The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Background
General Steel Holdings, Inc. (the “Company”)
was incorporated on August 5, 2002 in the state of Nevada. The Company through its 100% owned subsidiary, General Steel Investment,
operates steel companies serving various industries in the People’s Republic of China (“PRC”). The Company’s
main operation is manufacturing and sales of steel products such as steel rebar, hot-rolled carbon and silicon sheets and spiral-weld
pipes. The Company, together with its subsidiaries, majority owned subsidiaries and variable interest entity, is referred to as
the “Group”.
Recent developments
On April 29, 2011, a 20-year Unified Management
Agreement (“the Agreement”) was entered into between the Company, the Company’s 60%-owned subsidiary Shaanxi
Longmen Iron and Steel Co., Ltd. (“Longmen Joint Venture”), Shaanxi Coal and Chemical Industry Group Co., Ltd. (“Shaanxi
Coal”) and Shaanxi Iron and Steel Group (“Shaanxi Steel”). Shaanxi Steel is the controlling shareholder of Shaanxi
Longmen Iron and Steel Group Co., Ltd (“Long Steel Group”) which is the non-controlling interest holder in Longmen
Joint Venture, and Shaanxi Coal, a state owned entity, is the parent company of Shaanxi Steel. Under the terms of the Agreement,
all manufacturing machinery and equipment of Longmen Joint Venture and the $581.4 million (or approximately RMB 3.7 billion) of
newly constructed iron and steel making facilities owned by Shaanxi Steel, which includes one 400m
2
sintering machine,
two 1,280m
3
blast furnaces, two 120 ton converters and some auxiliary systems, are managed collectively as a single
virtual asset pool (“Asset Pool”). Longmen Joint Venture manages the Asset Pool as the principal operating entity and
is responsible for the daily operations of the new and existing facilities.
The Agreement leverages each of the parties’
operating strengths, allowing the Longmen Joint Venture to derive the greatest benefit from the cooperation and the newly constructed
iron and steel making facilities. At the designed efficiency level, these new facilities are expected to contribute three million
tons of crude steel production capacity per year.
Longmen Joint
Venture pays Shaanxi Steel for the use of the newly constructed iron and steel making facilities an amount equaling the depreciation
expense on the equipment constructed by Shaanxi Steel as well as 40% of the pre-tax profit generated by the Asset Pool. The remaining
60% of the pre-tax profit is allocated to Longmen Joint Venture. As a result, the Company’s economic interest in the profit
generated by the Asset Pool decreased from 60% to 36%. However, the overall capacity under the management of Longmen Joint Venture
has increased by three million tons, or 75%. The Agreement
is also expected to improve Longmen Joint Venture’s cost
structure through sustainable and steady sourcing of key raw materials and reduced transportation costs.
The
distribution of profit is subject to a prospective adjustment after the first two years based on each entity’s actual investment
of time and resources into the Asset Pool.
The parties
to the Agreement have
agreed to establish the Shaanxi Longmen Iron and Steel Unified Management Supervisory Committee ("Supervisory
Committee") to ensure that the facilities and related resources are being operated and managed according to the stipulations
set forth in the Agreement. However, the Board of Directors of Longmen Joint Venture, of which the Company holds 4 out of 7 seats,
requires a simple majority vote. Therefore, the Board of Directors of Longmen Joint Venture remains the controlling decision-making
body of Longmen Joint Venture and the Asset Pool.
The Agreement constitutes an arrangement
that involves a lease which met certain of the criteria of a capital lease and therefore, the lease is accounted for as such by
Longmen Joint Venture as a capital lease. See Notes 2 “Summary of significant accounting policies”, 13 “Capital
lease obligations” and 14 “Profit sharing liability”.
Note 2 – Summary of significant
accounting policies
|
(a)
|
Basis of presentation
|
The consolidated financial statements of
the Company reflect the activities of the following major directly owned subsidiaries:
Subsidiary
|
|
Percentage
of Ownership
|
|
General Steel Investment Co., Ltd.
|
British Virgin Islands
|
|
|
100.0
|
%
|
General Steel (China) Co., Ltd. (“General Steel (China)”)
|
PRC
|
|
|
100.0
|
%
|
Baotou Steel – General Steel Special Steel Pipe Joint Venture Co., Ltd.
|
PRC
|
|
|
80.0
|
%
|
Yangpu Shengtong Investment Co., Ltd.
|
PRC
|
|
|
99.1
|
%
|
Tianjin Qiu Steel Investment Co., Ltd. (“Qiu Steel”)
|
PRC
|
|
|
98.7
|
%
|
Longmen Joint Venture
|
PRC
|
|
|
VIE/60.0
|
%
|
Maoming Hengda Steel Company, Ltd. (“Maoming Hengda”)
|
PRC
|
|
|
99.0
|
%
|
Tianwu General Steel Material Trading Co., Ltd (“Tianwu Joint Venture”)
|
PRC
|
|
|
60.0
|
%
|
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) and include the accounts of all directly, indirectly owned subsidiaries and the variable interest entity listed above.
All material intercompany transactions and balances have been eliminated in consolidation.
|
(b)
|
Principles of consolidation – subsidiaries
|
The accompanying consolidated financial
statements include the financial statements of the Company, its subsidiaries, its variable interest entity (“VIE”)
for which the Company is the ultimate primary beneficiary, and the VIE’s subsidiaries.
Subsidiaries are those entities in which
the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial
and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes
at the meeting of directors.
A VIE is an entity in which the Company,
or its subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with, ownership
of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
All significant inter-company transactions and balances have
been eliminated upon consolidation.
Prior to enter into the Unified Management
Agreement on April 29, 2011, Longmen Joint Venture had been consolidated as the Company’s 60% direct owned subsidiary. Upon
entering into the Unified Management Agreement on April 29, 2011, Longmen Joint Venture was re-evaluated by Company to determine
if Longmen Joint Venture is a VIE and if the Company is the primary beneficiary.
Based on projected profits in this entity
and future operating plans, Longmen
Joint Venture
’s equity at risk is considered insufficient
to finance its activities and therefore Longmen
Joint Venture
is considered to be a VIE.
The Company would be considered the primary
beneficiary of the VIE if it has both of the following characteristics:
|
a.
|
The power to direct the activities of the VIE that most significantly impact the VIE’s economic
performance; and
|
|
b.
|
The obligation to absorb losses of the VIE that could potentially be significant to the VIE or
the right to receive benefits from the VIE that could potentially be significant to the VIE.
|
A Supervisory Committee was formed during
the negotiation of the Unified Management Agreement. Given there is both a Supervisory Committee and a Board with respect to Longmen
Joint Venture
, the powers (rights and roles) of both bodies were considered to determine which
party has the power to direct the activities of Longmen
Joint Venture
, and by extension, whether
the Company continues to have the power to direct Longmen
Joint Venture
’s activities after
this Supervisory Committee was formed and the significant investment in plant and equipment by owners of the Longmen Joint Venture
partner, as discussed in Note 1- “Recent Developments”. The Supervisory Committee, on which the Company holds 2 out
of 4 seats, requires a ¾ majority vote, while the Board, on which the Company holds 4 out of 7 seats, requires a simple
majority vote. As the Supervisory Committee’s role is limited to supervising and monitoring management of Longmen
Joint
Venture
and in the event there is any disagreement between the Board and the Supervisory Committee, the Board prevails,
the Supervisory Committee is considered subordinate to the Board. Thus, the Board of Directors of Longmen
Joint
Venture
continues to be the controlling decision-making body with respect to Longmen
Joint Venture
.
The Company, which controls 60% of the voting rights of the Board of Directors, has control over the operations of Longmen
Joint
Venture
and as such, has the power to direct the activities of the VIE that most significantly impact Longmen
Joint
Venture
’s economic performance.
In connection with the Unified Management
Agreement, the Company, Shaanxi Coal and Shaanxi Steel may provide such support on a discretionary basis or as needed in the future.
See Note 2 item (d) Liquidity.
As discussed in Note 1 - “Background”,
the Company has the obligation to absorb losses and the rights to receive benefits based on the profit allocation as stipulated
by the Unified Management Agreement that are significant to the VIE. As both conditions are met, the Company is the primary beneficiary
of Longmen
Joint Venture
and therefore, continues to consolidate Longmen
Joint
Venture as a VIE
.
The Company believes that the Unified Management
Agreement between Longmen Joint Venture and Shaanxi Coal is in compliance with PRC law and is legally enforceable. The Board of
Directors of Longmen Joint Venture continues to be the controlling decision-making body with respect to Longmen Joint Venture.
The Company, which controls 60% of the voting rights of the Board of Directors, has control over the operations of Longmen Joint
Venture and as such, has the power to direct the activities of the VIE. However, in the PRC law, and/or
uncertainties in the PRC legal system could limit the Company’s ability to enforce the Unified Management Agreement, which
in turn, may lead to reconsideration of the VIE assessment and the potential for a different conclusion. The Company is making
ongoing assessment to determine whether Longmen Joint Venture is a VIE.
The carrying amount of the VIE and its
subsidiaries’ consolidated assets and liabilities are as follows:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Current assets
|
|
$
|
1,674,171
|
|
|
$
|
1,087,108
|
|
Plant and equipment, net
|
|
|
1,217,264
|
|
|
|
553,688
|
|
Other noncurrent assets
|
|
|
45,836
|
|
|
|
54,099
|
|
Total assets
|
|
|
2,937,271
|
|
|
|
1,694,895
|
|
Total liabilities
|
|
|
(3,131,823
|
)
|
|
|
(1,612,925
|
)
|
Net assets (net liabilities)
|
|
$
|
(194,552
|
)
|
|
$
|
81,970
|
|
VIE and its subsidiaries’ liabilities
consist of the following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short term notes payable
|
|
$
|
1,105,570
|
|
|
$
|
447,992
|
|
Accounts payable
|
|
|
401,158
|
|
|
|
230,753
|
|
Accounts payable - related parties
|
|
|
81,403
|
|
|
|
56,742
|
|
Short term loans - bank
|
|
|
209,234
|
|
|
|
260,977
|
|
Short term loans - others
|
|
|
240,684
|
|
|
|
113,328
|
|
Short term loans - related parties
|
|
|
15,710
|
|
|
|
14,548
|
|
Other payables and accrued liabilities
|
|
|
31,249
|
|
|
|
27,932
|
|
Other payables - related parties
|
|
|
20,677
|
|
|
|
2,132
|
|
Customer deposits
|
|
|
84,767
|
|
|
|
129,832
|
|
Customer deposits - related parties
|
|
|
66,932
|
|
|
|
53,624
|
|
Deposit due to sales representatives
|
|
|
22,890
|
|
|
|
52,079
|
|
Taxes payable
|
|
|
5,386
|
|
|
|
5,159
|
|
Deferred lease income - current
|
|
|
2,099
|
|
|
|
1,971
|
|
Capital lease obligations, current portion
|
|
|
25,607
|
|
|
|
-
|
|
Intercompany payable to be eliminated
|
|
|
66,021
|
|
|
|
69,216
|
|
Total current liabilities
|
|
|
2,379,387
|
|
|
|
1,466,285
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Long term loans - related parties
|
|
|
92,035
|
|
|
|
91,020
|
|
Deferred lease income - noncurrent
|
|
|
76,425
|
|
|
|
55,620
|
|
Capital lease obligations, noncurrent portion
|
|
|
280,743
|
|
|
|
-
|
|
Profit sharing liability, noncurrent
|
|
|
303,233
|
|
|
|
-
|
|
Total non-current liabilities
|
|
|
752,436
|
|
|
|
146,640
|
|
Total liabilities of consolidated VIE
|
|
$
|
3,131,823
|
|
|
$
|
1,612,925
|
|
VIE and its subsidiaries’ statements
of operations are as follows:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Sales
|
|
$
|
3,496,551
|
|
|
$
|
1,846,080
|
|
Gross profit (loss)
|
|
$
|
(86,308
|
)
|
|
$
|
32,751
|
|
Loss from operations
|
|
$
|
(161,057
|
)
|
|
$
|
(8,073
|
)
|
Net loss attributable to controlling interest
|
|
$
|
(161,897
|
)
|
|
$
|
(32,668
|
)
|
Longmen Joint Venture has two 100% owned
subsidiaries, Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”). In addition, Longmen
Joint Venture has three consolidated subsidiaries, Hualong Fire Retardant Material Co., Ltd. (“Hualong”), Hancheng
Tongxing Metallurgy Co., Ltd. (“Tongxing”) and Beijing Huatianyulong International Steel Trading Co., Ltd. (“Huatianyulong”),
in which Longmen Joint Venture does not hold a controlling interest. Hualong, Tongxing and Huatianyulong are separate legal entities
which were established in the PRC as limited liability companies and subsequently acquired by Longmen Joint Venture in June 2007,
January 2008 and July 2008, respectively. Prior to and subsequent to their acquisition by Longmen Joint Venture, these three entities
have been operating as self-sustaining integrated sets of activities and assets conducted and managed for the purpose of providing
a return to shareholders consisting of all the inputs, processes and outputs of a business. However, these three entities do not
meet the definition of variable interest entities. Further consideration was given to whether consolidation was appropriate under
the voting interest model, specifically where the power of control may exist with a lesser percentage of ownership (i.e. less than
50%), for example, by contract, lease, agreement with other stockholders or by court decree.
Hualong
Longmen Joint Venture, the single largest
shareholder, holds a 36.0% equity interest in Hualong. The other two shareholders, who own 34.67% and 29.33% respectively, assigned
their voting rights to Longmen Joint Venture in writing at the time of the acquisition of Hualong. The voting rights have been
assigned through the date Hualong ceases its business operations or the other two shareholders sell their interest in Hualong.
Hualong’s main business is to supply refractory.
Tongxing
Longmen Joint Venture holds a 22.76% equity
interest in Tongxing and hundreds of employees of Longmen Joint Venture own the remaining 77.24%. Each individual employee shareholder
comprising the remaining 77.24% assigned its voting rights to Longmen Joint Venture in writing at the time of the acquisition of
Tongxing. The voting rights have been assigned through the date Tongxing ceases its business operation or the employees sell their
interest in Tongxing. Tongxing’s business is highly reliant on Longmen Joint Venture. Tongxing’s main business is to
process rebar (See Note 24).
Huatianyulong
Longmen Joint Venture holds a 50.0% equity
interest in Huatianyulong and the other unrelated shareholder holds the remaining 50.0%. The other shareholder assigned its voting
rights to Longmen Joint Venture in writing at the time of acquisition of Huatianyulong. The voting rights have been assigned through
the date Huatianyulong ceases its business operation or the other unrelated shareholder sells its interest in Huatianyulong. Huatianyulong
mainly sells imported iron ore.
The Company has determined that it is appropriate
for Longmen Joint Venture to consolidate these three entities with appropriate recognition in the Company’s financial statements
of the non-controlling interests in each entity, beginning on the acquisition dates as these were also the effective dates of the
agreements with other stockholders granting a majority voting rights in each entity, and thereby, the power of control, to Longmen
Joint Venture.
The Company’s
accounts have been prepared
in accordance with U.S. GAAP
on a going concern basis. The going
concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed
in the financial statements. The Company’s ability to continue as a going concern depends upon aligning its sources of funding
(debt and equity) with the expenditure requirements of the Company and repayment of the short-term debt facilities as and when
they fall due.
The steel business is capital intensive
and as a normal industry practice in PRC, the Company is highly leveraged. Debt financing in the form of short term bank loans,
loans from related parties, financing sales, bank acceptance notes, and capital leases have been utilized to finance the working
capital requirements and the capital expenditures of the Company. As a result, the Company’s debt to equity ratio at of December
31, 2011 and 2010 were (19.7) and 13.8, respectively. As of December 31, 2011, the Company’s current liabilities exceed current
assets (excluding non-cash item) by $689.6 million. And as of December 31, 2012, the Company’s current liabilities exceed
current assets (excluding non-cash item) by $784.8 million.
