Notice, which was retroactively effective as of January 1, 2008, an overseas enterprise will be deemed to be a PRC resident enterprise — and thus subject to Enterprise Income Tax of 25% on its global income if it satisfies four conditions: (i) the company’s management team responsible for daily operations are located in China, or the location where the management team carries out their responsibilities is in China; (ii) finance and personnel decisions are made or need approval by institutions or people in China; (iii) the company’s major property, accounting ledger, company seal and minutes of board meetings and shareholder meetings are kept in China; and (iv) at least half of the members of the board of directors with voting rights or the management team habitually live in China.





Although Tax Residency Notice applies only to overseas registered enterprises controlled by PRC enterprises, not to those controlled by PRC individuals, the determining criteria set forth in Tax Residency Notice may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. If we are deemed a PRC resident enterprise, we may be subject to the Enterprise Income Tax at 25% on our global income. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiaries, a 25% Enterprise Income Tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.





However, China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, will normally be subject to PRC tax.





Furthermore, the implementation rules of the New Tax Law provide that (i) if the enterprise that distributes the 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 Tax Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident.  Therefore, if we are considered as a PRC resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders as well as gains realized by such shareholders from the transfer of our shares may be regarded as China-sourced income and, thus, may be subject to PRC tax.





As the New Tax Law and the implementation rules have only recently taken effect, it is uncertain as to how they will be implemented by the relevant PRC tax authorities.  If dividend payments from Shandong Fuwei and from Fuwei (BVI) to us are subject to PRC withholding tax, our financial condition, results of operations and the amount of dividends available to pay our shareholders may be adversely affected.  Also, if dividends we pay to our overseas shareholders or gains realized by such shareholders from the transfer of our shares are subject to PRC withholding tax, it may materially and adversely affect your investment return and the value of your investment in us.  There is an income tax treaty in effect between the United States and China, so U.S. shareholders may be entitled to certain benefits under such treaty.




Cayman Island Taxation




The Cayman Islands currently has no exchange control restrictions and will not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax on the Company or any holder of our ordinary shares. Accordingly, payment of dividends on, and any transfer of, our ordinary shares will not be subject to taxation in the Cayman Islands, no Cayman Islands withholding tax will be required on such payments to any holder of our ordinaryshares and gains derived from the sale of our ordinaryshares will not be subject to Cayman Islands income or corporation tax.




74




F. Dividends and Paying Agents.




Not applicable.




G. Statement by Experts.




Not applicable.




H. Documents on Display




We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the Securities and Exchange Commission. Specially, we are required to file annually a Form 20-F no later than six month after the close of each fiscal year, which is December 31. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.




As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting requirements pursuant to Section 16 of the Exchange Act.




Documents concerning the Company that are referred to in this document may also be inspected at our office, which is at No. 387 Dongming Road, Weifang Shandong, People’s Republic of China, 261061.




Subsidiary Information.




Not applicable.




Item 11. Quantitative and Qualitative Disclosures about Market Risk.




Foreign exchange risk




We are exposed to the risk of foreign currency exchange rate fluctuation. We have never used derivative instruments to hedge our exchange rate risks, do not plan to do so, and may not be successful should we attempt to do so in the future. Nevertheless, we believe such risk is low as no foreign currency liabilities are incurred and the principal operations are limited mainly to the market in China.




Our operating subsidiary, Shandong Fuwei’s, functional currency is Renminbi while our functional currency is Hong Kong Dollars. Transactions in other currencies are recorded in Renminbi at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are converted into Renminbi at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in our statements of operations as a component of current period earnings.




The China State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of Renminbi into foreign currencies. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under the Rules, once various procedural requirements are met, Renminbi is convertible for current account transactions, including trade and services, but not for capital account transactions, including direct investment, loan or investment in securities outside China, unless the prior approval of the State Administration of Foreign Exchange of China is obtained. Although the Chinese government regulations now allow greater convertibility of Renminbi for current account transactions, significant restrictions still remain. Currently, we are not involved in foreign exchange transactions as all transactions are conducted in China are in Renminbi and all exporting business is completed in U.S. dollars.


75




The value of the Renminbi is subject to changes in China’s central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate generally has been stable. The official exchange rate for the conversion of Renminbi into U.S. dollars remained stable until Renminbi was revalued in July 2005 and allowed to fluctuate by reference to a basket of foreign currencies, including the U.S. dollar. Under the new policy, Renminbi is permitted to fluctuate within a band against a basket of foreign currencies.




We conduct substantially all of our operations through Shandong Fuwei, and its financial performance and position are measured in terms of Renminbi. Any appreciation of the Renminbi against the United States dollar would consequently have an adverse effect on our financial performance and asset values when measured in terms of United States dollar. Our solutions are primarily procured, sold and delivered in China for Renminbi. The majority of our revenues are denominated in Renminbi. Should the Renminbi appreciate against United States dollar, such appreciation could have a material adverse effect on our profits and the foreign currency equivalent of such profits repatriated by the Chinese entities to us.




Interest rate risk




We are exposed to interest rate risk arising from having short-term variable rate borrowings from time to time. Our future interest expense would fluctuate in line with any change in our borrowing rates. We do not have any derivative financial instruments and believe our exposure to interest rate risk and other relevant market risks is not material.




Inflation




According to the National Bureau of Statistics of China, the change in Consumer Price Index in China was 4.8%, 1.9% and 3.3% in 2008, 2009 and 2010 respectively.




Credit and liquidity risks




We adopt a risk assessment model to our customer credit management system, and we offer different credit terms to our customers based on criteria such as working relationship, payment history, creditworthiness and their financial position. All credit terms are approved by our finance department, in consultation with our sales department. For extension of larger credit limits, approvals have to be sought from our credit committee which is made up of members from our finance department, sales department and the CFO. Our finance department and sales department review our outstanding debtor balances on a monthly basis and follow up with customers when payments are due. We believe that there would not material impact risk to our operations in our credit and liquidity risk from sales and customers and other relevant market risks.




Item 12. Description of Securities Other than Equity Securities




Not applicable.




PART II




Item 13. Default, Dividend Arrearages and Delinquencies




None.




76




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




We completed our initial public offering of 4,312,500 ordinary shares on December 22, 2006. The shares sold in the initial public offering, or IPO, were registered on a Registration Statement on Form F-1 (file number: 333-138948) declared effective on December 18, 2006. Maxim Group LLC was the sole book running manager for the offering of our ordinary shares. After the payment of underwriting fees, proceeds from the initial public offering were $33,207,975, of which $3,269,846 were used to pay legal, accounting and professional fees and other related printing and filing fees.




The total use of the net proceeds during the two fiscal periods from 2007 to 2008 is as follows:


Approximate

Allocation of Net

Proceeds


Approximate

Percentage of Net

ProceedsNet proceeds from IPO

$
29,938,129



100.0
%Investment in new production line equipment


16,140,417



53.9Buildings and property for new production line


8,997,711



30.1Sales and marketing


300,000



1.0General corporate purpose, including working capital


4,500,000



15.3




None of the proceeds were paid, directly or indirectly, to our directors, officers or their associates or to any person owning ten percent or more of our ordinary shares or to our affiliates.




Item 15. Controls and Procedures




(a) Disclosure Controls and Procedures.




Under the supervision and with the participation of our management, including the principal executive officer and the principal accounting officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal accounting officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports is accumulated and communicated to management (including such officers) as appropriate to allow timely decisions regarding required disclosure and recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to us, including our consolidated subsidiaries. Additionally, there were no changes in our internal control over financial reporting that during the period covered by this Annual Report on Form 20-F has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




(b) Management’s annual report on internal control over financial reporting.




Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. In making its assessment of the effectiveness of the Company’s internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our evaluation, our principal executive officer and principal financial officer have concluded as of the Evaluation Date, our internal controls over financial reporting were effective as of December 31, 2010.




All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can only provide reasonable assurances with respect to financial statement preparation and presentation. In addition, any evaluation of effectiveness for future periods is subject to the risk that controls may become inadequate because of changes in conditions in the future.




The Company’s independent auditor, Kabani & Company, Inc., has audited the consolidated financial statements of the Company for the fiscal year ended December 31, 2010.




(c) Attestation report of the registered public accounting firm.




This Annual Report on Form 20-F does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this Annual Report.


77




(d) Changes in internal control over financial reporting.




There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. It should be noted that while our management believes that our disclosure controls and procedures provide a reasonable level of assurance; our management does not expect that our disclosure controls and procedures or internal financial controls will prevent all errors or fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.




Item 16 [Reserved]




Item 16A. Audit Committee Financial Expert




Our Board of Directors has nominated Tee Chuang Khoo, Changrong Ji, and Shan Jiang as members of the Audit Committee, all of whom are “independent” under the rules of Nasdaq Marketplace Rule 4200(a)(15).  In addition, Tee Chuang Khoo qualifies as an audit committee as the financial expert as defined under the applicable rules of the SEC issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002.




Item 16B. Code of Ethics




The Code of Ethics for the members of our Board of Directors and Officers was approved by our Board of Directors on March 27, 2007.




Item 16C. Principal Accountant Fees and Services




Audit Fees




The audit fees of Kabani & Company, Inc. (“Kabani”), our independent registered public accounting firm, in connection with review and audit fee for 2009 and 2010 was US$ 137,500 and US$148,035, respectively.




Audit-Related Fees




The audit related fee of Kabani including expenses for responding to SEC comments and out-of-pocket expenses, such as traveling and lodging, for the fiscal years ended December 31, 2009 and 2010 amounted to US$9,179 and US$2,270, respectively.




