GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Background
The Company (formerly known as American Construction Company) was established on August 5, 2002 for the purpose of commencing the business of general construction contracting. It was the Company's objective to provide to its customers timely and durable construction for their residential and commercial needs. We established a subsidiary for the purpose of achieving the above stated objectives in Saskatchewan, Canada and to enter the residential and commercial construction industry in this market.
To accomplish the above objective the founder of our company, Jeff Mabry established American Construction Company (a Nevada company) on August 5, 2002. American Construction Company then established its subsidiary, West Dee Construction Ltd. (a Saskatchewan, Canada Company) on August 8, 2002 by purchasing 100 shares from its treasury.
On October 14, 2004, American Construction Company and General Steel Investment Co., Ltd (referred to as General Steel) and Northwest Steel Company, a Nevada corporation, entered into an Agreement and Plan of Merger (the "Agreement") pursuant to which American Construction Company acquired General Steel, and it’s 70% ownership in its subsidiary Daqiuzhuang Metal Sheet Co., Ltd in exchange for shares of the Company’s common stock, of which 22,040,000 shares was a new issuance by the Company, and 7,960,000 shares are from certain shareholders of the Company, which in aggregate, constituted 96% of the total issued and outstanding shares of the Company.
Under the terms of the Agreement, General Steel will remain a 100% owned subsidiary of the Company. The transaction contemplated by the Agreement was intended to be a “tax-free" reorganization pursuant to the provisions of Section 351 and 368(a) (1) (A) of the Internal Revenue Code of 1986, as amended. The stockholders of General Steel, as of the closing date of the merger own approximately 96% of the Company's common stock outstanding as of October 15, 2004 (excluding any additional shares to be issued on outstanding options, warrants and other securities convertible into common stock).
The accounting for these transactions is identical to that resulting from a reverse-acquisition, except that no goodwill or other intangible assets is recorded. Accordingly, the financial statements of General Steel Investment Co., Limited are the historical financial statements of the Company, formerly the operations of Daqiuzhuang Metal Sheet Co., Ltd.
Based on the Company's Plan of Merger with General Steel, the Board of Directors determined to change the Registrant’s fiscal year end from January 31 to December 31.
On March 7, 2005, General Steel Holdings, Inc. (the Company) formally changed its name from American Construction Company to General Steel Holdings, Inc. The Company through its subsidiary in China principally engages in the manufacturing of hot rolled carbon and silicon steel sheets which are mainly used on tractors, agricultural vehicles and in other specialty markets. The Company sells its products through both retailers and wholesalers.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Background, (continued)
Daqiuzhuang Metal Sheet Co., Ltd. (referred to as Daqiuzhuang Metal) was established on August 18, 2000 in Jinghai county, Tianjin city, Hebei province, the People’s Republic of China (PRC). The Articles of Corporation provides for a 10 year operating term beginning on August 18, 2000 with registered capital of $ 9,583,200. The Company is a Chinese registered limited liability company with a legal structure similar to a limited liability company organized under state laws in the United States of America.
Note 2 - Summary of significant accounting policies
Basis of presentation
The consolidated financial statements of General Steel Holdings, Inc. reflect the activities of the following subsidiaries:
| | | | | Percentage |
| Subsidiary | | | | Of Ownership |
| General Steel Investment Co., Ltd. | | British Virgin Islands | | 100.0% |
| Tianjin Daqiuzhuang Metal Sheet Co., Ltd | | P.R.C. | | 70.0% |
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of General Steel Investment Co., Ltd. and Tianjin Daqiuzhuang Metal Sheet Co., Ltd. (collectively the “Company”). All material intercompany transactions and balances have been eliminated in the consolidation.
Revenue recognition
The Company recognizes revenue when the goods are delivered and title has passed. Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% 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.
Foreign currency translation
The reporting currency of the Company is the US dollar. The Company uses their local currency, Renminbi (RMB), as their functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Foreign currency translation, continued
Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and amounted to $121,405 and $0 as of March 31, 2006 and 2005, respectively. The balance sheet amounts with the exception of equity at March 31, 2006 were translated at 8.01 RMB to $1.00 USD as compared to 8.26 RMB at March 31, 2005. The equity accounts were stated at their historical rate. The average translation rate of 8.04 RMB for the three months ended March 31, 2006 was applied to income statement accounts.
