SECURITIES
AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 10-Q (Mark
One)
 
 x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 2009.
 
 o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
transition period from to
  Commission
File Number: 0-19276
 
 Fushi Copperweld,
Inc.
 
 Nevada
                
                13-3140715(State
      or other jurisdiction of incorporation or organization)
                
                (I.R.S.
      Employer Identification No.)
 
 1 Shuang Qiang Road,
Jinzhou, Dalian, People’s Republic of China 116100
 (Address
of principal executive offices) (Zip Code)
 
 011-86-411-8770-333 (PRC);
931-433-0460 (US)
 (Registrant’s
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes þ
 No  o
  Indicate
by check mark whether the registrant has electronically posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
 o
 No  
o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 Large
accelerated filer o
 Accelerated
filer þ
 Non-accelerated
filer o
 (Do not
check if a smaller reporting company)
 Smaller
reporting company o
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes o
 No 
þ
  APPLICABLE
ONLY TO CORPORATE ISSUERS:
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. The total shares outstanding at May
11, 2009 was 27,899,034.
  
 
 FUSHI
COPPERWELD, INC.
 
 INDEX
TO FORM 10-Q
 
 PagePart
      I - Financial InformationItem
      1 - Financial StatementsConsolidated
      Balance Sheets as of March 31, 2009 (unaudited)
                              and
      December 31, 2008
                            
                            
                            2Consolidated
      Statements of Income and Other Comprehensive Income for
                              the
      three months ended March 31, 2009 and 2008 (unaudited)
                            
                            
                            3Consolidated
      Statements of Cash Flows for the three months ended
                              March
      31, 2009 and 2008 (unaudited)
                            
                            
                            4Consolidated
      Statements of Shareholder’s
      Equity
                            
                            
                            5Notes
      to the Consolidated Financial Statements (unaudited)
                            
                            
                            6Item
      2 Management's Discussion and Analysis of Results of
                              Operations
      and Financial Condition
                            
                            
                            39Item
      3 Quantitative and Qualitative Disclosure about Market
Risk
                            
                            
                            60Item
      4 Controls and Procedures
                            
                            
                            63Part
      II. Other InformationItem
      1. Legal Proceedings
                            
                            
                            63Item
      1A. Risk Factors
                            
                            
                            64Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                            
                            
                            64Item
      3. Defaults upon Senior Securities
  
 
 Item
      4. Submission of Matters to a Vote of Security HoldersItem
      5. Other Information
                            
                            64Item
      6 Exhibits
                            
                            64Signature
      Page
                            
                            66
  
 FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES
 
 CONSOLIDATED  BALANCE
SHEETS
 AS OF
MARCH 31, 2009 AND DECEMBER 31, 2008
 
 March 31,
                                                
                                                
                                                December 31,2009
                                                
                                                
                                                2008UnauditedASSETSCURRENT
      ASSETS:Cash
                                                
                                                $
                                                42,716,858
                                                
                                                
                                                $
                                                65,611,770Restricted
      cash
                                                
                                                
                                                1,000,000
                                                
                                                
                                                
                                                1,000,000Accounts
      receivable, trade, net of allowance of bad debt of $290,338 and $318,529
      as of March 31, 2009 and December 31, 2008, respectively
                                                
                                                
                                                44,327,752
                                                
                                                
                                                
                                                49,782,548Inventories,
      net
                                                
                                                
                                                19,542,327
                                                
                                                
                                                
                                                6,977,852Notes
      receivables
                                                
                                                
                                                127,318
                                                
                                                
                                                
                                                171,300Other
      receivables and prepaid expenses
                                                
                                                
                                                1,074,603
                                                
                                                
                                                
                                                869,973Advances
      to suppliers
                                                
                                                
                                                14,347,996
                                                
                                                
                                                
                                                20,261,585Deposit
      in derivative hedge
                                                
                                                
                                                1,000,000
                                                
                                                
                                                
                                                1,000,000Prepaid
      taxes
                                                
                                                
                                                1,645,241
                                                
                                                
                                                
                                                670,805Total
      current assets
                                                
                                                
                                                125,782,095
                                                
                                                
                                                
                                                146,345,833PLANT
      AND EQUIPMENT, net
                                                
                                                
                                                118,212,704
                                                
                                                
                                                
                                                119,761,027OTHER
      ASSETS:Advances
      to suppliers, noncurrent
                                                
                                                
                                                8,734,390
                                                
                                                
                                                
                                                4,022,879Notes
      receivables, noncurrent
                                                
                                                
                                                769,106
                                                
                                                
                                                
                                                799,106Intangible
      assets, net of accumulated amortization
                                                
                                                
                                                12,269,426
                                                
                                                
                                                
                                                12,406,920Deferred
      loan expense, net
                                                
                                                
                                                3,045,275
                                                
                                                
                                                
                                                3,317,725Deferred
      tax assets
                                                
                                                
                                                9,430,554
                                                
                                                
                                                
                                                7,804,027Total
      other assets
                                                
                                                
                                                34,248,751
                                                
                                                
                                                
                                                28,350,657Total
      assets
                                                
                                                $
                                                278,243,550
                                                
                                                
                                                $
                                                294,457,517LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Revolver
      line of credit
                                                
                                                $
                                                4,125,266
                                                
                                                
                                                $
                                                4,712,075Accounts
      payable, trade
                                                
                                                
                                                5,384,595
                                                
                                                
                                                
                                                7,204,156Notes
      payable, current
                                                
                                                
                                                10,000,000
                                                
                                                
                                                
                                                5,000,000Short-term bank
      loans
                                                
                                                
                                                -
                                                
                                                
                                                
                                                17,588,400Other
      payables and accrued liabilities
                                                
                                                
                                                2,349,467
                                                
                                                
                                                
                                                4,751,460Customer
      deposits
                                                
                                                
                                                534,845
                                                
                                                
                                                
                                                542,540Cross
      currency hedge payable
                                                
                                                
                                                156,154
                                                
                                                
                                                
                                                104,324Total
      current liabilities
                                                
                                                
                                                22,550,327
                                                
                                                
                                                
                                                39,902,955LONG
      TERM  LIABILITIES:Derivative
      liability - conversion option
                                                
                                                
                                                1,767,604
                                                
                                                
                                                
                                                -Derivative
      liability – warrants
                                                
                                                
                                                274,681
                                                
                                                
                                                
                                                -Notes
      payable, noncurrent
                                                
                                                
                                                35,447,092
                                                
                                                
                                                
                                                40,000,000Fair
      value of derivative instrument
                                                
                                                
                                                7,139,205
                                                
                                                
                                                
                                                4,377,076Total
      long term liabilities
                                                
                                                
                                                44,628,582
                                                
                                                
                                                
                                                44,377,076Total
      liabilities
                                                
                                                
                                                67,178,909
                                                
                                                
                                                
                                                84,280,031COMMITMENTS
      AND CONTINGENCIES
                                                
                                                
                                                7,197,794
                                                
                                                
                                                
                                                7,197,794SHAREHOLDERS'
      EQUITY:Preferred
      stock,$0.001 par value, 5,000,000 shares authorized,none
      issued or outstanding
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Common
      stock,$0.006  par value, 100,000,000 shares authorized, March
      31, 2009: 27,899,034 shares issued and 27,799,034 outstanding December 31,
      2008: 27,499,034 shares issued and 27,399,034 outstanding
                                                
                                                
                                                166,795
                                                
                                                
                                                
                                                164,395Restricted
      common stock in escrow
                                                
                                                
                                                600
                                                
                                                
                                                
                                                600Additional
      paid in capital
                                                
                                                
                                                93,469,915
                                                
                                                
                                                
                                                91,172,890Statutory
      reserves
                                                
                                                
                                                12,998,375
                                                
                                                
                                                
                                                12,316,147Retained
      earnings
                                                
                                                
                                                79,674,697
                                                
                                                
                                                
                                                78,613,158Accumulated
      other comprehensive income
                                                
                                                
                                                17,556,465
                                                
                                                
                                                
                                                20,712,502Total
      shareholders' equity
                                                
                                                
                                                203,866,847
                                                
                                                
                                                
                                                202,979,692Total
      liabilities and shareholders' equity
                                                
                                                $
                                                278,243,550
                                                
                                                
                                                $
                                                294,457,517
  The
accompany notes are an integral part of these consolidated
statements.
 2
 
 FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (UNAUDITED)
 
 2009
                        
                        
                        2008REVENUES
                        
                        $
                        35,256,536
                        
                        
                        $
                        54,009,027COST
      OF GOODS SOLD
                        
                        
                        26,317,161
                        
                        
                        
                        39,275,340GROSS
      PROFIT
                        
                        
                        8,939,375
                        
                        
                        
                        14,733,687OPERATING
      EXPENSESSelling
      expenses
                        
                        
                        1,202,147
                        
                        
                        
                        792,911General
      and administrative expenses
                        
                        
                        3,070,242
                        
                        
                        
                        4,395,779Total
      operating expenses
                        
                        
                        4,272,389
                        
                        
                        
                        5,188,690INCOME
      FROM OPERATIONS
                        
                        
                        4,666,986
                        
                        
                        
                        9,544,997OTHER
      INCOME (EXPENSE)Interest
      income
                        
                        
                        83,617
                        
                        
                        
                        160,363Interest
      expense
                        
                        
                        (1,470,868
                        )
                        
                        
                        (1,780,469
                        )Change
      in fair value of derivative liability - hedge
                        
                        
                        (166,410
                        )
                        
                        
                        169,167Change
      in fair value of derivative liability - warrants
                        
                        
                        (63,238
                        )
                        
                        
                        -Change
      in fair value of derivative liability - conversion option
                        
                        
                        (539,037
                        )
                        
                        
                        -Other
      expense
                        
                        
                        (106,349
                        )
                        
                        
                        (55,127
                        )Total
      other expense, net
                        
                        
                        (2,262,285
                        )
                        
                        
                        (1,506,066
                        )INCOME
      BEFORE INCOME TAXES
                        
                        
                        2,404,701
                        
                        
                        
                        8,038,931(BENEFIT)
      PROVISION FOR INCOME TAXES
                        
                        
                        (696,216
                        )
                        
                        
                        468,435NET
      INCOME
                        
                        
                        3,100,917
                        
                        
                        
                        7,570,496OTHER
      COMPREHENSIVE INCOMEUnrealized
      gain on marketable securities
                        
                        
                        -
                        
                        
                        
                        22,301Foreign
      currency translation adjustment
                        
                        
                        (393,908
                        )
                        
                        
                        7,855,000Change
      in fair value of derivative instrument
                        
                        
                        (2,762,129
                        )
                        
                        
                        (5,109,480
                        )COMPREHENSIVE
      (LOSS) INCOME
                        
                        $
                        (55,120
                        )
                        
                        $
                        10,338,317EARNINGS
      PER SHARE:Basic
                        
                        $
                        0.11
                        
                        
                        $
                        0.28Diluted
                        
                        $
                        0.11
                        
                        
                        $
                        0.26WEIGHTED
      AVERAGE SHARES:Basic
                        
                        
                        27,563,478
                        
                        
                        
                        27,048,039Diluted
                        
                        
                        27,695,464
                        
                        
                        
                        28,228,604
 The
accompany notes are an integral part of these consolidated
statements.
  3
 
 FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (UNAUDITED)
 
 2009
                          
                          
                          2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                          
                          $
                          3,100,917
                          
                          
                          $
                          7,570,496Adjustments
      to reconcile net income used in operating activities:Depreciation
                          
                          
                          2,097,208
                          
                          
                          
                          1,404,042Deferred
      taxes
                          
                          
                          (1,626,528
                          )
                          
                          
                          (799,003
                          )Bad
      debt expense
                          
                          
                          -
                          
                          
                          
                          72,469Recovery
      of bad debt
                          
                          
                          (33,391
                          )
                          
                          
                          -Amortization
      of intangible assets
                          
                          
                          119,076
                          
                          
                          
                          62,277Amortization
      of loan commission
                          
                          
                          272,450
                          
                          
                          
                          668,356Amortization
      of stock compensation expense
                          
                          
                          590,868
                          
                          
                          
                          413,095Change
      in fair value of derivative liability - hedge
                          
                          
                          166,410
                          
                          
                          
                          (169,167
                          )Change
      in fair value of derivative liability - conversion option
                          
                          
                          539,037
                          
                          
                          
                          -Change
      in fair value of derivative liability - warrants
                          
                          
                          63,238
                          
                          
                          
                          -Investment
      loss on marketable securities
                          
                          
                          -
                          
                          
                          
                          16,158Change
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          5,377,902
                          
                          
                          
                          (9,990,035
                          )Inventories
                          
                          
                          (12,585,925
                          )
                          
                          
                          (13,669,483
                          )Other
      receivables and prepaid expenses
                          
                          
                          (168,913
                          )
                          
                          
                          (908,504
                          )Advances
      to suppliers - current
                          
                          
                          5,880,363
                          
                          
                          
                          (7,031,475
                          )Accounts
      payable
                          
                          
                          (1,814,721
                          )
                          
                          
                          6,602,565Other
      payables and accrued liabilities
                          
                          
                          (2,081,625
                          )
                          
                          
                          (1,364,005
                          )Customer
      deposits
                          
                          
                          (13,232
                          )
                          
                          
                          178,572Taxes
      payable
                          
                          
                          (975,566
                          )
                          
                          
                          285,445Net
      cash used in operating activities
                          
                          
                          (1,092,432
                          )
                          
                          
                          (16,658,197
                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Marketable
      securities
                          
                          
                          -
                          
                          
                          
                          2,983,842Notes
      receivables
                          
                          
                          73,884
                          
                          
                          
                          357,309Payments
      for derivative instrument
                          
                          
                          (114,580
                          )
                          
                          
                          -Proceeds
      from derivative instrument
                          
                          
                          -
                          
                          
                          
                          738,376Purchases
      of property and equipment
                          
                          
                          (715,104
                          )
                          
                          
                          (3,253,101
                          )Purchases
      on advances for purchase of equipment
                          
                          
                          (4,715,293
                          )
                          
                          
                          -Net
      cash (used in) provided by in investing activities
                          
                          
                          (5,471,093
                          )
                          
                          
                          826,426CASH
      FLOWS FROM FINANCING ACTIVITIES:Change
      in restricted cash
                          
                          
                          -
                          
                          
                          
                          (2,795,400
                          )Net
      (payments) borrowings on revolver line of credit
                          
                          
                          (586,809
                          )
                          
                          
                          2,749,402Proceeds
      from bank loans
                          
                          
                          -
                          
                          
                          
                          16,908,000Payments
      on bank loans
                          
                          
                          (17,553,600
                          )
                          
                          
                          (5,814,432
                          )Proceeds
      on issuance of common stock and warrants
                          
                          
                          1,920,000
                          
                          
                          
                          -Net
      cash (used in) provided by financing activities
                          
                          
                          (16,220,409
                          )
                          
                          
                          11,047,570EFFECT
      OF EXCHANGE RATE ON CASH
                          
                          
                          (110,978
                          )
                          
                          
                          3,450,059DECREASE
      IN CASH
                          
                          
                          (22,894,912
                          )
                          
                          
                          (1,334,142
                          )CASH,
      beginning of period
                          
                          
                          65,611,770
                          
                          
                          
                          79,914,758CASH,
      end of period
                          
                          $
                          42,716,858
                          
                          
                          $
                          78,580,616Supplemental
      cash flow disclosures:Interst
      paid
                          
                          $
                          1,950,860
                          
                          
                          $
                          2,853,861Income
      cash paid
                          
                          $
                          1,002,178
                          
                          
                          $
                          -
  The
accompany notes are an integral part of these consolidated
statements.
  4
 
 FUSHI
COPPERWELD, INC AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 
 Common
      stockShares
      outstanding
                    
                    
                    Shares
      In escrow
                    
                    
                    Additional
                    
                    
                    Retained
      earnings
                    
                    
                    AccumulatedNumber
                    
                    
                    Par
                    
                    
                    Number
                    
                    
                    Par
                    
                    
                    paid
      in
                    
                    
                    Statutory
                    
                    
                    Unrestricted
                    
                    
                    comprehensiveof
      shares
                    
                    
                    value
                    
                    
                    of
      shares
                    
                    
                    value
                    
                    
                    capital
                    
                    
                    reserves
                    
                    
                    earnings
                    
                    
                    income
      (loss)
                    
                    
                    TotalsBALANCE,
      December 31, 2007
                    
                    
                    25,211,304
                    
                    
                    $
                    151,268
                    
                    
                    
                    100,000
                    
                    
                    $
                    600
                    
                    
                    $
                    77,665,064
                    
                    
                    $
                    8,321,726
                    
                    
                    $
                    54,133,070
                    
                    
                    $
                    4,015,930
                    
                    
                    $
                    144,287,658CB
      transfer to common stock @$7.00
                    
                    
                    2,142,857
                    
                    
                    
                    12,857
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    14,987,143
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    15,000,000Stock
      compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    413,095
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    413,095Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,570,496
                    
                    
                    
                    
                    
                    
                    
                    7,570,496Adjustment
      to statutory reserve
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    998,605
                    
                    
                    
                    (998,605
                    )
                    
                    
                    
                    
                    
                    
                    -Change
      in fair value of derivative instrument
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (5,109,480
                    )
                    
                    
                    (5,109,480
                    )Foreign
      currency translation gain
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,855,000
                    
                    
                    
                    7,855,000Reverse
      unrealized loss on marketable securities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    22,301
                    
                    
                    
                    22,301BALANCE,
      March 31, 2008 (unaudited)
                    
                    
                    27,354,161
                    
                    
                    
                    164,125
                    
                    
                    
                    100,000
                    
                    
                    
                    600
                    
                    
                    
                    93,065,302
                    
                    
                    
                    9,320,331
                    
                    
                    
                    60,704,961
                    
                    
                    
                    6,783,751
                    
                    
                    
                    170,039,070Exercise
      of warrants for cash @ $3.11
                    
                    
                    44,873
                    
                    
                    
                    270
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    139,124
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    139,394Stock
      compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,455,714
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,455,714Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    20,904,013
                    
                    
                    
                    
                    
                    
                    
                    20,904,013Adjustment
      to statutory reserve
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,995,816
                    
                    
                    
                    (2,995,816
                    )
                    
                    
                    
                    
                    
                    
                    -Change
      in fair value of derivative instrument
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    9,247,800
                    
                    
                    
                    9,247,800Foreign
      currency translation gain
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,680,951
                    
                    
                    
                    4,680,951Allocation
      of APIC due to Kuhn's litigation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,487,250
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,487,250
                    )BALANCE,
      December 31, 2008, as previously reported
                    
                    
                    27,399,034
                    
                    
                    
                    164,395
                    
                    
                    
                    100,000
                    
                    
                    
                    600
                    
                    
                    
                    91,172,890
                    
                    
                    
                    12,316,147
                    
                    
                    
                    78,613,158
                    
                    
                    
                    20,712,502
                    
                    
                    
                    202,979,692Cumulative
      effect of reclassification of conversion option
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,357,150
                    )
                    
                    
                    
                    
                    
                    
                    (1,357,150
                    )BALANCE,
      January 1, 2009, as adjusted (unaudited)
                    
                    
                    27,399,034
                    
                    
                    
                    164,395
                    
                    
                    
                    100,000
                    
                    
                    
                    600
                    
                    
                    
                    91,172,890
                    
                    
                    
                    12,316,147
                    
                    
                    
                    77,256,008
                    
                    
                    
                    20,712,502
                    
                    
                    
                    201,622,542Shares
      issued for cash @ $4.80
                    
                    
                    400,000
                    
                    
                    
                    2,400
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,706,157
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,708,557Stock
      compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    590,868
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    590,868Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,100,917
                    
                    
                    
                    
                    
                    
                    
                    3,100,917Adjustment
      to statutory reserve
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    682,228
                    
                    
                    
                    (682,228
                    )
                    
                    
                    
                    
                    
                    
                    -Change
      in fair value of derivative instrument
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,762,129
                    )
                    
                    
                    (2,762,129
                    )Foreign
      currency translation loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (393,908
                    )
                    
                    
                    (393,908
                    )BALANCE,
      MARCH 31, 2009 (unaudited)
                    
                    
                    27,799,034
                    
                    
                    $
                    166,795
                    
                    
                    
                    100,000
                    
                    
                    $
                    600
                    
                    
                    $
                    93,469,915
                    
                    
                    $
                    12,998,375
                    
                    
                    $
                    79,674,697
                    
                    
                    $
                    17,556,465
                    
                    
                    $
                    203,866,847
  The
accompany notes are an integral part of  these consolidated
statements.
 