All Other Fees




Not applicable.




Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors




The policy of our directors who perform the functions customarily performed by an audit committee is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services and other services.




Audit of Financial Statements




Kabani, is responsible for the annual audit of financial statements for the years ended December 31, 2008, 2009 and 2010.


78




Item 16D. Exemptions from the Listing Standards for Audit Committee




Not applicable.




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




None.




16F. Change in Registrant’s Certifying Accountant.




Not applicable.




16G. Significant Differences in Corporate Governance Practices.





NASDAQ Marketplace Rules and Home Country Practices




Pursuant to NASDAQ Listing Rule 5615(a)(3), as a foreign private issuer the Company may follow home country corporate governance practices in lieu of the requirements of the Rule 5600 series, provided that the Company (i) complies with certain mandatory sections of the Rule 5600 series, (ii) discloses each requirement of Rule 5600 that it does not follow and describes the home country practice followed in lieu of such other requirement and (iii) delivers a letter to NASDAQ from the Company’s Cayman Islands counsel certifying that the corporate governance practices that the Company does follow are not prohibited by Cayman Islands law. The Company’s independent Cayman Islands counsel has certified to NASDAQ that the Company’s corporate governance practices are not prohibited by Cayman Islands law.




In connection with our annual shareholder meeting to be held on September 16, 2010, we provided NASDAQ with a notice of non-compliance with Rule 5620 (c) with respect to the annual meeting, quorum and proxy solicitation requirements. Instead, we follow Cayman Islands law and practice which permits a company whose annual meeting of shareholders is unable to be held for lack of a quorum, to dissolve such annual meeting, with the directors then to hold office until the next annual meeting. Pursuant to home country practice, we followed this practice for the annual meeting to be held on September 16, 2010.




Part III




Item 17. Financial Statements




The Company has elected to provide Financial Statements pursuant to Item 18 (see below).




Item 18. Financial Statements




The following documents are filed as Attachment A hereto and are included as part of this Annual report on Form 20-F.




Audited Consolidated Financial Statements of Fuwei Films (Holdings) Co., Ltd and Subsidiaries




Report of Independent Registered Public Accounting Firm.




Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2010, 2009 and 2008.




Consolidated Balance Sheets as of December 31, 2010 and 2009.




Consolidated Statements of Cash Flows for the year ended December 31, 2010, 2009 and 2008.




Consolidated Statements of Shareholders’ Equity for the year ended December 31, 2010, 2009 and 2008.




Notes to Consolidated Financial Statements.


79




Item 19. Exhibits.




The following exhibits are filed as part of this Annual Report:


No.

Description1.2

Form of Amended Memorandum of Association of Fuwei Films (Holdings) Co., Ltd. **1.3

Articles of Association Fuwei Films (Holdings) Co., Ltd. ***4.1

Form of Underwriting Agreement. *4.2

Loan Agreement between Communication Bank of China of Fuwei Films (Shandong) Co., Ltd. dated January 15, 2007***4.3

Loan Agreement between Communication Bank of China of Fuwei Films (Shandong) Co., Ltd. dated January 15, 2007***4.4

Asset Purchase Agreement between Fuwei Plastics and Shandong Weifang Auction Firm dated October 9, 2003 **4.5

Purchase Agreement between Beijing Baorui and Weifang Jing Cheng Auction Co., Ltd. dated December 17, 2004 **4.6

Service Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoan He**4.7

Employment Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoan He **4.8

Employment Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoming Wang **4.9

Employment Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiuyong Zhang **4.10

Equipment Contract between Fuwei Films (Holdings) Co., Ltd. and Brückner dated as of June 2005**4.11

Credit Letter from Communication Bank of China dated May 8, 2006 **4.12

Contract between Fuwei Films (Shandong) Co. Ltd. and Lindauer Dornier GmbH, dated January 20, 2007****4.13

Amendment to the Contract of January 20, 2007 between Fuwei Films (Shandong) Co. Ltd. and Lindauer Dornier GmbH, dated February 2, 2007****4.14

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communications, dated July 16, 2008 ****4.15

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Weifang City Commercial Bank, dated July 18, 2008****4.16

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Weifang City Commercial Bank, dated December 2, 2008 ****4.17

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Weifang City Commercial Bank, dated January 13, 2009 ****4.18

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Weifang City Commercial Bank, dated January 16, 2009 ****4.19

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communications, dated June 9, 2009*****4.20

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communications, dated June 9, 2009*****4.21

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and the Weifang Dongfang State-owned Assets Management Co., Ltd., dated November 20, 2009 *****4.22

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Weifang, dated January 13, 2010 *****4.23

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communications, dated June 7, 2010******




80




4.24

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communications, dated June 7, 2010******4.25

Loan Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communications, dated June 7, 2010******8.1

List of the company’s significant subsidiaries, their jurisdiction of incorporation and the names under which they operate business, if different from their name. ***11.1

Code of Ethics for CEO and Senior Financial Officers. ***12.1

Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. *******12.2

Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. *******13.1

Certification of Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. *******




*

Filed with the Company’s amendment to Registration Statement on Form F-1/A filed with the SEC on December 12, 2006.**

Filed with the Company’s Registration Statement on Form F-1 filed with the SEC on November 24, 2006.***

Filed with the Company’s Annual Report on Form 20-F for the year ended December 31, 2006 filed with the SEC on April 2, 2007.****

Filed with the Company’s Annual Report on Form 20-F for the year December 31, 2008 filed with the SEC on March 30, 2009.*****

Filed with the Company’s Annual Report on Form 20-F for the year ended December 31, 2009 filed with the SEC on April 21, 2010.******

Filed with the Company’s Quarterly Report on Form 6-k for the quarter ended June 30, 2010 filed with the SEC on August 16, 2010.*******

Filed herewith.


81




SIGNATURES




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




Fuwei Films (Holdings) Co., Ltd.By:
/s/ Xiaoan HeName: Xiaoan HeTitle: Chairman, Chief Executive OfficerBy:
/s/ Xiuyong ZhangName: Xiuyong ZhangTitle: Chief Financial Officer




Dated: March 25, 2011


82




INDEX TO FINANCIAL STATEMENTS





Audited Consolidated Financial Statements of Fuwei Films (Holdings) Co., Ltd. and subsidiaries

PageReport of Independent Registered Public Accounting Firm — Kabani & Company, Inc.

F-2Consolidated Balance Sheets as of December 31, 2010 and 2009.

F-3Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2010, 2009 and 2008.

F-4Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2010, 2009 and 2008.

F-5Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008.

F-6Notes to the Consolidated Financial Statements for the years ended December 31, 2010, 2009 and 2008.

F-7 - F-19




F-1




Report of Independent Registered Public Accounting Firm





Board of Directors and Stockholders of


Fuwei Films (Holdings) Co., Ltd. and Subsidiaries





We have audited the accompanying consolidated balance sheets of Fuwei Films (Holdings) Co., Ltd. and Subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for the years ended December 31, 2010, 2009 and 2008, all expressed in Chinese Yuan (RMB), and US Dollar (USD) expressed only for the year ended December 31, 2010.  These consolidated financial statements are the responsibility of the Company's management. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fuwei Films (Holdings) Co., Ltd. and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income (loss) and cash flows for the years ended December 31, 2010, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.





/s/ Kabani & Company, Inc.


Certified Public Accountants


Los Angeles, California





March 25, 2011


F-2




FUWEI FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


As of December 31, 2010 and 2009


(amounts in thousands, except share and per share data)


December 31, 2010


December 31, 2009Notes

RMB


US$


RMBASSETSCurrent assetsCash and cash equivalents




171,227



25,897



26,804Restricted cash




1,314



199



12,541Accounts and bills receivable, net

4


25,482



3,854



28,785Inventories

5


52,577



7,952



45,039Advance to suppliers




10,974



1,660



3,956Prepayments and other receivables

6


540



82



957Deferred tax assets – current




1,344



203



1,198Total current assets




263,458



39,847



119,282Plant, properties and equipment, net

7


284,891



43,088



318,600Construction in progress

7


197,193



29,824



237,118Lease prepayments, net

8


21,024



3,180



21,548Advanced to suppliers - Long term




2,787



422



2,367Goodwill

9


10,276



1,554



10,276Long-term deposit

10


16,760



2,535



21,000Deferred tax assets - non current

17


1,763



267



5,318Total assets




798,152



120,716



735,509LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilitiesShort-term borrowings

11


142,000



21,477



153,179Accounts payables




14,296



2,162



25,898Advance from customers




37,291



5,640



12,608Accrued expenses and other payables

12


20,993



3,175



6,981Deferred tax liabilities

17


1,822



276



-216,402



32,730



198,666Long-term loans

11


30,000



4,537



25,000Total liabilities




246,402



37,267



223,666Commitments and contingencies

22EquityShareholders’ equityRegistered capital(of US$0.129752 par value; 20,000,000 shares authorized; 13,062,500 issued and outstanding)




13,323



2,015



13,323Additional paid-in capital




311,907



47,174



311,907Statutory reserve




35,195



5,323



29,338Retained earnings




190,933



28,878



156,006Cumulative translation adjustment




1,186



179



993Total shareholders’ equity




552,544



83,569



511,567Non-controlling interest




(794
)


(120
)


276Total equity




551,750



83,449



511,843Total liabilities and equity




798,152



120,716



735,509




See accompanying notes to the consolidated financial statements.


