UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 5, 2004
HUAYANG INTERNATIONAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Nevada 0-30173 58-1667944
(State of Incorporation) (Commission File No.) (IRS Employer Identification No.)
386 Qingnian Avenue
Shenyang, China 110004
(Address of principal executive offices)
011-86-24-2318-0688
(Registrant's telephone number)
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
1
SECTION 5 -- CORPORATE GOVERNANCE AND MANAGEMENT
ITEM 5.01. CHANGES IN CONTROL OF REGISTRANT.
On August 5, 2004, Huayang International Holdings, Inc. (the "Company"
or "HIHI") completed a share exchange (the "Exchange") with the stockholders of
China Carbon Black Holdings Limited, a Hong Kong corporation ("CCB") pursuant to
the terms of an Agreement for Share Exchange, dated July 15, 2004. In the
Exchange, the Company acquired all of the issued and outstanding stock of CCB in
exchange for the issuance of 36,000,000 shares of its common stock.
At the time of execution of the Agreement for Share Exchange, and
immediately prior to completion of the Exchange, the Company had a total of
7,700,807 shares issued and outstanding. However, in conjunction with, and as a
condition to, completion of the Exchange, the designees of a principal
shareholder of the Company, Gao Wan Jun, agreed to surrender a total of
5,460,000 of their shares for the Company to issue to Gao Wan Jun (but the
shares are issued to his designees instead of himself) a total of 3,240,000
shares of restricted stocks of the Company following completion of the Exchange.
The Exchange resulted in a change of voting control of the Company.
Upon completion of the Exchange and the related share cancellation and share
issuances described above, the Company has a total of 38,240,807 shares issued
and outstanding, of which 30,178,382, or approximately 78.92%, are owned by
persons who were previously stockholders of CCB.
There has not yet been any change in the officers and directors of the
Company subsequent to completion of the Exchange.
THE BUSINESS
Forward Looking Statements
- --------------------------
All statements contained in the following description of the business
of the Company (which will be conducted through its wholly owned subsidiary,
CCB) which are not statements of historical fact are what is known as "forward
looking statements", which are basically statements about the future, and which
for that reason, involve risk and uncertainty, since no one can accurately
predict the future. Words such as "plans", "intends", "will", "hopes", "seeks",
"anticipates", "expects", "goal" and "objective" often identify such forward
looking statements, but are not the only indication that a statement is a
forward looking statement. Such forward looking statements include statements of
the plans and objectives of the management of the Company with respect to its
present and future operations, and statements which express or imply that such
present and future operations will or may produce revenues, income or profits.
Numerous factors and future events could cause the Company to change such plans
and objectives, or fail to successfully implement such plans or achieve such
objectives, or cause such present and future operations to fail to produce
revenues, income or profits. Such factors and future events include, but are not
limited to, the factors and future events which are described throughout this
description of the business of the Company.
2
Description of the Business
- ---------------------------
In 2004, CCB acquired 100% of Xin Jiang Ya Ke La Carbon Black Limited
("YaKeLa"), a company registered in China. From 2002 to 2004, YaKeLa mainly
engaged in the business of sales and manufacturing of carbon black, a black
powder made partly from the burning of natural gas. The product is used for
making rubber tires and other rubber products. Starting in 2005 YaKeLa, with its
own extraction facilities, will be capable of a full-scale extraction of natural
gas to generate electricity and supply it to a nearby with factory through its
own power generators and power transmission networks.
PRINCIPAL SHARE OWNERSHIP
The following table sets forth, as of August 5, 2004 (immediately
following the Exchange), stock ownership of each executive officer and director
of the Company, of all executive officers and directors of the Company, as a
group, and of each person known by the Company to be a beneficial owner of 5% or
more of its Common Stock. Except as otherwise noted, each person listed below is
the sole beneficial owner of the shares and has sole investment and voting power
as to such shares. No person listed below has any options, warrant or other
right to acquire additional securities of the Company except as may be otherwise
noted.
NUMBER OF SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED OF CLASS
Huayang International Trust
Shenyang Haitong House Properties Development, Ltd.
No. 386 Qingnian Street, Heping District
Shenyang, China 110004 540,000 1.41%
Gao Wan Jun (1) (2)
Shenyang Haitong House Properties Development, Ltd.
No. 386 Qingnian Street, Heping District
Shenyang, China 110004 540,000 1.41%
Guo Yuan Wang
5/Floor Back
31 Sing Woo Road
Happy Valley
Hong Kong 30,178,382 78.92%
Wang Yufei (2)
386 Qingnian Avenue
Shenyang, China 110004 0 0%
Wang Shao Hua (2)
386 Qingnian Avenue
Shenyang, China 110004 0 0%
Yu Yingtian (2)
386 Qingnian Avenue
Shenyang, China 110004 0 0%
Yin Liangpei (2)
386 Qingnian Avenue
Shenyang, China 110004 0 0%
Wang Yunfen (2)
386 Qingnian Avenue
Shenyang, China 110004 0 0%
All officers and directors as a group (6 in number) 540,000 1.41%
(1) Gao Wan Jun is the Trustee of the Huayang International Trust and he
and his family are the beneficiaries of the trust. Accordingly, they
may be deemed to be the beneficial owners of the shares owned by such
trust.
(2) The person listed is currently an officer, a director, or both, of the
Company.
SECTION 2 -- FINANCIAL INFORMATION
ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
Pursuant to the terms of the Exchange Agreement, the Company acquired one (1)
share of CCB common stock from the shareholder of CCB in the Exchange,
representing all of CCB's issued and outstanding capital stock. CCB is now a
wholly owned subsidiary of the Company, and the shares of CCB common stock
represent the Company's most significant asset. The Company expects to continue,
and expand, the existing business operations of CCB as our wholly owned
subsidiary.
SECTION 9 -- FINANCIAL STATEMENTS AND EXHIBITS
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
a) Financial statements of businesses acquired
Audited financial statements of Xin Jiang Ya Ke La Carbon Black
Company Limited, a China corporation, as of and for the years
ended December 31, 2003 and 2002.
Unaudited financial statements of Xin Jiang Ya Ke La Carbon Black
Company Limited, a China corporation, as of and for the six months
ended June 30, 2004.
b) Pro forma financial information.
Unaudited Pro Forma Combined Balance Sheets of the HIHI and YaKeLa
at June 30, 2004 and December 31, 2003.
Unaudited Pro Forma Combined Statements of Operations for the year
ended December 31, 2003 and for the six months ended June 30,
2004.
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
c) The following exhibits are filed as part of this Current Report on
Form 8-K/A:
2.1 Agreement for Share Exchange, dated July 15, 2004, by and
among Huayang International Holdings, Inc., a Nevada
corporation, China Carbon Black Holdings Limited, a Hong Kong
corporation, and the shareholders of China Carbon Black
Holdings Limited (filed with the Securities and Exchange
Commission on Form 8-K on August 19, 2004, and herein
incorporated by reference).
5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HUAYANG INTERNATIONAL HOLDINGS INC.