 5
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Note
1 - Organization and Line of Business
 
 Fushi
Copperweld, Inc., a Nevada corporation (“Fushi”), is the holding company of
Fushi Holdings, Inc., (“Fushi Holdings”) incorporated in the state of Delaware,
which is a holding company for Dalian Fushi International Bimetallic Cable Co.,
Ltd (“Fushi International”) organized under the laws of the People's Republic of
China (“PRC”).  Dalian Fushi Bimetallic Manufacturing Co., Ltd
(“Dalian Fushi”) is a variable interest entity through a contractual
relationship (note 2). Dalian Fushi is a limited liability company organized
under the laws of the PRC, which is engaged in the manufacturing and sale of
bimetallic wire products.
 
 Fushi
acquired Copperweld Bimetallics Holdings, LLC, a North Carolina limited
liability company and the holder of the partnership interest in Copperweld
Bimetallics, LLC, (“Copperweld”) a limited liability company registered in the
state of Delaware and the parent of Copperweld Bimetallics UK, Ltd. (“Copperweld
UK”), a private company registered in the United Kingdom and Copperweld
International Holdings, LLC a North Carolina limited liability
company.  Copperweld is a bimetallic sales and manufacturing operation
headquartered in Fayetteville, Tennessee. Copperweld UK is a manufacturing,
distribution and customer service facility located in Telford, England.
Copperweld International Holdings, LLC was a non-operating company that held
partnership interests in a company located in Tongling, PRC at December 31,
2007.  Those interests were liquidated in an agreement entered into by
Copperweld and its subsidiaries, affiliates and International Manufacturing
Equipment Sales, Inc. on January 16, 2008. Additionally, Fushi acquired
International Manufacturing Equipment Sales, LLC, a shell company that was, at
the time of purchase, a non-affiliated but commonly owned limited liability
company.
 
 Three of
the companies acquired on October 29, 2007 were dissolved in 2008:
 
 1.
Copperweld Holdings, LLC, a North Carolina limited liability company.  This
company had no liabilities and its only asset was the ownership of Copperweld
Bimetallics, LLC, which the ownership rights were transferred to Fushi
Copperweld, Inc. on October 29, 2007.
 
 2.
Copperweld Bimetallics International Holdings, LLC, a Delaware limited liability
company was established to hold the partnership interest in the Tongling joint
venture which has been dissolved.  This company was a shell company with no
assets or liabilities at the time the joint venture was dissolved.
 
 3.
International Manufacturing Equipment Suppliers, LLC, a North Carolina limited
liability company.  This company was not an affiliate of the Copperweld
companies. This company was formed by the prior owner of Copperweld
Bimetallics to facilitate the transfer of equipment to the Tongling joint
venture.  As noted above, the Tongling joint venture has been
dissolved.  This company had no assets or liabilities at the time of the
dissolution.
 
 Fushi,
Fushi Holdings, Fushi International, Dalian Fushi, Copperweld and Copperweld UK
are hereinafter referred to as “the Company”.
  6
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 The
Company is in the business of developing, designing, manufacturing,
marketing and distributing bimetallic wire products, principally copper-clad
aluminum and copper-clad steel. The Company's products are primarily focused on
serving end-user applications in the telecommunication, electrical utility, and
transportation markets. The Company’s products are sold in North America,
Europe, North Africa, the Middle East, and the PRC.
 
 Note
2 - Summary of Significant Accounting Policies
 
 Management
has included all adjustments, consisting only of normal recurring adjustments,
considered necessary to give a fair presentation of operating results for the
periods presented. Interim results are not necessarily indicative of results for
a full year. The information included in this Form 10-Q should be read in
conjunction with information included in the 2008 annual report filed on Form
10-K.
 
 Principles of
consolidation
 
 The
accompanying consolidated financial statements include the financial statements
of Fushi and its wholly owned subsidiaries, Fushi Holdings, Fushi International,
Copperweld, Copperweld UK and its 100% variable interest entity Dalian Fushi.
All significant inter-company transactions and balances have been eliminated in
consolidation.
 
 In
accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest
Entities" ("FIN 46R"), variable interest entities (VIEs) are generally entities
that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate
decision making ability.  All VIEs with which the Company is involved
must be evaluated to determine the primary beneficiary of the risks and rewards
of the VIE. The primary beneficiary is required to consolidate the VIE for
financial reporting purposes.
 
 The
Company has concluded that Dalian Fushi is a VIE and that the Company is the
primary beneficiary.  Under the requirements of FIN 46R, the Company
consolidated the financial statements of Dalian Fushi.
 
 Use of
estimates
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. For
example, the Company estimates the fair value of its derivative instrument.
Actual results could differ from those estimates.
  7
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Revenue
recognition
  The
Company's revenue recognition policies are in accordance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer
deposits.
 
 Shipping and handling
costs
 
 Shipping
and handling costs related to costs of goods sold are included in selling costs
and totaled $553,645 and $453,851 for the three months ended March 31, 2009 and
2008, respectively.
 
 Foreign currency translation
and other comprehensive income
 
 The
reporting and functional currency of the Company is the US dollar. The
subsidiaries Fushi International, VIE Dalian Fushi and Beijing Office use the
local currency Renminbi (RMB) to conduct business. Copperweld UK conducts
business in British Pounds.
 
 For the
subsidiaries whose functional currencies are other than the US dollar, all
assets and liabilities accounts were translated at the exchange rate on the
balance sheet date; stockholder's equity is translated at the historical rates
and items in the consolidated statements of operations and consolidated cash
flow statements are translated at the average rate in each applicable period.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders’
equity. The resulting translation gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
 
 The
balance sheet amounts with the exception of equity at March 31, 2009 were
translated at 6.833 RMB and £0.699 to $1.00, respectively. The balance sheet
amounts with the exception of equity at December 31, 2008 were translated at
6.823 RMB and £0.684. The average translation rates applied to income and cash
flow statement amounts for three months ended March 31, 2009 were 6.836 RMB and
£0.697 to $1.00, respectively.  The average translation rates applied
to income and cash flow statement amounts for the three months ended March 31,
2008 were 7.155 RMB and £0.506 to $1.00, respectively.
  In
accordance with FAS 95, "Statement of Cash Flows," cash flows from the Company's
operations is calculated based upon the local currencies. As a result, amounts
related to assets and liabilities reported on the consolidated statements of
cash flows will not necessarily agree with changes in the corresponding balances
on the consolidated balance sheets.
 
 Cash and concentration of
risk
 
 The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes. Cash includes cash on hand and demand deposits in
accounts maintained with state owned banks within the PRC and with banks in the
United Kingdom (“UK”) and the USA.
  8
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Certain
financial instruments, which subject the Company to concentration of credit
risk, consist of cash. The Company maintains balances at financial institutions
which, from time to time, may exceed deposit insurance limits for the banks
located in the United States and UK. Balances at financial institutions or state
owned banks within the PRC are not covered by insurance. As of March 31, 2009,
the Company had deposits in excess of federally insured limits totaling
$42,574,996. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant risks on its cash in bank
accounts.
 
 Parts of
the Company’s operations are carried out in the PRC and UK. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the two
countries, and by the general state of the two countries' economy. The Company's
operations in the two countries are subject to specific considerations and
significant risks not typically associated with companies in North America.
These include risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
 
 Restricted
cash
 
 Restricted
cash consists of monies, whereas, Kuhn's and the Company have agreed to
establish an escrow under which the Escrow Agent will hold certain funds in
escrow pending the conclusion of the action initiated by Kuhn's against the
Company, see Note 17.
 
 Additional product sales
information
  The
Company has expanded its geographic sales area from the Chinese domestic market
to the international market. The following chart shows that the PRC market
remains the largest single market for the Company while approximately 28% and
36% of sales were spread across international markets during the first quarter
of 2009 and 2008, respectively.
 
 March
      31, 2009
                        
                        
                        March
      31, 2008(Unaudited)
                        
                        
                        (Unaudited)China
                        
                        $
                        25,541,567
                        
                        
                        $
                        34,752,795USA
                        
                        
                        7,306,836
                        
                        
                        
                        12,422,970Europe
                        
                        
                        1,478,246
                        
                        
                        
                        3,507,766Other
      countries
                        
                        
                        929,887
                        
                        
                        
                        3,325,496Total
      sales
                        
                        $
                        35,256,536
                        
                        
                        $
                        54,009,027
  9
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Major customers and
suppliers
 
 Ten major
customers accounted for 24.1% and 32.3% of the sales for the three months ended
March 31, 2009 and 2008, respectively. Total receivable balance due from the top
ten customers at March 31, 2009 and December 31, 2008 amounted to $11,188,422
and $11,838,214, respectively.
 
 Five
major suppliers provided approximately 83.5% of the Company’s raw materials for
the three months ended March 31, 2009 and ten major suppliers provided 86.6% of
the Company’s raw materials for the three months ended March 31, 2008. At March
31, 2009, our advances to the major five suppliers were $13,797,147, all of
which was current. At December 31, 2008, our advances to the major five
suppliers were $20,111,644, all of which was current.
 
 Accounts
receivables
 
 During
the normal course of business, the Company extends unsecured credit to its
customers. Management regularly reviews aging of receivables and changes in
payment trends by its customers, and records a reserve when they believe
collection of amounts due are at risk. Accounts considered uncollectible are
written off through a charge to the valuation allowance. As of March 31, 2009
and December 31, 2008, management concluded its allowance for bad debts was
sufficient.
 
 Inventories
  Inventories
are stated at the lower of cost or market using a weighted average method.
Inventories consist of raw materials, work in process, finished goods and
packing materials. Raw materials consist of copper, aluminum and steel used in
production. The cost of finished goods included direct costs of raw materials as
well as direct labor used in production. Indirect production costs such as
utilities and indirect labor related to production such as assembling, shipping
and handling for raw material costs are also included in the cost of
inventory.
 
 The
Company reviews its inventories regularly for possible obsolete goods and
establishes reserves when determined necessary.
 
 Derivative
instrument
 
 Effective
January 1, 2009, the Company adopted FAS 161, “Disclosures about Derivative
Instruments and Hedging Activities, and amendment of FAS 133, which amends and
expands the disclosure requirements of FAS 133”. SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives and
quantitative disclosures about the fair value of and gains and losses on
derivative instruments. The Company uses a cross currency hedge, a derivative
financial instrument, to hedge the risk of rising interest rates on its variable
interest rate debt. This type of derivative financial instrument is known as a
cash flow hedge. The Company accounts for this interest rate swap in accordance
with FAS 133, “Accounting for Derivatives Instruments and Hedging Activity,”
which requires the derivative to be carried on the consolidated balance sheet at
fair value and to meet certain documentary and analytical requirements to
qualify for hedge accounting treatment. The above derivative qualifies for hedge
accounting under FAS 133 and, accordingly, changes in the fair value effective
portion is reported in accumulated other comprehensive income, net of related
income tax effects. Amounts included in accumulated other comprehensive income
are reclassified into earnings when the hedged transaction affects
earnings.
  10
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 At the
inception of the transaction, the Company documented the relationship between
hedging instruments and hedged items, as well as its risk management objective
and the strategy for undertaking various hedge transactions. This process
includes linking all derivatives designated to specific firm commitments of
forecast transactions. The Company also documents its assessment, both at
inception and on an ongoing basis, of whether the derivative financial
instruments that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. Any portion
deemed ineffective is recorded in earnings with the effective portion reflected
in accumulated other comprehensive. Changes in the fair values of derivative
financial instruments accounted for as cash flow hedges to the extent they
qualify for hedge accounting, are recorded in accumulated other comprehensive
income.
 
 Financial
instruments
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity under FAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” FAS 133 and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Before the adoption of EITF 07-5
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity's Own Stock", the convertible note issued in 2007 did not require
bifurcation or result in liability accounting. However, with the recent adoption
of EITF 07-5, the embedded conversion feature must be bifurcated from its host
instrument and accounted for separately as a derivative liability. Additionally,
the Company analyzes registration rights agreements associated with any equity
instruments issued to determine if penalties triggered for late filing should be
accrued under FSP EITF 00-19-2, “Accounting for Registration Payment
Arrangements.”
 
 FAS 107,
“Disclosures About the Fair Value of Financial Instruments” defines financial
instruments and requires fair value disclosure about those instruments. FAS 157,
“Fair Value Measurements,” adopted January 1, 2008, defines fair value,
establishes a three-level valuation hierarchy for disclosures of fair value
measurement and enhances disclosures requirements for fair value measures.
Receivables, payables, notes, loans, and derivatives all meet the definition of
financial instruments. The carrying amounts reported in the balance sheets for
accounts receivable, notes receivable, accounts payable, other payables, and
short term bank loans qualify as financial instruments are a reasonable estimate
of fair value because of the short period of time between the origination and
their expected realization and, if applicable, the stated interest rate is
equivalent to interest rates currently available.  The three levels
are defined as follow:
 
 ·
                Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
  11
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 ·
                Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 ·
                Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value.
 
 Other
than the derivatives, the Company did not identify any assets or liabilities
that are required to be presented on the balance sheet at fair value in
accordance with FAS 157.
 
 During
2007, the Company issued 3% secured convertible debentures in a face amount of
$20,000,000 which are due in 2012.  The conversion option embedded in
the convertible notes requires liability accounting at fair value and
periodically marked-to-market.  The Company used level 3 inputs for
its valuation methodology for the embedded feature as the fair value was
determined by using Cox-Ross-Rubinstein binomial pricing model based on various
assumptions.
 
 Also
during 2007, the Company borrowed $40,000,000 in the form of a high yield
debenture note with a floating rate. As of March 31, 2009, the outstanding
principal of high yield debenture note amounted to $40,000,000 and the
outstanding principal of convertible debenture note amounted to
$5,000,000.  The Company used Level 3 inputs for its valuation
methodology for the notes payable, and their fair values are determined using
cash flows discounted at relevant market interest rates in effect at the period
close since there is no observable market price.
 
 The
Company’s warrant liability is carried at fair value.  The Company
used Level 3 inputs for its valuation methodology for the warrant liability as
their fair values were determined by using the Cox-Ross-Rubinstein binomial
pricing model based on various assumptions.
 
 As of
March 31, 2009, the Company had a $7.1 million derivative
instrument.  Management obtains the fair value of the derivative
instrument from a financial institution using Level 3 inputs since there is no
observable market price.
 
 Carrying
      Value
                        March
      31, 2009
                      
                      Fair
      Value Measurements
                        March
      31, 2009
                        Using
      Fair Value HierarchyLevel
      1
                      
                      Level
      2
                      
                      Level
      3Derivative
      liability – conversion option
                      
                      $
                      1,767,604
                      
                      
                      
                      
                      
                      $
                      1,767,604Derivative
      liability – warrants
                      
                      $
                      274,681
                      
                      
                      
                      
                      
                      $
                      274,681Notes
      payable
                      
                      $
                      40,000,000
                      
                      
                      
                      
                      
                      $
                      36,306,247Convertible
      note
                      
                      $
                      5,447,092
                      
                      
                      
                      
                      
                      $
                      5,447,092Derivative
      Instrument
                      
                      $
                      7,139,205
                      
                      
                      
                      
                      
                      $
                      7,139,205
  12
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 For the
three months ended March 31, 2009 and 2008 the Company recognized a loss in the
change in fair value of derivative liability – conversion option in the amounts
of $539,037 and $0, respectively.
 
 For the
three months ended March 31, 2009 and 2008 the Company recognized a loss in the
change in fair value of derivative liability – warrants in the amounts of
$63,238 and $0, respectively.
 
 Derivative
liability
 
 Emerging
Issues Task Force (“EITF”) 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock”,
provides a criteria for determining whether freestanding contracts that are
settled in a company’s own stock, including common stock warrants, should be
designated as either an equity instrument, an asset or as a liability under
FAS 133 “Accounting for Derivative Instruments and Hedging Activities.”
Under the provisions of EITF 00-19, a contract designated as an asset or a
liability must be carried at fair value on a company’s balance sheet, with any
changes in fair value recorded in a company’s results of
operations.  Using the criteria in EITF 00-19, the Company determines
which options, warrants and embedded features require liability accounting and
records the fair values as a derivative liability. The changes in the values of
these instruments are shown in the accompanying consolidated statements of
income and other comprehensive income as “change in fair value of derivative
instrument.”
 
 Stock-based
compensation
 
 The
Company records and reports stock-based compensation under FAS 123R,
“Share-Based Payments." This Statement requires a public entity to measure the
cost of services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost is recognized over the
period during which services are received. Stock compensation for stock granted
to non-employees is determined in accordance with FAS 123R and the EITF 96-18,
"Accounting for Equity Instruments that are issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services," as the fair value
of the consideration received or the fair value of equity instruments issued,
whichever is more reliably measured.
 
 Plant and equipment,
net
  Plant and
equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred while additions, renewals and betterments are
capitalized. When the asset property and equipment is retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for substantially all assets with estimated lives as
follows:
  13
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Estimated Useful LifeBuildings
                  
                  20-39.5
      yearsMachinery
      and equipment
                  
                  7-15
      yearsOther
      equipment
                  
                  3-5
      yearsTransportation
      equipment
                  
                  3-5
      years
 
 Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and are placed into service. Maintenance, repairs and minor renewals
are charged directly to expense as incurred. Major additions and betterments to
buildings and equipment are capitalized. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as
incurred. The Company added production equipment during 2009 and the
interest capitalized for the three months ended March 31, 2009 and March 31,
2008 amounted to $1,350 and $45,448, respectively.
 
 Long-lived
assets
 
 The
Company evaluates the carrying value of long-lived assets each reporting period
in accordance with FAS 144 "Accounting for the Impairment of Disposal of
Long-Lived Assets". When estimated cash flows generated by those assets are less
than the carrying amounts of the asset, the Company recognizes an impairment
loss. Based on its review, the Company believes that, as of March 31, 2009,
there were no impairments of its long-lived assets.
 
 Intangible
assets
 
 Land use
rights – land in the People’s Republic of China is government owned. However,
the government grants “land use rights." The Company amortizes land use rights
on a straight line basis over the 50 year life.
 
 Patents –
Patents are stated at cost, less accumulated amortization. The Company amortizes
patents on a straight line basis over 7-15 years.
 
 The
Company evaluates intangible assets for impairment, at least annually and more
often whenever events or changes in circumstances indicate that the carrying
value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets, and goodwill is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. Based on its review, the
Company believes that, as of March 31, 2009, there was no impairment of
intangible assets.
  14
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Research and
development
 
 Research
and development expenses include salaries, consultant fees, supplies and
materials, as well as costs related to other overhead such as facilities,
utilities and other departmental expenses. The costs the Company incurs with
respect to internally developed technology and engineering services are included
in research and development expenses as incurred as they do not directly relate
to any particular licensee, license agreement or licenses fee.
 
 Research
and development costs are recorded in general and administrative expenses.
Research and development costs were $76,552 and $81,333 for the three months
ended March 31, 2009 and March 31, 2008, respectively.
 
 Earnings per
share
 
 The
Company reports earnings per share in accordance with the provisions of FAS 128,
"Earnings Per Share". FAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock using the treasury method. For the three months ended
March 31, 2009 and 2008, the Company properly excluded options, warrants and
convertible notes with anti-dilutive effects from the diluted earnings per share
calculation.
 
 Income
taxes
 
 The
Company records and reports income taxes pursuant to FAS 109, “Accounting for
Income Taxes" And FIN 48, “Accounting for Uncertainty in Income Taxes.” The
provision for income taxes consist of taxes currently due plus deferred taxes.
FAS 109 requires the recognition of deferred income tax liabilities and assets
for the estimated future tax effects attributable to temporary differences and
operating loss and tax credit carryforwards. Deferred tax liability or asset
attributable to temporary differences is accounted for using the balance sheet
liability method in respect of temporary differences between income tax basis
and financial reporting basis of assets and liabilities. Deferred tax expense or
benefit is the change during the year in deferred tax liabilities and
assets.  Deferred taxes are determined separately for each tax-paying
component (an individual entity or group of entities that is consolidated for
tax purposes) in each tax jurisdiction. Deferred tax liability or asset is
calculated at the tax rates that are expected to apply to the period when the
asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it is related to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in
equity. Deferred tax assets and liabilities are offset when they relate to
income taxes levied by the same taxation authority and the Company intends to
settle its current tax assets and liabilities on a net basis. Deferred tax
assets are reduced by a valuation allowanceif, based on the weight
of available evidence, it is more likely than not (a likelihood of more than 50
percent) that some portion or all of the deferred tax assets will not be
realized.
  15
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Under FIN
48, the evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition.
 