F-3




FUWEI FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


For the Years Ended December 31, 2010, 2009 and 2008


(amounts in thousands, except share and per share data)





2010


2009


2008Note

RMB


US$


RMB


RMBRevenues, net

13


501,458



75,843



320,731



447,255Cost of goods sold

14, 15


(370,905
)


(56,098
)


(296,118
)


(376,923
)Gross profit




130,553



19,745



24,612



70,332Operating expenses- Distribution expenses

14, 15


21,642



3,273



15,227



15,604- Administrative expenses

14


49,281



7,453



25,932



30,124Total operating expenses




70,922



10,727



41,159



45,728Operating income (loss)




59,630



9,019



(16,547
)


24,604Other income (expense)- Interest income




544



82



154



688- Interest expense

16


(8,846
)


(1,338
)


(6,540
)


(3,995
)- Others income, net




(575
)


(87
)


(92
)


(174
)Total other income (expense)




(8,877
)


(1,343
)


(6,478
)


(3,481
)Income (loss) before income tax benefit (expense)




50,754



7,676



(23,024
)


21,123Income tax (expense) benefit

17


(11,059
)


(1,673
)


4,064



(2,966
)Net income (loss)




39,695



6,004



(18,960
)


18,157Net (loss) income attributable to non-controlling interest




(1,088
)


(165
)


3



-Net income (loss) attributable to the Company




40,783



6,168



(18,963
)


18,157Other comprehensive (loss) income- Foreign currency translation adjustments




211



32



(68
)


(87
)Comprehensive (loss) income attributable to non-controlling interest




(1,070
)


162



3



-Comprehensive income (loss) attributable to the Company




40,976



6,197



(19,032
)


18,070Earnings (loss) per share,

Basic and diluted

23


3.12



0.47



(1.45
)


1.39Weighted average number ordinary shares,Basic and diluted

23


13,062,500



13,062,500



13,062,500



13,062,500





See accompanying notes to the consolidated financial statements.


F-4




FUWEI FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES




CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


For the Years Ended December 31, 2010, 2009 and 2008


(amounts in thousands, except share data)





Ordinary Shares











AccumulatedAdditional








other


TotalNumber of





paid-in


Statutory


Retained


comprehensive


shareholders'shares


Amount


capital


reserve


earnings


income


equityRMB


RMB


RMB


RMB


RMB


RMBBalance as of December 31, 2007


13,062,500



13,323



311,907



26,924



159,228



1,148



512,531Net income attributable to the Company


-



-



-



-



18,157



-



18,157Transfer to statutory reserve


-



-



-



2,414



(2,414
)


-



-Foreign currency translation adjustment


-



-



-



-



-



(87
)


-Balance as of December 31, 2008


13,062,500



13,323



311,907



29,338



174,970



1,061



530,599Net income attributable to the Company


-



-



-



-



(18,963
)


-



(18,963
)Foreign currency translation adjustment


-



-



-



-



-



(68
)


(68
)Balance as of December 31, 2009


13,062,500



13,323



311,907



29,338



156,007



993



511,567Net income attributable to the Company


-



-



-



-



40,783



-



40,783Transfer to statutory reserve


-



-



-



5,857



(5,857
)


-



-Foreign currency translation adjustment


-



-



-



-



-



193



193Balance as of December 31, 2010


13,062,500



13,323



311,907



35,195



190,933



1,186



552,544Balance as of December 31, 2010  US$


13,062,500



2,015



47,174



5,323



28,878



179



83,569




See accompanying notes to the consolidated financial statements.


F-5




FUWEI FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2010, 2009 and 2008


(amounts in thousands)





2010


2009


2008RMB


US$


RMB


RMBCash flow from operating activitiesNet income including non-controlling interest


39,695



6,004



(18,960
)


18,157Adjustments to reconcile net income to net cash






-provided by (used in) operating activities






-- Depreciation of property, plant and equipment


36,731



5,555



35,464



25,168- Amortization of intangible assets


454



69



889



490- Deferred income taxes


5,231



791



(4,064
)


(1,748
)- Bad debt (recovery) expense


(266
)


(40
)


697



4,818- Inventory provision


-



-



4,242



-Changes in operating assets and liabilities- Accounts receivable


3,404



515



11,609



18,186- Inventories


(7,538
)


(1,140
)


(18,693
)


11,080- Advance to suppliers


(7,018
)


(1,061
)


2,890



2,384- Prepaid expenses and other current assets


523



79



(4,929
)


89- Accounts payable


(11,581
)


(1,752
)


(4,475
)


3,691- Accrued expenses and other payables


8,341



1,262



1,902



(284
)- Advance from customers


24,683



3,733



3,827



(2,176
)- Tax payable


5,917



895



(2,411
)


172Net cash provided by operating activities


98,575



14,909



7,988



80,027Cash flow from investing activitiesPurchases of property, plant and equipment


(2,951
)


(446
)


(87,758
)


(56,093
)Restricted cash related to trade finance


11,217



1,697



(2,130
)


54,498Advanced to suppliers - non current


(420
)


(64
)


1,941



-Amount decrease in construction in progress


39,926



6,039



82,290



(54,155
)Amount decrease in deposit


4,240



641



-



(21,000
)Net cash provided by (used in) investing activities


52,012



7,867



(5,657
)


(76,750
)Cash flow from financing activitiesPrincipal payments of short-term bank loans


(11,179
)


(1,691
)


(11,585
)


(23,262
)Proceeds from short-term bank loans


5,000



756



20,000



5,000Net cash (used in) provided by financing activities


(6,179
)


(935
)


8,415



(18,262
)Effect of foreign exchange rate changes


16



2



236



(104
)Net increase (decrease) in cash and cash equivalent


144,424



21,843



10,982



(15,086
)Cash and cash equivalentsAt beginning of the year


26,804



4,054



15,823



30,909At end of the year


171,227



25,897



26,804



15,823SUPPLEMENTARY DISCLOSURE:Interest paid


8,846



1,338



8,399



11,705Income tax paid


3,658



553



-



2,966SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCIAL ACTIVITIES:During the years ended December 31, 2010, 2009 and 2008, the Company acquired equipment by incurring accounts payable inthe amount of:


-



-



7,071



-





See accompanying notes to the consolidated financial statements


F-6




FUWEI FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES


Notes to Consolidated Financial Statements


December 31, 2010 and 2009


(amounts in thousands, except per share data)




(1) Principal Activities and Reorganization




Fuwei Films (Holdings) Co., Ltd (the “Company”) and its subsidiaries (the “Group”) are principally engaged in the production and distribution of BOPET film, a high quality plastic film widely used in packaging, imaging, electronics, electrical and magnetic products in the People’s Republic of China (the “PRC”). The Company is a holding company incorporated in the Cayman Islands, established on August 9, 2004 under the Cayman Islands Companies Law as an exempted company with limited liability. The Company was established for the purpose of acquiring shares in Fuwei (BVI) Co., Ltd (“Fuwei (BVI)”), an intermediate holding company established for the purpose of acquiring all of the ownership interest in Fuwei Films (Shandong) Co., Ltd.




(2) Basis of Presentation




The Group’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).




This basis of accounting differs in certain material respects from that used in the preparation of the books of account of Shandong Fuwei, the Company’s principal subsidiary, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises limited by shares as established by the Ministry of Finance of the PRC (“PRC GAAP”), the accounting standards used in the country of its domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company’s subsidiaries to present them in conformity with US GAAP.




(3) Summary of Significant Accounting Policies and Practices




(a) Principles of Consolidation




The consolidated financial statements include the financial statements of the Company and its three subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.




(b) Foreign Currency Transactions




The Group’s reporting currency is the Renminbi (“RMB”).




The Company and Fuwei (BVI) operate in Hong Kong as investment holding companies and their financial records are maintained in Hong Kong dollars, being the functional currency of these two entities. Fuwei US company, the wholly owned subsidiaries of the company, their financial records are maintained in US dollars. Assets and liabilities are translated into RMB at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and income, expenses, and cash flow items are translated using the average rate for the period. The translation adjustments are recorded in accumulated other comprehensive income in the statements of shareholders’ equity and comprehensive income.




Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (the “PBOC”) prevailing at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. The resulting exchange differences are recorded in the statements of income.




Commencing from July 21, 2005, the PRC government moved the RMB into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.




For the convenience of the readers, the 2010 RMB amounts included in the accompanying consolidated financial statements in our annual report has been translated into U.S. dollars at the rate of US$1.00 = RMB 6.6118, being the noon buy rate for U.S. dollars in effect on December 31, 2010 in the City of New York for cable transfer in RMB per U.S. dollar as certified for custom purposes by the Federal Reserve Bank. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollar at that rate or at any other certain rate on December 31, 2010, or at any other date.




RMB is not fully convertible into foreign currencies. All foreign exchange transactions involving RMB must take place either through the PBOC or other institutions authorized to buy and sell foreign currency. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC which are determined largely by supply and demand.




(c) Cash and Restricted Cash




As of December 31, 2009 and 2010, there were cash and cash equivalents of RMB26,804 and RMB171,227 (US$25,897), respectively.




As of December 31, 2009 and 2010, there were restricted cash of RMB12,541 and RMB1,314 (US$199), respectively, as the balance held by bank as deposit for letters of credit.


F-7




(d) Trade Accounts Receivable




Trade accounts receivable are recorded at the invoiced amount after deduction of trade discounts, value added taxes and allowances, if any, and do not bear interest. The allowance for doubtful accounts is the Group’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable. The Group determines the allowance based on historical write-off experience, customer specific facts and economic conditions.