(Registrant)
Date: October 18, 2004 By: /s/ Guo Yuan Wang, Director
6
XINJIANG YA KE LA CARBON BLACK CO., LTD.
CONTENTS
--------
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002 F-2
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2003 AND FOR THE PERIOD
FROM APRIL 23, 2002 (INCEPTION) THROUGH DECEMBER 31, 2002 F-3
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE
PERIOD FROM APRIL 23, 2002 (INCEPTION) THROUGH
DECEMBER 31, 2003 F-4
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER
31, 2003 AND FOR THE PERIOD FROM APRIL 23, 2002
(INCEPTION) THROUGH DECEMBER 31, 2002 F-5 - F-6
NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
AND 2002 F-7 - F-20
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders of:
Xinjiang Ya Ke La Carbon Black Co., Ltd.
We have audited the accompanying balance sheets of Xinjiang Ya Ke La Carbon
Black Co., Ltd. (the "Company") as of December 31, 2003 and 2002 and the related
statements of operations and comprehensive income (loss), changes in
shareholders' equity and cash flows for the year ended December 31, 2003 and for
the period from April 23, 2002 (inception) through December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Xinjiang Ya Ke La Carbon Black
Co., Ltd. as of December 31, 2003 and 2002 and the results of its operations and
its cash flows for the year ended December 31, 2003 and for the period from
April 23, 2002 (inception) through December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
Weinberg & Company, P.A.
Boca Raton, Florida
September 28, 2004
F-1
XINJIANG YA KE LA CARBON BLACK CO., LTD.
BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
ASSETS
------
2003 2002
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 183,208 $ 53,889
Accounts receivable 1,004,786 638,312
Inventories 661,052 341,436
Notes receivable 12,082 24,042
Other receivables 88,773 162,039
Advances to suppliers 30,153 4,843
Due from related parties 1,514 --
------------ ------------
Total Current Assets 1,981,568 1,224,561
Property, plant and equipment, net 2,966,400 3,037,150
------------ ------------
TOTAL ASSETS $ 4,947,968 $ 4,261,711
------------ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 819,502 $ 286,548
Customer deposits 76,181 68,648
Value added tax payable 134,291 11,268
Payroll and welfare payable 58,848 16,422
Due to related parties 12,564 728,376
Other payable 5,852 5,982
------------ ------------
Total current liabilities 1,107,238 1,117,244
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Registered capital 3,277,544 3,277,544
Capital surplus 18,499 18,499
Reserve fund 118,747 --
Retained earnings (deficit) 425,722 (151,541)
Accumulated other comprehensive income (loss) 218 (35)
------------ ------------
Total Shareholders' Equity 3,840,730 3,144,467
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,947,968 $ 4,261,711
- ------------------------------------------ ============ ============
See accompanying notes to the financial statements.
F-2
XINJIANG YA KE LA CARBON BLACK CO., LTD.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2003 AND FOR THE PERIOD
-------------------------------------------------------
FROM APRIL 23, 2002 (INCEPTION) THROUGH DECEMBER 31, 2002
---------------------------------------------------------
2003 2002
------------ ------------
REVENUES $ 3,158,412 $ 1,783,510
COST OF GOODS SOLD (2,007,385) (1,534,840)
------------ ------------
GROSS PROFIT 1,151,027 248,670
General and administrative expenses (209,938) (252,435)
Selling and distribution expenses (321,803) (147,434)
------------ ------------
INCOME (LOSS) FROM OPERATIONS 619,286 (151,199)
OTHER INCOME (EXPENSES)
Interest income 376 196
Other income (loss), net 76,348 (538)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 696,010 (151,541)
Income taxes -- --
------------ ------------
NET INCOME (LOSS) 696,010 (151,541)
FOREIGN CURRENCY TRANSLATION GAIN (LOSS) 253 (35)
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 696,263 $ (151,576)
- --------------------------- ============ ============
See accompanying notes to the financial statements.
F-3
XINJIANG YA KE LA CARBON BLACK CO., LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 23, 2002 (INCEPTION) THROUGH
------------------------------------------------------
DECEMBER 31, 2003
-----------------
Accumulated
Retained Other
Registered Capital Reserve Earnings Comprehensive
Capital Surplus Fund (Deficit) Income (loss) Total
------------ ------------ --------- ------------ ------------ ------------
FOUNDERS' INITIAL CAPITAL CONTRIBUTIONS $ 3,277,544 18,499 $ -- $ -- $ -- $ 3,296,043
- ---------------------------------------
Foreign currency translation loss -- -- -- -- (35) (35)
Net Loss -- -- -- (151,541) -- (151,541)
------------ ------------ --------- ------------ ------------ ------------
BALANCE DECEMBER 31, 2002 $ 3,277,544 18,499 $ -- $ (151,541) $ (35) $ 3,144,467
- -------------------------
Foreign currency translation gain -- -- -- -- 253 253
Net Income -- -- -- 696,010 -- 696,010
Transfer to reserve fund -- -- 118,747 (118,747) -- --
------------ ------------ --------- ------------ ------------ ------------
BALANCE DECEMBER 31, 2003 $ 3,277,544 18,499 $118,747 $ 425,722 $ 218 $ 3,840,730
- ------------------------- ============ ============ ========= ============ ============ ============
See accompanying notes to the financial statements.
F-4
XINJIANG YA KE LA CARBON BLACK CO., LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003 AND
----------------------------------------
FOR THE PERIOD FROM APRIL 23, 2002 (INCEPTION) THROUGH
------------------------------------------------------
DECEMBER 31, 2002
-----------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 696,010 $ (151,541)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 419,805 141,707
Gain on disposal of fixed assets (78,836) --
Net gain on non-monetary transactions (9,846) --
Written off of funds advance to related party 32,296 --
CHANGES IN OPERATING ASSETS AND LIABILITIES
DECREASE (INCREASE) IN
Accounts receivable (2,241,986) (1,520,989)
Inventories 1,000,145 541,241
Notes receivable 11,960 (24,042)
Other receivable 73,266 (162,039)
Advance to suppliers (25,310) (4,843)
INCREASE (DECREASE) IN
Accounts payable 681,765 286,548
Customer deposits 7,533 68,648
Valued added tax payable 101,400 11,268
Payroll and welfare payable 42,426 16,422
Other payable (130) 5,982
------------ ------------
Net Cash Provided By (Used in) Operating Activities 710,498 (791,638)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (16,157) (3,636)
Disposal of property, plant and equipment 184,347 --
------------ ------------
Net Cash Used In Investing Activities 168,190 (3,636)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Paid-in capital received -- 120,822
Funds (advanced) received from shareholder (27,161) 27,161
Funds (advanced) received from related parties (722,461) 701,215
------------ ------------
Net Cash Provided By Financing Activities (749,622) 849,198
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 129,066 53,924
Effect of exchange rate changes on cash 253 (35)
Cash and cash equivalents, beginning of year 53,889 --
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 183,208 $ 53,889
- -------------------------------------- ============ ============
See accompanying notes to the financial statements.