 Value-added
tax
 
 Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are produced and sold in the PRC are
subject to a Chinese VAT at a rate of 17% of the gross sales price. All of
the Company’s products that are manufactured and sold in the UK are subject to a
UK VAT at a rate of 15% of the gross sales price. This VAT may be offset by
VAT paid by the Company on raw materials and other materials included in the
cost of producing their finished product. The Company recorded VAT payable and
VAT receivable net of payments in the financial statements. The VAT tax return
is filed offsetting the payables against the receivables.
 
 Adoption of EITF
07-5
 
 Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock”, which is effective with respect to financial
statements for fiscal years beginning after December 15, 2008 and replaced the
previous guidance on this topic in EITF 01-6.  Paragraph 11a of FAS
133 specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and (b) classified
in stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument.  EITF 07-5 provides a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuer’s own stock and thus able to
qualify for the FAS 133 paragraph 11(a) scope exception.
 
 The
conversion option embedded in the Company’s convertible notes previously met the
criteria in EITF 01-6, as well as the other criteria of FAS 133, paragraph 11(a)
and, accordingly, it was not separately accounted for as a derivative instrument
liability.  However, the conversion option does not meet the criteria
of EITF 07-5 because it requires that the conversion price be adjusted in
certain circumstances that do not meet the “fixed-for-fixed’ criteria in that
issue.  As a result, the Company is now required to separately account
for the embedded conversion option as a derivative instrument liability, carried
at fair value and marked-to-market each period, with changes in the fair value
each period charged or credited to income.
  16
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 In
accordance with the transition provisions of EITF 07-5, the new guidance has
been applied to the $5,000,000 of the Company’s convertible notes that were
outstanding as of January 1, 2009.  The cumulative effect of this
change in accounting principle of $1,357,150 has been recognized as a reduction
of the opening balance of Retained Earnings as of that date.  That
cumulative effect adjustment is the difference between the amounts previously
recognized in the Company’s balance sheet as of December 31, 2008 and the
amounts that would have been recognized if the guidance in EITF 07-5 had been
applied from the issuance date of the outstanding Convertible
Notes.
 
 Recently issued accounting
pronouncements
 
 In
December 2007, FAS 141(R), “Business Combinations," was issued. FAS 141R
replaces FAS 141.FAS
141R retains the fundamental requirements in FAS 141 that the acquisition method
of accounting, which FAS 141 called the purchase method, be used for all
business combinations and for an acquirer to be identified for each business
combination. FAS 141R requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. This replaces FAS 141’s cost-allocation process, which required the
cost of an acquisition to be allocated to the individual assets acquired and
liabilities assumed based on their estimated fair values. FAS 141R also requires
the acquirer in a business combination achieved in stages, sometimes referred to
as a step acquisition, to recognize the identifiable assets and liabilities, as
well as the noncontrolling interest in the acquiree, at the full amounts of
their fair values, or other amounts determined in accordance with FAS 141R. FAS
141R applies prospectively to 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, 2008. An entity may not apply it before that date. The
Company is currently evaluating the impact that adopting FAS 141R will have on
its consolidated financial statements.
 
 On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of FAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on our financial position or results for the year ended December
31, 2008.
 
 In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities”. FSP FAS 140-4 and FIN 46(R)-8 amends FAS 140 and
FIN 46(R) to require additional disclosures regarding transfers of financial
assets and interest in variable interest entities. FSP FAS 140-4 and FIN 46(R)-8
is effective for interim or annual reporting periods ending after December 15,
2008. The Company is evaluating the impact of adopting the
standard.
  17
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
FAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF
99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1 did not have a material impact on our consolidated financial
statements because all of our investments in debt securities are classified as
trading securities.
 
 In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. FSP FAS 157-4 amends FAS 157 and
provides additional guidance for estimating fair value in accordance with FAS
157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This FSP
shall be applied prospectively with retrospective application not permitted.
This FSP shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity early adopting this FSP must also early adopt FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”. Additionally, if an entity elects to early
adopt either FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” or FSP FAS 115-2 and FAS 124-2, it must also elect to
early adopt this FSP. The Company is currently evaluating this new FSP but do
not believe that it will have a significant impact on the determination or
reporting of our financial results.
  18
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. An entity may
early adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also,
if an entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB
28-1, the entity also is required to early adopt this FSP. We are currently
evaluating this new FSP but do not believe that it will have a significant
impact on the determination or reporting of our financial results.
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends FAS 107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments not measured on the balance sheet at
fair value in interim financial statements as well as in annual financial
statements. Prior to this FSP, fair values for these assets and liabilities were
only disclosed annually. This FSP applies to all financial instruments within
the scope of FAS 107 and requires all entities to disclose the method(s)
and significant assumptions used to estimate the fair value of financial
instruments. This FSP shall be effective for interim periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. We are
currently evaluating the disclosure requirements of this new FSP.
 
 Reclassification
 
 Certain
reclassifications have been made to the 2008 consolidated financial statements
to conform to the 2009 consolidated financial statement presentation. These
reclassifications had no effect on net income or cash flows as previously
reported.
 
 Note
3 - Accounts receivable
 
 Accounts
receivable consisted of the following:
 
 March
      31, 2009
                      
                      
                      December
      31, 2008(Unaudited)Trade
      accounts receivable
                      
                      $
                      44,618,090
                      
                      
                      $
                      50,101,077Allowance
      for bad debts
                      
                      
                      (290,338
                      )
                      
                      
                      (318,529
                      )Trade
      accounts receivable, net
                      
                      $
                      44,327,752
                      
                      
                      $
                      49,782,548
 19
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
  The
following table consists of allowance for doubtful accounts.
 
 Allowance
      for doubtful accounts at December 31, 2007
                        
                        $
                        135,418Additional
      reserves
                        
                        
                        72,469Accounts
      receivable write off
                        
                        
                        -Effect
      of foreign currency translation
                        
                        
                        3,742Allowance
      for doubtful accounts at March 31, 2008 (unaudited)
                        
                        
                        211,629Additional
      reserves
                        
                        
                        105,998Accounts
      receivable write off
                        
                        
                        (1,093
                        )Effect
      of foreign currency translation
                        
                        
                        1,995Allowance
      for doubtful accounts at December 31, 2008
                        
                        
                        318,529Recovery
      of bad debt
                        
                        
                        (33,391
                        )Accounts
      receivable write off
                        
                        
                        -Effect
      of foreign currency translation
                        
                        
                        5,200Allowance
      for doubtful accounts at March 31, 2009 (unaudited)
                        
                        $
                        290,338
 
 Note
4 - Inventories
 
 Inventories
consisted of the following:
 
 March
      31, 2009
                                
                                
                                December
      31, 2008(Unaudited)Raw
      materials
                                
                                $
                                15,676,851
                                
                                
                                $
                                3,929,585Work
      in process
                                
                                
                                1,502,650
                                
                                
                                
                                1,337,703Finished
      goods
                                
                                
                                2,476,537
                                
                                
                                
                                1,832,511Scrap
                                
                                
                                -
                                
                                
                                
                                38,540Totals
                                
                                
                                19,656,038
                                
                                
                                
                                7,138,339Less
      allowance for obsolete inventory
                                
                                
                                (113,711
                                )
                                
                                
                                (160,487
                                )Totals
                                
                                $
                                19,542,327
                                
                                
                                $
                                6,977,852
 
 The
following table consists of allowance for obsolete inventory:
 
 Allowance
      for obsolete inventory at December 31, 2007
                      
                      $
                      63,594Additional
      reserves
                      
                      
                      154,429Effect
      of foreign currency translation
                      
                      
                      -Allowance
      for obsolete inventory at March 31, 2008 (unaudited)
                      
                      
                      218,023Additional
      reserves
                      
                      
                      -Reserves
      write off
                      
                      
                      (72,246
                      )Effect
      of foreign currency translation
                      
                      
                      14,710Allowance
      for obsolete inventory at December 31, 2008
                      
                      
                      160,487Additional
      reserves
                      
                      
                      -Recovery
      of reserve
                      
                      
                      (46,776
                      )Effect
      of foreign currency translation
                      
                      
                      -Allowance
      for obsolete inventory at March 31, 2009 (unaudited)
                      
                      $
                      113,711
  20
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Note
5 - Plant and equipment
 
 Plant and
equipment consisted of the following:
 
 March
      31, 2009
                          
                          
                          December
      31, 2008(Unaudited)Land
                          
                          $
                          100,726
                          
                          
                          $
                          100,726Buildings
      and improvements
                          
                          
                          43,357,106
                          
                          
                          
                          43,418,544Transportation
      equipment
                          
                          
                          4,132,705
                          
                          
                          
                          4,138,892Machinery
      and equipment
                          
                          
                          71,699,775
                          
                          
                          
                          55,147,707Office
      furniture
                          
                          
                          1,165,286
                          
                          
                          
                          1,166,477Construction
      in progress
                          
                          
                          17,184,882
                          
                          
                          
                          33,163,330Totals
                          
                          
                          137,640,480
                          
                          
                          
                          137,135,676Less
      accumulated depreciation
                          
                          
                          (19,427,776
                          )
                          
                          
                          (17,374,649
                          )Totals
                          
                          $
                          118,212,704
                          
                          
                          $
                          119,761,027
 
 Depreciation
expense for the three months ended March 31, 2009 and 2008 amounted to
$2,097,208 and $1,404,042, respectively.
  Note
6 – Advances to suppliers
 
 Advances
on purchases are monies deposited or advanced to outside vendors for future
inventory and equipment purchases. Most of the Company’s vendors require a
certain amount of money to be deposited with them as a guarantee that the
Company will receive their purchase on a timely basis.
 
 Advances
to suppliers consisted of the following:
 
 March
      31, 2009
                    
                    
                    December
      31, 2008(Unaudited)Advances
      for inventories – current
                    
                    $
                    14,347,996
                    
                    
                    $
                    20,261,585Advances
      for equipment – non current
                    
                    
                    8,734,390
                    
                    
                    
                    4,022,879Total
      advances to suppliers
                    
                    $
                    23,082,386
                    
                    
                    $
                    24,284,464
  21
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Note
7 – Intangible assets
 
 Intangible
assets consist of land use rights and patents. In June 2008, the Company
obtained additional land use rights that were prepaid in previous periods and
reclassified to intangible assets-land use rights where it began to be
amortized.  Intangible assets consisted of the following:
 
 March
      31, 2009
                      
                      
                      December
      31, 2008(Unaudited)Patents
                      
                      $
                      1,752,653
                      
                      
                      $
                      1,755,025Land
      use rights
                      
                      
                      12,459,361
                      
                      
                      
                      12,478,090Total:
                      
                      
                      14,212,014
                      
                      
                      
                      14,233,115Less:
      accumulated amortization
                      
                      
                      (1,942,588
                      )
                      
                      
                      (1,826,195
                      )Intangible
      assets, net
                      
                      $
                      12,269,426
                      
                      
                      $
                      12,406,920
 
 Amortization
expense for the three months ended March 31, 2009 and 2008 amounted to $119,076
and $62,277.
 
 Estimated
amortization expense for each of the years end is as follow:
 
 March
      31,
                        
                        Amount2009
                        
                        $
                        469,9942010
                        
                        
                        469,9942011
                        
                        
                        469,9942012
                        
                        
                        451,3802013
                        
                        
                        208,368
 
 Note
8 - Prepaid taxes, Taxes Payable and Deferred Tax Asset
 
 Prepaid
taxes and taxes payable consisted of the following:
 
 March
      31, 2009
                      
                      
                      December
      31, 2008(Unaudited)Income
      Tax
                      
                      $
                      924,316
                      
                      
                      $
                      997,581VAT
      Benefit
                      
                      
                      (2,668,251
                      )
                      
                      
                      (1,779,973
                      )Others
                      
                      
                      98,694
                      
                      
                      
                      111,587Total
      prepaid taxes
                      
                      $
                      (1,645,241
                      )
                      
                      $
                      (670,805
                      )
 
 Income
Tax
 
 Under the
former Income Tax Laws of PRC, the Company is generally subject to an income tax
at an effective rate of 33% (30% state income taxes plus 3% local income taxes)
on income reported in the statutory financial statements after appropriate tax
adjustments. For an enterprise that qualifies as a new or high-technology
enterprise or a Foreign Invested Enterprise (“FIE”) located in the old town of
an inshore open city, it is subject to an income tax rate of 24%. In addition,
if the enterprise is located in a specially designated region that allows
foreign enterprises, the enterprise is entitled to a two-year income tax
exemption and a 50% income tax reduction for the following three
years.
  22
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Beginning
January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law replaced the
former income tax laws for Domestic Enterprises (“DEs”) and FIEs. The new
standard EIT rate of 25% replaced the 33% rate previously applicable to both DEs
and FIEs. The two years tax exemption, three years 50% tax reduction tax holiday
for production-oriented FIEs was eliminated. However, the new EIT Law permits
companies to continue to enjoy their former preferential tax treatments until
such treatments expire in accordance with their current terms.
 
 The
Company’s wholly owned subsidiary, Fushi International, is a foreign limited
liability company and is located in the old town of an inshore open city. Under
the former Income Tax Laws of PRC, the Company qualified to use 24% income tax
rate and has a full income tax exemption for the years ended December 31, 2006
and 2007 and a 50% income tax reduction for the years ending December 31, 2008,
2009 and 2010. Under the new EIT law effected in 2008, the company continues to
enjoy the former preferential tax rate until it expires in December 2010. So,
the applicable corporate income tax rate in 2009 is 12%. The provision for
income tax for the three months ended March 31, 2009 and 2008 was $930,311 and
$1,267,438, respectively.
 
 Dalian
Fushi was incorporated in the PRC and is subject to PRC income tax. Dalian Fushi
located its factory in a special economic region in Dalian, PRC and qualified as
a "new or high-technology enterprise" that is allowed a two year income tax
exemption beginning in 2002, the first year after it became profitable, and a
50% income tax reduction for the following three years, 2004 through 2006.
Dalian Fushi had a loss from operations in the first three months in year 2009,
so no provision for income taxes was made during this period.
 
 The
Company is subject to the United States federal income tax at a tax rate of 34%.
No provision for income taxes in the U.S. has been made as the Company had no
U.S. taxable income for the three months ended March 31, 2009 and
2008.
 
 Fushi,
Fushi Holdings, Copperweld Bimetallics Holdings, LLC and Copperweld Bimetallics,
LLC were incorporated in the United States and have incurred net operating
losses for income tax purposes since inception. The net operating loss carry
forwards for United States income taxes may be available to reduce future years’
taxable income. These carry forwards will expire, if not utilized, through 2025
and 2028.
 
 Copperweld
UK is organized as a United Kingdom private company and subject to 20% to 28%
statutory taxes on its taxable income. The provision for income tax for the
three months ended March 31, 2009 and 2008 was $0.
  23
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 The
(Benefit) Provision for income taxes consisted of the following:
 
 March
      31, 2009
                          
                          
                          March
      31, 2008(Unaudited)
                          
                          
                          (Unaudited)Provision
      for China income taxes
                          
                          $
                          930,311
                          
                          
                          $
                          1,267,438Deferred
      income taxes
                          
                          
                          (1,626,527
                          )
                          
                          
                          (799,003
                          )(Benefit)
      Provision for income taxes
                          
                          $
                          (696,216
                          )
                          
                          $
                          468,435
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended March 31, 2009 and 2008:
 
 March
      31, 2009
                      
                      
                      March
      31, 2008(Unaudited)
                      
                      
                      (Unaudited)U.S.
      Statutory rates on foreign income
                      
                      
                      34.0
                      %
                      
                      
                      34.0
                      %Foreign
      income not recognized in U.S.
                      
                      
                      (34.0
                      )
                      
                      
                      (34.0
                      )China
      income taxes
                      
                      
                      25.0
                      
                      
                      
                      25.0China
      income tax exemption
                      
                      
                      (13.0
                      )
                      
                      
                      (13.0
                      )Deferred
      tax recognized from NOL
                      
                      
                      (34.0
                      )
                      
                      
                      (34.0
                      )Other
      item (a)
                      
                      
                      (7.0
                      )
                      
                      
                      27.8Effective
      income tax rate
                      
                      
                      (29.0
                      )
      %
                      
                      
                      5.8
                      %
 
 a)
                The
      (7.0) % and 27.8%  represents the ($168,330) and $2,234,823 of
      (income) and expenses incurred by the Company that are not subject to
      income tax for the three months ended March 31, 2009 and 2008,
      respectively.
 
 The
estimated tax savings from the tax exemptions for the three months ended March
31, 2009, amounted to $1,007,837. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.11 to
$0.08 and diluted earning per share from $0.11 to $0.08.
 
 The
estimated tax savings from the tax exemptions for the three months ended March
31, 2008, amounted to $1,373,058. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.28 to
$0.23 and diluted earning per share from $0.26 to $0.24.
 
 Deferred Tax
Asset
 
 Fushi was
incorporated in the United States and has incurred net operating losses for
income tax purposes since inception. The net operating loss as of March 31, 2009
and December 31, 2008 amounted to $27,746,203 and $23,253,132 carry forwards for
United States income taxes may be available to reduce future years’ taxable
income. These carry forwards will expire, if not utilized, through, 2025 and
2029. Management believes that the realization of the benefits can be used by
our US operating subsidiary in future periods because expectations are that
Copperweld will have taxable income in future periods. Based on its review, the
Company believes that, as of March 31, 2009, it was not necessary to provide a
valuation allowance for deferred tax assets.
  24
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 The
deferred tax asset consisted of the following:
 
 Deferred
      tax asset at December 31,2008
                      
                      $
                      7,804,027Additions
      to deferred tax asset
                      
                      
                      1,626,527Deferred
      tax asset at March 31,2009
                      
                      $
                      9,430,554
 
 Value Added
Tax
 
 VAT on
sales and VAT on purchases in Dalian China amounted to $4,477,366 and $7,115,089
for the three months ended March 31, 2009, and $6,123,424 and $5,253,457 for the
three months ended March 31, 2008,  respectively.
 
 VAT on
sales and VAT on purchases in Copperweld UK amounted to $28,182 and $57,538 for
the three months ended March 31, 2009 and $73,284 and $86,906 for the three
months ended March 31, 2008, respectively.
 
 Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
 
 Note
9 - Short term bank loans and revolving credit lines
 
 Short
term bank loans represent amounts due to various banks and are due on demand or
normally within one year. These loans generally can be renewed with the banks.
Short term bank loans consisted of the following:
 
 Name
      of lender
                              
                              March
      31, 2009
                              
                              
                              December
      31, 2008(Unaudited)Guangdong
      Development bank, Dalian Stadium branch, due February 25, 2009, annual
      interest at 8.96%,secured by the Company’s land use rightand
      building.
                              
                              $
                              -
                              
                              
                              $
                              8,794,200Guangdong
      Development bank, Dalian Stadium branch, due March 9, 2009, annual
      interest at 8.96%, secured by the Company’s land use right and
      building
                              
                              
                              -
                              
                              
                              
                              2,931,400Guangdong
      Development bank, Dalian Stadium branch, due March 19, 2009, annual
      interest at 8.96%, secured by the Company’s land use right and
      building
                              
                              
                              -
                              
                              
                              
                              1,465,700Guangdong
      Development bank, Dalian Stadium branch, due March 26, 2009, annual
      interest at 8.96%, secured by the Company’s land use right and
      building
                              
                              
                              -
                              
                              
                              
                              4,397,100Total
      Short-Term Bank Loans
                              
                              
                              -
                              
                              
                              
                              17,588,400Wells
      Fargo Bank revolving credit line, annual interest at 0.5%  plus
      Chase bank rate, the line of credit expires in 2010, secured by all
      present and future account receivables, equipment, inventory and other
      goods, documents of title, general intangibles, investment property, and
      real estate of Copperweld.
                              