Plant and equipment, net
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with 3% residual value. The depreciation expense for the three months ended March 31, 2006 and 2005 amounted to $273,775 and $308,289, respectively.
Estimated useful lives of the assets are as follows:
| | Estimated |
| Useful Life |
| Buildings | 10-30 years |
| Machinery and equipment | 8-15 years |
| Other equipment | 5-8 years |
| Transportation equipment | 10-15 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.
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statements of operations. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Major additions and betterment to buildings and equipment are capitalized.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Plant and equipment, net, continued
Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of March 31, 2006, the Company expects these assets to be fully recoverable.
Plant and equipment consisted of the following:
| | | | March 31, | | | December 31, | |
| | | 2006 | | | 2005 | |
| | | Unaudited | | | Audited | |
| Buildings and improvements | | $ | 5,426,161 | | $ | 5,391,378 | |
| Transportation equipment | | | 430,894 | | | 485,699 | |
| Machinery | | | 12,884,609 | | | 12,752,995 | |
| Construction in progress | | | 7,605,823 | | | 4,231,318 | |
| Totals | | | 26,347,487 | | | 22,861,390 | |
| Less accumulated depreciation | | | 4,922,449 | | | 4,647,518 | |
| Totals | | $ | 21,425,038 | | $ | 18,213,872 | |
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles of the United States of America requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.
Cash and concentration of risk
Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the People’s Republic of China and Hong Kong. Total cash (including restricted cash balances) in these banks at March 31, 2006 and December 31, 2005, amounted to $4,722,935 and $11,446,120, respectively of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
Restricted cash
The Company through its bank agreements is required to keep certain amounts on deposit that are subject to withdrawal restrictions and these amounts are $2,754,551 and $2,735,583 as of March 31, 2006 and December 31, 2005, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Inventories
Inventories are stated at the lower of cost or market using the weighted average method. Inventories consisted of the following:
| | | March 31, | | | December 31, | |
| | | 2006 | | | 2005 | |
| | | Unaudited | | | Audited | |
| Supplies | | $ | 1,330,881 | | $ | 1,524,332 | |
| Raw materials | | | 4,510,790 | | | 1,195,022 | |
| Finished goods | | | 10,206,431 | | | 8,011,587 | |
| Totals | | $ | 16,048,102 | | $ | 10,730,941 | |
Inventories consist of supplies, raw materials and finished goods. Raw materials consist primarily of iron 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 costs are also included in the cost of inventory. No work in process inventory existed at March 31, 2006 and December 31, 2005, as all inventory in process was completed and transferred to finished goods prior to the physical inventory count. The Company reviews its inventory annually for possible obsolete goods or to determine if any reserves are necessary for potential obsolescence. As of March 31, 2006 and December 31, 2005, the Company has determined that no reserves are necessary.
Financial instruments
Statement of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value of financial instruments held by the Company. SFAS 107 defines the fair value of financial instruments as the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable, accrued liabilities and other payables to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Intangible assets
All land in the People’s Republic of China is owned by the government and cannot be sold to any individual or company. However, the government grants the user a “land use right” (the Right) to use the land. The Company has acquired land use rights during the years ending in 2000 and 2003 for a total amount of $2,870,902. The Company has the right to use this land for 50 years. As of March 31, 2006 and December 31, 2005, accumulated amortization amounted to $982,399 and $902,550. The costs of these rights are being amortized over ten years using the straight-line method.
Intangible assets of the Company are reviewed annually as to whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of March 31, 2006, the Company expects these assets to be fully recoverable.
Total amortization expense for the three months ended March 31, 2006 and 2005, amounted to $73,718 and $71,773, respectively.
Shares subject to mandatory redemption
The Company has adopted Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS 150 established classification and measurement standards for three types of freestanding financial instruments that have characteristics of both liabilities and equity. Instruments within the scope of FAS 150 must be classified as liabilities within the Company’s Consolidated Financial Statements and be reported at settlement date value. The provisions of FAS 150 are effective for (1) instruments entered into or modified after May 31, 2003, and (2) pre-existing instruments as of July 1, 2003. In November 2003, through the issuance of FSP 150-3, the FASB indefinitely deferred the effective date of certain provisions of FAS 150, including mandatory redeemable instruments as they relate to minority interests in consolidated finite-lived entities.