The Group reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by aging of such balances. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.




(e) Inventories




Inventories are stated at the lower of cost or market value. Cost is determined using Moving Weighted Average Method basis method. Cost of work in progress and finished goods comprises direct material, direct production cost and an allocated portion of production overheads based on normal operating capacity.




(f) Property, Plant and Equipment




Property, plant and equipment are stated at cost less accumulated depreciation and impairment.




Depreciation on property, plant and equipment is calculated on the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the assets as follows:




YearsBuildings and improvements

25 – 30Plant and equipment

10 – 15Computer equipment

5Furniture and fixtures

5Motor vehicles

5




Depreciation of property, plant and equipment attributable to manufacturing activities is capitalized as part of inventory, and expensed to cost of goods sold when inventory is sold. Depreciation related to abnormal amounts from idle capacity is charged to cost of goods sold for the period incurred. Total depreciation for the year ended December 31, 2008, 2009 and 2010 was RMB25,168, RMB 35,464 and RMB 36,731 (US$5,555) respectively, of which 97%, 88% and 90% were recorded in cost of goods sold and 3%,12% and 10% was recorded in administrative expenses, respectively.




Construction in progress represented capital expenditure in respect of the BOPET productions line. No depreciation is provided in respect of construction in progress.




(g) Lease Prepayments




Lease prepayments represent the costs of land use rights in the PRC. Land use rights are carried at cost and charged to expense on a straight-line basis over the respective periods of rights of 30 years. The current portion of lease prepayments has been included in prepayments and other receivables in the balance sheet.




(h) Intangible Assets




The Group acquired a trademark for use in the production and distribution of plastic flexible packaging materials. The trademark is carried at cost less accumulated amortization. Amortization expense is recognized on the straight-line basis over the estimated useful life of 5 years of the trademark.




Given the environment in which the Group currently operates, it is reasonably possible that the estimated economic useful life of the asset or the Group’s estimate that it will recover its carrying amount from future operations could change in the future.




(i) Goodwill




Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired.  Goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist.  Impairment testing is performed at a reporting unit level.  An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis.  A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce.  Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.




F-8




(j) Impairment of Long-lived Assets




Long-lived assets, other than goodwill, including property, plant, and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.




Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount in which the carrying amount of the asset exceeds the fair value of the asset.




(k) Revenue Recognition




Sales of plastic flexible packaging materials are reported, net of value added taxes (“VAT”), sales returns, trade discounts. The standard terms and conditions under which the Group generally delivers allow a customer the right to return product for refund only if the product does not conform to product specifications; the non-conforming product is identified by the customer; and the customer rejects the non-conforming product and notifies the Group within 7 days and 30 days of receipt for sales to customers in the PRC and overseas respectively. The Group recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sale price is fixed or determinable.




In the PRC, VAT of 17% on invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Group; instead, the amount is recorded as a liability on the consolidated balance sheet until such VAT is paid to the authorities.




(l) Government Grants




Government grants are recognized in the consolidated balance sheet initially as deferred income when they have been received. Grants that compensate the Group for expenses incurred are recognized as a reduction of expenses in the consolidated statement of income in the same period in which the related expenses are incurred.




(m) Research and Development Costs




Research and development costs are expensed as incurred. Research and development costs amounted to RMB737, RMB 269 and RMB 8,058(US$1,219) for the year ended December 31, 2008, 2009 and 2010 and such costs were recorded in administrative expenses.




(n) Retirement and Other Postretirement Benefits




Contributions to retirement schemes (which are defined contribution plans) are charged to expense as and when the related employee service is provided.




(o) Income Taxes




Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.




In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measuring and recognition in accounting for income taxes. The Company adopted FIN 48 beginning on January 1, 2007. The initial adoption of FIN 48 had no impact on the Company’s financial statements. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of interest expenses and administrative expenses in the statements of income, respectively. The additional disclosures required under FIN 48 are included in Note 19.




(p) Stock Option Plan




The fair value of stock options granted to Maxim Group LLC under the stock option plans is recognized as listing expenses deducted from IPO proceeds and recorded in additional paid-in capital.




On December 18, 2006, the Company granted 187,500 stock options to Maxim Group LLC as part of the compensation for the provision of services relating to the IPO of the Company. The stock option is exercisable at an exercise price equal to US$10.35 per ordinary share commencing six months from December 18, 2006 and expiring five years from December 18, 2006. The stock option and ordinary shares underlying the stock option may not be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective disposition thereof by any person for a period of six months.




The fair value of each option award is estimated on the date of grant using the Black-Scholes pricing model based on the following assumptions:


Fair value of shares on measurement date

US$ 8.28 per shareExpected volatility


57.26
%Expected dividends


0.00
%Expected term (in years)


5Risk-free rate


4.56
%




The fair value of the Company’s shares was estimated based on the IPO price of US$8.28 per share. The expected volatility is estimated by reference to the historical volatility of comparable companies listed on the NASDAQ Global Market. The risk-free rate for periods within the contractual life of the options is based on the U.S. government bond in effect at the time of grant. Expected dividend yields are based on historical dividends. Changes in these subjective input assumptions could materially affect the fair value estimates.




The Company recognized share-based compensation expenses of RMB5,643 for the year ended December 31, 2006, as listing expense deducted from IPO proceeds and recorded in additional paid-in capital. As of December 31, 2010, there was no unrecognized compensation costs related to unvested stock options.





F-9





(q) Earnings per Share




Basic earnings per share are computed by dividing net earnings by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is calculated by dividing net earnings by the weighted average number of ordinary and dilutive potential ordinary shares outstanding during the year. Diluted potential ordinary shares consist of shares issuable pursuant to stock option plan.




(r) Use of Estimates




The preparation of the consolidated financial statements in accordance with US GAAP requires management of the Group to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates and assumptions including those related to the recoverability of the carrying amount and the estimated useful lives of long-lived assets, valuation allowances for accounts receivable and realizable values for inventories. Changes in facts and circumstances may result in revised estimates.




(s) Segment Reporting




The Group uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Group’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Group’s reportable segments. Management, including the chief operating decision maker, reviews operating results solely by monthly revenue of BOPET film (but not by sub-product type or geographic area) and operating results of Shandong Fuwei, the operating subsidiary in the PRC. As such, the Group has determined that the Group has a single operating segment as defined by Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information.




(t) Contingencies




In the normal course of business, the Group is subject to contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters, including among others, product liability. The Group recognizes a liability for such contingency if it determines it is probable that a loss has occurred and a reasonable estimate of the loss can be made. The Group may consider many factors in making these assessments including past history and the specifics of each matter. As the Group has not become aware of any product liability claim since operations commenced, the Group has not recognized a liability for any product liability claims.




(u)Reclassification
 
 Certain reclassifications have been made to the fiscal year 2010 and 2009 consolidated financial statements to conform to the fiscal 2010 consolidated financial statement presentation. These reclassifications had no effect on net loss or cash flows as previously reported.




(v) Recently Issued Accounting Standards




Business Combinations:   In December 2010, the FASB issued amended guidance related to Business Combinations. The amendments affect any public entity that enters into business combinations that are material on an individual or aggregate basis. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company will assess the impact of these amendments on its consolidated financial statements if and when an acquisition occurs.




Intangibles-Goodwill and Other:   In December 2010, the FASB issued amended guidance related to Intangibles-Goodwill and Other. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.




Subsequent Events:  The FASB has issued amended guidance for subsequent events. The amendment removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC's literature. All of the amendments were effective upon issuance (February 24, 2010). The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.




Fair Value Measurements:  In January 2010, the FASB issued amended guidance for Fair Value Measurements and Disclosures. This update requires some new disclosures and clarifies existing disclosure requirements about fair value measurement. The FASB's objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, this update requires that a reporting entity disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, this update clarifies the requirements of existing disclosures. For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This update was adopted on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.




Receivables: In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU No. 2010-20 amends the guidance with ASC Topic 310, “Receivables” to facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses; and (3) the changes and reasons for those changes in the allowance for credit losses. The amendments in ASU No. 2010-20 also require an entity to provide additional disclosures such as a rollforward schedule of the allowance for credit losses on a portfolio segment basis, credit quality indicators of financing receivables and the aging of past due financing receivables. The Company is required to adopt ASU No. 2010-20 as of December 15, 2010 and is currently evaluating the impact the new disclosure requirements will have on its financials statements and notes.




F-10




(4) Accounts Receivable, net




Accounts receivable on December 31, 2010 and 2009 consist of the following:


12-31-2010


12-31-2009RMB


US$


RMBAccounts receivable


7,097



1,073



22,289Less: Allowance for doubtful accounts


(2,140
)


(324
)


(2,259
)4,957



750



20,030Bills receivable


20,525



3,104



8,75525,482



3,854



28,785




An analysis of the allowance for doubtful accounts for 2010, 2009 and 2008 is as follows:


12-31-2010


2009


2008RMB


US$


RMB


RMBBalance at beginning of year


2,259



342



4,074



2,644Bad debt (recovery) expense


(119
)


(18
)


(1,713
)


1,430Write-offs


-



-



(102
)


-Balance at end of year


2,140



324



2,259



4,074




The Group has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. These receivables are due within 7 to 90 days from the date of billing. Normally, the Group does not obtain collateral from customers.