                              
                              4,125,266
                              
                              
                              
                              4,712,075Total
                              
                              $
                              4,125,266
                              
                              
                              $
                              22,300,475
  25
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 The
Company paid off its four short-term loans with total balances of $17,588,400 on
January 5, 2009.
 
 Copperweld
maintains a revolving line of credit with Wells Fargo Bank. Availability of the
credit line is the lower of $12.8 million or the collateral balances. The
outstanding balance was $4,125,266 and $4,712,075 as of March 31, 2009 and
December 31, 2008, respectively. The Company deposits the cash collections from
its customers against the outstanding account balance of the line of credit on a
daily basis. Annual interest rate is equal to the applicable margin plus Chase
bank rate, during the first quarter of 2009, the actual annual interest
rate was 3.25%. The asset-based revolving line of credit with Wells Fargo
contains various covenants that are reported on a quarterly basis. As of March
31, 2009, Copperweld was in default under the terms of the revolving line of
credit agreement. See note 18 for detail.
 
 Copperweld
UK maintains a revolving line of credit with a limit of approximately $1,073,000
(or ₤750,000) but had no balance outstanding as of March 31, 2009 and December
31, 2008.  Both revolving lines of credit mentioned above expire in
2010.
 
 Total
interest expense on the revolving credit line and short term loan for
the three months ended March 31, 2009 and 2008 amounted to $90,775 and $494,332,
respectively, of which $1,350 and $45,448, respectively, was capitalized for
construction projects.
  26
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Note
10 – Notes payable
 
 Notes
payable consisted of the following:
 
 March
      31, 2009
                                        
                                        
                                        December
      31, 2008(Unaudited)Senior
      secured convertible notes (“Convertible Notes”), bearing interest at 3%
      per annum, maturing on January 24, 2012, convertible to common stock at an
      initial conversion price of $7.00 per share
                                        
                                        $
                                        5,447,092
                                        
                                        
                                        $
                                        5,000,000Guaranteed
      senior secured floating rate notes (“HY Notes”) maturing between July 24,
      2010 to January 24, 2012
                                        
                                        
                                        40,000,000
                                        
                                        
                                        
                                        40,000,000Subtotal
                                        
                                        
                                        45,447,092
                                        
                                        
                                        
                                        45,000,000Less
      current portion
                                        
                                        
                                        10,000,000
                                        
                                        
                                        
                                        5,000,000Total
      notes payable, noncurrent
                                        
                                        $
                                        35,447,092
                                        
                                        
                                        $
                                        40,000,000
 
 On
January 24, 2007, the Company and Citadel Equity Fund Ltd. ("Citadel") entered a
Notes Purchase Agreement.  In this transaction, Citadel
purchased:
 
 (i)           $40
million principal amount (less 3% Notes discount and 4% commission for proceeds
of $37,200,000) of guaranteed senior secured floating rate notes (“HY Notes”)
due between July 2009 to January 2012 and
 
 (ii)           $20
million principal amount (less 4% commission for proceeds of $19,200,000) of the
Company’s 3% senior secured convertible notes (“Convertible Notes”) due January
2012, which are convertible into shares of the Company's common stock at an
initial conversion price of $7.00 per share.
 
 The HY
notes bear interest at LIBOR (approximately 1.70% at March 31, 2009) + 7% and
changes to LIBOR + 5.6% permanently upon successful completion of Qualifying IPO
within eighteen months from January 24, 2007.  See below for
discussion of swap agreement changing variable interest to 8.3% fixed.The
Convertible Notes bear interest at a fixed rate of 3.00%, payable semi-annually
in arrears, and mature in 2012.  The HY Notes and the Convertible
Notes are guaranteed, jointly and severally, on a senior secured basis, by all
of the Company’s wholly-owned existing and future domestic
subsidiaries.   Subsequently on November 15, 2007, the Company
filed Form S-3 with the Securities and Exchange Commission (SEC) with a proposed
prospectus to register up to 5,743,143 shares including 2,857,143 shares
underlying the 3% Senior Convertible Notes. On November 21, 2007, the
registration statement was declared effective by the SEC.  Upon the
S-3 registration statement being declared effective, management concluded that
the Company had met all the requirements for a Qualifying IPO and therefore
notified the HY Notes holders of the 140 basis points step-down and subsequently
paid interest per the stepped down rate in January 2008.
  27
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Management
determined that the conversion option in Convertible Notes qualified as an
embedded derivative under FAS 133 through the adoption of EITF 07-5, as
discussed in Note 2.
 
 In
connection with the transaction, Citadel was also granted certain rights over
the Company and its subsidiaries.  On January 25, 2007, Fushi, Fushi
Holdings, Fushi International Dalian, Dalian Fushi, (the “Group Companies”), Li
Fu, our Chairman and Chief Executive Officer, Mathus Yue Yang, our then
President, Chris Wenbing Wang, our current President and Chief Financial Officer
and Citadel entered into an Investor Rights Agreement. Subsequently on June 4,
2008, the Group Companies, Li Fu, Chris Wenbing Wang and Citadel entered in an
Amended and Restated Investor Rights Agreement.  Pursuant to the
Investor Rights Agreement and the Amended and Restated Investor Rights
Agreement, Citadel was granted, among other things and subject to certain
conditions, a right of first refusal with respect to any debt or equity
financing sought by the Company. In addition, Messrs. Fu, Yang and Wang agreed
to a non-competition covenant relating to their employment and ability to engage
in a business that is competitive with the Company's business for five
years.
 
 The HY
Notes and the Convertible Notes were issued pursuant to indentures, each dated
January 25, 2007 (the “HY Indenture” and “CB Indenture”, respectively, and
together, the "Indentures") among the Company, Fushi Holdings, as guarantor, and
the Bank of New York, as trustee for the Notes.  The indenture, notes
purchase agreement and investor rights agreement related to the HY Notes and
Convertible Notes contain various covenants that may limit the Company’s
discretion in operating its business. In particular, the Company is limited in
its ability to merge, consolidate or transfer substantially all of its assets,
issue stock of its subsidiaries, incur additional debt and create liens on
assets to secure debt. In addition, the Company is required to comply with
certain financial covenants, including maintenance of a fixed charge coverage
ratio of at least 2.0 and maintenance of a leverage ratio not exceeding 5.5. In
addition, upon occurrence of events defined as “Asset Sale”, “Change of Control”
or “Designated Event (means any Fundamental Change or Termination of Trading)”
under the Indentures, holders of the HY Notes and Convertible Notes may require
the Company to make an offer to repurchase the principal amounts.
 
 The
Company also agrees that on the dates indicated in the following table, the
Company will prepay the corresponding principal amount (or such lesser principal
amount as shall then be outstanding) in respect of the aggregate principal
amounts.
  Date
                      
                      Principal AmountJuly
      24, 2009
                      
                      $
                      5,000,000January
      24, 2010
                      
                      $
                      5,000,000July
      24, 2010
                      
                      $
                      5,000,000January
      24, 2011
                      
                      $
                      5,000,000July
      24, 2011
                      
                      $
                      10,000,000
 
 The
entire remaining principal amount of the Notes shall become due and payable on
January 24, 2012.
  28
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Unless
previously redeemed, converted, purchased or cancelled, the Company must repay
the Convertible Notes on January 24, 2012. The Convertible Notes may not be
prepaid at any time prior to maturity. At maturity, the Company must repay all
of the outstanding Convertible Notes plus a premium of 15.00% per annum on the
principal amount calculated on a semi-annual basis, plus accrued and unpaid
interest on late payment, if any, to reflect an additional 5% per annum interest
in excess of the rate of interest then in effect. It’s estimated that the
Company will have to repay the principal of $5 million and an additional
redemption cost of $5,305,158.
 
 The
Convertible Notes are convertible at the option of the holder into the Company’s
common stock at an initial conversion price of $7 per share (approximating
14,286 shares per $100,000 principal amount of the Convertible Notes), subject
to downward adjustments of conversion price on March 1 and September 1 of each
year, beginning with March 1, 2008, to equal the simple arithmetic average of
VWAP for the fifteen trading days preceding such March 1 or September 1, with a
floor of $4.5.  On March 2, 2009, the conversion price was adjusted to
$5.11 (approximating 19,569 shares per $100,000 principal amount of the
Convertible Notes) to reflect the simple arithmetic average of VWAP for the
fifteen trading days preceding the reset date.
 
 In
addition, adjustment of the Conversion Rate will be made if and at each time,
upon completion of the quarter reviews (for each Fiscal Quarter ended March 31,
June 30 and September 30) or annual audit or each Fiscal Quarter ended December
31) of the Company’s consolidated financial statements an event defined as Financial and Operational
Trigger under the CB indenture shall have occurred in the immediately
preceding Fiscal Quarter, then within five (5) Business Days following issuance
of the review or audit report, as the case may be, for such Fiscal Quarter, the
Conversion Rate shall be adjusted pursuant to a formula provided in the CB
Indenture.  The Financial
and Operational Triggermeans, for the Company
and its subsidiaries on a consolidated basis, that net income for a Fiscal
Quarter shall be less than the US dollar amount indicated in the table below
opposite such Fiscal Quarter:
  Fiscal Quarter Ending
                                  
                                  Net IncomeJune
      30, 2007
                                  
                                  $
      5.0 millionSeptember
      30, 2007
                                  
                                  $
      5.0 millionDecember
      31, 2007
                                  
                                  $
      5.0 millionMarch
      31, 2008
                                  
                                  $
      6.0 millionJune
      30, 2008
                                  
                                  $
      6.0 millionSeptember
      30, 2008
                                  
                                  $
      6.0 millionDecember
      31, 2008
                                  
                                  $
      6.0 millionMarch
      31, 2009
                                  
                                  $
      7.2 millionJune
      30, 2009
                                  
                                  $
      7.2 millionSeptember
      30, 2009
                                  
                                  $
      7.2 millionDecember
      31, 2009
                                  
                                  $
      7.2
million
  29
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Upon
review of our consolidated financial statements, we determined that a Financial and Operational
Trigger as defined under the CB indenture occurred during the quarters
ended March 31, 2009
andDecember 31, 2008.  To the extent a conversion occurs, the
Company shall be required to deliver 279,614 additional shares of the
Company’s common stock to the holder of the Convertible Notes by increasing the
Conversion Rate with respect to such notes.  Further, the Company
cannot provide assurance that Financial and Operational
Trigger may not occur again in future fiscal quarters especially under
challenging macro-economic conditions and difficult operating environments like
the current one.
 
 On
January 8, 2008, Citadel Equity Fund Ltd. exercised its rights under the CB
indenture and received 2,142,857 shares in exchange for $15.0 million in debt
with an exchange factor of $7.00 in debt for each share of stock.
 
 As of
March 31, 2009, the Company had the carrying value of $5,447,092 of Convertible
Notes, of which, $5 million is principal and $447,092 is accrued interest and
redemption accretion.
 
 As
mentioned in Note 2, due to the recent adoption, of EITF 07-5, the Company has
re-evaluated the Convertible Notes’ conversion option and has since then
determined that it would require liability accounting.  The Company
has since then recorded the fair value of the conversion option as “derivative
liability – conversion option” in the accompanying consolidated financial
statements.  The change in the values of the conversion option is
shown in the accompanying consolidated statements of income and other
comprehensive income.
 
 Deferred
commissions on long term notes amounted to $2,925,846 (of which $1,237,500 was
due to Kuhn's verdict as explained in Note 19) as of March 31, 2009 and
$3,188,344 as of December 31, 2008.  Amortized commission for the
three months ended March 31, 2009 and 2008 amounted to $262,497 (of which
$112,500 was due to Kuhn's verdict as explained in Note 17) and $ 658,404,
respectively.
 
 Interest
on long term notes, including the premium, for the three months ended March 31,
2009, and 2008 amounted to $1,112,190, and $592,047, respectively.
 
 Both
amortized commission and interest on long term notes are recorded as interest
expense.
 
 Note
11 – Derivative instrument
 
 The
Company's operations are exposed to a variety of global market risks, including
the effect of changing interest rates. This exposure is managed, in part, with
the use of financial derivatives. The Company uses financial derivatives only to
hedge exposures in the ordinary course of business and does not invest in
derivative instruments for speculative purposes.
  30
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 On April
10, 2007, effective January 24, 2007, the Company entered into a cross currency
swap transaction (the Swap) with Merrill Lynch Capital Services, Inc. (“MLCS”)
on the $40 million HY notes which converts the LIBOR + 7% per annum USD
variable interest rate to an 8.3% per annum RMB fixed interest rate. The
agreement was deemed effective January 24, 2007. The Swap requires semi-annual
payment in arrears on July 24 and January 24 and matures on the earlier of (1)
cash settlement defined as early termination; or (2) January 24, 2012, at which
point the Swap requires an exchange of RMB and USD based principals. Under the
terms of the cross currency swap, the Company receives variable interest rate
payments in USD and makes fixed interest rate payments in RMB with settlement
netted in USD, thereby creating the equivalent of fixed-rate debt. MLCS requires
the Company to deposit $1,000,000 with them to secure the agreement. The deposit
may be increased to $3,000,000 if the exchange rate for RMB to USD falls below
6.5 and to $5,000,000 if the exchange rate falls below 5.5. This swap is
designated and qualified as a cash flow hedge. In July, 2008, the Company placed
the $1,000,000 deposit with MLCS to secure the agreement. As of March 31, 2009,
the deposit has remained the same.
 
 Since its
effective date, the fair value of this Swap Agreement changed to a payable of
$7,139,205 and $4,377,076 as of March 31, 2009, and December 31, 2008,
respectively. For the three months ended March 31, 2009, changes in fair value
of the Swap resulted in an increase in the liability and a loss to other
comprehensive income of $2,762,129, respectively; For the three months ended
March 31, 2008, changes in fair value of the Swap resulted in an increase in the
liability and a loss to other comprehensive income of $5,109,480, respectively,
net of taxes.
 
 The
Company had cross currency hedge payable amounting to $156,154 and $104,324 as
of March 31, 2009 and December 31, 2008 respectively. The total loss from
derivative transactions for the three months ended March 31, 2009 was $166,410
and the total gain from derivative transactions for the three months ended at
March 31, 2008 was $169,167, respectively.  For the three months ended
March 31, 2009, there were no amounts recorded in the consolidated statements of
income in relation to this interest rate swap related to ineffectiveness of the
swap transaction.
 
 Note
12 - Earnings per share
 
 The
following is information of net income per share:
 
 March
      31, 2009
                                
                                
                                March
      31, 2008(Unaudited)
                                
                                
                                (Unaudited)Net
      income for basic earnings per share
                                
                                $
                                3,100,917
                                
                                
                                $
                                7,570,496Add:
      Interest expense for convertible note
                                
                                
                                -
                                
                                
                                
                                27,762Deduct:
      Loan issuance cost
                                
                                
                                -
                                
                                
                                
                                (152,559
                                )Net
      income for diluted earnings per share
                                
                                $
                                3,100,917
                                
                                
                                $
                                7,445,699Weighted
      average sharesused
      in basic computation
                                
                                
                                27,563,478
                                
                                
                                
                                27,048,039Diluted
      effect of warrants, options and convertible note
                                
                                
                                131,986
                                
                                
                                
                                1,180,565Weighted
      average sharesused
      in diluted computation
                                
                                
                                27,695,464
                                
                                
                                
                                28,228,604Earnings
      per shareBasic
                                
                                $
                                0.11
                                
                                
                                $
                                0.28Diluted
                                
                                $
                                0.11
                                
                                
                                $
                                0.26
  31
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Shares
excluded from the calculation of diluted earnings per share:
 
 Date
                            issued/
                            granted
                          
                          Nature
                          
                          Excise
      price
                          
                          
                          Shares
      excluded
                            for
      year diluted
                            EPS
      calculation
                          
                          Reason
      for
                            exclusion10/23/2007
                          
                          Common
                            stock
      held in
                            escrow
                          
                          
                          
                          
                          
                          100,000
                          
                          Common
      stock
                            issued
      in
                            Company's
                            name11/31/2007
                          
                          Warrants
                          
                          
                          16.80
                          
                          
                          
                          100,000
                          
                          Anti-dilutive02/23/2009
                          
                          Warrants
                          
                          
                          5.25-6.00
                          
                          
                          
                          300,000
                          
                          Anti-dilutive05/21/2007
                            to
                            11/13/2007
                          
                          Options
                          
                          
                          11.75-20.94
                          
                          
                          
                          798,333
                          
                          Anti-dilutive04/10/2008
                            to
                            6/25/2008
                          
                          Options
                          
                          
                          15.04-23.25
                          
                          
                          
                          144,000
                          
                          Anti-dilutive
 
 Convertible
notes were anti-dilutive and excluded from the calculation of diluted earnings
per share too.
 
 Note
13 - Stockholders' Equity
 
 During
the first quarter of 2009, the following activities were recorded:
   
 On
February 23, 2009, the Company sold in a private placement 400,000 shares of its
common stock, par value $0.006 per share (the “Common Stock”) for an average
price of $4.80 per share, and warrants to purchase 300,000 shares of Common
Stock, for a total purchase price of $1,920,000.
 
 The
warrants consisted of Series A Warrants to purchase 100,000 shares of Common
Stock at an exercise price of $5.25 per share, Series B Warrants to purchase
100,000 shares of Common Stock at an exercise price of $5.50 per share, and
Series C Warrants to purchase 100,000 shares of Common Stock at an exercise
price of $6.00 per share.
  32
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 The
Series A and B Warrants are exercisable starting from the date of issuance
through the later of (i) February 22, 2010 and (ii) the date which is six (6)
months following the effective date of a registration statement filed by the
Company under which the resale of all of the shares of Common Stock underlying
the warrants have been registered under the Securities Act of 1933, as amended
(the “Securities Act”). The Series C Warrants are exercisable starting from the
date of issuance through the later of (i) August 22, 2010 and (ii) the date
which is twelve (12) months following the effective date of a registration
statement filed by the Company under which the resale of all of the shares of
Common Stock underlying the warrant have been registered under the Securities
Act.
  Because
of certain cash redemption clauses related to these warrants, the Company has
followed the criterias in EITF 00-19 and recorded the fair value of these
warrants as “derivative liability – warrants” in the accompanying consolidated
financial statements.  The changes in the values of these warrants are
shown in the accompanying consolidated statements of income and other
comprehensive income.
 
 The value
of the warrants were calculated using the Cox-Ross-Rubinstein binomial model
with the following assumptions: exercise price of $5.25 for Series A, $5.50 for
Series B and $6.00 for Series C Warrants; share price of $4.27 for all warrants;
risk free interest rate of 0.57% for Series A and B Warrants, and 0.69% for
Serice C Warrants; expected life of 1 year for Series A and B Warrants, and 1.5
years for Series C Warrants; and volatility of 60% for all
warrants.
 