The Company issued new redeemable stock in September, 2005. The net present value of the stock at the settlement date is recorded as a liability in the accompanying financial statements.
Income taxes
The Company has adopted Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109). SFAS 109 requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consist of taxes currently due plus deferred taxes. There are no deferred tax amounts at March 31, 2006 and December 31, 2005.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Income taxes, continued
The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit.
In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax 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 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.
Under the 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, unless the enterprise is located in a specially designated region where it allows foreign enterprises a two-year income tax exemption and a 50% income tax reduction for the following three years.
The Company’s subsidiary, Daqiuzhuang Metal Sheet Co., Ltd., became a Chinese Sino-foreign joint venture at the time of the merger on October 14, 2004 and it became eligible to receive a tax benefit. The Company is exempt from income taxes for the years ended December 31ô2005 and 2006 and 50% income tax reduction for the years ended December 31, 2007, 2008 and 2009. The Company received the tax exemption approval from the local tax authorities during the last quarter of 2005 and the Company had been recording a provision for income taxes for the first three quarters of 2005. During the last quarter of 2005 the Company reversed the provision for income taxes once they received the approval from the local tax authorities. The local Chinese tax authority waived the perviously accrued tax accumulated prior to January 1, 2005 in the amount of $253,250 which was recorded as other nonoperating income for the three months ended March 31, 2006 for previously accrued income taxes.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Income taxes, continued
The provision for income taxes for the period ended March 31 consisted of the following:
| | | | 2006 | | | 2005 | |
| | | Unaudited | | | Unaudited | |
| Provision for China Income Tax | | $ | - | | $ | 265,231 | |
| Provision for China Local Tax | | | - | | | 29,470 | |
| Total provision for income taxes | | $ | - | | $ | 294,701 | |
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended March 31:
| | | 2006 | | | 2005 | |
| U.S. statutory rates | | | 34.0 | % | | 34.0 | % |
| Foreign income not recoginized in USA | | | (34.0 | ) | | (34.0 | ) |
| China income taxes | | | - | | | 33.0 | |
| Total provision for income taxes | | | - | % | | 33.0 | % |
The estimated tax savings for the three months ended March 31, 2006 amounted to $191,674. The net effect on earnings per share had the income tax been applied would decrease earnings per share from $0.011 to $0.005.
Value added tax
Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with Chinese laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product.
Taxes payable consisted of the followings:
| | | March 31, | | | December 31, | |
| | | 2006 | | | 2005 | |
| | | Unaudited | | | Audited | |
| VAT taxes payable | | $ | 1,954,124 | | $ | 1,290,982 | |
| Income taxes payable | | | - | | | 385,510 | |
| Misc taxes | | | 1,147 | | | 5,838 | |
| Totals | | $ | 1,955,271 | | $ | 1,682,330 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Consolidated financial statements and condensed footnotes
The interim consolidated financial statements presented herein have been prepared by the Company and include the unaudited accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in the consolidation.
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures that are normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. Management of the Company believes the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in its Annual Report on Form 10-K dated March 31, 2006.
In the opinion of management, the unaudited consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2006 and December 31, 2005, and the results of operations, changes in shareholders’ equity and cash flows for the three months ended March 31, 2006 and 2005. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.
Note 4 - Earnings per share
The Company reports earnings per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share." SFAS No. 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.
Under SFAS 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", entities that have issued mandatory redeemable shares of common stock or entered into forward contracts that require physical settlement by repurchase of a fixed number of the issuer’s equity shares of common stock in exchange for cash shall exclude the common shares that are to be redeemed or repurchased in calculating basic and diluted earnings per share. Thus the 1,176,665 shares described in note 18 have been excluded from the earnings per share calculation.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Earnings per share, (continued)
The weighted average number of shares used to calculate EPS for the three months ended March 31, 2006 (31,250,000), 2005 (31,250,000) reflect only the shares outstanding for those periods.
Note 5 - Supplemental disclosure of cash flow information
Interest paid amounted to $499,877 and $440,221 for the three months ended March 31, 2006 and 2005, respectively.
Income tax payments amounted to $0 and $485,615 for the three months ended March 31, 2006 and 2005, respectively.