(5) Inventories




Inventories on December 31, 2010 and 2009 consist of the following:




12-31-2010


12-31-2009RMB


US$


RMBRaw materials


25,254



3,820



28,756Work-in-progress


1,419



215



2,274Finished goods


27,634



4,179



16,752Consumables and spare parts


849



128



633Allowance for obsolescense


(2,578
)


(390
)


(3,377
)52,577



7,952



45,039




(6) Prepayments and Other Receivables




Prepayments and other receivables at December 31, 2010 and 2009 consist of the following:





12-31-2010


12-31-2009RMB


US$


RMBCurrent:Purchase deposits of raw materials


10,974



1,662



3,956Prepayments


477



72



741Other receivables


63



10



21611,514



1,741



4,913Non-current:Purchase deposits of equipment


2,787



422



2,367




(7) Property, Plant and Equipment




Property, plant and equipment consist of the following:




12-31-2010


12-31-2009RMB


US$


RMBBuildings


44,398



6,715



33,549Plant and equipment


417,696



63,174



425,864Computer equipment


1,602



242



1,424Furniture and fixtures


6,958



1,052



5,929Motor vehicles


1,905



288



1,739472,561



71,472



468,505Less: accumulated depreciation


(187,670
)


(28,384
)


(149,905
)284,891



43,088



318,600




All of the Group’s buildings are located in the PRC. As of December 31, 2009 and 2010, property, plant and equipment with carrying value totaling RMB326,243 and RMB296,504 (US$44,845) respectively were pledged to banks as collateral for bank loans of RMB165,000 and RMB162,000 (US$24,502), respectively (see Note 12).
  Construction-in-progress represents capital expenditure in respect of the BOPET production line. Interest expense capitalized during the year ended December 31, 2008 and 2009 was RMB7,710 and RMB 1,739, and there was no interest capitalization ended December 31, 2010 (see Note 18).


F-11




(8) Lease Prepayments




The balance represents the lease prepayments of land use rights of the Group as follows:




12-31-2010


12-31-2009RMB


US$


RMBLand use rights prepayment


21,024



3,180



21,548




As of December 31, 2009 and 2010, prepaid land use rights were partly pledged to banks as collateral for short-term bank loans of RMB26,880 (US$4,065) (Note 12).




Land use rights amortization for the year ended December 31, 2008, 2009 and 2010 were RMB741 (US$112), respectively.




As of December 31, 2010, prepaid land use rights of the Group included certain parcels of land located in Weifang City, Shandong Province, the PRC, with a net book value of RMB21,024 (US$3,180). The land use rights for land with area of approximately 43,878 square meters, 5,279 square meters and 25,094 square meters will expire in November 2050, May 2053 and February 2055, respectively.




(9) Goodwill




Goodwill of RMB10,276 (US$1,554) on December 31, 2009 and 2010, which is not deductible for tax purposes, pertains solely to the Company’s acquisition of Shandong Fuwei in October 2004. The goodwill is attributable to the development potential of business acquired.




(10) Long-term Deposit





On January 20, 2008, Shandong Fuwei signed a “Letter of Intent of Joyinn Capital Increase and Share Expansion”(“LOI”) with Joyinn Hotel Investment & Management Co., Ltd. (“Joyinn”) and the Shareholder of Joyinn. Joyinn is a legal company of limited liability that registered on May 19, 2006 in Beijing, with registered capital of RMB 50,000.





According to the LOI, Shandong Fuwei deposited RMB 26,000 (half of the would-be added register capital of RMB 52,000), to Joyinn as the prepayment as of June 30, 2008. The prepayment to Joyinn will be regarded as investment payment after all parties enter into the final capital increase and shares expansion agreement during the effective term of this LOI. A share pledging agreement was entered into subsequently on April 9, 2008 between Shandong Fuwei and Shandong Xinmeng Investment Co., Ltd (“Pledger”), which holds 97.6% shares of Joyinn. The Pledger agreed to pledge its 52% interest in Joyinn, as a guarantee to the prepayment on the newly increased register capital made by Shandong Fuwei to Joyinn. Based on the mutual supplementary agreement signed in June 2008, the prepayment was decreased by RMB 5,000 and returned to the Company on June 18, 2008.




On June 23, 2009, Shandong Fuwei and the Pledger, the major shareholder of Joyinn, agreed that the Pledger would pledge another 19% of its interest in Joyinn in addition to the previous pledge of 52% interest in Joyinn as a guarantee to the prepayment on the newly increased register capital made by Shandong Fuwei to Joyinn. As a result, the Pledger’s percentage of pledged interest in Joyinn increased from 52% to 71%. In the current year, the Company impaired the deposit amount by RMB 4,240 (US$641). The impairment was determined based on an independent appraisal study. As of December 31, 2010 the total amount of the deposit was RMB 16,760 (US$2,535).




On July 14, 2009, Shandong Fuwei and Joyinn signed “Supplementary Agreement of Letter of Intent of Joyinn Capital Increase and Share Expansion” which extends the duration of former agreement to two (2) years that is, Fuwei has the option right to determine to continue or withdraw the investment prior to January 14, 2010, the expiration date of the agreement.





On January 14, 2010, when the agreement was expired Shandong Fuwei and the Pledger came to an agreement that the Pledger would transfer 71% of Joyinn’s shares which it owns to Shandong Fuwei. This agreement is subject to the approval of the authority body of both parities.




(11) Short-term and Long-term Bank Loans





12-31-2010


12-31-2009Lender




RMB


US$


RMBSHORT-TERM LOANSBank of Communications Co., Ltd.- June 9, 2009 to June 8, 2010


5.84
%








70,000- June 9, 2009 to June 8, 2010


5.84
%








70,000- June 8, 2010 to June 7, 2011


6.116
%


67,000



10,133- June 7, 2010 to June 6, 2011


6.116
%


70,000



10,587Bank of Weifang- January 13, 2009 to January 12, 2010


0.00
%










10,000- December 2, 2008 to December 2, 2011


0.00
%


5,000



756



5,000Bank of China- March 13, 2008 to March 13, 2009


5.45
%










(80
)- June 4, 2009 to June 4, 2010


1.38
%










3,259LONG-TERM LOANSBank of Weifang- January 16, 2009 to January 12, 2012


0.00
%


10,000



1,512



10,000- January 13, 2010 to January 12, 2012


0.00
%


10,000



1,512Weifang Dongfang State-owned Assets Management Co., Ltd.- October 19, 2009 to October 18, 2017


5.52
%


10,000



1,512



10,000172,000



26,014



178,179




Notes:




During the years ended December 31, 2009 and 2010, the Company entered into several loan agreements with commercial banks with terms ranging from one year to three years and eight years to finance its working capital, R&D investment and construction, and foreign trade. The weighted average interest rate of short-term bank loans outstanding as of December 31, 2009 and 2010 were 5.64% and 5.14% per annum, respectively.




The principal amounts of the above short-term loans are repayable at the end of the loan period.




The Company obtained two new short-term loans on June 7, 2010 and June 8, 2010, for RMB70,000 (US$10,587) maturing on June 6, 2011, and for RMB67,000 (US$10,133) maturing on June 7, 2011, respectively. The annual interest rate is up by 10% compared with the fixed benchmark interest rate 5.56% announced by the People’s Bank of China. As of December 31, 2010, the effect interest rate was 6.116%.





F-12





The Company entered into three interests free Loan Contracts with Bank of Weifang (formerly known as Weifang City Commercial Bank) for the amount of (i) RMB10,000 (US$1,512), effective January 13, 2010, with a maturity date of January 12, 2012; (ii) RMB10, 000 (US$1,512), effective January 16, 2009, with a maturity date of January 12, 2012; and (iii) RMB5,000 (US$756), effective December 2, 2008, with a maturity date of December 2, 2011.




On June 4, 2009, the Company entered into a one-year foreign currency loan agreement with Bank of China Weifang Branch for US$477 which was secured by a deposit of RMB 3,259 with an interest rate of 1.38375%, 0.2% down float by trading day’s LIBOR interest, in order to reduce the currency translation cost. Proceed of the loan of US$477 was paid off on June 4, 2010.





On November 20, 2009, the Company signed a long-term loan contracts of RMB10,000 (US$1,512) with Weifang Dongfang State-owned Assets Management Co., Ltd., with eight years loan term which became effective on October 19, 2009 and will expire on October 18, 2017. From 2015 to 2016, we will make principal installment payments of RMB3,350 (US$507) per year with the remaining principal balance of RMB3,300 (US$499) paid in 2017. The annual interest rate is 5.52% which is down by 10% compared with the fixed benchmark of 5-year interest rate announced by the People’s Bank of China. The loan is guaranteed by Shandong Deqin Investment & Guarantee Co., Ltd. and is used for our key projects.




Short-term loans outstanding, which are all denominated in Renminbi, are secured and guaranteed as follows:


12-31-2010


12-31-2009


12-31-2008RMB


US$


RMB


RMBSecured by:- property, plant and equipment


135,120



20,436



138,120



107,580- lease prepayments


26,880



4,065



26,880



60,000- bills receivable


-



-



-



-Guaranteed by related parties (Note 22(a))


10,000



1,512



10,000



-Restricted cash


-



-



3,259



-172,000



26,014



178,259



167,580




Long-term bank loans maturity for the next three years after December 31, 2010 are as follows:


RMB


US$1 year after


20,000



3,0253 year after


10,000



1,512




(12) Accrued Expenses and Other Payables




Accrued expenses and other payables on December 31, 2010 and 2009 consist of the following:


12-31-2010


12-31-2009RMB


US$


RMBPayables to contractors


-



-



-Other payables


13,570



2,052



5,474VAT payable and other taxes payable


7,422



1,123



1,507Audit fee


-



-



54620,993



3,175



6,981




(13) Revenues




The Company’s revenue is primarily derived from the manufacture and sale of plastic flexible packaging materials.