 Outstanding Warrants
                              
                              
                              Exercisable WarrantsExercise
                                Price
                              
                              Number
                              
                              
                              Average
                                Remaining
      Life
                                (years)
                              
                              
                              Average
                                Exercise
                                Price
                              
                              
                              Number
                              
                              
                              Average
                                Remaining
                                Life
                                (years)$
                              3.11
                              
                              
                              332,124
                              
                              
                              
                              2.75
                              
                              
                              
                              $
                              3.11
                              
                              
                              
                              332,124
                              
                              
                              
                              2.75$
                              16.80
                              
                              
                              100,000
                              
                              
                              
                              2.65
                              
                              
                              
                              $
                              16.80
                              
                              
                              
                              100,000
                              
                              
                              
                              2.65$
                              5.25
                              
                              
                              100,000
                              
                              
                              
                              0.90
                              
                              
                              
                              $
                              5.25
                              
                              
                              
                              100,000
                              
                              
                              
                              0.90$
                              5.50
                              
                              
                              100,000
                              
                              
                              
                              0.90
                              
                              
                              
                              $
                              5.50
                              
                              
                              
                              100,000
                              
                              
                              
                              0.90$
                              6.00
                              
                              
                              100,000
                              
                              
                              
                              1.39
                              
                              
                              
                              $
                              6.00
                              
                              
                              
                              100,000
                              
                              
                              
                              1.39
 
 The
following is a summary of the warrant activity:
 
 Number
      of
                                Warrants
                                Outstanding
                              
                              
                              Weighted
                                -Average
                                Exercise
                                Price
                              
                              Average
                                Remaining
                                Contractual
                                LifeBalance,
      at December 31, 2007
                              
                              
                              477,052
                              
                              
                              $
                              6.35
                              
                              3.92
      yearsGranted
                              
                              
                              -Forfeited
                              
                              
                              -Exercised
                              
                              
                              -Balance,
      at March 31, 2008
                              
                              
                              477,052
                              
                              
                              $
                              6.35
                              
                              3.67
      yearsRounding
      Adjustment
                              
                              
                              (55
                              )Granted
                              
                              
                              -Forfeited
                              
                              
                              -Exercised
                              
                              
                              (44,873
                              )
                              
                              $
                              3.11Balance,
      at December 31, 2008
                              
                              
                              432,124
                              
                              
                              $
                              6.28
                              
                              2.92
      yearsGranted
                              
                              
                              300,000
                              
                              
                              $
                              5.58Forfeited
                              
                              
                              -Exercised
                              
                              
                              -Balance,
      at March 31, 2009
                              
                              
                              732,124
                              
                              
                              $
                              5.99
                              
                              2.05
      years
  33
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Note
14 – Stock based compensation
  2007 Incentive
Plan:
  On
October 24, 2007, our Board of Directors approved the adoption of the Fushi
Copperweld, Inc. 2007 Stock Incentive Plan (the “2007 Plan”).  The
aggregate number of shares of Common Stock that may be issued under this Plan
shall not exceed 800,000 shares, provided, however, that such number shall be
increased at the end of each fiscal year of the Company in the same proportion
as the issued and outstanding stock of the during such fiscal year; subject to a
maximum of 10%of
the issued and outstanding stock of the Company. Share options must be granted
with an exercise price of at least 100% of the closing market price on the date
of grant. The Compensation Committee (or Chief Executive Officer) had authority
to set all the terms of each grant. Under the 2007 Plan, forfeited shares will
become available for grant again.
  Majority
of the options awarded under the 2007 Plan vest in two years from grant date.
The majority of the options granted under the 2007 Plan expire in
3 years.
  Under the
2007 Plan, the Company granted share options to all executives, directors and
employees as summarized below:
  Grant
      Year
                        
                        Number
      of Shares
                        
                        
                        Exercise
      Price Range2007
                        
                        
                        335,000
                        
                        
                        $
                        16.36-$20.942008
                        
                        
                        151,000
                        
                        
                        $
                        15.04-$23.252009
                        
                        
                        388,000
                        
                        
                        $
                        4.95Total
                        
                        
                        874,000
 The fair
value of each option award is estimated on the date of grant using the
Black-Scholes model using the following weighted-average
assumptions:
  Q1
                                      
                                      
                                      Year
      ended December 312009
                                      
                                      
                                      2008
                                      
                                      
                                      2007Risk-free
      interest rate(1)
                                      
                                      
                                      0.78
                                      %
                                      
                                      
                                      1.84%-2.82
                                      %
                                      
                                      
                                      3.54%-4.57
                                      %Expected
      dividend yield(2)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Expected
      option life(3)
                                      
                                      
                                      2
      Year
                                      
                                      
                                      
                                      0.5-2
      Years
                                      
                                      
                                      
                                      2
      YearsExpected
      stock price volatility(4)
                                      
                                      
                                      60
                                      %
                                      
                                      
                                      50
                                      %
                                      
                                      
                                      50
                                      %Weighted
      average fair value of options granted
                                      
                                      $
                                      1.85
                                      
                                      
                                      $
                                      4.57
                                      
                                      
                                      $
                                      4.06
  34
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 (1)
                  
                  Risk-free interest rate– Risk-free interest
      rate is based on US Treasury zero-coupon issues with maturity terms
      similar to the expected term on theexpected life of the option. An
      increase in the risk-free interest rate will increase compensation
      expense.(2)
                  
                  Expected dividend yield– The dividend yield was estimated by the Company based on its
      expected dividend policy over the expected term of the options. The
      Company has no plans to pay any dividend in the foreseeable future.
      Therefore, the Company considers the dividend yield to be
      zero.(3)
                  
                  Expected option life–
      Because the Company has no historical share option exercise experience to
      estimate future exercise patterns, the expected life was determined using
      the simplified method as these awards meet the definition of
      “plain-vanilla” options under the rules prescribed by Staff Accounting
      Bulletin No. 107. An increase in expected life will increase compensation
      expense.(4)
                  
                  Expected stock price
      volatility– This is a measure of the amount by which a price has
      fluctuated or is expected to fluctuate. As a forward-looking measure, the
      Company uses implied volatility of Company’s 225 days call options with
      strike price of $5.00 on May 7, 2009 (source: Morningstar.com), adjusted
      by the 2-year historical volatility of the Company’s stock as well as
      2-year historical volatilities of the Company’s comparable public
      companies, to calculate the expected stock price volatility. An increase
      in the expected volatility will increase compensation
    expense.
  Stock
compensation expense is recognized based on awards expected to
vest.  FAS 123R requires forfeitures to be estimated at the time of
grant and revised in subsequent periods, if necessary, if actual forfeitures
differ from those estimates. To the extent the actual forfeiture rate is
different from the original estimate, actual share based compensation related to
these awards may be different from the expectation. There is no material
difference between actual and estimated forfeitures during the three months
ended March 31, 2009.
  The
Company recognized $590,868 and $413,095 share-based compensation expense in
general and administrative expenses for the three months ended March 31, 2009
and 2008, respectively. As of March 31, 2009, the total compensation cost
related to stock options not yet recognized was $756,062 and will be recognized
over the weighted average life of 0.4 years.
 
 As of
March 31, 2009, the 892,333 executive options, 240,000 director options and
287,000 employee options outstanding had fair values of approximately
$3,473,081, $912,761 and $756,923 respectively.
  35
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 The
following is a summary of the stock option activity:
 
 Number
      of
                                  Options
                                  Outstanding
                                
                                
                                Weighted
                                  -Average
                                  Exercise
                                  Price
                                
                                
                                Aggregate
                                  Intrinsic
                                  ValueBalance,
      December 31, 2007
                                
                                
                                1,110,000
                                
                                
                                $
                                14.3
                                
                                
                                $
                                12,075,850Granted
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Forfeited
                                
                                
                                (50,000
                                )
                                
                                $
                                12.3
                                
                                
                                
                                -Exercised
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Balance,
      March 31, 2008
                                
                                
                                1,060,000
                                
                                
                                $
                                14.4
                                
                                
                                $
                                1,865,000Granted
                                
                                
                                151,000
                                
                                
                                $
                                21.3
                                
                                
                                
                                -Forfeited
                                
                                
                                (143,667
                                )
                                
                                $
                                18.1
                                
                                
                                
                                -Exercised
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Balance,
      December 31, 2008
                                
                                
                                1,067,333
                                
                                
                                $
                                14.9
                                
                                
                                
                                -Granted
                                
                                
                                388,000
                                
                                
                                $
                                4.95
                                
                                
                                
                                -Forfeited
                                
                                
                                (36,000
                                )
                                
                                $
                                4.95
                                
                                
                                
                                -Exercised
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Balance,
      March 31, 2009
                                
                                
                                1,419,333
                                
                                
                                $
                                12.41
                                
                                
                                
                                -
 
 Following
is a summary of the status of options outstanding at March 31,
2009:
 
 Outstanding
      Option
                    
                    Exercisable
      OptionsExercise
      Price
                    
                    Number
                    
                    Average
                      Remaining
                      Contractual
                      Life
                    
                    Average
                      Exercise
                      Price
                    
                    
                    Number
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price$12.30
                    
                    
                    408,333
                    
                    0.14
      years
                    
                    $
                    12.30
                    
                    
                    
                    383,333
                    
                    
                    $
                    12.30$11.75
                    
                    
                    150,000
                    
                    0.18
      years
                    
                    $
                    11.75
                    
                    
                    
                    135,927
                    
                    
                    $
                    11.75$13.70
                    
                    
                    125,000
                    
                    0.49
      years
                    
                    $
                    13.70
                    
                    
                    
                    125,000
                    
                    
                    $
                    13.70$16.44
      - $20.94
                    
                    
                    230,000
                    
                    0.58
      years
                    
                    $
                    18.69
                    
                    
                    
                    230,000
                    
                    
                    $
                    16.40$16.36
                    
                    
                    10,000
                    
                    0.62
      years
                    
                    $
                    16.36
                    
                    
                    
                    10,000
                    
                    
                    $
                    16.36$23.25
                    
                    
                    77,000
                    
                    0.00
      years
                    
                    $
                    23.25
                    
                    
                    
                    77,000
                    
                    
                    $
                    23.25$15.04
                    
                    
                    17,000
                    
                    0.03
      years
                    
                    $
                    15.04
                    
                    
                    
                    16,533
                    
                    
                    $
                    15.04$20.04
                    
                    
                    50,000
                    
                    1.14
      years
                    
                    $
                    20.04
                    
                    
                    
                    28,621
                    
                    
                    $
                    20.04$4.95
                    
                    
                    352,000
                    
                    0.75
      years
                    
                    $
                    4.95
                    
                    
                    
                    91,000
                    
                    
                    $
                    4.95Total
                    
                    
                    1,419,333
                    
                    
                    
                    
                    
                    
                    
                    
                    1,097,414
 
 Note
15 - Statutory reserves
 
 The laws
and regulations of the People’s Republic of China require that before a
Sino-foreign cooperative joint venture enterprise distributes profits to its
partners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations in proportions determined at the discretion
of the board of directors, after the statutory reserve.
  36
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 Surplus reserve
fund
 
 The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital. As of March 31, 2009, the Company has total registered capital of
approximately $80,931,711 (RMB 624.3 million). The Company is required to
contribute an additional $28,149,708 from future earnings. The transfer to this
reserve must be made before distribution of any dividend to shareholders. The
company will transfer at year end 10% of the year’s net income determined in
accordance with PRC accounting rules and regulations.
 
 The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 50% of the registered
capital.
 
 Note
16 – Employee pension
 
 The
Company’s employee pension for China employees generally includes two parts: the
first to be paid by the Company is 20% of the employee’s actual salary in the
prior year. The other part, paid by the employee, is 8% of the actual salary.
The Company made $31,991 and $30,462 in contributions of employment benefits for
China employees in the three months ended March 31, 2009 and 2008,
respectively.
 
 US
employees are provided a 401(k) plan.  US employees are eligible for the
defined contribution plan after three-months of full-time
employment.  Employee deferrals and company matching are 100% vested
immediately upon eligibility. The company made $30,540 and $33,335 in
contributions of employment benefits for US employees in the three months ended
March 31, 2009 and 2008, respectively.
 
 Copperweld
UK operates a defined contribution pension scheme for employees. All UK
employees are eligible to join the pension on satisfactory completion of their
trial period, which is typically three months. UK employees can contribute as
much as they like subject to current UK laws, but the company will match only
the first 2.5% of gross pay in the current year. The assets of the scheme are
held separately from those of the company. The annual contributions payable are
charged to expense. The company made $2,778 and $13,676 in contributions of
employment benefits for UK employees in the three months ended March 31, 2009
and 2008.
 
 Note
17 - Commitments and contingencies
 
 As
discussed in Note 11, the Company entered into a swap agreement that required a
$1,000,000 deposit to secure the transaction. If the exchange rate for RMB to US
Dollars drops below certain levels, the Company will be required to deposit up
to $5,000,000. In
July 2008, the Company deposited the $1,000,000 with MLCS to secure the
agreement.
  37
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009
 (Unaudited)
 
 On
December 11, 2007, the Company received service of an action filed by Kuhns
Brothers, Inc., Kuhns Brothers Securities Corp., and Kuhns Brothers & Co.,
Inc. against the Company in the United States District Court, District of
Connecticut on November 27, 2006.  On August 5, 2008, the Company received
verdict from the United States District Court that Kuhns is entitled to recover
a total of $7,197,794. The court ruling was recorded as a contingent liability
of $7,197,794 and was allocated to the following: (a) $710,544 was expensed
immediately in second quarter of 2008; (b) $3,000,000 was recorded as deferred
commissions on long term notes (also explained in Note 10) and is being
amortized over the remainder of the long term note’s life, $ 112,500 was
amortized for the three months ended March 31, 2009 and $1,650,000 was amortized
for the year ended December 31, 2008, $1,237,500 was outstanding as deferred
commissions on long term notes as of March 31, 2009; (c) $3,487,250 was
allocated to Additional Paid in Capital in second quarter of 2008.
 
 Note
18 - Subsequent events
 
 As of
March 31, 2009, Copperweld was in violation of certain financial covenants under
the terms of the revolving line of credit agreement with Wells Fargo. On May 6,
2009,Wells Fargo exercised its right to implement the 2% additional default rate
of interest effective April 1, 2009 and the additional default interest will be
charged on May 7, 2009
  38
 ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITIONS.
 
 The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form
10-Q.
 
 Certain
statements in this Report, and the documents incorporated by reference herein,
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements, which involve risks and uncertainties, regarding,
among other things, (a) our projected sales, profitability, and cash flows, (b)
our growth strategies, (c) anticipated trends in our industries, (d) our future
financing plans, and (e) our anticipated needs for, and use of, working capital.
They are generally identifiable by use of the words “may,” “will,”
“should,” “anticipate,” “estimate,” “plan,” “potential,” “project,”
“continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we
intend,” or the negative of these words or other variations on these words
or comparable terminology. Actual events or results may differ materially from
those discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under “Risk Factors” in our
Annual Report on Form 10-K and matters described in this report generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. You
should not place undue reliance on these forward-looking
statements.
 
 The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.
  The
"Company", "we," "us," "our," and the "Registrant" refer to (i) Fushi
Copperweld, Inc. (formerly Fushi International, Inc.), (ii) Fushi Holdings,
Inc.(formerly Diversified Product Inspections, Inc.) (“Fushi Holdings”), (iii)
Fushi International (Dalian) Bimetallic Cable Co., Ltd. (formerly Dalian
Diversified Product Inspections Bimetallic Cable, Co., Ltd.) (“Fushi
International (Dalian)”), (iv) Dalian Fushi Bimetallic Wire Manufacturing, Co.,
Ltd. (“Dalian Fushi”), (v) Copperweld Holdings, LLC, (vi) Copperweld Bimetallic,
LLC (“Copperweld”) and (vii) Copperweld Bimetallics UK, LLC. Unless the context
otherwise requires, all references to (i)  “PRC” and “China” are
to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to
United States dollars; (iii) “RMB” are to Yuan Renminbi of China; (iv)
“Securities Act” are to the Securities Act of 1933, as amended; and (v)
“Exchange Act” are to the Securities Exchange Act of 1934, as
amended.
 
 Overview
 
 We are
the global leader in the development, design, manufacture, marketing and
distribution of copper-cladded bimetallic engineered conductor products. Our
principal products, copper-clad aluminum (“CCA”) and copper-clad steel (“CCS”)
are primarily used as conductor components within wire and cable products in the
telecommunication, utility, transportation and industrial
industries.
  39
  Today, we
serve approximately 300 customers in 38 countries from our facilities in Dalian,
China, Fayetteville, TN, and Telford, England. We have a strong market position
in all markets in which we compete due to product, geographic region, customer
diversity and our ability to deliver superior products while operating as a low
cost provider.  As a result, we are now the leading producer of
bimetallic wire products in the world and are the market leaders in North
America, Europe, North Africa the Middle East, and the People’s Republic of
China.  We strive to continue expansion within current and evolving
markets, and to create shareholder value by:
 
 ·
              Investing
      in organic and inorganic growth in both infrastructure-based and
      fast-growing markets;·
              Focusing
      on expansion within and into new, higher-margin products, applications and
      markets through investment into new machinery and research and
      development;
 ·
              Continuously
      improving business processes throughout the Company by focusing on key
      performance indicators and operational excellence;·
              Hiring
      and developing strategic talent thus improving the effectiveness of our
      performance management processes;
and
 ·
              Protecting
      and enhancing shareholder value of the Fushi Copperweld
    brand.
 
 To
accomplish these goals, we are focused on continuously improving operational
efficiency in areas we view to be vital: quality, delivery, cost, and
innovation. We also take an opportunistic approach to achieving our goals, and
thus, we seek acquisitions of businesses which facilitate overall growth and
cash flows of the Company.
 
 Typically
using 70% less copper than conventional copper wire, but offering materially the
same utility and functionality, our bimetallic wire is used in applications such
as distribution products for telecommunication networks, cables for the wireless
industry, automotive and consumer products, video and data applications,
electrical power cables, wire components for electronic devices, as well as
other industrial conductors. In many applications, the value of bimetallic wire
is based on advantages other than the economies of bimetallic versus solid
copper.  Weight considerations strongly favor CCA because the end user
can expect approximately 2.6 times the length with the same weight as solid
copper.  Wire is sold by weight but used by length.  The
additional length increases the value of CCA. Weight is a major concern in some
applications where the end product is portable, such as cell phones, music
players, etc. and in automotive applications.  We believe that the use
of much lighter bimetallic products will continue to offer opportunities for
these applications. Other advantages include Radio Frequency ("RF") resistance
factor.  RF signals travel over the surface of the
wire.  With bimetallic wire, the RF resistance characteristics of the
copper cladding offers identical high frequency characteristics as solid copper,
but with much less weight and lower end-product stiffness.
 
 CCS
combines the functionality of copper with the strength of steel to provide a
higher value, stronger alternative to solid copper for use in coaxial drop
cables for cable television, electrical utility applications including ground
cables and tracer wire, automotive wiring harnesses, catenary cable for
electrified railroads and other applications requiring specific levels of
conductivity and higher levels of tensile strength. Copperweld CCS is synonymous
with copper-clad steel and is registered as Copperweld®.
  40
  Our
products are effectively “engineered composite conductors”. We do not produce
commodity products and are not subject to the same pricing effects of pure
commodity metals. Our customers purchase and use our products for their physical
and/or conductive qualities, which have their respective application advantages,
with cost savings being an added incentive. While the pricing volatility of our
raw materials, especially copper, is a primary cause of cost variations in our
products, changes in raw material costs do not materially affect our earnings
per share. Although an increase in the price of raw materials may serve to
reduce our gross margins as a percentage of net sales, likewise, a decline in
raw material prices will increase our gross margin as a percentage of net sales.
We generally pass the cost of price changes in our raw materials to our
customers rather than the percentage changes. We establish prices for our
products based on market factors and our cost to produce our products.
Typically, we set a base price for our products for our customers with an
understanding that as prices of raw materials change, primarily for copper but
also for aluminum and steel, we will pass the change through to our customers.
Therefore, when prices of raw material increase, our prices to our customers
increase and the amount of our total net sales increases while the dollar amount
of our gross margin remains relatively stable.  As a result, the
impact on earnings per share from volatile raw material prices is minimal,
although there are timing delays of varying lengths depending upon volatility of
metals prices, the type of product, competitive conditions and particular
customer arrangements.
 
 
  41
  The above
chart demonstrates how changes in the Comex monthly average of copper and
aluminum prices from January 2008 through March 2009 can hypothetically affect
our margins. The combined cost of copper and aluminum changed from approximately
$4.30 in January 2008 to a high of $5.30 in April 2008 and then trended
generally down during the remainder of 2008 to a low of $2.10 in December 2008
before rebounding to $2.35 in March 2009. In this example, we have a gross
margin per pound of $0.50 for illustrative purposes. Passing the changing costs
through to our customers’ prices allows us to maintain a level amount of dollar
gross margin. Considering gross margin as a percentage of net sales can be
misleading when raw materials costs are increasing even though the dollar amount
of gross margin remains the same. Although the gross margin would have
fluctuated between from 8.6% and 19.2% in our example, the dollar amount of
gross margin per metric ton and resulting net income flowing to earnings per
share remained the same.
  Factors
driving and affecting operations results include raw material prices, product
and price competition, economic conditions in various geographic regions,
foreign currency exchange rates, interest rates, changes in technology,
fluctuations in customer demand, variations in the mix of products, production
capacity and utilization, working capital sufficiency, availability of credit
and general market liquidity, patent and intellectual property issues,
litigation results and legal and regulatory developments, and our ability to
accurately forecast sales demand and calibrate manufacturing to such demand,
manage volatile raw material costs, develop, manufacture and successfully market
new and enhanced products and product lines, control operating costs, and
attract, motivate and retain key personnel to manage our operational, financial
and management information systems.
 