Note 6 - Notes receivable and note receivable - related party
Notes receivable represents trade accounts receivable due from various customers where the customers’ bank has guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within three to six months. The Company has the ability to submit their request for payment to the customer’s bank earlier than the scheduled payment date. However the Company will incur an interest charge and a processing fee when they submit a payment request early. The Company had $998,400 and $4,960 outstanding as of March 31, 2006 and December 31, 2005, respectively.
The note receivable from related party represents a note issued by the Company to a related party, Yang Pu Automotive Investment Limited, for business purpose on November 15, 2005. The note is in the amount of RMB 24,000,000, translated to $2,995,200, for one year with an interest rate at 7% and due at maturity.
Note 7 - Prepaid expenses
Prepaid expenses at March 31, 2006 consisted of the followings:
| | | | Current | | | Long-term | | | Total | |
| Rent | | $ | 44,928 | | $ | 333,715 | | $ | 378,643 | |
| Land use right | | | 20,136 | | | 503,356 | | | 523,492 | |
| Total | | $ | 65,064 | | $ | 837,071 | �� | $ | 902,135 | |
The Company rented a dormitory for its employees during 2005. The rent is for ten years starting on January 1, 2006 at RMB 90,000 per quarter or RMB 360,000 per year. The Company's prepayment at March 31, 2006 amounted to RMB 3,034,000 or $378,643.
The Company also entered into another rental agreement on July 21, 2005 to rent the land use right for its manufacture expansion. The total amount of the rental is RMB 8,067,400 for a period of 50 years starting on September 1, 2005. The Company made a prepayment of RMB 4,234,981 or $528,505 and prepaid balance remained at March 31, 2006 amounted to RMB 4,194,644 or $523,492.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Advances on inventory purchases
Advances on inventory purchases are monies deposited or advanced to outside vendors or related parties on future inventory purchases. Due to the high shortage of steel in China, 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 purchases on a timely basis.
This amount is refundable and bears no interest. The Company has a legal binding contract with their vendors for the guarantee deposit, which is to be returned to the Company at the end of the contract. The inventory is normally delivered within one month after the monies has been advanced. The total outstanding amount was $14,398,985 and $10,716,293 as of March 31, 2006 and December 31, 2005, respectively.
Note 9 - Other payable - related party
The Company has a short term loan from Golden Glister Holdings Limited. Golden Glister Holdings Limited is incorporated in the territory of the British Virgin Islands which our president Yu Zuo Sheng is the majority shareholder. The amount was loaned to General Steel Investment Co., Ltd for business operations. The Company had $330,000 and $980,000 outstanding on this loan as of March 31, 2006 and December 31, 2005, respectively. This amount is short-term and is non interest bearing.
Note 10 - Short term loans - bank
Short term loans - bank represent amounts due to various banks which are due on demand or normally within one year. These loans can be renewed with the banks. The Company had a total of $32,173,440 and $27,118,800 short term bank loans with various banks as of March 31, 2006 and December 31, 2005, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Short term loans - bank, (continued)
| | | March 31, | | | December 31, | |
| | | 2006 | | | 2005 | |
| | | Unaudited | | | Audited | |
| Loans from China Bank, JingHai Branch, due November 2006. Monthly interest only payment at6.138% per annum, secured by equipment and property | | $ | 1,123,200 | | $ | 1,116,000 | |
| | | | | | | | |
| Loans from Agriculture Bank, DaQiuZhuang Branch, due various dates from May 2006 to March 2007. Monthly interest only payments in 2005 ranging from 6.696% to 7.533% per annum, guaranteed by an unrelated third party and secured by property and equipment | | | 10,021,440 | | | 10,068,800 | |
| | | | | | | | |
| Loan from Construction Bank of China, JinHai Branch, due August 15, 2006. Monthly interest only payment at 7.4604% per annum, secured by properties | | | 1,010,880 | | | 1,004,400 | |
| | | | | | | | |
| Loans from ShangHai PuFa Bank, due various dates from July 2006 to March 2007. Monthly interest only payments ranging from 6.138% to 6.42% per month, guaranteed by an unrelated third party | | | 6,240,000 | | | 6,200,000 | |
| | | | | | | | |
| Loans from China Merchants Bank, due various dates from June 2006 to September 2006. Quarterly interest only payments, annual interest rate of 5.859% to 5.86%, guaranteed by an unrelated third party | | | 8,112,000 | | | 8,060,000 | |
| | | | | | | | |
| Loan from Construction Bank of China, due August 21, 2006Monthly interest only payment at 7.4604% per annum, guaranteed by an unrelated third party | | | 673,920 | | | 669,600 | |
| | | | | | | | |