F-5
XINJIANG YA KE LA CARBON BLACK CO., LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003 AND
----------------------------------------
FOR THE PERIOD FROM APRIL 23, 2002 (INCEPTION) THROUGH
------------------------------------------------------
DECEMBER 31, 2002
-----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $ -- $ --
============ ============
TAXES PAID $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
During 2003, the Company had the following non-monetary transactions (see note
9), which resulted in a net gain of $9,846:
- Received inventories valued at $1,875,512 in settlement of
outstanding accounts receivable of $1,875,512.
- Inventories, with a book value of $507,578 were exchanged for
property, plant and equipment, valued at $443,752. A loss of
$63,826 was recognized.
- Inventories, with a book value of $48,173 were exchanged for
accounts payable of $148,811. A gain of $79,015 was recognized,
net of VAT payable of $21,623.
- Machinery, with a book value of $22,862 was exchanged for a motor
vehicle, valued at $17,519 resulting in a loss of $5,343.
During 2002, the Company received inventories, valued at $888,627 for settling
an outstanding balance of accounts receivable, of $882,627.
At inception, the founders of the Company contributed property, plant and
equipment valued at $3,175,221 into the Company as paid-in capital.
See accompanying notes to the financial statements.
F-6
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
XINJIANG YA KE LA CARBON BLACK CO., LTD. (the "Company") is a privately
owned enterprise established in the People's Republic of China (the
"PRC") pursuant to the Corporate Law in PRC on April 23, 2002.
The principal activities of the Company are sales and manufacturing of
carbon black, a black powder made partly from the burning of natural
gas, and the product is used for making rubber. The Company also
engaged in non-monetary transactions. Also see note 9.
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
(a) Economic and Political Risks
The Company's operations are conducted in the PRC. Accordingly, the
Company's business, financial condition and results of operations may
be influenced by the political, economic and legal environments in the
PRC, and by the general state of the PRC economy.
The Company's operations in the PRC are subject to special
considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks
associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company's results may
be adversely affected by changes in the political and social conditions
in the PRC, and 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.
(b) Concentration of Credit Risk
The Company has four major customers who accounted for the following
percentage of total sales and total accounts receivable in 2003 and
2002:
Sales Accounts Receivable
Major Customers 2003 2002 2003 2002
--------------- ---- ---- ---- ----
Company A 19% 15% 16% 40%
Company B 12% 2% 14% -%
Company C 7% 6% 8% 11%
Company D 27% 45% 2% 23%
The Company has two major suppliers of natural gas who accounted for
the following percentage of total purchases and total accounts payable
in 2003 and 2002:
Purchases Accounts payable
Major Suppliers 2003 2002 2003 2002
--------------- ---- ---- ---- ----
Company E 9% 21% 25% 67%
Company F 33% -% 49% -%
F-7
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(c) Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over their respective estimated
useful lives, using the straight-line method. Estimated useful lives of
the property, plant and equipment are as follows:
Buildings 20 years
Machinery and equipment 10 years
Motors vehicles 5 years
Furniture and fixtures 5 years
The cost and related accumulated depreciation of assets sold or
otherwise retired are eliminated from the accounts and any gain or loss
is included in the statement of operations. The cost of maintenance and
repairs is charged to income as incurred, whereas significant renewals
and betterments are capitalized.
(d) Impairment of Long-Term Assets
Long-term assets of the Company are reviewed annually as to whether
their carrying value has become impaired, pursuant to the guidelines
established in Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
The Company also re-evaluates the periods of amortization to determine
whether subsequent events and circumstances warrant revised estimates
of useful lives.
(e) Accounts and Other Receivables
Accounts and other receivables are recognized and carried at original
invoice amount less allowance for any uncollectible amounts. An
estimate for doubtful accounts is made when collection of the full
amount is no longer probable. Bad debts are written off as incurred.
There was no reserve for doubtful accounts at December 31, 2003 and
2002.
(f) Inventories
Inventories are stated at the lower of cost and net realizable value.
Finished goods are determined on the weighted average cost basis and
are comprised of direct materials, direct labor and an appropriate
proportion of overhead. The cost of packing materials and supplies is
determined on the basis of weighted average.
Net realizable value is based on estimated selling prices less any
further costs expected to be incurred for completion and disposal.
F-8
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(g) Cash and Cash Equivalents
For financial reporting purpose, the Company considers all highly
liquid investments purchased with original maturity of three months or
less to be cash equivalents. The Company maintains no bank accounts in
the United States of America.
(h) Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes receivable, other receivables, advances to
customers, accounts payable, accrued expenses, customer deposits and
amounts due to/from related parties. Management has estimated that the
carrying amount approximates fair values due to their short-term
nature.
(i) Revenue Recognition
Revenue represents the sale of carbon black and other non-monetary
transactions, which is recognized upon the delivery of goods to
customers, and acceptance by the customers.
(j) Retirement Benefits
Retirement benefits are charged to operation at 14% of the payroll cost
in the form of contributions under defined contribution retirement
plans to the relevant authorities. As of December 31, 2003 and 2002,
the accrued retirement benefits payable were $34,314 and $3,865,
respectively. The retirement benefits charged to operations were
$40,914 and $12,283 in 2003 and 2002, respectively.
(k) Foreign Currency Translation
The accompanying financial statements are presented in United States
dollars. The functional currency of the Company is the Renminbi (RMB).
The financial statements are translated into United States dollars from
RMB at year-end exchange rates as to assets and liabilities and average
exchange rates as to revenues and expenses. Capital accounts are
translated at their historical exchange rates when the capital
transactions occurred.
2003 2002
--------- ----------
Year end RMB : US$ exchange rate 8.2767 8.2773
Average yearly RMB : US$ exchange rate 8.2770 8.2770
The RMB is not freely convertible into foreign currency and all foreign
exchange transactions must take place through authorized institutions.
No representation is made that the RMB amounts could have been, or
could be, converted into US$ at the rates used in translation.
F-9
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(l) Income Taxes
The Company accounts for income tax using an asset and liability
approach and allows for recognition of deferred tax benefits in future
years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation
allowance is provided for deferred tax assets if it is more likely than
not these items will either expire before the Company is able to
realize their benefits, or that future utilization is uncertain.
(m) Reserve Funds
In accordance with the PRC Companies Law, the Company is required to
transfer a percentage of its profit after taxation, as determined in
accordance with PRC accounting standards and regulations, to the
surplus reserve funds. The surplus reserve funds are comprised of the
statutory surplus reserve fund and the public welfare fund. Subject to
certain restrictions set out in the PRC Companies Law, the statutory
surplus reserve fund may be distributed to stockholders in the form of
share bonus issues and/or cash dividends. The public welfare fund is
non-distributable and must be used for capital expenditures on staff
welfare facilities.
(n) Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Management makes these estimates using the best
information available at the time the estimates are made; however
actual results could differ materially from those estimates.
(o) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, established standards for
the reporting and display of comprehensive income, its components and
accumulated balances in a full set of general purpose financial
statements. SFAS No. 130 defines comprehensive income to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires
that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported
in a financial statement that is presented with the same prominence as
other financial statements. The Company's only current component of
comprehensive income is foreign currency translation adjustment.