The following table shows the distribution of the Company’s revenue by the geographical location of customers, whereas all the Company’s assets are located in the PRC:


12-31-2010


12-31-2009


12-31-2008RMB


US$


RMB


RMBSales in China


397,781



60,162



285,120



388,823Sales in other countries (principally Europe, Asia and North America)


103,677



15,681



35,611



58,432501,458



75,843



320,731



447,255




The Company’s revenue by significant types of films for 2010, 2009 and 2008 was as follows:


12-31-2010





12-31-2009





12-31-2008RMB


US$


% of Total


RMB


% of Total


RMB


% of TotalPrinting film


76,720



11,604



15.3
%


35,231



11.0
%


56,607



12.7
%Stamping film


282,033



42,656



56.2
%


174,356



54.4
%


139,571



31.2
%Metallization film


28,108



4,251



5.6
%


35,138



11.0
%


45,148



10.1
%Specialty film


87,956



13,303



17.5
%


34,004



10.6
%


107,404



24.0
%Base film for other applications


26,641



4,029



5.3
%


42,002



13.1
%


98,525



22.0
%501,458



75,843



100.0
%


320,731



100.0
%


447,255



100.0
%




(14) Depreciation and Amortization




Depreciation of property, plant and equipment and amortization of intangible asset is included in the following captions:


12-31-2010


12-31-2009


12-31-2008RMB


US$


RMB


RMBCost of goods sold


33,154



5,014



32,139



25,362Distribution expenses


51



8



55



42Administrative expenses


3,526



533



2,976



614-36,731



5,555



35,170



26,018




F-13





(15) Freight Costs




The Group records freight costs related to the transporting of the raw materials to the Group’s warehouse in cost of goods sold and all other outbound freight costs in distribution expenses. For the year ended December 31, 2008, 2009 and 2010, freight costs included in cost of goods sold were RMB3,302, RMB2,765 and RMB1,985 (US$300), respectively, and RMB10,843, RMB9,618 and RMB10,186 (US$1,541), respectively, were included in distribution expenses.




(16) Interest Expense




The Group capitalizes interest expense as a component of the cost of construction in progress. The following is a summary of interest cost incurred during the year ended December 31, 2010, 2009 and 2008:


12-31-2010


12-31-2009


12-31-2008RMB


US$


RMB


RMBInterest cost capitalized


-



-



1,739



7,710Interest cost charged to expense


8,846



1,338



6,540



3,9958,846



1,338



8,279



11,705




(17) Income Taxes




Cayman Islands Tax




Under the current Cayman Island laws, the Company is not subject to tax on income or capital gain. In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax is imposed.




PRC Tax




Shandong Fuwei, being a Hi-Tech Enterprise in the Weifang Hi-Tech Industrial Zone in Shandong, the PRC, has been granted preferential tax treatments by the Tax Bureau of the PRC. According to the PRC Income Tax Law and various approval documents issued by the Tax Bureau, Shandong Fuwei’s profit was taxed at a rate of 15%.




If our subsidiary Shandong Fuwei was not entitled to a reduced enterprise income tax, or EIT, rate of 15% for the year ended December 31, 2010, 2009 and 2018, it would have had an EIT rate of 25%, net income and basic and diluted earnings per share would be reduced by the following amounts:




12-31-2010


12-31-2009


12-31-2008RMB


US$


RMB


RMBNet income


(5,075
)


(768
)


-



(2,966
)Earnings per share- Basic


(0.39
)


(0.06
)


-



(0.23
)- Diluted


(0.39
)


(0.06
)


-



(0.23
)




The Group had minimal operations in jurisdictions other than the PRC. Net income/(loss) before income taxes consists of:


12-31-2010


12-31-2009


12-31-2008RMB


US$


RMB


RMBCayman Islands


(14,423
)


(2,181
)


(4,989
)


(11,419
)British Virgin Islands


(2
)


(0.3
)


(1
)


(1
)PRC


67,900



10,269



(18,042
)


32,539U.S.A


(2,721
)


(412
)


8



-50,754



7,676



(23,024
)


21,119




The Company has no material unrecognized tax benefit which would favorably affect the income taxes in future periods and does not believe there will be any significant increases or decreases within the next twelve months. No interest or penalties have been accrued at the date of adoption.




Shandong Fuwei was designated as a High-and-New Tech Enterprise in December 2008 and enjoys the favorable income tax rate pursuant to the income law Enterprise Income Tax Law. Accordingly, the deferred taxes as of December 31, 2010, have been calculated employing the statutory rate of Shandong Fuwei of 15%.




Income tax benefit (expense) consist of:


Current


Deferred


TotalPRC income tax

RMB


RMB


RMBYear ended December 31, 2008


(4,715
)


1,748



(2,966
)Year ended December 31, 2009

-



4,064



4,064Year ended December 31, 2010


(8,427
)


(2,632
)


(11,059
)Year ended December 31, 2010 US$


(1,275
)


(398
)


(1,673
)




Income tax benefit reported in the consolidated statements of income differs from the income tax expense amount computed by applying the PRC income tax rate of 15% (the statutory tax rate of the Company’s principal subsidiary) for the year ended December 31, 2010, 2009 and 2008 for the following reasons:




12-31-2010


12-31-2009


12-31-2008RMB


US$


RMB


RMBIncome (loss) before income taxes


50,754



7,676



(23,024
)


21,123Computed “expected” tax expense (benefit)


(13,275
)


(2,008
)


(3,453
)


(5,280
)Non-deductible expenses


4,425



669



1,693



1,022Non-taxable income


(1,965
)


(297
)


(1,324
)


(3,030
)Tax holiday


8,850



1,339



5,388



3,385Tax rate differential of other tax jurisdictions


(9,094
)


(1,375
)


1,760



937Actual income tax (expense) benefit


(11,059
)


(1,673
)


4,064



(2,966
)




F-14




Tax effects of temporary differences that give rise to significant portions of the deferred tax assets/(liabilities) as of December 31, 2010 and 2009, are presented below.




Deferred income tax assets (liabilities):


12-31-2010


12-31-2009RMB


US$


RMBCurrentAccounts receivable


321



49



(353
)Other receivables


636



96



914Inventory impairment


387



58



6361,344



203



1,198Non-currentProperty, plant and equipment, principally due to differences in depreciation


1,763



267



2,134Construction in progress, principally due to capitalized interest


(1,417
)


(214
)


161Lease prepayments, principally due to differences in charges


(404
)


(61
)


(431
)Net loss carryforward


-



-



3,454(58
)


(9
)


5,318Net deferred income tax assets


1,285



194



6,516




In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, Shandong Fuwei will need to generate future taxable income of approximately RMB12,544 prior to 2031. Shandong Fuwei was under tax concession period for the period from January 28, 2003 to December 31, 2007. The net income before taxation for Shandong Fuwei for the year ended December 31, 2008 was RMB21,124, net loss was RMB23,308 ended December 31, 2009, and net income was RMB 40,783 (US$6,168) ended of December 31, 2010, respectively. Based upon the level of historical performance of Shandong Fuwei, management believes the deferred tax assets are realizable.




(18) Related Party Transactions




Name of party

RelationshipShandong Baorui Investment Co., Ltd (“Shandong Baorui”)

Former shareholder (10%) of Shandong Fuwei. Shandong Baorui is 22.1% owned by the Group Founders.Shenghong Group Co., Ltd (“Shenghong Group”)

Former shareholder (90%) of Shandong Fuwei.Shandong Neo-Luck Plastic Co., Ltd (“Shandong Neo-Luck”)

The Group Founders’ former employer previously engaged in the business of BOPET film production.Weifang Neo-Luck (Group) Co., Ltd (“Weifang Neo-Luck Group”)

Major shareholder (59%) of Shandong Neo-Luck. One of the directors of the Company was the general manager of Weifang Neo-Luck Group prior to joining the Company in April 2005.Easebright Investments Limited (“Easebright Investments”)

Shareholder of the Company(12.5%)Apex Glory Holdings Limited (“Apex Glory Holdings”)

Shareholder of the Company(52.9%)Everise Investment Management Co., Ltd.

Owned by the Management of the Company




(19) Pension Plan




Pursuant to the relevant PRC regulations, the Group is required to make contributions at a rate of 20% of employees’ salaries and wages to a defined contribution retirement scheme organized by the local Social Bureau in respect of the retirement benefits for the Group’s employees in the PRC. The total amount of contributions of RMB710, RMB991 and RMB 1,057(US$160) for the year ended December 31, 2008, 2009 and 2010, respectively, was charged to administrative expenses in the accompanying consolidated statements of income. The Group has no other obligation to make payments in respect of retirement benefits of the employees.




(20) Fair Value of Financial Instruments




The carrying amount of cash and cash equivalents, trade accounts receivable, prepayments and other receivables, amounts due from related parties, amounts due to related parties, and accrued liabilities and other payables, approximate their fair values because of the short maturity of these instruments.




The carrying amount of bank loans approximate the fair value based on the borrowing rates currently available for bank loans with similar terms and maturity.




F-15




(21) Business and Credit Concentrations




(a) Almost all of the Group’s customers are located in the PRC. There is no individual customer with gross revenue more than 10% of total gross revenue during the year ended December 31, 2008, 2009 and 2010.