Longmen Joint Venture, as the most important
subsidiary of the Company, accounted for majority of total sales of the Company. As such, the majority of the Company’s working
capital needs come from Longmen Joint Venture. The Company’s ability to continue as a going concern depends heavily on Longmen
Joint Venture’s operations. Longmen Joint Venture has obtained different types of financial supports, which are listed below
by category:
Line of credit
The Company received lines of credit from
seven major banks totaling $367.4 million with expiration dates ranging from December 28, 2013 to May 4, 2014.
Banks
|
|
Amount of
Line of Credit
(in millions)
|
|
|
Repayment Date
|
Bank of Jinzhou
|
|
$
|
31.7
|
|
|
January 7, 2014
|
China Merchants Bank
|
|
|
47.5
|
|
|
February 1, 2014
|
Bank of Chongqing
|
|
|
47.5
|
|
|
January 8, 2014
|
Bank of Communications
|
|
|
31.7
|
|
|
December 28, 2013*
|
Bank of Lanzhou
|
|
|
31.7
|
|
|
January 3, 2014
|
Industrial Bank
|
|
|
34.8
|
|
|
January 23, 2014
|
China Minsheng Bank
|
|
|
142.5
|
|
|
May 4, 2014
|
Total
|
|
$
|
367.4
|
|
|
|
*Management expects the line of credit
will be extended after December 28, 2013.
Vendor financing
Longmen Joint Venture signed additional
vendor financing agreements, which will provide liquidity to the Company in a total amount of $316.7 million with the following
companies:
Company
|
|
Financing period covered
|
|
Financing Amount
|
|
|
|
(in millions)
|
|
Company A – related party
|
|
January 6, 2013 – January 5, 2015
|
|
$
|
79.2
|
|
Company B – third party
|
|
January 6, 2013 – January 5, 2015
|
|
|
79.2
|
|
Company C – related party
|
|
October 1, 2012 – October 1, 2013
|
|
|
158.3
|
|
T
otal
|
|
|
|
$
|
316.7
|
|
Company A, a related party company and
Company B, a third party company, are both Longmen Joint Venture’s major coke suppliers. They have been doing business with
Longmen Joint Venture for years. Each company has signed a two-year agreement with Longmen Joint Venture which was effective on
January 6, 2013 to finance Longmen Joint Venture for its coke purchase for two-year. According to the above signed agreement, both
Company A and B will not demand any cash payments for next two years. As of the date of this report, our payables to Company A
and Company B were approximately $54.7 million and $31.1 million, respectively.
As a critical business stakeholder to the
Company’s Tianwu Joint Venture, Company C is a Fortune 500 Company. Its total iron ore sales in 2011 were over 16 million
metric tons. In October 2012, Company C signed a one year agreement which is effective and payables from October 2012 to finance
Longmen Joint Venture up to $158.3 million for its iron ore purchase. According to the agreement, during the contract period, Longmen
Joint Venture agrees to purchase iron ore from Company C in an amount not less than 3 million metric ton. Company C agrees to provide
the amount of not less than $158.3 million in iron ore for Longmen Joint Venture. During the contract term, Longmen Joint Venture
also needs to pay a monthly interest expense based on a variable interest rate equal to 110% of the one year benchmark rates of
similar loans published by the Peoples Bank of China. This agreement would also help secure Company C’s iron ore sales to
Longmen Joint Venture. The Company had not made any purchases from Company C as of the date of this report.
Customer financing
Longmen Joint
Venture also obtained customer financing support from Company D, a related party. Company D, a subsidiary of one of the largest
state-owned enterprise in its province signed a one year agreement which is effective from the October 1, 2012 to finance Longmen
Joint Venture $158.3 million by a way of payment in advance.
There is no customer financing yet as of the date of this report.
Financing sales
As part of our working capital management,
Longmen Joint Venture has entered into an additional financing sales agreement with a third party company, Company E and two 100%
owned subsidiaries of Longmen Joint Venture, named Yuxin Trading Co., Ltd. (“Yuxin”) and Yuteng Trading Co., Ltd. (“Yuteng”)(“financing
sales”) to provide liquidity to the Company in the total amount of $79.2 million.
According to the financing sales agreements,
Longmen Joint Venture sells rebar to Company E at a certain price, and Yuxin and Yuteng will purchase back the rebar from Company
E at a higher price than the original selling price from Longmen Joint Venture. Based on the contract terms, Longmen Joint Venture
is paid in advance for at least $7.9 million for the rebar sold. From December 31, 2012 till the expiration date of the contract
or December 31, 2013, the advance payment balance cannot be less than $79.2 million. The remaining financing sales balance can
be paid by installment based on Longmen Joint Venture’s goods delivery volume. As of the date of this report, our payable
to Company E was approximately $23.7 million.
Other financing
On January 7, 2013, Longmen Joint Venture
signed a payment extension agreement with each company listed below. In total, Longmen Joint Venture can get $43.5 million in financial
support from a two-year balancing payment extension granted by the following three companies:
Company
|
|
Financing period covered
|
|
Financing Amount
|
|
|
|
(in millions)
|
|
Company F – related party
|
|
January 7, 2013 – January 6, 2015
|
|
$
|
15.8
|
|
Company G – related party
|
|
January 7, 2013 – January 6, 2015
|
|
|
20.6
|
|
Company H – related party
|
|
January 7, 2013 – January 6, 2015
|
|
|
7.1
|
|
T
otal
|
|
|
|
$
|
43.5
|
|
According to the contract terms, Company
F, Company G and Company H, have agreed to grant a two year payment extension in the amounts of $15.8 million, $20.6 million and
$7.1 million respectively. As of the date of this report, our payables to Company F, Company G and Company H were approximately
$17.1 million, $20.9 million and $8.4 million, respectively.
Amount due to sales representatives
Longmen Joint Venture entered into agreements
with various entities to act as the Company’s exclusive sales agents in specified geographic areas. 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 in 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 is terminated. As of December 31, 2012, Longmen
Joint Venture has collected a total amount of $35.0 million. Historically, this amount is quite stable and we do not expect a big
fluctuation in this amount for the next twelve months from December 31, 2012 onwards.
With the financial support from the banks
and the companies above, management is of the opinion that the Company has sufficient funds to meet its future operations, working
capital requirements and debt obligations until the end of December 31, 2013. Management does not expect the result of our analysis
will be significantly different from December 31, 2012 to the date of this report. The detailed breakdown of Longmen Joint Venture’s
estimated cash flows items are listed below.
|
|
Cash inflow (outflow)
(in millions)
|
|
|
|
For the twelve months ended December 31, 2013
|
|
Current liabilities over current assets (excluding non-cash items) as of December 31, 2012
|
|
$
|
(784.8
|
)
|
Cash provided by line of credit from banks
|
|
|
367.4
|
|
Cash provided by vendor financing
|
|
|
316.7
|
|
Cash provided by customer financing
|
|
|
158.3
|
|
Cash provided by financing sales
|
|
|
79.2
|
|
Cash provided by other financing
|
|
|
43.5
|
|
Cash provided by sales representatives
|
|
|
35.0
|
|
Cash used in operations for the twelve months ended December 31, 2013
|
|
|
(30.3
|
)
|
Net projected change in cash for the twelve months ended December 31, 2013
|
|
$
|
185.0
|
|
As a result, the consolidated financial
statements for the year ended December 31, 2011 have been prepared on a going concern basis.
The preparation
of financial statements in conformity with
U.S. GAAP
requires management to make estimates and
assumptions that affect the amounts reported in the accompanying consolidated financial statements and footnotes. Significant accounting
estimates reflected in the Company’s consolidated financial statements include the fair value of financial instruments, the
useful lives of and impairment for property, plant and equipment, and potential losses on uncollectible receivables, the recognition
of contingent liabilities, the interest rate used in the financing sales, the fair value of the assets recorded under capital lease,
the present value of the net minimum lease payments of the capital lease and the fair value of the profit share liability. Actual
results could differ from these estimates
.
|
(f)
|
Concentration of risks and uncertainties
|
The Company’s operations are carried
out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s
operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North
America and Western Europe. 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.
The Company has significant exposure to
the fluctuation of raw materials and energy prices as part of its normal operations. As of December 31, 2011 and 2010, the Company
does not have any open commodity contracts to mitigate such risks.
Cash includes demand deposits in accounts
maintained with banks within the PRC, Hong Kong and the United States. Total cash (including restricted cash balances) in these
banks on December 31, 2011 and 2010 amounted to $518.2 million and $263.1 million, respectively. As of December 31, 2011,
$0.1 million cash in the bank was covered by insurance. The Company has not experienced any losses in other bank accounts and believes
it is not exposed to any risks on its cash in bank accounts.
The Company’s five major customers
are all distributors and collectively represented approximately 27.1% and 28.6% of the Company’s total sales for the years
ended December 31, 2011 and 2010, respectively. These five major customers accounted for 27.2% and 0% of total accounts receivable
as of December 31, 2011 and 2010, respectively. One of the five major customers accounted for more than 10% of total accounts receivable.
For years ended December 31, 2011 and 2010,
the Company purchased approximately 48.6% and 48.0% of its raw materials from five major suppliers, respectively. These five
vendors accounted for 16.9% and 28.3% of total accounts payable as of December 31, 2011 and 2010, respectively. None of the five
major suppliers individually accounted for more than 10% of total accounts payable.
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, the Company
has no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria
for revenue recognition are recorded as customer deposits. Sales revenue represents the invoiced value of goods, net of value-added
tax (VAT). All of the Company’s products sold in the PRC are subject to a Chinese value-added tax at a rate of 13% or 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 the finished product.
|
(h)
|
Foreign currency translation and other comprehensive income
|
The reporting currency of the Company is
the US dollar. The Company’s subsidiaries in China use the local currency, Renminbi (RMB), as their functional currency.
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. The statement of operations accounts are translated at the average translation rates and the equity accounts are translated
at historical rates.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income in the statement of 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 included in accumulated
other comprehensive income amounted to $10.2 million and $11.0 million as of December 31, 2011 and 2010, respectively. The balance
sheet amounts, with the exception of equity at December 31, 2011 and 2010 were translated at 6.37 RMB and 6.59 RMB to $1.00, respectively.
The equity accounts were stated at their historical rate. The average translation rates applied to statement of operations accounts
for the years ended December 31, 2011 and 2010 were 6.47 RMB and 6.76 RMB, respectively. Cash flows are also translated at average
translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the consolidated balance sheet.
The PRC government imposes significant
exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not
had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
|
(i)
|
Financial instruments
|
The accounting standards regarding fair
value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the
fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, short term investment,
accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the
short period of time between the origination of such instruments and their expected realization. For short term loans and notes
payable, the Company concluded the carrying values are a reasonable estimate of fair values because of the short period of time
between the origination and repayment and as their stated interest rates approximate current rates available.
The Company analyzes all financial instruments
with features of both liabilities and equity, pursuant to which the Company’s warrants were required to be recorded as a
liability at fair value and marked to market each reporting period.
The accounting standards define fair value,
establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair
value measures. 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.
|
|
·
|
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.
|
On December 13, 2007, the Company entered
into a Securities Purchase Agreement (the “Agreement”) with certain institutional investors issuing $40.0 million (“Notes”)
and 1,154,958 warrants. The warrants can be converted to common stock through May 13, 2013 at $13.51 per share, subject to customary
anti-dilution adjustments.
On December 24, 2009, the holders of the
existing warrants of 1,154,958 shares entered into an agreement with the Company that reset the exercise price from $13.51 to $5
per share and increased the number of warrants from 1,154,958 to 3,900,871.
In December 2009, the Company issued 2,777,778
warrants in connection with a registered direct offering.
The aforementioned
warrants and the conversion option embedded in the Notes meet the definition of a derivative instrument in the accounting standards.
Therefore these instruments are accounted for as derivative liabilities and recorded at their fair value as of each reporting period.
As all of the Notes were converted to common stocks by the end of 2010, the derivative instruments include only the outstanding
warrants of 6,678,649 as of December 31, 2011 and 2010. The change in the value of the derivative liabilities is charged against
or credited to income. The fair value was determined using the Cox Rubenstein Binomial Model, defined in the accounting
standard as Level 2 inputs, and recorded the change in earnings. See Note 10
– “
Convertible notes and
derivative liabilities” for the variables used in the
Cox Rubenstein Binomial model.
The Company determined the carrying value
of the profit sharing liability using Level 3 inputs by considering the present value of Longmen Joint Venture’s projected
profits/losses with a discount rate of 7.3% based on the Company’s average borrowing rate. The projected profits/losses in
Longmen Joint Venture were based upon, but not limited to, the following assumptions in the next 20 years:
|
·
|
projected selling units and growth in the steel market
|
|
·
|
projected unit selling price in the steel market
|
|
·
|
projected unit purchase cost in the coal and iron ore markets
|
|
·
|
selling and general and administrative expenses to be in line with the growth in the steel market
|
|
·
|
projected bank borrowings
|
The following table sets forth by level
within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on
a recurring basis as of December 31, 2011:
(in thousands)
|
|
Carrying Value as of December 31, 2011
|
|
|
Fair Value Measurements at December 31, 2011
Using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Derivative liabilities
|
|
$
|
10
|
|
$
|
-
|
|
$
|
10
|
$
|
-
|
|
Profit sharing liability
|
|
|
303,233
|
|
|
-
|
|
|
-
|
|
303,233
|
|
Total
|
|
$
|
303,243
|
|
$
|
-
|
|
$
|
10
|
$
|
303,233
|
|
We re-measured the fair value of the 40%
profit sharing liability as of December 31, 2011 and the difference is immaterial in comparing to the initial value.
The following table sets forth by level
within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a
recurring basis as of December 31, 2010:
(in thousands)
|
|
Carrying Value as of
December 31, 2010
|
|
|
Fair Value Measurements at December 31, 2010
Using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities
|
|
$
|
5,573
|
|
|
$
|
-
|
|
|
$
|
5,573
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the
beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis for the years ended December
31, 2011 and 2010:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
5,573
|
|
|
$
|
24,390
|
|
Initial measurement and recognition of the 40% profit sharing liability on April 29, 2011
|
|
|
280,857
|
|
|
|
-
|
|
Current period interest expense accreted
|
|
|
14,047
|
|
|
|
389
|
|
Current period payments made for principal and stated interest
|
|
|
-
|
|
|
|
(217
|
)
|
Current period note converted carrying value
|
|
|
-
|
|
|
|
(3,934
|
)
|
Change of derivative liabilities charged to earnings
|
|
|
(5,563
|
)
|
|
|
(15,055
|
)
|
Exchange rate effect
|
|
|
8,329
|
|
|
|
-
|
|
Ending balance
|
|
$
|
303,243
|
|
|
$
|
5,573
|
|
|
|
|
|
|
|
|
|
|
Except for the derivative liabilities and
profit sharing liability, the Company did not identify any other assets or liabilities that are required to be presented on the
balance sheet at fair value in accordance with the accounting standard.
Cash includes cash on hand and demand deposits
in banks with original maturities of less than three months.
The Company has notes payable outstanding
with various banks and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. The notes payable
are generally short term in nature due to its maturity period of six months or less, thus restricted cash is classified as a current
asset.
|
(l)
|
Accounts receivable and allowance for doubtful accounts
|
Accounts receivable include trade accounts
due from customers and other receivables from cash advances to employees, related parties or third parties. An allowance for doubtful
accounts is established and recorded based on managements’ assessment of potential losses based on the credit history and
relationships with the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance
is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful
accounts after management has determined that the likelihood of collection is not probable.
Notes receivable represents trade accounts
receivable due from various customers where the customers’ banks have guaranteed the payment. The notes are non-interest
bearing and normally paid within three to six months. The Company has the ability to submit request for payment to the customer’s
bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee. The Company had $92.9 million
and $49.1 million outstanding as of December 31, 2011 and 2010, respectively.
Restricted notes receivable represents
notes receivable pledged as collateral for short-term loans and short-term notes payable issued by banks. As of December 31, 2011
and 2010, restricted notes receivable amounted to $584.2 million and $240.3 million, respectively.
|
(n)
|
Advances on inventory purchase
|
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 complete its purchases on a timely basis.