F-10
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(p) Non-Monetary Transactions
In the normal course of operations, and in accordance with industry
custom, the Company trades its inventories or machineries with some of
its customers and suppliers. These transactions are recorded at fair
market value or relative market value, which uses retail price netting
of relative depreciated amounts, when fair market value is not
available. Gains or losses are recognized for the differences between
the book value of the assets given up and the fair market value or
relative market value of the assets traded in.
When the assets traded in are considered held for re-sale, the cost
method is used to record these transactions. No gain or loss is
recognized for the assets traded in.
(q) Recent Accounting Pronouncements
In January 2003, (as revised in December 2003) The Financial Accounting
Standards Board ("FASB") issued Interpretation No. 46, "Consolidation
of Variable Interest Entities", an interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements".
Interpretation No. 46 addresses consolidation by business enterprises
of variable interest entities, which have one or both of the following
characteristics: (i) the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional
subordinated support from other parties, which is provided through
other interest that will absorb some or all of the expected losses of
the entity; (ii) the equity investors lack one or more of the following
essential characteristics of a controlling financial interest: the
direct or indirect ability to make decisions about the entities
activities through voting rights or similar rights; or the obligation
to absorb the expected losses of the entity if they occur, which makes
it possible for the entity to finance its activities; the right to
receive the expected residual returns of the entity if they occur,
which is the compensation for the risk of absorbing the expected
losses.
Interpretation No. 46, as revised, also requires expanded disclosures
by the primary beneficiary (as defined) of a variable interest entity
and by an enterprise that holds a significant variable interest in a
variable interest entity but is not the primary beneficiary.
Interpretation No. 46, as revised, applies to small business issuers no
later than the end of the first reporting period that ends after
December 15, 2004. This effective date includes those entities to which
Interpretation 46 had previously been applied. However, prior to the
required application of Interpretation No. 46, a public entity that is
a small business issuer shall apply Interpretation 46 or this
Interpretation to those entities that are considered to be
special-purpose entities no later than as of the end of the first
reporting period that ends after December 15, 2003.
F-11
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
Interpretation No. 46 may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first
applied or by restating previously issued financial statements for one
or more years with a cumulative-effect adjustment as of the beginning
of the first year restated.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The changes in SFAS No. 149 improve financial
reporting by requiring that contracts with comparable characteristics
be accounted for similarly. This statement is effective for contracts
entered into or modified after June 30, 2003 and all of its provisions
should be applied prospectively.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting For Certain Financial Instruments with Characteristics of
both Liabilities and Equity". SFAS No. 150 changes the accounting for
certain financial instruments with characteristics of both liabilities
and equity that, under previous pronouncements, issuers could account
for as equity. The new accounting guidance contained in SFAS No. 150
requires that those instruments be classified as liabilities in the
balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable
shares, which the issuing company is obligated to buy back in exchange
for cash or other assets. A second type includes put options and
forward purchase contracts, which involves instruments that do or may
require the issuer to buy back some of its shares in exchange for cash
or other assets. The third type of instruments that are liabilities
under this Statement is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the value of
the issuers' shares. SFAS No. 150 does not apply to features embedded
in a financial instrument that is not a derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the
existing definition of liabilities in FASB Concepts Statement No. 6,
"Elements of Financial Statements". The remaining provisions of this
Statement are consistent with the FASB's proposal to revise that
definition to encompass certain obligations that a reporting entity can
or must settle by issuing its own shares. This Statement shall be
effective for financial instruments entered into or modified after May
31, 2003 and otherwise shall be effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of a non-public entity, as to which
the effective date is for fiscal periods beginning after December 15,
2004.
F-12
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
In March 2004, the U.S. Securities and Exchange Commission's Office of
the Chief Accountant and the Division of Corporate Finance released
Staff Accounting Bulletin ("SAB") No. 105, "Loan Commitments Accounted
for as Derivative Instruments". This bulletin contains specific
guidance on the inputs to a valuation-recognition model to measure loan
commitments accounted for at fair value, and requires that fair-value
measurement include only differences between the guaranteed interest
rate in the loan commitment and market interest rate, excluding any
expected future cash flows related to the customer relationship or loan
servicing. In addition, SAB105 requires the disclosure of the
accounting policy for loan commitments, including methods and
assumptions used to estimate the fair value of loan commitments, and
any associated hedging strategies. SAB105 is effective for derivative
instruments, entered into subsequent to March 31, 2004 and should also
be applied to existing instruments as appropriate.
The implementation of the above pronouncements are not expected to have
a material effect on the Company's financial statement presentation or
disclosures.
3. INVENTORIES
Inventories consist of the following as of December 31:
2003 2002
--------- ---------
Finished goods $459,111 $278,116
Packing materials and supplies 201,941 63,320
--------- ---------
$661,052 $341,436
========= =========
4. OTHER RECEIVABLES
Other receivables consist of the following as of December 31:
2003 2002
--------- ---------
Cash receivable $ 26,550 $ 38,747
Non-monetary receivable (See Note 9)
62,223 123,292
--------- ---------
$ 88,773 $162,039
========= =========
F-13
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December
31:
2003 2002
----------- -----------
At cost:
Buildings $ 768,850 $ 454,679
Machinery and equipment 2,482,272 2,653,355
Motor vehicles 213,067 62,276
Furniture and fixtures 11,092 8,515
----------- -----------
3,475,281 3,178,825
----------- -----------
Less : Accumulated depreciation
Buildings 38,405 10,524
Machinery and equipment 370,829 124,485
Motor vehicles 96,633 5,877
Furniture and fixtures 3,014 789
----------- -----------
508,881 141,675
----------- -----------
Property, plant and equipment, net $2,966,400 $3,037,150
=========== ===========
Depreciation expense for the years ended December 31, 2003 and 2002 was
$419,805 and $141,707, respectively.
In 2002, three production lines amounting to $3,156,732 were received
by the Company from the director/share holder as a contribution of
registered capital (See Note 11).
In 2003, the Company sold machinery with a net book value of $128,368
for $207,200. A gain of $78,836 has been recognized as other income.
6. DUE FROM / TO RELATED PARTIES AND RELATED PARTY TRANSACTIONS
Due from related parties:
2003 2002
----------- -----------
Daxin Petrolic Tech. Co., Ltd. $ 1,514 $ --
=========== ===========
F-14
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
6. DUE FROM / TO RELATED PARTIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
Due to related parties:
2003 2002
----------- -----------
Guozhuang Wang $ 12,564 $ 3,941
Guoyuan Wang -- 27,162
Daxin Petrolic Tech Co., Ltd. -- 295,102
Tabei Carbon Black Co., Ltd. -- 402,171
----------- -----------
$ 12,564 $ 728,376
=========== ===========
All the balances are unsecured, interest-free and have no fixed
repayment terms.
As of December 31, 2003 and 2002, the Company purchased materials
amounting to $42,920 and $13,556 from Wang Guo Zhuang, who is the
president of the Company.