 Highlights
for the quarter include:
 
 -
              CCA
      Volume shipped from Dalian increased 1% compared to first quarter 2008
      despite global economic slowdown;
 -
              Dalian
      operated at only 67% capacity in first quarter 2009; well positioned to
      capitalize on expected near term
growth;
 -
              Implemented
      further cost reductions at
Fayetteville;
 -
              Improved
      cash flows from operating activities by $15.6 million compared to first
      quarter 2008; and
 -
              Continued
      expansion of sales in the utility industry throughout the world. 
      Utility shipments during the first quarter of 2009 increased 2.9% over the
      same quarter in 2008 despite challenging macroeconomic conditions. We have
      strengthened our relationship with a major supplier to the utility market
      in the US and added personnel with contacts in Eastern Europe, the Middle
      East and in North Africa that will continue to increase our sales of
      ground wire applications within the utility market. Also, we have
      begun to realize orders related to the $585 billion stimulus package in
      the PRC announced in November 2008. We expect demand for our products
      related to infrastructure projects within the PRC to grow in future
      periods as a direct result of the stimulus
  package.
  42
  Current
Business Environment and Outlook for the remainder of 2009
 
 With
respect to the overall business trends for the remainder of 2009 and forward,
management recognizes that the current condition of the global economy may
present us with significant challenges to our financial condition and results of
operations. Data and statistics published by the International Monetary
Fund showed that the global economy decelerated quickly and severely in the
second half of 2008. This trend continued throughout the first two months of the
first quarter 2009, as China, a market that has generated most of our
revenue and growth, saw its GDP growth in the first quarter of 2009 drop to
6.1%, the slowest the country has experienced in ten years. The figure was more
than 10% in the first quarter of 2008, and 13% for 2007.  Global economic
turmoil, uncertainties in capital markets, currency fluctuations and commodity
cost volatility have substantially reduced the visibility for our industry and
our business.
 
 However,
statistics released by the PRC’s National Bureau of Statistics indicate that the
$586 billion package stimulus package implemented by the Chinese government in
November 2008 began to gain traction in the first quarter 2009, as total fixed
asset investment grew 28.8%, a growth of 4.2% compared to the same period 2008.
We believe the following macro-level trends will positively impact our business
and offer us opportunities to capture new business despite global economic
conditions and preserve profitability:
 
 ·
              Demand
      recovery for CCA-based telecommunication products in China, primarily due
      to 3G related capital investment;·
              Chinese
      Government stimulus packages focused on infrastructure, high-speed
      railways, T&D and power grid build out;·
              Continued
      strength of the grounding wire market;·
              Worldwide
      underlying long-term growth trends in electric utility and infrastructure
      markets; and·
              Continuing
      demand for cost effective, energy saving
  alternatives.
  In
addition to these macro-level trends, the Company is presented with tremendous
opportunities brought by the increasing capital expenditures of major
telecommunications operators in China subsequent to the restructuring and the
recent issuance of 3G licenses. Furthermore, we will focus on driving
profitability by streamlining our organizational structure and business
procedures, increasing operational efficiency and optimizing operating
processes, while managing production costs and operating expenses.
 
 We are
continuing to develop the high potential utility and electrical appliance
markets, to enhance productivity and to expand our sales of higher margin
products.  Meanwhile, we are also working to strengthen sales management
and customer relations.  We will seek to consolidate our relationships with
our best customers, stop or suspend selling to customers that pose significant
credit risk, and develop new customers cautiously.  In addition, as part of
our ongoing efforts to reduce total operating costs, we continuously improve our
ability to efficiently utilize existing and new manufacturing capacity to manage
expansion and growth.  Investment in new capacity will pay off by increased
product sales in the future. We believe that effectively utilizing manufacturing
assets, and generating economies of scale, will help offset high raw material
prices and dilute overhead over time. Moving forward, as we’re cautiously
optimistic about the demand growth for our various products, we expect our
combined utilization rates to improve.
  We
actively seek to identify and promptly respond to key economic and industry
trends in order to capitalize on expanding niche markets for our products, and
possibly entering into new markets both down and up stream, in order to achieve
better returns.  We believe that we have the resources, technology, working
capital and capacity to meet growing market demands.  Over the long-term,
we believe that we are well positioned to benefit from the growth opportunities
in China and throughout the world.
  43
  Results
of Operations
 
 Comparison
of the Three Months Ended March 31, 2009 and 2008
 
 Net
Sales
 
 Three
      Months EndedIn
      Millions USD
                            
                            March 31,2009
                            
                            
                            2008
                            
                            
                            ChangeSales
                            
                            $
                            35.3
                            
                            
                            $
                            54.0
                            
                            
                            $
                            (18.7
                            )
                            
                            
                            -34.6
                            %
 
 Net sales
decreased 34.6% over the same quarter one year earlier primarily due to a 22.0%
decline in average selling prices and to a lesser extent a decrease in volume of
tons sold of 1,280 metric tons, or 13.8%, partially offset by a slight growth in
CCA tons sold from our Dalian facility over the same period.  Sales
from our Dalian, China facility was $26.4 million and $8.9 million at our
Fayetteville, TN and Telford, U.K. facilities. Volume at the Company’s Dalian
facility grew slightly due to increased 3G related demand and continued
expansion into the utility market.  The company’s Fayetteville
facility experienced a 37% decrease in volume as a result of global economic
downturn.
 
 Our
products are engineered products rather than commodities; therefore, the selling
prices of our products are dependent upon diameter, tensile strength,
conductivity and other factors specified by each customer. For example, Dalian’s
prices may be lower than Fayetteville’s for CCA because Dalian’s products
sold for telecom may require less engineering and fewer manufacturing processes
than for products sold by Fayetteville, based on application. Both Dalian and
Fayetteville sell a variety of CCA products and the price for each variety
varies based on the composition of the product and the amount of manufacturing
required and the ratio of copper to aluminum. As with CCA, the average selling
price of CCS varies by product type primarily based on the amount of copper in
the product and the amount of manufacturing required.
 
 Net
Sales by Industry
 
 Three
      Months EndedMarch
      31,In
      Millions
                          USD
                        
                        
                        2009*
                        
                        
                        
                        2008*
                        
                        
                        ChangeTelecom
                        
                        
                        14.6
                        
                        
                        
                        29.5
                        
                        
                        
                        (14.9
                        )
                        
                        
                        -50.6
                        %Utility
                        
                        
                        19.0
                        
                        
                        
                        21.3
                        
                        
                        
                        (2.3
                        )
                        
                        
                        -11.1
                        %Transportation
                        
                        
                        0.4
                        
                        
                        
                        0.5
                        
                        
                        
                        (0.1
                        )
                        
                        
                        -18.9
                        %Other
                        
                        
                        1.7
                        
                        
                        
                        2.7
                        
                        
                        
                        (1.0
                        )
                        
                        
                        -37.7
                        %Total
                        
                        
                        35.7
                        
                        
                        
                        54.0
                        
                        
                        
                        (18.3
                        )
                        
                        
                        -34.1
                        %
 *Net
sales do not include deductions resulting from returns, freight, rebate and cash
discounts.
  44
  The
following table presents the breakdown of metric tons shipped to customers by
industry:
 
 Three
      Months Ended March 31,
                                              
                                              
                                              
                                              
                                              
                                              Percentage
      of
                                                Total2009
                                              
                                              
                                              2008
                                              
                                              
                                              Change
                                              
                                              
                                              2009
                                              
                                              
                                              2008Telecom
                                              
                                              
                                              3,468
                                              
                                              
                                              
                                              4,736
                                              
                                              
                                              
                                              (1,268
                                              )
                                              
                                              
                                              (26.8
                                              )%
                                              
                                              
                                              43.4
                                              %
                                              
                                              
                                              51.3
                                              %Utility
                                              
                                              
                                              4,026
                                              
                                              
                                              
                                              3,914
                                              
                                              
                                              
                                              112
                                              
                                              
                                              
                                              2.9
                                              %
                                              
                                              
                                              50.5
                                              %
                                              
                                              
                                              42.2
                                              %Transportation
                                              
                                              
                                              61
                                              
                                              
                                              
                                              43
                                              
                                              
                                              
                                              18
                                              
                                              
                                              
                                              41.9
                                              %
                                              
                                              
                                              0.8
                                              %
                                              
                                              
                                              0.5
                                              %Other
                                              
                                              
                                              427
                                              
                                              
                                              
                                              569
                                              
                                              
                                              
                                              (142
                                              )
                                              
                                              
                                              (25.1
                                              )%
                                              
                                              
                                              5.3
                                              %
                                              
                                              
                                              6.2
                                              %Total
                                              
                                              
                                              7,982
                                              
                                              
                                              
                                              9,262
                                              
                                              
                                              
                                              (1,280
                                              )
                                              
                                              
                                              (13.8
                                              )%
                                              
                                              
                                              100.0
                                              %
                                              
                                              
                                              100.0
                                              %
 
 We are
expanding our sales to the utility market.  During the three month
period ended March 31, 2009, our sales to the utility segment increased by
112 tons.  Shipments to the utility segment increased from 42.2%
of total shipments for the three months ended March 31, 2008 to 50.5% of total
shipments for the same period in 2009.  Shipments to the telecom
segment declined by 26.8% or by 1,268 tons and declined from 51.3% of total
shipments to 43.4% when comparing the three months ended March 31, 2008 and
2009, respectively, primarily due to decreased demand from North American and
European markets.
 
 The
following table presents the breakdown of metric tons shipped by each of our
facilities to customers in each industry:
 
 Three Months Ended March 31, 2009Dalian
                        
                        
                        Fayetteville
                        
                        
                        TelfordMetricTons
                          Shipped
                        
                        
                        % of
                          Tonnage
                        
                        
                        MetricTons
                          Shipped
                        
                        
                        % of
                          Tonnage
                        
                        
                        MetricTons
                          Shipped
                        
                        
                        % of
                          TonnageTelecom
                        
                        
                        2,497
                        
                        
                        
                        31.3
                        %
                        
                        
                        946
                        
                        
                        
                        11.9
                        %
                        
                        
                        24
                        
                        
                        
                        0.3
                        %Utility
                        
                        
                        3,332
                        
                        
                        
                        41.7
                        %
                        
                        
                        644
                        
                        
                        
                        8.1
                        %
                        
                        
                        51
                        
                        
                        
                        0.6
                        %Transportation
                        
                        
                        0
                        
                        
                        
                        0.0
                        %
                        
                        
                        33
                        
                        
                        
                        0.4
                        %
                        
                        
                        28
                        
                        
                        
                        0.4
                        %Other
                        
                        
                        57
                        
                        
                        
                        0.7
                        %
                        
                        
                        370
                        
                        
                        
                        4.6
                        %
                        
                        
                        0
                        
                        
                        
                        0.0
                        %Total
                        
                        
                        5,886
                        
                        
                        
                        73.7
                        %
                        
                        1,994
                        
                        
                        
                        25.0
                        %
                        
                        
                        102
                        
                        
                        
                        1.3
                        %
 
 Dalian
shipped 73.7% of total tonnage produced during the first three months of 2009
with shipments to the utility market contributing 41.7% and sales to the telecom
market contributing 31.3% of total volume. Fayetteville shipped 25.0% of total
tonnage split between telecom at 11.9% and utility with 8.1%. Total
transportation accounted for 0.8% for the shipments in the first three months of
2009. Telford shipped 1.3% of total tonnage split between telecom, utility
and transportation.
 
 Capacity
and Output
 
 The
following table summarizes installed capacities and outputs for the three month
period ended March 31, 2009. Capacity is stated on an annual basis while output
is the amount of product shipped during the first three months of 2009.
Telford’s production does not include cladding and the numbers reflect CCS that
was further processed by Telford during the three months ended
period.
  45
 
 Dalian
                    
                    
                    Fayetteville
                    
                    
                    TelfordCapacity
                    
                    
                    Output
                    
                    
                    Capacity
                    
                    
                    Output
                    
                    
                    Capacity
                    
                    
                    OutputCCA
                    
                    
                    34,000
                    
                    
                    
                    5,829
                    
                    
                    
                    12,400
                    
                    
                    
                    494
                    
                    
                    
                    
                    
                    
                    -CCS
                    
                    
                    800
                    
                    
                    
                    7
                    
                    
                    
                    16,300
                    
                    
                    
                    1,500
                    
                    
                    
                    900
                    
                    
                    
                    79Other
                    
                    
                    
                    
                    
                    
                    50
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    23Total
                    
                    
                    34,800
                    
                    
                    
                    5,886
                    
                    
                    
                    28,700
                    
                    
                    
                    1,994
                    
                    
                    
                    900
                    
                    
                    
                    102
 
 At March
31 2009, we had combined annual production capacity for CCA of 46,400 metric
tons and CCS cladding capacity of 18,000 metric tons on an annual basis based on
our product mix at March 31, 2009. Installed capacity can increase or decrease
based on the size of the rod used in the cladding operation for CCA and on the
conductivity engineered into the CCS production. Additionally, a further 6,000
metric tons of annualized CCA capacity was successfully installed and
commissioned at our Dalian facility on April 30, 2009.  We also expect
to install a further 4,100 metric tons of annualized CCS cladding capacity at
our Dalian facility by the end of the third quarter 2009.
  Product
Mix
 
 Three
      Months Ended
                                        March
      31,Metric
      Tons Sold
                                      
                                      2009
                                      
                                      
                                      2008
                                      
                                      
                                      ChangeCCA
                                      
                                      
                                      6,323
                                      
                                      
                                      
                                      6,844
                                      
                                      
                                      
                                      (521
                                      )
                                      
                                      
                                      -7.6
                                      %CCS
                                      
                                      
                                      1,585
                                      
                                      
                                      
                                      2,231
                                      
                                      
                                      
                                      (646
                                      )
                                      
                                      
                                      -29.0
                                      %Other
                                      
                                      
                                      74
                                      
                                      
                                      
                                      187
                                      
                                      
                                      
                                      (113
                                      )
                                      
                                      
                                      -60.4
                                      %Total
                                      
                                      
                                      7,982
                                      
                                      
                                      
                                      9,262
                                      
                                      
                                      
                                      (1,280
                                      )
                                      
                                      
                                      -13.8
                                      %
  Percentage
      of Tons SoldPeriod
      Ended March 31,Based
      on Metric Tons
                            
                            2009
                            
                            
                            2008CCA
                            
                            
                            79.2
                            %
                            
                            
                            73.9
                            %CCS
                            
                            
                            19.9
                            %
                            
                            
                            24.1
                            %Other
                            
                            
                            0.9
                            %
                            
                            
                            2.0
                            %100.0
                            %
                            
                            
                            100.0
                            %
 
 The chart
above illustrates the growth of CCA as a percentage of tons sold comparing the
three month period ended March 31 2009 to March 31, 2008 for the combined
facilities.  The demand for our CCA products in the PRC remained
strong during the first quarter 2009 compared to the same periods in 2008
despite worsened macro-economic conditions. However, we experienced a
significant tapering of demand of 53.9% in CCA products in markets served from
our Fayetteville facility.
  46
  Gross
Margin
 
 Three
      Months Ended March 31,2009
                    
                    
                    2008
                    
                    
                    ChangeGross
      Margin (in millions)
                    
                    $
                    8.9
                    
                    
                    $
                    14.7
                    
                    
                    $
                    (5.8
                    )
                    
                    
                    -39.5
                    %As
      a Percentage of Sales
                    
                    
                    25.4
                    %
                    
                    
                    27.3
                    %
                    
                    
                    -1.9
                    %
 
 Gross
profit in the first quarter decreased 39.5% year over year to $8.9 million from
$14.7 million.  Gross margin decreased to 25.4% from 27.3% in the
prior year period.  Gross margin at the Company’s Dalian, China
facility decreased slightly from approximately 33.8% to
32.8%.   This decrease primarily resulted from pricing pressure
from smaller, poorly capitalized competitors, many of whom were forced to
liquidate inventory in order to meet financial obligations, partially positively
offset by the pickup in RF cable demand related to the first of three stages of
3G rollout since the latter part of first quarter of 2009.   The
gross margin at the Fayetteville and Telford facilities declined from
approximately 13.4% to 3.1% mostly as a result of lower capacity utilization and
deterioration in product mix.  The cost of goods sold increased from
72.7% of net sales for the three months ended March 31, 2008 to 74.6% at March
31, 2009.
 
 Selling
Expenses
 
 Three
      Months Ended March 31,(in millions)
                    
                    2009
                    
                    
                    2008
                    
                    
                    ChangeSelling
      Expenses
                    
                    $
                    1.2
                    
                    
                    $
                    0.8
                    
                    
                    $
                    0.4
                    
                    
                    
                    50.0
                    %As
      a Percentage of Sales
                    
                    
                    3.4
                    %
                    
                    
                    1.5
                    %
                    
                    
                    1.9
                    %
  Selling
expense increased by $0.4 million or 50% for the three months period ended March
31, 2009 compared to the same quarter of 2008.  Selling expenses
increased primarily because of increased efforts in sales to penetrate the
electrical utility market. As a percentage of net sales, selling expenses
increased from 1.5% of net sales for the 2008 quarter to 3.4% of net sales
during the first quarter of 2009.
 
 General
and Administrative Expenses
 
 Three
      Months Ended March 31,(in millions)
                    
                    2009
                    
                    
                    2008
                    
                    
                    ChangeGeneral
      and Administrative Costs
                    
                    $
                    3.1
                    
                    
                    $
                    4.4
                    
                    
                    $
                    (1.3
                    )
                    
                    
                    -29.5
                    %As
      a Percentage of Sales
                    
                    
                    8.7
                    %
                    
                    
                    8.1
                    %
                    
                    
                    0.6
                    %
  47
  General
and administrative expenses decreased by $1.3 million or 29.5% during the three
month period ended March 31, 2009 compared to the same period in 2008. This
decrease was principally a result of lower sales volumes, lower capacity
utilization and an increase in cost saving initiatives. As a percentage of net
sales, general and administrative expenses increased slightly by 0.6% to 8.7%
from 8.1% for the first quarter of 2008 due to decreased revenue in the
first quarter of 2009. During the first quarter of 2009, included in
general and administrative expenses were non-factory depreciation and
amortization of $440,548 and amortization of intangible assets of $119,076,
compared to $403,010 and $62,277 respectively in the first quarter of 2008,
increases of depreciation expense for the current quarter was mainly due to the
completion of Dalian office building and started to depreciate.
 
 Other
Income ( Expense )
 
 InterestIncome (Expense)
 
 Three
      Months Ended March 31,(in millions)
                    
                    2009
                    
                    
                    2008
                    
                    
                    ChangeInterest
      Income
                    
                    $
                    0.1
                    
                    
                    $
                    0.2
                    
                    
                    $
                    (0.1
                    )
                    
                    
                    -50.0
                    %Interest
      Expense
                    
                    $
                    (1.5
                    )
                    
                    $
                    (1.8
                    )
                    
                    $
                    0.3
                    
                    
                    
                    -16.7
                    %Net
      Interest Expense
                    
                    $
                    (1.4
                    )
                    
                    $
                    (1.6
                    )
                    
                    $
                    0.2
                    
                    
                    
                    -12.5
                    %Net
      Interest Expense as a % of Net Sales
                    
                    
                    4.0
                    %
                    
                    
                    3.0
                    %
                    
                    
                    1.0
                    %
  Net
interest expense in the first quarter decreased by approximately $230,000,
versus the first quarter of 2008, which was primarily the result of the
repayment of Dalian’s short term bank loans. As a percentage of net sales, net
interest expense increased from 3.0% for the first quarter of 2008 to 4.0%
during the first quarter of 2009.
 
 Change in fair value of
derivative liability
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity under FAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” FAS 133 and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Before the adoption of EITF 07-5
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity's Own Stock", the convertible note issued in 2007 did not require
bifurcation or result in liability accounting. However, with the recent adoption
of EITF 07-5, the embedded conversion feature must be bifurcated from its host
instrument and accounted for separately as a derivative liability.
 