There were no amounts due from customers representing more than 10% of the outstanding accounts receivable at December 31, 2009 and 2010.




(b) The Group purchased a significant portion of PET resin required for the production of BOPET film from Sinopec Yizheng Chemical Fibre Company Limited (“Sinopec Yizheng”) during the year ended December 31, 2008, 2009 and 2010. The Group believes that there are a limited number of suppliers in the PRC with the ability to consistently supply PET resin that meets the Group’s quality standards and requirements. Currently, the Group has an annual supply agreement with Sinopec Yizheng pursuant to which Sinopec Yizheng has agreed to supply fixed quantities of PET resin to the Group on a monthly basis at the prevailing market prices. The terms of such supply agreement are reviewed annually. Although the Group believes that it maintains a good relationship with its major suppliers, there can be no assurance that Sinopec Yizheng will continue to sell to the Group under normal commercial terms as and when needed.




The following are the vendors that supplied 5% or more of our raw materials for each of the year ended December 31, 2010, 2009 and 2008:


Percentage of total purchases (%)Supply

2010


2009


2008Sinopec Yizhang Chemical Fibre Company Limited

PET resin and Additives


42.4



45.8



44.8Jiangyin Huaxin Compound Co., Ltd.

PET resin


11.6



12.5



9.7Mahongany Joy Investment Ltd

PET resin


11.1



-



-




Note: To our knowledge, Jiangying Huaxin Compound and Mahogany Joy Investments are related companies.




(22) Commitments and Contingencies




(a) Operating lease commitments




Future minimum lease payments under non-cancelable operating leases as of December 31, 2010 are as follows:


RMB2010


401




The Company leases warehouses, staff quarters and offices under operating leases. The leases typically run for an initial period of one to three years, with an option to renew the lease after that date at which time all terms are renegotiated. None of the leases includes contingent rentals.




For the year ended December 31, 2008, 2009 and 2010, total rental expenses for non-cancelable operating leases were RMB2,792, RMB1,182 and RMB 728 (US$110), respectively.




(b) Capital commitments




Capital commitments for purchase of property, plant and equipment as of December 31, 2010 were RMB134,830 (US$20,392).




(c) Outstanding bills receivable discounted




As of December 31, 2010, the Company had not retained any recourse obligation in respect of bills receivable discounted with and sold to banks.




(d) Legal Proceedings




DMT Arbitration




In 2006, Shandong Fuwei received correspondence relating to an arbitration proceeding initiated by DMT S. A. (“DMT”) against Shandong Neo-Luck in the ICC International Court of Arbitration (the “ICC”). In that proceedings DMT sought monetary damages against Shandong Neo-Luck for approximately US $1,250 plus interest relating to a claim of partial non-payment for the DMT production line, which Shandong Fuwei acquired from Beijing Baorui in 2005. In early 2007, the ICC determined that despite arguments made to the ICC that Shandong Fuwei should not be a party to the proceeding; the arbitration should proceed with Shandong Fuwei as the respondent pending adjudication of issues relating to jurisdiction and liability.




A hearing was held by the ICC in November 2007. Subsequent to the hearing, at the invitation of Weifang Neoluck (Group) Co., Ltd (“Neoluck Group”), the original majority shareholder of Shandong Neo-Luck, the Neoluck Group and DMT engaged in efforts to achieve a settlement of the pending arbitration on January 18, 2008. Shandong Fuwei joined these discussions later as an interested party and in order to support a resolution of the pending dispute and to achieve resolution of certain outstanding service and spare part issues.




After several weeks of negotiations among the parties, in March 2008, the parties entered into two agreements, a Service and Technical Assistance Agreement (the “Service Agreement”), between DMT and Shandong Fuwei, and a Settlement Agreement (the “Settlement Agreement”) between DMT and the Neoluck Group. Under the Service Agreement, Shandong Fuwei would pay an amount of US$180 in two installments with respect to service and spare parts. The Company made its first payment in April 2008.  As of December 31, 2010, Shandong Fuwei has paid US$135 and still US$45 left unpaid.




Under the Settlement Agreement, the Neoluck Group was obligated to pay an amount equal to US$900 in RMB by delivery of a bank draft to DMT. In April 2008, the Neoluck Group had not performed its obligation under the Settlement Agreement, and, the Neoluck Group and DMT entered into a Supplemental Agreement pursuant to which the Neoluck Group would pay the amount owed to DMT in two installments. The Neoluck Group paid the first installment equal to US$ 450 in April 2008. As agreed between Neoluck Group and DMT, the remaining US$450 was to be paid in installments by the end of December 2008. As of December 31, 2010, Neoluck Group has paid US$ 320 and still has US$130 outstanding to DMT.




In the event the arbitration proceedings continue as a result of non-performance of the payment obligation, it is possible for the arbitral tribunal for the ICC International Court of Arbitration to rule in favor of DMT, which might result in a liability for Shandong Fuwei for the amount claimed plus interest. However, any possible liability regarding DMT’s claim should be reduced by the amount previously paid to DMT in connection with the above-described settlement. It should be noted further that in such event Fuwei might have sustainable claims for damages against the Neoluck Group for its failure to perform its obligations under the Settlement Agreement.




On January 18, 2010 the Company was advised by the Secretary of The International Court of Arbitration of International Chamber of Commerce (ICC) the arbitration was withdrawn due to DMT’s failure to pay the balance of the advance on costs.




F-16




Class Action




On October 19, 2007, the Company became aware that a class action lawsuit had been filed in the United States District Court for the Southern District of New York, on behalf of all persons who purchased the Company’s stock from the date of the Company’s IPO on December 19, 2006 through October 16, 2007. The complaint alleged that the Company and certain of its present and former officers, directors and shareholders violated the Securities Act of 1933.




On November 21, 2007, the Company was given notice that a second class action lawsuit had been filed in the United States District Court for the Southern District of New York, commenced on behalf of all persons who purchased the Company’s stock pursuant or traceable to the Registration Statement and Prospectus issued in connection with the Company’s IPO during the period from December 19, 2006 through November 12, 2007. The complaint alleged that the Company, its underwriters and certain of its executives (collectively, the “defendants”) violated Sections 11, 12(2) and 15 of the Securities Act of 1933. The complaint also alleged the defendants by misrepresenting or omitting material information regarding the Company and its business operations.




On January 24, 2008, the Court consolidated into a single action the putative securities class actions pending against the Company and certain of its officers, directors and shareholders.  The Court also appointed Ninyat Tonyaz as lead plaintiff, appointed the Rosen Law Firm, P.A. as lead counsel, and granted plaintiffs leave to file a consolidated amended class action complaint.  The consolidated action is styled In re Fuwei Films Securities Litigation, Case No. 07-CV-9416 (RJS).




On March 14, 2008, plaintiffs filed a consolidated amended class action complaint  (the "Amended Complaint") naming as defendants the Company, Xiaoan He, Mark Stulga, Jun Yin, Tongju Zhou, Duo Wang, and the Company's IPO underwriters (the “Underwriter Defendants”) — Maxim Group LLC, WR Hambrecht + Co.and Chardan Capital Markets, LLC.  The Amended Complaint asserts claims for violation of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.  The Company, Messrs. He and Stulga, and the Underwriter Defendants were served with the Amended Complaint and, as described below, moved to dismiss the claims asserted against them.




On May 14, 2008, the Company and Messrs. He and Stulga filed a motion to dismiss the Amended Complaint in its entirety.  The Underwriter Defendants separately moved to dismiss the Amended Complaint.




On November 3, 2008, Plaintiffs filed proofs of service with the Court, indicating that Messrs. Yin, Wang, and Zhou had been served with the Amended Complaint on or about August 14, 2008, and that they had 90 days after such date to serve an answer to the Amended Complaint or a motion pursuant to Rule 12 of the Federal Rules of Civil Procedure.




By letter dated March 17, 2009, Plaintiffs apprised the Court of Fuwei’s March 10, 2009 Press Release disclosing the initial verdict against Messrs. Yin, Wang, and Zhou, and requested that the Court take judicial notice of this press release in adjudicating the pending motions to dismiss.




By the Court’s Memorandum and Order dated July 10, 2009, the motions to dismiss of the Company, Messrs. He and Stulga, and the Underwriter Defendants were granted in part and denied in part. In ruling on the motion to dismiss, the Court was required to assume that the facts alleged by the plaintiffs are true and to draw all reasonable inferences in the plaintiffs’ favor.  Applying that standard, the motions to dismiss of the defendants were granted in part and denied in part by the court. The Court dismissed plaintiffs’ claims to the extent they were based upon Fuwei’s alleged failure to disclose the DMT arbitration proceeding.  The Court also dismissed certain of plaintiffs’ claims to the extent they were brought on behalf of shareholders who did not purchase their shares directly in the IPO.




The Court sustained plaintiffs’ remaining claims. However, the Court noted that defendants may be able to assert affirmative defenses provided by the federal securities laws in a motion for summary judgment, which could resolve the case before trial.




On September 9, 2009, the Company and Messrs. He and Stulga filed their answer to the Amended Complaint. On October 2, 2009, the Court entered a case management plan and scheduling order, which set deadlines relating to pre-trial discovery, mediation, and dispositive motions. Discovery thereafter proceeded.