As of December 31, 2003 and 2002, the Company purchased carbon black
amounting to $339,852 and $765,788 from Tabei Carbon Black Co., Ltd.,
which the Company's president, Wang Guo Zhuang is the major owner.
In 2003 and 2002, Daxin Petrolic Tech Co., Ltd., another company owned
by the president of the Company, paid rental fees amounting to $122,029
and $321,681 respectively on behalf of the Company, which were all
repaid by the Company in 2003 and 2002. In 2003, the Company paid
rental fees of $46,815 to Daxin Petrolic Tech Co., Ltd. for a leased
dynamotor. In addition, the Company loaned $32,296 to Daxin Petrolic
Tech Co., Ltd. in 2003, which has been fully written off when Daxin
Petrolic Tech Co., Ltd. liquidated its business.
7. OTHER INCOME (LOSS), NET
Other income (loss), net represents:
2003 2002
----------- -----------
Gain on disposal of machinery $ 78,833 $ --
Net gain on non-monetary transactions 9,846 --
Other (12,331) (538)
----------- -----------
$ 76,348 $ (538)
=========== ===========
F-15
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
8. INCOME TAXES
(a) Corporation Income Tax ("CIT")
In accordance with the relevant tax laws and regulations of PRC, the
applicable corporation income tax rate for the Company is 33%. The
Company is entitled to full exemption from CIT from 2002 to 2004 due to
the approval of local government. No provision for CIT was made for the
years 2003 and 2002 as the Company enjoyed the CIT exemption.
The Company's tax expense differs from the "expected" tax expense for
the years ended December 31, 2003 and 2002 (computed by applying the
CIT rate of 33 percent to net profit) as follows:
2003 2002
---------- ----------
Computed "expected" expense $ 229,683 $ --
Non-taxable income net of non-deductible
expenses 27,944 --
Unused net operating loss carried forward (591) --
CIT exemption (257,036) --
---------- ----------
Income tax expense $ -- $ --
========== ==========
The tax effects of temporary differences that give rise to the
Company's net deferred tax assets as of December 31, 2002 and 2003 are
as follows:
2003 2002
---------- ----------
Deferred tax assets:
Depreciation $ 9,446 $ 2,338
Expenses not yet deducted for tax
purposes 20,836 --
---------- ----------
Total deferred tax assets 30,282 2,338
Valuation allowance (30,282) (2,338)
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
(b) Value Added Tax ("VAT")
In accordance with the relevant tax laws in the PRC, VAT is levied at
17% on the invoiced value of sales and is payable by the consumer. The
Company is required to remit the VAT collected to the tax authority,
but may deduct therefrom the VAT it has paid on eligible purchases. As
of December 31, 2003 and 2002, the VAT payable were $134,291 and
$11,268, respectively.
F-16
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
9. NON-MONETARY TRANSACTIONS
During 2003, the Company received 6,819 sets of tires, valued at
$1,545,942 and 2,500 sets of tires, valued at $329,570 from Hangzhou
Zhongce Tire Co. & Guizhou Tires Co. Ltd., respectively for settlement
of the outstanding balances of accounts receivable $1,545,942 and
$329,570. The Company considers that all inventories traded in will be
used for future sales. Thus, all tires received are valued based on
cost method and no gain or loss has been recognized in 2003.
In April 2003, the Company exchanged 760 sets of tires with a book
value of $94,240 for two motor vehicles with a relative market value of
$60,410 and $24,503. A loss of $9,327, which represents the excess of
book values of the inventories exchanged over the relative market
values of assets traded in, had been recognized as other expense in
2003. The legal titles of the motor vehicles received are in the name
of the president, Mr Wang Guo Zhuang. Mr Wang and the Company mutually
agreed that Mr Wang held the motor vehicles on behalf of the Company
and the Company's legal counsel has confirmed that they are the
Company's assets. Currently, the Company is in the process of
transferring the legal titles of the motor vehicles over to the
Company. Such transfer procedures are expected to be completed in late
2004 or early 2005.
In April 2003, the Company exchanged 455 sets of tires with a book
value of $28,997 for a motor vehicle, which the re-saleable value
cannot be reasonably estimated due to the lack of second hand market
information in the PRC. A loss of $28,997 had been recognized as other
expense. The legal title of the motor vehicle received is in the name
of the president, Mr Wang Guo Zhuang. Mr Wang and the Company mutually
agreed that Mr Wang held the motor vehicle on behalf of the Company and
the Company's legal counsel has confirmed that they are the Company's
assets. Currently, the Company is in the process of transferring the
legal title of the motor vehicle over to the Company. Such transfer
procedures are expected to be completed in late 2004 or early 2005.
In October 2003, the Company exchanged 3,769 sets of tires with a book
value of $314,135 for an investment in real property considered to have
the same relative market value. No gain or loss had been recognized for
this transaction. As of December 31, 2002, the Company transferred
tires with a total book value of $123,292 as a deposit for the real
property and such amount has been recorded as other receivable. As of
December 31, 2003, the legal title of the investing property received
is in the name of the president, Mr Wang Guo Zhuang. Mr Wang and the
Company mutually agreed that Mr Wang held the real property on behalf
of the Company and the Company's legal counsel has confirmed that it is
the Company's asset. Currently, the Company is in the process of
transferring the legal title of the real property over to the Company.
Such transfer procedures are expected to be completed in late 2004 or
early 2005.
F-17
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
9. NON-MONETARY TRANSACTIONS (CONTINUED)
In December 2003, the Company exchanged 883 sets of tires with a book
value of $48,173 for a debt extinguishment, which had a book value of
$148,811. A gain of $79,015 had been recognized as other income in
2003.
In December 2003, the Company exchanged 638 sets of tires with a book
value of $57,280 for a motor vehicle with a relative market value of
$14,499. A loss of $42,781 which represents the excess of book value of
the inventories exchanged the relative market value of asset traded in,
was recognized as other expense in 2003. As of December 31, 2003, the
638 sets of tires have been delivered whereas the Company did not
receive the motor vehicle until 2004. Accordingly, the corresponding
amount of the motor vehicle has been recorded as other receivable.
In December 2003, the Company exchanged a loading machine with a book
value of $22,862 for a motor vehicle with a relative market value of
$17,519. A loss of $5,343 which represents the excess of book value of
the inventory exchanged over the relative market value of asset traded
in, was recognized as other expense in 2003. As of December 31, 2003,
the loading machine was delivered, however the Company did not receive
the motor vehicle until 2004. Accordingly, the corresponding amount of
the motor vehicle has been recorded as other receivable.
In December 2003, the Company exchanged 258 sets of tires with a book
value of $12,926 for a crane with a relative market value of $30,205. A
gain on the exchanged of $17,279 had been recognized as other income in
2003. As of December 31, 2003, the 258 sets of tires have been
delivered, however the Company did not receive the crane until 2004.
Accordingly, the corresponding amount of the crane has been recorded as
other receivable.