 Emerging
Issues Task Force (“EITF”) 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock”,
provides a criteria for determining whether freestanding contracts that are
settled in a company’s own stock, including common stock warrants, should be
designated as either an equity instrument, an asset or as a liability under
FAS  133 “Accounting for Derivative Instruments and Hedging Activities.”
Under the provisions of EITF 00-19, a contract designated as an asset or a
liability must be carried at fair value on a company’s balance sheet, with any
changes in fair value recorded in a company’s results of
operations.  Using the criteria in EITF 00-19, the Company determines
which options, warrants and embedded features require liability accounting and
records the fair values as a derivative liability. The changes in the values of
these instruments are shown in the accompanying consolidated statements of
income and other comprehensive income as “change in fair value of derivative
instrument.”
  48
  For the
three months ended March 31, 2009 and 2008 the Company recognized a loss in the
change in fair value of derivative liability – conversion option in the amounts
of $539,037 and $0, respectively.
 
 For the
three months ended March 31, 2009 and 2008 the Company recognized a loss in the
change in fair value of derivative liability – warrants in the amounts of
$63,238 and $0, respectively.
  Tax
 
 Profit
before tax for Dalian was $6.9 million in the first quarter 2009 and the loss
for Fayetteville and Telford before tax was $1.4 million.  Loss at the
Fushi Copperweld parent company level was $3.2 million primarily due to interest
expenses on the High Yield notes, stock-based compensation, changes in fair
value of derivative liabilities related to Convertible Notes conversion options,
hedge and warrants, as well as professional fees and outside service expenses.
On a consolidated basis, profit before tax was $2.4 million and we recognized a
net tax benefit of $0.7 million.
 
 Dalian
                    
                    
                    Fayetteville
                      & Telford
                    
                    
                    Parent
                      Company
                    
                    
                    ConsolidatedProfit
      (Loss) before income tax
                    
                    
                    6,927,028
                    
                    
                    
                    (1,367,276
                    )
                    
                    
                    (3,155,051
                    )
                    
                    
                    2,404,701Income
      tax expense (credit)
                    
                    
                    930,311
                    
                    
                    
                    (491,763
                    )
                    
                    
                    (1,134,764
                    )
                    
                    
                    (696,216
                    )Profit
      after income tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,100,917
  Net
Income
 
 Three
      Months Ended March 31,(in millions)
                                
                                2009
                                
                                
                                2008
                                
                                
                                Amount
                                
                                
                                % ChangeNet
      Income Before Taxes
                                
                                $
                                2.4
                                
                                
                                $
                                8.0
                                
                                
                                $
                                (5.6
                                )
                                
                                
                                -70.0
                                %(Benefit)Provision
      for Income Taxes
                                
                                $
                                (0.7
                                )
                                
                                $
                                0.5
                                
                                
                                $
                                (1.2
                                )
                                
                                
                                -240.0
                                %Net
      Income After Taxes
                                
                                $
                                3.1
                                
                                
                                $
                                7.5
                                
                                
                                $
                                (5.0
                                )
                                
                                
                                -58.7
                                %Net
      Income as a % of Net Sales
                                
                                
                                8.8
                                %
                                
                                
                                13.9
                                %
                                
                                
                                -5.3
                                %
 
 Net
income for the three months period ending March 31, 2009 was $2.4 million
compared to $8.0 million for the comparable period in 2008, a decrease of
approximately $5.6 million or 70%. Net income as a percentage of net sales
declined from 14.1% for the prior period to 8.8%, principally due
to an erosion of combined gross margin primarily attributable to a sharp
decline in gross margins from Fayetteville and Telford
operations.  The net margin decline was also a result of increased
selling expenses as a percentage of net sales and increased non-cash expenses
including the change in fair value of derivative liability, increased
depreciation and amortization and increased share-based
compensation.
  49
  Earnings
Per Share
 
 Three
      Months Ended March 31,2009
                      
                      
                      2008Unaudited
                      
                      
                      UnauditedNet
      Income for Basic Earnings Per Share
                      
                      $
                      3,100,917
                      
                      
                      $
                      7,570,496Basic
      Weighted Average Number of Shares
                      
                      
                      27,563,478
                      
                      
                      
                      27,048,039Net
      Income per Share—Basic
                      
                      $
                      0.11
                      
                      
                      $
                      0.28Net
      Income for Diluted Earnings Per Share
                      
                      $
                      3,100,917
                      
                      
                      $
                      7,445,699Diluted
      Weighted Average Number of Shares
                      
                      
                      27,695,464
                      
                      
                      
                      28,228,604Net
      Income per Share—Diluted
                      
                      $
                      0.11
                      
                      
                      $
                      0.26
 
 Basic
and diluted earnings per share (EPS) for the quarter ended March 31, 2009 were
$0.11 and $0.11, compared to $0.28 and $0.26 for the first quarter last
year.
 
 Selected
Balance Sheet Data at March 31, 2009 (unaudited) and the year ended December 31,
2008:
 
 Selected
      Balance Sheet DataMarch
      31, 2009
                    
                    
                    December
      31, 2008(in millions)
                    
                    Unaudited
                    
                    
                    
                    
                    
                    ChangeCash
                    
                    $
                    42.7
                    
                    
                    $
                    65.6
                    
                    
                    $
                    (22.9
                    )
                    
                    
                    -34.9
                    %Accounts
      Receivable, net
                    
                    $
                    44.3
                    
                    
                    $
                    49.8
                    
                    
                    $
                    (5.5
                    )
                    
                    
                    -11.0
                    %PP&E
                    
                    $
                    118.2
                    
                    
                    $
                    119.8
                    
                    
                    $
                    (1.6
                    )
                    
                    
                    -1.3
                    %Total
      Assets
                    
                    $
                    278.2
                    
                    
                    $
                    294.5
                    
                    
                    $
                    (16.3
                    )
                    
                    
                    -5.5
                    %Short
      Term Debt
                    
                    $
                    14.1
                    
                    
                    $
                    27.3
                    
                    
                    $
                    (13.2
                    )
                    
                    
                    -48.4
                    %Long
      Term Debt
                    
                    $
                    35.4
                    
                    
                    $
                    40.0
                    
                    
                    $
                    (4.6
                    )
                    
                    
                    -11.5
                    %Shareholders'
      Equity
                    
                    $
                    203.9
                    
                    
                    $
                    203.0
                    
                    
                    $
                    0.9
                    
                    
                    
                    0.4
                    %
 
 Our
financial condition continues to improve as measured by an increase of 0.4% in
shareholders’ equity during the first three months of 2009. Cash decreased 34.9%
during the quarter primarily due to repayments of short term loans and the
decrease of our accounts receivable by 11% as a result of decreased sales
volume. Property, plant and equipment decreased by 1.3% during the three months
ended March 31, 2009 compared to the prior year end. Short term debt decreased
by 48.4% as a result of repayments of short term loans at our PRC operation.
Long term debt declined by 11.5% because $5.0 million of our outstanding $40.0
million notes was reclassified to short term debt because of a January 2010 due
date on such portion of the notes.
  50
  Customers
 
 For the
three months ended March 31, 2009, no customer accounted for ten percent (10.0%)
or more of sales. During the first three months of 2009, our largest five
customers together accounted for 19.0% of our sales based on tons and 13.6%
based on net sales compared to 20.7% based on tons and 19.9% based on net sales
during the same period in 2008. Our largest customer represented 3.2% of sales
during the three months ended March 31, 2009. Our ten largest customers
represented 29.9% of tons sold and 24.1% of net sales for the first three months
of 2009.  Total receivable balance due from the top ten customers at
March 31, 2009 and December 31, 2008 amounted to $11,118,422 and $11,838,214,
respectively.
 
 Our
strategy is to continue to expand and diversify our customer base in future
periods. We believe this increased diversification significantly limits our
market risk and gives us a stronger base on which to expand. We further believe
our overall customer composition and the concentration of our top customers will
continue to change as we expand our business and seek to shift our product sales
portfolio to higher margin products and markets. However, the loss of, or
significant reduction in orders from any of our largest customers may have a
material adverse impact on our financial condition and operating results. We are
continuing to expand and consolidate the direction of our combined sales and
marketing group in order to focus our resources on diversification of our
customer base, product mix and geographic presence to mitigate customer
concentration risk. Our objective is to focus on expanding our existing business
relationships by offering a wider range of products and building new sales
relationships throughout the world with our expanded sales
organization.
 
 Manufacturing
 
 Manufacturing
copper-clad products involves bonding a copper strip to an aluminum or steel
core, drawing the clad product to a finished diameter and heat treating as
necessary depending upon the customer’s specifications. We use proprietary
technologies developed in Dalian and Fayetteville.  We also own the
worldwide rights to other technologies. These proprietary technologies allow us
to produce superior copper-clad products compared to other producers. Our
technology base and research and development department supports continuing
development and the geographical spread of our manufacturing locations improves
our ability to provide superior service to our international customer
base.
 
 Our
manufacturing activities are determined and scheduled upon both firm orders and
projected sales information gathered by our sales personnel from direct contact
with our customers. Customers typically submit purchase orders seven to thirty
days prior to the requested delivery date. However, depending on the product and
the available equipment run schedules, the lead time can be as short as three
days. The sales price is determined at the time of purchase based on a formula
or a unit price for each product. In either case, the purchase price is a
function of the market price of our raw materials at the time of purchase,
subject to an adjustment at the time of delivery for many of our customers and
to the processes required to produce our engineered products. For some
customers, we adjust our prices based on the cost of raw materials for the
previous month rather than prices at the time of shipment.
  51
  Geography
 
 Our sales
and marketing is a global operation. We market and sell our products through our
direct sales force. In some countries we use sales agents or distributors to
provide assistance with or lead our sales and distribution in selected
countries. A substantial portion of our customers served by our Dalian sales
force is based in the PRC. Some of our customers are US based corporations that
have established subsidiaries operating inside the PRC. Several of these
corporations were former customers of our Fayetteville facility but now place
orders through their subsidiaries located in the PRC. We categorize these orders
as domestic orders within the PRC. On the other hand, most of our customers
served by our Fayetteville and Telford based sales group are located in the
Americas, Europe, Africa, Asia, excluding the PRC and the Middle East. We are
transferring most of our Asian customers to our PRC based sales group in order
to provide more efficient customer service. As a result, we anticipate that most
of our net sales will continue to be derived from sales to our Asian customers.
We anticipate that our sales growth can continue worldwide because of our
working capital base, our combined sales force, our production capacity and our
commitment to innovative research and development of our existing products and
for developing new products.
 
 The
following table presents our sales by geographic region for the periods
indicated:
 
 March 31, 2009
                    
                    
                    March 31, 2008(Unaudited)
                    
                    
                    (Unaudited)China
                    
                    $
                    25,541,567
                    
                    
                    $
                    34,752,795USA
                    
                    
                    7,306,836
                    
                    
                    
                    12,422,970Europe
                    
                    
                    1,478,246
                    
                    
                    
                    3,507,766Other
      countries
                    
                    
                    929,887
                    
                    
                    
                    3,325,496Total
      sales
                    
                    $
                    35,256,536
                    
                    
                    $
                    54,009,027
 
 Cost
of Goods Sold
 
 Components
      of Cost of Goods SoldThree
      Months Ended March 31.2009
                    
                    
                    2008Cost
      of Goods Sold
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Primary
      Material Cost
                    
                    
                    81.6
                    %
                    
                    
                    86.2
                    %Accessorial
      material cost
                    
                    
                    2.6
                    %
                    
                    
                    1.5
                    %Labor
                    
                    
                    6.1
                    %
                    
                    
                    4.7
                    %Manufacturing
      Overhead
                    
                    
                    9.7
                    %
                    
                    
                    7.6
                    %
  52
  Primary
material costs as a percentage of Cost of Goods Sold decreased
approximately 4.6% between the first three months ended March 31, 2008 and the
three month period ended March 31, 2009, reflecting the decline in raw material
costs.  Labor and manufacturing overhead increased on a percentage
basis between the first three months ended March 31, 2008 and the three month
period ended March 31, 2009; however, decreased 12.2% and 14.1% year-over-year
on an absolute basis, respectively.
 
 Suppliers
 
 Our top
five suppliers provided 83.5% of our raw materials for the three months ended
March 31, 2009.  Four suppliers each provided more than 10.0% of our
purchases.  During the first three months ended March 31, 2008, our
top five suppliers provided 60.6% of raw materials and two suppliers provided
10.0% or more of our supplies.  We have numerous suppliers
and continually review our purchase practices to assure that we are not
relying on too few suppliers.  The same review also assures that we
are purchasing our raw materials at the competitive market prices. At March 31,
2009, our advances to the major five suppliers were $13,797,147, all of which
was current. At December 31, 2008, our advances to the major five suppliers were
$20,111,644, all of which was current.
 
 Taxation
 
 Fushi
Copperweld, Inc. (formerly Fushi International, Inc.) is incorporated in the
State of Nevada, Fushi Holdings is incorporated in the State of Delaware,
Copperweld Bimetallics, LLC is chartered in the State of Delaware and Copperweld
Bimetallics UK, Ltd., is registered in the United Kingdom. We have a
manufacturing facility and administrative offices located in Dalian, P.R.C.,
Fayetteville, Tennessee, USA, and Telford, UK. We are subject to taxation on our
net taxable income in the PRC, the US and the UK.
 
 U.S.
income tax
 
 The
Company is subject to the United States federal income tax at a rate of
34%.  No provision for income taxes in the U.S. has been made for the
first three months 2009 as the Company had no U.S. taxable income. In future
periods, we believe no provision for US income tax will be accrued as we have
sufficient tax loss carry forwards to offset any taxable income earned. No
provision for US income tax was accrued on the earnings of our non-US operations
because the earnings generated from our non-U.S. operating companies are
generally subject to United States taxation only when such earnings are
repatriated to the United States. Additionally, we believe that we will not
generate any significant amount of US income tax liability under the income
imputation rules applicable to a United States company that owns "controlled
foreign corporations" for United States federal income tax purposes. Therefore,
no provision for U.S. federal income taxes or tax benefits on the undistributed
earnings and/or losses of our company has been made.
 
 US entities of Fushi have incurred net
operating losses for income tax purposes since inception. The netoperating loss as of March 31, 2009 and December 31, 2008 amounted to
$27,746,203 and $23,253,132. The loss carry forwards for United States income
taxes may be available to reduce future years’ taxable income. These carry
forwards will expire, if not utilized, through 2025 and 2029. Management
believes that the realization of the benefits can be used by our US operating
subsidiary in future periods because expectations are that Copperweld will have
taxable income in future periods. As of March 31,2009, the deferred tax assets
were 9.4 million and the deferred tax benefit realized in the three months ended
March 31, 2009 was 1.6 million, based on its review, the Company believes that,
as of March 31, 2009, it was not necessary to provide a valuation allowance for
deferred tax assets.
  53





For next
quarters of the year, the company still expects losses from US entities and the
deferred tax benefit will be accrued as 34% of the actual loss in next quarters.
The company will review the valuation of deferred tax assets quarterly to
determine any valuation allowance necessary according to FAS 109.





P.R.C.
enterprise income tax




During
the first quarter of 2009, our PRC chartered subsidiaries continue to produce
taxable income for PRC tax purposes. PRC enterprise income tax is calculated
based on taxable income determined under PRC accounting principles. In
accordance with “Income Tax Law of China for Enterprises with Foreign Investment
and Foreign Enterprises,” or the Income Tax Law, “Foreign Invested Enterprises”,
or FIEs, established in the PRC were generally subject to an “Enterprise Income
Tax”, or EIT, rate of 33% prior to January 1, 2008. PRC domestic companies are
governed by the Enterprise Income Tax Laws of the PRC and are also generally
subject to an EIT.





Effective
January 1, 2008, the new EIT Law in PRC imposed a unified income tax rate of
25.0% on all domestic-invested enterprises and FIEs, such as our PRC operating
subsidiaries, unless they qualify under certain limited exceptions. But the EIT
Law permits companies to continue to enjoy their existing preferential tax
treatments until such treatments expire in accordance with their current terms.
Any increase in our effective tax rate as a result of the above may adversely
affect our operating results





Fushi
International (Dalian) (“FID”), a wholly owned subsidiary of Fushi Holdings,
Inc., was incorporated in the PRC as an FIE and is subject to PRC income tax
which is computed according to the relevant laws and regulations in the PRC. FID
has located its factories in a special economic region in Dalian and is granted
certain preferential treatments including a corporate income tax rate of 24%. In
September 2005, FID was approved as a wholly foreign owned enterprise. This
economic region allowed FID a two-year income tax exemption for the years ended
December 31, 2006 and 2007, and a 50% income tax reduction for the following
three years ended December 31, 2008, 2009, and 2010. Therefore, during the
current fiscal year, our PRC operations are taxed at a rate of 12% subject to
appropriate adjustments.





The
provision for China income tax for the three months ended March 31, 2009 and
2008 was $930,311 and $1,267,438, respectively.





U.K.
income tax





Copperweld
UK is organized as a United Kingdom private company and subject to 20% to 28%
statutory taxes on its taxable income. The provision for income tax for the
three months ended March 31, 2009 and 2008 was $0 for both
periods.


54





Foreign
Currency Translation Gains











The value
of the USD versus the RMB appreciated slightly during the first three months of
2009 compared to a continuous decline over the same period 2008. As a result of
the appreciation of the RMB, we recognized a foreign currency translation loss
of $0.4 million for the first three months of 2009 compared to a gain of $7.9
million for the same quarter last year. Given the uncertainty of exchange rate
fluctuations, we cannot estimate the effect of these fluctuations on our future
business, product pricing, and results of operations or financial
condition.





A
significant portion of our revenues and our expenses are derived from our
Dalian, P.R.C. facility and thus are denominated in RMB Yuan. For our operations
in the PRC, the income statement accounts were translated at 1 RMB Yuan to
0.14628 USD in the first three months of 2009 and balance sheet amounts with the
exception of equity at March 31, 2009 were translated at 1 RMB Yuan to 0.14635
USD.





LIQUIDITY
AND CAPITAL RESOURCES





We have
historically financed our operations and capital expenditures principally
through private placements of debt and equity offerings, bank loans, and cash
provided by operations. Significant factors affecting our cash liquidity include
(1) cash provided by operating activities, (2) cash used for capital
expenditures, and (3) our available credit facilities and other borrowing
arrangements. At March 31, 2009, the majority of our liquid assets were held in
RMB denominations deposited in banks within the PRC. The PRC has strict rules
for converting RMB to other currencies and for movement of funds from the PRC to
other countries. Consequently, in the future, we may face difficulties in moving
funds deposited within the PRC to fund working capital or capital expenditure
requirements for our locations outside the PRC. To mitigate the
difficulties of moving funds, we plan to maintain and expand our working capital
lines for Fayetteville and Telford as necessary as our sales increases and our
working capital needs grow.


55





As is
customary in the industry, we provide payment terms to most of our customers
that exceed terms that we receive from our suppliers. Therefore, the Company’s
liquidity needs have generally consisted of working capital necessary to finance
receivables and raw material inventory. Capital expenditures have historically
been necessary to expand the production capacity of the Company’s manufacturing
operations.





In
summary, our cash flows were:





Three Months Ended March
31,(in
      millions)
                          
                          2009
                          
                          
                          2008Net
      cash used in operating activities
                          
                          $
                          (1.1
                          )
                          
                          $
                          (16.7
                          )Net
      cash used in investing activities
                          
                          $
                          (5.5
                          )
                          
                          $
                          (0.8
                          )Net
      cash (used in) provided by financing activities
                          
                          $
                          (16.2
                          )
                          
                          $
                          11.0Effect
      of exchange rate on cash
                          
                          $
                          (0.1
                          )
                          
                          $
                          3.5Cash
      and cash equivalents at beginning of period
                          
                          $
                          65.6
                          
                          
                          $
                          79.9Cash
      and cash equivalents at end of period
                          
                          $
                          42.7
                          
                          
                          $
                          78.5





For the
three months ended March 31, 2009, net cash used in operating activities
was $1.1 million, which is an increase of $15.6 million from 16.7 million
used for the same period in 2008, reflecting a significant improvement in
operating cash flow year over year.  The favorable change is primarily
attributable to decreases in accounts receivable and advances to suppliers
consistent with decreased revenue, partially offset by a decrease in net income
and a decrease in accounts payable.





For the
three months ended March 31, 2009, net cash used in investing activities
was $5.5 million, and was primarily attributable to $5.4 million in property and
equipment purchases and advances.