On March 26, 2010, Fuwei, Messrs. He and Stulga, the Underwriter Defendants, and Plaintiffs, through their respective attorneys, engaged in mediation aimed at resolving the litigation. On June 24, 2010, the parties reached a settlement in principle. Subject to the Court’s approval, Plaintiffs have agreed to accept US$2.15 million in full and final settlement of all claims they have or may have against the Company, certain of its present and former officers, directors, and shareholders, and the underwriters. Fuwei Films has agreed to contribute US$1.0 million towards the settlement. The signed settlement agreement was submitted to the Court for approval on September 9, 2010. The Court has preliminarily approved the settlement, directed that notice be given to the class, and set a fairness hearing for April 27, 2011.




In September 2010, pursuant to the settlement agreement and subject to the Court’s approval, Plaintiffs have agreed to accept US$2.15 million in full and final settlement of all claims they have or may have against the Company, certain of its present and former officers, directors, and shareholders, and the underwriters. Fuwei Films has agreed to contribute US$1.0 million towards the settlement. The signed settlement agreement has been submitted to the Court for approval.




The Company’s management continues to believe that the plaintiffs’ allegations are without merit. However, in recognition of the attendant risks and costs of continued litigation, and the benefits of resolving the same, the Board of Directors has unanimously consented to settle this case.




As of December 31, 2010, the Company accrued US$1.0 million liability in connection with this litigation excluding defense costs. In accordance with the settlement agreement, the Company has deposit US$0.8 million in the Securities Litigation Settlement Fund account in January 2011.




(e) Contingencies
  On November 12, 2009, the Supreme People’s Court of Shandong Province issued the final verdict of three individuals who indirectly constitute our major shareholders, Mr. Jun Yin, Mr. Tongju Zhou and Mr. Duo Wang. Mr. Yin was sentenced to death with a stay of execution for two years, the other two defendants, Mr. Zhou and Mr. Wang, each received life imprisonment, all of their personal property will be confiscated.


F-17




Although the management believes that the shares owned by the major shareholders, Jun Yin, Duo Wang and Tongju Zhou will eventually be confiscated by the Chinese government. In accordance with the final verdict issued by the Supreme People’s Court of Shandong Province, it has no knowledge of the timing and procedures involved in enforcing such a verdict. We have been informed by the Listing Qualification Department of the NASDAQ Stock Market LLC that they knew the continuing uncertainty associated with the verdict as a matter of concern, and have contacted the relevant State agency to see if any further information regarding such procedures is available.
  On November 12, 2009, the company announced that it had become aware of the final verdict issued by the Supreme People's Court of Shandong Province, concerning the Company's three major shareholders, Mr. Jun Yin, Mr. Tongju Zhou and Mr. Duo Wang. The Supreme People's Court upheld the initial verdict issued by the Intermediate court in March 2009. The March 2009 initial verdict sentenced Mr. Yin to death, with a stay of execution for two years; the other two defendants, Mr. Zhou and Mr. Wang, each received life imprisonment; all of the personal property of the three individuals will be confiscated. The three individuals appealed the initial verdict to the Supreme People's Court of Shandong Province in March 2009. In November 2009, the Supreme People's Court of Shandong Province issued the final verdict, upholding the initial verdict issued by the Intermediate Court in March 2009. None of these individuals is involved in Fuwei's day-to-day operations. We met with officials of the Wei-Fang State-owned Assets Supervision and Administration Commission in March 2011 and learned that there is also another civil verdict issued by the Second Intermediate People’s Court of Beijing that conflicts with the foregoing verdict, which conflict must be resolved prior to any enforcement of the verdict and any confiscation of the personal property of the individuals.The final judgment against the three shareholders may cause uncertainty to the Company’s operation due to the uncertain timeline associated with its enforcement. In the event that the verdict could not be enforced timely, we may ultimately be delisted from the Nasdaq Global Market.


(23) Earnings (Loss) Per Share




Basic and diluted earnings per share for the period/year ended December 31, 2010, 2009 and 2008 have been calculated as follows:


2010


2009


2008RMB


US$


RMB


RMBNet income (loss) available to ordinary shareholders


40,783



6,168



(18,963
)


18,157Denominator for basic net income (loss) available to ordinary shareholders:Weighted average number of ordinary shares outstanding


13,062,500



13,062,500



13,062,500



13,062,500Basic earnings (loss) per share


3.12



0.47



(1.45
)


1.39Net income (loss) available to ordinary shareholders


40,783



6,168



(18,963
)


18,157Denominator for diluted net income (loss) available to ordinary shareholders:Weighted average number of ordinary shares outstanding


13,062,500



13,062,500



13,062,500



13,062,500Weighted average number of share options13,062,500



13,062,500



13,062,500



13,062,500Diluted earnings (loss) per share


3.12



0.47



(1.45
)


1.39




(24) Fuwei Films (Holdings) Co., Ltd (Parent Company)




Under PRC regulations, the Company’s operating subsidiary, Shandong Fuwei may pay dividends only out of its accumulated profits, if any, determined in accordance with the accounting standards and regulations prevailing in the PRC (“PRC GAAP”). In addition, Shandong Fuwei is required to set aside at least 10% of its accumulated profits each year, if any, to fund the statutory general reserve until the balance of the reserve reaches 50% of its registered capital. The statutory general reserve is not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing shareholdings, or by increasing the par value of the shares currently held by them, provided that the reserve balance after such issue is not less than 25% of the registered capital. Further, Shandong Fuwei is also required to allocate 5% of the profit after tax, determined in accordance with PRC GAAP, to the statutory public welfare fund which is restricted to be used for capital expenditures for staff welfare facilities owned by the Company. The statutory public welfare fund is not available for distribution to equity owners (except in liquidation) and may not be transferred in the form of loans, advances, or cash dividends. As of December 31, 2010, an aggregate amount of RMB 47,020 (US$7,112) has been appropriated from retained earnings and set aside for statutory general reserve and public welfare fund, by Shandong Fuwei.




As of December 31, 2010, the amount of restricted net assets of Shandong Fuwei, which may not be transferred to the Company in the form of loans, advances or cash dividends by the subsidiaries without the consent of a third party, was approximately 70% of the Company’s consolidated net assets as discussed above. In addition, the current foreign exchange control policies applicable in the PRC also restrict the transfer of assets or dividends outside the PRC.




The following presents condensed unaudited unconsolidated financial information of the Parent Company only.




Condensed unaudited Balance Sheet as of December 31, 2010 and 2009


2010


2009RMB


US$


RMBCash and cash equivalents


92



14



28Other current assets


282,893



42,786



293,179Investments in subsidiaries


395



60



409Total assets


283,380



42,860



293,617Current liabilities


49,315



7,459



34,657Total shareholders’ equity


234,065



35,401



258,960Total liabilities and shareholders’ equity


283,380



42,860



293,617




Condensed unaudited Statements of Operations (For the years ended December 31, 2010, 2009 and 2008)


2010


2009


2008RMB


US$


RMB


RMBInterest expense


(12
)


(2
)


-



(15
)General and administrative expenses


(14,411
)


(2,180
)


(4,974
)


(11,404
)Loss before equity in undistributedearnings of subsidiaries


(14,423
)


(2,181
)


(4,974
)


(11,419
)Equity in earnings of subsidiaries


58,478



8,844



(13,989
)


31,668Net income (loss)


44,055



6,663



(18,963
)


(20,248
)





F-18




Condensed unaudited Statement of Cash Flows (For the year ended December 31, 2010, 2009 and 2008)




2010


2009RMB


US$


RMBCash flow from operating activitiesNet income (loss)


40,783



6,168



(18,963
)Adjustment to reconcile net income (loss) to net cash from operating activities:- Equity in earnings of subsidiaries


(55,206
)


(8,350
)


13,975- Foreign exchange gain


-



-



-Changes in operating assets and liabilities:- Other current assets


-



-



(41
)- Other current liabilities


6,139



929



1,153Net cash used in operating activities


(8,284
)


(1,253
)


(3,876
)Cash flow from financing activitiesPayments to related parties


8,321



1,258



4,306Proceeds from related parties


(10
)


(2
)


(412
)Effect of foreign exchange


38



6



0.1Net cash provided by financing activities


8,348



1,263



3,893Net increase in cash


64



10



16Cash and cash equivalents:At beginning of year


28



4



12At end of year


92



14



28





(25) Subsequent Events




Fuwei Shandong and Dornier had entered an equipment purchase contract for the third production line in January 2007. Fuwei Shandong made the prepayment to Dornier for 3.1 million Euros, Due to the fund shortage of Fuwei Shandong at that time, Dornier terminated the initial contract with Fuwei Shandong. The two parties have been in discussion on a renewed equipment purchase contract. The prepayment made will be considered in the renewed contract together with additional cost of 4.2 million Euros incurred by Dornier, which includes financial cost, storage cost, and equipment modification cost. As of March 25, 2011, we have not entered into the renewed contract because of pending provisions of the renewed contract.




(26) Unaudited Quarterly Data
  Quarter

Ended

March 31, 2010


June 30, 2010


September 30, 2010


December 31, 2010


TotalRMB


US$


RMB


US$


RMB


US$


RMB


US$


RMB


US$Revenue


88,455



12,956



110,319



16,163



129,174



18,950



173,511



26,243



501,458



75,843Gross profit


12,767



1,870



19,670



2,882



40,515



5,944



57,601



8,712



130,553



19,745Net income


300



44



(3
)


(0.4
)


15,043



2,210



25,443



3,848



40,783



6,168Basic and diluted earnings per share


0.02



0.003



(0.00
)


(0.00
)


1.15



0.17



1.95



0.29



3.12



0.47




F-19