During 2002, the Company received 6,000 sets of tires, valued at
$882,677, from Hangzhou Zhongce Tire Co. for settling the outstanding
balances of accounts receivable. The Company considers that all
inventories traded in will be used for future sales. Thus, the tires
received are valued based on cost method and no gain or loss has been
recognized in 2002.
F-18
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
10. COMMITMENTS AND CONTINGENCIES
The Company leased three manufacturing production lines from a third
party and a dynamotor from a related party in year 2002 and 2003.
Accordingly, for the years ended December 31, 2003 and 2002 the Company
recognized rental expense in the amount of $410,777 and $362,450,
respectively.
As of December 31, 2003, the Company has outstanding commitments in
respect of non-cancellable operating leases for factory land use right,
which fall due as follows:
The minimum lease payments
under non-cancellable
operating leases:
Within one year $ 410,792
===========
The Company leased the land use right from the landlord, an independent
third party, on a year to year renewal basis. The Company has obtained
a representation from the landlord that the landlord has a 50 year land
use right with the PRC and the landlord has guaranteed to lease the
land use right to the Company as long as the Company wants to continue
the lease within the period of the land use rights the landlord
possesses.
11. REGISTERED CAPITAL AND CAPITAL SURPLUS
The Company was incorporated with a registered capital of $3,277,544
(RMB 27,129,000) and was contributed by the founders as follows:
Registered Capital
Capital Surplus
----------- -----------
Cash contribution of
RMB 1,000,000 $ 120,822 $ --
Contribution of property,
plant and equipment of
RMB 26,281,996 3,156,722 18,499
----------- -----------
$3,277,544 $ 18,499
=========== ===========
The excess of contribution (above and beyond the PRC requirement)
amounted to $18,499 (RMB152,996) and has been recorded as capital
surplus.
F-19
XINJIANG YA KE LA CARBON BLACK CO., LTD.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
--------------------------------
12. SUBSEQUENT EVENTS
The shareholders of the Company have agreed to a re-structuring plan
with an investment holding company whereby the Company would transfer
100% of the Company's shares into an investment holding company. In
April 28, 2004, China Carbon Holding Company Limited, a limited
liability company was incorporated in Hong Kong and the shareholders of
the Company are in the process of transferring all of the Company's
shares into the holding company.
On August 5, 2004, the stockholders of the Company completed a share
exchange (the "Exchange") with the Huyang International Holdings, Inc.
("HIHI") pursuant to the terms of an Agreement for Share Exchange,
dated July 15, 2004. In the Exchange, HIHI acquired all of the issued
and outstanding stock of the Company in exchange for the issuance of
36,000,000 shares of its common stock. The stockholders of the Company
will own approximately 78.92 % of HIHI after the Exchanged.
F-20
XINJIANG YA KE LA CARBON BLACK CO., LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
XINGJIANG YA KE LA CARBON BLACK COMPANY LIMITED
INTERIM FINANCIAL STATEMENTS
---------------------------------------------------
CONTENTS
Unaudited Balance Sheet as of June 30, 2004 F-22
Unaudited Statements of Operations for the six months ended
June 30, 2004 and 2003 F-23
Unaudited Statements of Cash Flows for the six months ended
June 30, 2004 and 2003 F-24
Unaudited Statements of Changes in Shareholders' Equity for
the six months ended June 30, 2004 F-25
---------------------------------------------------
F-21
XINJIANG YA KE LA CARBON BLACK CO., LTD.
UNAUDITED BALANCE SHEET
AS OF JUNE 30, 2004
June 30,
2004
-----------
Assets:
Cash and cash equivalents $ 50,647
Account receivable 1,238,499
Inventories 582,700
Note receivable 409,835
Other receivable 10,249
Advance to supplier 102,971
Due from related parties
-----------
TOTAL CURRENT ASSETS 2,394,901
Property, plant, and equipment net 2,940,052
-----------
TOTAL ASSETS $5,334,953
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable $ 699,357
Customer deposit 49,478
Other payable 68,994
Other taxes payable 118,628
Payroll and welfare payable 65,944
Accrued expense 181,234
Amount due to related paties 72,889
-----------
TOTAL LIABILITIES 1,256,524
-----------
Shareholders' equity:
Registered capital $3,277,544
Capital surplus 18,499
Reserve fund 118,747
Accumulated other comprehensive income 267
Retained earnings 663,372
-----------
TOTAL SHAREHOLDERS' EQUITY 4,078,429
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,334,953
===========
F-22
XINJIANG YA KE LA CARBON BLACK CO., LTD.
UNAUDITED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30
----------------------------
2004 2003
----------- -----------
REVENUES $1,795,347 $1,742,622
COST OF SALES 1,290,446 1,165,189
----------- -----------
GROSS PROFIT 504,901 577,433
GENERAL AND ADMINISTRATIVE EXPENSES 78,967 84,303
SELLING EXPENSES 233,552 124,458
----------- -----------
INCOME/(LOSS) FROM OPERATIONS 192,382 368,672
OTHER INCOME/(LOSS)
Interest income 120 27
Other income/(loss), net 45,148 66,855
----------- -----------
INCOME BEFORE INCOME TAXES 237,650 435,554
----------- -----------
INCOME TAXES -- --
NET INCOME $ 237,650 $ 435,554
=========== ===========
F-23
XINJIANG YA KE LA CARBON BLACK COMPANY LIMITED
UNAUDITED STATEMENTS OF CASH FLOW
SIX MONTHS ENDED JUNE 30
---------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 237,650 $ 435,554
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 166,611 209,902
Gain on disposal of fixed assets 0 0
CHANGES IN OPERATING ASSETS AND LIABILITIES
DECREASE (INCREASE) IN
Accounts receivable and notes receivable (631,466) (486,367)
Other receivable and advance to customers 5,706 53,380
Inventory 78,352 (733,813)
INCREASE (DECREASE) IN
Accounts payable (120,145) 1,259,245
Customer deposits (26,703) (68,648)
Other payable and accrued liabilities 235,809 84,357
------------ ------------
Net Cash Provided By (Used in) Operating Activities (54,186) 753,610
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (140,227) (33,023)
Disposal of fixed assets
------------ ------------
Net Cash Used In Investing Activities (140,227) (33,023)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Paid-in capital received
Funds (advanced) received from shareholder 0 0
Funds (advanced) received from related parties 61,839 (728,376)
------------ ------------
Net Cash Provided By Financing Activities 61,839 (728,376)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (132,574) (7,789)
============ ============
Effect of exchange rate changes on cash 13 (38)
Cash and cash equivalents, beginning of year 183,208 53,889
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 50,647 $ 46,062
- -------------------------------------- ============ ============
F-24
XIN JIANG YA KE LA CARBON BLACK COMPANY LIMITED
UNAUDITED STATEMENTS OF CHANGES OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
ACCUMULATED
OTHER
REGISTERED CAPITAL RESERVE RETAINED COMPREHENSIVE
CAPTIAL SURPLUS FUND EARNINGS INCOME TOTAL
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AS OF JANUARY 1, 2004 $3,277,544 $ 18,499 $ 118,747 $ 425,722 $ 218 $3,840,730
Foreign currency translation gain 49 49
Net Income 237,650 237,650
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AS OF JUNE 30, 2004 $3,277,544 $ 18,499 $ 118,747 $ 663,372 $ 267 $4,078,429
=========== =========== =========== =========== =========== ===========
F-25
HUAYANG INTERNATIONAL HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
----------------------------------------------------
CONTENTS
Unaudited Pro Forma Combined Balance Sheets at
June 30, 2004 and December 31, 2003 F-28
Unaudited Pro Forma Combined Statements of
Operations for six months ended June 30, 2004 F-29
Notes to June 30, 2004 Unaudited Pro Forma
Combined Financial Statements F-30
Unaudited Pro Forma Combined Balance Sheets at
December 31, 2003 F-31
Unaudited Pro Forma Combined Statements of Operations
for the year ended December 31, 2003 F-32
Notes to December 31, 2003 Unaudited Pro Forma
Combined Financial Statements F-33
----------------------------------------------------
F-26
PRO FORMA COMBINED FINANCIAL STATEMENTS
The accompanying unaudited pro forma combined financial statements are
based upon the historical condensed balance sheets and condensed statements of
operations of Huayang International Holdings, Inc. ("HIHI" or the "Company") and
Xinjiang Ya Ke La Carbon Black Co., Ltd. ("YaKeLa"). The unaudited pro forma
combined balance sheet has been prepared as if the acquisition occurred on June
30, 2004 and December 31, 2003. The unaudited pro forma combined financial
statements of operations for the year ended December 31, 2003 and for the six
months ended June 30, 2004 have been prepared as if the acquisition had occurred
on January 1, 2003. The statements are based on accounting for the business
combination as a reverse acquisition, whereby the Company will be the surviving
corporate entity, but YaKeLa is the accounting acquirer. As YaKeLa is the
accounting acquirer in a transaction accounted for as a purchase in accordance
with generally accepted accounting principles, the purchase price has been
allocated to the Company's assets and liabilities based upon preliminary
estimates of their respective fair values. The pro forma information may not be
indicative of the results that actually would have occurred if the merger had
been in effect from and on the dates indicated or which may be obtained in the
future.