This amount is refundable and bears no
interest. The Company has legally binding contracts with its vendors, which required the deposit to be returned to the Company
when the contract ends. The inventory is normally delivered within one month after the monies have been advanced. The total outstanding
amount, including advances to related parties, was $83.8 million and $30.8 million as of December 31, 2011 and 2010, respectively.
Inventories are comprised of raw materials,
work in progress and finished goods and are stated at the lower of cost or market using the weighted average cost method. Management
reviews inventories for obsolescence and cost in excess of net realizable value at least annually and records a reserve against
the inventory and additional cost of goods sold when the carrying value exceeds net realizable value. The Company had written-off
$37.5 million inventory cost for the year ended December 31, 2011.
|
(p)
|
Shipping and handling
|
Shipping and handling for raw materials
purchased are included in cost of goods sold. Shipping and handling cost incurred to ship finished products to customers are included
in selling expenses. Shipping and handling expenses for finished goods for the years ended December 31, 2011 and 2010 amounted
to $30.1 million and $9.5 million, respectively.
|
(q)
|
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 a 3%-5% residual value.
The depreciation expense on assets acquired under capital leases is included
with depreciation expense on owned assets.
The estimated useful lives are as follows:
Buildings and Improvements
|
|
10-40 Years
|
|
Machinery
|
|
10-30 Years
|
|
Machinery and equipment under capital lease
|
|
20 Years
|
|
Other equipment
|
|
5 Years
|
|
Transportation Equipment
|
|
5 Years
|
|
The Company assesses all significant leases
for purposes of classification as either operating or capital. At lease inception, if the lease meets any of the four following
criteria, the Company will classify it as a capital lease; otherwise it will be treated as an operating lease: a) transfer of ownership
to lessee at the end of the lease term, b) bargain purchase option, c) lease term is equal to 75% or more of the estimated economic
life of the leased property, d) the present value of the minimum lease payments is 90% or more of the fair value of the leased
asset.
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 betterment to buildings and equipment
are capitalized. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed
as incurred.
Long lived assets, including buildings
and improvements, equipment and intangible assets are reviewed if events and changes in circumstances indicate that its carrying
amount may not be recoverable, to determine 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 (See Note 6). The Company also re-evaluates
the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates
of useful lives.
Intangible assets of the Company are reviewed
at least annually, more often when circumstances require, determining 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 December 31, 2011, the Company expects these assets to be fully recoverable.
Land use rights
All land in the PRC is owned by the government.
However, the government grants “land use rights.” General Steel (China) acquired land use rights in 2001
for a total of $3.7 million (RMB $23.7 million). These land use rights are for 50 years and expire in 2050 and 2053. The Company
amortizes the land use rights over the twenty-year business term because its business license had a twenty-year term.
Long Steel Group contributed land use rights
for a total amount of $23.4 million (RMB $148.6 million) to the Longmen Joint Venture. The contributed land use rights are for
50 years and expire in 2048 to 2052.
Maoming Hengda has land use rights amounting
to $2.6 million (RMB $16.6 million) for 50 years that expire in 2054.
Other than the land use rights that General
Steel (China) acquired in 2001, the Company amortizes the land use rights over their 50 year term.
Entity
|
|
Original Cost
|
|
|
Expires on
|
|
|
|
(in thousands)
|
|
|
|
|
General Steel (China)
|
|
$
|
3,727
|
|
|
|
2050 & 2053
|
|
Longmen Joint Venture
|
|
$
|
23,351
|
|
|
|
2048 & 2052
|
|
Maoming Hengda
|
|
$
|
2,607
|
|
|
|
2054
|
|
Mining right
Mining rights are capitalized at cost when
acquired, including amounts associated with any value beyond proven and probable reserves, and amortized to operations as depletion
expense using the units-of-production method over the estimated proven and probable recoverable tons. In October 2011, Longmen
Joint Venture acquired iron ore mining right amounting to $2.3 million (RMB $14.9 million), which is amortized over the estimated
recoverable reserve of 4.2 million tons.
|
(s)
|
Investments in unconsolidated entities
|
Entities in which the Company has the ability
to exercise significant influence, but does not have a controlling interest, are accounted for using the equity method. Significant
influence is generally considered to exist when the Company has an ownership interest in the voting stock between 20% and 50%,
and other factors, such as representation on the Board of Directors, voting rights and the impact of commercial arrangements, are
considered in determining whether the equity method of accounting is appropriate. The Company accounts for investments with ownership
less than 20% using the cost method.
Longmen Joint Venture and its subsidiary
- Hancheng Tongxing Metallurgy Co., Ltd. (“Tongxing”) invested in several companies from 2003 to 2007. The table below
summarizes Longmen Joint Venture and Tongxing’s investment holdings as at December 31, 2011 and 2010.
Unconsolidated subsidiaries
|
|
Year
acquired
|
|
|
2011
Net investment
(In thousands)
|
|
|
Owned %
|
|
|
2010
Net investment
(In thousands)
|
|
|
Owned
%
|
Shaanxi Daxigou Mining Co., Ltd
|
|
2004
|
|
|
$
|
8,304
|
|
|
|
22.1
|
|
$
|
4,779
|
|
|
22.1
|
Shaanxi Xinglong Thermoelectric Co. Ltd.
|
|
|
2004- 2007
|
|
|
|
-
|
|
|
|
|
-
|
|
8,534
|
|
|
20.7
|
Huashan Metallurgical Equipment Co., Ltd.
|
|
|
2003
|
|
|
|
3,067
|
|
|
|
25.0
|
|
|
2,907
|
|
|
25.0
|
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd
|
|
|
2003
|
|
|
|
428
|
|
|
|
23.8
|
|
|
-
|
|
|
25.0
|
Xian Delong Powder Engineering Materials Co., Ltd.
|
|
|
2007
|
|
|
|
1,041
|
|
|
|
24.1
|
|
|
1,236
|
|
|
27.0
|
Total
|
|
|
|
|
|
$
|
12,840
|
|
|
|
|
|
$
|
17,456
|
|
|
|
Total investment
income in unconsolidated subsidiaries amounted to $3.9 million and $6.4 million for the years ended December 31, 2011 and 2010,
respectively, which is included in “Income from equity investments”
in the consolidated statements of operations
and other comprehensive income (loss)
.
On April 30,
2011, a share transfer agreement was signed with the Labor Union Trust of Long Steel Group, transferring Tongxing’s 20.7%
share of Shaanxi Xinglong (“Xinglong”) Thermoelectric Co., Ltd to the Labor Union Trust of Long Steel Group for $11.3
million
(RMB 72.9 million)
on April 30, 2011. As of April 30, 2011, our investment in Xinglong
was approximately $9.9 million and this transaction resulted in a gain of $1.4 million, which is included in “Income from
equity investments”
in the consolidated statements of operations and other comprehensive income (loss)
.
|
(t)
|
Short-term notes payable
|
Short-term notes payable are lines of credit
extended by banks. The banks in-turn issue the Company a bankers acceptance note, which can be endorsed and assigned to vendors
as payments for purchases. The notes payable are generally payable at a determinable period, generally three to six months. This
short-term note payable bears no interest and is guaranteed by the bank for its complete face value and usually matures within
three to six-month period. The banks usually require the Company to deposit a certain amount of cash at the bank as a guarantee
deposit, which is classified on the balance sheet as restricted cash.
Customer deposits represent amounts advanced
by customers on product orders. The product normally is shipped within one month after receipt of the advance payment, and the
related sale is recognized in accordance with the Company’s revenue recognition policy. As of December 31, 2011 and 2010,
customer deposits amounted to $158.8 million and $188.4 million, respectively, including deposits received from relate parties,
amounting to $68.3 million and $54.9 million, respectively.
|
(v)
|
Deferred lease income
|
To reimburse Longmen Joint Venture for
certain construction costs incurred as well as economic losses on suspended production to accommodate the construction of the new
iron and steel making facilities on behalf of Shaanxi Steel, in the fourth quarter of 2010, Shaanxi Steel reimbursed Longmen Joint
Venture for the value of assets dismantled, various site preparation costs incurred and rent under a 40-year land sub-lease that
was entered into by the parties in June 2009 (the "Longmen Sub-lease"), and for the reduced production efficiency caused
by the construction. Applying the
lease accounting guidance,
the Company has concluded that,
except for the reimbursement for site preparation costs incurred, the amount of reimbursement should be deferred and recognized
as a component of the land that was sub-leased during the construction, to be amortized to income over the remaining term of the
40-year sub-lease. Deferred lease income represents the remaining balance of compensation being deferred. See Note 12–“Deferred
lease income”.
|
(w)
|
Non-controlling Interest
|
Non-controlling
interest mainly consists of Long Steel Group’s 40% interest in Longmen Joint Venture, Baotou Iron and Steel Group’s
20% interest in Baotou Steel Pipe Joint Venture, an individuals’ 0.9% interest in Yangpu Shengtong Investment Co., Ltd. ,
two individuals’ 1.3% interest in Qiu Steel, an individual’s 1% interest in Maoming Hengda, and TME Group’s 40%
interest in Tianwu Joint Venture
. The non-controlling interests are presented in the consolidated balance sheets, separately
from equity attributable to the shareholders of the Company. Non-controlling interests in the results of the Company are presented
on the face of the consolidated statement of operations as an allocation of the total income or loss for the year between non-controlling
interest holders and the shareholders of the Company.
The Company has adopted the accounting
principles generally accepted in the United States regarding earnings per share (“EPS”), which 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 are 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.
Treasury stock consists of shares repurchased
by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method.
As of December 31, 2011, the Company had
repurchased 1,090,978 total shares of its common stock under the share repurchase plan approved by the Board of Directors in December
2010.
The Company accounts for income taxes in
accordance with the accounting principles generally accepted in the United States for income taxes. Under the asset and liability
method as required by this accounting standard, the recognition of deferred income tax liabilities and assets for the expected
future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities.
Provision for income taxes consists of taxes currently due plus deferred taxes. The accounting principles generally accepted in
the United States for accounting for uncertainty in income taxes clarify the accounting and disclosure for uncertain tax positions. A
tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit
that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not”
test, no tax benefit is recorded.
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 consolidated 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. Deferred tax assets are
recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences
can be utilized. Deferred tax is calculated using 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 income taxes are recognized for
temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net
operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant
taxing authorities.
Income tax returns for the year prior to
2009 are no longer subject to examination by tax authorities.
|
(aa)
|
Share-based compensation
|
The Company accounts for equity instruments
issued in exchange for the receipt of goods or services from other than employees in accordance with the accounting standards regarding
accounting for stock-based compensation and accounting for equity instruments that are issued to other than employees for acquiring
or in conjunction with selling goods or services. Costs are measured at the estimated fair market value of the consideration received
or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments
issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of
performance by the provider of goods or services as defined by these accounting standards. In the case of equity instruments issued
to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
|
(bb)
|
Comprehensive income
|
In June 2011, the Company adopted the revised
guidance issued by the FASB on the presentation of comprehensive income that requires an entity to present reclassification adjustments
on the face of the financial statements from other comprehensive income to net income and eliminates the option of presenting the
components of other comprehensive income as part of the statement of changes in stockholders’ equity.
|
(cc)
|
Recently issued accounting pronouncements
|
In May 2011,
the Financial Accounting Standards Board (“FASB”) issued revised guidance on the “Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The revised guidance specifies how to measure
fair value and improve the comparability of fair value measurements presented and disclosed in financial statements prepared in
accordance with U.S. GAAP and IFRSs, not requiring additional fair value measurements and not intending to establish valuation
standards or affect valuation practices outside of financial reporting. The revised guidance is effective for all reporting entities
that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a
reporting entity’s shareholders’ equity in the financial statements during interim and annual periods beginning after
December 15, 2011. The adoption of this guidance will not have a material impact on its consolidated financial statements
.
In December 2011, the FASB issued authoritative
guidance on disclosures about offsetting assets and liabilities. The update requires entities to disclose information about offsetting
and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring
improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current
literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset
in accordance with current literature. This guidance is effective for fiscal years, and interim periods within those years, beginning
on or after January 1, 2013. The Company does not anticipate that the adoption of this guidance will have a material impact on
the consolidated financial statements.
In December 2011, the FASB issued a deferral
of the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income.
The amendments in this update defer those changes in the guidance that relate to the presentation of reclassifications out of accumulated
other comprehensive income on the components of net income and other comprehensive income for all periods presented. The amendments
are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption
of this guidance will have a material impact on the consolidated financial statements.
Certain prior year amounts have been reclassified
to conform to the current year presentation. These reclassifications have no effect on the accompanying consolidated statements
of operations and cash flows
.
Note 3 – Accounts receivable (including
related parties), net
Accounts receivable, including related
party receivables, net of allowance for doubtful accounts consists of the following:
|
|
December 31, 2011
|
|
|
December
31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Accounts receivable
|
|
$
|
14,624
|
|
|
$
|
18,796
|
|
Less: allowance for doubtful accounts
|
|
|
(2,023
|
)
|
|
|
(296
|
)
|
Accounts receivable – related parties
|
|
|
20,593
|
|
|
|
4,160
|
|
Net accounts receivable
|
|
$
|
33,194
|
|
|
$
|
22,660
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
296
|
|
|
$
|
490
|
|
Charge to expense
|
|
|
1,972
|
|
|
|
174
|
|
Less: write-off
|
|
|
(284
|
)
|
|
|
(386
|
)
|
Exchange rate effect
|
|
|
39
|
|
|
|
18
|
|
Ending balance
|
|
$
|
2,023
|
|
|
$
|
296
|
|
Note 4 – Inventories
Inventories consist of the following:
|
|
December 31, 2011
|
|
|
December 31,
2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Supplies
|
|
$
|
20,869
|
|
|
$
|
13,733
|
|
Raw materials
|
|
|
240,898
|
|
|
|
381,178
|
|
Finished goods
|
|
|
35,962
|
|
|
|
58,725
|
|
Total inventories
|
|
$
|
297,729
|
|
|
$
|
453,636
|
|
Raw materials consist primarily of iron
ore and coke at Longmen Joint Venture. The cost of finished goods includes direct costs of raw materials as well as direct labor
used in production. Indirect production costs at normal capacity such as utilities and indirect labor related to production such
as assembling, shipping and handling costs for purchasing are also included in the cost of inventory.
The Company values its inventory at the
lower of cost or market, determined on a weighted average method, or net realizable value. For the years ended December 31, 2011
and 2010,
the Company had written-off $37.5 million and $1.1 million inventory cost, which was included
in “Total cost of goods sold” in the consolidated statements of operations and other comprehensive income (loss).
Note 5– Advances on inventory
purchases
Advances on inventory purchases are monies
deposited or advanced to outside vendors or related parties on future inventory 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 complete its purchases on a timely
basis.
This amount is refundable and bears no
interest. The Company has legally binding contracts with its vendors, which require the deposit to be returned to the Company or
netted against accounts payable due to its vendors to the extent there are unpaid balances when the contract ends. The inventory
is normally delivered within one month after the monies have been advanced. The total outstanding amount, including advances to
related parties, was $83.8 million and $30.8 million as of December 31, 2011 and 2010, respectively.