| Loans from Shenzhen Development Bank, Tianjin Branch due various dates from February to March 2007. Quarterly interest only payments ranging from 5.856% to 5.859%, secured by inventories | | | 4,992,000 | | | - | |
| Totals | | $ | 32,173,440 | | $ | 27,118,800 | |
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Short term notes payable
The Company has the following short term notes payable outstanding as for March 31, 2006 and December 31, 2005:
| | | | March 31, | | | December 31, | |
| | | 2006 | | | 2005 | |
| | | Unaudited | | | Audited | |
| China Bank, Jing Hai Branch, various amounts, due May 2006, restricted cash required 50% of loan amount, guaranteed by the Company | | $ | 1,447,680 | | $ | 1,438,400 | |
| | | | | | | | |
| Agricultural Bank of China, various amounts, due dates ranging between June and July 2006,restricted cash required of 50% of loan amount, guaranteed by the Company and an unrelated third party | | | 1,497,600 | | | 1,488,000 | |
| | | | | | | | |
| ShangHai PuFa Bank, due May 2006, restricted cash required of 50% of loan balance, guaranteed by an unrelated third party | | | 2,496,000 | | | 2,480,000 | |
| Totals | | $ | 5,441,280 | | $ | 5,406,400 | |
Total interest expense for the three months ending March 31, 2006 and 2005 on all debt amounted to $499,877 and $440,221, respectively.
Note 12 - Customer deposits
Customer deposits represent amounts advanced by customers on product orders. The product normally is shipped within six months after receipt of the advance payment and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of March 31, 2006 and December 31, 2005, customer deposits amounted to $2,572,512 and $1,276,536, respectively.
Note 13 - Deposits due to sales representatives
The Company has entered into agreements with various entities to act as the Company’s exclusive sales agent in a specified area. These exclusive sales agents must meet certain criteria and are required to deposit a certain amount of money with the Company. In return the sales agents receive exclusive sales rights to a specified area and discounted prices on products they order. These deposits bear no interest and are required to be returned to the sales agent once the agreement has been terminated. The Company had $1,581,216 and $1,261,080 in deposits due to sales representatives outstanding as of March 31, 2006 and December 31, 2005, respectively.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Major customers and suppliers
The Company has 5 major customers which represent approximately 62% and 43% of the Company’s total sales for the three months ended March 31, 2006 and 2005, respectively.
For the three months ended March 31, 2006 and 2005, the Company purchases approximately 97% and 90%, respectively, of their raw materials from four major suppliers.
Note 15 - Minority interest
Minority interest represents the outside shareholders’ 30% interest in Tianjin Daqiuzhuang Metal Sheet Co., Ltd.
Note 16 - Other expenses and income, net
Other income and expense for the three months ended March 31 consist of the following:
| | | 2006 | | | 2005 | |
| | | Unaudited | | | Unaudited | |
| Finance/interest expense | | $ | (466,064 | ) | $ | (441,659 | ) |
| Interest income | | | 60,033 | | | 17,427 | |
| Other nonoperating income | | | 354,844 | | | 11,551 | |
| Other nonoperating expense | | | (28,798 | ) | | (3,065 | ) |
| Total other expense | | $ | (79,985 | ) | $ | (415,746 | ) |
Other nonoperating income includes the previously accrued income. During 2005, the company has approved from the P.R.C. local government for two years income tax exempt and three years of 50% income tax reduction. The local Chinese tax authority waived the perviously accrued tax accumulated prior to January 1, 2005 in the amount of $253,250 which was recorded as other nonoperating income for the three months ended March 31, 2006 for previously accrued income taxes.
Note 17 - Reclassifications
Certain amounts for the three months ended March 31, 2005 in the accompanying financial statements have been reclassified to conform to the 2006 presentation. These reclassifications have no effect on net income or cash flows.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Private Offering of Redeemable Stock
The Company has offered an aggregate of 3,333,333 shares of Common Stock par value $0.001 in a private placement to investors at a purchase price of $1.50 per share. On September 18, the Company entered into a subscription agreement with certain investors to sell a total of 1,176,665 shares of common stock at $1.50 per share. In addition, two warrants are attached to each share of common stock and each warrant gives the warrant holder the right to purchase an additional share of common stock or a total of 2,353,330 of common stock in the future. The warrants can be exercised on the first anniversary date at $2.50 per share and on the second anniversary date at $5.00 per share. The number of shares attached to the warrants will be adjusted due to dividends and changes in the capital stock structure changes.