F-27
HUAYANG INTERNATIONAL HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2004
YAKELA HIHI PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
ASSETS
------
CURRENT ASSETS
Real estate rental property, net $ -- $ 6,585,716 $ -- $ 6,585,716
Real estate held for development and sale -- 2,487,164 -- 2,487,164
Cash and cash equivalents 50,647 258,636 -- 309,283
Accounts receivable 1,238,499 33,919 -- 1,272,418
Inventory 582,700 -- -- 582,700
Notes receivable 409,835 2,388,000 -- 2,797,835
Other receivable 10,249 -- -- 10,249
Advance to customers 102,971 -- -- 102,971
Amount due from related parties, net 175,504 -- 175,504
------------- ------------- ------------- -------------
Total Current Assets 2,394,901 11,928,939 -- 14,323,840
Other asset -- 25,800 -- 25,800
Property, plant and equipment, net 2,940,052 1,233,572 (2,278,429) (1) 1,895,195
------------- ------------- ------------- -------------
TOTAL ASSETS $ 5,334,953 $ 13,188,311 $ (2,278,429) $ 16,244,835
------------ ============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY / (DEFICIT)
------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 699,357 $ 54,370 $ -- $ 753,727
Customer deposits 49,478 -- -- 49,478
Accrued interest -- 730,339 -- 730,339
Accrued expenses 181,234 -- -- 181,234
Other payable 68,994 -- -- 68,994
Other tax payable 118,628 2,359,227 -- 2,477,855
Payroll and welfare payable 65,944 -- -- 65,944
Amount due to related parties 72,889 1,778,157 -- 1,851,046
Bank loan -- 3,298,456 -- 3,298,456
Minority interest -- 176,019 -- 176,019
------------- ------------- ------------- -------------
Total current liabilities 1,256,524 8,396,568 -- 9,653,092
------------- ------------- ------------- -------------
SHAREHOLDERS' EQUITY / (DEFICIT)
Registered capital 3,277,544 154,016 (2,666,744) (2) 764,816
Capital surplus / Additional paid in capital 18,499 18,342,291 (13,316,249) (3) 5,044,541
Reserve fund 118,747 -- 118,747
Retained earnings / (Deficits) 663,372 (13,730,595) 13,730,595 (4) 663,372
Accumulated other comprehensive income (loss) 267 26,031 (26,031) (4) 267
------------- ------------- ------------- -------------
Total Shareholders' Equity / (Deficit) 4,078,429 4,791,743 (2,278,429) 6,591,743
------------- ------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY / (DEFICIT) $ 5,334,953 $ 13,188,311 $ (2,278,429) $ 16,244,835
- ------------------------------------------------------ ============= ============= ============= =============
The accompanying notes are an integral part of the Unaudited Pro Forma Combined Financial Statements
F-28
HUAYANG INTERNATIONAL HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
YAKELA HIHI PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
REVENUES $ 1,795,347 $ 280,438 $ -- $ 2,075,785
COST OF GOODS SOLD (1,290,446) -- -- (1,290,446)
------------- ------------- ------------- -------------
GROSS PROFIT 504,901 280,438 -- 785,339
Cost of real estate sold -- (116,452) -- (116,452)
General and Administrative Expenses (78,967) (142,237) -- (221,204)
Selling and Distribution Expenses (233,552) -- -- (233,552)
Impairment of real estate -- -- -- --
Depreciation and amortization expense -- (114,796) -- (114,796)
Interest expense -- (124,695) -- (124,695)
Other operating expenses -- -- -- --
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 192,382 (217,742) -- (25,360)
OTHER INCOME/(EXPENSES)
Interest income 120 -- -- 120
Other income (loss), net 45,148 -- -- 45,148
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 237,650 (217,742) -- 19,908
Minority interest -- 7,886 -- 7,886
Income taxes -- -- -- --
------------- ------------- ------------- -------------
NET INCOME (LOSS) 237,650 (209,856) -- 27,794
FOREIGN CURRENCY TRANSLATION GAIN -- 160 -- 160
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ 237,650 (209,696) $ -- 27,954
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted -- 7,700,807 30,540,000 (5) 38,240,807
LOSS PER SHARE
Basic and diluted (0.03) 0.00
The accompanying notes are an integral part of the Unaudited Pro Forma Combined Financial Statements
F-29
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) Adjustment for purchase accounting applied to write down the value of
the fixed assets to reflect the excess of the value of acquired assets
over the cost of the acquisition.
(2) To reflect the net change in registered capital as a result of:
a. Issuance of 36,000,000 shares of common stock as the consideration
of purchase of YaKeLa
b. Cancellation of 5,460,000 shares of common stock
c. Elimination of YaKeLa's common stock deemed purchased by HIHI.