Note 6 – Plant and equipment,
net
Plant and equipment consist of the following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Buildings and improvements
|
|
$
|
183,343
|
|
|
$
|
116,294
|
|
Machinery
|
|
|
626,978
|
|
|
|
502,958
|
|
Machinery under capital lease
|
|
|
581,413
|
|
|
|
-
|
|
Transportation and other equipment
|
|
|
18,132
|
|
|
|
13,253
|
|
Construction in progress
|
|
|
8,203
|
|
|
|
65,749
|
|
Subtotal
|
|
|
1,418,069
|
|
|
|
698,254
|
|
Less: accumulated depreciation
|
|
|
(155,318
|
)
|
|
|
(95,642
|
)
|
Less: impairment of long-lived assets
|
|
|
(5,515
|
)
|
|
|
-
|
|
Total
|
|
$
|
1,257,236
|
|
|
$
|
602,612
|
|
Construction in progress consisted of the
following as of December 31, 2011:
Construction in progress
|
|
Value
|
|
Completion
|
description
|
|
(In thousands)
|
|
date
|
Thousands tons gas tank piping transformation
|
|
$
|
629
|
|
March 2012
|
Sintering machine transformation
|
|
|
470
|
|
January 2012
|
Inventory warehouse
|
|
|
211
|
|
February 2012
|
Electricity dispatch center
|
|
|
158
|
|
June 2012
|
Steelmaking system transformation
|
|
|
96
|
|
June 2012
|
Project materials
|
|
|
5,759
|
|
|
Others
|
|
|
880
|
|
|
Total
|
|
$
|
8,203
|
|
|
The Group is obligated under a capital
lease for new iron and steel making facilities, including one sintering machine, two converters, two blast furnaces and some auxiliary
systems that expire on April 30, 2031. The carrying value of assets acquired under the capital lease consists of the following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Machinery
|
|
$
|
581,413
|
|
|
$
|
-
|
|
Subtotal
|
|
|
581,413
|
|
|
|
-
|
|
Less:
accumulated depreciation
|
|
|
(18,411
|
)
|
|
|
-
|
|
Carrying value of leased assets
|
|
$
|
563,002
|
|
|
$
|
-
|
|
Long lived assets,
including construction in progress are reviewed if events and changes in circumstances indicate that its carrying amount may not
be recoverable, to determine whether their carrying value has become impaired.
General Steel (China) leases facility to
Tianjin Daqiuzhuang Steel Plates Co., Ltd. (“Lessee”) including approximately 776,078 square feet of workshops, land,
equipment and other facilities. The term of the original lease is from January 1, 2010 to December 31, 2011 and the monthly base
rental rate due to General Steel (China) is approximately $0.3 million (RMB 1.7 million). On July 28, 2011, General Steel (China)
signed a supplemental agreement with the lessee to extend the lease for an additional five years to December 31, 2016. However,
due to current steel market conditions, the lessee has informed the Company that they did not plan to lease the assets after the
end of 2012 and will terminate the supplemental agreement early. There was no penalty for early termination of the lease. General
Steel (China) currently does not have plans to lease the facility to another company and as such, a write-down in the carrying
value of property, plant and equipment in relation to this event has been assessed and an impairment amount of $5.4 million (RMB
35.1 million) was in the selling, general and administrative expenses.
Due to significant downturn in
steel prices in the fourth quarter of 2011and the associated negative impact on the Company’s gross profit and
operating loss, the Company assessed the recoverability of all of its remaining long lived assets. Such assessment did not
result in any other impairment charges for the year ended December 31, 2011.
The Company determined that
the construction in progress in Maoming Hengda was impaired as of June 30, 2010. For the year ended December 31, 2010, $1.7
million construction-in-progress has been written off and included in selling, general and administrative expenses.
Depreciation expenses for the years ended
December 31, 2011 and 2010 amounted to $56.4 million and $40.1 million, respectively. These amounts include depreciation of assets
held under capital leases for the years ended December 31, 2011 and 2010, which amounted to $18.1 million and $0, respectively.
Note 7 – Intangible assets, net
Intangible assets consist of the following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Land use rights
|
|
$
|
29,685
|
|
|
$
|
28,462
|
|
Mining right
|
|
|
2,338
|
|
|
|
-
|
|
Software
|
|
|
685
|
|
|
|
660
|
|
Subtotal
|
|
|
32,708
|
|
|
|
29,122
|
|
Less:
|
|
|
|
|
|
|
|
|
Accumulated amortization – land use rights
|
|
|
(6,442
|
)
|
|
|
(5,316
|
)
|
Accumulated amortization – mining right
|
|
|
(822
|
)
|
|
|
-
|
|
Accumulated amortization – software
|
|
|
(301
|
)
|
|
|
(134
|
)
|
Subtotal
|
|
|
(7,565
|
)
|
|
|
(5,450
|
)
|
Intangible assets, net
|
|
$
|
25,143
|
|
|
$
|
23,672
|
|
The gross amount of the intangible assets
amounted to $32.7 million and $29.1 million as of December 31, 2011 and 2010, respectively. The remaining weighted average amortization
period is 35.3 years as of December 31, 2011.
Total amortization expense for the years
ended December 31, 2011 and 2010 amounted to $1.1 million and $1.1 million, respectively.
Total depletion expense for the years ended
December 31, 2011 and 2010 amounted to $0.8 million and $0, respectively.
The estimated aggregate amortization and
depletion expenses for each of the five succeeding years is as follows:
Years ended
|
|
Estimated
amortization and depletion expenses
|
|
|
Gross carrying
amount
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
December 31, 2012
|
|
$
|
1,922
|
|
|
|
23,221
|
|
December 31, 2013
|
|
|
1,922
|
|
|
|
21,299
|
|
December 31, 2014
|
|
|
1,922
|
|
|
|
19,377
|
|
December 31, 2015
|
|
|
1,922
|
|
|
|
17,455
|
|
December 31, 2016
|
|
|
1,922
|
|
|
|
15,533
|
|
Thereafter
|
|
|
15,533
|
|
|
|
-
|
|
Total
|
|
$
|
25,143
|
|
|
|
|
|
Note 8 – Debt
Short-term notes payable
Short-term notes payable are lines of credit
extended by banks. Banks in turn issue the Company a bank acceptance note, which can be endorsed and assigned to vendors as payments
for purchases. The notes payable are generally payable within three to six months. This short-term note payable is guaranteed by
the bank for its complete face value. The banks do not charge interest on these notes, but usually charge a transaction fee of
0.05% of the notes value. In addition, the banks usually require the Company to deposit either a certain amount of cash at the
bank as a guarantee deposit, which is classified on the balance sheet as restricted cash, or provide notes receivable as security,
which are classified on the balance sheet as restricted notes receivable. Restricted cash as a guarantee for the notes payable
amounted to $363.3 million and $167.7 million as of December 31, 2011 and 2010, respectively. Restricted notes receivable as a
guarantee for the notes payable amounted to $451.1 million and $159.3 million as of December 31, 2011 and 2010, respectively.
The Company had the following short-term
notes payable as of:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
General Steel (China): Notes payable to various banks in China, due June 2012. Restricted cash required of $7.9 million and $11.7 million as of December 31, 2011 and 2010, respectively; guaranteed by third parties. These notes payable were either repaid or renewed subsequently on the due dates.
|
|
$
|
7,934
|
|
|
$
|
21,541
|
|
Longmen Joint Venture: Notes payable to various banks in China, due various dates from January to June 2012. $355.4 million restricted cash and $451.1 million notes receivable are secured for notes payable as of December 31, 2011, and comparatively $150.7 restricted cash and $159.3 million notes receivable secured as of December 31, 2010, respectively; some notes are further guaranteed by third parties while others are secured by equipment and land use rights. These notes payable were either repaid or renewed subsequently on the due dates.
|
|
|
1,105,570
|
|
|
|
447,992
|
|
Bao Tou: Notes payable to various banks in China, due in April 2011. Restricted cash required of $5.3 million as of December 31, 2010, guaranteed by third parties.
|
|
|
-
|
|
|
|
10,619
|
|
Total short-term notes payable
|
|
$
|
1,113,504
|
|
|
$
|
480,152
|
|
Short-term loans
Short-term loans represent amounts due
to various banks, other companies and individuals, including related parties, normally due within one year. The principal of the
loans are due at maturity but can be renewed at the bank’s option. Accrued interest is due either monthly or quarterly.
Short term loans due to banks, related
parties and other parties consisted of the following as of:
Due to banks
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
General Steel (China): Loans from various banks in China, due various dates from January to December 2012. Weighted average interest rate was 7.5% per annum; some are guaranteed by third parties while others are secured by equipment and inventory. These loans were either repaid or renewed subsequently on the due dates.
|
|
$
|
43,149
|
|
|
$
|
24,220
|
|
Longmen Joint Venture: Loans from various banks in China, due various dates from January to December 2012. Weighted average interest rate was 8.3% per annum; some are guaranteed by third parties, restricted cash or notes receivables while others are secured by equipment, buildings, land use right and inventory. These loans were either repaid or renewed subsequently on the due dates.
|
|
|
209,234
|
|
|
|
260,978
|
|
Tianwu: Loans from Industrial and Commercial Bank of China Limited, due date various from March to August 2012
. Interest rate
was 5%
additional to standard bank interest rate, and
secured by accounts receivables
. These loans were either repaid or renewed subsequently on the due dates
|
|
|
1,571
|
|
|
|
-
|
|
Total short-term loans - bank
|
|
$
|
253,954
|
|
|
$
|
285,198
|
|
As of December
31, 2011 and December 31, 2010, the Company
has not met its financial covenant stipulated by certain loan agreements related
to the Company’s debt to asset ratio. Based on the financial covenant, the Company should keep its debt to asset ratio below
85%, however, as of December 31, 2011 and 2010, the Company's debt to asset ratio was 105.4% and 93.2%, respectively.
Furthermore, the Company is party to a
loan agreement with a cross default clause whereby any breach of loan covenants will automatically result in default of the loan.
The outstanding balances of the short term loans affected by the above breach of covenant and cross default as of December 31,
2011 and December 31, 2010 were $12.6 million and $12.1 million, respectively. According to the Company’s short term loan
agreements, the banks have the rights to request for more collateral or additional guarantees if the breach of covenant is not
remedied or request early repayment of the loan if the Company does not cure such breach within a certain period of time. As of
the date of this report, the Company has not received any notice from the banks to request more collateral, additional guarantees
or early repayment of the short term loans due to the breach of covenant.
Due to unrelated parties
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Longmen Joint Venture: Loans from various unrelated companies and individuals, due various dates from January to June 2012, and weighted average interest rate was 6.2% per annum. These loans were either repaid or renewed subsequently on the due dates.
|
|
$
|
143,102
|
|
|
$
|
75,380
|
|
Longmen Joint Venture: Loans from financing sales.
|
|
|
97,583
|
|
|
|
37,947
|
|
Maoming Hengda: Loans from one unrelated parties and one related party, due on demand, none interest bearing.
|
|
|
5,972
|
|
|
|
14,385
|
|
Total short-term loans – others
|
|
$
|
246,657
|
|
|
$
|
127,712
|
|
The Company had various loans from unrelated
companies amounting to $246.7 million and $127.7 million as of December 31, 2011 and 2010, respectively. Of the $246.7 million,
$6.0 million loans carry no interest, $97.6 million of financing sales are subject to interest rates ranging between 0.6% and 3.2%,
and the remaining $143.1 million are subject to interest rates ranging from 3.4% to 9.0%. All short term loans from unrelated companies
are payable on demand and unsecured.
As part of its
working capital management, Longmen Joint Venture has entered into a number of sale and purchase back contracts ("contracts")
with third party companies and Yuxin and Yuteng. According to the contracts, Longmen
Joint Venture
sells rebar to the third party companies at a certain price, and within the same month, Yuxin and Yuteng will purchase back the
rebar from the third party companies at a price of 0.6% to 3.2% higher than the original selling price from Longmen
Joint
Venture
. Based on the contract terms, Longmen
Joint Venture
is paid
in advance for the rebar sold to the third party companies and Yuxin and Yuteng are given a credit period of several months to
one year from the third party companies. There is no physical movement of the inventory during the sale and purchase back arrangement.
The margin of 0.6% to 3.2% is determined by reference to the bank loan interest rates at the time when the contracts are entered
into, plus an estimated premium based on the financing sale amount, which represents the interest charged by the third party companies
for financing Longmen
Joint Venture
through the above sale and purchase back arrangement. The
revenue and cost of goods sold arising from the above transactions are eliminated and the incremental amounts paid by Yuxin and
Yuteng to purchase back the goods are treated as financing costs in the consolidated financial statements.
Total financing sales for the years ended
December 31, 2011 and 2010 amounted to $998.9 million and $761.8 million, respectively, which are eliminated in the Company’s
consolidated financial statements. The financial cost related to financing sales for the years ended December 31, 2011 and 2010,
accounted to $10.7 million and $7.0 million, respectively.
Short term loans due to related parties
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Longmen Joint Venture: Loans from Tianjin Hengying Trading Co., Ltd, due in April 2012, and
interest rate was 5.2% per annum. This loan was repaid subsequently on the due date.
|
|
$
|
15,710
|
|
|
$
|
-
|
|
Longmen Joint Venture: Loans from Shaanxi Steel, due July 2011, and interest rate was 5.6% per annum.
|
|
|
-
|
|
|
|
14,548
|
|
Total short-term loans - related parties
|
|
$
|
15,710
|
|
|
$
|
14,548
|
|
Long-term loans due to related parties
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Longmen Joint Venture: Loans from Shaanxi Steel Group, due various dates from July 2013 to
November 2015 and interest rates 5.6% - 5.9% per annum
|
|
$
|
92,035
|
|
|
$
|
91,020
|
|
Total long-term loans - related parties
|
|
$
|
92,035
|
|
|
$
|
91,020
|
|
As of December 31, 2011, the total assets
used by the company as collateral were $20.3 million for the aforementioned debts.
Total interest expense, net of capitalized
interest, amounted to $114.9 million and $51.3 million for the years ended December 31, 2011 and 2010, respectively.
Capitalized interest amounted to $3.0 million
and $2.1 million for the years ended December 31, 2011 and 2010, respectively.
Note 9 – Deposits due to sales
representatives
Longmen Joint Venture entered into agreements
with various entities to act as the Company’s exclusive sales agent in a specified geographic 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 in a specified area and at discounted prices on products they order. These deposits bear
no interest and are required to be returned to the sales agent once the agreement is terminated. The Company had $23.8 million
and $52.1 million in deposits due to sales representatives, including deposits due to related parties, as of December 31, 2011
and 2010, respectively.
Note 10 – Convertible notes and derivative liabilities
The Company has 3,900,871 warrants outstanding
in connection with the $40 million convertible notes issued in 2007 and 2,777,778 warrants outstanding in connection with a registered
direct offering in 2009. The aforementioned warrants met the definition of a derivative instrument in the accounting standards
and are recorded at their fair value on each reporting date. The change in the value of the derivative liabilities is charged against
or credited to income each period.
The fair value of the warrants as of December
31, 2011 was calculated using the Cox Rubenstein Binomial model based on the following variables:
|
|
|
2007 Warrants
|
|
2009 Warrants
|
|
Expected volatility
|
|
|
55%
|
|
50%
|
|
Expected dividend yield
|
|
|
0%
|
|
0%
|
|
Risk-free interest rate
|
|
|
0.17%
|
|
0.24%
|
|
Expected lives
|
|
|
1.37 years
|
|
0.48 years
|
|
Market price
|
|
|
$0.99
|
|
$0.99
|
|
Strike price
|
|
|
$5.00
|
|
$5.00
|
|
As of December 31, 2011 and 2010, derivative liabilities amounted
to $10.2 thousand and $5.6 million, respectively.
The Company has the following warrants outstanding:
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
|
6,678,649
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding as of December 31, 2010
|
|
|
6,678,649
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding as of December 31, 2011
|
|
|
6,678,649
|
|
|
Exercise Price
|
|
|
Quantity
|
|
Remaining Contractual Life
(Years)
|
Outstanding and exercisable warrants issued in 2007
|
$
|
5.00
|
|
|
|
3,900,871
|
|
1.37
|
Outstanding and exercisable warrants issued in 2009
|
$
|
5.00
|
|
|
|
2,777,778
|
|
0.48
|
Note 11 - Supplemental disclosure of
cash flow information
Interest paid, net of capitalized,
amounted to $22.5 million and $20.9 million for the years ended December 31, 2011 and 2010, respectively.
The Company paid income tax amounted to $0.8 million
and $1.8 million for the years ended December 31, 2011 and 2010, respectively.
For the year ended December 31, 2011, the
Company recognized $0.3 million of non-operating income that has not been collected. The unpaid amount was included in the other
receivables in the consolidated balance sheets.