At the option of the investors the Company maybe required to repurchase the 1,176,665 shares of common stock 18 months after the closing date at a per share price of $1.95.
In accordance with SFAS no. 150, the Company has recorded this stock issuance as a liability in the financial statements due to the mandatory redemption provision. The shares have been recorded at the net present value of the stock using a discount interest rate of 6.5%. The following table shows the carrying value of the shares subject to mandatory redemption:
| Total liability of mandatory redeemable common stock 1,176,665 shares at $1.95 per share | | $ | 2,294,497 | |
| | | | | |
| Interest expense to accrue over the next 18 months | | | (212,606 | ) |
| | | | | |
| Net present value at September 30, 2005 | | $ | 2,081,891 | |
| | | | | |
| Interest accrued between October 2005 and March 2006 | | | 68,585 | |
| | | | | |
| Carrying value at March 31, 2006 | | $ | 2,150,476 | |
Interest expense will be accrued over the next 12 months and interest expense accrued for the three months ended March 31, 2006 amounted to $34,570.
Under this private offering, the Company raised a total of $1,765,000 and received net proceeds of $1,606,150 net of $158,850 of commissions paid. The difference between the net present value of redeemable stock on September 30, 2005 and the net proceeds, which is $475,741, was recorded as decrease in paid-in capital.
Note 19 - Retirement plan
Regulations in the People’s Republic of China require the Company to contribute to a defined contribution retirement plan for all employees. All Joint Venture employees are entitled to a retirement pension amount calculated based upon their salary at their date of retirement and their length of service in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to the retired staff.
GENERAL STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 - Retirement plan, (continued)
The Joint Venture is required to make contributions to the state retirement plan at 20% of the employees’ monthly salary. Employees are required to contribute 7% of their salary to the plan. Total pension expense incurred by the Company amounted to $61,661 and $0 for the three ended March 31, 2006 and 2005, respectively.
Note 20 - Joint venture agreement with Baotou Steel
On September 28, 2005, General Steel Investment Co., Ltd., a wholly owned subsidiary of General Steel Holdings, Inc., entered into a certain Baotou-GSHI Special Steel Joint Venture Agreement (the "Agreement") with Da Qiu Zhuang Metal Sheet Co., Ltd., and Baotou Iron and Steel (Group) Co., Ltd., a limited liability company formed under the laws of the People's Republic of China (the "Baotou Steel"). The name of the joint venture will be Baotou Steel-General Steel Special Steel Joint Venture Company Limited.
The Joint Venture Company will be located at Kundulun District, Baotou City, Inner Mongolia, China. The stated purposes of the Joint Venture Company are, among others, to produce and sell special steel and to improve the product quality and the production capacity and competitiveness by adopting advanced technology in the production of steel products. The Joint Venture Company shall have a capacity of producing 600,000 tons of specialty steel products a year.
The registered capital of the joint venture will be approximately $24,000,000. The products of the joint venture will be sold in the Chinese market and abroad. The ownership will be comprised of the following:
| | | % Ownership | |
| Baotou Iron and Steel (Group) Co.,Ltd. | | | 49 | % |
| General Steel Investment Co., Ltd. | | | 31 | % |
| Da Qiu Zhuang Metal Sheet Co., Ltd | | | 20 | % |
Baotao Steel shall contribute land, existing equipment and materials at an estimated value of approximately $12,000,000 which will be contributed to the joint venture at the date of the approval of Joint Venture or issuance of the business license. General Steel Investment Co., Ltd. will contribute approximately $7,500,000 of cash and Da Qiu Zhuang Metal Sheet Co., Ltd. will contribute approximately $5,000,000 cash. These contributions will be required to be made on the following payment schedule 30% of their capital contribution within 30 days of the date of approval of the Joint Venture; 30% of their capital contribution within 3 months of the date of approval of the Joint Venture; and 40% of their capital contribution within 6 months of the date of approval of the Joint Venture. As of March 31, 2006, the Company has not received the approval from the Local Chinese authority.