(3) To reflect the net change in additional paid in capital as a result of:
a. Elimination of the Company's historical retained earnings and
adjustment to additional paid-in-capital for purchase accounting.
b. Issuance of 36,000,000 shares of common stock as the consideration
of purchase of YaKeLa
c. Cancellation of 5,460,000 shares of common stock
(4) Elimination of the Company's historical retained earnings and
adjustment to additional paid-in-capital for purchase accounting
(5) To reflect the net increase in number of shares of common stock
outstanding as a result of:
a. Issuance of 36,000,000 shares of common stock as the consideration
of purchase of YaKeLa
b. Cancellation of 5,460,000 shares of common stock
(6) Pro forma share capital
No. of shares Amount
Authorized :-
Common stock at $0.02 par value 50,000,000 $ 1,000,000
============= =============
Issued and outstanding :-
Common stock prior to the Exchange 7,700,807 154,016
Additional paid-in capital -- 18,342,291
Common stock issued to purchase YaKeLa 36,000,000 720,000
Additional paid-in capital with the purchase -- 1,080,000
Common stock cancelled (5,460,000) (109,200)
Additional paid-in capital with the cancellation -- (163,800)
Accumulated deficit of HIHI at date of purchase -- (13,431,564)
------------- -------------
At June 30, 2004 38,240,807 $ 6,591,743
============= =============
F-30
HUAYANG INTERNATIONAL HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2003
YAKELA HIHI PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
ASSETS
------
CURRENT ASSETS
Real estate rental property, net $ -- $ 6,681,080 $ -- $ 6,681,080
Real estate held for development and sale -- 2,603,586 -- 2,603,586
Cash and cash equivalents 183,208 302,172 -- 485,380
Accounts receivable 1,004,786 520 -- 1,005,306
Inventory 661,052 -- -- 661,052
Notes receivable 12,082 -- -- 12,082
Other receivable 88,773 -- -- 88,773
Advance to customers 30,153 -- -- 30,153
Amount due from related parties less allowance 1,514 2,505,987 -- 2,507,501
------------- ------------- ------------- -------------
Total Current Assets 1,981,568 12,093,345 -- 14,074,913
Other asset -- 25,995 -- 25,995
Property, plant and equipment, net 2,966,400 1,252,909 (2,278,429) (1) 1,940,880
------------- ------------- ------------- -------------
TOTAL ASSETS $ 4,947,968 $ 13,372,249 $ (2,278,429) $ 16,041,788
------------ ============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY / (DEFICIT)
------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 819,502 $ 778,868 $ -- $ 1,598,370
Customer deposits 76,181 -- -- 76,181
Other payable 5,852 -- -- 5,852
Other tax payable 134,291 2,348,849 -- 2,483,140
Payroll and welfare payable 58,848 -- -- 58,848
Amount due to related parties 12,564 1,760,772 -- 1,773,336
Bank loan -- 3,298,416 -- 3,298,416
Minority interest -- 183,905 -- 183,905
------------- ------------- ------------- -------------
Total current liabilities 1,107,238 8,370,810 -- 9,478,048
------------- ------------- ------------- -------------
SHAREHOLDERS' EQUITY / (DEFICIT)
Registered capital 3,277,544 154,016 (2,666,744) (2) 764,816
Capital surplus / Additional paid in capital 18,499 18,342,291 (13,106,553) (3) 5,254,237
Reserve fund 118,747 -- 118,747
Retained earnings / (Deficits) 425,722 (13,520,739) 13,520,739 (4) 425,722
Accumulated other comprehensive income (loss) 218 25,871 (25,871) (4) 218
------------- ------------- ------------- -------------
Total Shareholders' Equity / (Deficit) 3,840,730 5,001,439 (2,278,429) 6,563,740
------------- ------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY / (DEFICIT) $ 4,947,968 $ 13,372,249 $ (2,278,429) $ 16,041,788
- ------------------------------------------------------ ============= ============= ============= =============
The accompanying notes are an integral part of the Unaudited Pro Forma Combined Financial Statements
F-31
HUAYANG INTERNATIONAL HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
YAKELA HIHI PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
REVENUES $ 3,158,412 $ 523,727 -- $ 3,682,139
COST OF GOODS SOLD (2,007,385) -- -- (2,007,385)
------------- ------------- ------------- -------------
GROSS PROFIT 1,151,027 523,727 -- 1,674,754
General and Administrative Expenses (209,938) (467,982) -- (677,920)
Selling and Distribution Expenses (321,803) -- -- (321,803)
Impairment of real estate -- (10,845,792) -- (10,845,792)
Depreciation and amortization expense -- (403,483) -- (403,483)
Interest expense -- (252,096) -- (252,096)
Other operating expenses -- (1,450) -- (1,450)
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 619,286 (11,447,076) -- (10,827,790)
OTHER INCOME/(EXPENSES)
Interest income 376 -- -- 376
Other income (loss), net 76,348 -- -- 76,348
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 696,010 (11,447,076) -- (10,751,066)
Minority interest -- 565,596 -- 565,596
Income taxes -- -- -- --
------------- ------------- ------------- -------------
NET INCOME (LOSS) 696,010 (10,881,480) -- (10,185,470)
FOREIGN CURRENCY TRANSLATION GAIN (LOSS) 253 -- -- 253
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ 696,263 (10,881,480) $ -- (10,185,217)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted -- 7,700,807 30,540,000 (5) 38,240,807
LOSS PER SHARE
Basic and diluted (1.41) (0.27)
The accompanying notes are an integral part of the Unaudited Pro Forma Combined Financial Statements
F-32
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) Adjustment for purchase accounting applied to write down the value of
the fixed assets to reflect the excess of the value of the acquired
assets over the cost of the acquisition.
(2) To reflect the net change in registered capital as a result of:
a. Issuance of 36,000,000 shares of common stock as the consideration
of purchase of YaKeLa
b. Cancellation of 5,460,000 shares of common stock
c. Elimination of YaKeLa's common stock deemed purchased by HIHI.
(3) To reflect the net change in additional paid in capital as a result of:
a. Elimination of the Company's historical retained earnings and
adjustment to additional paid-in-capital for purchase accounting.
b. Issuance of 36,000,000 shares of common stock as the consideration
of purchase of YaKeLa
c. Cancellation of 5,460,000 shares of common stock
(4) Elimination of the Company's historical retained earnings and
adjustment to additional paid-in-capital for purchase accounting
(5) To reflect the net increase in number of shares of common stock
outstanding as a result of:
a. Issuance of 36,000,000 shares of common stock as the consideration
of purchase of YaKeLa
b. Cancellation of 5,460,000 shares of common stock
(6) Pro forma share capital
No. of shares Amount
Authorized :-
Common stock at $0.02 par value 50,000,000 $ 1,000,000
============= =============
Issued and outstanding :-
Common stock prior to the Exchange 7,700,807 154,016
Additional paid-in capital -- 18,342,291
Common stock issued to purchase YaKeLa 36,000,000 720,000
Additional paid-in capital with the purchase -- 1,080,000
Common stock cancelled (5,460,000) (109,200)
Additional paid-in capital with the cancellation -- (163,800)
Accumulated deficit of HIHI at date of purchase (13,459,567)
------------- -------------
At December 31, 2003 38,240,807 $ 6,563,740
============= =============
F-33