For the years ended December 31, 2011 and
2010, the Company recognized $13.8 million and $35.6 million, respectively, of deferred lease income in related to other receivables
– related parties that have not been collected.
The Company
capitalized all the fixed assets constructed by Shaanxi Steel for a price of $572.5 million through a 20 year capital lease starting
from April 29, 2011 upon the inception of the Unified Management Agreement
. See Note 13 – “Capital lease obligations”.
During the year ended December 31, 2011,
the Company issued 974,571 shares of common stock for repayment of debt of $4.8 million.
On April 30,
2011, a share transfer agreement was signed with the Labor Union Trust of Shaanxi Long Steel Group, transferring Tongxing’s
20.7% share of Shaanxi Xinglong (“Xinglong”) Thermoelectric Co., Ltd to the Labor Union Trust of Shaanxi Long Steel
Group for $11.3 million on April 30, 2011. This transaction resulted in a gain of $1.4 million, which is included in “Income
from equity investments”
in the consolidated statements of operations and other comprehensive income (loss)
.
As of December 31, 2011, the unpaid amount of $11.4 million was included in the other receivable – related parties.
Note 12 - Deferred lease income
As explained in Note 2(v)
- “Deferred lease income”, to compensate the Group for costs and economic losses incurred during construction
of the new iron and steel making facilities owned by Shaanxi Steel, Shaanxi Steel reimbursed Longmen Joint Venture $11.0
million (RMB 70.1 million) in the fourth quarter of 2010 for the value of assets dismantled, $5.8 million (RMB 38.1 million)
for various site preparation costs incurred by Longmen Joint Venture and rent under a 40-year property sub-lease that was
entered into by the parties in June 2009 (the "Longmen Sub-lease"), and $28.7 million (RMB 183.1 million) for the
reduced production efficiency caused by the construction. In addition, in 2010 and 2011, Shaanxi Steel reimbursed Longmen
Joint Venture $14.1 million (RMB 89.5 million) and $14.0 million (RMB 89.3 million), respectively, for trial production costs
related to the new equipment.
During the period from June 2010 to
March 2011, as construction progressed and certain of the assets came online, Longmen Joint Venture used the assets free of
charge to produce saleable units of steel products during this period. As such, the cost of using these assets and therefore
the fair value of the free rent received was imputed with reference to what the depreciation charge would have been on these
assets had they been owned or under capital lease to Longmen Joint Venture during the free use period. This cost of $6.9
million (RMB 43.9 million) each year were deferred and will be recognized over the term of the land sub-lease similar to the
other charges and credits related to the construction of these assets.
The deferred lease income is amortized to income over the remaining term of
the 40-year land sub-lease. For the years ended December 31, 2011 and 2010, the Company recognized lease income of $2.0
million and $0.9 million, respectively. As of December 31, 2011 and 2010, the balance of deferred lease income amounted to
$78.5 million and $57.6 million, respectively, of which $2.1 million and $2.0 million represents balance to be amortized
within one year.
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
57,591
|
|
|
$
|
16,487
|
|
Add: Reimbursement for dismantled assets
|
|
|
-
|
|
|
|
568
|
|
Add: Reimbursement for loss of efficiency
|
|
|
-
|
|
|
|
20,676
|
|
Add: Reimbursement for trial production cost
|
|
|
14,042
|
|
|
|
13,584
|
|
Add: Deferred depreciation cost during free use period
|
|
|
6,904
|
|
|
|
6,656
|
|
Less: Lease income realized
|
|
|
(2,008
|
)
|
|
|
(943
|
)
|
Exchange rate effect
|
|
|
1,995
|
|
|
|
563
|
|
Ending balance
|
|
|
78,524
|
|
|
|
57,591
|
|
Ending balance – current portion
|
|
|
(2,099
|
)
|
|
|
(1,971
|
)
|
Ending balance - noncurrent portion
|
|
$
|
76,425
|
|
|
$
|
55,620
|
|
Note 13 - Capital lease obligations
As explained in Note 1- “Background”,
on April 29, 2011, the Company’s subsidiary, Longmen Joint Venture entered into a Unified Management Agreement with Shaanxi
Steel and Shaanxi Coal under which Longmen Joint Venture uses new iron and steel making facilities including one sintering machine,
two converters, two blast furnaces and other auxiliary systems constructed by Shaanxi Steel. As the 20-year term of the agreement
exceeds 75% of the assets’ useful lives, this arrangement is accounted for as a capital lease. The ongoing lease payments
are comprised of two elements: (1) a monthly payment based on Shaanxi Steel’s cost to construct the assets of $2.3 million
(RMB14.6 million) to be paid over the term of the Unified Management Agreement of 20 years and (2) 40% of any remaining pre-tax
profits from the Asset Pool which includes Longmen Joint Venture and the newly constructed iron and steel making facilities. The
profit sharing component does not meet the definition of contingent rent because it is based on future revenue and is therefore
considered part of the financing for the capital leased assets which is related to the Unified Management Agreement. For purposes
of determining the value of the leased asset and obligation at the inception of the lease, the lease liability is then reduced
by the value of the profit sharing component, which is recognized as a separate financial liability carried at fair value. See
Note 14 – “Profit sharing liability”.
Presented below is a schedule of estimated
minimum lease payments on the capital lease obligation as well as payments for the profit sharing liability for the next five years
as of December 31, 2011:
(in thousands)
|
|
Capital Lease Obligation
Minimum Lease Payments
|
|
|
Capital Lease Obligation
Profit (Loss) Sharing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012
|
|
$
|
46,029
|
|
|
$
|
-
|
|
|
$
|
46,029
|
|
Year ended December 31, 2013
|
|
|
27,617
|
|
|
|
-
|
|
|
|
27,617
|
|
Year ended December 31, 2014
|
|
|
27,617
|
|
|
|
-
|
|
|
|
27,617
|
|
Year ended December 31, 2015
|
|
|
27,617
|
|
|
|
-
|
|
|
|
27,617
|
|
Year ended December 31, 2016
|
|
|
27,617
|
|
|
|
-
|
|
|
|
27,617
|
|
Thereafter
|
|
|
395,845
|
|
|
|
854,157
|
|
|
|
1,250,002
|
|
Total minimum lease payments
|
|
|
552,342
|
|
|
|
854,157
|
|
|
|
1,406,499
|
|
Less:
amounts representing interest
|
|
|
(245,992
|
)
|
|
|
(550,924
|
)
|
|
|
(796,916
|
)
|
Ending balance
|
|
$
|
306,350
|
|
|
$
|
303,233
|
|
|
$
|
609,583
|
|
Longmen Joint Venture does not expect to
make payments on the profit sharing payment until year 2021 when Longmen Joint Venture will start to generating accumulated profit
after recovering from the
previous years’ losses.
Interest expense for the years ended December
31, 2011 on the capital lease obligations are $27.7 million and $18.6 million on the minimum lease payment and profit sharing liability,
respectively.
As of December 31, 2011 and 2010, the amount
payable to Shaanxi Steel was approximately $18.4 million and $0, respectively, and was included in the current portion of capital
lease obligation
.
Note 14 –
Profit
sharing liability
The profit sharing liability is recognized
initially at its estimated fair value at the lease commencement date and included in the initial measurement and recognition of
the capital lease in addition to the fixed payment component of the minimum lease payments. Subsequently, this financial instrument
is accounted for separately from the lease accounting (Note 13- “Capital lease obligations”). The initial fair value
of the expected payments under the profit sharing component of the Unified Management Agreement is amortized over the term of the
agreement using the effective interest method. The value of the profit sharing liability will be reassessed each reporting period
with any change in fair value accounted for on a prospective basis.
Based on the performance of the Asset Pool,
no profit sharing payment was made for the year ended December 31, 2011. Payments to Shaanxi Steel for the profit sharing are made
based on net cumulative profits.
Note 15 – Other income (expense)
Gain on debt settlement
On June 16, 2011, the Company and Maoming
Hengda entered into a Debt Repayment Agreement with Guangzhou Hengda Industrial Group Ltd. (“Guangzhou Hengda”), an
unrelated party, and its sole shareholder Ms Ding Yumei whereby the Company issued 974,571 shares of its common stock (the “Shares”)
to Ms Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to partially repay the outstanding balance due to Guangzhou
Hengda by $4.8 million. The Company recorded paid-in-capital based on the market price of its common stock on the date of debt
settlement at $1.48 per share, totaling $1.4 million and a gain from debt settlement totaling $3.4 million for the year ended December
31, 2011, respectively, which was the difference between the amount of debt extinguished and the fair value of the Shares issued
in the settlement.
Realized income from future contracts
On May 2011, the Company entered
a forward contract with one unrelated party to minimize the economic impact of price fluctuations of steel rebar.
The contract was not material and only represent less than 1% of the company’s anticipated rebar sales in 2011. The
Company has not designated the derivative as a hedging instrument, and, as such, includes the realized gain or loss in
other income (expense). For the year ended December 31, 2011, the Company realized $0.4 million gain on these contracts.
There was no cash deposit held in the brokerage account and no trading financial assets and no open contracts held as of
December 31, 2011. There are no required minimum investment amount and no specific contract period requirement on this future
brokerage contract. The contract amount may be withdrawn at any time.
On May 2010, the Company entered a
forward contract with one unrelated party to minimize the economic impact of price fluctuations of steel rebar. The contract
was not material and only represent less than 1% of the Company’s anticipated rebar sales in 2010. The Company has not
designated the derivative as a hedging instrument, and, as such, includes the realized gain or loss in other income
(expense). For the year ended December 31, 2010, the Company realized $1.4 million gain on these contracts.
There was no cash deposit held in the brokerage account and no trading financial assets and no open contacts held as of
December 31, 2010. There are no required minimum investment amount and no specific contract period requirement on this future
brokerage contract. The contract amount may be withdrawn at any time.
Lease income
The deferred lease income from the reimbursement
from Shaanxi Steel for the net book value of the fixed assets that were demolished and for the inefficiency costs caused by the
construction and loss incurred in the beginning stages of the system production is amortized to income over the remaining sub-lease
term. For the years ended December 31, 2011 and 2010, the Company recognized deferred lease income of $2.0 million and $0.9 million,
respectively.
Note 16 – Taxes
Income tax
Significant components of the provision
for income taxes on earnings and deferred taxes on net operating losses from operations for the years ended December 31, 2011 and
2010 are as follows:
(In thousands)
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Current
|
|
$
|
175
|
|
|
$
|
1,267
|
|
Deferred
|
|
|
15,419
|
|
|
|
(10,049
|
)
|
Total provision (benefit) for income taxes
|
|
$
|
15,594
|
|
|
$
|
(8,782
|
)
|
Under the Income Tax Laws of the PRC, General
Steel (China), Baotou Steel Pipe Joint Venture (located in Inner Mongolia province), Maoming Hengda (located in Guangdong province)
and Tianwu Joint Venture (located in Tianjin Port Free Trade Zone) are subject to income tax at a rate of 25%.
Longmen Joint Venture is located in the
Mid-West region of China and as such, qualifies for the “Go-West” tax rate of 15% promulgated by the government. In
2010, the Chinese government announced that the “Go-West” tax initiative would be extended for 10 years, and thus,
the preferential tax rate of 15% will be in effect until 2020. This special tax treatment for Longmen Joint Venture will be evaluated
on a year-to-year basis by the local tax bureau.
The estimated tax savings (costs) due to
the preferential tax rate for the years ended December 31, 2011 and 2010 are $0 and $(6.1) million, respectively. The net effect
on earnings per share if the preferential tax rate had not been applied would increase loss per share by $ 0 and $0.11 for the
years ended December 31, 2011 and 2010, respectively.
The following table reconciles the U.S.
statutory rates to the Company’s effective tax rate for the years ended December 31, 2011 and 2010 are as follows:
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
U.S. Statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
China income taxes
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Current year tax loss that were not recognized as deferred tax assets
|
|
|
(27.3
|
)%
|
|
|
2.3
|
%
|
Effect of deferred tax assets valuation allowance
|
|
|
(17.1
|
)%
|
|
|
-
|
|
Effect of different tax rate of subsidiaries operating in other jurisdictions
|
|
|
13.6
|
%
|
|
|
(12.3
|
)%
|
Total provision for income taxes
|
|
|
(5.8
|
)%
|
|
|
15.0
|
%
|
Deferred taxes assets – China
According to
Chinese tax regulations, net operating losses can be carried forward to offset operating income for the next five years. The Group’s
losses carried forward of $309.0 million will begin to expire in 2014. Originally, management believed the deferred tax asset is
fully realizable.
After the filing of the 2010 Form 10-K/A, management reevaluated the Company's
future operating forecast based on the current steel market condition. The Chinese government recently announced several policies
to curb the real estate price increases across the country which led to a slowdown in demand for construction steel products. Additionally
due to the continued global economic slowdown and the overcapacity issues in China's steel market, management expected there would
be a sustained increase in margin pressure in the next five years until all the existing but outdated steel capacity across the
whole industry are eliminated. Management took into consideration this potential negative impact on average selling price and gross
margin of its products, re-performed an operating forecast for the next five years and concluded that the beginning-of-the-year
balance of deferred tax assets mainly relating to the net operating loss carry forward may not be fully realizable due to the reduction
in the projection of income to be available in the next 5 years. Management therefore decided to provide 100% valuation allowance
for the deferred tax assets at Longmen Joint Venture, which represent approximately 99% of the total deferred tax assets of the
Company as of December 31, 2011. The valuation allowance as of December 31, 2011 was $47.7 million.
Management will review
this valuation allowance periodically and make adjustments as warranted
.
The movement of the deferred income tax assets arising from
carried forward losses is as follows:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
15,301
|
(A)
|
|
$
|
5,044
|
(A)
|
(Tax assets realized) net operating losses carried forward
for subsidiaries subject to a 25% tax rate
|
|
|
920
|
|
|
|
2,343
|
|
Effective tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Deferred tax asset
|
|
|
230
|
(B)
|
|
|
586
|
(B)
|
Net operating losses carried forward for Longmen Joint
Venture and subsidiaries subject to a 15% tax rate
|
|
|
211,967
|
|
|
|
65,019
|
|
Effective tax rate
|
|
|
15
|
%
|
|
|
15
|
%
|
Deferred tax asset
|
|
|
31,795
|
(C)
|
|
|
9,753
|
(C)
|
Less: Valuation allowance
|
|
|
(46,914
|
)(D)
|
|
|
-
|
(D)
|
Exchange difference
|
|
|
(245
|
)(E)
|
|
|
(82
|
)(E)
|
Total (A+B+C+D+E)
|
|
$
|
167
|
|
|
$
|
15,301
|
|
Movement of valuation allowance:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
-
|
|
Current period addition
|
|
|
46,914
|
|
|
|
-
|
|
Current period reversal
|
|
|
-
|
|
|
|
-
|
|
Exchange difference
|
|
|
789
|
|
|
|
-
|
|
Ending balance
|
|
$
|
47,703
|
|
|
$
|
-
|
|
Deferred taxes assets – U.S.
General Steel Holdings, Inc. was incorporated
in the United States and has incurred net operating losses for income tax purposes for the years ended December 31, 2011 and 2010.
The net operating loss carry forwards for United States income taxes amounted to $1.8 million, which may be available to reduce
future years’ taxable income. These carry forwards will expire, if not utilized, through 2031. Management believes that the
realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing
losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred
tax asset benefit to reduce the asset to zero. The valuation allowance as of December 31, 2011 was $0.6 million. The net change
in the valuation allowance for the year ended December 31, 2011 was $0.2 million. Management will review this valuation allowance
periodically and make adjustments as warranted.
The Company has cumulative proportionate
retained earnings from profitable subsidiaries of approximately $0.7 million as of December 31, 2011. Accordingly, no provision
has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount
of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.
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 PRC
laws. The value added tax (“VAT”) standard rates are 13% to 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. As of December 31, 2011 and 2010, the Company had $20.4 million
and $37.3 million in value added tax credit which are available to offset future VAT payables, respectively.