For the
three months ended March 31, 2009, net cash used in financing activities was a
cash deficit of $16.2 million, which was primarily attributable to the
repayments on $17.6 million in bank loans and a decrease in our revolving line
of credit of $0.6 million partially offset by proceeds on a private placement of
$1.9 million.





At March
31, 2009, our cash balance was $42.7 million compared to $78.6 million at March
31, 2008. As of March 31, 2009, we had RMB180 million, or USD
26.3 million, in available borrowing capacity under our credit facility with
Guangdong Development Bank in Dalian.


56


Like all
businesses, we are assessing the current financial environment on a daily basis
from financial data published in the market place, discussions with our
customers regarding their current and future purchasing plans and through
discussions with our suppliers and others with some insight within the financial
realm in order to develop a better perspective of the future opportunities for
our company.  At this time, we believe that our sales will continue to
grow because of the infrastructure development in the PRC and throughout Asia.
In future periods, as a result of our acquisition of Copperweld, we believe we
can realize significant savings on capital expenditures by moving underutilized
equipment to locations with a need for that equipment. We anticipate that our
working capital requirements may increase as a result of the continued expansion
of our combined business, continued increases or recovery in sales, potential
increases in the price of copper and our other raw materials over the longer
term, competition and our relationship with suppliers or customers. We believe
that our existing cash, cash equivalents and cash flows from operations,
combined with availability under our revolving credit facility, will be
sufficient to meet our presently anticipated future cash needs for at least the
next 12 to 18 months. We may, however, require additional cash resources due to
changed business conditions or other future developments, including any
investments or acquisitions we may decide to pursue. Considering the current
global liquidity shortage, there can be no assurance that such finding will be
available when needed, or, if available, that it will be available on terms
acceptable to the Company.





On August
5, 2008, a judgment was entered in the Kuhn’s matter awarding the plaintiffs
$7.2 million and our financial statements were adjusted in the prior period
accordingly. We have appealed the decision, and will continue to vigorously
defend against these claims which we believe to be without merit; however, we
have no assurance that we will prevail in our appeal. Should we ultimately be
required to pay the plaintiffs the amount of the judgment, the payment will have
an impact upon our liquidity and working capital. We believe that the payment,
should it be required, will not adversely affect our ability to fund our
working capital needs or to fund our capital expenditure needs.





In
connection with the judgment rendered against us in the action filed by Kuhns
Brothers, Inc., Kuhns Brothers Securities Corp., and Kuhns Brothers & Co.,
Inc. in the United States District Court, District of Connecticut we were
required to post a bond equal to $6,105,695.97.  On January 12, 2009,
our board of directors proposed and agreed, pending the appeal of the judgment,
that we issue one million (1,000,000) shares of our common stock, into escrow,
in lieu of posting cash. The Company entered into an escrow agreement to that
effect with Kuhns and an escrow agent. However, such proposal was not accepted
by the District Court and Kuhns and such shares were cancelled.  The
Company is currently in the process of settling the case and the
appeal.





Recent
Developments





On
February 11, 2009, Mr. J. Dwight Berry was appointed to serve as our Chief
Operating Officer. Mr. Berry had served as our Vice President of Commercial
Development with oversight of the Company’s sales and research and development
since June 2008.  Also on February 11, 2009, James A. Todd’s
resignation as Financial Controller was accepted and an agreement was
reached.


57


On
February 23, 2009, we sold in a private placement 400,000 shares of our common
stock, par value $0.006 (the “Common Stock”) for an average price of $4.80
per share, and warrants to purchase 300,000 shares of Common Stock, for a total
purchase price of $1,920,000. The warrants consisted of Series A Warrants
(“Series A Warrants”) to purchase 100,000 shares of Common Stock at an exercise
price of $5.25 per share, Series B Warrants (“Series B Warrants”) to purchase
100,000 shares of Common Stock at an exercise price of $5.50 per share, and
Series C Warrants (“Series C Warrants”) to purchase 100,000 shares of Common
Stock at an exercise price of $6.00 per share. The Series A and B Warrants are
exercisable starting from the date of issuance through the later of (i) February
22, 2010 and (ii) the date which is six (6) months following the effective date
of a registration statement filed by the Company under which the resale of all
of the shares of Common Stock underlying the warrants have been registered under
the Securities Act of 1933, as amended (the “Securities Act”). The Series C
Warrants are exercisable starting from the date of issuance through the later of
(i) August 22, 2010 and (ii) the date which is twelve (12) months following the
effective date of a registration statement filed by the Company under which
the resale of all of the shares of Common Stock underlying the warrant have been
registered under the Securities Act.





Copperweld
maintains a revolving line of credit with Wells Fargo Bank. Availability of the
credit line is the lower of $12.8 million or the collateral balances. The
outstanding balance was $4,125,266 and $4,712,075 at March 31,2009 and December
31, 2008, respectively. Due to the net loss of Copperweld amounted to $1,170,468
incurred during the 12 months calculated EBITDA ended March 31, 2009; Copperweld
reported a fixed-charge ratio of -2.97 to 1.0.  As a
result Copperweld was in default under the credit line as of March 31,
2009.  On May 6, 2009, Wells Fargo exercised its right to implement
the 2% additional default rate of interest effective April 1, 2009 and the
additional default interest will be charged on May 7, 2009.




Critical
Accounting Policies





Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
“Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock”, which is effective or financial statements for fiscal years
beginning after December 15, 2008 and which replaced the previous guidance on
this topic in EITF Issue 01-6.  Paragraph 11a of FAS 133 specifies
that a contract that would otherwise meet the definition of a derivative
but is both (a) indexed to the Company’s own stock and (b) classified in
stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument.  EITF 07-5 provides a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuer’s own stock and thus able to
qualify for the FAS 133 paragraph 11(a) scope exception.





The
conversion option embedded in the Company’s Convertible Notes previously met the
criteria in EITF Issue 01-6, as well as the other criteria of FAS 133, paragraph
11(a) and, accordingly, it was not separately accounted for as a derivative
instrument liability.  However, the conversion option does not
meet the criteria of EITF 07-5 because it requires that the conversion price be
adjusted in certain circumstances that do not meet the “fixed-for-fixed’
criteria in that Issue.  As a result, the Company is now required to
separately account for the embedded conversion option as a derivative instrument
liability, carried at fair value and marked-to-market each period, with changes
in the fair value each period charged or credited to income.


58


In
accordance with the transition provisions of EITF 07-5, the new guidance has
been applied to the $5,000,000 of the Company’s Convertible Notes that were
outstanding as of January 1, 2009.  The cumulative effect of this
change in accounting principle of $1,357,150 has been recognized as a reduction
of the opening balance of Retained Earnings as of that date.  That
cumulative effect adjustment is the difference between the amounts previously
recognized in the Company’s balance sheet as of December 31, 2008 and the
amounts that would have been recognized if the guidance in EITF 07-5 had been
applied from the issuance date of the outstanding Convertible
Notes.





Effective
January 1, 2009, the Company adopted SFAS 161, "Disclosures about Derivative
Instruments and Hedging Activities, and amendment of FASB No. 133", which amends
and expands the disclosure requirements of SFAS 133. SFAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives
and quantitative disclosures about the fair value of any gains and losses on
derivative instruments.





Recent
Account Pronouncements





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
FAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF
99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1 did not have a material impact on our consolidated financial
statements because all of our investments in debt securities are classified as
trading securities.





In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. FSP FAS 157-4 amends SFAS 157
and provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This FSP
shall be applied prospectively with retrospective application not permitted.
This FSP shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity early adopting this FSP must also early adopt FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”. Additionally, if an entity elects to early adopt either FSP FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt
this FSP. The Company is currently evaluating this new FSP but do not believe
that it will have a significant impact on the determination or reporting of our
financial results.




In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of
other comprehensive income and be amortized over the remaining life of the
debt security as an increase in the carrying value of the security. This FSP
shall be effective for interim and annual periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity may early adopt this FSP only if it also elects to early adopt
FSP FAS 157-4. Also, if an entity elects to early adopt either FSP FAS 157-4 or
FSP FAS 107-1 and APB 28-1, the entity also is required to early adopt this FSP.
We are currently evaluating this new FSP but do not believe that it will have a
significant impact on the determination or reporting of our financial
results.
  59


In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS 107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments not measured on the balance sheet at
fair value in interim financial statements as well as in annual financial
statements. Prior to this FSP, fair values for these assets and liabilities were
only disclosed annually. This FSP applies to all financial instruments within
the scope of SFAS 107 and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This FSP shall be effective for interim periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. We are
currently evaluating the disclosure requirements of this new FSP.





Off-Balance
Sheet Arrangements





We have
not engaged in any off-balance sheet transactions since our
inception.





Item
3. Quantitative and Qualitative Disclosures about Market Risk





Commodity
Price Risk





Certain
raw materials used by us are subject to price volatility caused by supply
conditions, political and economic variables and other unpredictable factors.
The primary purpose of our commodity price management activities is to manage
the volatility associated with purchases of commodities in the normal course of
business. We do not speculate on commodity prices.





We are
primarily exposed to price risk related to our purchase of copper used in the
manufacture of our products. Our copper price management strategy involves the
use of natural techniques, where possible, such as purchasing copper for future
delivery at fixed prices. We did not have any commodity price derivatives or
hedging arrangements outstanding at March 31, 2009 and did not employ any
commodity price derivatives during the quarter ended March 31,
2009.





Foreign
Exchange Risk





While our
reporting currency is the US dollar, a substantial percentage of our revenues
and costs are denominated in RMB and a significant portion of our assets and
liabilities are denominated in RMB. As a result, we are exposed to foreign
exchange risk as our revenues and results of operations may be affected by
fluctuations in the exchange rate between the US Dollar and RMB. If the RMB
depreciates against the US Dollar, the value of our RMB revenues and assets as
expressed in our US Dollar consolidated financial statements will
decline.


60





The RMB
is currently freely convertible under the “current account”, which includes
dividends, trade and service-related foreign exchange transactions, but not
under the “capital account”, which includes foreign direct investment. On May
19, 2007, the People’s Bank of China announced a policy to expand the maximum
daily floating range of RMB trading prices against the U.S. dollar in the
inter-bank spot foreign exchange market from 0.3% to 0.5%. While the
international reactions to the RMB revaluation and widening of the RMB’s daily
trading band have generally been positive, with the increased floating range of
the RMB’s value against foreign currencies, the RMB may appreciate or depreciate
significantly in value against the U.S. dollar or other foreign currencies in
the long term, depending on the fluctuation of the basket of currencies against
which it is currently valued.





We
recognized a foreign currency translation adjustment of approximately $0.4
million for the quarter ended March 31, 2009.





Interest
Rate Risk





We are
primarily exposed to interest rate risk arising from the 6 month LIBOR rate on
which the interest rate for our Guaranteed Senior Secured Floating Rate Notes
due 2012 (HY Notes) totaling $40 million or 60% of our total liability, is
based. If there was a hypothetical 1% change in 6-month LIBOR interest rate, the
net impact to earnings would be approximately $0.4 million on an annualized
basis.





In order
to mitigate our exposure to volatility in interest rates and foreign currency
exchange rates associated with the HY Notes, on April 10, 2007, the Company
entered into a cross currency swap transaction (the Swap) with Merrill Lynch
Capital Services, Inc. (“MLCS”). The Swap, with a notional principal value of
$40 million, converts the LIBOR + 7% per annum USD variable interest rate to an
8.3% per annum RMB fixed interest rate. The agreement was deemed effective
January 24, 2007. The Swap requires semi-annual payment in arrears on July 24
and January 24 and matures the earlier of (1) cash settlement defined as early
termination; or (2) January 24, 2012, at which point the Swap requires an
exchange of RMB and USD based principals. Under the terms of the cross currency
swap, the Company receives variable interest rate payments in USD and makes
fixed interest rate payments in RMB with settlement netted in USD, thereby
creating the equivalent of fixed-rate debt. The Company uses this derivative
instrument only to hedge exposures in the ordinary course of business and does
not invest in derivative instruments for speculative purposes.





The fair
value of the Swap is determined on an annual basis with the assistance of third
party provided calculations which reflect the present values of the difference
between estimated future variable-rate receipts in USD and future fixed-rate
payments in RMB. Since its effective date, the fair value of this Swap agreement
changed to a payable of $7,139,205 and $4,377,076 as of March 31, 2009, and
December 31, 2008, respectively. For the three months ended March 31, 2009,
changes in fair value of the Swap resulted in an increase in the liability and a
loss to other comprehensive income of $2,762,129, respectively; For the three
months ended March 31, 2008, changes in fair value of the Swap resulted in an
increase in the liability and a loss to other comprehensive income of
$5,109,480, respectively, net of taxes. The Company had cross currency hedge
payable amounting to $156,154 and $104,324 as of March 31, 2009 and December 31,
2008 respectively. The total loss from derivative transactions for the three
months ended March 31, 2009 was $166,410 and the total gain from derivative
transactions for the three months ended at March 31, 2008 was $189,954,
respectively.  For the three months ended March 31, 2009, there were
no amounts recorded in the consolidated statements of income in relation to this
interest rate swap related to ineffectiveness of the swap
transaction.


61





The
Company accounts for this interest rate swap in accordance with FAS No. 133,
“Accounting for Derivatives Instruments and Hedging Activity,” which requires
all derivatives to be carried on the balance sheet at fair value and to meet
certain documentary and analytical requirements to qualify for hedge accounting
treatment. The above derivative qualifies for hedge accounting under FAS 133
and, accordingly, changes in the fair value is reported in accumulated other
comprehensive income, net of related income tax effects.





The
Company also has outstanding senior convertible notes that may be converted into
the Company’s common stock. On January 8, 2008, the convertible notes holder
elected to convert $15.0 million of the $20 million convertible notes into
common shares. If the $5 million Convertible Notes outstanding as of March 31,
2009 are not converted at maturity, January 24, 2012, the Company will have to
repay the principal of $5 million and an additional redemption cost of
$5,305,158.





Under
SFAS 157, the Company used Level 3 inputs for its valuation methodology for the
$40 million HY note and $5 million convertible notes payable outstanding, and
their fair values are determined using cash flows discounted at relevant market
interest rates in effect at the period close. The estimated fair value of the
Company’s outstanding HY notes and convertible notes was $41.8 million at March
31, 2009.





Changes
in the market value of the Company’s debt do not affect the reported results of
operations unless the Company is retiring such obligations prior to their
maturity. This analysis did not consider the effects of a changed level of
economic activity that could exist in such an environment and certain other
factors. Further, this sensitivity analysis assumes no changes in the Company’s
financial structure.





Credit
Risk





We have
not experienced significant credit risk, as most of our customers are long-term
customers with excellent payment records. We review our accounts receivable on a
regular basis to determine if the allowance for doubtful accounts is adequate at
each quarter-end. We only extend 30 to 90 day trade credit to our largest
customers, which tend to be well-established and large businesses, and we have
not seen any major customer’s accounts receivable go uncollected beyond 90 days
or experienced any material write-off of accounts receivable in the
past.





Inflation
Risk





In recent
years, China has not experienced significant inflation, and thus inflation has
not had a material impact on our results of operations. According to the
National Bureau of Statistics of China (NBS) (www.stats.gov.cn), the change in
Consumer Price Index (CPI) in China was 3.9%, 1.8% and 1.5% in 2004, 2005 and
2006, respectively. However, in the fiscal year ended December 31, 2007,
according to NBS, CPI rose significantly at a monthly average rate of 4.8%.
Especially during the months of August, September, October, November, and
December, CPI was up 6.5%, 6.2%, 6.5%, 6.9% and 6.5%, respectively. Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although we do not believe that inflation has had
a material impact on our financial position or results of operations to date, a
high rate of inflation may have an adverse effect on our ability to maintain
current levels of gross margin and selling, general and administrative expenses
as a percentage of sales revenue if the selling prices of our products do not
increase with these increased costs.


62





Item
4. Controls and Procedures.





(a)
Evaluation of disclosure controls and procedures. Our chief executive officer
and our chief financial officer, after evaluating the effectiveness of the
company’s “disclosure controls and procedures” (as defined in the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15e and
15d-15e) as of the end of the period covered by this report (the “Evaluation
Date”), have concluded that, as of the Evaluation Date, our disclosure controls
and procedures were not effective at the reasonable assurance level to enable
the Company to record, process, summarize and report information required under
the Securities and Exchange Commission’s rules in a timely fashion.





(b)
Changes in internal controls. During the fiscal quarter covered by this
quarterly report, there was no change in our internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect our internal control over financial reporting.





A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control systems are met.
Because of the inherent limitations in all control systems no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.





PART
II





Item
1. Legal Proceedings.





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. Litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from
time to time that may harm our business.





In
connection with the judgment rendered against us in the action filed by Kuhns
Brothers, Inc., Kuhns Brothers Securities Corp., and Kuhns Brothers & Co.,
Inc. in the United States District Court, District of Connecticut we were
required to post a bond equal to $6,105,695.97.  On January 12, 2009,
our board of directors proposed and agreed, pending the appeal of the judgment,
that we issue one million (1,000,000) shares of our common stock, into escrow,
in lieu of posting cash. The Company entered into an escrow agreement to that
effect with Kuhns and an escrow agent. However, such proposal was not accepted
by the District Court and Kuhns and such shares were cancelled.  The
Company is currently in the process of settling the case and the
appeal.




63




Item
1A. Risk Factors





The risk
factors included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 have not materially changed as of March 31, 2009.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





Not
applicable.





Item
5. Other Information.





On July
22, 2008 (the “Effective Date”), Mr. Wenbing Christopher Wang, the Company’s
Chief Financial Officer, entered into an employment agreement with the Company
(the “Wang Employment Agreement”).  The initial term of the Wang
Employment Agreement is for two years commencing on the Effective Date provided
that such term would automatically extend for an additional two-year period on
the expiration date of the initial term unless written notice of non-renewal is
provided by either party at least six months prior to the expiration date of the
term.  Mr. Wang’s base salary is no less than $200,000 per year, which
salary may be increased at the discretion of the Board of Directors but in no
event shall be decreased.  The Board of Directors shall review Mr.
Wang’s salary at least on an annual basis.  In addition to the base
salary, Mr. Wang is entitled to participate in an annual cash bonus plan and any
cash bonus is to be paid within two and one-half months following the end of the
fiscal year.  If Mr. Wang is terminated without Cause (as defined in
the Wang Employment Agreement) or Mr. Wang terminates the Wang Employment
Agreement or for Good Reason (as defined in the Wang Employment Agreement) and
Mr. Wang executes and delivers a valid and effective release of all claims
against the Company in a form and format prepared by the Company, Mr. Wang shall
be entitled to receive(1) a lump sum cash payment in the amount of any accrued
but unpaid salary as of his date of termination, (2) a lump sum cash payment
equal to any accrued and unpaid bonus for any prior fiscal year, (3) a lump
sum cash payment equal to the pro rata amount of any bonus payable with respect
to the fiscal year in which termination occurs and (4) an amount equal to the
sum of (a) 50% of his then current annual base salary and (b) 50% of the average
annual cash bonus payments paid by the Company to Mr. Wang during the
preceding three fiscal years.  Mr. Wang is also entitled to continued
medical and life insurance benefits for a period of six months following the
date of termination.  The Wang Employment Agreement also contains
non-competition and non-disclosure covenants following any termination of Mr.
Wang’s employment.  A copy of the Wang Employment Agreement is filed
herewith as Exhibit 10.1 and incorporated by reference herein.





Item
6. Exhibits





(a)
Exhibits





10.1 –
Executive Employment Agreement between the Company and Wenbing Christopher Wang,
effective as of July 22, 2008





64




31.1 –
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.




31.2 –
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.





32.1 –
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.


65





SIGNATURES





Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned there unto duly
authorized.





FUSHI
      COPPERWELD, INC.Date:
      May 11, 2009
                      BY:
                      /s/
      Wenbing
      Chris WangWenbing
      Chris WangChief
      Financial Officer (Principal
                        Accounting
      and Financial Officer)




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INDEX TO
EXHIBITS





EXHIBIT
                  NUMBER
                
                DESCRIPTION10.1
                
                10.1
      – Executive Employment Agreement between the Company and Wenbing
      Christopher Wang, effective as of July 22, 2008.31.1
                
                Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
                
                Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
                
                Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002.




67