Sales and purchases
are recorded net of VAT collected and paid as the Company acts as an agent for the government for VAT collection. VAT on sales
and VAT on purchases amounted to $985.9 million and $
934.2
million, respectively, for the year
ended December 31, 2011, $519.0 million and $482.4 million, respectively, for the year ended December 31, 2010.
Taxes payable consisted of the following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
VAT taxes payable
|
|
$
|
4,856
|
|
|
$
|
3,921
|
|
Income taxes payable
|
|
|
96
|
|
|
|
840
|
|
Misc. taxes
|
|
|
6,422
|
|
|
|
1,476
|
|
Totals
|
|
$
|
11,374
|
|
|
$
|
6,237
|
|
Note 17 – Loss per share
The computation of loss per share is as
follows:
(in thousands, except per share data)
|
|
December 31, 2011
|
|
|
December31, 2010
|
|
Loss attributable to holders of common stock
|
|
$
|
(177,187
|
)
|
|
$
|
(30,006
|
)
|
Basic and diluted weighted average number of common shares outstanding
|
|
|
54,750
|
|
|
|
53,113
|
|
Loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(3.24
|
)
|
|
$
|
(0.56
|
)
|
The Company had warrants exercisable for
6,678,649 shares of the Company’s common stock at December 31, 2011 and 2010. For the years ended December 31, 2011 and 2010,
all outstanding warrants were excluded from the diluted earnings per share calculation since they are anti-dilutive.
Other than the aforementioned potentially
dilutive securities, there were no other potentially dilutive securities outstanding for the years ended December 31, 2011 and
2010.
Note 18 – Related party transactions and balances
Related party transactions
As disclosed in Notes 1- “Background”
and 13 – “Capital lease obligations”, Longmen Joint Venture entered into a capital lease arrangement on April
29, 2011, with Shaanxi Coal and Shaanxi Steel, which are related parties of the Group. The following is an analysis of the leased
assets under the capital lease:
|
|
Balance at December 31, 2011
|
|
|
|
(in thousands)
|
|
Machinery
|
|
$
|
581,413
|
|
Less: accumulated depreciation
|
|
|
(18,411
|
)
|
Carrying value of leased assets
|
|
$
|
563,002
|
|
b. On April
30, 2011, Tongxing completed its transfer of 20.7% share of Shaanxi Xinglong Thermoelectric Co., Ltd. to the Labor Union Trust
of Shaanxi Long Steel Group. The transfer price of $11.3 million (RMB 72.9 million) was considered to be at fair value based on
management assessment. As of April 30, 2011, our investment in Xinglong is approximately $9.9 million and this transaction resulted
in a gain of $1.4 million, which is included in “Income from equity investments”
in the consolidated statements
of operations and other comprehensive income (loss)
.
c. On March
31, 2010, General Steel (China), entered into a lease agreement with Tianjin Daqiuzhuang Steel Plates Co., Ltd. (the “Lessee”),
whereby General Steel (China) leases its facility located at No. 1, Tonga Street, Daqiuzhuang Town, Jinghai County, Tianjin City
to the Lessee (the “Lease Agreement”). The Lease Agreement provides approximately 776,078 square feet of workshops,
land, equipments and other facilities to the Lessee and allows the Company to reduce overhead costs while providing a recurring
monthly income stream resulting from payments due under the lease. The term of the Lease Agreement is from January 1, 2010 to December
31, 2011 and the monthly base rental rate due to General Steel (China) was approximately $0.2 million (RMB1.7 million).
On
July 28, 2011, General Steel (China) (lessor) signed a supplemental agreement with the lessee to extend the lease for an additional
five years to December 31, 2016. However, due to current steel market conditions, the lessee has informed the Company that they
do not intend to extend the lease at the end of 2012 and plans to terminate the supplemental agreement early. There is no penalty
for early termination
.
For the years ended December 31, 2011 and
2010, General Steel (China) realized rental income in each period of $3.1 million which has been included in “other non-operating
income (expense), net” in the consolidated statements of operations and other comprehensive income (loss).
.
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Original cost of fixed assets leased
|
|
$
|
33,903
|
|
|
$
|
33,385
|
|
Less: Accumulated depreciation
|
|
|
(17,813
|
)
|
|
|
(15,286
|
)
|
Less : Impairment of long-lived assets
|
|
|
(5,515
|
)
|
|
|
-
|
|
Fixed assets leased, net
|
|
$
|
10,575
|
|
|
$
|
18,099
|
|
The future rental payments to be received
associated with the Lease Agreement entered into on March 31, 2010 and the supplemental agreement entered into on July 28, 2011
and ending on December 31, 2012, are as follows:
As at December 31,
|
|
|
Amount
|
|
|
|
|
(in thousands)
|
|
|
2012
|
|
|
$
|
3,115
|
|
|
Thereafter
|
|
|
|
-
|
|
|
Total
|
|
|
$
|
3,115
|
|
d. The following chart summarized sales to related parties for
the years ended December 31, 2011 and 2010.
Name of related parties
|
|
Relationship
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Long Steel Group
|
|
Noncontrolling shareholder of Longmen Joint Venture
|
|
$
|
337,359
|
|
|
$
|
344,556
|
|
Tianjin Hengying Trading Co., Ltd
|
|
Partially owned by CEO* through indirect shareholding
|
|
|
94,984
|
|
|
|
47,268
|
|
Tianjin Dazhan Industry Co, Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
76,130
|
|
|
|
43,778
|
|
Sichuan Yutai Trading Co., Ltd
|
|
Significant influence by Long Steel Group**
|
|
|
187,689
|
|
|
|
-
|
|
Shaanxi Yuchang Trading Co., Ltd
|
|
Significant influence by Long Steel Group
|
|
|
160,422
|
|
|
|
-
|
|
Shaanxi Haiyan Trade Co.,Ltd
|
|
Significant influence by Long Steel Group
|
|
|
58,299
|
|
|
|
38,545
|
|
Shaanxi Shenganda Trading Co., Ltd
|
|
Significant influence by Long Steel Group
|
|
|
37,432
|
|
|
|
-
|
|
Tianjin General Qiugang Pipe Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
20,014
|
|
|
|
-
|
|
Shaanxi Steel
|
|
Majority shareholder of Long Steel Group
|
|
|
19,735
|
|
|
|
1,152
|
|
Beijing Daishang Trading Co., Ltd.
|
|
Noncontrolling shareholder of Longmen Joint Venture’s subsidiary
|
|
|
-
|
|
|
|
5,503
|
|
Tianjin Daqiuzhuang Steel Plates Co., Ltd.
|
|
Partially owned by CEO through indirect shareholding
|
|
|
-
|
|
|
|
8,385
|
|
Shaanxi Long Steel Group Baoji Steel Rolling Co., Ltd
|
|
Subsidiary of Long Steel Group
|
|
|
69,872
|
|
|
|
-
|
|
Shaanxi Junlong Rolling Co., Ltd
|
|
Investee of Long Steel Group
|
|
|
48,991
|
|
|
|
-
|
|
Others
|
|
Entities either owned or have significant influence by our affiliates or management
|
|
|
842
|
|
|
|
183
|
|
Total
|
|
|
|
$
|
1,111,769
|
|
|
$
|
489,370
|
|
*The CEO is referred to herein
as the chief executive officer of General Steel Holdings, Inc.
**Long Steel Group has the ability
to significantly influence the operating and financial decisions of the entity through equity ownership either directly or through
key employees, commercial contractual terms, or the ability to assign management personnel.
e. The following charts summarize purchases from related
parties for the years ended December 31, 2011 and 2010.
Name of related parties
|
|
Relationship
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Long Steel Group
|
|
Noncontrolling shareholder of Longmen Joint Venture
|
|
$
|
913,850
|
|
|
|
553,752
|
|
Hancheng Jinma Coking Co., Ltd
|
|
Investee of Longmen Joint Venture’s subsidiary (unconsolidated)
|
|
|
4,772
|
|
|
|
8,489
|
|
Hancheng Haiyan Coking Co., Ltd
|
|
Noncontrolling shareholder of Long Steel Group
|
|
|
391,065
|
|
|
|
234,479
|
|
Xi’an Pinghe Metallurgical Raw
Material Co., Ltd
|
|
Noncontrolling shareholder of Long Steel Group
|
|
|
37,890
|
|
|
|
-
|
|
Shaanxi Long Steel Group Baoji
Steel Rolling Co., Ltd
|
|
Subsidiary of Long Steel Group
|
|
|
19,076
|
|
|
|
-
|
|
Shaanxi Junlong Rolling Co., Ltd
|
|
Investee of Long Steel Group
|
|
|
19,110
|
|
|
|
-
|
|
Shaanxi Huafu New Energy Co., Ltd
|
|
Significant influence by the Long Steel Group
|
|
|
34,810
|
|
|
|
-
|
|
Beijing Daishang Trading Co., Ltd.
|
|
Noncontrolling shareholder of Longmen Joint Venture’s subsidiary
|
|
|
6,509
|
|
|
|
1,984
|
|
Others
|
|
Entities either owned or have significant influence by our affiliates or management
|
|
|
1,471
|
|
|
|
1,019
|
|
Total Related Party Purchases
|
|
|
|
$
|
1,428,553
|
|
|
$
|
799,723
|
|
Related party balances
|
a.
|
Accounts receivables – related parties:
|
Name of related parties
|
|
Relationship
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Long Steel Group
|
|
Noncontrolling shareholder of Longmen Joint Venture
|
|
$
|
9,187
|
|
|
$
|
3,023
|
|
Shaanxi Long Steel Group Baoji
Steel Rolling Co., Ltd
|
|
Subsidiary of Long Steel Group
|
|
|
3,141
|
|
|
|
|
|
Hancheng Haiyan Coking Co., Ltd
|
|
Noncontrolling shareholder of Long Steel Group
|
|
|
303
|
|
|
|
-
|
|
Tianjin Daqiuzhuang Steel Plates
|
|
Partially owned by CEO through indirect shareholding
|
|
|
755
|
|
|
|
-
|
|
Tianjin Hengying Trading Co., Ltd.
|
|
Partially owned by CEO through indirect shareholding
|
|
|
-
|
|
|
|
1,054
|
|
Shaanxi Steel
|
|
Majority shareholder of Long Steel Group
|
|
|
7,207
|
|
|
|
83
|
|
Total
|
|
|
|
$
|
20,593
|
|
|
$
|
4,160
|
|
|
b.
|
Other receivables – related parties:
|
Other receivables - related parties are
those nontrade receivables arising from transactions between the Company and its related parties, such as advances or payments
on behalf of these related parties.
Name of related parties
|
|
Relationship
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Long Steel Group
|
|
Noncontrolling shareholder of Longmen Joint Venture
|
|
$
|
15,244
|
|
|
$
|
993
|
|
Shaanxi Steel
|
|
Majority shareholder of Long Steel Group
|
|
|
66,869
|
|
|
|
-
|
|
Maoming Shengze Trading Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
937
|
|
|
|
8,095
|
|
Tianjin Daqiuzhuang Steel Plates Co., Ltd.
|
|
Partially owned by CEO through indirect shareholding
|
|
|
-
|
|
|
|
1,078
|
|
Shaanxi Huafu New Energy Co., Ltd
|
|
Significant influence by Long Steel Group
|
|
|
2,441
|
|
|
|
|
|
Teamlink Investment Co., Ltd
|
|
Owned by CEO through indirect shareholding
|
|
|
2,000
|
|
|
|
-
|
|
Tianjin Dazhan Industry Co, Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
-
|
|
|
|
455
|
|
Others
|
|
Entities either owned or have significant influence by our affiliates or management
|
|
|
188
|
|
|
|
317
|
|
Total
|
|
|
|
$
|
87,679
|
|
|
$
|
10,938
|
|
c.
|
Advances on inventory purchase – related parties:
|
Name of related parties
|
|
Relationship
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Long Steel Group
|
|
Noncontrolling shareholder of Longmen Joint Venture
|
|
$
|
1,028
|
|
|
$
|
-
|
|
Tianjin General Qiugang Pipe Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
15,678
|
|
|
|
6,187
|
|
Maoming Shengze Trading Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
3,538
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
20,244
|
|
|
$
|
6,187
|
|
d.
|
Accounts payable - related parties:
|
Name of related parties
|
|
Relationship
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Hancheng Haiyan Coking Co., Ltd
|
|
Noncontrolling shareholder of Longmen Joint Venture
|
|
$
|
46,487
|
|
|
$
|
25,708
|
|
Long Steel Group
|
|
Noncontrolling shareholder of Longmen Joint Venture
|
|
|
11,231
|
|
|
|
28,329
|
|
Tianjin Dazhan Industry Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
25,511
|
|
|
|
2,764
|
|
Xi’an Pinghe Metallurgical Raw Material Co., Ltd
|
|
Noncontrolling shareholder of Long Steel Group
|
|
|
12,800
|
|
|
|
-
|
|
Tianjin Hengying Trading Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
14,856
|
|
|
|
17,264
|
|
Henan Xinmi Kanghua Fire Refractory Co., Ltd
|
|
Noncontrolling shareholder of Longmen Joint Venture’s subsidiary
|
|
|
1,185
|
|
|
|
880
|
|
Hancheng Jinma Coking Co., Ltd
|
|
Investee of Longmen Joint Venture’s subsidiary (unconsolidated)
|
|
|
-
|
|
|
|
1,579
|
|
Beijing Daishang Trading Co., Ltd
|
|
Noncontrolling shareholder of Longmen Joint Venture’s subsidiary
|
|
|
1,600
|
|
|
|
1,101
|
|
Maoming Shengze Trading Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
-
|
|
|
|
1,954
|
|
Tianjin General Qiugang Pipe Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
8,034
|
|
|
|
-
|
|
Others
|
|
Entities either owned or have significant influence by our affiliates or management
|
|
|
124
|
|
|
|
115
|
|
Total Accounts Payable – Related Parties
|
|
|
|
$
|
121,828
|
|
|
$
|
79,694
|
|
e
.
|
Short-term loans - related parties:
|
Name of related parties
|
|
Relationship
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Shaanxi Steel
|
|
Majority shareholder of Long Steel Group
|
|
$
|
-
|
|
|
$
|
14,548
|
|
Tianjin Hengying Trading Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
15,710
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
15,710
|
|
|
$
|
14,548
|
|
f.
|
Other payables – related parties:
|
Other payables – related parties
are those nontrade payables arising from transactions between the Company and its related parties, such as advances or payments
from these related parties on behalf of the Group.
Name of related parties
|
|
Relationship
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Tianjin Hengying Trading Co, Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
$
|
-
|
|
|
$
|
10,168
|
|
Long Steel Group
|
|
Noncontrolling shareholder of Longmen Joint Venture
|
|
|
20,001
|
|
|
|
-
|
|
Wendlar Investment & Management Group Co., Ltd
|
|
Common control under CEO
|
|
|
241
|
|
|
|
-
|
|
Yangpu Capital Automobile
|
|
Partially owned by CEO through indirect shareholding
|
|
|
1,398
|
|
|
|
1,350
|
|
Tianjin Daqiuzhuang Steel Plates Co., Ltd.
|
|
Partially owned by CEO through indirect shareholding
|
|
|
5,771
|
|
|
|
-
|
|
Tianjin General Qiugang Pipe Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
-
|
|
|
|
4,547
|
|
Tianjin Hengying Trading Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
1,040
|
|
|
|
-
|
|
Wenchun Han
|
|
Director of General Steel (China)
|
|
|
-
|
|
|
|
2,124
|
|
Others
|
|
Entities either owned or have significant influence by our affiliates or management
|
|
|
422
|
|
|
|
25
|
|
Total
|
|
|
|
$
|
28,873
|
|
|
$
|
18,214
|
|
g.
|
Customer deposits – related parties:
|
Name of related parties
|
|
Relationship
|
|
December 31, 2011
|
|
|
December
31, 2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Hancheng Haiyan Coking Co., Ltd
|
|
Noncontrolling shareholder of Long Steel Group
|
|
$
|
-
|
|
|
$
|
5,081
|
|
Shaanxi Yuchang Trading Co., Ltd
|
|
Significant influence by Long Steel Group
|
|
|
24,256
|
|
|
|
-
|
|
Sichuan Yutai Trading Co., Ltd
|
|
Significant influence by Long Steel Group
|
|
|
5,972
|
|
|
|
-
|
|
Tianjin Hengying Trading Co, Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
1,506
|
|
|
|
-
|
|
Tianjin General Qiugang Pipe Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
9,102
|
|
|
|
-
|
|
Long Steel Group
|
|
Noncontrolling shareholder of Longmen Joint Venture
|
|
|
4,755
|
|
|
|
48,161
|
|
Beijing Shenhua Xinyuan Metal
Materials Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
1,345
|
|
|
|
1,299
|
|
Shaanxi Haiyan Trade Co.,Ltd
|
|
Significant influence by Long Steel Group
|
|
|
6,822
|
|
|
|
-
|
|
Shaanxi Junlong Rolling Co., Ltd
|
|
Investee of Long Steel Group
|
|
|
1,540
|
|
|
|
-
|
|
Tianjin Dazhan Industry Co., Ltd
|
|
Partially owned by CEO through indirect shareholding
|
|
|
11,178
|
|
|
|
-
|
|
Shaanxi Shenganda Trading Co., Ltd
|
|
Significant influence by Long Steel Group
|
|
|
1,750
|
|
|
|
-
|
|
Others
|
|
Entities either owned or have significant influence by our affiliates or management
|
|
|
51
|
|
|
|
381
|
|
Total
|
|
|
|
$
|
68,277
|
|
|
$
|
54,922
|
|
h.
|
Deposits due to sales representatives – related parties
|
Name of related parties
|
|
Relationship
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Hancheng Haiyan Coking Co., Ltd
|
|
Noncontrolling shareholder of Long Steel Group
|
|
$
|
471
|
|
|
$
|
455
|
|
Shaanxi Junlong Rolling Co., Ltd
|
|
Investee of Long Steel Group
|
|
|
472
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
943
|
|
|
$
|
455
|
|
|
i.
|
Long-term loans – related parties:
|
Name of related parties
|
|
Relationship
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Shaanxi Steel
|
|
Majority shareholder of Long Steel Group
|
|
$
|
92,035
|
|
|
$
|
91,020
|
|
Total
|
|
|
|
$
|
92,035
|
|
|
$
|
91,020
|
|
The Company also provided guarantee on
related parties’ bank loans amounting to $56.6 million and $3.0 million as of December 31, 2011 and as of December 31, 2010,
respectively.
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
57,591
|
|
|
$
|
16,487
|
|
Add: Reimbursement for dismantled assets
|
|
|
-
|
|
|
|
568
|
|
Add: Reimbursement for loss of efficiency
|
|
|
-
|
|
|
|
20,676
|
|
Add: Reimbursement for trial production costs
|
|
|
14,042
|
|
|
|
13,584
|
|
Add: Deferred depreciation cost during free use period
|
|
|
6,904
|
|
|
|
6,656
|
|
Less: Lease income realized
|
|
|
(2,008
|
)
|
|
|
(943
|
)
|
Exchange rate effect
|
|
|
1,995
|
|
|
|
563
|
|
Ending balance
|
|
|
78,524
|
|
|
|
57,591
|
|
Ending balance – current portion
|
|
|
(2,099
|
)
|
|
|
(1,971
|
)
|
Ending balance – noncurrent portion
|
|
$
|
76,425
|
|
|
$
|
55,620
|
|
For the years ended December 31, 2011 and
2010, the Company realized deferred lease income from Shaanxi Steel, a related party, amounting $2.0 million and $0.9 million,
respectively.
Note 19 - Equity
Preferred Stock
On May 18, 2007, the Company entered into
a Purchase Agreement with Victory New Holdings Limited (“Victory New”), a British Virgin Islands registered company
under the control of the Company’s Chairman, CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), to acquire Victory
New’s 30% interest in
General Steel (China
). The Company agreed to issue to Victory New
an aggregate of 3,092,899 shares of its Series A Preferred Stock with a fair value of $8,374,000, and these shares of Series A
Preferred Stock carry a voting power of 30% of the combined voting power of the Company’s common and preferred stock while
outstanding. The holders of preferred stock are entitled to receive noncumulative dividends, when and if declared by the board
of directors. Dividends are not mandatory and shall not accrue. Preferred shares are non-redeemable.
2010 Equity Transactions
The Company granted senior management and
directors 733,300 shares of common stock as compensation in 2010. The shares were valued at the quoted market price on the
grant date. The Company recorded compensation expense of $2.2 million for the year ended December 31, 2010.
On June 7, 2010, the Company issued 928,163
shares of common stock to one of Maoming Hengda’s creditors to settle certain short-term loans.
On August 4, 2010, $3.5 million of the
Notes were converted to 1,208,791 shares of common stock. According to the Notes agreement, the Company incurred make-whole
amount of $0.7 million and accrued interest expense of $0.2 million settled in shares on conversion and 350,885 shares of common
stock were issued.
On December 21, 2010, the Company’s
Board of Directors authorized to repurchase up to an aggregate of 1,000,000 shares of the Company’s common stock as part
of a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program does not have
an expiration date and these repurchases may be made from time to time in the open market or in privately negotiated transactions
in accordance with applicable laws.
As of
December 31, 2010, the Company has repurchased 316,760 shares for a total cost of $0.9 million
.
2011 Equity Transactions
On
March 31, 2011, the Company granted senior management and directors 240,734 shares of common stock at $2.40 per share, as
compensation. The shares were valued at the quoted market price on the grant date. The Company recorded compensation
expense of $0.6 million.
On
June 1, 2011, the Company announced an increase of additional 1,000,000 shares of common stock may be purchased under the Share
Repurchase Program launched in December 2010, bringing the total authorized shares of its common stock available for purchase to
2,000,000. During the year ended December 31, 2011, the Company has repurchased 774,218 shares with $1.9 million pursuant to the
Share Repurchase Program. The Company had a total of 1,090,978 shares of treasury stock as of December 31, 2011.
On June 16, 2011, the Company and Maoming
Hengda entered into a Debt Repayment Agreement with Guangzhou Hengda and its sole shareholder Ms Ding Yumei whereby the Company
issued 974,571 shares of its common stock to Ms Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to repay loan
balance of $4.8 million due to Guangzhou Hengda.
On
June 28, 2011, the Company granted senior management and directors 191,150 shares of common stock at $1.44 per share, as compensation.
The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.3 million.
On
September 26, 2011, the Company granted senior management and directors 189,650 shares of common stock at $1.18 per share, as compensation.
The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
On
December 28, 2011, the Company granted senior management and directors 166,150 shares of common stock at $1.04 per share, as compensation.
The shares were valued at the quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
Note 20 – Retirement plan
Regulations in the PRC require the Company
to contribute to a defined contribution retirement plan for all employees. All the employees of the Company’s entities in
China 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. The Company’s entities in China are required to contribute based on the higher of 20% of the employees’
monthly base salary or 12% of the minimum social average salary of the city where the facilities are located. Employees are required
to contribute 8% of their base salary to the plan. The minimum social average salary is announced by the local Social Security
bureau and updated annually. Total pension expense incurred by the Company amounted to $7.0 million and $5.1 million for the years
ended December 31, 2011 and 2010, respectively.
Note 21 – Statutory reserves
The laws and regulations of the People’s
Republic of China require that before
a
foreign
-invested
enterprise distributes profits to its shareholders, it must first satisfy all tax liabilities, provision for losses in previous
years, and make allocations, in proportions determined at the discretion of the board of directors, to the statutory reserves.
The statutory reserves include the surplus reserve funds and the enterprise fund and these statutory reserves represent restricted
retained earnings.
Surplus reserve fund
The Company is required to transfer 10%
of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund
until such reserve balance reaches 50% of the Company’s registered capital.
The transfer to this reserve must be made
before distribution of any dividend to shareholders. 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 25% of the registered
capital. For the years ended December 31, 2011 and 2010, the Company made contributions of $0.1 million and $0 to these reserves,
respectively.
Special reserve
The Company is required by the PRC government
to reserve safety and maintenance expense to the cost of production based on the actual quantity of mineral exploited. The
amount of reserves is determined within the unit price range provided by Ministry of Finance of PRC.
For
the years ended December 31, 2011 and 2010, The Company made contributions of $ 82.0 thousand and $40.0 thousand to these reserves,
respectively
Note 22 – Commitment and contingencies
Rental Commitments
Baotou Steel Pipe Joint Venture has a 5
year rental agreement with Bao Gang Jianan to rent two buildings. The agreement began in June 2007 for $0.3 million (or RMB1.8
million) per year.
As of December 31, 2011, total future minimum
lease payments for the unpaid portion under this operating lease were as follows:
Year ended,
|
|
Amount
|
|
|
|
(in thousands)
|
|
December 31, 2012
|
|
$
|
141
|
|
Total
|
|
$
|
141
|
|
Total rental expense amounted to $0.3 million
and $0.4 million for the years ended December 31, 2011 and 2010, respectively.
Longmen Joint Venture has $1.8 million
contractual obligations related to construction projects as of December 31 2011.
Purchase Commitments
Longmen Joint Venture has signed an annual
purchase agreement with its vendor to supply iron ore to be delivered based on the production demand. From October 2012 to October
2013, the minimum purchase commitment is 3 million tons.
Contingencies
As of December 31, 2011, Longmen Joint
Venture provided guarantees to related parties’ and third parties’ bank loans, including lines of credit and others,
amounting to $253.5 million.
Nature of guarantee
|
|
Guarantee
amount
|
|
Guaranty Due Date
|
|
|
(In thousands)
|
|
|
Line of credit
|
|
$
|
202,675
|
|
Various from
February
2012 to March 2015
|
Bank loans
|
|
|
36,447
|
|
Various from January 2012 to March 2014
|
Confirming storage
|
|
|
12,018
|
|
Various from March 2012 to May 2012
|
Financing by the rights of goods delivery in future
|
|
|
2,357
|
|
March 2012
|
Total
|
|
$
|
253,497
|
|
|
Name of parties being guaranteed
|
|
Guarantee amount
|
|
|
Guaranty Due Date
|
(In thousands)
|
|
(In thousands)
|
|
|
|
Shaanxi Daxigou Mining Co., Ltd.
|
|
$
|
39,275
|
|
|
January 2012
|
Hancheng Haiyan Coking Co., Ltd
|
|
|
17,281
|
|
|
July 2012, extended to March 2013
|
Long Steel Group Fuping Rolling Steel Co., Ltd
|
|
|
6,284
|
|
|
Various from February to July 2012, partial guarantee amount extended to March 2013
|
Yichang Zhongyi Industrial Co., Ltd
|
|
|
42,574
|
|
|
Various from February 2012 to April 2013, partial guarantee amount extended to May 2013
|
Jingmen Desheng Metal Co., Ltd
|
|
|
51,089
|
|
|
Various from June 2012 to August 2013
|
Chengdu Yusheng Steel Trading Co., Ltd
|
|
|
3,692
|
|
|
Various from January to April 2012
|
Xi’an Kaiyuan Steel Co., Ltd
|
|
|
1,257
|
|
|
Various from May to September 2012
|
Shaanxi Hongan Material Co., Ltd.
|
|
|
8,955
|
|
|
Various from January to October 2012, partial guarantee amounts extended to October and December 2013
|
Shaanxi Anlin Material Co., Ltd.
|
|
|
2,357
|
|
|
March 2012
|
Shaanxi Mengxing Trading Co., Ltd.
|
|
|
8,326
|
|
|
Various from March to May 2012
|
Chongqing Qiaorui Technology Trading Co., Ltd
|
|
|
2,969
|
|
|
Various from November to December 2012
|
Xi’an Zexin Material Co., Ltd.
|
|
|
4,713
|
|
|
January 2012
|
Chengdu Zhongyi Steel Co., Ltd.
|
|
|
1,885
|
|
|
April 2012, extended to December 2013
|
Shaanxi Huatai Huineng Group, Ltd.
|
|
|
23,565
|
|
|
March 2012
|
Hancheng Sanli Furnace Burden Co., Ltd.
|
|
|
15,710
|
|
|
March 2015
|
Shaanxi Heimao Coking Co., Ltd
|
|
|
23,565
|
|
|
July 2012
|
Total
|
|
$
|
253,497
|
|
|
|
As of December 31, 2011, the Company did
not accrue any liability for the amounts the Group has guaranteed for third and related parties because those parties are current
in their payment obligations and the Company has not experienced any losses from providing guarantees. The Company has evaluated
the debt guarantees and concluded that the likelihood of having to make payments under the guarantees is remote and that the fair
value of the stand-ready obligation under these commitments is not material.
Note 23 – Segments
The Company’s chief operating decision
maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being income
from operations of the Group’s four regional divisions in the PRC: Longmen Joint Venture in Shaanxi province, Maoming Hengda
in Guangdong province, Baotou Steel Pipe Joint Venture in Inner Mongolia province and General Steel (China) & Tianwu Joint
Venture in Tianjin City.
The Group operates in one business segment
that includes four different divisions. These reportable divisions are consistent with the way the company manages its business,
each division operates under separate management groups and produces discrete financial information. The accounting principles
applied at the operating division level in determining income from operations is generally the same as those applied at the consolidated
financial statement level.
The following represents results of division
operations for years ended December 31, 2011 and 2010:
(In thousands)
|
|
For the year ended December 31,
|
|
Sales:
|
|
|
2011
|
|
|
|
2010
|
|
Longmen Joint Venture
|
|
$
|
3,496,551
|
|
|
$
|
1,846,080
|
|
Maoming Hengda
|
|
|
9,946
|
|
|
|
10,011
|
|
Baotou Steel Pipe Joint Venture
|
|
|
8,036
|
|
|
|
12,315
|
|
General Steel (China) & Tianwu Joint Venture
|
|
|
267,543
|
|
|
|
68,918
|
|
Total sales
|
|
|
3,782,076
|
|
|
|
1,937,324
|
|
Interdivision sales
|
|
|
(218,180
|
)
|
|
|
(55,184
|
)
|
Consolidated sales
|
|
$
|
3,563,896
|
|
|
$
|
1,882,140
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
2011
|
|
|
|
2010
|
|
Longmen Joint Venture
|
|
$
|
(86,308
|
)
|
|
$
|
32,751
|
|
Maoming Hengda
|
|
|
(392
|
)
|
|
|
(2,726
|
)
|
Baotou Steel
|
|
|
491
|
|
|
|
562
|
|
General Steel (China) & Tianwu Joint Venture
|
|
|
(3,845
|
)
|
|
|
2,589
|
|
Total gross profit
|
|
|
(90,054
|
)
|
|
|
33,176
|
|
Interdivision gross profit
|
|
|
1,840
|
|
|
|
(1,761
|
)
|
Consolidated gross profit
|
|
$
|
(88,214
|
)
|
|
$
|
31,415
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
2011
|
|
|
|
2010
|
|
Longmen Joint Venture
|
|
$
|
(161,057
|
)
|
|
$
|
(8,073
|
)
|
Maoming Hengda
|
|
|
(2,568
|
)
|
|
|
(5,782
|
)
|
Baotou Steel
|
|
|
(2,516
|
)
|
|
|
(862
|
)
|
General Steel (China) & Tianwu Joint Venture
|
|
|
(10,902
|
)
|
|
|
1,133
|
|
Total loss from operations
|
|
|
(177,043
|
)
|
|
|
(13,584
|
)
|
Interdivision income (loss) from operations
|
|
|
1,840
|
|
|
|
(1,762
|
)
|
Reconciling item (1)
|
|
|
(4,838
|
)
|
|
|
(5,816
|
)
|
Consolidated loss from operations
|
|
$
|
(180,041
|
)
|
|
$
|
(21,162
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to General Steel Holdings, Inc.:
|
|
|
2011
|
|
|
|
2010
|
|
Longmen Joint Venture
|
|
$
|
(161,897
|
)
|
|
$
|
(32,668
|
)
|
Maoming Hengda
|
|
|
3,763
|
|
|
|
(5,450
|
)
|
Baotou Steel
|
|
|
(1,861
|
)
|
|
|
(744
|
)
|
General Steel (China) & Tianwu Joint Venture
|
|
|
(17,120
|
)
|
|
|
(330
|
)
|
Total net loss attributable to General Steel Holdings, Inc.
|
|
|
(177,115
|
)
|
|
|
(39,192
|
)
|
Interdivision net loss
|
|
|
(1,501
|
)
|
|
|
(1,762
|
)
|
Reconciling item (1)
|
|
|
1,429
|
|
|
|
10,948
|
|
Consolidated net loss attributable to General Steel Holdings, Inc.
|
|
$
|
(177,187
|
)
|
|
$
|
(30,006
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
2011
|
|
|
|
2010
|
|
Longmen Joint Venture
|
|
$
|
54, 755
|
|
|
$
|
34,131
|
|
Maoming Hengda
|
|
|
205
|
|
|
|
3,411
|
|
Baotou Steel
|
|
|
246
|
|
|
|
281
|
|
General Steel (China) & Tianwu Joint Venture
|
|
|
3,125
|
|
|
|
3,330
|
|
Consolidated depreciation and amortization
|
|
$
|
58,331
|
|
|
$
|
41,153
|
|
|
|
|
|
|
|
|
|
|
Finance/interest expenses:
|
|
|
2011
|
|
|
|
2010
|
|
Longmen Joint Venture
|
|
$
|
104,372
|
|
|
$
|
49,180
|
|
Maoming Hengda
|
|
|
262
|
|
|
|
109
|
|
Baotou Steel
|
|
|
(10
|
)
|
|
|
14
|
|
General Steel (China) & Tianwu Joint Venture
|
|
|
6,655
|
|
|
|
1,955
|
|
Interdivision interest expenses
|
|
|
(709
|
)
|
|
|
-
|
|
Reconciling item (1)
|
|
|
4,379
|
|
|
|
25
|
|
Consolidated interest expenses
|
|
$
|
114,949
|
|
|
$
|
51,283
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
2011
|
|
|
|
2010
|
|
Longmen Joint Venture
|
|
$
|
108,885
|
|
|
$
|
80,718
|
|
Maoming Hengda
|
|
|
1,978
|
|
|
|
8,735
|
|
Baotou Steel
|
|
|
32
|
|
|
|
44
|
|
General Steel (China) & Tianwu Joint Venture
|
|
|
44
|
|
|
|
419
|
|
Consolidated capital expenditures
|
|
$
|
110,939
|
|
|
$
|
89,916
|
|
Total Assets as of December 31, 2011 and 2010
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Longmen Joint Venture
|
|
$
|
2, 937,271
|
|
|
$
|
1,694,895
|
|
Maoming Hengda
|
|
|
48,350
|
|
|
|
47,839
|
|
Baotou Steel Pipe Joint Venture
|
|
|
8,093
|
|
|
|
31,852
|
|
General Steel (China) & Tianwu Joint Venture
|
|
|
146,150
|
|
|
|
194,966
|
|
Interdivision assets
|
|
|
(88,326
|
)
|
|
|
(173,076
|
)
|
Reconciling item (2)
|
|
|
2,583
|
|
|
|
2,904
|
|
Total Assets
|
|
$
|
3,054,121
|
|
|
$
|
1,799,380
|
|
|
(1)
|
Reconciling item represents the unallocated income or expenses of the Company, arising from General
Steel Investment Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel for years ended December 31, 2011 and 2010.
|
|
(2)
|
Reconciling item represents assets held at General Steel Holdings, Inc., General Steel Investment
Co., Ltd, Yangpu Shengtong Investment Co., Ltd and Qiu Steel as of December 31, 2011 and 2010.
|
Note 24 – Subsequent events
On March 1, 2012, the Company sold its
22.76% equity interest of Tongxing for approximately $9.2 million to a related party. In connection with this transaction, the
Company will receive the land use rights at fair market value for approximately $9.5 million and payable in cash of approximately
$0.3 million. The result of this transaction has no material impact on the Company’s sales and operating income.
On March 26, 2012, the
Company granted senior management and directors 165,400 shares of common stock at $0.75 per share, as compensation. The shares
were valued at the quoted market price on the grant date.
On March 27, 2012, in order to maximize
our shareholder value, the Company announced a new share repurchase program, which allows the Company to repurchase up to an aggregate
of 2,000,000 shares of its common stock and brings the total of authorized shares of our common stock available for repurchase
to 4,000,000 shares. From April 3, 2012 through September 30, 2012, the Company repurchased an additional 1,381,328 shares at an
average price of $1.02 per share. As of the date of this report, the Company has repurchased 2,472,306 shares in total at an average
price of $1.70 per share.
On
June 28, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.80 per share, as compensation.
The shares were valued at the quoted market price on the grant date.
On
September 27, 2012, the Company granted senior management and directors 167,900 shares of common stock at $1.29 per share, as compensation.
The shares were valued at the quoted market price on the grant date.
On
December 28, 2012, the Company granted senior management and directors 169,150 shares of common stock at $1.00 per share, as compensation.
The shares were valued at the quoted market price on the grant date.
GENERAL STEEL HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
SCHEDULE 1 - CONDENSED PARENT COMPANY BALANCE SHEETS
|
AS OF DECEMBER 31, 2011 AND 2010
|
(In thousands)
|
ASSETS
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
48
|
|
|
$
|
47
|
|
Restricted cash
|
|
|
4
|
|
|
|
1,130
|
|
Other receivables
|
|
|
1
|
|
|
|
3
|
|
Prepaid expense
|
|
|
60
|
|
|
|
205
|
|
TOTAL CURRENT ASSETS
|
|
|
113
|
|
|
|
1,385
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Intercompany receivable
|
|
|
85,106
|
|
|
|
84,941
|
|
TOTAL OTHER ASSETS
|
|
|
85,106
|
|
|
|
84,941
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
85,219
|
|
|
$
|
86,326
|
|
|
|
|
|
|
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LIABILITIES AND EQUITY
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CURRENT LIABILITIES:
|
|
|
|
|
|
|
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|
Other payables and accrued liabilities
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|
$
|
7
|
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|
$
|
8
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|
TOTAL CURRENT LIABILITIES
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|
7
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|
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|
8
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OTHER LIABILITIES:
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|
|
|
|
|
|
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|
Loss in excess of investment in subsidiaries
|
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192,493
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|
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11,192
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TOTAL OTHER LIABILITIES
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192,493
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11,192
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DERIVATIVE LIABILITIES
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10
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5,573
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TOTAL LIABILITIES
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|
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192,510
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16,773
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COMMITMENT AND CONTINGENCIES
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EQUITY:
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Preferred stock, $0.001 par value, 50,000,000 shares authorized,
3,092,899 shares
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issued and outstanding as of December 31, 2011 and 2010
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3
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3
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Common stock, $0.001 par value, 200,000,000 shares authorized, 56,601,988
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and 54,678,083 shares issued, 55,511,010 and 54,522,973 shares outstanding
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as of December 31, 2011 and 2010, respectively
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56
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55
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Treasury stock, at cost, 1,090,978 and 316,760 shares as of
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(2,795
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)
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(871
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)
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December 31, 2011 and 2010, respectively
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Paid-in-capital
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107,940
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104,970
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Statutory reserves
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6,388
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6,202
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Accumulated deficits
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(229,083
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)
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(51,793
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)
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Accumulated other comprehensive income
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10,200
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10,987
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TOTAL SHAREHOLDER'S EQUITY (DEFICIENCY)
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(107,291
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)
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69,553
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TOTAL LIABILITIES AND EQUITY
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$
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85,219
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|
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$
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86,326
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GENERAL STEEL HOLDINGS, INC.
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SCHEDULE 1 - CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
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FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
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(In thousands)
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2011
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2010
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OPERATING EXPENSES
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General and administrative expenses
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$
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(2,149
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)
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$
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(3,057
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)
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Total operating expenses
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(2,149
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)
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|
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(3,057
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)
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|
|
|
|
|
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OTHER INCOME (EXPENSE)
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|
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Finance/interest (expense) income
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|
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(1
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)
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1,714
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Change in fair value of derivative liabilities
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|
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5,563
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15,055
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Total other income, net
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5,562
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16,769
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EQUITY LOSS OF SUBSIDIARIES
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(180,600
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)
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(43,718
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)
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NET LOSS
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(177,187
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)
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(30,006
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)
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FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
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|
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(787
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)
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2,869
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COMPREHENSIVE LOSS
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$
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(177,974
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)
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$
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(27,137
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)
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GENERAL STEEL HOLDINGS, INC.
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SCHEDULE 1 - CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS
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FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
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(In thousands)
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2011
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2010
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$
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(177,187
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)
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$
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(30,006
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)
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Adjustments to reconcile net loss to cash provided by (used in) operating activities:
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Change in fair value of derivative instrument
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(5,563
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)
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(15,055
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)
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Stock issued for services and compensation
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1,530
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2,479
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Make whole shares interest expense on notes conversion
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-
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1,130
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Amortization of deferred note issuance cost and discount on convertible notes
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-
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17
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Loss from subsidiaries
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180,600
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43,718
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Changes in operating assets and liabilities
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Other receivables
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1
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(3
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)
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Prepaid expense
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141
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349
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Intercompany receivable
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1,277
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1,880
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Other payables and accrued liabilities
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(1
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)
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(2,483
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)
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Net cash provided by operating activities
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|
798
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2,026
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Restricted cash
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1,126
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(1,130
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)
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Net cash provided by (used in) investing activities
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1,126
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(1,130
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)
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CASH FLOWS FINANCING ACTIVITIES:
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Payments made for treasury stock acquired
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(1,923
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)
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(870
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)
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Net cash used in financing activities
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|
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(1,923
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)
|
|
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(870
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)
|
|
|
|
|
|
|
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|
|
INCREASE IN CASH
|
|
|
1
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
CASH, beginning of year
|
|
|
47
|
|
|
|
21
|
|
|
|
|
|
|
|
|
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CASH, end of year
|
|
$
|
48
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions of investing and financing activities:
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|
|
|
|
|
|
|
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Share issuance for intercompany's debt settlement
|
|
$
|
1,442
|
|
|
$
|
2,404
|
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GENERAL STEEL HOLDINGS, INC.
CONDENSED NOTES TO SCHEDULE 1
Certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed
or omitted. The Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries.
Schedule I of Article 5-04 of Regulation
S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above
test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of
net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may
not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of
a third party (i.e., lender, regulatory agency, foreign government, etc.).
The condensed parent company financial
statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the subsidiaries
of General Steel Holdings, Inc. exceed 25% of the consolidated net assets of General Steel Holdings, Inc. The ability of our Chinese
operating affiliates to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances
of the Chinese operating subsidiaries. Because a significant portion of our operations and revenues are conducted and generated
in China, a significant portion of our revenues being earned and currency received are denominated in Renminbi (RMB). RMB is subject
to the exchange control regulation in China, and, as a result, we may be unable to distribute any dividends outside of China due
to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.
The Company has 3,900,871 warrants outstanding
as a result of the $40.0 million convertible notes issued in 2007 and 2,777,778 warrants outstanding in connection with a registered
direct offering in 2009. The aforementioned warrants met the definition of a derivative instrument in the accounting standards
and are recorded at their fair value on each reporting date. The change in the value of the derivative liabilities is charged against
or credited to income each period.
Refer to Note 10 of the Notes to the Consolidated
Financial Statements for the convertible notes and derivative liabilities.
Preferred Stock
On May 18, 2007, the Company entered into
a Purchase Agreement with Victory New Holdings Limited (“Victory New”), a British Virgin Islands registered company
under the control of the Company’s Chairman, CEO and majority shareholder, Zuosheng Yu (aka Henry Yu), to acquire Victory
New’s 30% interest in General Steel (China). The Company agreed to issue to Victory New an aggregate of 3,092,899 shares
of its Series A Preferred Stock with a fair value of $8,374,000, and these shares of Series A Preferred Stock carry a voting power
of 30% of the combined voting power of the Company’s common and preferred stock while outstanding. The holders of preferred
stock are entitled to receive noncumulative dividends, when and if declared by the board of directors. Dividends are not
mandatory and shall not accrue. Preferred shares are non-redeemable.
2010 Equity Transactions
The Company granted senior management and
directors 733,300 shares of common stock as compensation in 2010. The shares were valued at the quoted market price on the
grant date. The Company recorded compensation expense of $2.2 million for the year ended December 31, 2010.
On June 7, 2010, the Company issued 928,163
shares of common stock to one of Maoming Hengda’s creditors to settle certain short-term loans.
On August 4, 2010, $3.5 million of the
Notes were converted to 1,208,791 shares of common stock. According to the Notes agreement, the Company incurred make-whole
amount of $0.7 million and accrued interest expense of $0.2 million settled in shares on conversion and 350,885 shares of common
stock were issued.
On December
21, 2010, the Company’s Board of Directors authorized to repurchase up to an aggregate of 1,000,000 shares of the Company’s
common stock as part of a share repurchase program (the “Share Repurchase Program”). The Share Repurchase
Program does not have an expiration date and these repurchases may be made from time to time in the open market or in privately
negotiated transactions in accordance with applicable laws.
As of December 31, 2010, the Company has repurchased 316,760
shares for a total cost of $0.9 million
.
GENERAL STEEL HOLDINGS, INC.
CONDENSED NOTES TO SCHEDULE 1
2011 Equity Transactions
On March 31, 2011, the Company granted
senior management and directors 240,734 shares of common stock at $2.40 per share, as compensation. The shares were valued at the
quoted market price on the grant date. The Company recorded compensation expense of $0.6 million.
On June 1, 2011, the Company announced
an increase of additional 1,000,000 shares of common stock may be purchased under the Share Repurchase Program launched in December
2010, bringing the total authorized shares of its common stock available for purchase to 2,000,000. During the year ended December
31, 2011, the Company has repurchased 774,218 shares with $1.9 million pursuant to the Share Repurchase Program. The Company had
a total of 1,090,978 shares of treasury stock as of December 31, 2011.
On June 16, 2011, the Company and Maoming
Hengda entered into a Debt Repayment Agreement with Guangzhou Hengda and its sole shareholder Ms. Ding Yumei whereby the Company
issued 974,571 shares of its common stock to Ms Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to repay loan
balance of $4.8 million due to Guangzhou Hengda.
On June 28, 2011, the Company granted senior
management and directors 191,150 shares of common stock at $1.44 per share, as compensation. The shares were valued at the quoted
market price on the grant date. The Company recorded compensation expense of $0.3 million.
On September 26, 2011, the Company granted
senior management and directors 189,650 shares of common stock at $1.18 per share, as compensation. The shares were valued at the
quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
On December 28, 2011, the Company granted
senior management and directors 166,150 shares of common stock at $1.04 per share, as compensation. The shares were valued at the
quoted market price on the grant date. The Company recorded compensation expense of $0.2 million.
On
March 26, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.75 per share, as compensation.
The shares were valued at the quoted market price on the grant date.
On March 27, 2012, in order to maximize
our shareholder value, the Company announced a new share repurchase program, which allows the Company to repurchase up to an aggregate
of 2,000,000 shares of its common stock and brings the total of authorized shares of our common stock available for repurchase
to 4,000,000 shares. From April 3, 2012 through September 30, 2012, the Company repurchased an additional 1,381,328 shares at an
average price of $1.02 per share. As of the date of this report, the Company has repurchased 2,472,306 shares in total at an average
price of $1.70 per share.
On
June 28, 2012, the Company granted senior management and directors 165,400 shares of common stock at $0.80 per share, as compensation.
The shares were valued at the quoted market price on the grant date.
On
September 27, 2012, the Company granted senior management and directors 167,900 shares of common stock at $1.29 per share, as compensation.
The shares were valued at the quoted market price on the grant date.
On
December 28, 2012, the Company granted senior management and directors 169,150 shares of common stock at $1.00 per share, as compensation.
The shares were valued at the quoted market price on the grant date
.